Alex Simmons

Facebook is a powerful tool for connecting individuals and users likely find it difficult to imagine functioning in society without it. Currently, no other platforms compare to the comprehensive connectivity that Facebook offers.

In light of this, Facebook’s expansive reach has been recognized by Steve Bannon, former senior advisor to President Trump and current head of Breitbart news. Bannon has stated his opinion that Facebook serves as a social utility and should be regulated as such by the government. He goes on to argue that to be a participant in society, it is a essentially a requirement to be using Facebook.

Interestingly enough, on the other side of the political spectrum, Mark Zuckerberg shares this view. The phrase “Social Utility” was originally part of Facebook’s mission statement. It has been a topic of late that Facebook (amongst other technology companies) has an unprecedented monopoly over social media, and that regulation is required.

However, the argument that Facebook is a monopoly and that it is an essential social utility, isn’t necessarily true. The implications of the accusations would logically require some sort of government intervention to protect consumer welfare. Ultimately regulating Facebook and the services that it offers would negatively impact the business and make it less useful. Facebook is not a monopoly, nor is it an essential “Social Good”, but just another successful business.


What is a Monopoly?

Strictly speaking, according to the OECD a monopoly occurs when a single entity controls the entire market for a good or service. Some additional characteristics of a monopoly include: lack of economic competition, lack of substitutes, prices well above marginal cost, high barriers to entry, and high monopoly profits. It is true that Facebook has several characteristics that could warrant this categorization.

Facebook runs an immensely profitable business, which can mainly be attributed to its lean cost base. This was illustrated in Q2 of 2017 , as Facebook’s operating margin was 47.2% . There are also immense barriers to entry for competitors in the social media industry due to the value of a network being largely derived from a network effect . To drive ad revenue and be competitive, a business must have a massive network of individuals. As of September 2017, between Facebook, WhatsApp, Messenger, and Instagram, Facebook had a total of 5.36 billion users, accounting for 4 of the top 7 social media apps by usage .

Despite this, Facebook also has several characteristics that disqualify it from the traditional definition of monopoly. They do face substantial economic competition from rival Google and there are several other smaller players such, as Snapchat and Pinterest, that compete in the space. Substitutes are tricky, as there are several platforms that offer the same functionality, however not as a comprehensive package. Platforms like Snapchat, QQ, and WeChat all offer messaging (as does SMS) and sharing functionality amongst users. There are other peripheral platforms that serve specific functions independently.

Facebook is not immune from competitive pressures, and has been forced to adapt its product offering to be competitive. A recent example of this is the introduction of “Stories” across the Facebook and Instagram platforms . Snapchat stories were initially a primary use case for the business. Facebook however quickly adapted and introduced the feature primarily to its Instagram platform. According to TechCrunch, Instagram stories have grown to 250 million daily users within a year, which dwarfs Snapchat’s 166 million users. Facebook saw a smaller incumbent market player introduce new functionality, and ultimately replicated it. Being forced to respond to competitive pressures is uncharacteristic of a supposed monopoly . Facebook saw an opportunity and responded quickly to competitive pressures by creating a product that has outperformed its competition. This is a testament to the competitive advantage Facebook has in user interface and design, but not necessarily to its monopolistic position in social media.


Comparison

Perhaps the most direct comparison from a business perspective would be with the Bell System Monopoly from 1877 to 1984. At the end of 1983, Bell System was broken up by the U.S. Justice Department due to its telecommunications monopoly . Bell System’s growth to monopoly could largely be attributed to its network effects (in a different sense of the term) and vast infrastructure. As the business started connecting individuals, these connections created more value for the business.

The infrastructure that was built essentially created an economic “moat” for Bell Systems. Bell had invested in a massive telecommunication network that made it impossible for smaller players to compete regionally. In addition, to use this extensive network it was necessary to use a Bell device, ultimately creating two sources of monopolistic power . The telecommunication industry is now intensely regulated and still is dominated by relatively few companies as a result. Breaking up Facebook would largely diminish its usefulness, as the business exists to connect people. Having a shared platform is what makes the connectivity Facebook offers so compelling, as one can find almost anyone and connect instantly via the internet.

That being said, network effects make it incredibly difficult to compete with Facebook. As more people began using the platform over the past 13 years, it created incremental value for Facebook as a social service. Currently Facebook alone has just over 2 billion users . To date, there are 3.58 billion users of the internet, implying that approximately 56% of all internet users currently use Facebook. This doesn’t include WhatsApp, Messenger, and Instagram which offer an additional 3.3 billion users , although it should be noted that there is considerable overlap with Facebook users and the previously mentioned services.

However, Facebook does not possess the same massive infrastructure based competitive advantage Bell Systems had created for itself. The platform and its features are not strictly unique to the business. And at 56% of internet users, that doesn’t represent the same monopolistic dominance that Bell Systems possessed in the U.S. market. Bell Systems reached a peak market share of over 90% of the U.S. telecommunications market in 1969 . Being a Bell customer meant you exclusively used Bell, however using Facebook is not mutually exclusive with other social media platforms. In addition to this, Facebook’s strength is in its vast user base isn’t their direct source of revenue. Facebook offers advertising products to companies and doesn’t make money directly from its user base like in the case of Bell.


Facebook’s Product Offering

Often Facebook is portrayed as a social media company while Google is viewed as a search engine company. While both companies offer these services to users, the reality is that they both compete in the broader online advertising markets. Their customers are businesses that pay for user impressions and clicks, and they attract these users through free services . Last year, Facebook charged its advertisers $16.56 per user . While these free services are largely dominated by Google and Facebook, the online advertising market is far from a monopoly.

Facebook faces a large amount of competitive forces from both small and large players. Large players such as Verizon and Amazon are entering the advertising market, with stronger network effect competitive positions then new social media platforms like Snapchat . They compete for U.S. and global digital ad revenue, not users, and in that market place Facebook is not the largest player. Google commands 40.7% of the U.S. digital ad market, and Facebook only 19.7% . This is hardly a monopoly for Facebook, and for the fiscal year 2016, 97.3% of its revenue was derived from the digital ad market . Globally, Facebook and Google combined only control approximately a fifth of the global total advertising industry, which is relatively subdued when compared to the U.S. market .

The case for government intervention can be made when a single firm is given too much market power, and this negatively effects its consumers through discouraged competition. From the perspective of users, it could be argued they are negatively affected by the sale of their personal data or loss of privacy. From the perspective of businesses however, by in large Facebook offers affordable and effective advertising products. Users are also increasingly accessible by advertisers on different media as there are a vast amount of advertising streams available online . Facebook is not mutually exclusive with other social media platforms, and users are free to migrate where they choose. In addition, users are free to share as little or as much as they like. They are only negatively affected by the extent to which they share personal information online .


Conclusion: Don’t believe the hype

Facebook offers users the ability to connect and share at a higher quality of service than others. There are several companies that offer similar connectivity however none have experienced the same scope of success as Facebook. Facebook succeeds by offering its users a comprehensive suite for their social media needs and are constantly introducing new functionality. They have successfully adapted and integrated the features of competitors to retain a prominent position amongst users. In addition to this, they deliver these features profitably, delivering superior margins to its shareholders.

This has resulted in a dominant position in terms of number of users, however not necessarily a dominant position amongst Facebook’s real customers. Several other companies offer the same product to advertisers, but packaged differently. The market is incredibly diverse, and both users and advertisers have their pick of the platform they want to use. In the U.S. digital advertising market, they hold a fifth of all advertising dollars, which is a far cry from the monopoly indicated by Facebook’s critics .

Facebook’s dominance in users makes some uncomfortable, but ultimately users have benefited from the network Facebook has built. Government interference would ultimately impede its ability to serve its users, which it has done incredibly well. It could cause disincentives to innovate, or worsen the existing dominance at a detriment to advertisers and users. Facebook is just an excellent business offering a superior product to advertisers and an impressive service to users.