Much has changed since the early days of Facebook in Mark Zuckerberg’s room at Harvard University two decades ago. Today, working out how best to regulate the company is a vital issue for policy-makers around the world. Protecting consumers without dampening innovation is critical.
Facebook started out as the ‘hot or not’ website ‘Facemash’ in a Harvard dorm room back in 2004. Today, it is the mega-corporation Meta Platforms Inc, boasting more than three billion active users and a trillion dollar market capitalisation.
Much has been written about the company’s social and political impact, but what have 20 years of Facebook meant for the economy? Aside from Meta shareholders (including, of course, its co-founder and chief executive Mark Zuckerberg), who has benefited economically from Facebook’s ascendancy? And who has lost out?
Facebook Ads has been transformative for start-ups
Controversial for its threat to privacy and use in political campaigning, Facebook’s advertising system has been hugely beneficial for people seeking to grow new businesses. Launched in 2007, Facebook Ads enables marketing messages to be targeted at users based on algorithmic inferences about their consumer preferences. These inferences are based on data about people’s activity on Facebook apps and elsewhere on the web. The system is self-service and barriers to entry are remarkably low: just $1 and a credit card.
Some of the biggest beneficiaries have been start-ups, which typically lack the buying power to compete with incumbents for broadcast media such as TV and press. Facebook has enabled these firms to focus their limited resources on targeting only the customers most likely to be interested in their products.
In an interview for my book Good Data, a venture capital investor told me they believed that access to Facebook Ads had been a necessary condition for the success of ‘Silicon Roundabout’, the UK’s equivalent of Silicon Valley, centred on Shoreditch in East London. Today, the UK has 53 'unicorns' – technology companies valued at more than $1 billion. It is plausible that Facebook Ads helped these organisations to form and flourish.
Facebook and consumer needs
At the same time, Facebook Ads has made possible all kinds of ‘long tail’ businesses that would have been economically unfeasible before. Companies making and selling everything from weighted duvets to slippers with removable soles can now operate without intermediation by retailers or brokers.
For example, ManyPets – a fintech unicorn that I co-founded in 2012 – would not have survived infancy without the ability to target people with niche insurance needs on Facebook. Meta reports that more than ten million business globally now use its advertising platform, directly supporting more than $360 billion of economic activity.
A final economic benefit of Facebook Ads has been greater measurability of advertising. Although they are unpopular with data regulators, pixel- and cookie-tracking technologies allow Facebook advertisers to see which ads resulted in sales, going some way to resolving the dilemma articulated by marketing pioneer John Wanamaker (1838-1922): ‘Half the money I spend on advertising is wasted; the trouble is, I don’t know which half’.
This translates into a general benefit to the economy. With Facebook Ads, it arguable that organisations are able to allocate capital more efficiently than before – at least in terms of their digital marketing budgets.
The hidden negatives of Facebook Ads
But there are costs imposed by Facebook on others – what economists call ‘negative externalities’. Low entry barriers to using targeted messaging on Facebook have also benefitted scammers, with $770 million lost to fraud initiated on social media in the United States in 2021. Investment and romance scams, in particular, have become easier to perpetrate thanks to personal information being so readily available on Facebook and Instagram profiles.
It is also arguable that Facebook is partly responsible for electoral outcomes that have been highly consequential from an economic perspective. Populist politicians including Matteo Salvini in Italy and Rodrigo Duterte in the Philippines credited the capabilities of Facebook for victories at the ballot box.
Until 2018, there were no additional controls or reporting on political ads run on Facebook. Among those taking advantage was Vote Leave in the UK, which targeted ads with misleading claims to specific segments of Facebook users as part of its successful Brexit campaign. Analysts estimate that Brexit has reduced the size of the UK economy by as much as 6%. Mixing social media and politics can lead to major economic changes, affecting people’s day to day lives and livelihoods outside the internet.
Has Facebook killed the media industry?
If the extent of Facebook’s role in election and referendum outcomes is hard to quantify, its impact on the media industry has been more noticeable. While the idea that Facebook is to blame for the long-term decline in news publishers’ revenues is too simplistic, there is no doubt that the attention that consumers now give to apps like Instagram and WhatsApp rather than TV and print – and the corresponding acceleration in the migration of advertising budgets to digital channels like Facebook Ads – have been highly disruptive.
Figure 1: Global ad spending, divided by media share, inflation-adjusted
Source: GroupM via the Wall Street Journal
At the same time, along with platforms like YouTube, Facebook provides distribution for the flood of user-generated content that provides substitutes for media companies’ products. The result is that there is no longer such a clear-cut business model for print journalism – an economic shift with profound consequences for the information environment and the public sphere.
Laws like those enacted in Australia and Canada – which require social media companies to compensate news publishers – may well miss the mark, by failing to recognise that these are complex structural changes in the economy rather than the result of anti-competitive practices. Legislating against Facebook on the basis of competition rules alone may not be enough.
Facebook, competition policy and consumer welfare
Facebook is not without its monopolistic tendencies. With the acquisitions of Instagram (for $1 billion in 2012) and WhatsApp (for $19 billion in 2014), the company deployed capital to neutralise its fastest-growing competitors. Where acquisition has not been possible, Facebook has ruthlessly copied competitive products. For example, it built the ‘Stories’ feature to be a Snapchat-killer; Threads, which acquired its first 100 million users in just five days, is designed to do the same to X (formerly Twitter); and Reels is designed to wipe out TikTok.
Competition policy-makers, particularly in the United States, had got used to Robert Bork’s idea that consumer welfare is the standard by which the functioning of markets ought to be judged. As Facebook’s products have always been free to consumers, there has supposedly been no reason for competition authorities to intervene.
But in 2024, we find ourselves in a position where Meta has operating margins greater than 30% and vast amounts of free cash at its disposal – enough to invest $10 billion per annum in pursuit of 'the metaverse’, and even more in building the world’s largest cluster of GPUs (the sophisticated computer chips needed to train generative AI models).
If Meta comes to dominate the virtual reality and artificial intelligence (AI) markets with economically and socially damaging consequences, it will be at least in part because of inaction over its dominance of social media. Failing to curb Facebook’s grip on digital advertising is one thing. Allowing Meta to become the dominant force in AI and virtual reality technology could bring a whole new host of economic, social and political risks.
So, is Facebook a natural monopoly?
With that said, it is not obvious that a dominant global provider of free social networking services is a bad thing in and of itself. Facebook’s advertising-based business model works to the advantage of poorer users in developing and emerging economies. Such groups are less valuable targets for advertisers than more affluent users in North America and Europe, but they receive identical services anyway.
Estimating the economic value of free digital services is notoriously difficult. But it is possible to quantify this redistributive effect: my analysis of the company’s financial results suggests that it amounted to a benefit to users in emerging and developing economies of around $25.5 billion in 2018 – roughly the same as Germany spent on overseas development aid that year.
Table 1: Transfer of value between Facebook users in different world regions, 2018
Source: Good Data (author’s calculations)
Since 2013, Facebook has also invested heavily in physical infrastructure, providing mobile internet access in parts of the world that were economically unattractive for traditional telecommunications providers (telcos) to connect. In 2020, its investments in subsea cables and networks in sub-Saharan Africa and Asia were forecast to deliver $120 billion in economic benefits by 2025.
A final point is that social networks become more useful the more people use them, which means that there are costs to users of breaking them up. Perhaps it is time to start thinking of Facebook – and regulating it as – a natural monopoly, rather than relying on competition policy alone.
Conclusion
Facebook has dramatically levelled the economic playing field, for better and for worse. The presence of Facebook Ads means that it has never been easier to grow a business – but the same goes for perpetrating a fraud or interfering in an election. People everywhere have unprecedented free access to social networking services and a global platform to distribute their own content – but at costs to competition and the information environment with which we are only beginning to come to terms.
Where can I find out more?
- Don’t Break Up Facebook – Treat It Like A Utility: Dipayan Ghosh argues that Facebook is a natural monopoly, meaning it should be regulated in the same way as a public utility.
- Free goods and economic welfare: Diane Coyle and David Nguyen estimate the value of free digital services by surveying UK internet users’ willingness to lose access to them.
- Never-Ending Niches: Ben Thompson unpacks the complex relationship between the decline of newspapers and the rise of social media.
