Issue 14

Why Facebook shouldn't be regulated

Delivered on 06 January 2019 by Justin Pyvis. About a 7 min read.

If you follow EconByte then you’re probably aware of my dislike of Facebook and so I apologise in advance for yet another Facebook-related post. But in light of even more revelations of Facebook’s abuse of its user’s data, it may come as some surprise to see me, of all people, advocating against the regulation of Facebook. Hear me out.

Regulating Facebook will only make it more dominant

There’s a strong and growing impetus around the world to subject Facebook, and by proxy all other social media companies, to sterner regulation. For example, British politician Damian Collins issued a statement calling for authorities to investigate Facebook and for it to once again appear before his committee to “explain how their policies work on access to user data, and whether policies are a breach of data privacy law, as it would appear that user data was made available to firms without the informed consent of the user having been given”.

Investigations are already underway both in Washington and Germany, with both countries trying to determine whether or not Facebook is a monopoly and should be regulated as such. As Collins stated:

“Given the dominant market position they enjoy in social media, this gives real concerns about whether they are behaving as a monopoly, exercising their considerable power to further dominate the commercial environment in which they trade; making some businesses, and breaking others in the process.”

Fair enough, too; Facebook is as creepy as they come. Even with location tracking turned off, Facebook uses IP addresses, check-ins, and cities on profiles to approximate user locations for ads and other services. Then there are the bugs, such as the one where app developers were mistakenly granted permission to access the photos of up to 5.6 million users. Oh and who could forget its dodgy VPN application, supposedly developed to provide users with “greater privacy and control around their data”, but in reality was literally designed to spy on people.

That said, I would be surprised if regulators managed to define Facebook as a monopoly without somehow bending the rules. A popular economics textbook by Greg Mankiw defines monopoly as “a firm that is the sole seller of a product without close substitutes… is a price maker… earns extraordinary profits for an extended period… price is greater than marginal cost… [and] market power is based on substantial barriers to entry”.

While there is no exact replica of Facebook, and certainly none with the network effects that it has developed over time, there are plenty of close substitutes. As for being a price maker, Facebook doesn’t even sell a product to consumers - it’s an advertising company and its users pay with data instead of dollars. The barriers to entry are also tiny; at the end of the day, Facebook is just another website and plenty of alternatives have come and gone throughout its existence.

But when you’re an antitrust lawyer, everything’s a monopoly.

The enormous amount of media attention directed at Facebook and its morally opaque business model has resulted in all sorts of critters emerging from the woodwork, including antitrust lawyers. Former antitrust assistant attorney general Sally Hubbard, writing for CNN Business, had this to say:

“Facebook, for example, doesn’t need to have a monopoly over a market as broad as “all social media.” All social media platforms are not substitutes for Facebook. You can’t see baby pictures on LinkedIn, and you can’t keep in touch with Grandma on Twitter. The closest substitute to Facebook is Instagram, which isn’t much of a choice since Facebook owns it.”

There’s plenty more in the article but it’s painful stuff. I mean, you can make any company into a monopoly if you narrow your definition of “market” enough. All electric vehicles are not substitutes for a Telsa. Monopoly! I control the market for EconByte posts. Monopoly!

But baby pictures, really? You want to see some distant associate’s baby pictures that badly, but not enough to accept Facebook’s conditions or I don’t know, ask them for a picture, that you would prefer to cry monopoly and drag Facebook through the courts?

As for grandma, if you truly wanted to keep in touch, why not call once in a while? Email? SMS? The possibilities are virtually endless. I would go on but the article is so dimwitted and ignorant of the subject with which it deals that I just can’t.

Politics is not economics

While Facebook may fail an economist’s definition of monopoly, good politics is not necessarily good economics (in fact, it often runs contrary). To a politician, Facebook is ripe for regulation and its constant exploitation of its user’s data has shaped up as the perfect justification.

But alas, without forcing it to change its business model entirely, regulating Facebook will do little to help its users and will in all likelihood further entrench its status as a monopoly.

A key problem with regulating Facebook as a monopoly is that it will require a myriad of generalised, industry-wide regulations. No doubt the end package will have a noble aim and name, with the Eurozone’s “General Data Protection Regulation” (GDPR) the most prominent example. But Facebook already operates in Europe and so has been subject to the GDPR even as the list of accusations against it continues to grow.

The sad fact is people just don’t care about their data and will consent to almost anything put in front of them so as to continue using the free service, meaning while regulations such as GDPR might sound all warm and fuzzy, in practice they have few privacy-boosting effects.

A study by Jared Spool of User Interface Engineering found that less than 5% of users change their settings at all. Indeed, the only thing the average user will have noticed as a result of the GDPR is the return of the annoying pop-up in the form a “we use cookies” consent box. Worse, it has already worked to further centralise power in the hands of Google and Facebook:

“GDPR, the European Union’s new privacy law, is drawing advertising money toward Google’s online-ad services and away from competitors that are straining to show they’re complying with the sweeping regulation.

The reason: the Alphabet Inc. ad giant is gathering individuals’ consent for targeted advertising at far higher rates than many competing online-ad services, early data show. That means the new law, the General Data Protection Regulation, is reinforcing—at least initially—the strength of the biggest online-ad players, led by Google and Facebook Inc.”

I have no doubt that on some margins, regulating Facebook will help. But given the money and politics involved, designing the perfect regulation is virtually impossible and not without cost. Every piece of additional red tape will not only increase Facebook’s costs, but also the cost of a potential competitor from competing with Facebook as a place for you to share and store your cat photos. It risks turning Facebook into a utility; it will create artificial barriers to entry not just for a Facebook clone, but for some yet to be conceived idea that may fail at the first hurdle given the additional costs of getting started.

What happens to the small start-up that hopes to one day replace Facebook by competing on a slightly different margin if it needs to raise tens (or hundreds) of thousands of dollars to comply with the new regulations? It could be an end-to-end encrypted social network, where by “friending” someone you essentially exchange a cryptographic key that decrypts particular content. It could be a completely decentralised, federated system. Whatever. Broad-based “social media” regulation will nip such start-ups in the bud before they can ever see the light of day.

Those pesky unintended consequences

There’s also a very real risk of rent seeking and regulatory capture. You can bet your bottom dollar that Facebook will throw billions of dollars at “guiding” industry regulation through lobbying, political donations and “industry consultations”. Facebook will be willing to pay the cost of being regulated if it means its competitors, both present and not yet conceived, will have to pay it as well. How is a startup supposed to compete with the 20,000 security and content reviewers and small army of lawyers already on Facebook’s payroll?

Just as Uber decimated the taxi industry, unless a future competitor’s product is leaps and bounds above Facebook’s, the heavily regulated legacy provider will linger on. Facebook will divert some of its profits to political campaign contributions and regulatory compliance costs but will become even more entrenched - ‘utilified’ - in the process.

Regulating Facebook would be a win for Facebook, regulators, politicians, lawyers, accountants, content screeners, the NSA, etc., but would represent a large unseen loss for consumers who will be stuck with Facebook and its data abuse for far longer than they should. Contrary to what the media, politicians and antitrust lawyers claim, there are lots of alternatives to Facebook, including social media abstinence.

People like Facebook

A study recently found that the average Facebook user would require more than $1,000 to deactivate their account for just a single year. At the end of the day, Facebook has been able to grow not through monopoly status (e.g. as might a water utility) but by giving consumers what they want in a highly competitive market. In this case, that happens to be a free platform to share their lives to the world in exchange for their data, which it sells to advertisers to fund itself.

The fact that Facebook maintains so many active users in probably the most competitive sector in the world is proof enough that they are happy with the exchange, so for heaven’s sake please don’t regulate it and unintentionally entrench an advertising company as the social media gold standard for years to come.

Issue 14: Why Facebook shouldn't be regulated was compiled by Justin Pyvis and delivered on 06 January 2019.