Facebook is the dominant social network, but it doesn’t dominate internet advertising.
Facebook (NASDAQ:FB) CEO Mark Zuckerberg recently faced a congressional hearing sparked by the revelation that data from 87 million Facebook users was improperly accessed by data firm Cambridge Analytica. The hearing was filled with awkward questions that revealed that lawmakers didn’t fully grasp Facebook’s business model or its privacy practices.
In the midst of this, Sen. Lindsey Graham, R-S.C., asked Zuckerberg a question investors should have paid special attention to: “Who’s your biggest competitor?” Zuckerberg seemed to struggle with his answer, saying that the “average American uses eight different apps” per day to connect to their friends.
Zuckerberg didn’t name those apps, but his count likely included at least four that are owned by Facebook: the main Facebook app, Facebook Messenger, WhatsApp, and Instagram. Messenger, Facebook, and WhatsApp are the top three social apps in the United States on iOS, according to App Annie. Instagram ranks first in the photo and video category, ahead of YouTube and Snap‘s Snapchat.
Graham then asked if Facebook held a “monopoly” on the social networking market, to which Zuckerberg replied, “It certainly doesn’t feel like that to me.”
However, it isn’t that simple. Let’s examine three reasons Facebook should be considered a monopoly, and three reasons it shouldn’t be.
Three reasons Facebook is a monopoly
Facebook could be considered a monopoly that has too much power for three simple reasons: its dominant user base, its pricing power, and its lack of direct competition.
Facebook is the largest social network in the world, with 2.13 billion monthly active users (MAUs). Alphabet‘s (NASDAQ:GOOG) (NASDAQ:GOOGL) YouTube is considered the second-largest social network in the world with 1.5 billion active users, but it focuses on videos rather than directly on social connections.
Facebook generates most of its revenue by selling targeted ads and it throttles the number of available ad slots to boost ad prices. Its total number of ads rose just 15% last year, compared to 50% in 2016. Yet its average price per ad surged 29% last year, versus 5% growth in 2016. This tells us that Facebook has tremendous pricing power in the ad market, and that it can easily offset slower ad growth with higher prices.
Zuckerberg told Graham that Facebook’s business “overlap(s)” with the businesses of Google, Apple, Amazon, and Microsoft “in different ways.” That’s certainly true, but none of those companies is Facebook’s direct competitor. Google repeatedly tried to gain a foothold in the social media market, but all its efforts — including Orkut, Latitude, Buzz, Jaiku, Dodgeball, and Google+ — failed to match Facebook’s appeal.
Three reasons Facebook isn’t a monopoly
Yet Facebook wouldn’t be deemed a a monopoly if we consider three other factors: its market share, the effectiveness of its ads, and its shifting demographics.
Facebook is a major player in internet advertising, but it’s still no match for Google. Facebook’s ad revenue rose 49% to $39.9 billion in 2017, while Google’s ad revenues grew 20% to $95.4 billion. You could claim that Google and Facebook hold a duopoly in internet ads, but you couldn’t claim that the smaller player holds a monopoly.
Facebook also isn’t the best when it comes to ad effectiveness, undercutting a case for a monopoly designation. A recent Cowen & Company survey of senior ad buyers found that 48% of respondents stated that Google’s ads had the highest ROI, while Facebook ranked second at 30%. All other platforms held single-digit percentages.
Lastly in this case against a monopoly label, Facebook doesn’t have an iron grip on all its users. The number of 12- to 17-year-old Facebook users in the U.S. fell 10% in 2016 and another 11% in 2017, according to eMarketer. Facebook is retaining some of those users through Instagram, but lots of them are heading over to Snapchat, which Zuckerberg should have named as a growing competitor.
I don’t think Facebook is a monopoly. Facebook is the dominant social network, but it doesn’t rule the internet advertising market in the same way the old AT&T controlled the US telco market or Microsoft conquered the PC operating system market.
As long as Google generates higher internet ad revenues and smaller players like Snapchat keep pulling away users, Facebook should not be labeled — or regulated — as a monopoly.
COMPETITION IS AT THE HEART OF FACEBOOK’S PRIVACY PROBLEM
AMERICANS ARE CONCERNED they have no control over their data—and they should be.
Our data are being turned against us. Data powers disinformation campaigns attacking democratic institutions. It is used to foment division and turn us against one another. Cambridge Analytica harvested the personal informationof approximately 87 million Facebookusers not just to target would-be voters with campaign ads but, as former Cambridge Analytica staffer Christopher Wylie put it to the New York Times, to “fight a culture war in America.”
Consumers are trusting companies with vast amounts of intimate data and receiving very little assurance that it will be properly handled and secured. In turn, our data are used to power the connected services we use, and depending on the platform or app, are sold to advertisers. Sometimes, as in the case of Facebook, we receive services for free in exchange for our data.
But in this system individuals bear the risk that their data will be handled properly—and have little recourse when it is not.
It is time for a better deal. Americans should have rights to and control over their data. If we don’t like a service, we should be free to move our data to another.
But Facebook’s control of consumers’ information and attention is substantial and durable. There are more than 200 million monthly active Facebook users in the United States, and the company already owns two potential competitors—Instagram, a social photo-sharing company, and WhatsApp, a messaging service. Facebook also collects and mines consumers’ data across the internet, even for consumers without Facebook accounts.
It is also difficult and time-consuming to move data between platforms.
The ability to control this data isn’t just part of Facebook’s business model; it’s also a vital component of creating choice, competition, and innovation online. The value of Facebook’s network grows and depends on the number of people who are on it.
But unlike other networks—such as your phone company, which is required to let you keep your existing phone number when switching service providers and make calls regardless of the carrier you use—Facebook and other technology companies also have the final say over whether you can take your key information to a competing service or communicate across different platforms.
The result of this asymmetry in control? The same network effect that creates value for people on Facebook can also lock them into Facebook’s walled garden by creating barriers to competition. People who may want to leave Facebook are less likely to do so if they aren’t able to seamlessly rebuild their network of contacts, photos, and other social graph data on a competing service or communicate across services.
This friction effectively blocks new competitors—including platforms that might be more protective of consumers’ privacy and give consumers more control over their data—from entering the market. That’s why we need pro-competitive policies that give power back to Americans through more rights and control over their data.
Privacy and competition are becoming increasingly interdependent conditions for protecting rights online. It is critical that we restore Americans’ control over their data through data portability and interoperability requirements.
Data portability would reduce barriers to entry online by giving people tools to export their network—rather than merely downloading their data—to competing platforms with the appropriate privacy safeguards in place.
And today, you can already use your Facebook account to import your profile and contacts on Spotify and some other social apps.
The bottom line: Unless consumers gain meaningful controlover their personal information, there will be continue to be persistent barriers to competition and choice online.
Of course, there need to be guardrails in place to protect the privacy and security of users.
Legislators and regulators also need to more extensively reform data security and privacy law to improve privacy, transparency, and accountability online—particularly among data brokers and credit reporting agencies like Equifax—and create more transparency in political advertisements and spending online.
But at a minimum, Americans should have real control over their data. A pro-competitive solution to reducing barriers to entry online will encourage platforms to compete on providing better privacy, control, and rights for consumers.