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Facebook Instagram Acquisition Closes

Facebook Instagram Acquisition Closes

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Published by Josh Constine

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Published by: Josh Constine on Aug 22, 2012
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07/10/2013

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Anticipated acquisition by Facebook Inc of Instagram Inc
ME/5525/12The OFT’s decision on reference given on 14 August 2012. Full text of decisionpublished 22 August 2012.
Please note that the square brackets indicate figures or text which have beendeleted or replaced in ranges at the request of the parties or third parties forreasons of commercial confidentiality.
PARTIES
1.
 
Facebook, Inc.
(
Facebook
) is an internet platform for people to stayconnected and to express themselves to their family and friends. Within theFacebook environment, there are multiple ways for users to shareinformation including: posting news items, individual messages, displayingphotos and videos, playing games and organising events. Third partysoftware developers can develop apps and websites and make themavailable to users in the Facebook environment. In the year ended 31December 2011, Facebook earned revenues of US$3.7 billion fromadvertising, and sales of digital and virtual goods.
 
2.
 
Instagram Inc. (Instagram)
was founded in March 2010 and as at 6 June2012 consisted of 13 employees. Instagram’s product is a free mobilephone photo application. It functions by allowing users to take photos,apply digital filters to those photos, and then share those photos on theInstagram network or via other social networks, including Facebook.Instagram has generated no revenue since it was established.
TRANSACTION
3.
 
Facebook proposes to acquire the entire issued share capital of Instagramfor consideration of $300 million in cash and 22,999,412 shares of
1
 
Facebook common stock (
Transaction
). Facebook proposes to acquireInstagram through [ ].
4.
 
The Office of Fair Trading (
OFT
) opened its own investigation into theTransaction on 21 May 2012. The administrative deadline is 16 August2012.
JURISDICTION
5.
 
As a result of the Transaction Facebook and Instagram will cease to bedistinct. Given that Instagram has not generated any turnover since it wasestablished, the turnover test set out in section 23(1)(b) of the EnterpriseAct 2002 (the
Act
) is not met. The parties overlap in the supply of virtualsocial networking services. Facebook’s share of supply in the UK of virtualsocial networking services is over 25 per cent
1
and, given that Instagram isactive in the supply of virtual social networking services, the Transactionwould result in an increment.
2
 Consequently, the share of supply test insection 23 of the Act is met.
6.
 
The OFT therefore believes that it is or may be the case that arrangementsare in progress or in contemplation which, if carried into effect, will resultin the creation of a relevant merger situation.
FRAME OF REFERENCE
7.
 
Social networks are two-sided markets. They compete to add users and toattract advertising revenue. Advertisers are willing to pay to purchaseadvertising space on the social networks’ sites and apps based on thenumber of users that the network has and the information that thenetworks records on those users (for example, their demographics).
Product scope
8.
 
Facebook is active in the provision of three relevant services: socialnetworking to users, a camera app to users (launched after the
1
2
The parties are deemed to supply these services even though they do not charge for them byvirtue of section 128(3)(c) of the Act.
2
 
announcement of the transaction), and advertising space to advertisers.The majority of Facebook’s advertising is display advertising.
9.
 
Instagram provides an app allowing users to take and modify photos andshare those photos with other users on the Instagram network or post thephotos to other social networks (including Facebook).
10.
 
As no substantial competition concerns arise on any reasonable frame ofreference affected or potentially affected by the Transaction, it was notnecessary for the OFT to reach a conclusion on the exact scope of theframe of reference in this respect.
Geographic scope
11.
 
Subject to limited exceptions, users can access Facebook anywhere in theUK that they can obtain an internet connection. Advertisers are interestedin targeting users with particular demographic, psychographic, andbehavioural characteristics. Third parties told the OFT that the scope of thegeographic market may be limited by national boundaries because ofidiosyncrasies of language and culture.
12.
 
Instagram users need internet access to download the app and sharephotos electronically, but do not need internet access to take photos. Onceuploaded to say the iTunes store (for example), apps can be downloadedfrom anywhere that the mobile telephone user has an internet connection.
13.
 
The relevant frames of reference are likely to be international, albeit someadvertising is likely to be national. As no substantial competition concernsarise on any reasonable frame of reference affected by the Transaction, itwas not necessary for the OFT to reach a conclusion on the exact scope ofthe geographic frame of reference in this respect.
HORIZONTAL ISSUES
14.
 
The OFT considered two unilateral effects theories of harm: actualcompetition in the supply of photo apps and potential competition in thesupply of social network services.
3

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