Why The OFT And FTC Let Facebook Buy Instagram: FB Camera Is Tiny, IG Makes No Money, And Google

Evidence from Facebook and Instagram plus analysis from outside experts has convinced the Federal Trade Commission to today approve the landmark acquisition. After four months of investigation, the UK’s Office Of Fair Trading that works with the FTC also revealed exactly why it approved the deal.

The OFT cites that Camera+ and other competitors dwarf Facebook’s standalone Camera app, Instagram has no revenue and limited ways to earn any, and that Google’s ad business and social network will be stiff competition for Facebook even if it owns Instagram.

Here’s the breakdown of the OFT’s decision, which likely includes many parallels to how Zuck got his way in 5-0 FTC vote for Facestagram.

A Bag Full Of Cameras

One reason cited in the Office Of Fair Trading’s decision to allow the acquisition to proceed was that Facebook’s own standalone Camera app lags far behind other mobile photo apps:

“According to data provided by the parties, Camera Awesome and Hipstamatic have been downloaded more than three times more than Facebook Camera, Facebook’s camera app. Camera+ has been downloaded more than six times more than Facebook’s camera app. Instagram has been downloaded more than 45 more times than Facebook Camera. Whilst this is an imprecise measure of market share and does not scale for Facebook Camera’s relative recent entry onto the market, it gives some indication of the availability and popularity of other photo sharing apps.”

Essentially, Facebook wouldn’t have a monopoly on mobile photo sharing if the deal closed. As of March, Camera Awesome had four million downloads. With healthy growth to 6 million since, that would put Facebook Camera at around two million downloads, which roughly meshes with being 1/45th the size of  Instagram’s 80 million active user count.

The Instagram buy will certainly put it in the lead, especially considering Facebook sees 300 million photo uploads a day to its service and has the largest photoset in the world. Still, it won’t be untouchable.

The whole situation might titillate conspiracy theorists who’d suggest Facebook launched but didn’t really promote Facebook Camera just to help close the Instagram deal. But the negotiations were swift and Facebook released its own standalone app just a month and a half after signing the deal — likely too little time to build an app to fool the FTC.

No Green For The Little Brown App

Instagram’s lack of advertising also convinced the OFT to halt its investigation.

“The parties’ revenue models are also very different. While Facebook generates revenue from advertising and users purchasing virtual and digital goods via Facebook, Instagram does not generate any revenue…In terms of whether Instagram may have the potential to compete with Facebook’s photo sharing app for advertising revenue, one third party told the OFT that it does not consider that Instagram provides significant marketing opportunities. The commercial opportunities are limited because consumers take and upload photos, but do not spend a significant amount of time in the app. This limits its attractiveness to advertisers for two reasons. First, eyeballs are not on the app for a significant period of time and second, limited user data is captured.”

That’s somewhat believable, but I think Facebook may have lucked out on this one. Yes, Instagram wasn’t competing with it for ad dollars yet, but that’s partly because it was purposefully staying lean and focusing on product rather than hiring a sales team. But with the location data Instagram has on where users take photos, it could have sold ads to local businesses in the form of glossy marketing photos inserted into the feed.

If the deal finally goes through, Facebook will be able to lend Instagram its enormous sales squad. They could get big retailers with lots of brick-and-mortar stores like Target to run Instagram feed ads to nearby users.

Stiff Competition From Google

Even if Instagram does help Facebook monetize mobile, they’ll still be far behind Google’s ad business. The OFT noted that “The parties advised that Google has a 44 per cent share of global online advertising expenditure”. There’s also Yahoo and Microsoft to compete with.

Google’s got Google+ sucking up targetable user data, so Facebook won’t suddenly become the only social graph. Finally, Google controls the Google Play Android app store where Instagram is downloaded from. In what seems misinformed, the OFT cited this as a reason why Facebook wouldn’t or at least wouldn’t gain from shutting down (or foreclosing) Instagram’s ability to share to Google+:

“In addition to its strength in advertising, its competitor status through Google+ and its important role as an advertising intermediary, Google also operates Google Play, an online app store for the Android mobile operating software. Overall, Google appears to have several options for retaliation in the event that its social network was foreclosed by the merger parties.”

That doesn’t make any sense considering the only way to share to Google+ from Instagram is on Android after you share a photo, you can use Google’s “Intents” cross-app sharing to post a photo to Google+. It’s a native Android OS feature Instagram doesn’t control, and it might not be able to shut off. So Facebook doesn’t have much to threaten Google with, and if Google tried to retaliate by dropping Instagram from Play, it would probably cause a hate tsunami from developers and could even push users to buy iPhones.

For all these reasons, the OFT concluded “This merger will therefore not be referred to the Competition Commission under section 33(1) of the Act.” The FTC likely came to approve the deal based on similar information.

With the green light, the deal could be getting closed by Mark Zuckerberg and Kevin Systrom right now, and the two could announce the marriage of Facebook and Instagram as soon as tomorrow morning. Then we’ll finally see what the world’s top social network plans to do with the apps that opened our eyes. Here’s a few ideas.