Sheryl Sandberg, a former executive at Meta Platforms, today recounted in US court how the company's leadership fretted over upsetting shareholders as it stared at a potential revenue shortfall of $6 billion in 2020 thanks to stiff competition from TikTok. The admission by Meta Platforms' former chief operating officer comes a day after the company's chief executive, Mark Zuckerberg, described the Chinese video-sharing app as the "highest competitive threat" to Instagram and Facebook over the last few years.
Sheryl Sandberg, a former executive at Meta Platforms, today recounted in US court how the company's leadership fretted over upsetting shareholders as it stared at a potential revenue shortfall of $6 billion in 2020 thanks to stiff competition from TikTok. The admission by Meta Platforms' former chief operating officer comes a day after the company's chief executive, Mark Zuckerberg, described the Chinese video-sharing app as the "highest competitive threat" to Instagram and Facebook over the last few years.
Sandberg was on the witness stand for a second consecutive day in a Washington, DC, federal court, testifying in the Federal Trade Commission's monopolization lawsuit against Meta. The government is trying to unravel the company's 2012 and 2014 acquisitions of Instagram and WhatsApp.
Kevin Huff, counsel for Meta, questioned Sandberg about a document related to a September 2020 Board of Directors meeting. "TikTok growth is estimated to drive more than 3 billion in revenue risk in the 2024 overall ads Outlook with downside risk up to a total of 6 billion," the exhibit said.
Sandberg explained that the document showed people were spending more time on TikTok and not spending the time Meta had expected and forecast for Instagram. "We faced a low revenue risk. We were going to be down by $3 billion or maybe $6 billion in our estimates."
"Was that important?" Huff asked.
"Yes, because those estimates are how we used to plan and fund the company," Sandberg said. The money was used to buy servers, build out data centers, hire engineers and hire people on the business side. "There's a pretty long lag time to that spending, and so being this much down in a revenue forecast is a really big risk to the company," she said.
"How would that have impacted Meta?" Huff asked.
"That's a big deal. It's a lot of money. It's a lot of spending. It's a big margin," Sandberg replied. "Wall Street doesn't really like misses of any size, but particularly in the billions, and for our own planning purposes, that's a very big difference."
To mitigate the threat from TikTok, Meta responded by introducing Instagram "Reels".
Reels is a type of short-form video content created and shared on Instagram and Facebook. Users can record, edit, and share videos, often with music, effects, and text, within a limited time frame of anywhere between 30 seconds and up to three minutes on Instagram.
Despite this, TikTok's impact on Meta grew after 2020, Sandberg said. That's because "it's a great product. People love it. Their algorithms are excellent."
People enjoy using TikTok and it is "very engaging once you're in it, people stay in it and spend a lot of time," she testified.
While Instagram Reels has been very successful, according to Sandberg, TikTok has also grown "very, very quickly" at the same time.
Sandberg testified that building reels for Meta's ads business was really important. "Because if we hadn't, I think we would have lost considerably more time. It eventually gave another place, another surface, for our advertisers to advertise on."
— Slow to realize TikTok's rise —
In 2018, the leadership at Meta Platforms was "a little bit slow" to recognize the competitive concern there emerging from TikTok as the app was starting to ramp up, according to Zuckerberg.
The founder of Facebook, now Meta Platforms, was the first witness in the two-month long trial and testified for three consecutive days.
By 2020-21, Meta's executive team ramped up efforts to counter TikTok, he said.
"Since then, it's just been much more of a very heated competition, as we are working to improve our AI and improve the creator ecosystem to get the best content that we can into our system. But, yeah, this [TikTok] has remained... probably the highest competitive threat for Instagram and Facebook over the last few years."
TikTok's rapid growth affected Meta's family of apps where Facebook and Instagram's growth "slowed down dramatically," as did that of other competitors, the Meta CEO said.
Zuckerberg was quizzed about a document in which a colleague wrote, "While Reels V2 is aggressive and promising, we still have some concerns [about whether] it is sufficient to neutralize the threat" of TikTok. The colleague further wrote: "Tiktok in the US is a much bigger threat to our family of apps, and we need to put up a stronger assault, much like Rooms and Stories."
"I remember a very high sense of urgency," he replied.
In 2020, TikTok had notched up 1 billion app installs. "It was growing extremely quickly. We were really feeling the impact on our engagement of this headwind...a lot of the behavior in the overall market shifting towards both another type of format and other competitors. So yeah, we felt pretty urgently about this," Zuckerberg said.
Sandberg was later quizzed whether network effects protected Meta from competition after 2012.
"Not at all," she said, thanks to TikTok and Snap. "These services didn't exist. TikTok is absolutely huge. So are Snap, so are other things that have started since, or have grown very large since."
Network effects also didn't prevent Snap and TikTok from rising because product innovation is always the most important aspect of gaining market share, she said. TikTok put out "an incredibly compelling product."
When Tiktok was launched, Meta didn't have a particularly compelling product or any short-form video product. "But Tiktok was taking so much market share and taking so much engagement, particularly among a very important demographic that Meta had to build that product, and [it] built Reels."
Sandberg’s testimony bolsters Meta’s argument that the relevant market for competition in the FTC’s case encompasses a wide swath of digital services employing various strategies to capture the time and attention of users.
By contrast, the FTC's complaint alleges Meta's monopoly in a market for “personal social networking services” where the company doesn't compete with YouTube, X, LinkedIn, TikTok, Snapchat, Discord and Twitch among others.
— Ads, user time, attention —
Sandberg was hired by Zuckerberg in 2008 when Facebook was still new but boasted of 70 million to 80 million pairs of user eyeballs. The former chief operating officer of Facebook said her advertising background and a six-year stint at Google proved useful at her new employer.
“What Meta had was people’s time and attention,” Sandberg said. That stockpile of engagement made advertising a good monetization model.
Sandberg was quizzed about Meta’s process for delivering ads across its family of apps.
Personal social networking providers typically monetize their platform through the sale of advertising. The FTC alleges that Facebook’s suppression of competing personal social networking providers also enabled Facebook to avoid close competition in the supply of advertising services.
Meta had increased the so-called “ad load” on users over time, Sandberg said. She justified the move by saying that an increase in ad quality gave Meta an opportunity to make more money in a way that didn’t harm users.
During questioning by Meta attorney Kevin Huff, Sandberg discussed the company’s efforts to study the impact of ads on the user experience. That included an experiment where a small cohort of Facebook users for years never saw any ads on the platform, Sandberg said.
After observing user behavior, “we knew the ads weren’t harming users,” she said.
However, when FTC attorney Susan Musser questioned Sandberg, she acknowledged that Zuckerberg had once described ads as “a tax on users.”
— Big Tech bidding war over WhatsApp —
Jim Goetz, a former partner at venture capital firm Sequoia Capital who is known for being the first and only external investor of WhatsApp before it was bought by Facebook for $19 billion, was the FTC’s third witness.
Goetz said he was the “point person” for the team managing Sequoia’s investments in WhatsApp. He spent much of his time testifying about the VC firm’s valuation of the company at various points in time and his personal attempts to prevent WhatsApp’s founders from engaging with Big Tech suitors.
Meta attorney Kevin Miller asked whether Facebook overpaid when it spent roughly $19 billion in February 2014 to acquire WhatsApp.
“No,” Goetz said. While the price may seem high, the benefit of time has shown that WhatsApp fit into a pattern where young, private companies can unlock long-term value after being acquired by public companies that facilitate additional growth.
Goetz couldn’t answer when FTC attorney Daniel Matheson asked whether Meta had ever made any money through WhatsApp.
Matheson then showed an e-mail chain from 2013: WhatsApp founder Jan Koum had forwarded Goetz a plea from Zuckerberg to keep Facebook abreast of potential acquisition offers.
“Would you sell for a higher price?” Zuckerberg wrote. “We love what you’re doing and would be happy to pay more too,” the Meta CEO wrote in the 2013 e-mail to Koum.
“Also, just remember you promised me you’d come talk to me if you ever were seriously talking to anyone else about this?” Zuckerberg wrote.
“Artful,’ Goetz wrote back to Koum. “Clear to us that you could get tencent, facebook and google to get into a bidding war (with microsoft and yahoo trailing).”
US District Judge James Boasberg stepped in to quiz Goetz about encouraging the startup’s founders to “go public” and stay independent instead of being bought out by larger rivals.
“Why does it matter to you whether it goes public or is bought by someone, if the purchase price is significant enough?” the judge asked.
Google bought YouTube for $1.6 billion in 2006, Goetz replied. Companies who develop something unique can compound by a factor of 10 in the public markets, he said.
During cross-examination, Goetz was asked if WhatsApp had flourished under Meta. “Absolutely,” he said.
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