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Behind Facebook's $1bn Instagram antitrust dodge

A free pass for Zuck, not Microsoft

Open ... and Shut Apparently it's wrong to dominate the market for free search and free web browsers, but it's perfectly fine to dominate the market for photo sharing. That seems to be the lesson from the curious silence from antitrust authorities on Facebook's proposed $1bn acquisition of Instagram.

Pundits applaud Facebook's strategic coup, taking out a rising competitor for a small slice of Facebook's market value, but this is the very kind of behavior antitrust bodies normally frown upon.

So why aren't we hearing any antitrust objections?

It's not surprising that the tech world has been silent on this aspect of the acquisition. We get to watch the Silicon Valley success story play out before our eyes: two years, 12 people, and a $1bn acquisition. What's not to love?

Beyond furthering Silicon Valley mythology about start ups and rags-to-riches success, many (including I) see the acquisition as a shrewd move to knock out a competitor before it became a mortal threat. Instagram was growing at a rapid pace, something that even Facebook, with its massive dominance of online photo sharing, could not ignore.

As Chris Dixon expresses it:

But this kind of defensive move is exactly what antitrust laws were designed to inhibit. Let's face it: Facebook isn't getting much in the way of technology know-how or infrastructure from Instagram. Even Facebook knows how to plaster the world in ugly sepia tones. As a regular user of both Facebook's mobile photo sharing and Instagram's, it's stretching to suggest that Instagram has bested Facebook in terms of ease of use, performance, or much of anything else.

If anything, Instagram thrived because it did one thing well (photo sharing), and because, frankly, it was a place to do so outside the 800-pound gorilla: Facebook. So, in buying Instagram, Facebook gets an app that was spreading like wildfire in a market - photo sharing - that Facebook dominates and wants to keep dominating. And all those people trying to escape Facebook? Well...

"But the product is free!" you protest, "So antitrust regulations don't apply." Nice try, but wrong. The fact that consumers don't pay directly for photo sharing on either Facebook or Instagram is relevant, but by no means dispositive. As David S Evans, chairman of Global Economics Group and Lecturer at Chicago Law School, writes (Warning – PDF):

A key point is that the existence of a free good signals that there is a companion good, that firms consider both products simultaneously in maximizing profit, and that commonly used methods of antitrust analysis, including market definition, probably need to be adjusted to properly analyze two inextricably linked products. When antitrust or merger analysis involves a free product, the analysis of consumer welfare and injury also needs to account for customers of both the free product and its companion product since any change in market conditions for customers of one product affects the customers of the other product.

In other words, there is no free lunch. Or there might be, but if you're eating for free you're going to pay in some other way.

Google likes to argue that free products shouldn't be considered under antitrust laws, but Google has a lot at stake in that argument. It has come under increasing scrutiny for its use of free products like YouTube and search to block competitors that, despite being free, help to drive billions of dollars in profit.

Speaking of billions, the very price tag that Facebook put on Instagram indicates a potential problem, as John Carney argues. As US federal government guidelines for the Justice Department and Fair Trade Commission suggest, the fact that Facebook paid such a hefty premium for Instagram may well signal anticompetitive behavior:

The financial terms of the transaction may also be informative regarding competitive effects. For example, a purchase price in excess of the acquired firm’s stand-alone market value may indicate that the acquiring firm is paying a premium because it expects to be able to reduce competition or to achieve efficiencies.

It's not even a positive that Facebook says it intends to leave Instagram to run independently, as this also signals that Facebook was simply trying to put a lid on a competitor, rather than beat it in the market.

None of which means that I'm cheering for antitrust review of this merger. I'm not. Technology moves so fast that government intervention is generally unnecessary to guard the free market. By the time the government had ruled on Microsoft, for example, the industry had routed around Microsoft, and the company is still trying to catch up in things like mobile, social and cloud.

But I'm confused as to why Facebook is getting a free pass when, for example, Microsoft spent years duking it out with US and European regulators over antitrust claims related to Internet Explorer - another free product. "But that's different!" you shout, "for Microsoft is not only evil, but the browser is fundamental to gaining access to the web!"

Is it? In mobile we seem to have found plenty of ways to access the web without using a browser, and arguably this trend could have been hastened by Microsoft blocking up the desktop browser experience. Regardless, who is to say that photo sharing isn't fundamental to using the web in critical ways? I doubt Facebook would have paid so much unless it believed photo sharing is essential to its own social business, which many of us believe is the engine for tech's next decade.

At one time search was just a free service with no clear revenue model behind it. Google changed that and now is in hot water for stifling competition in free search, because it inhibits others from competing to make money elsewhere. Photo sharing today is hard to monetise – Instagram didn't even bother trying – but that's not to say someone won't crack the code tomorrow. Given Facebook's $1bn price tag on Instagram, it seems to think there's real money in free photo sharing.

Perhaps the US antitrust authorities have finally wised up and decided not to meddle in a market that seems able to retain a mean competitive streak without government intervention. One can hope. ®

Matt Asay is senior vice president of business development at Nodeable, offering systems management for managing and analysing cloud-based data. He was formerly SVP of biz dev at HTML5 start-up Strobe and chief operating officer of Ubuntu commercial operation Canonical. With more than a decade spent in open source, Asay served as Alfresco's general manager for the Americas and vice president of business development, and he helped put Novell on its open source track. Asay is an emeritus board member of the Open Source Initiative (OSI). His column, Open...and Shut, appears three times a week on The Register.

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