Facebook is a monopoly. But is that right?
Mark Zuckerberg made a special announcement today on national television. Lina Khans FTC filed its case to end Facebook's monopoly.
Facebook's monopoly is obvious to the average person. As James E. Boasberg of U.S. District Court, District of Columbia stated in his recent decision: No one who sees the title of The Social Network 2010 wonders about which company it is. However, obviousness is not an antitrust standard. Monopoly is a legal term that Lina Khan's FTC has not met. The FTC's second foray was more substantive than today's refiling. However, it still lacks critical arguments. These are just a few ideas.
Facebook's monopoly is obvious to the average person. However, obviousness is not an antitrust standard.
The FTC must first define the market accurately: personal social networking which includes messaging. The FTC must prove that Facebook has over 60% market share. To do this, revenue is the right metric.
Although consumer harm is a well-known test for monopoly determination, the courts don't require the FTC prove that Facebook damages consumers in order to win the case. Alternate pleadings can be made by the government to show that Facebook is harming consumers by suppressing wages within the creator economy. If the creator economy exists, then ads on Facebooks services are only worth their value if creators work. No one would view the ads before or between videos if there was no user-generated content. Facebook has suppressed creator wages, causing harm to consumers.
Note: This is the first part of a series about the Facebook monopoly. Cloudflare's recent post on Amazons monopoly within their industry inspired me. Although it may have been a competitive strategy, I believe it was more of a patriotic duty. It serves as a guidepost for legislators and regulators dealing with complex issues. My generation has seen with sadness and trepidation how technologists who have never used email in the past question legislators about products that have long permeated our lives in ways we don't yet know. My company and I both stand to lose little, but as a participant of the latest generation social media startups and an American concerned about the future of democracy, I feel a responsibility to try.
The court ruled that the FTC must pass a two-part test. First, the FTC must identify the market in which Facebook holds monopoly power. This must be defined by the D.C. Circuit in Neumann, Reinforced Earth Co. (1986). This market is for personal social networking services that include messaging.
The FTC must also prove that Facebook has a dominant market share. Courts have determined that 60% is the minimum threshold, as established by the U.S. 3rd U.S. Circuit Court of Appeals, FTC v. AbbVie 2020. This market share analysis can be done using the following metric: revenue daily active users (DAU), x average revenue/user (ARPU). Facebook has a control of over 90%.
Snapchats investor presentations are the solution to FTC's problems:
This chart shows Facebook's 91% monopoly of the personal social network market. This gray blob looks a lot like an oil deposit that Facebook's Standard Oil operations have drilled. Snapchat and Twitter are small wildcatters that are almost insignificant when compared to Facebook's size. Market observers should not forget that Facebook attempted to acquire both companies once before.
The market includes messaging
Initial claims by the FTC that Facebook holds a monopoly on the personal social networking market were made. The FTC alleged that mobile messaging apps on Facebook were excluded from the market due to a lack of a shared social space and (iii) a lack of a social graph for users to find and friend other users.
This is false because messaging is not tied to Facebook's power. This was demonstrated by Facebook's acquisition of WhatsApp, promotion for Messenger and previous attempts to acquire Snapchat and Twitter. Facebook's control over messaging is the key to any personal social network service's ability to expand its features.
The ecosystem becomes more valuable the more people spend time there. Depending on who you ask, social networks value is calculated either algorithmically (Metcalfes Law) or logarithmically (“Zipfs Law”). In social networks, 1+1 equals more than 2.
The ever-increasing amount of nodes that companies have access to, which allows them to build more features, makes social networks valuable. To describe this relationship, Zuckerberg invented the social graph. This is evident in the monopolies of Line and Kakao in Japan, Korea, and China. They started with messaging, and grew to be dominant social networking giants.
Today's refiling by the FTC explains how Facebook, Instagram, and Snapchat all use three key features to create personal social networking services:
First, personal social networks services are built around a social graph which maps the connections between users' friends, family, and other people.
This is unfortunately only a partial truth. Social media's treacherous waters are a place where feature sets are often copied and promoted in a cross-promotional manner. What about Instagram's copying Snapchat stories? Since its inception, Facebook has copied features from some of the most popular apps on the market. The most recent example is the launch of Live Audio Rooms, a Clubhouse competitor. Snapchat and Twitter are completely competitors to Facebook.
To demonstrate Facebook's vastness and insatiable appetite to copy and delete, messaging must be included. Messenger and WhatsApp have more than 2 billion users and 1.3 billion respectively. WhatsApp's ease of feature copying means that a messaging service with this scale could be a large social network within a few months. This is exactly why Facebook bought the company. It is amazing how broad Facebook's social media services are. The FTC must understand that messaging is an important part of the market. This acknowledgement would be a boon for their case.
The metric Revenue is a measure of Facebook's monopoly
Boasberg thinks revenue is not the best metric to measure personal networking. The total revenues earned by PSN services can't be used as a metric to determine market share, since they are all earned in a different market, viz. the market for advertising. Advertising is not all created equal. Today's refiling correctly identified social advertising as distinct from display advertising.
It goes too far in trying to avoid naming revenues as the distinctive market share metric. The FTC instead cites time spent and daily active users (DAU) as distinguishing market share metrics. In a world in which Instagram and Facebook compete with Snapchat, these metrics could bring together Instagram and Facebook Blue over the 60% monopoly threshold. The FTC doesn't make a convincing argument for the use of these metrics. Facebook should be compared with other social networking services like Discord or Twitter. Their inclusion in the market would weaken the FTC's decision on DAU/MAU and time spent.
Cash is the king. The FTC should stress that revenue is what matters. Snapchat shows that revenue in the personal social networking industry is calculated using ARPU x DAU. The personal social media industry is different from the entertainment market, where Facebook competes with YouTube and TikTok. This market is also distinct from the Google display search advertising market. Advertising-based consumer technology does not all look the same. Advertising is not a market, but a business model.
Netflix's subscription revenue is clearly competing in the same media market as CBS' advertising model. News Corp.'s acquisition of MySpace, a Facebook competitor, speaks volumes about the internets potential disruption and destruction of traditional media advertising markets. Snapchat is pursuing advertising. However, Discord and its incipient competitors are growing rapidly using subscriptions. Their market share is still a small fraction of that of Facebook.
Alternative pleading: Facebook's market power suppresses wages within the creator economy
FTC correctly argued that the FTC should have the largest possible market to define their monopoly. The FTC's strongest argument is that personal social networking (of which Facebook has at least 80%) should not include entertainment. This argument has the greatest chance of succeeding and is the most narrow.
They could also choose to present a wider argument in the alternative that requires a larger swing. Lina Khan, who famously wrote about Amazon in her 2017 New Brandeis note, noted that the traditional economic consumer harm test doesn't adequately address the risks posed by Big Tech. These harms are too abstract. The Curse of Bigness is a White House advisor Tim Wu's argument. Judge Boasberg also acknowledges that antitrust law doesn't solely depend on price effects. Facebook can be dismantled without having to prove the negative effects of price effects.
Facebook is a problem for consumers. Facebook has hurt consumers because they have underpaid workers whose labor is what makes Facebook's value. YouTube is an example of personal networking that includes entertainment. Influencers have the ability to charge brands on YouTube and Facebook. This is not the point; it is about the percentage of advertising revenue paid to creators.
YouTube's traditional percentage is 55%. YouTube revealed that it had paid $30 billion to rights holders and creators over the past three years. Let's say half the money goes directly to rights holders. That means creators have averaged $15 billion per year, which would be $5 billion annually. This is a significant portion of YouTube's $46 billion revenue. YouTube paid creators 33% of its revenue, which is a significant amount considering YouTube's non-advertising revenue.
Facebook announced a paltry $1Billion program in a year and a change just weeks ago. Facebook doesn't disclose the percentage of revenue it gives creators, even though they may make money through interstitial ads. This would be offensive. Facebook has reported $210 billion in revenue over the three-year equivalent period. One-third of that revenue would be paid to creators at $70 billion or $23 billion per year.
Why hasn't Facebook paid creators in the past? It hasn't had to. Facebook's social graph is so big that creators have to post there. The scale afforded to creators by success on Facebook Blue or Instagram allows them to monetize directly through selling to brands. The creators of Facebook's ads are the reason they have value. Without users creating content, the social network would cease to exist. Creators are entitled to more than what they produce on their own. Facebook suppresses creators wages simply because it can. This is what monopolies do.
Facebooks Standard Oil ethos
Facebook has been the Standard Oil for social media. It used its core monopoly to launch its march upstream and downstream. Zuckerberg made the announcement in July and he is focusing his attention today on the metaverse market, which Roblox pioneered. Facebook's drilling continues after achieving a monopoly on personal social media, and competing successfully in entertainment social media. Facebook is free but it harms Americans because it stifles creator wages. Antitrust laws state that consumer harm does not have to be a condition of proving a Sherman Act monopoly. Monopolies are illegal in their own right. The FTC has more chance of winning if it can refile the market definition and marketshare. It should win.
Substack originally published a previous version of this article.