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Facebook's Instagram deal gets FTC second request

by William McConnell in Washington | Published May 30, 2012 at 5:24 PM

Facebook Inc. confirmed Wednesday that it has received a second request from the Federal Trade Commission for its $1 billion purchase of Instagram Inc.

The request for information extends the FTC's review beyond the initial 30-day waiting period, perhaps substantially, as the FTC investigates its competition concerns.

The review, however, is expected to pose little threat to the acquisition. Even Facebook's critics concede that the FTC will have little ground for imposing conditions on the deal, much less convincing a court to block it.

Reuters, citing an industry source, said Tuesday that Facebook had received the FTC's second request on May 15.

In an e-mailed statement Tuesday, a Facebook spokesman said, "We'll continue to work closely with the FTC as the agency reviews this transaction and look forward to answering any questions that arise."

Challenging the deal based on the competitive threat critics say is posed by the Instagram deal, would require the FTC to accept a novel theory of harm. Although Instagram's application, which enables superfast uploading of photographs to social networks or websites, has become popular, the company has roughly a dozen employees and no revenue. Instagram can hardly be considered a player in any defined market. It also can't claim to be a critical platform for social media -- Facebook developed its own mobile photo app with ease.

The harm the FTC is being asked to consider by rivals such as Google Inc. and Twitter Inc. is whether the rapid scale-up in Instagram's user base could one day allow it to become a social media outlet on its own, a potential competitor that Facebook is nipping in the bud. Indeed, Instagram saw roughly 14.6 million unique users in April, up from 8.2 million in March, according to web marketing research firm comScore Inc.

Ankur Kapoor, antitrust partner at Constantine Cannon LLP said that while Instagram's size pales in comparison to Facebook's 900 million users, the rapid increase in Instagram usage demonstrates that it has the potential to grow to a competitive scale.

"What really matters in Internet competition is the user base. Facebook's user base is unprecedented and gives it a dominant position as a social network," Kapoor said.

The next best thing is Google+ but "really there's nobody else," he said. "Scale is hard to get but Instagram has gotten it very quickly. The FTC will want to know to what extent Instagram may have been planning to add additional services like video and text messaging. If internal documents show Instagram was considering challenging Facebook on other social media services it could decide the deal is a threat to competition."

Several tech analysts have noted, however, that Instagram's rapid traffic increase is largely due to its popularity among Facebook users and the service's ability to piggyback on Facebook's scale and that the company put itself up for sale, an indication that if Instagram had plans to compete with Facebook head-to-head, those plans have been abandoned.

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