Another Ugly Truth: Facebook's Moat

 Another Ugly Truth: Facebook’s Moat

 

“An Ugly Truth” is the name of a recent book about Facebook, authored by Sheera Frenkel and Cecilia Kang, reporters for the New York Times. The book is an eye-opening, stomach-churning account of Facebook’s history from its birth in 2006 through its role in Trump’s election in 2016, up until the recent history of the attack on the Capitol on January 6, 2021. After reading the book, I considered: Why does Facebook have a Teflon coating, and just keeps growing despite all its missteps, misses and company-first decisions with significant global impact?

 

First, to understand the book’s point of view, present tense, stated in the last paragraph, let’s read it here:

 

“One thing is certain. Even if the company undergoes a radical transformation in the coming years, that change is unlikely to come from within. The algorithm that serves as Facebook’s beating heart is too powerful and too lucrative. And the platform is built upon a fundamental, possibly irreconcilable dichotomy: its purposed mission to advance society by connecting people while also profiting off them. It is Facebook’s dilemma and its ugly truth.”[i]

 

What the book chronicles is exactly the above: As Facebook got bigger (by acquisitions and users) and became more relevant in people’s lives, thus more irresistible for advertisers’ money, the more it became a platform not only for people wanting to say hi to Grandma, but people wanting to overthrow governments, influence elections, and spread misinformation easily to the world’s biggest audience. Of course, the known examples are Trump’s use of the platform before and after his election and defeat (he was at one point Facebook’s biggest advertiser), the Cambridge Analytica scandal, and the insurrection of January 6. How to balance hate being spread on its pages with “free speech” (Oliver Wendell Holmes may be doing spins in his grave) and pissing off users when you take a stand for or against something that may influence their lives (Trump’s BS) or even get people killed (Myanmar), which might lead to loss of users and revenue?

 

Facebook’s “Battle for Domination” becomes a battle to walk the tightrope between revenue and principle- in the public and government’s eyes, with revenue the clear and simple goal. Frenkel and Kang leave no doubt that, to Zuckerberg, the algorithm was and is “Company over Country.”[ii]

 

Fast forward to today, July 27, 2021. Two recent news articles about Facebook reveal the road that Facebook has chosen to walk, at least up to now. The first is, as reported by Reuters, that Facebook will restrict targeting of users under 18 according to their behavior on other sites (they still can be targeted, but only based on their activity on Facebook/Instagram/Messenger).[iii]

 

The other is an article in the New York Times by the same Cecilia Kang entitled, “The F.T.C. asks for an extension to refile its Facebook antitrust suit,” which was thrown out by the District Court in D.C.  and given 30 days to refile (good luck with finding something in the next 30 days that they didn’t find before).[iv]

 

For those who are thinking (again) that altruism and social responsibility has become the mantra at Facebook over moneymaking, ask yourself if Facebook is doing this because they want to protect our children, or because they want to protect themselves? The same question must be asked about Apple’s IOS 14.5 (which gives the users the right to opt out of companies selling their info to other companies) and Google’s new Privacy Policy. 

 

And, I believe the answer to this question for three of Scott Galloway’s Four Horsemen[v] is the same: when they have more to lose than gain, only then will they consider compromising any activity that contributes to revenue.

 

Why can they get away with this and why does their business keep growing significantly (Facebook’s share price has increased 61.44% in the last year[vi])? The simple answer is the same as for every other company- Their Moat.

 

For those of you who are not familiar with the term, an economic Moat is, put simply, a barrier to entry for any threats to the enterprise- be it another company, economic issues, governments or Pandemics. The wider the Moat, the safer the company is to continue its mission and prosper. 

 

Morningstar Investments, the famous investment research company, defines four types of Moats:

 

1.    Switching Costs- The financial and/or emotional cost of switching from one brand/product/service to another

2.    Intangible Assets- Brand image, patents, trade secrets, customer perception

3.     Cost Advantage- Based on:

1.    Economies of scale- eg., Amazon Prime-wide

2.    Process advantage- Be cheaper eg., Payless Shoe Stores, Kmart-narrower

4.    Network Effect- Value grows as people use the brand or service more and more-self perpetuating[vii]

 

Let’s look at each as regards Facebook:

 

1.    Switching Costs- Sure, you can switch social media apps, but a. you want to be where everyone is, is the soul of social media, and b. If you did switch from Facebook, your likely choice would be Instagram, which is—Facebook. Yes, you can go TikTok or Reddit or Snapchat but in the 6+ hours the average teenager spends on the internet, which social media app is where the action is? And what would it take, if it were at all possible, for the invaders of the moat to be a real alternative to Facebook? Switching costs are both financial and functional. And advertisers know that.

2.    Intangible Assets- Facebook is a brand that has withstood governmental attacks, hackers, invaders and their own greed and inability to respond in a timely and correct manner-but it is still—Facebook. And advertisers know that.

3.    Economies of Scale- In this case, Scale above all is reach. Half the world outside of China is on Facebook. And advertisers know that.

4.    Network Effect- Why Facebook keeps getting bigger and bigger. The huge trove of data feeds the monster and it perpetuates itself. And advertisers know that.

 

Is there anything that can readjust the balance between social responsibility, actually protecting users from hate and misinformation, and the constant flood of increased revenue without overbearing government control, which would taint the experience? 

 

Well, as Frenkel and Kang have aptly stated above, if there is an answer, nobody has found it yet. Even if government is successful in breaking up the company, it will be broken into pieces so big that they may be able to regenerate to an even bigger tomorrow. But yet, given the absolute fact that our children are digital-native and are influenced more and more by what they see and hear on social media, where they may spend most of their day, it is a problem that must be solved for the good of society. Will today’s teenagers and young people demand more social responsibility of companies they deal with? I have polled every class I teach about this, and they all say yes. 

 

But, the question really is, are they the influencers or the influenced?

 

And Facebook, with the rest of the Four Horsemen, goes on.

 

Author’s Note: An Ugly Truth is a well-written, totally engaging, at times stomach-turning, book that everyone should read, if they live anywhere in this world.

 

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[i] Sheera Frenkel and Cecilia Kang, “An Ugly Truth: Inside Facebook’s Battle for Domination,” (New York: HarperCollins, 2021), p. 300.

[ii] Ibid., p. 117.

[iii] Reuters.com, “Facebook will restrict ad targeting of under-18s,” https://www.reuters.com/article/us-facebook-advertising/facebook-will-restrict-ad-targeting-of-under-18s-idUSKBN2EX1OS

[iv] NewYorkTimes.com, “The F.T.C. asks for an extension to refile its Facebook antitrust suit,” https://www.nytimes.com/2021/07/23/technology/ftc-facebook-antitrust-lawsuit.html

[v] Scott Galloway, “The Four: The hidden DNA of Amazon, Apple, Facebook and Google,” (New York: Portfolio/Penguin, 2017) p. 2. 

[vi] Seekingalpha.com, https://seekingalpha.com/symbol/FB

[vii] Morningstar.com, “Types of economic moats,” http://news.morningstar.com/classroom2/course.asp?docId=144046&page=5