3 February 2018

How do you solve a problem like Facebook?


For those worried about Facebook’s economic and political might, there appeared to be some good news this week. In its fourth-quarter earnings report, the company announced that its users are spending 50 million hours less, per day, on the social network. That is a five per cent fall in use. The number of daily users in the US and Canada also went down.

But what looked like a hint that Facebook might finally be on the wane was really an illustration of the social network’s power. Yes, Facebook admitted, people were spending less time scrolling through their News Feeds, but that was largely by design.

As part of Mark Zuckerberg’s mission to “make sure Facebook isn’t just fun, but also good for people’s well-being and society”, users were exposed to fewer short viral videos that had kept so many glued to the app. Zuckerberg has announced further tweaks to the News Feed: more baby pics, less news (fake or otherwise). In other words, we’re using Facebook less, but only because Mark Zuckerberg has decided that’s okay with him. So far, these changes don’t seem to have hurt revenue, which is up 47 per cent year-on-year.

The social media giant adopts this gentler, contrite tone as it stands accused of a wide range of misdeeds. Dodging taxes, spreading propaganda, hoarding personal data, gobbling up competitors and making us all miserable to name just a few. Some criticisms are fairer than others (Zuckerberg didn’t put Donald Trump in the White House), but they all boil down to market power. Only a monopolist could get away with this sort of behaviour, goes the thinking.

Whether or not Facebook is, in fact, a monopoly is a more complicated question than it seems (mostly because it depends on how you define what they are competing for, and who with). But the market in social networks undeniably tends towards monopoly. The fact that it is only worth being on a social network that your friends are on creates a huge barrier to entry for Facebook’s challengers. The barrier is not necessarily insurmountable – Facebook itself proved that when it saw off Myspace – but it gives incumbents a huge advantage.

On both sides of the Atlantic, Facebook’s position of dominance has been deemed a problem to which a solution must be found. The issue is that so many of the courses of action are unsatisfactory. The EU’s Competition Commissioner Margrethe Vestager has taken a tough line with the tech giants largely by making them pay large fines. It is far from clear that these high-profile clashes between big business and big government actually help the consumer.

Another tried and tested way to fight monopolies is by breaking them up. This has worked well in the past, but, beyond forcing Facebook to sell WhatsApp and Instagram, it is hard to see how such an approach can work with a social network.

Then there is more regulation, the easiest and least advisable option. The tech giants lobbying teams have ballooned in size in the last few years; they would be bound to leave their mark on whatever new rules were introduced. Those rules would almost certainly favour those who benefit from the status quo, strangle innovation and make disruption more difficult. That is one of the problems with the EU’s General Data Protection Regulation, which comes into effect in May. It may be a nusiance for the likes of Facebook and Google but the minnows trying to compete with them are the ones that will really suffer.

Luigi Zingales and Guy Rolnik, professors at the University of Chicago’s Booth School of Business, have a better idea: give users ownership of all their digital connections that Facebook has control of. They propose a system in which users could reroute their Facebook interactions to a new social network in the same way you can reroute a phone call. The solution gets to the heart of the problem: those network externalities that give incumbents such an advantage.

The idea has its own problems – over data security (it would probably be illegal in the EU under the GDPR) and compatibility, for example. But its fights monopoly power with competition and consumer sovereignty. And crucially it would do so while incentivising rather than undermining innovation, which is the ultimate weapon against monopolies.

Oliver Wiseman is Editor of CapX.