Facebook Monopoly: Examining Facebook's Market Dominance

Is Facebook Truly a Monopoly?

The question of whether Facebook operates as a monopoly is frequently raised. Today, Mark Zuckerberg delivered a televised “special announcement.”

This announcement arrived at a particularly noteworthy time, coinciding with the refiling of a case by Lina Khan’s FTC aimed at dismantling Facebook’s perceived monopolistic control.

The Challenge of Proving Monopoly Status

To many, Facebook’s dominance appears self-evident. As Judge James E. Boasberg of the U.S. District Court for the District of Columbia noted, the film “The Social Network” immediately identifies a single company in the public consciousness.

However, perceived obviousness doesn't satisfy legal antitrust standards. A monopoly possesses a specific legal definition, and the FTC, under Lina Khan’s leadership, has yet to fully demonstrate this definition applies to Facebook.

The current refiling of the case represents a more detailed approach than the FTC’s initial attempt. Nevertheless, certain crucial arguments remain underdeveloped. Insights from legal experts suggest potential avenues for strengthening the case.

Key Arguments for the FTC

Firstly, the FTC needs to accurately define the relevant market. This should encompass personal social networking, inclusive of messaging platforms.

Secondly, the FTC must demonstrate that Facebook commands more than 60% of this defined market. The most appropriate measure for establishing this control is through revenue figures.

Consumer Harm and the Creator Economy

While demonstrating direct consumer harm is a traditional test for monopoly claims, courts do not necessarily require the FTC to prove such harm to succeed.

Alternatively, the government can build a strong argument that Facebook negatively impacts consumers by suppressing earnings within the creator economy.

If the creator economy is a legitimate economic force, the value derived from advertisements on Facebook’s platforms is directly linked to the work of content creators. Without user-generated content, engagement with advertisements would significantly decline.

Therefore, Facebook’s actions that reduce creator compensation constitute harm to consumers.

Understanding the Core Issue

The Federal Trade Commission (FTC) faces a dual challenge, as outlined by the court. It must first delineate the specific market where Facebook wields monopolistic influence, a requirement stemming from the precedent set in Neumann v. Reinforced Earth Co. (1986) by the D.C. Circuit.

This market is understood to encompass personal social networking services, inclusive of messaging platforms. Subsequently, the FTC is obligated to demonstrate Facebook’s commanding share within this defined market.

Establishing Market Dominance

Court rulings, specifically FTC v. AbbVie (2020) from the 3rd U.S. Circuit Court of Appeals, have established a threshold of 60% or greater market share to signify dominance. The appropriate measure for determining this share is definitively revenue, calculated as daily active users (DAU) multiplied by average revenue per user (ARPU).

Currently, Facebook maintains control over more than 90% of this market, a figure that clearly indicates a dominant position.

Evidence of Monopoly Power

The solution to the FTC’s challenge is readily available within Snapchat’s publicly released investor presentations:

This graphic illustrates the extent of Facebook’s monopoly – a 91% share of the personal social networking market. The substantial market control resembles a significant resource extraction, effectively managed by Facebook’s operations.

Platforms like Snapchat and Twitter represent comparatively minor players, possessing limited scale in relation to Facebook’s overall reach. It’s noteworthy that Facebook previously attempted acquisitions of both of these companies.

Key Takeaways

• The FTC must prove Facebook’s monopoly power using a two-part test.
• Market share is determined by revenue (DAU x ARPU).
• Facebook controls over 90% of the personal social networking market.
• Snapchat’s investor presentations provide clear evidence of Facebook’s dominance.

Defining the Relevant Market

Initially, the Federal Trade Commission (FTC) asserted that Facebook maintained a monopoly within the market for “personal social networking services.” However, the original complaint notably excluded “mobile messaging” from this defined market.

The FTC’s reasoning centered on the belief that messaging applications lacked a crucial “shared social space” for user interaction and did not utilize a “social graph” to help users discover and connect with known individuals. This assessment, however, overlooks the integral connection between messaging and Facebook’s overall power.

Facebook’s strategic acquisition of WhatsApp, coupled with the promotion of Messenger and previous attempts to acquire Snapchat and Twitter, clearly demonstrate the importance of messaging. The ability to expand feature offerings is key, and Facebook’s competitive advantage relies heavily on its control within the messaging landscape.

The value of any digital ecosystem increases with user engagement. This value is often calculated using principles like Metcalfe’s law or Zipf’s law, both of which highlight the exponential growth potential of social networks – where the combined value exceeds the sum of its parts.

Network Effects and Dominance: Social networks gain value as the number of users, or “nodes,” increases, enabling companies to build and integrate additional features. Facebook’s founder, Mark Zuckerberg, termed this interconnectedness the “social graph.” The dominance of platforms like Line, Kakao, and WeChat in Japan, Korea, and China, respectively, exemplifies this principle; they all originated with messaging and expanded into comprehensive social networking services.

The FTC’s Revised Definition

The FTC’s recent refiling now identifies Facebook, Instagram, and Snapchat as personal social networking services, all sharing three core characteristics:

• Social Graph: A mapping of connections between users, including friends, family, and personal contacts.
• Shared Social Space: Features enabling users to interact with connections and share experiences, often in a one-to-many broadcast format.
• Connection Discovery: Tools that help users find and connect with others, facilitating the growth of their personal networks.

Despite this revised definition, it remains incomplete. The dynamic nature of social media, as the FTC itself acknowledges, involves frequent feature replication and cross-promotion. The copying of Snapchat’s “Stories” feature by Instagram serves as a prime example.

From its inception, Facebook has consistently replicated successful features from competing applications. The recent launch of Live Audio Rooms, a direct competitor to Clubhouse, further illustrates this pattern. Consequently, Twitter and Snapchat should be recognized as direct competitors to Facebook.

The inclusion of messaging is vital to accurately portray Facebook’s extensive reach and its propensity to replicate and potentially eliminate competition. WhatsApp and Messenger boast over 2 billion and 1.3 billion users, respectively. Given the ease with which features can be copied, a messaging service of WhatsApp’s scale could rapidly evolve into a full-fledged social network.

This potential is precisely why Facebook acquired WhatsApp. The company’s breadth of social media services is substantial, and the FTC’s case would be strengthened by acknowledging messaging as an integral component of the relevant market.

The Core Issue: Facebook's Dominant Position and Revenue

Judge Boasberg’s assessment that revenue isn't suitable for gauging personal social networking market share is flawed. He incorrectly equates business model with the market itself. It’s crucial to recognize that not all forms of advertising are equivalent.

The FTC’s recent refiling rightly distinguishes between “social advertising” and “display advertising.” However, the agency deviates from sound reasoning when attempting to avoid revenue as the primary indicator of market share.

Alternative Metrics and Their Shortcomings

Instead, the FTC proposes using “time spent,” “daily active users (DAU),” and “monthly active users (MAU).” While these metrics might suggest a combined Facebook Blue and Instagram share exceeding a 60% monopoly threshold when considering only Snapchat as competition, the FTC’s justification for this metric selection is weak.

A more accurate assessment would involve comparing Facebook to other personal social networking services like Discord and Twitter. Including these platforms would likely diminish the significance of the FTC’s chosen metrics.

Why Revenue Remains the Decisive Factor

Ultimately, financial performance is paramount. Revenue is the most telling metric and should be the FTC’s central focus. As demonstrated by Snapchat, revenue within the personal social media sector is determined by Average Revenue Per User (ARPU) multiplied by DAU.

The personal social media market operates distinctly from the entertainment social media market, where Facebook contends with platforms like YouTube, TikTok, and Pinterest. Furthermore, this differs from the display search advertising market dominated by Google.

Advertising represents a business model, not a market category in itself. Consider the media landscape: Netflix’s subscription revenue directly competes with CBS’ advertising-supported model.

Historical Precedent and Emerging Trends

News Corp.’s acquisition of MySpace, a former competitor to Facebook, underscored the internet’s capacity to disrupt and dismantle established media advertising markets. Snapchat has opted for an advertising-based approach, while emerging competitors like Discord are achieving growth through subscription models.

Despite these alternatives, the market share held by these competitors remains comparatively small when measured against Facebook’s substantial presence.

• Key Takeaway: Revenue accurately reflects market dominance in personal social networking.
• Important Distinction: Advertising is a business model, not a defining market characteristic.

A Different Approach to the Antitrust Case: Facebook’s Dominance and Creator Compensation

The Federal Trade Commission’s (FTC) strategy of defining the narrowest possible market for its monopoly claim is sound. Focusing on personal social networking – a sector where Facebook maintains a controlling share of at least 80% – avoids the complexities of including entertainment within the definition. This focused approach maximizes the likelihood of a successful outcome.

However, the FTC possesses the option of presenting a more expansive argument, one with potentially greater impact. Drawing inspiration from Lina Khan’s influential 2017 analysis of Amazon, which sparked the New Brandeis movement, it’s crucial to recognize that conventional economic assessments of consumer harm are insufficient when evaluating the actions of large technology companies. The detrimental effects are often too diffuse to be easily quantified.

As White House advisor Tim Wu articulates in “The Curse of Bigness,” and as Judge Boasberg acknowledged in his ruling, antitrust legislation isn't solely dependent on demonstrable price increases. A case for dismantling Facebook can be made even without conclusive evidence of negative price effects.

Nevertheless, Facebook has demonstrably harmed consumers. These consumers are, in fact, the content creators whose contributions form the core value of Facebook’s platform, and they are systematically undercompensated. Expanding the definition of personal networking to encompass entertainment provides a relevant comparison point: YouTube.

On both YouTube and Facebook-owned platforms, content creators can generate income by directly partnering with brands. However, the critical factor isn’t direct brand deals; it’s the proportion of advertising revenue distributed to creators. YouTube traditionally allocates 55% of its advertising revenue to creators.

YouTube recently announced that it has distributed $30 billion to creators and copyright holders over the past three years. Assuming a conservative estimate that half of this sum went to rights holders, creators have collectively earned $15 billion, averaging $5 billion annually. This represents a substantial portion – roughly one-third – of YouTube’s $46 billion revenue during that period.

In contrast, Facebook recently unveiled a comparatively modest $1 billion program spanning just over a year. While creators may derive some income from in-feed advertisements, Facebook refrains from disclosing the percentage of revenue shared with creators, likely due to its inadequacy. Over a comparable three-year timeframe, Facebook generated $210 billion in revenue.

Applying the same one-third revenue share to creators would equate to $70 billion, or $23 billion per year. The disparity is significant.

The reason for Facebook’s limited creator compensation is simple: it hasn’t been compelled to offer more. The sheer size of Facebook’s social network compels creators to maintain a presence on the platform regardless. The reach provided by Facebook and Instagram enables creators to monetize their content through direct brand partnerships. Facebook’s advertising revenue is directly attributable to the labor of its creators; without user-generated content, the social graph would be nonexistent.

Creators are entitled to a more equitable share of the value they generate. Facebook actively suppresses creator wages due to its monopolistic power. This behavior is characteristic of monopolies.

The Dominant Position of Facebook and its Expansion

For an extended period, Facebook has operated much like Standard Oil within the realm of social media. The company has consistently leveraged its foundational monopolistic position to extend its influence into related sectors. Zuckerberg’s reiterated emphasis on the metaverse, initially announced in July, represents a move into a territory largely established by Roblox.

Having secured a dominant share in personal social networking, and demonstrating strong competition in entertainment-focused social media and virtual reality, Facebook continues to pursue expansion. While access to Facebook itself is without charge, its monopoly power demonstrably disadvantages Americans by suppressing earnings for content creators.

It’s important to note that antitrust legislation, specifically the Sherman Act, does not require proof of consumer detriment to establish the existence of a monopoly. The mere presence of a monopoly is, in itself, a legal concern.

The Potential for FTC Action

With a refined market definition and accurate assessment of market share, the Federal Trade Commission (FTC) possesses a significant opportunity to succeed in challenging Facebook’s dominance. A favorable outcome for the FTC is entirely plausible.

This piece was initially published on Substack.