Daniel Altman

The New Monopolies

The New Monopolies

Twenty-nine years ago, on Jan. 1, 1984, the Bell Telephone Company ceased to exist, having been broken up into smaller firms by the U.S. government. Bell had controlled the American telephone network since its inception, and this control gave it an unfair advantage in selling a variety of goods and services used for communication. Fast-forward to today: If the same were true for a global Internet giant like Facebook or eBay, could consumers still be protected?

Only a few Internet companies have reached a scale that raises questions about competition, but each has at least 100 million customers. So far, legal authorities in the United States and elsewhere have scrutinized them mainly when they have pushed into markets on the fringes of their own business, as in Facebook’s attempt to prevent other software from complementing its own system or Google’s use of its search engine to influence consumers’ purchasing decisions. Last week, the United States decided that Google’s behavior did not discourage competition.

But Google is different from Facebook and eBay. The usefulness of Google’s search engine depends only indirectly on how many other people are using it; for Facebook and eBay, the network of other users is of central importance and can guarantee customers’ loyalty, even when they feel mistreated. Despite this potential drag on competition, however, the companies’ market shares in their core lines of business have not come into question.

That’s unusual, since they have been completely dominating their markets. Depending on how you measure, Facebook may account for as much as 95 percent of the time Americans spend using online social networks. As of a few years back, eBay had 90 percent of the online auction markets in the United States and Europe. With that market locked up, it’s now competing with Amazon for regular retail sales.

A simple reason for the companies’ free pass may be that they charge very little or nothing for their services. Facebook’s famous pledge "It’s free (and always will be)" may help to insulate it from antitrust claims. And indeed, one of economists’ primary concerns about dominant firms is that they will gouge consumers, or at least raise prices in a way that pushes some buyers out of the market. But economists also worry that a dominant firm will erect barriers to keep other companies out of its primary market.

The lack of competitors hurts consumers, too, by blocking the introduction of new and potentially better products — for example, a social networking site that gives users easier control of their content and privacy. Clearly, promising to offer a service for free does not solve this problem. If it finally becomes clear that Facebook’s network is so enormous that no other social network can break into the market, then its own business may become a target for regulators.

In Facebook’s case, such action may be premature. After all, Friendster and Myspace were apparently strong incumbents before being quickly supplanted. Other companies, like eBay, may not escape so easily. Like Facebook, eBay has an enormous network of registered users, but it does charge for its services. It has not faced any serious competition during most of its existence, and its global presence is growing, with more than three dozen markets so far totaling almost $2 billion in quarterly revenues. The question is whether regulators will see online auction services as a discrete market, rather than just one of many ways of selling stuff.

Sooner or later, a regulator somewhere in the world is bound to take a crack at one or more of these companies on the basis that their networks constitute barriers to competition. If the challenge is successful, the outcome will be very different from what happened to Ma Bell. A case against Facebook in a small country might simply lead the company to stop offering its services there. In the United States or the European Union, that might not be an option.

A company like Facebook cannot simply be carved up into geographical regions or have some services separated from others. Its product is a holistic user experience, and — if necessary — it could serve the whole world from a single base of operations. Creating a slew of mini-Facebooks that covered consumers from different states or countries wouldn’t remove any barriers, either, since the network and its uniform product would undoubtedly stay intact; dismantling such a popular product would probably end up hurting consumers more than helping them.

What are the alternatives? Governments could try to prevent Facebook from offering new services, in order to give new entrants a fighting chance. A more extreme possibility would be to nationalize the company or turn it into a public trust, forcing it to be run for consumers’ benefit. In eBay’s case, the solution might be to regulate its prices, as governments already do with utilities like water and electricity.

Yet any remedy that threatened to damage the company’s business or its value to shareholders could ultimately be ineffective or even counterproductive. Facebook, eBay, or any other Internet company could just relocate its headquarters to a friendlier regulatory climate, taking thousands of jobs with it — but with no interruption in its services. After all, the United States and the EU aren’t in the business of blocking websites the way China and many Middle Eastern countries do.

It’s tough to find a solution that would truly promote competition without destroying the Internet giants’ valuable contributions to the global economy. These companies are part of a new species of global business not anticipated by decades-old antitrust legislation or standard theories of industrial organization. Right now, the world doesn’t have the right jurisdictions, tools, or even ideas to deal with them. So do we just have to live with their virtual monopolies, whatever prices they decide to charge and whatever services they deign to offer?

Not necessarily. When government fails to act, or can’t, consumers still have a choice. In early December, changes to the policy on ownership of photos at Instagram, a Facebook subsidiary, led to outcries among users and in the media. Even though Instagram dropped the changes after three days, thousands of users had already switched to or at least tried other services.

The next step is for consumers to organize themselves so that they can confront potential abuses. If they speak with one voice, the companies will listen and even consult with them before pursuing new strategies. Why? Because the billion-plus Facebook and eBay users aren’t just customers — they’re also the companies’ most important assets.