The Antitrust Case Against Facebook You Need to Know About

Yves here. Don’t kid yourself that Facebook might be considering turning over a new leaf in light of all the bad press it’s been getting about fake news and its spying. As Lambert pointed out in Water Cooler yesterday:

“Facebook’s new chief lawyer helped write the Patriot Act” [The Verge]. “But many are already troubled by [Jennifer] Newstead’s history lobbying and legislating for more powerful electronic surveillance. As The Hillpoints out, a 2002 Justice Department press release describes her as “helping craft” the legislation. Notorious Bush administration lawyer John Yoo described her as the ‘day-to-day manager of the Patriot Act in Congress’ in his 2006 book.” • Jon Yoo? That’s quite a recommendation. I mean, depending on the kind of business you’re in.

By Lynn Parramore, Senior Research Analyst, the Institute for New Economic Thinking. Originally published at the Institute for New Economic Thinking website

Former ad tech entrepreneur and advertising executive Dina Srinivasan is author of a well-researched study in the Berkeley Business Law Journal laying out the case that social network giant Facebook has now entered America’s annals of dangerous monopolies. Taking a deep dive into the company’s practice of tracking and watching consumers, even after they leave Facebook itself and as they travel around the web, she describes a firm that is getting away not only with alarming levels of surveillance, but anticompetitive behavior that has pernicious effects on the economy. Srinivasan discusses how Facebook came to have these frightening powers and why they should not be tolerated in a democracy.

Lynn Parramore: When Facebook started, consumers were drawn to a useful platform that allowed them to connect to other internet users for free. Facebook lured people from other platforms by offering greater privacy than rivals like MySpace. Why was this so significant?

Dina Srinivasan: Facebook entered the market just like any other business, trying to please consumers and beat out rivals. Facebook is really interesting because it’s had this really long back and forth public dialogue with consumers about user data and privacy— a long negotiation. At first, Facebook was all about privacy, saying: We do not and will not use cookies [small text files that websites can install on users’ computers] to collect your personal information.

Then we have this long record of Facebook trying to push back on privacy provisions and a long history of consumers saying, no, don’t do that, we’re not ok with that and revolting, and then Facebook backing down saying, ok, that was a mistake, we won’t do that.

Normally the focus in economics and antitrust when it comes to monopoly power is price. Is the company extorting consumers? But in this market, MySpace, Facebook, and other social networks were free. They were free but were serving ads. So what were they competing on? Well, if you go back and look at the history of the market you see that these social networks were competing on privacy levels amongst other things. Consumers wanted privacy. This is why the discussion of privacy is so important when you look at these markets from a monopoly perspective.

This is not something particular to social networking. The antitrust tipping point against AT&T was instigated by a competitor that was trying to provide American consumers with better privacy when it came to communications. People wanted to buy the Hush-A-Phone [a noise-reducing device] but AT&T didn’t want people to do that. Communications and privacy have gone hand-in-hand for a long time.

So it really seemed like consumers could trust Facebook to care about their privacy.

Yeah, it’s hard to believe today but people thought they could trust Facebook because the company kept saying and doing things that caused people to trust them.

When Facebook first changed its product to track consumers across the internet, consumers revolted and Facebook retreated and said sorry. When Facebook introduced the “Like” buttons and people were suspicious that they would be used for tracking, Facebook told the public that the buttons were only for users’ own “safety and protection” and not for tracking.

Later, when people started to develop mistrust on privacy, Facebook kept assuring them that they could trust the company over other social networks. For example, at one point Facebook gave users the right to vote on any future privacy changes. But it turns out the trust was misplaced. After it gained power in the market, Facebook revoked users’ right to vote on privacy changes, and then started to use the “Like” buttons for tracking.

The New Zealand privacy commission recently called Facebook “morally bankrupt pathological liars.” Leaked documents continue to reveal just how deceptive and aggressive Facebook was and they continue to feed the narrative that Facebook was convincing users that it cared about their privacy. But behind the scenes it was degrading their privacy and leveraging their data. American antitrust laws require companies to compete honestly and “on the merits.” Does it look like Facebook built its monopoly honestly?

What caused Facebook to begin to renege on some of the key privacy promises?

Facebook is what’s called a closed communication network, very similar to what AT&T was. There was a point in history when American consumers who had an AT&T phone could only make calls to and receive calls from other AT&T customers.

We see something similar in social networking: You have to have the Facebook app, the Instagram app, and the Twitter app on your phone because none of the messaging platforms want to communicate with each other. Old time telecommunications was like that. An office would have multiples phones on a desk — one for each telecommunications network. Eventually this creates a dynamic in which the market tends to consolidate towards the one company that has the greatest base of customers.

For social networking, you want to be where all of your friends and family are so that you can communicate with the most people. So the market starts to tip in Facebook’s favor, yet Facebook continues to perpetuate one particular promise of not tracking users as they move around the web. But after competitors folded and left the market, Facebook reneges on the most important privacy promise: not to track users across the web.

What are consumers supposed to do now? Quit Facebook? Where do you go? Who else has 2 billion users? The market has consolidated in Facebook’s favor.

Privacy means a lot of different things on the internet. Some cookies we might want to have, like one that allows a website to keep track of a password. But with Facebook, we’re talking about a much broader form of monitoring—a pretty big shift from the claims of caring about privacy.

This is my focus: It’s not about extracting information about users when they’re on the site but about tracking users off of Facebook. It is a suffocating level of surveillance when it comes to speech and thinking and research online. But this practice also has very consequential effects on the greater competitive landscape. This is how they extract what economists call “monopoly rent” — instead of forcing the consumer to pay higher prices, they extract the consumer’s privacy.

It’s one thing for Facebook to say, we’re going to track and log everything you do on Facebook, but it’s quite another thing when you see the company tracking and logging and recording everything that you do or read on millions and millions of websites or mobile apps that have acquiesced to Facebook to allow their own customers to be tracked.

How did Facebook manage to pull this off? How can they track me even when I’m not on the site?

In 2010 Facebook launched “Like” buttons and other social widgets [pieces of code on a web page that interact with the user on the screen] and started licensing them to other businesses on the representation that social widgets weren’t meant for tracking.

That’s how it got major publishers on board. Publishers were also concerned for their own reasons: They thought, hey, if we let you put your code on our site, we’re concerned that you might track our own users and use the information to price undercut us on the digital ad side of the market. Facebook gained their initial participation by representing that it was not doing that.

Then in 2014 Facebook changes its mind. It changed its mind the same month that Google announced it would fold its own social network.

By that time Facebook has millions of businesses carrying these social widgets. So how is the market going to correct from that? The only way it could correct from it is if all publishers got together at the same time and said: We quit!

This is why in order to restore competition we need to give consumers the ability to opt out of being tracked across sites.

Let’s talk about how this behavior harms other businesses.

Facebook now has monopoly power over the social networking market. So it goes to other businesses that have their own mobile applications or websites and says, ok, if you want to use or license our products and services, then you have to agree to allow us to surveil your customers. And by the way, we can even use that information to compete with you and price undercut you in the digital advertising market.

This is not even a rational deal. But everybody falls in line because everybody has to use the Facebook social network. The consequence of this is that the Facebook policy of tracking users after they leave the site is now integrated into the privacy policies of millions of independent businesses that have nothing to do with Facebook.

In a way, Facebook has set the structure across the internet to a lowest common denominator in terms of privacy. Other websites and apps aren’t able to compete on privacy because they’ve agreed to these terms and there is no alternative.

It’s like Facebook has invaded the whole internet economy with its tracking code, like a virus.

On the one hand we live in a democracy—we have the 4^th Amendment and we don’t want unreasonable, intrusive searches and seizures. On the other hand, we live with this social communications network where everything you do is tracked and recorded. What I was really interested in is going back and asking, how on Earth did the market get here because this doesn’t make very much sense.

We really have two outliers that track and log consumer behavior when they’re connected to the internet on the websites and applications of various businesses: Facebook and Google. Like Facebook, Google is able to leverage its market power in one market to force consumers and other businesses to agree to oppressive surveillance terms.

CEO Mark Zuckerberg just announced a privacy-focused vision for social networking. What’s your take on it?

His announcement was strategic in that it matched the headlines that everyone wants to read about. Facebook announced “privacy changes” so the problem must be fixed, right? Wrong.

Zuckerberg proposed making communications on Facebook more private by making them encrypted. I don’t have any philosophical problem with Facebook setting the standard of privacy with consumers that are interacting on its own platform. Encrypted or not.

But his announcement doesn’t solve any of the problems that are interfering with the market’s ability to compete on the variable of privacy. The privacy issue that needs to be addressed from a competition perspective is Facebook’s practice of tracking users after they leave Facebook. This is what Facebook needs to stop doing. Facebook is still doing this. Zuckerberg was off the mark.

So Zuckerberg’s announcement avoids the biggest issues.

Yup. The biggest issue from an antitrust perspective is Facebook’s practice of tracking people after they leave Facebook.

There’s a concept that’s difficult to follow but it’s important. Facebook makes its money by selling digital advertisements. American publishers such as the New York Times or the Wall Street Journal or ESPN also make their money by selling digital ads.

You have to understand how these digital ad markets work in order to understand the competition concerns. Ads are traded in real-time trading environments. When you go to the New York Times as a user, there’s something happening in the background while the page is loading. The newspaper is selling the ad that’s about to pop up on the page to the highest bidder. The ad buyers are not just purchasing a random ad space that’s going to pop up on the New York Times page. They’re buying the audience. They’re buying an ad that’s going to be shown to you according to information it knows about you.

Let’s say ESPN produces lots of Super Bowl content. Every user that comes to their site that reads Super Bowl content is thrown into a database called “Super Bowl enthusiasts.” So when a brand wants to come and advertise to “Super Bowl enthusiasts,” ESPN can serve those ads to that audience.

What happens when Facebook code is on ESPN’s site is that Facebook is quietly in the background watching, notating, recording, and generating those audience lists on the back of ESPN’s labor. Then they use those audience lists and can turn around and sell digital advertising directed at those audiences for prices lower than ESPN could. This is because ESPN has labor costs. It has to pay writers. Facebook rode off ESPN’s hard work.

Facebook now starts to build an additional advantage. Facebook knows more about the ESPN user than ESPN does because they are tracking the user all over the web whereas ESPN doesn’t do that. Facebook has more granular information for targeting ads.

We see this dynamic in the market where American publishers are bleeding cash and not able to sustain their business models, while in the meantime these two pillars in Silicon Valley, Facebook and Google, are ingesting taking the vast majority of all incremental dollars that enter the market. Why? The most important reason is because of this tracking behavior. We would think that in a democracy it’s crucial to make sure that publishers can have a sustainable business model.

America hasn’t been very active in pursuing antitrust cases in the last couple of decades. Can you say a little about what kinds of situations should concern us most right now?

Unlike monopolies of yesterday, Facebook is hurting consumers by conducting surveillance. They are watching you online. This gives them a tremendous amount of power. Power to suffocate a citizenry with surveillance. Power to make you think twice before deciding what to read or watch. Power to not show you a job ad because it knows you are pregnant. Power to surveil the readership of news publishers and then drive them out of business. Power to put politicians in office. Power to keep politicians out of office.

Facebook is undermining our country, our democracy. They are undermining independent journalism. But the press is a guardian of democracy. People know this. This is a market failure problem.

What are the remedies? Should Facebook just be broken up?

While break-up is terribly sexy linguistically, we have more effective tools that we can turn to that would help competition work again.

Giving people the option to not be tracked across the internet is really important from a competition perspective. We know Facebook could not get people to agree to being tracked when Facebook faced competition. So giving people a right to not be tracked restores the health of the market.

Since so many other companies have now copied Facebook and Google’s practice of tracking consumers online, we now need to solve the market problem by giving people a right to not be tracked by all of them at once. A national “Do Not track” option for consumers similar to the “Do Not Call” option.

Some might say that the “Do Not Call” option doesn’t work as well as it should.

That’s because companies in foreign countries have figured out a way to bypass the rules. But with “Do Not Track,” we’d be able to monitor and catch companies that are cheating. We wouldn’t have the enforcement problems that we do with “Do Not Call” unless the sites or apps the user is visiting belong to foreign companies.

Let Facebook set its own privacy terms to whatever it wants, but consumers should be able to opt out of Facebook carrying these terms over to other websites and apps.

This is definitely a populist issue. The California Consumer Privacy Act was passed unanimously by the state assembly and senate. I was on a road trip recently through rural California and a farmer showed me his burner phone and explained he didn’t want to be tracked. It’s something that concerns consumers and people at large. I think we need to look at the dynamics in the market that are causing it to just continuously be on this downward spiral. Do people really have to resort to referendums to fix this? Give consumers a right to opt out of this practice. We’ll see everyone start to compete on privacy once again.

What other tools do you think would help?

We should look at interoperability. Just like we forced AT&T and others in the telecommunications market to allow their customers to receive inbound and make outbound phone calls to different networks, we can have a parallel solution in the social networking market.

If you went into an office a century ago, you’d have seen multiple telephones on the desk. One to call people on each telecommunications network. Even text messaging was network specific in the U.S. in the early 2000s. If you had a Sprint phone you couldn’t text people on AT&T from your phone.

Same problem here. People have to have the Facebook app, the Twitter app, etc. because the networks are not interoperable.

Mandating that Facebook open up its network to competitive social networks would allow consumers to go to a different social network but still communicate outward to people on Facebook. This would restore choice to consumers and would allow competitors to enter the market.

Technically speaking, we know this is feasible because Facebook at one point did allow Twitter users to cross-post their communications to Facebook users.

Another smaller idea that has been circulated is the portability of one’s contact list on Facebook. The idea is that you should be able to export your list of contacts to a competitive social network. I think from a business perspective it’s less important to consumers because we have probably 70% match rates between our Facebook contact list and our cell phone contact list. But still, thumb’s up, good idea. All these are very easy technical solutions.