How and why to break up Facebook

Or, the new antitrust playbook

For those of you blessedly living in caves, on Friday, Democratic presidential candidate Elizabeth Warren announced her plan to break up the tech giants. Her spiel on it is worth reading (as a side note: can you even imagine Trump issuing such a wonky polemic?)

Her argument goes wobbly in places—does anyone really care that we have Bing in addition to Google?—but the overarching theme is the usual progressive one (as in trustbuster-Teddy-Roosevelt-progressive) around big business getting too big for society’s good.

I’m going to withhold judgement on the details of Warren’s polemic (which many commenters are pointing out are debatable in places), and instead focus on one big overarching aspect of contemporary digital capitalism that I think many antitrust crusaders miss: Silicon Valley isn’t full of monopolists, it’s full of what are (technically) called monopsonists.

A monopsony is a market dominated by one buyer and many sellers, and is the exact inverse (in many ways I’ll soon illustrate) of a monopoly, requiring entirely different antitrust remedies.

(For readers of Ben Thompson, yes, this is similar to his ‘Aggregator Theory’ of tech companies, but I prefer going with the wonky econ term to reflect the dual and mirror-image nature of this phenomenon vs. classic monopoly. But Thompson’s treatment is great too.)

Consider this old Silicon Valley saw (and I quote the luminiferous ether of Linkedin think-fluencers):

“The biggest media company in the world, Facebook, produces no media; the biggest hospitality company in the world, Airbnb, owns no hotel rooms; the biggest taxi company company in the world, Uber, owns no taxis.”

If this old saw is true, then what defines Uber as a taxi company, if they don’t actually supply the service in question via owned-and-operated drivers and cars? The fact they have everyone drunkenly looking for a ride in the Mission District of San Francisco at 2AM on a Friday night staring at their app, that’s what. And ditto people looking to read the news of the day (Facebook) or buy an offbeat and unique travel experience (Airbnb).

Monopsony so flips the script on what we normally think of commerce, it’s kind of mind-bending, and thus worth citing an easy-to-understand example before diving into the digital weirdness.

Perhaps the best one comes from the old bricks-and-mortar world: Walmart. As amply elucidated in Charles Fishman’s The Walmart Effect, Walmart is a ruthless monopsonist, having seized an enormous amount of retail consumer demand in the US and then (and here’s the key point distinguishing them from monopolists) offering their customers more and more for less and less. How do they manage to maintain 24% gross margins? By chiseling their suppliers endlessly, absolutely applying the deal-making screws on everything they buy from mangoes to Levi’s jeans, and demanding immense volume discounts (which they use to undercut other, smaller retailers as well, thus demolishing Main Streets everywhere). Their shoppers they keep felicitously happy (mottoes: “Always Low Prices!”, “Save Money, Live Better!”), and their suppliers they keep continually miserable by threatening to shut off the demand spigot they control.

So how does this work in the world of trafficked bits instead of atoms?

Airbnb, (potential) monopsonist

Another piece of news last week was that Airbnb had acquired just-in-time hostelry startup Hotel Tonight. Its name is the product offering: you can book a same-night hotel among a roster of quirky or boutique hotels (vs. just the local Motel 6). At first glance, this seems odd: what does the Berkeley in-law unit or rural Montana cabin of Airbnb have to do with stuck business travelers booking the Ace Hotel after missing a flight? Why wouldn’t Airbnb buy, say, upstream property management firms (which have already emerged to help Airbnb hosts) to more closely integrate its supply pipeline like every market-dominating firm from Standard Oil to McDonald’s?

As we’ll see with Facebook, unlike supply monopolists, demand monopsonists (which Airbnb will become if it gets big enough) work by horizontally integrating any and all adjacent demand to their core business, rather than vertically integrating supply of the same, dominating their value chain via a bottoms-up (vs. top-down) stranglehold. Thus, Airbnb (which again doesn’t directly control a single bed anywhere) buys another hostelry service that (like itself) is nothing more than a mobile app clicked on by a user: an inbound flow of sales leads to the actual suppliers of the lodging service.

What’s the demand monopsony playbook look like in media?

Facebook, absolute and complete monopsonist

Facebook is a monopsonist of human attention, and the suppliers of media it uses to satisfy that demand are either users themselves, who voluntarily supply Facebook via their own hyper-mediated personal lives. Or they’re conventional media outlets like The New York Times or Fox News, which (semi) voluntarily share their (expensive-to-produce) content via Newsfeed.

As Walmart does with its suppliers, this monopsony grants Facebook the leverage to set prices with media suppliers, which universally are…$0. Facebook pays nothing for its media. In the case of users, this is arguably paid for via the in-kind service of Facebook itself (which is certainly not cheap to provide). In the case of outside media, Facebook provides distribution for their content. The problem there is that Facebook drinks their revenue milkshake by upstreaming their advertising budgets with its own advertising, negating the advantage of distribution (as outside media has woefully learned).

An advertising wonkery aside: The reason this is even possible isn’t due to Facebook, and predates them. It’s actually due to another amalgam mentioned by Warren: the Google/Doubleclick hybrid, which produced probably the most momentous (and under-reported) shift in media over the past couple of decades. Thanks to the convoluted machinery of Internet advertising, the advertising world went from being about content publishers and advertising context—The Times unilaterally declaring, via its ‘rate card’, that ads in the Times Style section cost $30 per thousand impressions—to the users themselves and the data that targets them—Zappo’s saying it wants to show this specific shoe ad to this specific user (or type of user), regardless of publisher context. Flipping the script from a historically publisher-controlled mediascape to an advertiser (and advertiser intermediary) controlled one was really Google’s doing. Facebook merely rode the now-cresting wave, borrowing outside media’s content via its own users’ sharing, while undermining media’s ability to monetize via Facebook’s own user-data-centric advertising machinery. Conventional media lost both distribution and monetization at once, a mortal blow.

Why am I so sure that Facebook should be view through the lens of a demand-aggregating monopsonist?

To prove this, I’ll reference the First Law of Corporate Skulduggery: you can tell what a company actually does as a business by noting where it risks doing its most sketchy and underhanded shit.

In the case of Facebook, that is unambiguously in the ‘Growth’ team, which uses every piece of psychological or technical trickery—emails, repeated notifications, hoovering your contact info or location data to feed you better friend recommendations, etc.—to get you to engage with the platform and thus expand demand. Consider one recent and egregious example: Facebook acquired Israeli company Onavo, which purported to offer users VPN services (indirecting your mobile traffic through them, ironically enough, for privacy reasons), but which also measured mobile app usage. Why did FB want a VPN company? So it would have spyware on everyone’s devices (particularly contested demographics like teens) to detect pockets of overlooked demand. Apple yanked the app from the App Store for terms-of-service violations, but FB only rebooted the hack via a sketchy teen-polling app, causing a showdown between the two giants.

If Facebook were a conventional supply monopolist, what it would be doing would be ‘vertically integrating’ upstream of itself, say, launching a rival media service to Fox News, and then selectively amplifying its own content at the expense of outside rivals. It would be cutting ruthless, exclusive deals with celebrities to keep them posting on Instagram but selectively neglect SnapChat. It would be iterating endlessly around its own product, trying to find new social media ‘supply’ it can push on consumers.

But Facebook is resisting both the advantages and responsibilities of a media company, needing to be dragged into moderating its own content as media companies do. And it’s not trying to (directly at least) gain exclusive locks on content from celebrities. It hasn’t shipped a new (uncopied) user feature in years. In short, it’s not trying to control supply at all.

That, counter-intuitively, is the monopsonist smoking gun right there.

Supply monopolists vertically integrate to own their value chain, extracting more value, and shutting out supply rivals, and then go on to jack up prices on consumers. Demand monopsonists horizontally integrate, acquiring or copying-to-steal user demand adjacent to their existing demand at no additional cost to consumers, and that way gain leverage over their suppliers (and advertisers, if that’s the model). Facebook will never own a media production company, just as Airbnb and Uber will never own a hotel or a physical taxi company. But they’ll own every square-foot of demand that feeds those industries if they can.

How does American antitrust law deal with this?

In short, it mostly doesn’t. How would it? After the Reagan 80s, and the antitrust philosophy put forth by the ‘Chicago School’ and solicitor general Robert Bork, US antitrust intervention is perceived almost exclusively as a consumer protection issue that focuses on pricing as the only valid measure of corporate abuse. How’s that work with an app like Facebook that’s free?

I would argue that American antitrust must shift from focusing on consumer harm as demarcator of antitrust violation, to lack of consumer benefit, with an accompanying (and anti-competitive) benefit to the resulting merged companies. That’s the new anti-competitive foul that the FTC umpire should be regulating.

Ask yourself this: How did users benefit from Facebook acquiring Instagram and WhatsApp? The short answer is: not at all. Many Instagram users don’t even realize the app is owned by Facebook (making declarations of “I’m quitting Facebook for Instagram” rather comical), and the same holds with WhatsApp. The guiltiest section in Mark Zuckerberg’s recent manifesto was around messaging and ‘interoperability’. This is a nakedly desperate attempt to justify the corporate merger with some (or any really) utility for the user, where right now there is none.

For the new Facebook conglomerate however, advantages abound. By unifying the complex and cost-intensive technical and operational backends of the three apps, once-upstart companies Instagram and WhatsApp (which had respectively 11 and 32 employees on acquisition) were quickly able to achieve world-class scalability. Any aspiring rival to Instagram, particularly in light of privacy expectations like GDPR, or new user expectations around content moderation, will need to build up their costly legal and operational abilities practically from the day it’s just a dozen engineers staring at eye-popping usage dashboards (which is how Instagram got started). This raises an immense barrier to entry for any Facebook competitors.

And that’s not even mentioning the business advantages of offering advertisers, via a unified sales pipeline, inventory on both Facebook proper and Instagram. Advertisers privilege reach for their targeted audience above all, and a huge pool of unified inventory is worth far more than the sum of its constituent parts. No Facebook rival started now, has much chance of succeeding, barring a total dropping of the ball by Facebook (which is unlikely given Zuck’s maniacal focus).

What would antitrust do there?

In a monopoly situation, antitrust means disaggregating supply to bring relief to consumers. In a monopsony situation, antitrust means disaggregating demand to bring relief to suppliers (which in a very long-term and second-order way presumably ultimately benefits consumers). It’s the exact opposite of traditional anti-trust, in that you segment the soon-to-be-dismembered entity along user fault lines, not supply ones. In the case of the Facebook trifecta, the boundaries are obvious: the companies as they existed pre-acquisition.

In the case of something like Uber (were it to be regulated), the split is more interesting. Uber offers differing products like UberPool and UberX, the former a jitney-like service for commuters and the latter just regular point-to-point taxis, which are often serviced by the same driver-vehicle combo. The post break-up version would split those two (even if the supply was effectively the same). Ditto Airbnb with its recent Hotel Tonight acquisition. (This is for demonstration purposes, to be clear. Neither of those companies has achieved the market dominance that would warrant antitrust intervention.)

Aside from the fomenting of competition, a Facebook breakup would perhaps de-intensify the strident media cycle around disinformation and content moderation that shows no signs of stopping. If kicking Alex Jones off the platform doesn’t mean (effectively) kicking them off the Internet, the debates assume rather less of a momentous free-speech character. Facebook would be, assuming the breakup worked at all, just one more app among many echoing the shouts and clamors of our ever-bickering species. That would be good for the market, as well as our mental health.