Market dominance, the business model, and internal culture: Mark should learn from Microsoft.
I’ve written extensively about Facebook in Exponential View for the past three years. (In fact, you can see everything I’ve written about Facebook at this link).
Nearly two years ago (EV#60), I wrote:
“My hunch is that we’re going to see an increasing desire to regulate or curtail their activities. Why? Because that faint sound you hear is the penny is dropping. GAFAs control crucial choke-points in the political economy… platform neutrality is a myth.”
In July 2016:
“And Facebook determines what we view based on an algorithm essentially designed to maximise time on site & retention. That is, Facebook figures out what to show us to have us staying longer and coming back to Facebook.”
In September 2016:
“Several years ago, Mark Zuckerberg started to describe Facebook as a ‘social utility’. There is no doubt that Facebook has achieved that status of both utility and monopoly. It is time Facebook took this status more seriously.”
In November 2016:
“Mark Zuckerberg doesn’t believe that content on Facebook can influence how people vote. But at the same time, the company contends that advertising on Facebook does influence what people will buy.”
My friends at The Economist show their frustration with the founder: “[Facebook’s] culture melds a ruthless pursuit of profit with a Panglossian and narcissistic belief in its own virtue. Mr Zuckerberg controls the firm’s voting rights. Clearly, he gets too little criticism.”
Why isn’t this story about the breach of trust with Cambridge Analytica?Because Facebook’s data and data-sharing policies have been known for years.
And because, as Dennis Yu, a successful performance marketer argues, the power of its own internal data models and algorithmic targeting likely exceeds those of external parties:
“Facebook’s own targeting and optimization is way more powerful [than the 50m users Cambridge Analytica had access to.] I know, since I had more data from the [Facebook’s own] F8 platform than the Cambridge Analytica folks.
ANY random, unsophisticated person with a dollar a day and some provocative content can wreak havoc — you don’t need a crazy team of scientists working in a dark room since the [Facebook] ad algo does the heavy lifting.
And there are MAJOR data providers that we’re not allowed to mention that have orders of magnitude more sensitive data to let us target on for free-way more powerful, specific targeting than what Facebook has ever offered.”
Why do Facebook’s problems stem from the trifecta of business model, market dominance and internal culture?
Facebook is dependent on monetising its users through advertising, and the value of those adverts is dependent on garnering as much of the consumer attention in the world as possible, together with figuring out how to get as much consumer data as possible.
Product innovation focuses on that and that alone. As Dennis argues above, it is plenty powerful enough. (As this Twitter user found out, Facebook also keeps records of some of your phone calls.)
But from this laser-focus stem the harmful externalities that I’ve discussed over the past three years. (And some, like Yuval Harari, argue for even more harmful potential consequences, in what he describes as “dataism.” You can hear Yuval and I discuss this here.)
Why the market dominance? Facebook has achieved market dominance and it is from that dominance that the problem arises. If Facebook had 10,000 users, no one would care. But it essentially controls large tracts of media attention and, crucially, is a player in the health of the news ecosystem of most of the countries in which it is dominant.
Why the culture? Facebook has been fabulously successful. It has built an incredible culture to execute the vision of its founder. The strength of that culture will take time — perhaps decades — to change, especially across tens of thousands of people who work there (many of whom, presumably, disagree with me, The Economist, The Financial Times, and many others that some form of regulation is in order).
Veteran tech analyst, Om Malik, says Facebook’s DNA is “that of a social platform addicted to growth and engagement… and this will never change.” But the firm is heavily reliant on its saturated US and European markets, where average revenue per user is $27 and $8.86 per annum, compared to only $2.54 in Asia-Pac. These are also the markets where we are likely to see significant regulatory pushback.
James Crabtree argues that we overlook that Facebook faces a severe political backlash in Asia as well, largely of its own making. The combination of a comparative lack of reputable news organisations in those markets and growing engagement of Facebook has increased the risk of fake news and misinformation. The result: Facebook has been accused of fomenting violence in Sri Lanka and stirring up hatred against the Rohingya in Burma, according to the UN. It risks being “clobbered” by governments in the region, says Crabtree.
Facebook to learn from… Microsoft
I said that Facebook won’t find this easy to fix.
One precedent, for a high flying firm which came to a cropper only to right itself, may be Microsoft. At the peak of its power, the firm was the scourge of trust-busters for several years because of the dominance of Windows. While it was the Internet, a fundamentally different technology platform, which tempered Microsoft’s power, it is valuable to understand how long it took to adjust company culture and execution.
Fourteen years. More than a decade, and it involved two changes in CEO, first from Gates to Ballmer and then from Ballmer to Nadella. It remained profitable in that time, but its share price was flat and ennui was its commercial stock-in-trade.
Since Nadella’s appointment, Microsoft has been on a run with its share price more the doubling and its pivot to a cloud-based business model (and different operating practices) successfully completed. Changing values, culture and business model takes an awfully long time.
In the medium term, this scandal will have limited impact on Facebook, its global user numbers or its financial success. But it may be the start of the firm sailing into much stronger headwinds, with more critics, opponents and new competitors capable of bursting its founder’s bubble.
So what now?
The Economist has some recommendations for Zuck & the firm, including the implementation of a cross-industry Data Rights Board which would police use of consumer data, and potentially enforce Europe’s General Data Protection Regulation globally.
Apple (which doesn’t rely on arbitraging individual consumer data) is one tech firm broadly in favour of more consumer data regulation.
My take is that we need to move swiftly to figure out, agree and implement the new rules for a healthy platform ecosystem, with respect to market dominance and ensuring a healthy civil society. What is currently a hodge-podge of old law, new instruments (like the GDPR and NetzDG), consumer pressure, and out-dated monopoly law, needs to be refreshed and revised, on a nation-by-nation basis if need be.
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