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If it looks and acts like an oligopoly ... the power of Facebook and other online elite

If it looks and acts like an oligopoly ... the power of Facebook and other online elite

Fergus Hanson is author of Internet Wars: The Struggle for Power in the 21st Century. This is the final installment in a series. Part 1 examined economic cyber espionage; part 2 cyber war; and part 3 citizen activism 

Internet mythology suggests the online world is the sort of free market paradise Adam Smith would have hyperventilated over. But what if the opposite were true: could the internet be prone towards monopoly or oligopoly?

To answer that question, let's start with historical precedent. In his classic book The Master Switch, Columbia University Professor Tim Wu traces the rise and fall of previous information empires and forensically details a common trait: their tendency towards monopoly.

Wu argues there are five reasons for this:

  • The network effects information industries create.
  •  The economies of scale they facilitate.
  • The power of integration.
  •  The ‘will to power’ that the heads of information industries exhibit.
  •  The nation state’s taste for monopoly.

All of these apply to the internet. [fold]

Facebook is useful because everyone already uses it. The cost to Google of having a new user conduct a search is close to nothing. An integrated hardware and software system, like Apple’s iPhone has helped create the most valuable company in history. I’ll leave the judgement on the CEOs personalities to others, but they certainly have some interesting views on the world. As for the state taste for monopoly, the PRISM program detailed in these NSA slides, suggest the value of concentrated ownership. No doubt China and Russia feel the same way about their own home grown platforms like Baidu and Yandex.

What about the practical realities though? It would be nearly impossible to list all the start-ups and companies operating online so how could a monopoly exist? Internet Wars doesn’t argue off all these businesses will be killed off. But it does appear that a few companies are rapidly securing monopoly or oligopoly control of key economic chokepoints, through which most companies will have to operate if they want to reach customers. For example, we see Facebook dominating social media, Apple and Google dominating mobile, Google dominating search, and Amazon becoming the world’s online department store.

The prevailing logic suggests the barriers to entry are so low that even these large players will soon be disrupted by the next big thing. But that ignores the characteristics of information industries identified by Wu. A critical one is size, which provides access to cash and means any potential rival can be bought. To this end there have been some eye-watering deals: Facebook’s US$1 billion for Instagram and US$19 billion for WhatsApp, Google’s US$1.65 billion for YouTube, Microsoft’s US$8.5 billion for Skype and Apple’s US$3 billion for Beats. This also applies to new industries: witness Google's spending spree, buying up the world’s top robotics firms and those at the forefront of the internet of things.

Well, assuming these companies are securing monopoly positions — so what? The most obvious impact will be on competition online. Explaining Amazon’s 'ridiculouslyhigh' price-to-earnings ratio, Peter Cohan observed in Forbes:

...investors have long believed that Amazon would use its low prices to wipe out competitors in many product categories. And having vanquished those competitors, Amazon would be in a position to reap the rewards of its huge market share – by raising its prices with impunity.

It will also affect dynamism. If all businesses eventually migrate their individual websites to Facebook, for example, the internet will be a much less vibrant place because everyone will have to conform to Facebook's rules.

It also affects basic rights. Now that one-fifth of the world uses Facebook, it plays an important gatekeeper role over the news we can and cannot see: a role for which it is poorly equipped.

The 2012 leak of Facebook’s censorship rules highlighted the odd moral code it was imposing on the world: breastfeeding images were banned, but crushed heads got the thumbs up.

The latest Pew survey shows nearly two thirds of Americans get news from Facebook, up from 47% in 2013, a finding that underlines its rapid development as an information gatekeeper.

It’s not hard to find other examples of internet giants exercising arbitrary control over our rights. Google and Facebook have both courted controversy by banning users from using pseudonyms.

In one high-profile example, Facebook deactivated the account of author Salman Rushdie and only reactivated it once it had changed his name from Salman (his middle name) to Ahmed (his first name). Rushdie tweeted Facebook’s founder, Mark Zuckerberg, with the message: ‘Morons. @MarkZuckerbergF? Are you listening?’ Eventually his original account was reinstated, but for many less prominent figures, the policy held. Facebook followed this up by going after drag queens using pseudonyms.

What does this mean for policy makers? For a start, there is a need to look seriously at options for maintaining competition online. This isn’t easy, but the Europeans have begun. We also need to consider the implications and obligations companies with global monopolies might have when it comes to issues like censorship: if a company like Facebook is where most people get their news, should it be able to apply a stricter censorship regime than that allowed in your country of origin?

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