Photo: Denys Vitali. Source: Pixabay. CC0
Facebook is the largest social network in the world, with over 2 billion active users. Their messenger apps have over a billion users each, as does Instagram. Together, they have enormous pricing power with advertisers. Because they have such a large active user base, they can charge high ad rates and still be the cheapest way for businesses to reach their target markets.
They dominate advertising on social media, but Google is actually bigger. In 2017 Facebook claimed $40 million in digital ad revenue, while Google’s revenues were more than twice as large. They may not be a monopoly in the classic sense – after all, advertisers can always go to YouTube or Amazon or Snapchat or some other digital platform if they don’t like the blue hoodie people – but they don’t leave a lot of oxygen in the ad-auction room.
And when a Senator asks Mark Zuckerberg, “Who’s your biggest competitor?” it’s not a simple or easy question. 68% of Americans use Facebook. When hackers game the Facebook algorithms to insert made-up stories into users’ news feeds, millions of people start to believe that Pope Francis endorsed a political candidate or that kale causes heart disease.
Sure, Facebook has a massive scale and a huge impact. But is it a monopoly? A little history is instructive. Two decades ago, the Federal government brought an antitrust suit against Microsoft, alleging monopolistic and predatory behavior. They were giving away Internet Explorer with Windows, assuring themselves victory in the browser war they were fighting with Netscape. Most users were surprised. Why attack a company for giving stuff away?
The antitrust proceeding took two years and ended in a settlement where Microsoft shared some of its programming code with other software developers. Browsing programs proliferated. Now there are four major browsers, with several minor platforms out there. The fight for market share between Microsoft (IE), Google (Chrome), Apple (Safari), and Mozilla (Firefox) has led to more innovation and better features than anyone expected.
Microsoft shares during the antitrust case. Source: Bloomberg.
When the government announced its action against Microsoft, the stock took a big hit. Now, the company is dominant in enterprise cloud solutions. They’ve reinvented themselves half a dozen times. I’m not advocating government action against Facebook, but I wonder if the same thing could happen again. Necessity is the mother of invention.
250 years ago, Adam Smith wrote that businesses often conspire against the public, using government regulations to do so. Whether it’s our browsers or our data or our systems, competition is almost always more effective than regulation. Investors should take note: nothing concentrates a business-person’s mind like having a rival.
Douglas R. Tengdin, CFA
Charter Trust Company
“The Best Trust Company in New England”