Facebook executives approached Ali Partovi, the creator of a popular app that used Facebook’s data, a decade ago with a threatening ultimatum. Sell your company to us or we will shut you down, according to legal filings. Partovi’s app, iLike, had built a predecessor to the “like” button.
The negotiations — when Facebook was a much smaller player — are early evidence of the hardball tactics to neutralize competition that got the social network to where it is today: a platform that counts more than a third of the world’s population as monthly users of its family of apps, which include WhatsApp messaging and the photo-sharing service Instagram.
That behavior is now the subject of sweeping antitrust lawsuits filed Wednesday from 48 state attorneys general and the Federal Trade Commission. The suits allege that the company is a monopoly that abused its market power through years of anti-competitive conduct and illegal acquisitions, enabling Facebook to become the world’s largest social network while stripping users of alternatives.
The suits call specifically for breaking up WhatsApp and Instagram, which Facebook bought in 2014 and 2012, respectively. It quotes Facebook chief executive Mark Zuckerberg identifying both companies as growing threats that needed to be neutralized.
Facebook on Wednesday said the FTC’s actions would have a chilling effect on innovation and that the acquisitions had been reviewed by regulators at the time, including the FTC. “Now, many years later, with seemingly no regard for settled law or the consequences to innovation and investment, the agency is saying it got it wrong and wants a do-over,” the company said in a statement.
In an email to staff that was also posted on the company’s website, Zuckerberg said that the company faced an incredibly competitive landscape, noting Google, Twitter, Snapchat, Apple’s iMessage, TikTok, and YouTube. He also said that he didn’t anticipate any impact from the lawsuit on people’s jobs.
The social network has made a habit of buying up, threatening, spying on and outright copying rivals, a strategy so successful that some investors have said in recent years that there was no point in even funding or building social apps anymore.
Facebook would “pounce” on competitive threats in the same way Microsoft did when it got into trouble with regulators, Scott Sandell, managing partner of the venture capital firm New Enterprise Associates, who was product manager for Microsoft’s Windows 95 until 1995, told The Washington Post in a 2017 interview.
Although Zuckerberg made promises of independence to the founders of WhatsApp and Instagram when he purchased the companies, today those apps are fully merged into Facebook, making a breakup technically challenging.
“Facebook is about to find out if there will be consequences to undermining American democracy and public health,” said Facebook critic and former investor Roger McNamee. “They have scrambled to make the job of regulators more difficult by merging the back end of key products.”
For most of the company’s history, Zuckerberg was laser-focused on growing the company’s user base, which had skyrocketed to a half-billion users at the time of its 2012 public offering, eight years after its founding — a trajectory that was then unheard of for a technology company. But Facebook was threatened by rising upstarts, including Path and Instagram.
Zuckerberg was impressed by Instagram’s exclusive focus on visual communication, telling a deputy that the company was “approaching this problem from the perspective of how to help people take beautiful photos,” which was different from Facebook’s “gimmicky” approach, according to the FTC suit. Facebook had not conquered smartphones.
Zuckerberg thought that utilizing the phone’s camera was a growing trend in social networking, one the company did not want to fall behind on. “One concerning trend is that a huge number of people are using Instagram every day,” he wrote, according to the documents. The prospect of falling behind was “really scary,” Zuckerberg said.
Zuckerberg’s purchase of Instagram for $1 billion, which took its 16 employees by surprise, came with promises of independence.
But shortly after the company was acquired, a team from Facebook came in and began introducing photo-tagging and other Facebook features. Instagram’s product teams thought these features were too identified with Facebook, according to people familiar with the meetings. Facebook also prevented Instagram from introducing features that would compete with Facebook, according to documents in the lawsuit.
The clash over Instagram’s independence eventually led its founders, Kevin Systrom and Mike Krieger, to quit in 2018.
Over the years, the two apps have become fully integrated, sharing user data, ad systems and merging messaging services.
In 2013, Facebook ramped up its growth strategy by purchasing a little-known app called Onavo. Onavo marketed itself to the public as providing secure virtual private networking services.
On the back end, however, it also tracked users’ online activity, including what apps they used, allowing it to see which ones were becoming popular. Executives would receive “Early Bird” reports on apps surging in popularity, according to the lawsuit, and quickly learned that WhatsApp was gaining 1 million users per day, many in the developing world. (Facebook shut down Onavo in 2019 after public scrutiny.)
Facebook executives feared being usurped by mobile messaging services, which were taking on the characteristics of social networks. One executive described the rise of mobile messaging services as “the biggest threat to our product that I’ve ever seen in my 5 years here at Facebook … we’re all terrified,” according to the FTC documents.
Another Facebook executive described WhatsApp chief executive Jan Koum as the company’s biggest competitor, and that Facebook’s greatest problem would be if WhatsApp landed in the hands of Google.
When Facebook acquired WhatsApp in 2014, for $19 billion, it was one of the largest acquisitions in the history of Silicon Valley.
Zuckerberg told WhatsApp co-founder Brian Acton that he would not merge data from Facebook with data from WhatsApp, a promise that Acton reiterated to European regulators, who were scrutinizing the deal.
But a few years later, that is exactly what Facebook did. That move — and other actions to compromise WhatsApp’s independence — led Acton and Koum to quit the company and Facebook to be fined $122 million by the European Union in 2017.
As Facebook grew through acquisitions, it also cut off smaller competitors that depended on its platform. Facebook had long given developers access to its platform, known as an API, but was often fickle with how developers could use the data. The FTC’s lawsuit alleges that Facebook used its clout to leverage its power and hurt competition.
The FTC’s charges echo claims from a previous case brought by an app developer, SixFourThree, which charged that it was killed off by Facebook when the company made a sudden change to restrict its data.
In 2011, Facebook changed its policies so that apps which could potentially compete with Facebook were no longer allowed to use its data. The policy change was so abrupt that one employee protested, “I think it … sends a message to the world (and probably more importantly to our employees) that we’re scared that we can’t compete on our own merits,” according to the lawsuit
But Facebook knew it could do what it wanted because by that time its API had become essential for any aspiring social app, according to documents unearthed by the FTC.
Even as Facebook’s problems have mounted in recent years, few in Silicon Valley have been willing to publicly criticize the company’s business practices.
But the impact has surfaced in court records. In a deposition in the SixFourThree lawsuit, Partovi, who declined to comment, said he never forgot Facebook’s intimidation tactics. “When you’re threatened, it only takes once,” he said. “So from that point on, we lived under that threat.”