Monopolies I Have Known
In light of Mark Zuckerberg’s Congressional testimony (and Facebook’s own natural monopoly) I reflected on some of the monopolies I’ve known. Given what Facebook does I focused on communications companies, which historically were somewhat close to what social networks of today provide.
AT&T’s government granted monopoly
We trace this back over 100 years to the Kingsbury Commitment of 1913. That agreement set out the rules for AT&T’s place as the US’s national carrier and how it needed to work with local service providers. In the early days of communications technology build-out, national governments often stepped in to guide (or control) what telecommunications companies were able to provide which services and for what benefits of the population.
AT&T however was known as a “gold-plated” monopoly. Phone service in the US extended to rural areas that were more expensive to build out (not a condition seen in every other country) and the degree of innovation coming out of the company was dramatic. Some of their innovation portfolio includes dial tone, mobile telephony (car phones originally), the transistor, Unix… This gold-plated aspect led to some interesting experiments in employee training, including a foray into teaching the humanities (see The Organization Man Goes to College: AT&T’s Experiment in Humanistic Education). This investment in employees is comparable to Peter Thiel’s argument that companies like Google are also monopolies — and that’s why they take care of their employees.
Telecommunications hardware used to be much more locked down than today. It used to be illegal, then uncommon, to own a landline phone in the US. AT&T rented them. The monopoly granted AT&T allowed the company to regulate any devices that connected to their network — a term that was interpreted loosely. Legal action by AT&T to enforce its monopoly dominance included preventing a company called the Hush-a-Phone (basically a cup that fit on top of your telephone handset in order to shield the speaker’s voice) from selling its products. Why go to such lengths to prevent this physical product from existing? If you have near total control, any little step away from that is problematic.
Interestingly, Peter Drucker argued against AT&T’s monopoly breakup in 1984, but on behalf of national security. The national security and telecommunications infrastructure and equipment issue is still a concern today (actually part of an ongoing concern for at least the last 20 years) with Chinese equipment provider Huawei.
The swing of general communications technology moved from government enforced monopoly to decentralized.
China Telecom
China Telecom has a much shorter history than AT&T and being based in a different country with different needs and at a different time, competition to this monopoly came in different forms. An early competitor was China Unicom, which in the mid-1990s had low single-digit market share overall and market penetration in just a few urban areas. The company was dependent on China Telecom for national interconnections (which sometimes was cut). Starting in 1998, China (as did other parts of the world) started to allow more companies to offer telecommunications services, initially through (lower quality) Voice Over IP (VOIP) calls. These early calls were not like the Skype you later came to know. Rather, the caller would dial the number of a local gateway and then their destination phone number (basically operating like a calling card except that the voice traffic was routed at least partly on an IP line). Later enterprise implementations were seamless and did not require the caller to dial multiple phone numbers. I remember various Chinese government agencies during this time exploring VOIP network rollout, some with official licenses, some because the founder’s relative was so-and-so and they were operating in the grey market (many long stories there).
Impact to the consumer — the official and later market determined price of a phone call dropped significantly. Back in 1997, the official rate to call from China to the US (something very few people ever did) was US$1.30/minute. During that time I knew someone who was arrested for offering cheaper non-official services. By 2000, the rate had fallen to around $0.10/minute. It’s been basically free for years now.
In China, total subscribers (both fixed and mobile) was 7 million in 1990. The number of just mobile subscribers in China is now 1.6 billion. Yes, that’s more than the total number of people in China. More and more countries have mobile phone penetration of greater than one per capita. Oh, and Unicom later went on to build an enormous VOIP and mobile network.
Other countries have dealt with communications technology in different ways. In Myanmar (then Burma) people went to jail in the 1990s for illegal possession of a fax machine or a modem (the Internet was only made legal there in 2003). These actions (as elsewhere around the world) were more based on protection government communications control than consumer access.
The above were state granted and regulated monopolies. However, we could also think about how else the initial national communications infrastructure might have been built out around the world.
Now back to Facebook. One of the interesting exchanges from the Senate hearings was this one between Zuckerberg and Senator Graham:
Graham: Who is your biggest competitor?
Zuckerberg: Senator, we have a lot of competitors.
Graham: Who’s your biggest?
Zuckerberg: I think the categories — did you want just one? I’m not sure I can give one. But can I give a bunch?
Graham: Mmhmm.
Zuckerberg: There are three categories that I would focus on. One are the other tech platforms, so Google, Apple, Amazon, Microsoft; we overlap with them in different ways.
Graham: Do they provide the same service you provide?
Zuckerberg: In different ways, different parts of it, yes.
Graham: Let me put it this way: If I buy a Ford and it doesn’t work well and I don’t like it, I can buy a Chevy. If I’m upset with Facebook, what’s the equivalent product that I can go sign up for?
Zuckerberg: Well, the second category that I was going to talk about —
Graham: I’m not talking about categories. What I’m talking is the real competition you face.
Other articles don’t focus on this point, looking at social networking businesses across different markets and usages. If you think of just the casual, social pieces of peoples’ lives, what is the biggest social networking competitor to Facebook?
Sources of Monopoly Power
The list of sources of monopoly power in which Facebook is strong includes: no substitute goods, network externalities, and increasingly technological superiority and manipulation.
Facebook has an advertising revenue model. Therefore, anything that interferes with the company from earning ad revenue from their user generated content is likely to be seen as a threat. In 2008, Power Ventures, a social network of social networks was sued by Facebook on multiple counts (another interesting take is here). Part of the case is still pending. What did Power Ventures do to draw Facebook’s attention? They enabled users of Facebook and many other social networks to see all of their feeds in one place — and without the original social network generating, or being credited for, the advertising. Good for the users (convenience) but bad for the ad-based companies.
In its 2017 annual report, Facebook shows 184 M daily active users in US and Canada — the smallest number by any of their regions, which are all more populous. By revenue, however, it’s the reverse. The US and Canada, having more developed and profitable advertising markets and what seems to be more frequent usage, generate the highest per user revenue (over $84/user in the US and Canada for the 2017 annual report’s most recent four quarters, p 38). Facebook’s social networking ad revenue market share approaches 80% in the US.
I won’t go into the details on the Cambridge Analytica scandal, with which anyone reading this far probably already has background. If it weren’t for Cambridge Analytica, when would Zuckerberg have testified to Congress? It would have come eventually.
