On Wednesday, March 2, 2016, the Bundeskartellamt (BKA), Germany’s antitrust enforcer, announced that it had initiated a probe of Facebook. In announcing the probe, BKA president Andreas Mundt stated that, “For advertising-financed internet services such as Facebook, user data are hugely important. For this reason it is essential to also examine under the aspect of abuse of market power whether the consumers are sufficiently informed about the type and extent of data collected.” The view is that the BKA is probing whether Facebook’s terms of service, which permit the use of user data for ad-tracking, are an abuse of Germany’s data protection laws and of its dominant position within the social network market.
The BKA’s investigation appears to be related to the European Union’s broader “digital single market” initiative. The EU is generally looking at its digital markets in an effort to make them more competitive. As part of that initiative, for example, in September 2015, the EU initiated a public consultation on the regulatory environment for platforms, online intermediaries, data and cloud computing and the collaborative economy. The first brief results are available from that survey. This initiative, at least in part, is ostensibly designed to reduce the amount of regulation applicable to these markets, to help “level the playing field” and make the collaborative economy more competitive. Some commentators are skeptical of that stated intent, notwithstanding promises from Europe to the contrary. These commentators seem to think the EU is targeting US tech companies with a view toward breaking them down to the benefit of national champions.
It seems fairly clear from this investigation of Facebook that that is in fact their goal. It may not be their intent, however.
Europe differs from America in its treatment of dominant firms. They believe that once a company is dominant, it effectively becomes a utility that needs to be regulated. They also believe that the antitrust authorities can serve as ad hoc regulatory boards that step in freely whenever a dominant participant materializes and before the state can set up proper regulatory agencies.
The American bias is that dominant participants have achieved dominance because of business acumen and that it is market distorting to regulate those businesses absent actual exclusionary behavior. Very few Americans think the antitrust agencies should be regulating markets as part of their antitrust mandate. So, when an American says, let’s level the playing field, it means, let’s create the freest possible market ab initio, throw the participants out into that market and allow the participants to fight to achieve dominance if they can. When a European says it, it means, let’s make sure no one entity takes the field for any appreciable amount of time. To them, the perpetual state of “competition” as evidenced by a market with large numbers of participants is the ends. Sort of like an interminable game of whack-a-mole. To Americans, the finish, or even perhaps the race itself, isn’t nearly as important as how the race starts. Let’s turn to Facebook and the BKA. At first blush, it would appear the question is whether Facebook is so dominant in social media that they can use that dominance to force consumers into giving up personal information that they would not otherwise absent that dominance. The idea being that with that unlawfully gained data, Facebook can serve advertisements that are so perfectly tailored that other entities that offer advertising cannot compete with Facebook, or perhaps that the purchasers of advertising must always turn to Facebook as a source of supply.
As with any technology market, the critical first step is to unbundle the components of the offering to indentify the basic functional quanta that make up offering. Technology is very fluid. One can move a hundred lines of code from one piece of “software” to another in a blink of an eye. Looking at just the four corners of a piece of software to determine whether it’s a “product” is therefore a less-than-useful tool in assessing potential market power because it obfuscates the source of the potential market power—the functionality, or functionalities, that drive consumer demand.
Facebook offers several “functions.” One is the social interaction—keeping up with ones friends and acquaintances. Users like you and I are consumers of social interaction. Another is the advertisements. Facebook sells a service to advertisers where they will serve up to particular individual advertisements for products that they believe the individuals will like. Facebook has developed an algorithm—a model that can identify what its users like and may want to buy—by observing click-throughs on their own pages, by entering into tracking agreements with third parties like Amazon, and by correlating bits and pieces of what individuals post to their own pages with what they click through and purchase, among others.
Let’s look at Google briefly. Google knows, by virtue of its tracking systems, that when someone types in “pissed” in a search engine at 8:00 a.m. from a mobile device in a tunnel going into Manhattan that that person is probably angry about traffic. So Google serves up anger management, alternative commuting resources and the like. But let’s say someone types in “pissed” at 11:00 p.m. on a Friday in Cardiff. Google might serve that person advertisements of pubs within walking distance of his location. Google knows that “pissed” to a New Yorker means angry. Google also knows that “pissed” means drunk to a Welshie at 11:00 p.m. Repeat those interactions over billions of events over time, and Google becomes a massive lexicon, learning what people mean through their language and behavior as well as other indicia like location and time.
Facebook is the same. Except by virtue of its ability to understand what individuals are posting on their pages, Facebook’s knowledge can be far deeper than what Google can achieve because Facebook simply sees more into a person’s life. Let’s say I type in “florist” in Google sometime near Valentine’s day. Google serves up a few local florists that specialize in red roses. It assumes that I want roses because it’s near Valentine’s. Now let’s say, I’m on Facebook, however, and I have updated my status to say I’m going to a funeral on Friday in Austin and need to send some flowers. Instead of the advertisement for rose-selling florists, I’m given a picture of a funeral flower arrangement and the name of a local Austin florist. Facebook understands me better because it has a better context. My best friend knows me better than a friend I play golf with at the club because my best friend has had more interactions with me in more contexts. He knows I hate pastrami and would never suggest getting a couple sandwiches. My golf buddy doesn’t. If my best friend were to design ads for me, they’d be much more effective.
On its face, Facebook and Google (I’m ignoring Google plus) are very different products. In essence, however, they are very close substitutes. In fact, given Facebook’s intimacy with users, Facebook has probably surpassed Google in its desirability as a competitor for advertising. But because some people conceptualize the two as very different products, they will not see the two of them as competitors and as a consequence may in fact see much less competition between them than there is. In a world where a presumption of dominance can lead easily to market distorting regulation, that ignorance can prove quite dangerous.
The value of each firm is in its ability to drive a diverse group of participants by offering meaningful services on their platforms. If they didn’t offer a great social service, then there would be no data. And remember, that service is both a luxury and free.
There is some argument that people don’t realize how much companies like Facebook understand them. (I would not be surprised to see someday a “Facebook Career Coach” app that can tell you with some accuracy what career you should pick. People who post obsessively about the Cure, cats and buy Size 10 Doc Martens should not become lawyers as 80 percent of those people who have done that live alone with their cats and post morose life defeating updates in mid-life…) As long as people are told, however, that those data are being collected as you post about your most recent, well-earned sandwich, then they should be allowed to make that choice. But that’s my American voice again.
In any event, the “lexicons” that Google, and now Facebook, have developed, have been developed because of the business acumen of those companies. Europe is free to come up with a product that is just as alluring as Facebook. They are also free to require their social media to explain in whatever detail they want to users how those user’s data will be used. But from an antitrust perspective, those lexicons are the hard-earned intellectual property of the companies that invested the time and money to develop them. Giving access to those lexicons to undeserving, late arrival rivals in the interests of “leveling the playing field” is inefficient market distortion.