Posts Tagged ‘bubble’

Facebook, Instagram, Google, and the Monopoly Fallacy

April 13, 2012

Ah yes. The Net is abuzz with the sound of a billion dollars (I’m refraining from the “Dr. Evil” references with great effort) landing in Instagram’s lap, courtesy of Mark Zuckerberg’s Facebook. And whatever the associated mix of cash and Facebook stock turns out to be, that’s one hell of lot of moolah for a firm that’s only been around a couple of years, has a grand total of 13 employees, and zero income (not to mention nada profit).

They don’t even have their own infrastructure — they use Amazon Web services array of servers, though one might assume now that at some point those functionalities will be assimilated into Facebook’s farm.

But what really fascinates me about this acquisition is how it puts another nail firmly in the coffin of false arguments that Google, twitter, or various other large Web services firms are monopolies in their operational spheres, potentially or currently in need of antitrust enforcement.

What is Zuckerberg really buying with Instagram?

The entire management and staff of the company can be counted on three hands, with fingers to spare. Good people to be sure, but probably not worth a billion dollars.

What of Instagram’s core technology — letting people take photos, pretend to be artists by applying various filters (a capability provided by innumerable other programs and apps), then sharing the results with their so-called friends and followers — is there a billion dollars of value there?

Some 30 million or so Instagram users come along (like it or not!) with the deal, who will almost certainly find themselves intimately entwined with Facebook’s existing 800-odd million users at some stage. A significant collection of warm bodies, but a billion bucks worth? Hmm.

So again, what is Zuckerberg really getting for that billion dollar price tag?

Peace of mind.

My gut feeling is that Facebook saw the shadow of a significant potential competitor forming in cyberspace, and decided to nip it in the bud — while it was still practical to do so just by throwing a chunk of money in the appropriate direction.

But how could Instagram — no infrastructure, no income, hardly any employees — be a threat to the 800-pound gorilla of social networking that is Facebook?

Zuckerberg isn’t my idea of a good role model, but he’s nobody’s fool.

He knows full well what many of us have been saying for years — that disruptive competition on the Web can appear and grow quickly at any time, and will usually be essentially just a single click away for your current users.

The Cadillac that is Facebook looked in its rear-view mirror, and realized that the little Nash Rambler of Instagram was pulling up with surprising speed.

With users increasingly able to easily extract their data from existing services if they want to switch — Google has long supported Data Liberation, and Facebook is now moving in a similar direction — that “one click away” competitive reality is now even more the order of the day.

And the counterexamples are equally instructive.

Where effective competition does not exist, cannot be easily created, or where users cannot move between competitors without pinning the hassle meter in the red zone, we see complacency and often abusive behaviors that indeed do call for regulatory approaches.

Microsoft’s antitrust problems were fundamentally the result of their unwillingness to play fair, by their maneuvers to lock PC manufacturers and users into Windows environments whether they wanted to be there or not.

The giant ISPs in the U.S. who control most Internet access have spent decades manipulating the regulatory and political environments to purposely limit effective competition, to make it as difficult as possible for subscribers to switch services where any competition did exist, and to utterly control the “road” that connects subscribers to the Internet itself.

There was no “one-click” escape from Microsoft’s anticompetitive behavior, and there isn’t one today for users in the increasing concentrated, restrictive, and manipulative world of the immensely powerful major U.S. ISPs.

So perhaps we owe Facebook and Mark Zuckerberg some gratitude after all.

They have helped to illustrate the fallacies of accusations claiming evil monopolistic behavior by Google or other major Web services firms where users are free to easily switch between competitors, while also pointing us toward a better understanding of why regulatory oversight of the dominant ISPs is so badly needed.

The key to understanding Internet competition is in the click.

Facebook has provided us all with a billion dollar lesson in why this is true.

Just please don’t send us the bill.

— Lauren Weinstein