At some point in the future regulators may look at the industry and argue that dominant social networks are “natural monopolies” with too great a concentration of market power. But long before that hypothetical eventuality, is it smart strategy forFacebook to break itself up?
If history is a guide, Facebook’s strategy should be driven by its consideration of the market and competitors. These eventually take a greater toll on the 800 lb. gorilla’s market share and market power than do the actions of regulators. Microsoft may have been slowed down by its legal battles, but eventually it was nimbler competitors that ran circles around it.
And Microsoft, as we know, was a harbinger of a new type of market power – companies that are dominant and have few competitors because that is the market structure that makes the most sense from the customers’ standpoint.
How can less competition make sense for the customer?
The answer, of course, is in network effects. Take the social networking world. For those who want to socially network, it makes sense to congregate where everybody else is hanging out. There is only one village square. Being on a different square from everyone else doesn’t get you anywhere – you just miss the party. So it makes sense to have an account on Facebook, where you can easily connect with everyone else who is on Facebook. It’s kind of self-defeating to be on Diaspora or Friendster or My (empty) Space.
This structure would transform Facebook into a truly 21st century company: the first information utility.
So why would Facebook do something like this?
Most of the reasons are competitive and strategic, but the approach might also have the benefit of keeping regulators off its back. We could fast forward or even skip a process that some see coming: regulators investigate Facebook (and perhaps other dominant companies in the social network space), drag them through the courts, declare them “natural monopolies” that should not be concentrated in one entity, and demand their break-up.
Why not skip ten years, spare the company and the taxpayers a lot of headache, headlines, time, and money? (Sure, it’d be lousy for the lawyers — but hey, you can’t please everybody).
And since the company would be breaking up pro-actively rather than under a regulatory gun, it would do so on its own terms, not ones dictated by regulators.
With multiple front-ends, the company spreads its risk: it has a much greater chance of continuing to benefit from the party, wherever it is happening.
Sometimes, it is better to eat your own lunch.