Concentration of power: Why Facebook should not have been permitted to buy WhatsApp

Over the past years public talk and actions by European policy makers and leaders of certain industries against the big U.S. Internet companies have become a common occurrence. The main target has been Google’s search business, which the European parliament preferably would like to separate from the other company divisions. Google’s role in promoting its own services on the leading mobile OS Android also has led to increased scrutiny by the European commission. The same happens now in Russia.

The big issue with many of the measures and anti-rhetoric directed at Google specifically and major Internet companies from California generally is how short-sighted, uninformed and destructive they are. In regards to Google, the theoretical case for antitrust actions is getting weaker by the day. The company is facing a host of different challenges which I described on my personal blog in November (“14 reasons why there is no need to breakup Google”). The other day Forbes published a piece titling “Microsoft Is The New Google, Google Is The Old Microsoft”, referring to the lack of short-term innovation at Google and the comeback of Microsoft as innovator. Whether this comparison is fair or not – it stands symbolically for how Google is seen not by all, but by a growing number of industry people: As a giant that has passed its peak. Why regulating a company that already is facing a bunch of market-related challenges?

Google and the alleged market failure

Some German academic leaders recently called for an “open index of the web”, claiming that Google’s dominance proves a market failure. “For more than ten years, we have been dependent on a single search engine, and no other company has been able to challenge it. We do not foresee the market regulating itself in the future”, they write on their website. Nobody knows why these people never seem to have heard of Bing or DuckDuckGo and why they apparently are under the impression of an obligation to perform searches on Google. Their pessimism about the self regulation of this market does not appear to be too well-reflected either, as the shift from desktop to mobile poses the biggest threat to Google’s business ever. Again I am referring to my list of threats to Google’s future well-being in which this is explained. As I have suggested in the previous paragraph: It actually looks increasingly likely that the market will regulate itself when it comes to Google search. The rise of mobile changes the game pretty significantly. If there ever has been a good time to wait and see instead of making use of radical regulatory actions such as a breakup, it is now.

Punishing good company performance

However, the concentration of power among a few companies that more or less know everything about basically every Internet user on this planet is a problem that needs a response. Too much concentration is never a good thing. But the response should not be as uncreative and hostile as to demand a breakup of companies that undisputed have created outstanding products. Google’s search would not have reached billions of users if people would not really have loved it. Breaking up a company that has become a market leader solely because of its outstanding products means to punish innovation and customer-centric product thinking. It tells all other firms and entrepreneurs: Make sure that your products and services are not too superior, otherwise we have to intervene and reduce the quality of your products. Be mediocre, not great.

Who really wants that?

Lock-in and network effects are the real threat

In my eyes, regulation needs to look much more into the future instead of only focusing on the current market situation of a company. And it needs to understand what actually poses the biggest threat to a functioning market in the digital sector: It is not market share per se but the existence of lock-in and network effects. Global networks change the game, because they make the switch to another service provider so much harder. Most people do not really love Facebook (anymore), still more than a billion use it. It is not because the product itself is so great, but because users receive a perceived value that no other service can provide that does not have more than a billion users. How to built a network-based service with more than a billion users is a tricky question that not even a juggernaut like Google was able to figure out. Remember Google+?

But occasionally, some companies, usually startups, discover the magic formula. WhatsApp, Instagram, Snapchat are among the most prolific ones who pulled that off. Two of them, Instagram and WhatsApp, were acquired by Facebook. Snapchat is still independent and currently valued by investors at a staggering $19 billion. Snapchat CEO Evan Spiegel famously rejected a $3 billion offer by Facebook at the end of 2013. It is unclear whether he wants to bring Snapchat to an IPO or just sell the company at a much higher price.

The case for stricter acquisition rules

That brings me to what I perceive as the biggest obstacle to a functioning market in today’s consumer Internet: Acquisitions of young, but strong networks without significant revenue by other strong networks. In other words, I think that for the common good as well as for the digital markets, Facebook should not have been permitted to buy WhatsApp. Why? Because at the point when Facebook announced that acquisition, WhatsApp already had more than 400 million active users worldwide. Everybody with a bit knowledge of the laws of online social networks was able to predict that the chat app’s user numbers would explode even more. Why else would Facebook accept an acquisition of a company with close to zero revenues that it ends up paying $22 billion for?! It can’t be more obvious.

whatsapp

By buying WhatsApp, the world’s leading social network, Facebook made sure that no matter how the blue and white core product would do – it would still keep users close and ensure future revenue sources. With WhatsApp, Facebook did not buy a product or company but a tightly meshed post-tipping point network of hundreds of millions of people. Facebook did not need to do anything but ponying up the cash and stock it paid with. No innovation was needed. And users basically had no other choice than to accept it. There certainly are dozens of other messengers, and some of them are pretty strong in specific parts of the world. However, as the numbers show: With more than 700 million active users WhatsApp today is bigger than ever. Most users either did not find their friends on other messengers, or they simply did not care enough to switch. It’s great for Facebook. It is maybe not so great for users whose vast amounts of data are concentrated at one company. And it is pretty bad for all other companies that try to compete with WhatsApp but that do not have a “sugar daddy” that pays their bills without wanting them to earn their own money.

Based on their existing set of criteria, antitrust authorities allowed Facebook to buy WhatsApp. My personal position is that if there should be any kind of more aggressive regulatory activity in order to limit the concentration of power in the digital space, it has to be about limiting certain kinds of acquisitions on other grounds than financial metric-driven market dominance. I do not see myself equipped to suggest specific criteria, but it mainly should be about one thing: If a consumer-oriented networking company with a high level of market dominance wants to buy a young, low-revenue consumer-oriented company in the networking space, it should be prohibited to do so if there is a high probability that the acquisition target independently will become a massive success itself. With the right data, it is possible to make pretty solid growth predictions. Mark Zuckerberg obviously had access to this data.

I am aware that this is a controversial idea that many industry representatives might be skeptical about. There is the risk of a reduced number of potential buyers for successful startups that operate networks. Also despite not being a libertarian I usually tend to prefer less regulation over too much regulation. However, I think this kind of forward-looking regulation would actually be very good for competition as well as for the general public. It might even curb the built-to-exit culture that is so typical for today’s startup ecosystem and that leads to many products and services that are not even intended to be able to sustain themselves.

If Facebook would not have been allowed to buy WhatsApp

Let’s stay with the example of WhatsApp: What would have happened if Facebook would have been prohibited from acquiring the company? Maybe another company with less of a footprint and dominance in the social web field would have bought it. Or WhatsApp would have been forced to come up with a business model in order to earn money and stay independent. Facebook would have felt more pressure to innovate with its core product, instead of just buying what’s already successful. It would have changed the prospects of the company, making it more vulnerable for the innovator’s dilemma. That actually is a healthy thing from a competition point of view because it leads to changing market leaders. I see rather little downside but massive upside.

If we accept the premise that many sectors of the networking-based consumer Internet business are characterized by “winner takes it all” tendencies and that too much concentration is a bad thing, the best way to ensure a fair competition might be to allow entrepreneurs to built these winners, but to prevent those who are winning today from purchasing those that with some certainty will win tomorrow. Money will never be an issue that prevents these acquisitions. Only regulation could. I am not willing to fully say that it definitely should, but I see the chance that this actually could lead to positive things. That can hardly be said about the breakup fantasies of European politicians and academics.

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