There are several public policy issues associated with social media companies that are very much in the news and on the agenda of policymakers worldwide. Among them, privacy (how data collected in the course of providing service is used), antitrust (are these companies operating in a way that is economically damaging to the public interest) and propaganda (are these companies manipulating or allowing the manipulation of ideas in all way that is harmful to society). There are many opinions about whether Facebook, Google and Amazon’s market dominance is a problem. In this post, I examine the dynamics of this situation and provide a framework for thinking about the privacy and antitrust aspects, leaving discussion of the proliferation of propaganda for another day.
The following is not intended to suggest solutions but outlines considerations that should be included in a complete and well-defined examination of the issues that should be considered in the policy-making process.
- The winner takes all character (resulting in market dominance) of industries that exploit “the network effect” is fundamental to their business model. It is obvious that a social network that only has half of your friends on it isn’t going to be very effective at serving its purpose—which is of course making it easy for all of friends to communicate easily with one another. I would point out that this same logic (everyone had to be connected to the same telephone network) underlies (for many years) the value of a monopoly telephone network and only ceased to be an issue when the technology allowing carriers to easily switch calls across company boundaries. Until then, the phone company could justify its monopoly status.
That said, the situation with social networks is even more complicated than the phone companies ever had to deal with. The logistics of routing a call is simple compared to the process of interactively sharing an almost limitless and constantly changing set of attributes with both friends and the public. And, even after the breakup of the Bell System, the resulting entities were big enough to make the investments to participate as functionality evolved and standards changed to account for the evolution systems capabilities.
The standards required to allow seamless interoperability across social networks would require substantial engineering and standards (both in terms of APIs and database design) to be put in place. Ongoing standards efforts, requiring significant investment and rigorous process, would be necessary to ensure that as individual social networks’ functionality is extended that the standards would support those extensions.
Even if (and that is a big if) Facebook (and YouTube, WhatsApp, Messenger, WeChat, Instagram, etc. ) were to agree to participate, it is very unlikely that smaller companies would be able to hold up their end of the bargain and participate in the standards process or even be able to extend their platforms quickly enough to keep up with the industry/competition.
So, this is not a simple data portability issue. And while a “data portability” solution might sound appealing: 1) it won’t work well in operation—you can’t operationally make two ecosystems interoperate in real time with only data portability. As noted earlier, it would take a substantial API infrastructure in terms of both the APIs themselves and an operational environment that would facilitate real-time interaction between social networks; and 2) even if one only considers data interoperability, the data structures underlying a sophisticated social network (like Facebook) is likely to be a moving target, i.e. changing continually to support new functionality.
Google is a slightly different story. Its capabilities are a direct result of the number of users. There are two benefits: 1) The large number of users generate information, by performing searches and selecting the answers that work best, that makes the platform perform better. This results in a virtuous cycle that improves search results and makes the platform more competitive; and 2) The scale at which Google operates supports large investments in technology and the collection of information necessary to build the indexes that make Google searches so productive.
As was outlined in a recent Communications of the ACM article titled: The Web is Missing as Essential Part of Infrastructure: An Open Web Index, it would be possible to share large components of a search engine infrastructure allowing companies in the search business to leverage the core and build differentiating functionality around it. There is some precedent for this. Many companies leverage Chromium (including Google and Microsoft, but also many other smaller products) to deliver leading edge offerings that compete on peripheral functionality that the big players don’t or won’t support. One example of this is Brave, which touts is ability to block ads and still performs well.
I will close this section by noting that an open source strategy (like Chromium) would probably not take down the giants in social media the way Chromium took down Internet Explorer. It would however make opportunities for niche players one of which might eventually turn into the “next big thing”. This is a nice segue into my next point.
- The speed of change in the technology market. Today’s goliaths tend to be tomorrow’s has-beens. I won’t spend a lot of time on this point for two reasons: 1) for those of you who buy into it, it is a no brainer; and 2) for those of you who don’t, I will never convince you. That said, I would argue that the antitrust cases against Kodak, IBM and Microsoft were largely settled by the growth of alternative technologies that broke the power of the monopoly. Today’s market is more dynamic, and new technologies emerge (and displace the legacy market leaders) faster every year. Remember that Microsoft, once seen as being dominant, has had the elements that support its seemingly unstoppable market power largely eviscerated by cloud computing. That doesn’t mean that Microsoft, unlike Kodak, is not still a formidable competitor, but they don’t “own” the desktop the way they did 15 years ago. There are cloud alternatives to most of Microsoft’s offerings and while Microsoft is still a powerhouse, it is hardly the monopoly it once seemed to be.
The network (here, I mean the Internet) that makes Google and Facebook look invincible is the same infrastructure that allowed them to leap past Alta-Vista and Friendster (remember them?). While the incumbents might seem unstoppable, the technology (the Internet) that provides their foundation, also makes it easy for the next generation of competitors to launch and grow at frighteningly swift rates. As Clayton Christensen has noted in The Innovators Dilemma, the incumbents are rarely the ones to see their successors until it is too late and they are no longer relevant.
- The question of monopoly. The analysis I read in the press focuses on the potential harm to the individual consumer who uses the product. This is wrong-headed. As I pointed out in the first bullet point above, social networks don’t work very well if everyone isn’t on them, so a monopoly is necessary for the network effect to deliver value. The real monopoly, if there is one, is in the market for advertising. If you are an advertiser there really aren’t a lot of high quality, i.e., well vetted, consumers to whom your advertisements can be laser targeted. According to Axios, Google has 37% of this market, Facebook as 21%, Amazon and Microsoft have 4% each and the rest is shared by many smaller players. So, if you want to be both effective and efficient you really have two choices. So, it isn’t a monopoly.
But I am splitting hairs. And, the reason we have a duopoly is that scale and network really do matter (see previous bullet point) when it comes to being able to deliver large numbers of qualified prospects to an advertiser.
Further, social network users will only use the social network as long as it delivers (the best) value. They will jump ship when something better comes along. At which point, the information necessary to sell access to well-qualified users disappears and the losing social network fades from view just like SixDegrees, Blogger, Friendster and MySpace and a host of others.
I will close this section by asserting that the Facebooks, Googles and Twitters of the world aren’t really buying up their competitors before they have a chance to emerge as real threats. If they were, 1) we would have seen a different dynamic if any of the acquisitions were really the next generation of big things. Those acquisitions would have eclipsed their acquirer the way Time Warner eclipsed AOL as the better business model will always prevail. This has not happened; and 2) the competitors wouldn’t sell. Just like in the early days of Facebook and Google, the owners would have confidence that their business is going to change the world and is worth way more than the incumbents would ever be able to afford. In the first case a successful “engulf and devour” strategy would be obvious and in the second, no transaction would take place.
- The supercharged nature of an advertising model that builds a profile of the users’ interests and buying habits which are then used as the fuel that drives revenue for these businesses. To the extent that a user makes use of Google, Facebook or Amazon (or their competitors) these entities can develop a pretty darn good understanding of what someone is likely to buy and when they are likely to buy it.
They have built multibillion-dollar businesses on that information and have been less than judicious in using it, both internally and as evidenced by whom they share/sell it to, making both the computer literate and politicians very nervous.
This advertising model pays for a lot of the services that we all use. Which the begs the question…
- Do people understand that their information is being leveraged to pay for the service they are getting and if they are, do they care? I would argue that there are plenty of low-tech examples of consumers not understanding what they are doing and the government (for longer than I can remember) being pretty much OK with it.
I will share a personal (and somewhat embarrassing story) about a leasing transaction around one of my first cars. I was at the car dealership with my wife, who has a PhD in finance. She asked the finance manager to provide the information necessary so that she could calculate the implicit interest rate for the lease. This cause quite a kerfuffle which resulted in the finance manager claiming that there is no implicit interest rate associated with a lease. We didn’t end up acquiring the car there, but I must admit, that the dealership had constructed alternatives (and they did it legally, i.e. within the constraints demanded by the law), but didn’t provide the information necessary for someone without a finance degree to properly compare financing options. Most people look at their monthly payment and not what it is costing them to finance the car. And if they were able to do the comparison, many might save longer, purchase their car with a larger down payment, thereby finance less and severely restricting a very profitable business for the dealership, but others wouldn’t care.
The government pretends to protect us with all kinds of regulation, but I believe that you could argue that automobile financing, and title and payday loans are at least as exploitive as Google’s, Amazon’s and Facebook’s use of our private information to run their advertising businesses.
I am not saying the current situation is good, but that there is good evidence to suggest that even with the best of intentions (and it is a big assumption about “best intentions”), regulation can only do so much.
- The lack of grown-ups to provide a level of emotional intelligence to the decision-making process. And, I don’t necessarily mean older people. I am referring to people with broader experience who can bring a historical and ethical perspective to the decision-making.
It is amazing to me that smart people can (appear to) be so one dimensional. The long-term health of a business requires multi-dimensional thinking. The answer isn’t always to maximize short term profits nor is it to bend to the fad of the moment.
To geek out here for a moment, I love the scene in Star Trek II: The Wrath of Khan where Spock points out to Kirk that the while Khan is super smart, he is, literally a two-dimensional thinker. That is, in three-dimensional space Khan only works in two dimensions. Taking advantage Khan’s two-dimensional thinking allows the good guys to outmaneuver the super smart guy and gain the upper hand. End of geek-out.
My experience (and I have been around a while) suggests that multidimensional thinking is fed by diversity of thought, background and experience, thinking three steps ahead and putting gut feelings in their rightful place—which isn’t on the sidelines, nor is it front and center. These are the things that grown-ups bring to the table. Being a grown-up doesn’t always require that you have grey hair, but those that don’t are more the exception than the rule.
These are all considerations that our political leaders who are trying to make decisions need to take into consideration when trying to decide how to best deal with their market dominance. They are all beneficiaries of the network effect and are unlikely to be the last to:
- (mix a metaphor) ride the wave of the network effect; and/or
- Take advantage of technological or market innovations to dominate a market.
I acknowledge that they (Facebook, Google, Amazon, etc.) are complicated dynamic businesses that that have grown tremendously, are very profitable and dominate their markets. But, I caution all of the people who are trying to break up these “tech giants” or to redefine monopoly to be able to “combat” the bad tendencies of these innovators to explore the issues outlined above and account for them in crafting a solution. I am not saying that changes aren’t needed; I firmly believe that they are, but the problem is not a simple one and without carefully accounting for the issues outlined above, there is a serious probability that the cure will be a lot worse than the disease.
Copyright 2019 Howard Niden
— you can find this (days earlier) and other posts at www.niden.com
And, if you like this post: 1) please let me know; and 2) pass on your “find” to others.