No Person or Government Can Effectively Regulate Facebook

During his hearing on Capitol Hill, Facebook CEO, Mark Zuckerberg, largely asked the senators to regulate his company. Yes, he was open to it. But do not be deceived. Facebook and Mark are aware that no one can do that, effectively.

While it was possible to regulate or break Standard Oil (hello ExxonMobil, Chevron, etc) to make way for competition in the U.S. energy industry, the business structure of the web makes regulation harder. Yes, you can easily regulate a bank. You can do so on medical companies and hospitals. But to think you can accomplish same on web business is an illusion. There is no sector in the history of markets where marginal cost largely disappears when user base runs into millions.

At its peak in late 1970s and early 1980s, General Motors (GM) employed hundreds of thousands of people but yet could not serve the world because it was expensive doing so. In the web age, WhatsApp was serving the world with less than 20 people before it was acquired for roughly $19 billion. Simply, if you regulate or break WhatsApp, very soon another WhatsApp will emerge because making that happen is marginally not as tedious in terms of cost. You have no luck to tame aggregators without simply asking another aggregator to germinate and take over the void.

In a perfect market, the marginal cost of a digital product is zero. This means that the price of a digital product tends to zero: welcome freemium and ad-supported business. However, only firms with network effects dominate and benefit. The core reason is that if in a perfect market, and the marginal cost of producing digital product is zero, the price will inevitably go to zero.

This is the heart of the freemium model where you get many things free, which is possible because of the aggregation construct, where companies provide those digital products and then create an ecosystem to sell adverts. The firms benefit more than the suppliers by providing the platforms [Facebook makes money for photos supplied by families. Sure you like the Likes]. As shown in the Figure, great companies deliver the near-zero marginal price for high quality product, making it challenging for anyone that carries a non-zero marginal price to compete, exacerbated if the product is even not top-grade. This is one of the biggest challenges digital entrepreneurs face.

As I have noted that Facebook would be bigger and better if there is regulation because regulation will make it nearly impossible to have another Facebook. There is no regulation Facebook cannot absorb, and future web companies will be nipped as they may not have the resources to even begin.

Be careful what you wish. The world of Internet would change because of the GDPR(General Data Protection Regulation). Companies like Facebook and Google would be affected. In short, these companies are smiling at the bureaucrats in Brussels. U.S. Congress may have a regulation as more revelations emerge on how Facebook data was compromised by Cambridge Analytica.

If you decide to break Facebook apart, one part will grow and dominate others. This is possible because of the positive continuum of network effect where the biggest keeps getting bigger and also better. I explained that in a recent piece in the Harvard Business Review. You can regulate Facebook but another company will come to take over its position because in this sector, it is winner-takes-all. Yes, the best wins.  Why? The scalable advantage improves with lower marginal cost.

And that is the problem. With their high scalable advantages running on aggregation construct, digital empires like Facebook and Google can take up offline empires, and may still not be within the crosshairs of the regulators. No one can effectively regulate Facebook, for example, unless you want another company (not named Facebook) to take its position. The operating structure of the business is mutative, and that means that it can grow through network effects which reward the best: a better service brings more users, and the more the users, the better the service, setting up a positive continuum. So, if you break Facebook, one part could grow and over time could dominate other parts, provided that part is the surviving best. Or another company with stronger advantage, post-Facebook breakup, would take over the new market and become the new category-king.

So, if U.S. breaks Facebook, one of those pieces can emerge to fill that void. Or another product from say China or India can emerge and become the world’s leader. It is a web business running on the aggregation construct. They are not structured to have 20 banks in Lagos. You expect to have one popular social media in Lagos for a specific sector. That one leader is what matters. If you break, the one that is best will grow (and win) because network effect will make it easier to attract users to it.

This is my take: U.S. will not regulate Facebook or its web companies at the level many are expecting [I expect nothing to change except cosmetics reporting of violations] because it knows that Chinese competitors which are also well-funded will go after Facebook users across the globe. And even if U.S. regulates Facebook by breaking it, the best surviving part will grow to dominate over time because of network effect where the best gets better and bigger. We just have to agree that Facebook is an ICT utilities and I was very happy when my editors in Harvard allowed me to use that against the company. You negotiate with your utilities [ electricity, water] because you have no alternatives. That is where we are with Facebook.

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