Fair Play: The Facebook Conundrum

Facebook Blog

The birth of Facebook Inc. depicted in the 2010 movie “The Social Network” shows competition working exactly as market economists say it should. Two different innovators, Facebook founder Mark Zuckerberg and Harvard Connection founders Cameron and Tyler Winklevoss produced rival social networking sites. Facebook won the battle handily.

Yes, there was a lawsuit about whose idea it was to begin with, but that dispute centered on intellectual property. The competition in the free-for-all social networking market was sound.

Except now there are no effective alternatives to Facebook. “If I buy a Ford and it doesn’t work well and I don’t like it, I can buy a Chevy,” Sen. Lindsey Graham (R-S.C.) told Zuckerberg at a high-profile hearing last week. “If I’m upset with Facebook, what’s the equivalent product that I can go sign up for?”

Zuckerberg didn’t have a good answer, except to say that he doesn’t “feel like” he has a monopoly.

He may be the only one that sees it that way. Facebook is so powerful that “libertarians are now arguing for regulation,” observed University of Tennessee law professor Maurice Stucke at last week’s American Bar Association antitrust conference in Washington.

Stucke, who has written extensively on big data and competition, said the U.S. antitrust laws may not be up to the task of addressing the power of Facebook and other tech giants like Google Inc. and Amazon.com. “There is this new wave coming, and these new [tech] models haven’t been working” under traditional U.S. antitrust tenets, he said.

Since the 1980s, U.S. antitrust law has been narrowly focused on prices, which doesn’t speak to the dominance that companies like Facebook and Google exercise over users. After all, those products don’t divest the consumer of cash.

Here’s how powerful they are: “I use Google every day,” said Open Markets Institute President Barry Lynn at the conference. That’s a significant statement because Lynn is a leader in the emerging anti-Google, anti-monopoly movement.

Lynn isn’t shy about his views. He says these companies’ dominance is leading to the “destruction of American democracy and the enslavement of the American people.”

If he can’t find an alternative to Google, who can?

The problem lies in a bedrock component of antitrust thinking, both in the U.S. and Europe, that respects success on the merits. Winners in a fair fight deserve to exist without being reined in, the theory goes.

“We don’t turn on the successful competitor,” said Howard University antitrust law professor Andrew Gavil. Let’s not forget, he added, big tech companies “have delivered an extraordinary amount of consumer value. That’s why they grew as fast as they did.”

So now regulators, consumers, legislators, and the courts are at an impasse. Antitrust enforcers can’t punish Facebook or Google for being successful, and consumers still want what they have to offer. Even if everyone wants more choices, antitrust law isn’t equipped to create competitors out of thin air. Its sole job is to protect a marketplace that allows a fair fight.

If Facebook is behaving unfairly, there are ways to address that. Germany’s competition regulators came down hard on Facebook in December for using its dominant position to force users to allow it to engage in unlimited data collection. The European Union also slapped a $2.7 billion fine on Google for skewing search results.

But fining the companies and forcing them to change their data policies is about as far as the competition enforcers will go. So far, there appears to be no appetite to “break up” Facebook or Google.

Zuckerberg promised to work with Congress to come up with meaningful regulations to ensure Facebook users’ privacy doesn’t get breached. What comes of that, if anything, is anybody’s guess.

But one thing is certain – those new regulations won’t diminish Facebook’s power, said Joshua Gans, an economist at the Brattle Group.

“Regulations will involve technical solutions,” Gans said. Facebook presumably would be involved in negotiating the technical aspects of fixing its privacy problem. That would make it better equipped than an upstart rival to deal with the eventual government requirements. “If you’re a new entrant, that’s a problem.”

Maybe that’s why Zuckerberg appeared so blasé when he told lawmakers Facebook would be willing to accept government rules.

What’s Happening

On Monday, the trial between the Justice Department and AT&T Inc. over its proposed purchase of Time Warner enters its fifth week.

Quote of the Week

“God knows I’m not afraid of bringing a lawsuit.”

--DOJ antitrust chief Makan Delrahim, speaking at the ABA’s antitrust spring meeting.

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