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Regulating Facebook


Lawmakers in Washington spent about 10 hours this week questioning Facebook CEO Mark Zuckerberg. Their questions were focused on Facebook's use of personal data and some other concerns. And now lawmakers have to decide what to do, meaning do they try to regulate Facebook or not? As they move forward, an important question will be, is Facebook a monopoly? Here's Republican Senator Lindsey Graham in Tuesday's hearing asking Zuckerberg if his company has any competitors.


LINDSEY GRAHAM: Is Twitter the same as what you do?

MARK ZUCKERBERG: It overlaps with a portion of what we do.

GRAHAM: You don't think you have a monopoly.

ZUCKERBERG: It certainly doesn't feel like that to me.


KING: Greg Ip is on the line with us now. He's chief economics commentator for The Wall Street Journal. Good morning, Greg.

GREG IP: Hey, good morning.

KING: All right. It's a simple question, but let's get it out there. If Facebook is a monopoly, why is that a problem?

IP: Well, it's a problem because if you're unhappy with the way Facebook deals with you, either as a user or as an advertiser, you don't really have alternatives. And that's one of the important things that sets Facebook apart from other companies. If you are unhappy with their privacy approach, with the way they sell ads against you, you really don't have much choice. You can opt out of certain things, but ultimately, the only choice consumers have is to go somewhere else. And there are other social media platforms, but none of them really do what Facebook does. And more important, most of them do not have all the friends that you've accumulated in your network that you already have on Facebook.

KING: All right. So at this point, it's going to be hard for any competitor to try to compete with Facebook. Zuckerberg, on the other hand, says it doesn't feel to him like Facebook is a monopoly. Do you think there's a case to back him up?

IP: Well, sure. I mean, he's - he doesn't let moss grow under his feet. Facebook is a terrific service. People love it. You can do things with Facebook that you can't do anywhere else. They bring out new features all the time. And for the typical user, it's all free. I mean, what could be better than that? But on the other hand, if you were to look at some of the usual tests of monopoly, Facebook seems to meet a lot of them. First of all, there's its market share - 87 percent of adults use Facebook or one of its products, like Instagram or WhatsApp. Now, it's true that they might be using others as well, but once again, none are just like Facebook.

There is the fact that it has these extremely high profit margins, and typically, very high profit margins are a sign that there are barriers to entry. It's difficult for other companies to come into this market and do what Facebook does. And they have, what we call, network effects, which means that as more people join Facebook, it becomes even more useful and more compelling for other people to join Facebook. So for all these reasons, they kind of meet sort of the sniff test for a monopoly or a monopoly-like company.

KING: So then can lawmakers regulate Facebook without having to officially call it a monopoly, or do they have to - they have to say Facebook is a monopoly and then they can proceed?

IP: So historically, we - this country has taken a very dim view of companies that reach monopoly status and are not regulated. And that is why historically companies that have reached that size, whether it was Standard Oil a century ago or AT&T 20 or 25 years ago, they either end up regulated or there are constraints put on their size or their growth. Now, with Facebook, it's a slightly different question because they haven't been around that long, and it's a very dynamic industry. And Zuckerberg can correctly say that there is nothing guaranteed about their market position today. There are people coming along trying to chip away at it, whether it's LinkedIn or Twitter or Snapchat.

On the other hand, if you sort of look at the capital markets today, it's very difficult for a company to get the capital needed to compete with Facebook. So if you're the government, you sort of say, well, we cannot rely on normal market forces to introduce competitive effects to change Facebook's behavior. And so in those situations in the past, you have put constraints on the behavior of companies like that - look at Microsoft, for example.

KING: Yeah.

IP: Or you break them up.

KING: Greg Ip is chief economics commentator for The Wall Street Journal. Thanks so much, Greg.

IP: All right, thank you. Transcript provided by NPR, Copyright NPR.