In its last second quarter financial report, Facebook reported it had more than 2.7 billion users worldwide, and 256 million users in the United States and Canada. Based on population statistics, the huge platform's reach among users in the United States and Canada is almost 70 percent of their entire population.
Facebook also reported an average revenue of US$7.05 (HK$55) per user, worldwide. This all added up to more than US$18 billion in advertising revenue and a net income of more than US$5 billion ... in one quarter!
According to Statista, Facebook now controls 77 percent of all social network advertising.
How did this happen? Antitrust experts and economists refer to it as "market power."
The US House Judiciary subcommittee's report on Big Tech, released recently, called it monopoly power. This power is wielded over users and advertisers with a devastating impact on news organizations that rely on both audience and advertising revenue to survive.
There are three pillars of Facebook's market power: high switching costs, strong network effects and access to data. Let's briefly explore each before getting to some of the impacts.
High switching cost
One key way to create size is to make switching to another social platform difficult. This is exactly what Facebook has done.
Over time, Facebook users invest a lot of their time to create their personal network of family, friends, co-workers, businesses, etc.
Users are becoming more and more concerned with privacy issues (remember the Facebook-Cambridge Analytica furor?), the proliferation of fake news and concerns of how data collected from their activity is used, among other things. But moving to another social platform is difficult as users have to completely start from scratch to build a new network.
Facebook makes it extremely difficult to import your information, photos and users to another platform.
One other thing: if you think Instagram is an alternative, it was purchased by Facebook in 2012. And you will still start from scratch there. Interestingly, if you are an advertiser on Facebook and Instagram you can switch between the two. In fact, back in 2016, Facebook described in a photo that advertising on both platforms goes together like peanut butter and jelly. Not the case for users.
As a result of its huge reach, Facebook enjoys a strong "network effect." As reported in the US House report, Investigation of Competition in Digital Markets, a positive network effect is one where the attractiveness of a product increases with the number of people using it.
In fact, the report noted that Facebook's practices have "tipped the market in its favor, primarily facing competitive pressure from within its own family of products."
Access to data
Many of us think Facebook is "free" for users.
Well, it really isn't. In exchange for using the platform, you are providing valuable personal data in exchange. And good luck if you want to change your settings to limit the data collected on you. Facebook uses this data to sell targeted advertising, resulting in the US$18 billion of quarterly revenue noted above.
It also creates a more targeted user experience, which leads you to spend more time on the site. More time means more advertising revenue. It also means the platform collects more data. More data means better targeting, which means higher advertising rates and revenue.
And so the circle goes.
In addition to all of this, Facebook is working hard to expand its "walled garden." The platform needs content. It needs trusted content, although it makes money on untrusted - or fake - news. Initially the design was to have a snippet of news that then linked back to the originator's site for details.
More and more of the strategy has shifted to provide news within Facebook's site to keep users there for longer periods of time, resulting in more advertising revenue.
How does this impact news organizations like The Seattle Times, for instance?
Our newsroom costs alone in 2019 exceeded US$16 million. This does not include supporting activities like technology, product development, marketing, human resources, finance, rent, etc. We invest extraordinary dollars to create trusted content that Facebook delivers to its users, now in ways that keeps readers on their site, not ours.
The Seattle Times also invests millions of dollars to support our advertising-sales efforts.
The results of those efforts and investments have declined because of technology platforms' dominance, including Facebook. Rates and margins have declined.
It is very difficult to compete against the vast data pool and resulting targeted advertising Facebook offers. To stay viable, we must sell "social" advertising options to our customers.
The problem is that when we sell a Facebook campaign, versus a seattletimes.com campaign, our margins are 57 percent lower. Again, we absorb the cost of sales, Facebook reaps the revenue and profit, and we are left with profits that are 57 percent less than our own advertising.
It is a vicious cycle.
Without some change in the model, I fear we will see further declines in the number of journalists and growing numbers of news deserts.
Congress and the US Justice Department need to level the playing field with the tech platforms. We also encourage Congress to pass HR 7640, the Local Journalism Sustainability Act, which would provide support and incentives to help sustain newspapers and media companies as we cope with not only the Big Tech players, but also the devastating impacts of the pandemic on our business.
The Seattle Times (TNS)