Facebook’s market power overwhelms competition

Opinion

Hey there, time traveller!
This article was published 27/11/2020 (1769 days ago), so information in it may no longer be current.

IN its last second quarter financial report, Facebook reported it had more than 2.7 billion users worldwide, and 256 million users in the United States and Canada. Based on population statistics, the huge platform’s reach among users in the U.S. and Canada is almost 70 per cent of the entire population.

Facebook also reported average revenue of US$7.05 per user, worldwide, and US$36.49 each in the U.S. and Canada. This all added up to more than US$18 billion in advertising revenue and a net income of more than $5 billion … in one quarter! According to Statista, Facebook now controls 77 per cent of all social network advertising.

How did this happen? Antitrust experts and economists refer to it as “market power.”

The U.S. House Judiciary subcommittee’s report on Big Tech, released recently, called it monopoly power. This power is wielded over users and advertisers with a devastating impact on news organizations that rely on both audience and advertising revenue to survive.

There are three pillars of Facebook’s market power: high switching costs, strong network effects and access to data. Let’s briefly explore each before getting to some of the impacts:

High switching costs

One key way to create size is to make switching to another social platform difficult. This is exactly what Facebook has done.

Over time, Facebook users invest a lot of their time to create their personal network of family, friends, co-workers, businesses, etc. Users are becoming more and more concerned with privacy issues (remember the Facebook-Cambridge Analytica furor?), the proliferation of fake news and concerns of how the data collected from their activity is used, among other things. But moving to another social platform is difficult, as Facebook users have to completely start from scratch to build a new network.

Facebook makes it extremely difficult to import your information, photos and users to another platform.

One other thing: If you think Instagram is an alternative, it was purchased by Facebook in 2012. And you will still start from scratch there. Interestingly, if you are an advertiser on Facebook and Instagram you can switch between the two. In fact, back in 2016, Facebook described in a photo that advertising on both platforms goes together like peanut butter and jelly. Not so for users.

Network effects

As a result of its huge reach, Facebook enjoys a strong “network effect.” As reported in the U.S. House report, Investigation of Competition in Digital Markets, a positive network effect is one where the attractiveness of the product increases with the number of people using it. In fact, the report noted that Facebook’s practices have “tipped the market in its favour, primarily facing competitive pressure from within its own family of products.”

Access to data

Many of us think Facebook is “free” to users. Well, it really isn’t. In exchange for using the platform, you are providing valuable personal data in exchange. And good luck if you want to change your settings to limit the data collected on you. Facebook uses this data to sell targeted advertising resulting in the US$18 billion of quarterly revenue noted above.

It also creates a more targeted user experience, which leads you to spend more time on the site. More time on the site means more advertising revenue to Facebook. It also means the platform collects more data. More data means better targeting, which means higher advertising rates and revenue. And so the circle goes.

How does this impact the Seattle Times? Our newsroom costs alone in 2019 exceeded US$16 million. This does not include supporting activities such as technology, product development, marketing, human resources, finance, rent, etc. We invest extraordinary dollars to create trusted content that Facebook delivers to its users, now in ways that keeps readers on their site, not ours.

The Seattle Times also invests millions of dollars to support our advertising-sales efforts. The results of those efforts and investments have declined because of the technology platforms’ dominance, including by Facebook. Rates and margins have declined.

It is a vicious cycle. Without some change in the model, I fear we will see further declines in the number of journalists here and elsewhere and growing numbers of news deserts across the country.

Congress and the U.S. Justice Department need to level the playing field with the tech platforms. We also encourage Congress to pass HR 7640, the Local Journalism Sustainability Act, which would provide support and incentives to help sustain newspapers and media companies as we cope with not only the Big Tech players, but also the devastating impacts of the pandemic on our business.

Alan Fisco is president of the Seattle Times and recently was elected president of America’s Newspapers, an association of newspaper executives.

— The Seattle Times