Facebook is too powerful — but will breaking it up solve the problem?
“You have someone like Elizabeth Warren who thinks that the right answer is to break up the companies … if she gets elected president, then I would bet that we will have a legal challenge, and I would bet that we will win the legal challenge.”
— Mark Zuckerberg, CEO of Facebook
Amid all the recent controversy and pressure, on October 10th, the Verge released two hours of leaked audio from Facebook’s internal employee meeting. In it, Mark Zuckerberg rallied Facebook employees against critics and responded to the much-publicized plan by Elizabeth Warren, the Democratic front-runner for the 2020 Presidential election, to break up tech giants including Facebook. Senator Warren is not the only one calling to break-up Facebook; many in the media and policy circles, including Facebook’s co-founder Chris Hughes, have also argued strongly in favor of such an action. Given today’s anti-Big Tech sentiment, it is worth thinking whether the catchy slogan “break them up” is simply adopted by politicians to garner popular support or if there are merits to such a policy. Facebook has numerous problems including privacy, content moderation and market concentration, and while these problems are interrelated, I am going to focus on the problem of market concentration because that directly relates to antitrust concerns.
Facebook is too powerful and least trusted among social media companies
A common measure of market power is a firm’s percentage share of the market. Facebook’s control of over 80% of social media consumer time in the US, reflects Facebook’s monopolistic power in the social network market. Across the world, one in every two people who have access to internet, has a Facebook account. As of October 2019, Facebook, Instagram and Messenger are the three largest mobile social networking apps in the US in terms of users. WhatsApp also ranked in the top ten. All four of them are owned by the same firm: Facebook, Inc. Facebook also has over 70% of the market share of the ad revenue in all social networking platforms.
Given the enormous size and influence of Facebook in our lives, the concern about Facebook’s monopolistic power is not surprising. In Canada, social media companies are among the least trusted companies, with Facebook being the least trusted among the social media companies, when it comes to doing what is in the best interest of the public. 60% of Canadians believe that the government should intervene with social media companies to require that they fix the problems they have created in our political system.
However, just being ‘big’ is not an anti-trust violation or a bad thing. If a product gets a large market share because it is good and the company did not harm consumer welfare or has not behaved anti-competitively toward its rivals, breaking up that company is not a justified measure. The challenge lies in that digital platform services like Facebook are offered for free and thus it is difficult to argue consumer harm due to market concentration.
Although Facebook provides ‘free’ service, it doesn’t mean the cost is zero. There are several non-monetary costs of using Facebook, such as attention to advertisements, giving up rights to personal information and rights to creative labor. The mistake lies in conflating monetary price and cost. Hence, zero-price market doesn’t mean there cannot be any consumer welfare harm.
Facebook has power over people due to the structural network effect
Scholars distinguish between power ‘over’ and power ‘with’ others wherein powerful actors can either bend people to their will or cooperate with them. Given the recent incidents that indicate Facebook’s power over consumers, media and advertisers, it is easy to focus on the latest outrage. But it is more important to understand the structural sources of Facebook’s power.
In a nutshell, Facebook enjoys strong network effects, extreme economies of scope due to the role of data, marginal costs close to zero, and a global reach. This combination of advantages creates a salient barrier to entry to the social media market. The network effect comes from Facebook’s current active user base of over two billion people which is incomparable with any other social media, and people join the platform which also has all their friends. Given the massive amount of data Facebook collects that powers targeted advertising, it also has significant market power in advertising market. Facebook uses these structural advantages against its competitors, often by predatory copying strategy, an illustration being Facebook copying rival Snapchat’s features in order to prevent Snapchat from establishing a foothold in the social media market. This copycat strategy not only causes significant non-monetary consumer harms, such as product degradation and stifled innovation, but also hurts the start-up ecosystem by creating a strong disincentive for investors and entrepreneurs to put money and effort into creating products that Facebook might copy. Because of these features of social network market, scholars have called it winner-take-all market and Facebook currently has a big incumbent advantage.
Some concerns about innovation and start-up ecosystem might be overstated. Large firms like Facebook might in fact be more innovative than smaller ones. This is because large firms have an advantage in recruiting the most talent (by paying them significantly higher than smaller competitors), and they are getting better at avoiding bureaucratic stagnation. Recent research also suggests a positive impact of large firms’ aggressive acquisition strategies, arguing that an active M&A market provides exit opportunities and thus incentivizes higher investment. Moreover, new regulations regarding user privacy and content moderation require high regulatory compliance cost, which only bigger companies like Facebook can afford.
Ultimately, the problem lies in Facebook’s power over people and other actors. Why can’t people switch to other social media platforms if they don’t trust or like using Facebook? Facebook’s aggressive acquisition strategy means that though many are switching from Facebook to Instagram, both are owned by Facebook Inc. More importantly, due to the network benefits and accumulated data (posts, photos, conversations, likes) in Facebook, people face high switching costs if they want to switch.
Breaking up Facebook won’t solve the structural problem of market concentration
Breaking up Facebook Inc into Facebook, Instagram and WhatsApp is not going to solve the structural problems we are worried about (i.e. competition, privacy, platform governance). It is also practically challenging due to several reasons. Firstly, Senator Warren’s plan is fuzzier than it may seem, i.e. if Facebook and WhatsApp need to be separated, why should it keep Messenger, its other instant-messaging service? Or, why should Apple keep iMessage? Both may be regarded as services on top of a platform. This raises questions such as- What is part of the platform and what is not? Facebook also began integrating the back ends of Instagram and WhatsApp in January 2019, making a potential undoing a difficult task.
More importantly, due to network effects and winner-take-all nature of social media market, breaking up Facebook won’t stop Facebook itself, or another social media becoming dominant again. This is called the Starfish problem. People want to be in the social media where most of their friends are, and so even if Facebook is broken up, people are going to most likely stay/ flock back to Facebook with network and accumulated data benefits. A better approach to solving this structural problem is by having regulations that reduce the entrenched market power of dominant platforms and level the playing field between incumbents and entrants. One suggestion is enabling data portability, which will reduce switching costs. It will make data portable across platforms- a user can switch her existing repository of photos, conversations, posts, contacts and more. This would enable people to own their data, would improve personalization in the new platform based on past data, and allow competitors to compete on quality of their service.
But perhaps most importantly, data portability gives some power back to people and gives people choice. The EU has taken the lead in establishing the ‘right to data portability’ and the US and Canada should follow suit.
Update: Within days of publishing this post, Facebook announced that Facebook users will be able to transfer their Facebook photos and videos directly to other services, starting with Google Photos. This photo transfer tool is based on code developed through Facebook’s participation in the open-source Data Transfer Project and will first be available to people in Ireland, with worldwide availability planned for the first half of 2020.
