Understanding Facebook's Monopoly

Wednesday Nov 28th 2012 by Mike Elgan
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Anti-trust regulators are living in the past. Here's why Facebook is technology's number-one monopoly.

Since the dawn of the PC revolution, antitrust regulators, including the US Department of Justice, the attorneys general of the 50 states, the EU and all their peers around the world have failed to fairly or reasonably apply existing anti-trust law to consumer electronics companies.

The poster child of anti-trust regulation was Microsoft, action against which was always late and off the mark. Microsoft was universally said to have a monopoly in operating systems in the 1990s, even though any PC owner could erase Windows and install an alternative operating system in less than half an hour.

Still, the anti-trust regulators feared that Microsoft's dominance would guarantee that Internet Explorer(IE) would always be the overwhelmingly dominant web browser.

Ironically, Microsoft's defense all along was that if Microsoft produced crappy versions of IE, and rivals make superior browsers, IE would lose its dominant position.

Nobody cares that Microsoft was totally vindicated by the failure of Internet Explorer. Microsoft's lawyers were right all along. When Firefox was the best-quality browser, it rose to dominant market share. When Google came along with an even better browser, Chrome rose to dominant market share.

The reason the anti-trust regulators were wrong about browsers was that they believed consumers wouldn't choose based on features and product quality, but on "bundling" -- they would use whichever one was there, despite how good or bad the product and its alternatives were.

Yes, "bundling," as well as availability, marketing and brand awareness all play a role. But ultimately, discerning users judge browsers by the relative qualities of the product. Ultimately, both consumers and competition were both protected by a functioning marketplace.

Why Facebook Is A Monopoly

In fact, nearly all the major consumer technology targets for antitrust litigation, from IBM to Microsoft to Intel to the current target, Google, have been off the mark for a very simple reason.

At their cores, every one of the monopolistic products or services in question have been characterized by both markets with real alternatives for users, and also by the simple fact that comparable product qualities were really the dominant factor in consumer choice.

More people choose Google Search, for example, over the many alternatives because they believe attributes of that service created by Google are superior.

Facebook, however, is the first major dominant product in the history of technology where the main reason for choosing it has almost nothing to do with product quality, or by the attributes created by the company.

Everybody is on Facebook because everybody is on Facebook. I call it Facebook's "monopoly on everybody."

Most people I've talked to over the past year about social networking choice have told me, in a nutshell, that relative product quality has nothing to do with their choice of social network. They choose Facebook because their friends, family and colleagues are on Facebook, and not because it has better features or services.

I've had the same conversation a hundred times. Someone complains about Facebook, either because something is hard to use, or because Facebook is violating user privacy, or because Facebook advertising is annoying, or because some new feature is forced on users.

When I suggest switching to a superior alternative, the response is always a "what-can-you-do?" shrug -- leaving Facebook is out of the question no matter how bad it gets and no matter how much better the competition is because Facebook is where the people are.

Facebook came into existence as everybody's all-purpose social network precisely at the time in history when this category of online service went mainstream -- and they've benefited massively from that happy accident.

Now that they've got everybody, having everybody is the whole business model, their source of market power and user lock-in.

There has never been any situation quite like this in the history of anti-trust legislation, and the laws around anti-trust have failed to understand this dynamic.

Lawmakers also fail to understand the differences in social networks. Everything called a "social network" is lumped in together into the same category, even though from a monopoly, consumer lock-in and consumer choice point of view, Facebook is in a category all by itself.

People join Linkedin, Pinterest, Twitter, Google+ and all other social networks primarily because of the unique feature benefits those services offer, and only secondarily because of who else is a member.

All those social networks that compete in some way against Facebook are competing on a very un-level playing field.

Linkedin adds resume and reference features; Pinterest competes with graphical layouts and easy posting; Twitter pushes for ease of use and quick-and-dirty posting; Google+ adds multi-user video chats and higher quality photo posting.

These companies are trying to win users with features and product benefits; but Facebook is competing with the Mother of All Features: Your family and friends. That's the only thing Facebook's got that nobody else does. And that's the main thing keeping Facebook users from switching to superior alternatives.

Why This Should Be an Antitrust Issue

The highest purpose of anti-trust and consumer protection laws is to, well, protect consumers.

Any monopoly is in a position to unfairly exclude competition, abuse customers without losing them, fix prices, engage in predatory pricing, or do other things that change the market in a way that restricts free trade and consumer choice.

The definition of a monopoly, and the whole body of legal work around anti-trust and competition laws, comes from the old world of old-school companies making physical products or offering straight-forward services.

We live in a new world now, and companies like Facebook are benefiting from the obsolescence of our laws.

For one thing, Facebook's dominant position comes from network effects, rather than exclusive access to markets or resources. For another, the Facebook "user" isn't the "customer." The advertiser is the customer, and the user is technically the product. (If you want to understand this, just think about who pays Facebook and what they pay for.)

Still, let's strip away all the mumbo jumbo and look at the reality of what Facebook is currently getting away with.

First, Facebook's "monopoly on everybody" means the company is in the position to abuse users without losing them.

When I tell family and friends all the different ways Facebook is working against them with privacy and other abuses, and that other services are available that don't do this, they say they know and understand all that -- but will stick with Facebook because that's where everybody is.

Second, Facebook's "monopoly on everybody" forces competitors to actively contribute to Facebook's continued and growing dominance. If you're a competitive social network not backed by a giant company, you have to support Facebook or go out of business. Small social networks like Instagram (now gobbled up by Facebook), SquareSpace or any new social service coming online absolutely must support Facebook or face extinction. But by supporting Facebook, they increase their competitor's dominance.

And third, Facebook's "monopoly on everybody" un-levels the playing field and represents a barrier to entry to new competitors.

A new social network can enter the market and be demonstrably superior in every possible way, and it still has zero chance against Facebook precisely because people don't choose all-purpose networks based on the relative virtues of the products.

It doesn't matter if a competitor is better than Facebook, Facebook wins because it has a "monopoly on everybody."

What Should Regulators Do?

So what am I proposing here? I'm saying that, first and foremost, anti-trust legislation needs to be updated to include this new kind of monopoly.

That would mean that Facebook users should be subject to special protections against Facebook violations of privacy. Anti-trust legislators need to investigate, for example, EdgeRank-gate -- the shell game Facebook is playing whereby it systematically blocks status updates from reaching the people who signed up to receive those updates on the one hand, then offers to deliver them for a price on the other hand.

They need to look into Facebook's recent email switcheroo, whereby they replaced users' email address in contacts with an @facebook.com address without user permission.

They need to probe Facebook's use of social ads, which make users appear to promote or advocate products or services when they had no intention of being co-opted in that way.

These are just examples of areas for investigation.

In fact, a great place for anti-trust regulators to start would be a special Wikipedia page set up expressly to list the many criticism people have leveled against the company. (Some of these are bogus, or mere sour grapes. But some of them could be considered serious in the light of consumer protection.)

I'm not saying that Facebook should be nationalized, or over-regulated. I'm just saying that Facebook represents a new and historically unique kind of monopoly that lawmakers need to quickly understand and deal with, instead of going after non-monopolies who sell products in free markets on a level playing field.

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