What should we do about network-effect monopolies?

by benkuhnbenkuhn.net1 min read6th Jul 202017 comments

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Many large companies today are software monopolies that give their product away for free to get monopoly status, then do the most horrible things once they’ve won. (Previously, previously.) Can we do anything about this?

Unfortunately, “you’re the product” is a popular business model for a reason: businesses like Facebook would be really hard to support without them.

Facebook would be suicidal to charge its users money, because its entire selling point is that everyone uses it, and “everyone” hates paying money. In the US, Facebook makes over $40 per person on ads (source). Can you imagine if instead of ads they tried to charge people $40 a year?

Even on the margin, anything that costs Facebook users also makes it less valuable for its remaining users—it’s a negative feedback loop. The same goes for any other site where users create value for other users, like Twitter or Craigslist or Yelp or Wikipedia. (It’s not an accident that these are some of the most stagnant popular websites!)

In fact, this is a fundamental problem with network effects. If a company wants to maintain a network effect, they need as many users as possible. To get users, they have to have a free product. To keep their product free, they have to get paid by someone else. And when they start getting paid by someone else, they’ll inevitably start prioritizing that person’s interests.

Historically with other network-effect businesses, we’ve mostly addressed this via:

  • regulation (e.g. local utilities)

  • breakups (e.g. Bell)

  • standardization and interoperability (e.g. email, the Web, cryptocurrency)

So far for tech monopolies, people seem to be focused mostly on breakups—e.g. Facebook from Instagram/Whatsapp—but standardization seems to have produced much better outcomes in the past. (I like email and the Web a lot more than National Grid…) I’d be interested to see more exploration of that option!

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Even on the margin, anything that costs Facebook users also makes it less valuable for its remaining users—it’s a negative feedback loop. The same goes for any other site where users create value for other users, like Twitter or Craigslist or Yelp or Wikipedia. (It’s not an accident that these are some of the most stagnant popular websites!)

If I look at Wikipedia I don't buy that Wikipedia's stagnation is due to lack of money. The problem is more that the Wikimedia Foundation is that constant war with the community and doesn't spend it's money wisely. 

The WMF would also have no problem with being a membership organization that charges members money. It would however mean that it would become democratically accountable which the WMF abhors. 

I agree. While WMF only receives the minutest fraction of the value it creates (or I should say, Wikipedia editors because they're the ones who do the actual work), that's not the limiting factor. Like education in America - throwing even more money at the people & systems you believe have failed is not the answer.

Even back in 2009 or so when I was warning the WMF about the editor retention crisis, an existential crisis, the WMF did not actually lack money, and it ramped up its fundraising greatly afterwards. What it lacked was any sense of priorities: it spent its time on prestige projects like sending DVDs to Africa instead of actually keeping the wiki community itself healthy and investing in things like a WYSIWYG editor. It's possible that if you gave WMF enough billions of dollars, it would, by sheer chance, fund the things it needs to fund; but given that it showed it couldn't spend effectively the money it did get, I am not optimistic about the counterfactual here.

Oops this was super unclear, sorry—the thing that ties together all of these crappy websites isn't money issues, just that they're the winner in a network-effect-based business, thus have no plausible competitors and no incentive to become more useful / less crappy.

While Wikipedia didn't have an existential threat from a competitor, they did have the existential threat of the editor retention crisis as gwern describes. 

Why do you think such a threat provides no incentive to become less crappy but an external competitior would?

How would a standardized social network work? Maybe it would let you download your friends lists and posts in a format that could be easily uploaded to a different social network? That way there's less switching costs for social networks.

Some api features mandated so that third parties can create services that allow you to interact with the network more on your own terms, like rss.

I think there are different sets of "we" that you might be addressing the question to. The instinct to use government is understandable, but without an understanding of what is actually monopolized, it's unlikely to be effective. Note also that the network effect is a recognition of a whole lot of value being created, at least some of which is NOT captured by the monopoly. Simply reducing the effect (by limitation or forced disaggregation) could easily hurt consumers a lot, in addition to hurting the monopolist.

For some values, forced interoperability (published least-common-denominator APIs and specifications) can help, but they're slow and the providers are very well trained in how to extend them to preserve their value-add in protected(monopolistic) ways.

And the fundamental network-effect value is _very_ hard to open up. That value is identity/addressing. The exact right balance of (feeling of) privacy and accessibility is fragile and not very portable.

The examples that you highlighted in your links are Google Chrome, Facebook, Grubhub, Amazon, Apple phones, Google search, and Yelp. Out of these, FB is the only one that seems like it deserves to be called a monopoly: Chrome competes with Firefox (among others), Grubhub competes with Caviar (among others), Amazon competes with google searching "buy [product]" and the gazillion other results that show up, Apple phones compete with Android, Google search competes with Bing and DuckDuckGo, and Yelp competes with Google reviews as well as other review sites.

https://www.ftc.gov/tips-advice/competition-guidance/guide-antitrust-laws/single-firm-conduct/monopolization-defined

Courts do not require a literal monopoly before applying rules for single firm conduct; that term is used as shorthand for a firm with significant and durable market power — that is, the long term ability to raise price or exclude competitors. That is how that term is used here: a "monopolist" is a firm with significant and durable market power. Courts look at the firm's market share, but typically do not find monopoly power if the firm (or a group of firms acting in concert) has less than 50 percent of the sales of a particular product or service within a certain geographic area. Some courts have required much higher percentages.

Grubhub used to be over 50% but is now behind Doordash, so maybe doesn't qualify.

Apple has a monopoly on iOS app distribution (aside from rooted phones) and is using it to extract rents, which is what the link is about.

Firefox has 4% market share compared to Chrome's 65%.

Amazon has 40-50% of the ecommerce market depending on which stats you trust.

Google Search has 85%+ market share.

I basically disagree with the idea that the US FTC gets to decide what the word 'monopoly' means. I also think that having a high market share doesn't mean you face competition - indeed, it can mean that you're winning the competition.

Re: Apple, it may have a monopoly on iOS app distribution, but when people are considering what phones to buy, they get to choose between iPhones and iOS apps and Androids with Android apps. Admittedly, there's some friction in changing from one to the other.

Signal started out with wanting to build a federalized and interoperable platform but after a while concluded that it's a bad idea because it siffles the ability to innovate. Email still isn't end-to-end encrypted by default. I do use Signal to communicate with my friends over using email. I likely wouldn't if their would be no desktop version of Signal (the breaking change that ended their interoperability). 

On the more hopeful side, Protocol Labs does good work with IPFS, OrbitDB, AvionDB and FileCoin. Microsoft providing an open protocol with ION is also good news. 

On the standardization and interoperability side of things. There's been effort to develop decentralized social media platforms and protocols. Most notably being the various platforms of the Fediverse. Together with opensource software, this let's people build large networks that keep the value of network effects while removing monopoly power. I really like the idea of these platforms, but due to the network monopoly of existing social media platforms I think they'll have great difficulty gaining traction.

Even on the margin, anything that costs Facebook users also makes it less valuable for its remaining users—it’s a negative feedback loop.

I think you meant to say "positive feedback loop". "Negative" refers to self-stabilizing, not bad/undesirable or the sign of the change.

Is that average ad revenue a mean or a real average? 

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What is a "real average"?

Sorry, meant to ask if it’s a median or a mean; The words escaped me then.