Setting The Record Straight: The Facts On Chris Hughes’ NYT Op-Ed
Despite the rhetoric of Facebook co-founder Chris Hughes’ New York Times op-ed, his arguments should be considered alongside the comments of antitrust and competition experts, who have noted two key points:
—Where Hughes sees no alternatives to Facebook, the reality is that consumers have a dynamic set of options, with product innovation driven by competition.
—Mergers and acquisitions can—and do—increase competition, including when it comes to Facebook and Instagram.
Where Hughes sees no alternatives to Facebook, the reality is that consumers have a dynamic set of options, with product innovation driven by competition.
—According to economist David Evans, tech leaders (including Facebook) compete against 27 different categories and face competition from disruptive innovation due to low entry costs and reversible network effects. “Online platforms face dynamic competition as a result of: disruptive innovation that provides opportunities for entry; competition from online platforms that have secured a toehold in one area but compete across multiple areas; the fragility of category leadership resulting from the fact that network effects are reversible and entry costs are low; and the prevalence of ad-supported models, which result in seemingly disparate firms competing for consumer attention and advertiser dollars.”
—While Hughes fears network effects lead to dominance, Evans further notes that network effects are not insurmountable and platforms are vulnerable thanks to multi-homing and low switching costs. “A naïve view of indirect network effects implies that a successful communications platform would be secure from competition since people wouldn’t join or use a platform that didn’t include most of their personal network. The flaw in that reasoning is that people can multihome on online communications platforms. A few people in a network try a platform. If enough join, and like it, then eventually all of them could switch or drop the initial platform. This phenomenon has happened repeatedly. AOL, MSN Messenger, Friendster, Myspace, and Orkut all rose to great heights, and then rapidly declined, while Facebook, Snap, WhatsApp, Line, and others quickly rose. Nothing about the underlying economics or technology of online platforms has changed that would prevent this same cycle from repeating itself going forward.”
—Nick Gillespie, Reason’s editor-at-large, noted that Hughes’ call for government action disregards consumers’ ability to shape the market. “The idea that the government will do a better job at fixing what’s ‘wrong’ is risible, especially when the option of individual users simply walking away remains a viable option. In the United States, the number of Facebook users seems to be declining (hence the company’s call for regulation). Many leavers do seem to be going to Facebook’s sister site, Instagram, where the experience is markedly different and which still proves the basic point that Facebook doesn’t have an iron grip on an audience. Roam around cyberspace a bit and you’ll see the vast, empty ruins of once-unstoppable empires known as MySpace, AOL, Yahoo…”
Mergers and acquisitions can—and do—increase competition, including when it comes to Facebook and Instagram.
—As antitrust expert Herbert Hovenkamp has written, mergers place pressure on rivals to innovate; if those rivals don’t rise to the task, it’s not the purpose of antitrust to protect them. “For example, Walmart is now expanding its offerings to include delivery and other services. Any time a merger or other practice reduces a firm’s costs or improves its products or services, it boosts competition by putting pressure on obsolete or less efficient rivals. But protecting these rivals should not be the purpose of the antitrust laws. Rather, the focus of antitrust laws should be on maximizing output, which benefits both consumers and workers.”
—When it comes to mergers, Assistant Attorney General for Antitrust Makan Delrahim has made similar notes on the benefits to consumers:
—”We may not have had what we have today had those transactions [like Google/Youtube and Facebook/Instagram] not occurred, and that’s sometimes the pro-competitive benefits of mergers.”
—Antitrust economist Carl Shapiro notes that acquisitions are “an important exit strategy for tech startups.” “One common fact pattern that can involve a loss of future competition occurs when a large incumbent firm acquires a highly capable firm operating in an adjacent space. This happens frequently in the technology sector.”
—”Smaller acquisitions happen on a regular basis, and indeed are an important exit strategy for tech startups.”
—A subsector analysis of tech from Oliver Wyman finds no evidence that investment flows away from areas where tech leaders are involved in M&A, rebutting any argument of kill-zones. “There was not a material enough difference in the magnitude of growth rates to suggest that FGA acquisitions had an impact on growth rates of specific subsectors. As such, we find no evidence to suggest that FGA M&A has an impact on different subsectors’ growth rates.”
—Where Hughes faults Facebook for adapting Instagram to compete against new entrants, antitrust expert Herbert Hovenkamp notes this is “not any kind of theft at all” and actually leads to “less monopoly, not more.” “The proposal faults house brands for copying the goods of others. To be sure, intellectual property laws are not always effective at preventing copying. Nevertheless, making a cheaper generic copy of another firm’s trademarked brand is not any kind of theft at all. Rather, it serves consumers by giving them the opportunity to avoid paying for a trademark or name that they do not want. The result is less monopoly, not more.”