The European Union imposed a 2.4 billion euro ($2.7 billion) fine on Google last Tuesday for manipulating its search engine results to favor its own comparison shopping service. It is just the latest institution to recognize the increasing monopolization of the technology industry.
Google has about a 90 percent market share in searches, while Facebook has a penetration of about 89 percent of internet users. Economists have a fancy name for this phenomenon: “network externalities.” In traditional product markets, one customer’s choice (for example, a particular car tire) does not directly affect other individuals’ preferences for that product, and competition generally ensures that consumers enjoy the best products at the lowest possible price.
In the market for social media, by contrast, when one customer uses Facebook over Myspace, it has a direct (and positive) impact on other customers’ preferences for the same social network: I want to be in the social network where my friends are. These markets naturally tend toward a monopoly.
Historically, there have been two main government interventions to reduce this risk of monopoly power. The first is price regulation. When railway companies gained excessive market power in the late 1800s, the United States government created the Interstate Commerce Commission and gave it the power to set maximum prices. (In the long run, the remedy turned out to be worse than the disease, but that’s another story.)
The second is antitrust. When Standard Oil, in the early 1900s, controlled 90 percent of oil refinery capacity in the United States, the federal government used its antitrust power to break it up into more than 30 smaller companies. A similar breakup was imposed 70 years later on AT&T.
Still, there is a problem with traditional antitrust policy when looked at through the lens of network externalities: It focuses only on consumers’ benefits from competition. But consumers love Google and Facebook since they do not pay a dime for their services.
What many users do not fully appreciate is that they do pay for these services, in the form of very valuable information. And those who appreciate this cost have no choice: There is no major search engine that does not store our past searches or collect information on our activities, and there is no significant social media platform that does not retain our preferences. That is the cost of using these technologies. Lack of competition also means lack of choice, which is ultimately lack of freedom. But what can be done?
For a 21st-century problem, we suggest a 21st-century solution: a reallocation of property rights via legislation to provide more incentives to compete. In fact, the idea is not new. Patent law, for example, attributes the right to an invention to the company a scientist works for, to motivate companies to invest in research and development. Similarly, in the mobile industry, most countries have established that a cellphone number belongs to a customer, not the mobile phone provider. This redefinition of property rights (in jargon called “number portability”) makes it easier to switch carriers, fostering competition by other carriers and reducing prices for consumers.
The same is possible in the social network space. It is sufficient to reassign to each customer the ownership of all the digital connections that she creates — what is known as a “social graph.” If we owned our own social graph, we could sign into a Facebook competitor — call it MyBook — and, through that network, instantly reroute all our Facebook friends’ messages to MyBook, as we reroute a phone call.
If I can reach my Facebook friends through a different social network and vice versa, I am more likely to try new social networks. Knowing they can attract existing Facebook customers, new social networks will emerge, restoring the benefit of competition.
Today Facebook provides developers with application-program interfaces that give them access to its customers’ social graph, Facebook Connect and Graph A.P.I. Facebook controls these gates, retaining the right to cut off any developer who poses a competitive threat. Anticipating this outcome, very few developers invest seriously in creating alternatives, eliminating even the threat of competition.
By guaranteeing access to new customers’ data and contacts, a Social Graph Portability Act would reduce the network externality dimension of the existing digital platforms and ensure the benefits of competition.
by Luigi Zingales and Guy Rolnik, NY Times | Read more:
Image: Brian Snyder/Reuters
[ed. See also: Is social graph portability workable?]
Google has about a 90 percent market share in searches, while Facebook has a penetration of about 89 percent of internet users. Economists have a fancy name for this phenomenon: “network externalities.” In traditional product markets, one customer’s choice (for example, a particular car tire) does not directly affect other individuals’ preferences for that product, and competition generally ensures that consumers enjoy the best products at the lowest possible price.
In the market for social media, by contrast, when one customer uses Facebook over Myspace, it has a direct (and positive) impact on other customers’ preferences for the same social network: I want to be in the social network where my friends are. These markets naturally tend toward a monopoly.
Historically, there have been two main government interventions to reduce this risk of monopoly power. The first is price regulation. When railway companies gained excessive market power in the late 1800s, the United States government created the Interstate Commerce Commission and gave it the power to set maximum prices. (In the long run, the remedy turned out to be worse than the disease, but that’s another story.)The second is antitrust. When Standard Oil, in the early 1900s, controlled 90 percent of oil refinery capacity in the United States, the federal government used its antitrust power to break it up into more than 30 smaller companies. A similar breakup was imposed 70 years later on AT&T.
Still, there is a problem with traditional antitrust policy when looked at through the lens of network externalities: It focuses only on consumers’ benefits from competition. But consumers love Google and Facebook since they do not pay a dime for their services.
What many users do not fully appreciate is that they do pay for these services, in the form of very valuable information. And those who appreciate this cost have no choice: There is no major search engine that does not store our past searches or collect information on our activities, and there is no significant social media platform that does not retain our preferences. That is the cost of using these technologies. Lack of competition also means lack of choice, which is ultimately lack of freedom. But what can be done?
For a 21st-century problem, we suggest a 21st-century solution: a reallocation of property rights via legislation to provide more incentives to compete. In fact, the idea is not new. Patent law, for example, attributes the right to an invention to the company a scientist works for, to motivate companies to invest in research and development. Similarly, in the mobile industry, most countries have established that a cellphone number belongs to a customer, not the mobile phone provider. This redefinition of property rights (in jargon called “number portability”) makes it easier to switch carriers, fostering competition by other carriers and reducing prices for consumers.
The same is possible in the social network space. It is sufficient to reassign to each customer the ownership of all the digital connections that she creates — what is known as a “social graph.” If we owned our own social graph, we could sign into a Facebook competitor — call it MyBook — and, through that network, instantly reroute all our Facebook friends’ messages to MyBook, as we reroute a phone call.
If I can reach my Facebook friends through a different social network and vice versa, I am more likely to try new social networks. Knowing they can attract existing Facebook customers, new social networks will emerge, restoring the benefit of competition.
Today Facebook provides developers with application-program interfaces that give them access to its customers’ social graph, Facebook Connect and Graph A.P.I. Facebook controls these gates, retaining the right to cut off any developer who poses a competitive threat. Anticipating this outcome, very few developers invest seriously in creating alternatives, eliminating even the threat of competition.
By guaranteeing access to new customers’ data and contacts, a Social Graph Portability Act would reduce the network externality dimension of the existing digital platforms and ensure the benefits of competition.
by Luigi Zingales and Guy Rolnik, NY Times | Read more:
Image: Brian Snyder/Reuters
[ed. See also: Is social graph portability workable?]
