The financial press is not worried about revelations at Facebook. User interaction is decreasing. Outrage about Cambridge Analytica is quite real. Why would they be so placid? Because we can’t work for anyone else in this town. Of course there is another side of this story — FB does have a near monopoly on affinity side advertising, and this will be explored at length in this essay. Nevertheless, the idea that we have no one else to work for is the heart of the problem, and why so many seeming solutions like #deletefacebook miss the point.
Fraud, Fraud, and Crap
The world of online advertising is riddled with true fraud. In many cases this means that a company is putting out a call for a particular sort of slot for an advertisement, you have no idea if the placements you get are legitimate. There is an entire ecosystem of firms intermediating transactions that may or may not have any fulfillment.
IAB’s ads.txt product is making a difference. Eventually block-chain technology may allow robust, but not necessarily efficient verification. Even when fraud is not taking place, much of the online ecosystem is no longer desirable. Some agencies played around with buying practices, damaging trust. The Adpocalypse saw advertisers reject placement with inferior content on YouTube. Even when the transactions were legitimate, the product was not strong.
Nielsen evolved in the television ratings world to fill a critical role — providing real audience information. The question of what audiences did with that programming and if the commercials sunk in has been a long standing topic of research. The reason why we have ended up with this particular configuration has
Google’s position has been slowly eroding as verified header bidding methods have allowed advertisers to go somewhere other than the big G. In response, a new product called Exchange Bidding will allow Google to access some of his market.
In general, this is likely to decrease revenue for everyone involved. The games played by the trading desks depended on an opaque market — this will be an increasingly transparent market, a strong down force on margin. At the same time, this will help keep the pie itself from shrinking due to reasonable fears of fraud. From a market level perspective, this takes Google out of the game as a serious threat to Facebook. After all, their primary product will be increasingly subject to exchange driven margin erosion. The last, great, black box of the industry is Zuck’s.
Just a Few Players
There really are just a few modal categories: desktop, mobile, and video. Those are then further refined with the distinction between in-stream, search, and locative types. Google tends to specialize in search, Facebook in-stream. Both can access the locative through different affordances of their respective platforms: which in this case include, FB, Insta, Messenger, Chrome/Android, Google Search, and YouTube. Those six properties belong to two players, neither of which has effectively worked across specialities. Facebook’s super search, which if I understand correctly was largely disabled this week, never really took off as a search engine proper. Google+, well, you know what happened, or you don’t in which case that is powerful evidence too.
Second tier players in this market include a number of specialist offerings, like Foursquare, and alternative search engines like Bing. Apple also has a number of opportunities like News and apps, but these are largely secondary. Twitter offers more of a newspaper like experience, and Pinterest has a number of profitable vectors, but they are not for external advertisers as much as an entire niche ecosystem that Facebook has never effectively challenged.
In short, if you are looking to make a large social buy, Facebook is your only option. The case that Facebook has a near monopoly on in-stream affinity network advertising is fairly clear. Unfortunately, this argument won’t escape the event horizon of the weak theory of markets espoused by the past few Presidents. The key is understanding the danger from a less familiar angle: monopsony.
Facebook and Market Failure
You might say, this looks like a monopoly, Dan. I would say, I think of it more like a monopsony — when one company controls is the only buyer, typically of labor. An example of this is a company town — why keep working for AwfulCorp? Because it is the only choice. This is much the same situation that we are in with our largest social network. It alone occupies the affinity space. Ambient awareness and social support are real and important concepts. You are continuing to use it because you get some social goods from it.
This is a real part of American life. Nearly all labor markets outside the largest fifteen metro areas are highly concentrated. A total lack of anti-trust enforcement absent consumer price impacts has allowed a few, giant firms to dominate the economy. There is still enough competition to preclude these firms from dramatically increasing consumer prices, but that does not do much for the rest of the economy. Monopsony is in may ways more insidious and more dangerous. A monopoly exercising their capacity to spike prices will be circumvented. Being locked out of the entire basic game of liberalism, via employment access, is far more severe. Democratic contestation of a monopsony is difficult — luring a source of jobs is the sine qua non of of the post-welfare state. If you are lucky, the welfare functions of the state will reappear as positive externalities of liberalism itself.
Here is another example, of monopoly, but may help with explaining the harm as well as the case for regulation. United Airlines seems pretty bad at being an airline. People really don’t have an alternative. In the major markets, key airports are fortresses, with good reason, these hubs allow efficient connections and likely reduce congestion and overall cost. At the same time, you rarely have a one-to-one choice between similar products, there will be higher prices, additional connections, and worse flight times. As you may have noticed air travel is a highly regulated industry. Capital markets are similarly subject to regulation.
But can’t we just move to another platform and let the market handle this? Another Facebook is not coming soon. The events of the last few weeks have definitely shifted the user base toward a more private orientation. Users have also come to expect the power of the Facebook infrastructure. Even if you could get users to start to introduce information that would produce a dynamic feed, the technical capacity for such a system would exceed your capitalization. Which underscores the historical narrative of the dominance of Facebook: Friendster grew and failed due to the purge, Myspace replaced it and was destroyed by shifting contexts, Facebook moved back into Friendster’s space and excelled in the now stabilized scene. Scale is aligned with the heart of the product, there will only be one. This is not a tale of competition and market selection — this is a story of the evolution of the space around a single firm. It is conceivable that this is a market that can’t not fail.
You leaving Facebook isn’t the answer either — this is a structural problem that requires a structural solution. Decreasing emotional support on Facebook is such a serious externality that it was the topic of the Cornell mood manipulation experiment. The benefits of access to online resources are so great, and the democratizing possibility that online social support inverts the standard rich-get-rich logic takes on a tragic dimension. Neither can the answer be for the well staffed local newsrooms of the1980s to return. There are many benefits to be found in small scale publishing.
In a failed market, regulation is necessary. Recent changes at Facebook underscore this point. The negative externalities of a poorly managed media company are almost entirely non-tradable. Market logic is already thin in this sector to start with — in a world where there is one buyer of user attention, regulation is necessary. There are two primary domains: a. communication law as it stands must be enforced in this sector, b. control of personal information, somewhat akin to the Civil Law tradition, must be enacted. If Facebook is willing to ‘change’ business practices enough to matter voluntarily, then formalizing those promises in law should not be a problem for the company, if anything those regulations would decrease uncertainty and allow the development of new capital related to now stable API driven businesses.
Sometimes markets work, the final decision of which jam you by is a fine example: this decision exists with in a context of regulation of food production, capital investment, truck driving, among many other domains. We are reaching the end of a two decade plus natural experiment where online communication firms were not held responsible for their choices. It is time for clear structures to guide the development of online communication — the coming era of large page and political ad verification is just a start. Facebook is the only employer in this space and should be regulated as such.