Business Unusual

Why breaking up is hard to do

Facebook is facing renewed scrutiny over its dominant position. It is arguably the major player for social media, advertising, personal messaging and a significant news distribution channel.

Facebook does not describe itself as a publisher but rather a platform. The challenge they face is to regulate what people post and, worse, what they choose to promote via their platform. It has lawmakers in many countries questioning if they are simply too big to be entrusted to look after their own regulation.

Facebook is big. Just over half the planet’s seven billion people now have access to the internet. Facebook has 2.2 billion people use their platform every month.

In some regions, Facebook is the only way users can access the internet, although Facebook does not consider themselves a monopoly.

What is a monopoly?

The word is Greek for one seller. It has two other related terms; oligopoly - which is Greek for a small group of monopolies - and monopsony - more Greek for one buyer.

In an ideal market, there are multiple buyers and sellers and competition regulate prices and quality of services.

Historically, developments in industry moved at a pace that when an opportunity became available many would be able to access the resource or benefit from a new market and regulation could be limited.

As advances became more technical and covered by protection from patents, the conditions for competition shifted. It was expensive to compete and exclusive supply of a patented product would further limit competition.

At this point, world economies began to consider the best way to manage it. Depending on the ideology of thestates involved, regulation may have been limited in capitalist states or in socialist and communist states more significant.

Are monopolies and oligopolies bad?

The short answer is yes, but often the harm is not to the consumer in the short term or even the economy when times are bad.

It is a problem when they abuse their position or collude. They are also more vulnerable when things change rapidly as large companies are focused on process and slow to change.

In South Africa, our history and politics have created an economy which has many oligopolies. State-Owned Enterprises (SOEs) like Transnet, Eskom and ACSA are effectively monopolies. Eskom is also a monopsony in that for many coal producers and independent power producers they only have Eskom as a buyer.

That is not to say that many listed or private companies are not part of oligopolies. Mobile communications are dominated by MTN, Vodacom and Cell C. Banking has many players, but is dominated by a small group of them. Retail has a few very large players and many more minor ones.

The point is that it's not uncommon and depending on the size of the market it could be argued that it may even help.

Big companies can make savings because of their scale and undertake larger investments in their infrastructure. Had there been more mobile companies created in 1994, the competition may have prevented the roll-out of the network from the profitable urban areas to cover the less profitable but unserviced rural areas.

If there was no regulation you might even have a scenario where a network would choose to focus on just one city, requiring you to get a new sim should you travel from Joburg to Cape Town.

What to do when dominant players abuse their position

This is the trillion dollar question. In the past when a monopoly existed in a single country, the regulator or government could create a law to address it. This became more difficult with multinational companies that were not regulated by any one government.

There are three ways that companies could abuse a dominant position.

  • Prevent or regulate prices through cartels or agreements that reduce competition
  • Buy smaller potential future competitors to eliminate competition or merge with competitors
  • Engage in practices to harm competitors through pricing, restrictions or unfair practices that limited their freedom to compete.

For practices that extend beyond a country’s borders, institutions like the World Trade Organisation (WTO) or European Parliament have greater powers.

Is it now becoming an issue?

The issue has been around since business has had the ability to become dominant. It has become more of an issue following the First Industrial Revolution and the increase in globalisation.

Railways, once a huge and unprofitable mix of companies all trying to make their own sections of rail profitable, merged to create bigger and bigger players until a few players controlled the whole network. The same occurred with oil extraction following the Second Industrial Revolution and the same with telegraph and telephone networks.

There is a loose connection that the shifts from industrial revolutions create new markets which initially are highly competitive but not profitable until a few leaders begin consolidating the market and create what could become a monopoly.

In the 1930s a mechanical tabulation system designed to help process the huge volume of information collected from the US census was turned into a company that grew to become IBM. It actively pursued a strategy that limited competition though leasing the machines rather than sell them. They supplied proprietary cards to operate the machine (giving them an exclusive and lucrative steady demand for basic paper cards that anyone could have made) and they relied on patents to prevent others using the same methods to build the machines.

In the 1950s vacuum tubes allowed for electronic computing and, while IBM initially resisted, they soon switched to use their market power to buy or undercut competitors to become the dominant player in early computing too.

Many years later a computer software programmer would amend some code for IBM called DOS and provide it for a licence fee. As all the machines were supplied with the software, it became the most used. When Bill Gates upgraded the software and launched Windows, also as a licensed operating system, hardware manufacturers effectively sold his product for him. In 1999 Microsoft’s dominance was so great that the US and EU were looking to break up the company.

In the end, it didn’t happen although it did make changes to allow other software to be included with Microsoft’s own.

Google’s rise saw calls for it to be challenged for anti-competitive behaviour. The EU fined the company over $2 billion for how it was displaying search results in 2017.

Amazon has faced similar questions about its dominance.

The latest is Facebook and whether it should be allowed to control so much of the digital tools people use to connect: Facebook, WhatsApp, Messenger and Instagram to name a few. They have acquired over 60 companies which are now part of the app over a billion people use every day.

The problem is not whether or not companies like Facebook are dominant or even a monopoly. The question is what is the consequence to consumers for getting the best price or service? Could a competitor enter the market and stand a chance to grow? Does it limit the opportunity for innovation? Can the dominant player be trusted to not abuse their position?

An added challenge is that with digital businesses there is a network effect. As more people are able to connect to a network like Facebook, more are drawn to connect to it too. Given its current size it seems unlikely that, other than networks that have been created in China and possibly Russia, there is little chance a new player could effectively compete.

This is not a problem that anyone is going to solve. Regulation is probably the best way to address it, but it will require a body with global reach to manage the impact of global companies that are only going to consolidate further as we navigate a path through the Fourth Industrial Revolution.



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