Facebook boss Mark Zuckerberg. Photo / Getty Images
"This is the biggest threat to our product that I've ever seen in my five years here at Facebook," the email read. "We're all terrified."
It was October 4, 2012, and Facebook was already the world's largest social network. Having agreed to buy Instagram for an unprecedented US$1bn (NZ$1.4bn) only seven months earlier, it was still recovering from a disastrous public float and racing to catch up with a worldwide shift towards smartphones.
Now a new threat was on the horizon: WhatsApp. Facebook's chief executive Mark Zuckerberg and his lieutenants had watched in mounting alarm as the little green messaging app rapidly mushroomed across the world. Fearing displacement, Facebook began making overtures to buy WhatsApp too – finally succeeding in 2014 for an eye-watering US$19bn.
The email above, sent by Facebook's then director of product management, is one of many frantic internal exchanges revealed by US investigators on Wednesday. In two long-awaited lawsuits, federal and state officials accused Facebook of systematically abusing its market power to kill off competition and maintain an illegal monopoly.
The complaints, filed by the Federal Trade Commission (FTC) and a coalition of 48 states and territories, both sought to put roadblocks on Facebook's future acquisitions, and could even lead to the break-up of its business.
They quote extensively from emails, memos and messages in which Facebook employees discuss how to destroy rising threats to their business, in some cases expressing moral doubts about the company's behaviour.
Facebook responded forcefully, describing the suits as "revisionist history" that would have a "chilling effect on innovation" and put businesses on notice that "no sale will ever be final". It vowed to fight and win the case on the basis that buying Instagram and WhatsApp made them better for consumers.
For now, the two cases – based on a mixture of new and previously reported documents – form the clearest picture yet of how Mark Zuckerberg and his "super paranoid" executives have fought ruthlessly over the last 12 years to keep Facebook on top.
Facebook's relentless quest to snap up other apps
According to the FTC, the story of Facebook's decade-long spree of strategic acquisitions begins when the company was only four years old.
In June 2008, Facebook was firmly on a path to dominate the new-fangled social media market, having just surpassed the doomed incumbent Myspace. That month, the FTC quotes Zuckerberg as saying that "it is better to buy than compete". He soon had a chance to put that into practice.
In 2009, Facebook acquired Octazen, a Malaysian company that automatically imported users' phone contacts into an app, a now-ubiquitous function in social networks, and FriendFeed, which aggregated content from multiple social networks into one feed. In both cases Facebook later cut off other companies' access.
The states' lawsuit alleges that these deals were intended to prevent Twitter, then a major rival, from using or buying them. One executive mused that buying Octazen "for a few million" could be worth it to "slow some competitors down for a quarter or so".
Another employee told a colleague: "I remember you said to me a long time (six months ago) 'we can just buy them' when I said to you that Friendfeed is the company I fear most. That was prescient! :)."
'We're getting our ass kicked by Instagram'
When he was first told by one of Facebook's investors in January 2012 that Instagram might be worth $500m, Zuckerberg considered that price "crazy". Although it was a sensation in Silicon Valley, it still made no money and had only a handful of employees.
But the Facebook chief had already had his eye on the app for some time. As early as February 2011, the FTC quotes him telling employees: "we need to track this closely." Attempts to build its own photo app fell behind, leading one executive to berate the team for "getting our ass kicked by Instagram".
Instagram's rise came at a delicate time for Facebook, which was scrambling to make up for its lethargy in adapting to smartphones. Zuckerberg's fear was that if Instagram was allowed even a modest foothold in photo sharing, it might start copying Facebook's core features.
By January 2012 he was fretting that Instagram's unique features gave it "ways to replace us".
"What we're really buying is time," he told chief financial officer David Ebersman. "Buying [rivals] now will give us a year or more to integrate their dynamics before anyone can get close to their scale again."
In a now famous exchange, when asked whether his goal was to "neutralise a competitor", Zuckerberg said yes. Forty-five minutes later, he sent a follow-up: "I didn't mean to imply that we'd be buying them to prevent them from competing with us in any way."
Meanwhile, the engineers working on Facebook's rival app were in a panic, with one manager demanding: "We need to get into ship mode asap. Not sure if you've seen the recent Instagram numbers but we just don't have time."
It all turned out well, for Facebook at least. On the day the deal went public, Zuckerberg privately mused that the nice thing about start-ups was that you could always simply acquire them.
WhatsApp: 'the biggest threat we've ever faced'
The toner was barely cold on the Instagram deal before Facebook began worrying about another gap in its armour. The company's last-minute pivot to mobile had left it perilously behind on private messaging, which Zuckerberg believed to be "the single most important app on anyone's phone".
While hard to monetise, messaging apps targeted the most dense and "intimate" part of users' social lives. The most popular, such as China's WeChat, were already becoming a launch pad for other services: gaming, payments, and ultimately a new kind of social network built from the start for smartphones.
This strategy was termed "morphing" by Javier Olivan, Facebook's vice president of growth. According to the states' complaint, he argued that morphing messenger apps were "arguably the most dangerous beachheads", and Zuckerberg agreed.
WhatsApp was considered to be the most dangerous. Throughout 2012 and 2013, Facebook's "terrified" director of product management was joined by a chorus of executives who described the app as "our biggest competitor", "the real deal" and "the biggest threat we've ever faced".
One said: "WhatsApp launching a competing platform is definitely something I'm super paranoid about."
Another worry was that that WhatsApp might end up in "the wrong hands". According to the FTC, when a colleague suggested that the app would be a choice target for Google, Olivan said: "That is definitely what I would do if I was them."
And so the asking price climbed steadily. In 2012, Zuckerberg suggested paying $1bn; in 2013, $5-6bn; in 2014, WhatsApp was finally his at $19bn.
The FTC quotes one manager's approving message: "Worth it. Prevents probably the only company which could have grown into the next Facebook purely on mobile... 10pc of our market [value] is worth that."
Facebook's ownership was a death sentence for some apps
In Facebook's response this week to the two lawsuits, general counsel Jennifer Newstead lent heavily on the idea that WhatsApp and Instagram have Facebook to thank for their modern superstar status.
Similarly, she argued that WhatsApp "had very little presence in the US" and was being held back by its subscription fee (a princely $0.99 per year).
Yet Wednesday's lawsuits contain ample evidence that Facebook's decision to buy the apps was driven by a belief that they were already becoming successful enough to be dangerous.
In fact, according to the states' complaint, Zuckerberg dismissed the idea that Instagram's tiny team and lack of revenue made it a risky purchase, arguing in 2012 that the app had been "on the path to win".
WhatsApp, too, appears to have been regarded as a genuine threat precisely because it might grow to replicate Facebook if left alone.
'It just makes me feel like a bad person'
Beyond the mergers, both lawsuits also focus on how Facebook has wielded its control over who can access its data to punish rivals and bring other companies in line.
Much of that behaviour was first revealed in 2018 in a cache of documents published by British MPs, which showed Zuckerberg ordering executives to block competitors from integrating their systems with Facebook's services.
Some sections are tantalisingly redacted, referring to numerous apps which the lawsuits allege were damaged or destroyed by Facebook's capricious guardianship of its official external interfaces, known as APIs.
In her response, Ms Newstead dismissed those actions as "standard in the industry", saying that many other Silicon Valley firms enforce similar rules and many do not allow public access to their APIs at all.
"Companies are allowed to choose their business partners, and it gives platforms [such as Facebook] comfort that they can open access to other developers without that access being exploited unfairly," she said.
But according to US officials, Facebook employees were not so certain. Mirroring claims made in a recent civil lawsuit by an aggrieved app makers, the states accuse Facebook of luring developers into depending on open access to its systems before ruinously closing the gate.
Some workers are also said to be unhappy with Facebook's "selective" treatment of rival services, with one allegedly objecting to the idea of putting apps in different categories of access based on "how scared we are of them".
In response, Facebook's head of developer products is quoted as defending the changes but admitting that they were "not great". An engineer piped up: "That feels unethical somehow, but I'm having difficulty explaining how. It just makes me feel like a bad person."
- Telegraph Media Group
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