Facebook is a platform, a medium of information exchange. The information is contributed into the network for free by users, and users derive value from the network by seeing the information shared by others. Facebook needs money though to pay for its operations, its engineers, its network infrastructure, and everyone else involved in making a very large organisation function. It gets this money by participating in its own network, taking information from users that is relevant to advertisers and then sending those users content generated by advertisers, i.e. ads. It does this in exchange for actual currency.
This basic model is not so sinister. People derive genuine value from Facebook. And targeted advertising doesn’t seem especially harmful. While ads can be manipulative, they also impart information about products which we might find useful. And we are more likely to find it useful when the ads are targeted based on our profiles.
But the nature of network effects mean that I cannot hope to compete with Facebook. I could start a new social network that offers identical services, in terms of friends and posts and likes and so on, but promise to advertise a little bit less, making my service a little more amenable to users though a little less profitable per user. In a perfectly fluid market, the kind that appears in economics textbooks, every user would switch immediately to my network. It provides a better product, so why not? Facebook would respond by improving its product in some way and sacrificing a little bit of its profit margin to prevent an exodus of customers. This back and forth goes on until the profits on each side are just enough to keep the relevant capital invested. This is market competition.
In reality, it would be extremely costly, in time and energy, for users to transfer all the data they had contributed to Facebook over to my network. But even more importantly, the real value of the network isn’t your own information that you have contributed, but the information contributed by people you care about. No single individual has an incentive to come to my network, since all their friends are still on Facebook, whereas my network is empty.
So instead of reducing its profit margin to offer a better product and keep users from moving to competitors, Facebook can craft its platform in whatever way will maximise profits, put as many ads in as it can, exercise tight control of the appearance and function of the app, direct content to users as best suits its goals and not the users’. The competition Facebook faces is that if it creates a platform so hostile to its users, they will engage less with the platform, contribute less information, which ultimately is why users are there. Facebook does not directly compete with other social networks, but in a way it competes with itself, and so must constrain itself from being totally abusive.
If you still have faith in competition consider the most serious attempt to offer a direct alternative to Facebook. It was called Google+ and it came from a tech company even larger than Facebook, with perhaps the deepest pool of engineering talent in the world. Even more importantly it came with a captive audience of hundreds of millions of users of Google’s other products who were automatically assigned Google+ accounts. Yet it didn’t take long before only Google employees were using it. There was perhaps no company in a better position to create a direct competitor to Facebook and even they failed.
Many other social media companies have succeeded by making products tangential to Facebook’s such as Twitter and Snapchat. Though as Facebook expanded the scope of its offering to include photo sharing and instant messaging it simply bought out it’s biggest competitors in those markets; Instagram and Whatsapp.
Facebook is subject to no real competition for its core product. It is a monopoly and we should be concerned.