Understanding Facebook's Monopoly

Anti-trust regulators are living in the past. Here's why Facebook is technology's number-one monopoly.
Posted November 28, 2012

Mike Elgan

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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.

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Tags: Facebook, Twitter, social media, LinkedIn, google+

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