Rohan Silva: Are we seeing the end of Mark Zuckerberg’s game of monopoly?

Centre of attention: Mark Zuckerberg takes his seat before the Senate committee
EPA
Rohan Silva12 April 2018
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Mark Zuckerberg is living every young person’s worst nightmare: trying to explain how tech stuff works to the nation’s elderly. That was one Twitter user’s verdict after watching veteran US politicians doing a comically bad job of grilling the 33-year-old Facebook founder in two high-profile public hearings this week.

Zuckerberg had come to Washington DC to be quizzed about data privacy, in the wake of the news that the political consulting firm Cambridge Analytica might have unlawfully collected personal information on 87 million Facebook users without permission.

This is a hugely important topic — but sadly, even though the politicians got to interview Zuckerberg for 10 solid hours, they didn’t make any real headway, because barely any of them seemed to know much about technology or business. In the words of the influential tech writer Kara Swisher: “The senators really dropped every single ball possible.”

In fact, investors were so happy about how well Zuckerberg was doing against the politicos that Facebook’s share price went up during the first hearing — increasing the value of the company by more than £2 billion. But if I owned Facebook stock, I’m not sure I’d be quite so confident.

One line of questioning that kept popping up was the issue of whether or not his company is a monopoly, meaning it has little or no competition from other companies.

One senator asserted that “Facebook is the dominant social platform with no true competition”, while another made the point that if you buy a car, you can easily switch to another brand if you don’t like it, but it’s much harder to find an alternative to Facebook. On this point, Zuckerberg was much less confident, struggling to name another business that’s a genuine rival.

It’s perhaps not surprising that he stumbled — after all, many experts have long argued that the social network has effectively become a monopoly, and action should be taken.

As the director of the Roosevelt Institute said after the hearings were over: “The fact that Zuckerberg couldn’t name his competitors spoke volumes.”

The reason this matters is that in business, competition is vital. It helps ensure consumers don’t get ripped off because in a competitive market companies can’t easily hike up prices, as they know consumers will switch to a rival. Competition also helps drive innovation, as companies fight to stay ahead of the rest by coming up with new products.

Ever since President Roosevelt took action to break up big oil and railway companies in the early 20th century, successive generations of American politicians have seen it as their responsibility to tackle monopolies and ensure the US economy remains dynamic and innovative.

But what’s fascinating — and complex — about Facebook is that it doesn’t fit into the old way lawmakers have tended to think about monopolies, which is to focus on whether they’re abusing their dominant position to push up prices.

That makes sense if you’re thinking about a traditional business such as a bank or an energy company. But as we all know, Facebook is free to use — no matter how many hours a day you spend on it or how many photos you upload.

But the thing about social networks — which obviously hadn’t been invented when competition laws were first drawn up — is that they tend towards monopoly because if all your friends are using Facebook, then it’s really hard for you to use a different service.

''Given that EU rules set a lower bar for judging market dominance by a company, it wouldn’t be surprising if it took action''

According to business analyst Ben Thompson: “The issue is straightforward. Networks are the monopoly-makers of the internet era. To build one is extremely difficult but, once built, they are nearly impregnable.”

This helps explain why 95 per cent of young American adults use Facebook — and why Facebook accounted for 77 per cent of revenue growth in digital advertising in the US in 2016.

For many experts the fact that the social network giant has been able to buy companies such as Instagram and WhatsApp is further proof that it may be becoming a monopoly, and using its power to reduce competition and stifle innovation.

Another example is the way Facebook tried to buy Snapchat — and, having been rebuffed, immediately started copying its best features in order to undermine the fledgling business.

According to academics such as Professor Scott Galloway at New York University, this all adds up to a clear picture: “Bottom line — this is a monopoly.” Only time will tell whether American politicians take the same view and decide to act.

And, of course, the EU will no doubt be looking closely at this issue too. Given that EU rules set a lower bar for judging market dominance by a company, it wouldn’t be surprising if it took action, much like it did with Microsoft and Google.

If politicians stepped in, what might this mean? For starters, it could make it much more difficult for Facebook to keep buying other companies, so further entrenching its dominant position.

It might lead to new restrictions on how Facebook can access information from Instagram, WhatsApp and other businesses it has acquired — or even force these companies to be divested or sold, breaking up the social network.

Or, as we’ve seen with other monopolies in the past, even if the company isn’t broken up, regulations could be introduced to make it harder for it to abuse its dominant position.

In the words of the chief economics commentator of The Wall Street Journal: “Facebook’s days as an unregulated monopoly may be numbered.”

That might be good news for competition and innovation — but probably not for Mark Zuckerberg.

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