What next for Instagram as the founders exit?

Increased scale for Facebook raises user and competition issues

This article is republished with permission from Knowledge @ Wharton, the online business journal of the Wharton School at the University of Pennsylvania, which owns the copyright to this content.

Instagram co-founders Kevin Systrom and Mike Krieger are resigning amid reports of rising tension with parent company Facebook, a decision that ends their six-year relationship with the social media giant and fuels speculation about the future of the popular photo-sharing app.

The founders sold their fledging app to Facebook in 2012 for almost US$1 billion and stayed on – Systrom as chief executive and Krieger as chief technical officer – while Facebook transformed the platform into a mega-success and one of its main sources of advertising revenue.

According to Bloomberg News, Instagram grew from 30 million registered users when it was acquired to one billion monthly users in 2018. The media outlet in June estimated Instagram's worth at more than US$100 billion (A$1.42 billion).

While Systrom, 34, and Krieger, 32, have not commented publicly on their reasons for leaving, they said in a statement that they want to take some time off and regroup: "Building new things requires that we step back, understand what inspires us and match that with what the world needs; that's what we plan to do."

Facebook CEO Mark Zuckerberg also issued a statement praising the founders' talents and leadership, but made no mention of the reported clashes over changes to the product.

Kevin Werbach, Wharton professor of legal studies and business ethics, and Jennifer Golbeck, an information studies professor and director of the Social Intelligence Lab at the University of Maryland, look ahead to what may happen next for Facebook, which is dealing with pressing concerns about data security and potential of federal regulation.

The following are five key points from their observations.

Promises are made to be broken

It's not uncommon for founders to leave in the months or years after an acquisition as their creative control deteriorates and product vision shifts. The business landscape is littered with examples, including previous resignations at Facebook.

Zuckerberg purchased messaging platform WhatsApp in 2014 and retained founding member Jan Koum, who also joined Facebook's board of directors. But Koum announced in April he was leaving amid unconfirmed reports of conflict over the direction of the company.

"Facebook gets in there, and they promise to leave them alone and let them do their thing, then Facebook eventually starts meddling with them and trying to make them Facebook-like," Golbeck says.

"If you've built this thing and really have a vision for it as something different than Facebook, that can be disheartening. And that's what we've seen now for the second time."

She notes the departure of Systrom and Krieger wasn't much of a surprise, considering how Facebook changed Instagram "in ways that nobody really liked". For example, the Instagram founders were proud that they did not include a three-line 'hamburger menu' on the app, but Facebook later added it.

"On the one hand, that's a little thing," Golbeck says. "On the other hand, if you are guaranteed that you have control over your app and Facebook's just going to own you, and then they start messing around with things like that or throwing Facebook notifications into Instagram and kind of ruining the experience that you've created, I'm not at all surprised that that frustration reached a boiling point and led us to this spot."

Werbach says most founders have a creative drive and entrepreneurial spirit that simply doesn't go away because of an acquisition. Ambition often leads them to seek the next thing in their professional lives.

"We shouldn't make too much of these executives leaving because the reality is, the vast majority of the time when founders get bought, eventually they leave those acquiring companies because they want to be entrepreneurs," he says.

"They want to run small, interesting companies. They get bored when this thing is the same thing week after week or they're in a huge organisation. So, that's not that shocking. The timing is such that anything that happens around Facebook is going to get scrutiny and be controversial."

According to Werbach, the real issue going forward is competition. Instagram has one billion users and Facebook has 2.2 billion, so where do they go from there?

"There's no way to segment the market. There are not that many two or three-billion people markets in the world. There are only seven or eight billion people on the planet, so everyone's going after the same things," he says. 

'I think they understood what they were getting into, getting bought by Facebook. A billion dollars is a lot of money'


As always, money talks

Werbach suspects that Systrom and Krieger had no financial reason to stay at Facebook. The pair founded Instagram in 2010 as a location check-in app, working out of a humble office in San Francisco. The deal with Zuckerberg made them instantly wealthy.

"I think they understood what they were getting into, getting bought by Facebook. A billion dollars is a lot of money," Werbach says, reminding observers that money is at the heart of any business transaction.

"It's part of this larger maturation process that we all need to stop thinking about these companies as somehow different, inherently, from normal businesses.

"Mark Zuckerberg really is idealistic. These people really do believe they are changing the world for the better. But, ultimately, you're going to make a business decision. You're going to do things with a financial incentive, and that's true for the people buying and the people selling."

Golbeck agrees. "When there's US$1 billion on the table, I think they have tried to negotiate the right agreement so they could keep building the thing that they love and not have it just become Facebook. That works for a while and despite the agreements, it doesn't last forever," she says.

Facebook is a ruthless competitor

Many social networks have come and gone, and nascent Instagram could easily have been one of them. But Zuckerberg saw its appeal, and went in for the kill.

"Instagram was a company that could have been a very serious competitor to Facebook. It didn't look like it at the time. It was tiny, but Facebook bought it ... and then built it up into something big," Werbach says.

"It's just inherent in the logic of a company like Facebook that is so relentlessly focused on growth, that you can't avoid the kind of meddling that we're talking about. Again, if you don't want to be part of that, then you can't really change Facebook from the inside."

By their very nature, technology companies must evolve quickly, so they are constantly searching for the next big thing. When Instagram began, smartphones were just getting started – along with selfies. Facebook began falling out of favour with the younger generation, which flocked to photo and video-based apps such as Instagram and Snapchat.

According to the professors, it makes sense that Facebook wanted to acquire Instagram, in much the same way that Google wanted to purchase YouTube.

"Allowing Google to buy YouTube also seemed like, 'Oh my God, they're crazy! Why are they spending $1.5 billion on this little video-sharing site?" Werbach says.

"It was hugely important to Google as Google, and to Google in terms of preventing certain kinds of competition."

'Even though it’s a different platform, [I think Instagram is] going to essentially converge with Faceboo


What happens if the platforms merge?

While Facebook and Instagram still maintain their separate identities, some of their functions are starting to become similar, such as the 'stories' feature that allows users to create video and photo collections on either platform.

The professors say convergence is somewhat inevitable in business.

"The issue is, will what comes next be something fundamentally different, or will it be the same kind of platform that's making the same kinds of trade-offs and focusing in on the same kinds of techniques to just ramp up engagement at all costs, which is what has led to some of the problems, some of the controversies?" Werbach says.

"I think Instagram as part of Facebook can't escape from that, even though it's a different platform. It's going to essentially converge with Facebook."

While Golbeck thinks it was smart for Facebook to acquire Instagram, she doesn't think merging the platforms would work. If they become too similar, there is no reason for people to use both.

Golbeck adds that she's often asked to predict the future of social media – not an easy task. Eight or nine years ago, she was predicting that people would want to separate their activities into different applications with different contexts, "because they don't want one behemoth of Facebook where everybody they know is looking at everything they do".

She believes that trend will continue. "Merging into the main Facebook, to just have it be another feature, is the thing that upset the WhatsApp founders. It upset the Instagram founders. It upset the users," she says. "I'm not sure Facebook is going to be successful if they push that as their main strategy."

'Merging into the main Facebook, to just have it be another feature, is the thing that upset the WhatsApp founders'


Don't forget about AT&T

The headlines about Facebook's business transactions underscore a looming issue for the social network: the potential for federal regulation as the company grows even bigger.

Facebook is valued at more than US$500 billion. But regulation isn't just a threat for Facebook. Alphabet, which is the parent company of Google, is closing in on Apple's US$1 trillion valuation, and Amazon became the second US company to reach that mark in September.

The amassed financial and technological power of these companies reminds Werbach of what happened to AT&T. In perhaps the nation's best-known case of anti-trust law, the US federal government broke up the communications monopoly in 1982.

"Obviously, it's hard to make any kind of policy predictions, given the current environment in Washington," Werbach says. "Although this issue of anti-trust is one that crosses over party lines. It's one where Trump himself has been very aggressive in seeking oversight of the technology companies, for example."

It would be easier for policymakers to prevent mergers from happening to begin with, but it would not be unthinkable for them to try to break up big companies in the name of competition. The professors say they also expect policymakers will come up with new mechanisms to encourage competition, rather than just regulations to block acquisitions.

Facebook's recent troubles over data security have increased regulatory attention on tech companies, which are being accused of pursuing profits over safeguarding user information.

In April, Zuckerberg testified before Congress to answer questions about how Cambridge Analytica was able to interfere with the 2016 elections using data from Facebook. Recently, Facebook disclosed that the personal information of almost 50 million users had been exposed in a security breach, the largest in its 14-year history.

Golbeck notes that both Facebook and Google are starting to get antitrust "pushback" in Europe, and she believes the US will also ramp up pressure.

"Their issues are more on the privacy side in Europe, but we've certainly seen that," she says.

"We saw it with Microsoft in the 1990s and 2000s. It will be interesting to see how that plays out here, especially as we hopefully move towards the space where we get some privacy regulation, or some regulation around personal data holding, because I think that is going to show just how centralised the personal data is in the Facebook space ... and how much influence that has over the industry of online advertising."


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