Capitalisn’t: Hail to the Chief of Facebook

Kate: Hello, I’m Kate Waldock of Georgetown University.

Luigi: I’m Luigi Zingales of the University of Chicago.

Kate: This is the pilot episode of Capitalisn’t.

Luigi: You mean capitalism?

Kate: No, Capitalisn’t, as in what capitalism is and capitalism isn’t.

Luigi: Basically what works in the current market system and what doesn’t.

Kate: We are two academic economists. I know just one of those would be boring enough, together they sound unbearable, but we’re here to prove you wrong.

Luigi: Because we’re very passionate about public policy, and we do believe that economics can be really useful in coming up with new proposals and new perspectives.

Kate: On this podcast we’re going to explore the problems of capitalism, but we’re here to fix it, not destroy it. We’re more critical of capitalism than the Left and more supportive of true capitalism than the Right.

Luigi: And what is better to begin with than talking about the potential presidential run of Mark Zuckerberg, the CEO of everyone’s favorite social media platform, Facebook?

Kate: Actually my favorite social media platform is Instagram.

Luigi: Actually my favorite is WhatsApp. Doesn’t matter. Facebook owns them all.

Kate: Yeah, Facebook owns all of them.

Speaker 3: New clues that Facebook’s chief, Mark Zuckerberg, could be eyeing another office, maybe the presidency.

Speaker 4: It was just dinner, but it could be Mark Zuckerberg’s first course in politics.

Speaker 5: If he left the company he would lose his majority control, except if he was leaving to serve in government.

Speaker 6: I doubt if he would run, but if he did I would vote for him because I trust him.

Kate: All right, so let’s say that Mark Zuckerberg does decide to run for president in 2020. What’s the big deal? I mean, after all, Mark Zuckerberg seems like a nice guy. He’s giving away all his money, or so he says, to charity over the course of his lifetime, and also this isn’t an economic issue. It’s a political issue.

Luigi: You mean you’re not worried? This is like super important because this guy has an enormous amount of economic power thanks to the control of Facebook, all the social media, all the data, and now he might become the President of the United States with all the power that presidency gives to you. You put them together, this guy becomes too powerful.

Kate: Yeah, but he’s powerful because he was a good businessman. I mean, some people think that he just got lucky, but based on his net worth, why is that such a big deal?

Luigi: I don’t think it’s a problem necessarily that the businessman becomes president, even if the last record was not great, but I grew up in Italy and Berlusconi was a media, and still is, a media mogul, and all of the sudden decided to run for office. Of course, his TVs were broadcasting how great he was, and he controlled at the time half of the markets of TV in Italy and became Prime Minister. Becoming Prime Minister, he got control over the other half of the TV that was state owned, so at some point he controlled the entire TV market in Italy. This is the problem of putting together sort of the power that comes from business, the power that comes from government, and becomes absolute power. As you know, absolute power corrupts absolutely.

Kate: All right, so as a disclaimer I have a connection to Facebook. Back in the day I was friends with Eduardo, who was one of the original Facebook founders, Eduardo Saverin that is. He has since exiled himself to Singapore, and I haven’t seen him since, but we were friends.

Luigi: And as a disclaimer, I don’t like Facebook because my children did not befriend me in Facebook and I cannot see what they’re doing.

Kate: Yeah, it’s because it’s weird to be friends with your dad. I’m not friends with my dad.

Luigi: But I’m a nice dad.

Kate: All right, one of the reasons that it’s hard to pinpoint the role of Facebook as a monopolist or a duopolist is that traditionally for monopoly it produces some sort of good, and consumers purchase that good, and there’s a price. For Facebook it’s less clear what’s going on there. First of all, it collects information from people, and using all that aggregated information it sells advertisements to anybody, to anyone who wants to advertise online as long as they pay a price. There’s two different ways that the monopoly is being obfuscated here, being covered up here. First of all, as a consumer of Facebook—right—if you have a Facebook page, it feels like you’re not paying anything. It feels like you get to post pictures for free, and you get to have friends for free, but you are paying something. I mean the value of your private information is, in itself, a currency. You’re not paying for Facebook with dollars, but you are paying with information about yourself, which a lot of people would want by the way.

On the other end of the spectrum, Facebook is charging digital advertisers to be able to reach an audience on Facebook, and they may be charging monopoly prices on that side, but because it’s not obvious as a consumer, because we like having access to Facebook for free, I don’t think that it gets as much attention, particularly, from antitrust regulators.

Luigi: You’re absolutely right. In fact, I had the fortune to interview Judge Richard Posner, who was one of the luminaries of US antitrust, at a conference that the Stigler Center organized, and he was talking about Google, not about Facebook, but he was saying that he loves Google, that Google offers its service for free, at least as a consumer, that’s exactly the point you are making, and he doesn’t see any problem of antitrust with Google.

Richard Posner: I spend a lot of time Googling, so I don’t want to hear criticisms of Google, my principal source of knowledge. That’s why I say I’m, I might just be out of it, but I’m very comfortable with the modern American giant companies. I mean, maybe there are lurking serious antitrust problems, but they don’t come to my court.

Luigi: But there is a reason why they don’t come to your court, you know.

Richard Posner: Well, Google gives access to two billion websites, and that seems to me to swamp the concern about that they’re, you know, a serious problem.

Kate: I think it’s important that we talk about the word monopoly. I’m going to try and define it here. A monopoly is a producer of a good. In fact, it’s the major producer of that good, and for whatever reason, it’s difficult for other firms to come in and start producing that same good. That’s what we call barriers to entry. Therefore, competition against that main producer is limited, and that’s what we call market power.

Imagine a world in which there’s no Android, and there’s no Samsung Galaxy, and there’s no LG, and in this world if you want to buy an ... sorry, if you want to buy a smart phone, you basically have to buy an iPhone. There aren’t that many other options. In that case, Apple would be a monopoly in the market for smartphones.

Luigi: So that would be like Microsoft was in the mid-’90s with operating systems for computers. They were, by and large, the only operating system people had on PCs.

Kate: Yeah. I’m sorry, I don’t remember the mid-’90s.

Luigi: I know, that’s the reason why I mentioned, but what’s interesting is what happened to Microsoft when they had this dominant market share? They actually got indicted for violation of the antitrust laws in the United States, and they had to fight these allegations for a long time, and eventually they were convicted for abusing their position. Most people don’t know, but today we have Google and Facebook as different from Microsoft because of that antitrust suit. Because what Microsoft was doing at the time was using its monopolist position on operating systems to expand in more and more markets. So you probably don’t even know that before Excel there was a thing called Lotus 1-2-3, and you don’t know that before-

Kate: What?

Luigi: Yeah. The first spreadsheet was called Lotus 1-2-3, and it was an independent company, and it was completely wiped out by the fact that Microsoft incorporated a copycat of Lotus 1-2-3 into its Office suite, and as a result, Lotus was gone. Before Word existed a company called WordPerfect. We’ve seen this before. What Facebook is doing by buying Instagram, by sort of copying other products that come into market is exactly what Microsoft was doing 20 years ago.

Kate: OK, I just want to outline all the potential reasons that a monopoly might be bad. OK?

Luigi: OK.

Kate: So first of all, pricing. Monopoly pricing. I’m going to go back to my iPhone example. If you’re the only company selling phones in a market ... I don’t know how much you would be willing to pay for a phone, but let’s say the average person is willing to pay $800 for a phone, which is, I think, pretty fair, given how much iPhones cost. Let’s say it costs this producer, Apple, $200 to make a phone. So if Apple has a monopoly in a market, it can decide to price its iPhones at $800, even though it only costs it really $200 to make. Whereas if there were a ton of phone producers in a market, competition, or at least the way economic theory goes, is that competition amongst those producers would lower the price of the phone until it was basically the bare minimum that it cost to make.

Luigi: You don’t need to go to phones. Think about drugs. In the United States, many drugs are monopolies because of the patent, and they sell at an outrageous price. Many, many times the production cost, and that is the rent that the monopolies extract.

Kate: And-

Luigi: But to be fair, economists, I don’t necessarily agree with this, but economists say that this rent is just a transfer. It is a transfer between consumers, from consumers to producers, and if you don’t see any problem with that ... There is no inefficiency involved in that transfer. Now, you might think this is bad for income inequality, but not necessarily for economic efficiency.

Kate: Yeah, so this is actually something that confuses me a bit about ... I don’t want to put a name on this school of thought, but the school of thought that thinks that the monopolies aren’t actually that bad. Right? They recognize that high prices, monopoly prices are not in and of themselves a problem, and that’s something that Scalia said in a Supreme Court ruling where he was talking about why monopolies are not problematic. But if you’re acknowledging that a company is charging monopoly prices, doesn’t it also follow that there is under-consumption? Those two things go hand-in-hand, and so-

Luigi: Yes, it does, but it is case by case. You can argue that in some sort of markets that loss is small, and there are some benefits of monopoly. The way people sell the monopoly is that because you have some extra profits you’re going to do more investment, and so long-term the efficiency’s going to be higher. John Hicks, a British economist who won the Nobel Prize many, many years ago, said that the biggest privilege of a monopoly is a quiet life. So it’s a quiet life for the producers. It’s a quiet life for the workers. There’s not the pressure to innovate and improve. That’s the reason why I said that the antitrust suit against Microsoft was really instrumental for Google and Facebook to arise, because otherwise we’d be in the hands of Bing and not of Google search.

Kate: I think if you’re a true monopoly and you have a lot of power in a market, then you can shirk your social responsibilities. So if you’re a monopolist, and everyone wants that one good that you’re producing, you can kind of treat your workers very poorly. You can pollute. And it’s hard for people to really criticize you in any way. It’s hard for people to have any say because they need your product.

Luigi: But Facebook is not just a monopoly. It is a particular monopoly in what is now called the digital platform business. The digital platform is a different concept because it naturally leads to a concentration of the business in one or a few sources. This is not unique to Facebook. We see that Google is very similar. We see all the digital platforms with that characteristic. It is what we economists call natural externalities.

Kate: So you’re saying that these naturally arise because if you use a particular sort of email client, then you want your friends and everyone else in your network to be using the same email client, and so this builds, and it builds, and all of the sudden everyone is using Gmail.

Luigi: Absolutely, and very often it’s not even guaranteed that the platform that comes out as the winner is the best. It simply is what everybody else is using.

Kate: Yeah, and so I think in some respect, this is particularly relevant for a social network. Right? It’s a social network. You want your friends to be on it. There’s no point in sharing your photographs and in posting what you’re saying if none of your friends are on it, and so a social network will naturally kind of snowball into something that has everybody on it. But at the same time, social networks are trendy. It used to be the case that Myspace was really popular, and there were social networks before that.

Luigi: I think that you are right that there is the possibility of switches, but this possibility is much easier in early phases. That’s the Myspace versus Facebook analysis, but also it is easier if there are the conditions that make it possible, and here there are two things that make it difficult. Number one, there is not the data portability, or the portability of the social graph, from one network to the other. Suppose that you come up with a better social network, and I want to join it. I would like to carry with me the social graph of my friends. If I were able to do it, I’m more likely to join because, as you said, all my friends would be notified that I moved to your social network and will receive a reminder that I am in the new social network. But if I cannot do that, then I’m stuck with Facebook, and today the ownership of the data of the social graph belongs to Facebook, and they are fighting very aggressively to keep it, and one of my ideas is we should actually give data to the people, ownership of the social graph to the people.

Kate: Yeah, so this is related to that, but not necessarily about the social graph, is this question of how important is information to Facebook and to other potential competitors? I think it’s worth mentioning something that happened, or has come out in the news relatively recently, which is that there was this company called Houseparty. It was sort of a video chat group app, and it was starting to gain some traction, but Facebook had acquired a company called Onavo, which was an Israeli company. They acquired it a few years ago. And Onavo, because of the way that it provided network services, can essentially spy on everything that you are doing on your phone.

If you have Onavo installed for some purpose, that company can see how much time you’re spending on Snapchat, how much time you’re spending on Facebook, exactly what you’re viewing. Prior to that, only the actual phone providers could have this information. Facebook purchased Onavo, and they’ve been using the data that they’ve gotten from Onavo to essentially crush their competition before the competition even becomes big. They have these special, built-in, proprietary metrics using Onavo data so that they can identity potential competitors or just purchase them outright.

Luigi: You see, that’s exactly Microsoft 1998 all over again. The incumbent with a huge market share abuses the power they have from the market share to crush the competition, and that is what is the biggest problem.

Kate: I would push back on that a little bit because the issue with Microsoft was that they were bundling products together, which is explicitly outlawed according to the Clayton Act. Microsoft had all of these computers, and the computer would come with Microsoft software on it. So it was the fact that when you purchased a Microsoft computer that you already got the Microsoft software, which if you didn’t want that, you’d have to actually go out to a computer store and purchase that other software. It was that tying together of products that made it problematic. Here it’s less clear. I mean, Facebook certainly isn’t bundling. Right? That’s not the crime that it’s committing. In some sense you could say that it’s like corporate espionage because they’re stealing Houseparty’s data-

Luigi: But forget the way they obtained this stuff. That is for the police to investigate, but let’s look from an economic point of view. From an economic point of view what they are doing is they are sort of smashing the competition by basically using their unique market power to leverage their network and trying to prevent new entry. That’s exactly what a monopoly does in a way that is very negative, and they give-

Kate: I don’t think Facebook used their unique market power, though. Let’s say Facebook were like a $2 billion company. Let’s say they only had 20 percent of the market share in social networks. They could’ve still bought Onavo. They still could’ve used their data. It was nothing about Facebook being a monopoly that made this problematic.

Luigi: No, but the way in which they are able to crush, what’s the name, Officeparty-

Kate: Houseparty.

Luigi: Houseparty, sorry. The way they are able to crush Houseparty is because all of the sudden they’re going to start to offer, within their Facebook suite or whatever, Houseparty as a feature for free. Exactly like Microsoft did. And how do they make money? They make money with the data and with the advertising. If you are an advertiser, do you want to give advertising to the Houseparty that has very few customers, or you want to give it to somebody that has a lot of customers? That’s exactly why they leverage their existing market share to conquer markets that are contiguous, and the market for Houseparty is slightly different than the market for Facebook, but they’re gaining that, and in the same way in which they got Instagram. Part of it is Instagram could have become a competitor to Facebook and-

Kate: Oh, they were definitely competitors. That’s why they purchased it for what, a billion dollars?

Luigi: Yeah, and so they bought it out. And where was the antitrust when they bought it out? This could have been stopped by the antitrust, but the antitrust was asleep.

Kate: OK, but if you were a federal regulator, what would have been your argument for preventing that acquisition to take place? What, that Facebook is really popular, all of my friends are on it, so therefore it shouldn’t be fair, I mean you need-

Luigi: Wait a second, the antitrust is not a popularity game. The antitrust is say-

Kate: No, I’m saying like a social network is a popularity game, and a social network’s value is all in it’s popularity.

Luigi: I understand, but if I say that Facebook has 90 percent market share in-

Kate: of what?

Luigi: Of the social network, and then they are going to-

Kate: But that’s meaningless. I mean, how can you define a market if it’s not charging any money for its social network?

Luigi: They are charging money. It’s called your data. You pay in giving away your data for free, and that’s a pretty important thing because that data, number one is worth a fortune, number two is worth more the more you have it because you can use it in a more strategic way, and that is what gives this sort of self-enforcing power of Facebook that becomes more and more powerful.

Kate: OK, but I think that this is an important distinction to make. Up until now, I mean not even now, but traditionally antitrust law has had to do with the fraction of the market, the existing market where transactions are taking place that a company has. You’re talking about the assets that a company has. You’re saying that in terms of the data assets that exist in the world, Facebook owns let’s say like 90 percent of those assets, and that’s not traditionally the way that antitrust is defined.

Luigi: Actually-

Kate: Are you saying that we should rewrite antitrust rules?

Luigi: No. We should just reinterpret the antitrust rules. The antitrust rules were created in 1890, the first one, when politicians and even economists did not understand very well the difference between what is a monopoly and distortion of monopoly. They were created because they thought that excessive market power was bad. Excessive concentration of power was bad. Excessive dimension, bigness, was bad, and they created the law for this. Then over the years, we reinterpreted those laws as saying that you should care about consumer welfare, but that’s a reinterpretation. The law, the 1890 Sherman Act, does not speak the language of economics because it’d not been developed at the time yet.

Kate: OK-

Luigi: ... and actually, to be honest, it was the Chicago School, so-

Kate: Yeah, I haven’t wanted to say that.

Luigi: The Chicago School, in the ’70s, we interpret this by saying we should interpret not in terms of market share. We should interpret of consumer surplus, which I think was, to be honest, reasonable at the time because at the time people had become obsessed with market share to the point that you couldn’t even gain 20 percent of market share. That was considered excessive monopoly. I think that the application of the original stuff in the 1960s went too far. The reaction was reasonable. The reaction has gone too far, especially in light of new phenomena like digital platforms like Facebook.

Kate: I think that you’re being too generous to the original drafters of the Sherman Act. The actual text says, basically, every contract in restraint of trade or commerce among the states is illegal. I mean that’s just too vague. We need better antitrust law that explicitly defines what a market is, and whether information, as an asset, counts as having a dominant market share.

Luigi: I think that buying Instagram by Facebook is a form of restraint of competition. I think you should read ... What you just read is so clear, you don’t need any new law. You just need somebody who’s willing to apply it.

Kate: Right, but the problem with that argument is that then you’re going to get people on the other side saying, “Oh, well if you construe the law this way, then anything can be considered a restraint of trade or competition, and therefore we need to interpret the law as conservatively as possible.” I think that we should rewrite our antitrust laws to make them more specific so that there’s no question.

Luigi: I’m not against rewriting the law, but it’s not going to happen anytime soon. Let me break it to you. And what I think is we need something fast. In particular, God forbid, Zuckerberg becomes president. Can you imagine? Now he’s going to rewrite the law, and you know what that will look like.

Kate: Look, I agree with you that Facebook owns too much information, and I agree with you that it can leverage that information in a way that squelches pretty much any potential competitor no matter how small, and I agree with you that data privacy is an important topic, but it’s not clear to me that the way that the law is written means that Facebook is a monopoly that’s abusing its market power, and that’s what I have a problem with. It’s the fact that the text of the statutes is too vague, and it allows people to get away with these things.

Luigi: I’m not a lawyer and I’m willing to concede that you might be right here. I think that it is so clear cut from an economic point of view that the law should understand that, and if it doesn’t, I’m happy to change the law, but I think that what is important is actually to go after Facebook not only because it controls a lot of data ... Google does too, and by the way Google is another problem that we’re going to talk-

Kate: Yeah, we’re not talking about that.

Luigi: ... maybe a different podcast-

Kate: Yeah.

Luigi: ... but in addition-

Kate: Google, we’re coming after you. Don’t worry.

Luigi: In addition to that, they are also the channel of transmission of a large set of the news that people read. I think that, to me, is even more scary than the monopoly itself, because you can argue that Amazon has a huge monopoly on online blah-blah, but at least so far they don’t control news. It might control books, but they don’t control news. So I think that Facebook does represent a problem, and it represents even a bigger problem if Mark Zuckerberg runs for office.

Kate: Yeah, you touched on a point that actually makes me sort of sad, which is that if we had impending regulation that was about to revise the antitrust, that was about to make antitrusts tougher on media companies, or was about to make it so that people actually owned their own data, or made it so that people could import their data over, if those types of regulation were on the horizon and Mark Zuckerberg announced his presidency, then I would be like, “Oh, well he’s obviously going to veto them as president.” But the sad thing is that they’re not even on the horizon. In some sense it doesn’t feel like Mark Zuckerberg running for president would even change much, and I think that that’s the biggest problem.

Luigi: OK, so maybe you should start a petition and say sort of-

Kate: Great, we’re starting a petition.

Luigi: And the petition should be [explicit]?

Kate: That’s your title, not mine. This podcast may contain explicit content.

Luigi: You cut that out.

Kate: He’s not cutting it out.