Regulation

Meta and the FTC point to different parts of Google’s filings to international regulators to reinforce their views of the market. In an Australian filing where Google was attempting to avoid a social media probe, it stated that even though digital products can have overlapping audiences, “there are a number of use cases that only social media platforms such as Facebook can satisfy.” It earlier told European regulators that it competes with social networks for users.

The FTC presents Filner with a post-mortem document about YouTube’s 2014-2019 experiment with adding social features, such as in-app messaging. “We learned that taking a page from social apps and bluntly asking for contact access in the YouTube app would likely lead to user backlash and rejection,” the document reads. “Users who probably hadn’t batted an eyelash about providing their contacts to Snapchat didn’t see YouTube as a relevant app to share contacts with.”

Filner is currently a senior director of product management at YouTube. The FTC appears to be attempting to demonstrate that YouTube serves a distinct market from Meta’s apps and is not a direct competitor in the “personal social networking” market it has defined for this case.

Goetz says the $19 billion deal was reasonable because, like other companies that get acquired early on, “it looks like a high price, but with the benefit of time, it’s very clear that these young private companies had the potential to emerge into independent public companies.” The FTC has contended that Meta was willing to pay what it did because it was trying to get a potential competitor off the market.

Goetz is supporting Zuckerberg’s earlier characterization of the WhatsApp founders’ “disdain” for advertising and adding social features. He says that, before WhatsApp was acquired, Sequoia partners suggested launching a new app with social media features as a potential business model, but the founders wouldn’t have it. “We were quickly shot down and dismissed,” Goetz recalls. “They were very clear.”

Koum forwarded Goetz a message he got from Zuckerberg in 2013, asking if he’d consider selling for a higher price. “Clear to us that you could get tencent, facebook and google into a bidding war (with microsoft and yahoo trailing). Suggest you avoid the lunch and continue with your craftiness on any reply,” Goetz counseled. He testifies that he wanted Koum to recognize that they had lots of options and could fetch a higher price by playing bidders off each other.

That’s what WhatsApp founder Jan Koum told his investor, Jim Goetz, in a 2012 email. Koum referred to it as a “rumor” Zuckerberg heard, and that he worried Tencent would use the messaging app to compete with Facebook outside of China. “I told him I’ll let him know if we ever do get an offer we would ever consider,” Koum wrote about his interaction with Zuckerberg. “That made him feel better.”

A 2013 Sequoia internal memo notes that, “Multiple companies with a combined market cap in excess of $750B have reached out to WhatsApp at various points in time including Facebook, Microsoft, Yahoo, Google, Twitter, Tencent and NHN. Strategic interest is likely due to the company’s unique positioning as a large, global, independent and growing mobile-only asset.”

Judge Boasberg asks Goetz why he prefers that his portfolio companies go public. Goetz responded that it’s much better for his firm’s returns when promising companies go public, citing YouTube as an example of a company that was acquired and is now a highly valuable asset within the larger Google conglomerate. “They’re typically category leaders, they developed something that is unique, and in most cases, those companies compound 10x in the public markets,” he says.

In a 2012 document, Sequoia noted that Apple had entered the messaging market with the launch of iMessage but that “penetration has been modest and we know of no multi-platform ambitions in Cupertino.” On the other hand, the investor warned, “Facebook is the most significant threat given their user base, exceptional user engagement and willingness to support all the major mobile platforms.”

We’ve moved on to Sequoia Capital’s Jim Goetz, an investor in WhatsApp. The FTC is trying to show that WhatsApp had plenty of resources and investment to make a go of it on its own, or with another company, even if Meta hadn’t scooped it up.

Following the uproar over the 2018 data scandal revelation, Meta’s board considered giving users the option to opt out of advertising and pay for a subscription instead. The slide described the proposed product as a “paid monthly subscription offering that allows users to experience Facebook (and potentially our other apps) without ads.” The goal, it said, was to “address the meme: ‘if you are not paying for a service, you are the product.’”

A slide from a September 2020 Meta board meeting deck showed that Instagram revenue was “meaningfully lower” for the second half of the fiscal year than what the company had planned due to TikTok increasingly attracting users’ attention. That made Meta adjust its revenue estimates to be about $3 billion to $6 billion lower than previously anticipated.

It’s “not true” that Meta shows more ads to people who like sharing with friends and family, Sandberg says, disputing the government’s claim. Judge Boasberg summarizes the FTC’s argument that, because users who prefer sharing with friends are allegedly captive on Meta’s services, the company can increase the amount of ads they see without them leaving. He asks if Meta took those users’ preferences into account in serving ads. “I don’t believe so,” Sandberg says.

Sandberg is echoing something we heard from Zuckerberg, her former boss, over the past few days. These execs argue that consumers seeing more ads in Meta’s apps doesn’t mean the experience is getting worse. Sandberg says ads in features like stories are not very intrusive, and Meta can tell users are still having a good experience based on whether they stop and engage with the ads.

She’s being questioned by Meta’s attorney now, and we’re hearing about her experience working on Google’s advertising business in the early 2000s.

The then-COO had told Zuckerberg in 2012 she thought they were paying too much to acquire Instagram. In retrospect, she testifies, “I was wrong. Like, very wrong.” No one today would say they paid too much for Instagram, she adds, before leaving the stand for the day. We expect she’ll continue her testimony tomorrow.

Sandberg says that network effects — the idea that having more connected users on a platform can make it more valuable — have not done much to help it outcompete rivals in recent years. She points to the popularity of TikTok, which serves content largely from people you already know, and says that “the network effect of having a friends and family graph was much less important over time.”

The FTC is showing Sandberg a 2018 board presentation from soon after the news of the Facebook Cambridge Analytica data scandal broke. Despite a decline in the perceptions users had of Facebook, the company reported to its board that there had been “no visible impact to core engagement metrics” globally or in the US to metrics like time spent.

That’s how Sandberg remembers the discussions leading up to the acquisition. She also acknowledges that Facebook eventually ended its own photos app project after acquiring Instagram.

In a 2011 email, Sandberg told colleagues that Google’s social network meant that “for the first time, we have real competition and consumers have real choice.” She wrote that it would mean “will have to be better to win, our margins may go down over time, we will no longer be able to make as many mistakes and hold onto our core users.” Sandberg testifies she was concerned because Google “created almost an exact replica” of Facebook.

She’s the second witness in the case, and will likely be here for several hours.

The CEO spent around 13 hours testifying over the past three days and he’s finally finished. We heard about his wild ideas for Meta throughout the years, as well as how he views the social media market, and his mindset leading up to his consequential acquisitions of Instagram and WhatsApp, the central focus of the case.

The CEO testifies that it was reasonable for him to take a more assertive role in scaling advertising on Instagram several years post-acquisition. Early on, he says, Instagram co-founder Kevin Systrom “wanted to personally approve every ad that went on Instagram himself.” And while Zuckerberg was initially “happy to oblige,” he says it later made sense to make the app bear more responsibility for generating revenue.

That’s what Zuckerberg tells the FTC attorney who’s questioning him now. Zuckerberg says he didn’t want to deal with the complexity of “any connection that they had to China.” Musical.ly went on to be acquired by China-based ByteDance, was rebranded to TikTok, and grew into a major Meta competitor, he says.

One of WhatsApp’s founders used Craigslist as an example of his ambitions for the messaging service, Zuckerberg testifies, calling the site a “lifestyle company.” And rather than buying WhatsApp to prevent its growth, Zuckerberg says he had to convince its founders to add social features post-acquisition. This cuts against the FTC’s theory that WhatsApp might have grown to challenge Meta’s dominance had it remained independent or under different ownership.

Zuckerberg considered that WhatsApp could pivot its messaging platform into a “formidable competitor” to Facebook until he got to know its founders. “It became completely clear” they would never add the kind of features necessary to do that, he testifies, because they actually “looked down” on such things. “It’s hard to really express the kind of disdain that they had” for what other messaging apps were doing at the time, he says.

But he points out that the largest platforms today have had the backing of larger companies with massive infrastructure, like Google’s YouTube and ByteDance’s TikTok. “Could I say it would have been impossible for them to do it without us? Obviously not. I mean, we did it,” he says. “But does it seem like it would have been likely?” Definitely not, he says.

Instagram’s growth was never preordained, Zuckerberg says, and the app benefited from Meta’s investment to get to the massive reach it has today. At the time of the deal in 2012, Zuckerberg hoped to grow Instagram from 10 million to 100 million users. It reached a billion users by 2018. Had Meta not bought Instagram, Zuckerberg says, “it’s very hard to know” how things would have turned out. That’s a key challenge for the FTC to address.

The CEO is challenging one of the core arguments of the FTC’s case: Meta’s alleged intent to grow its monopoly power by taking out rivals. “Was the intent to stop offering or stop making Instagram good? Absolutely not,” he testifies.

This old Andy Grove quote is how Zuckerberg describes his mindset toward competition. He says it has been interesting to look back on all the things he was worried about that never materialized the way he expected. One example is Dropbox, which he saw as an “upstream” feature that could eventually become competitive based on its photo storage offerings. “I was focused on things that ended up being so different,” he says.

Zuckerberg says network effects — where more users on a platform makes it better — are not always a good thing, even though the FTC says they’ve grown Meta’s power. He’s previously worried about this so much he’s considered resetting users’ Facebook friends. After accumulating friends over time, users might “wake up one day five years later” and realize they’re following people they no longer care about, he says. But AI recommendations have helped solve for this.

We’ve seen a lot of old emails over the past couple of days where Zuckerberg has expressed frustration and a sense of urgency to catch up with rivals that seem to be on Meta’s heels. He’s spinning these documents as a function of his own competitive spirit. “You can bet that I’m not going to rest until we do quite a bit better than where we’re at now,” he testifies about today’s competition with TikTok.

We’re getting started with day three of Meta’s antitrust trial with some controversy. A Snap attorney complains to Judge Boasberg that Meta released slides with inadvertently flawed redactions. He also accuses Meta’s lead attorney of openly referencing Snap’s competitive assessments that should have been private.

In an echo of an infamous exchange from one of Zuckerberg’s earlier visits to Washington, Judge James Boasberg asks the CEO to clarify how iMessage and WhatsApp make money. Zuckerberg explains that Meta sells ads that send people to chat with businesses on WhatsApp. He also tells the judge that he thinks Apple is incentivized to keep iMessage exclusive to iOS so that its users don’t want to switch from iPhones to Android.

When asked by Meta’s lead lawyer, Mark Hansen, Zuckerberg says he doesn’t know what MeWe is and “hadn’t heard of it” prior to this case. Aside from Snapchat, MeWe is the other app the government says is in the same “personal social networking services” market that Meta allegedly monopolizes.

As an aside to a question about European regulations, Zuckerberg says that “it seems no matter what we do, the European Union seems to find we’re not following their rules.”