Markets are addressing Facebook’s problems

By Mark Jamison

These are tough days for Facebook. An hours-long network outage recently led users to sign up for Signal, Telegram, and other rival services, and triggered calls for more regulation. A former employee is using The Wall Street Journal, 60 Minutes, and Senate testimony to criticize her former colleagues’ morals, leading to more calls for government control. The Federal Trade Commission continues pressing its antitrust suit, and Facebook’s own Oversight Board is questioning the company’s favoritism of high-profile users.

via Twenty20

Facebook’s critics have their points. The sudden loss of a valued service is hard on users, who deserve better. The sheer amount of scholarly evidence on Facebook addiction, intrusion, and depression is alarming. The company is anything but transparent in its content moderation. And Facebook’s network effects of 2.9 billion users and its 300-petabyte database for machine learning makes competing with it difficult and costly.

It’s easy to conclude that more government regulation is the answer. Even Facebook asks for more regulation. But more regulation and antitrust prosecutions won’t solve these problems: We already have laws against deceitful business practices and violating business agreements. And antitrust regulators struggle to show that Facebook has actual market power.

Fortunately, competition is rising to provide the discipline that regulation has failed — and would continue failing — to provide even with more laws. Existing and emerging competitors are following Jeff Bezos’ adage: “Your margin is my opportunity.”

What is the evidence that competition is working? WhatsApp’s rivals gained users rapidly during Facebook’s outage. And a number of social media platforms are finding more success than Facebook is: According to Pew, more American adults now use YouTube than Facebook, and YouTube, Reddit, and Pinterest are all gaining users. Meanwhile, the percent of US adults using Facebook has been flat for five years, during which TikTok has grown from zero to 1 billion users worldwide, and is now more than one-third the size of Facebook. As I have written:

The average American has more than seven social media accounts. And people are finding more and more social media options: On a global basis, the number of accounts per person nearly doubled between 2014 and 2020.

And, previously:

The average Facebook user is on Facebook about 10 minutes per day, or only 8 percent of the time Americans spend on social media daily.

Why are other social media companies succeeding relative to Facebook? One reason is that some consumers simply prefer other platforms. Facebook is eight points below average for social media consumer satisfaction, according to the American Customer Satisfaction Index. In contrast, Pinterest and TikTok are eight and two points above the average, respectively. A recent study found that the most prominent reasons people leave Facebook include the emergence of better platforms, feeling addicted, peer pressure, and privacy concerns — problems also cited by the aforementioned former Facebook employee in her call for regulation.

Competition is solving problems, just as Adam Smith’s invisible hand metaphor and Joseph Schumpeter’s creative destruction theory posited it would.

Competition has always been more effective than regulation whenever competition is feasible. The Department of Justice (DOJ) won its case to breakup Standard Oil in 1911, but the breakup had little effect. It was oil discoveries in the Midwest in the 1890s that drove prices down. The DOJ’s 1969 antitrust case against IBM was dropped in 1982 because the rise of Apple, Hewlett Packard, Compaq, and other personal computers had eroded IBM’s sales. In 2001 the Federal Communications Commission gave only conditional approval to an AOL-Time Warner merger in part because the agency was concerned AOL was dominant in instant messaging. But the dominance was fleeting at best: Blackberry launched in 1999, Apple introduced iChat in 2002, and Skype launched in 2003.

Why do markets resolve problems better than regulation? Markets move faster and more effectively than government agencies do. Rivals anticipate opportunities, risk their own capital testing consumer interests, and succeed only if consumers agree that the old business models must be destroyed. Regulation, by contrast, is slow, lacks market tests, and can be captured by economic and political interests.

Competition fails primarily when customers are unable to choose because of barriers to competition. It appears that there are no such barriers in Facebook’s case. Signal, Telegram, TikTok, and others are overcoming Facebook’s network effects and extensive database. And new business models are emerging: Project Liberty’s business model enables social media firms to share data and other resources that make market entry costly. What should governments do? They should enforce existing laws that require firms to be honest and transparent in their dealings with customers. They should be informative to customers and potential rivals about perceived business failings. And they should act humbly, recognizing that their knowledge is limited and that creative destruction is full of surprises.

National News Tags:, , , , , , , ,