The Rise of Social Media and its Antitrust Implications

Joshua D. Wright George Mason University School of Law

Quello Center Workshop on the Governance of Social Media November 11, 2011

Rise of Social Networking

• Friendster (2002) hits 3 million users in its first 3 months

• MySpace (2003) quickly outpaces all others

• Facebook (2004) first surpasses MySpace in popularity in April 2008 (monthly unique visits)

– Has over 800 million active users today

– Average U.S. user spends almost 8 hours a month (over 15 minutes a day) on FB

• Google+ (2011) reaches 40 million users in its first 4 months

Antitrust in High-Tech Industries

• Dynamic competition

– Characterized by innovation and discovery of new markets

• Error cost considerations prominent

– Danger of chilling pro-competitive conduct that is not well understood by economists and judges

• Antitrust agencies have recently increased focus on high-tech industries

– See e.g., Microsoft, Intel, Rambus, N-Data, Google, Facebook, Twitter

Dangers of a Monopoly Fixation

“One important result of this preoccupation with the monopoly problem is that if an economist finds something – a business practice of one sort or another – that he does not understand, he looks for a monopoly explanation. And as in this field we are very ignorant, the number of ununderstandable practices tends to be rather large, and the reliance on monopoly explanation frequent.” Ronald Coase, Industrial Organization: A Proposal for Research (1972)

Antitrust First Principles

• Market power – Acquisition or creation of market power

resulting from exclusionary conduct

• Competitive effects – Plausible theory of competitive harm

– Efficiencies

The ultimate focus is upon the actual competitive effects of business conduct in the market place.

The Modern Legal Approach to Exclusionary Conduct

“Whether any particular act of a monopolist is exclusionary, rather than merely a form of vigorous competition, can be difficult to discern: the means of illicit exclusion, like the means of legitimate competition, are myriad. The challenge for an antitrust court lies in stating a general rule for distinguishing between exclusionary acts, which reduce social welfare, and competitive acts, which increase it. From a century of case law on monopolization under s 2, however, several principles do emerge. First, to be condemned as exclusionary, a monopolist's act must have an "anticompetitive effect.” That is, it must harm the competitive process and thereby harm consumers. In contrast, harm to one or more competitors will not suffice.”

United States v. Microsoft Corp., 253 F.3d 34 (D.C. Cir. 2001).

Is Monopoly Power Ubiquitous on the Internet?

“[W]hy does [the Internet] look increasingly like a Monopoly board? Most of the major sectors today are controlled by one dominant company or an oligopoly. Google “owns” search; Facebook social networking; eBay rules auctions; Apple dominates online content delivery; Amazon retail; and so on.”

Tim Wu, In the Grip of the New Monopolists

What is Antitrust “Market Power”?

• “Market power is the ability to raise prices above those that would be charged in a competitive market.”

– Supreme Court in NCAA n.38 (1984)

• “A merger enhances market power if it is likely to encourage one or more firms to raise price, reduce output, diminish innovation, or otherwise harm customers as a result of diminished competitive constraints or incentives.”

– Horizontal Merger Guidelines at 2 (Aug. 2010)

Is Facebook Really a Monopolist?

• Does FB have sufficient market power to profitably reduce market output and increase market prices?

– Properly defining the relevant market is crucial

• Analysis must take into account unique aspects of social media firms

1. Two-sided markets

2. Network effects

3. Highly dynamic and innovative environment

4. Competition for the field in the battle to be “gateway to the Internet”

Facebook and Monopoly Power: Defining the Market

• Durable market power is predicate to antitrust violation of Sherman Act

• User side – Everything’s free!

– Competition from other social networking sites; Google; Apple’s Siri

• Advertiser side – Competition for advertising and “eyeballs” comes

from many sources

– FB is the largest seller of online display ads, but only earns 17.7% of these revenues

– Less than 5% of total U.S. online ad revenues

What about Network Effects?

• Do network effects create barriers to entry?

– Value of FB increases to users as more users join

– But also create additional value for advertisers

• Distinguish between users and advertisers

– Users don’t care much about the number of advertisers

– Where are the switching costs for advertisers?

– Most advertisers on FB pay-per-click, meaning that the additional benefit they receive from reaching more users is internalized

Lock-In

• Antitrust claims that social network can harm consumers by exploiting switching costs – FB is where users’ friends are

– Users have invested in putting their info on FB

– It’s difficult to transfer info from FB to another site

• But antitrust courts have eviscerated after-market holdup claims

• FB is clearly worried that its users are not locked-in – E.g., in 2010, to compete with Google on exportability of

user information, FB created way for users to download all their profile information into a zip file, which could then be uploaded to a new site

Essential Facilities

• Essential facilities requires demonstration of: 1. Monopoly control of an essential facility

2. Inability to reasonably replicate

3. Denial of use of facility to competitor

4. Ability to share access with competitors

• No evidence to support these claims – Prevalence of multi-honing

– “Essential” to whom?

• Users have lots of other options

• Advertisers don’t need FB to advertise online

– Platform easily replicated – in fact, a myriad of other social networking sites exist

Conclusions

• Antitrust first principles should guide analysis of competition policy & social networks

– Error-cost framework is crucial, given the intensely innovative and volatile environment

– Must demonstrate both monopoly power and consumer harm

– Analysis must take into account unique aspects of competition among social networking sites

• Cautionary note: Section 5 of the FTC Act