Competition in Tech is More Vibrant than It Looks

Ryan Khurana of CEI.

"Calls for regulatory action against big tech firms, including Amazon and Google parent company Alphabet, have intensified after they reported record profits. The case that the largest online giants are monopolies that require antitrust action has been made by critics from both left and right. The case against these companies, however, is on shaky ground.

On the surface, it looks like there is significant market concentration. Facebook owns the top three social media apps—Facebook, WhatsApp, and Messenger, all of which exceed 1 billion unique monthly active users. The company captures 20.9 percent of total U.S. digital ad revenue, putting it only behind Alphabet, which, through products like Google Search and YouTube, captures 42.2 percent, leading to claims that these two firms form a duopoly (although Amazon is fast encroaching on this space).

However, putting these numbers in perspective makes the picture more complicated.
First, while Facebook dominates social media apps, this does not mean it dominates mobile entirely. Apple’s native iMessage service, which does not show up in social media download statistics, shows much higher user engagement than Facebook Messenger, especially among younger demographics. While Snapchat has less than one third of Instagram’s users, those under 25 use Snapchat much more heavily, suggesting that demographics need to be taken account in order to assess long-term dominance. The market space online is far more complex than direct competition, as each social media site seeks to carve out its own niche.

One criticism levied against a firm like Facebook is that its dominant position can be used to influence its users in a way others cannot. Claims about addictiveness and the network effects that make Facebook difficult to leave are cited to justify claims that Facebook is too big. Yet, this obscures the fact that Facebook has not been able to leverage its market dominance. For instance, in 2014, Facebook attempted to develop a standalone Camera app to compete against the rising Snap and Instagram, but it quickly failed and was discontinued.

Competitiveness online requires developing ecosystems for users, given the difficulty of leveraging existing user bases to sell new products.

This reveals one of the difficulties in seeing who is competing against whom online. Facebook competes not only against other social media sites like Snap, but also against the likes of Google, Apple, and Microsoft in various domains. Online competition requires a firm being able to provide for a variety of user demands or seed ground to rival startups. Unless a firm like Apple can provide a messaging service  its users enjoy, it would allow Facebook to gain ground, weakening the long-term prospects of the business. These “platform wars” mean that competition between tech giants takes place over many different products and services, at various tiers, and that to understand the level of concentration, one cannot specify the market too narrowly.

The recent international controversy surrounding the amount of “fake news” on Facebook reveals that the company’s market dominance only appears strong when the market is defined incorrectly. The firm responded to claims that it bears responsibility for “fake news” and has been trying to change its user experience to respond to those pressures. Its latest gambit, which involved prioritizing well-being, cost it users—which will likely show up in decreased ad revenue. Consumers’ ability to voice their concerns to Facebook—and Facebook’s profits being on the line if it does not take those concerns seriously—suggest that claims that the firm has the ability to abuse its market dominance are unfounded.

It is a feature of platform economics that interaction with the user base drives improvements in the platform. If platforms fail to respond to user concerns or needs, they can fall from seemingly dominant positions rapidly—as recent history amply demonstrates.

Correctly specifying the market makes the claim that Facebook and Google constitute a duopoly in online advertising similarly unfounded. When one looks at advertising in general, the two firms together account for 20 percent of ad revenue. While digital ad revenues are growing, it is fallacious to claim that there is too much concentration when the two companies take up only a fifth of the total advertising marketplace. If Facebook and Google are increasing their revenues to the detriment of newspapers, neglecting newspaper print ads exaggerates the supposed concentration.

The line between what is and is not an online company is increasingly blurry. Alphabet continues to branch out into physical products, while Apple is both an established software and hardware manufacturer. Netflix is a streaming service, but among its competitors are distributors that release films in theatres, which incentivized Disney to rethink its future business models with its Fox buyout. Thus, the concentration levels of these companies looks artificially inflated due to the difficulty in specifying what their market actually is.

One thing is perfectly clear. Consumers are by and large happy with their services. None of the Big Five tech companies—Alphabet, Amazon, Microsoft, Apple, and Facebook—have an approval rating below 60 percent. These companies may be large, but competition among them is as fierce as ever, incentivizing them to consistently innovate and provide consumers with new and better services.
Attempting to force “competition” (according to a model developed in the pre-tech economy), without a clear understanding of the current market dynamics and the consumer welfare implications, would leave users worse off. These days, that means all of us."