Facebook’s willingness to copy seen as hurtful to innovation

SAN FRANCISCO — Four years ago, Facebook spent over $150 million on a free app used by millions.

Today that app, called Onavo, has become a little-known weapon in Facebook’s massive expansion strategy — helping the social-networking giant determine what is gaining popularity among consumers. It can then bring similar features to its own products, according to five people familiar with the effort who spoke on the condition of anonymity because it involves internal corporate strategy.

The Onavo app, called Onavo Protect, is what is known as a virtual private network, which means it disguises the traffic of smartphone users as they browse the internet and use apps. But while it advertises itself to users as a way to “keep you and your data safe,” Facebook is able to glean detailed insights about what consumers are doing when they are not using the social network’s family of apps, which includes Facebook, Messenger, WhatsApp and Instagram.

The technology shows how far Facebook is willing to go as part of its aggressive strategy to reach into new areas beyond social networking, often by rapidly acting to mimic the most successful features of rival companies’ apps. Facebook did this most recently by replicating a key element of the Snapchat app. It also has done so for many other businesses, including a recent online fundraising tool, food delivery, offline meetups and its On This Day feature, which shows Facebook users pictures of what they did on the same day a year earlier.

Nobody has claimed that what Facebook is doing is illegal. But interviews with two dozen top investors and entrepreneurs suggest it is having a profound impact on innovation in Silicon Valley, by creating a strong disincentive for investors and startups to put money and effort into creating products Facebook might copy.

“It’s what we did at Microsoft,” said Scott Sandell, managing partner of the prominent venture capital firm New Enterprise Associates, who was product manager for Microsoft’s Windows 95 until 1995. The Justice Department brought a landmark antitrust case against the company in 1998. “Whenever we saw a threat, boy, did we pounce on it.”

Facebook declined to comment but noted that roughly 100 million apps and businesses use Facebook’s developer tools or have a Facebook page that drives installations to apps.

Unease about Facebook’s influence comes when the balance of power in Silicon Valley has been shifting away from startups toward four dominant companies — Facebook, Apple, Amazon.com and Google.

With their app stores, Apple and Google — which recently was fined $2.7 billion by the European Union on antitrust concerns — are the gatekeepers for millions of new businesses. Forty-three percent of all online retail revenue now flows to Amazon, according to the market research firm Slice Intelligence. (Amazon CEO Jeff Bezos owns The Washington Post.) And Facebook counts one-third of the world’s population in its monthly user base.

“The dominance of these companies is choking off the startup world,” Roger McNamee, an early investor in Google and Facebook and founder of the investment firm Elevation Partners, said of the two companies. “I helped create a monster, and I regret it.”

Many in Silicon Valley say copying is fair game, arguing it is intrinsic to competition and to the history of U.S. business. While some academics have begun to question whether there needs to be new rules to limit the power of tech giants, almost no one in libertarian-leaning Silicon Valley thinks Facebook should be further regulated, with some saying it forces the best entrepreneurs to be more creative. Others point out that Facebook is nimble at copying but also frequently fails, leaving room for outsiders.