All Broken Up About Facebook

continues to be under intense scrutiny. As a quick overview of why that is, we look at scandals ranging from data breaches, interference from various parties to affect stuff like political elections using Facebook as a platform, and the company's own history of questionable policies, including one that allowed Facebook employees to essentially look at anything they wanted to among users because there were thousands of passwords saved in plaint text,

which is not good. But there are also talks about the company perhaps being too powerful in general as it consolidates massive individual services like WhatsApp, Instagram, and Facebook itself into a more unified, dominant platform. That's brought about conversations toying with the idea of breaking Facebook up into smaller companies, conversations that have been happening for a while now. Today I want to talk about that particular tactic, how Facebook

got there and what might happen next? And since I record these shows in advance of their publication, by the time you hear this, more may have developed in that story. So let's start off with the concept of monopolies and the government's power to break them up. The definition of a monopoly is a situation where one producer or group of producers acting together controls the market supply of a

good or service. So, for example, if you were the only person in the world who could provide internet broadband service to customers, you would be in control of a monopoly. And in a monopoly, there is no competition in the market for that good or service, and that means you could set all the rules. You could set the price and demand people meet that price. There'll be no other market pressures for you to do Otherwise. You could also

restrict the output on purpose to increase the demand. You would have very little reason to worry about your customers at all, because your customers would literally have no one else to turn to if they were dissatisfied. They either deal with you or they go without. And as I mentioned, a monopoly can actually consist of more than one entity.

If the collected entities are all working together, you could have what amounts to a cabal of companies that are all agreeing on things like how much they will charge for their products or services, where they will operate within a region, and how much are their supply they will put on the market. That would allow the group to

continue to dictate price and supply. You can also have similar situations in which only a couple of companies dominate the market, but aren't working directly with one another to control everything all the time. They may actually compete against each other in limited fashion, but again, this is a limited competition as there are only two companies dominating the industry. This is what we call a duopoly for consumers. A duopoly could be slightly better than a monopoly, but it's

rarely much better. From there, you can go to an oligopoly. Technically, a duopoly is the smallest type of oligopoly. This is any situation which a small number of large entities dominate a particular market. In the United States, you could argue that internet service providers have or at least at certain times, have behaved as an oligopoly. Ideally, for consumers, every given market will have many companies in it, all competing for business.

This helps ensure that an individual consumer can seek out a solution that best meets their needs and means. As a consumer, you can look at all the offerings available in your area and way different factors such as the quality of the goods and services, the cost you'll have to meet, how easy it is to get hold of them, the various reputations of the different competing companies, and so on. But with a douopoly, your options are limited to two.

With a monopoly, you have no options at all. Generally speaking, governments tend to protect the public against monopolies. However, there are times when a government might actually create a monopoly for the purposes of scaling the business up to meet population demands, such as with utilities. Power utilities in the

United States are dominated by near monopolies certain markets. The reason for that is largely because it is an incredibly expensive and difficult thing to build out and maintain a power utility, and supplying electricity is an incredibly important task. These companies typically face state level regulations to make sure they aren't gouging customers with unreasonable price hikes, or they might do so for the purposes of national security, such as when the United States Navy attempted to create a

monopoly in radio broadcasting during World War One. The Navy was told that they weren't supposed to do that. By the way, that effort ultimately fell short, and the Navy had to hand over the assets to civilian companies. General Electric would form the Radio Corporation of America for that very purpose, And while our c A wasn't a total monopoly, it was the dominant corporation in the early days of

radio broadcasting post World War One. So there have been instances in which a monopoly was seen as useful or even necessary to achieve certain ends, but in general the US government is wary of them. The state of affairs began in the late eighteen hundreds as the Industrial Revolution was changing commerce dramatically. You might remember from my episodes on the Industrial Revolution how things like steam engines and

railroad systems were transforming the world. They were also transforming business. Successful endeavors would buy up smaller enterprises to increase their reach. This led to a situation where fewer and fewer companies were holding more and more of the market. A U S Senator named John Sherman foresaw how this could develop into a real problem, and then famously compared the situation

to that of a monarchy. He said that the citizens of the United States had already decided that they didn't want a king to rule over them politically, and so they should be just as resistant to a king like company ruling over some necessary market. Sherman's name would attached to an important piece of legislation in eighteen ninety, the Sherman Antitrust Act, which established laws that made it illegal for anyone to try and form a monopoly or to

restrict trade in any given market. Should the U. S. Government suspect any company of doing so, the Justice Department has the authority to take that company to federal court, and from there the government can do many things, such as create regulations that the company must abide by, or even order the company to be broken up into smaller entities that presumably would compete against one another. The Sherman Antitrust Act was just the first federal legislation about how

to deal with monopolies and anti competitive practices. Other laws such as the Clayton Act, the Federal Trade Commission Act, and a couple of others would round out the policy. A trust, by the way, in this sense, is essentially a business that is operating as an effective monopoly, or one that might be a true monopoly. There have been some pretty famous antitrust lawsuits in the United States that

led to the breakup of big companies. One of those was John D. Rockefeller's Standard Oil Company in the early nineteen hundreds. While there were numerous oil companies in the US at the time, Rockefeller used his leverage to broker favorable deals that discouraged competition wherever Standard Oil was in operation. The US government swooped in and took Standard Oil to court, ultimately breaking the company up into more than thirty smaller oil companies, many of which would merge with one another

and grow to become ginormous conglomerates. So today those include Chevron, Exxon, then Mobile, when eventually those two would merge back together to become ex On, Mobile and Emico. Much more recently was the antitrust case against A T and T in the nineteen seventies and early nineteen eighties. The details of the case are complicated, and maybe I should do a full episode about what happened in that case. In the future.

But at the heart of the matter was that the US government believed A. T and T had been using its powerful market position to suppress competition. The government's goal was to break A. T and T up. The company had several operating companies called Regional Bell Operating Companies or r B o c s that the government wanted to see split off from A. T and T. The government also wanted A. T and T to divest itself of

its manufacturing subsidiary of Western Electric. The reason they are called Bell operating companies is that they and A T and T itself traced their history back to Alexander Graham Bell, inventor of the telephone. They all grew out of the Bell Telephone comp Any, which evolved into the American Telephone and Telegraph Company, or A T and T. This wasn't the first time the government had concerns about the company.

Back in nineteen forty nine, the Justice Department had filed a suit against A. T and T, stating the company was violating the Sherman Anti Trust Act and that it should spin off Western Electric. That lawsuit would eventually end in a consent decree signed by A. T and T. Executives in nineteen fifty six. Then the company held on

to a Western Electric. Ultimately, A T and T settled its case out of court, agreeing to divest itself of the Bell operating companies creating these seven so called baby Bells. Since then, most of those companies have merged with one another, with four of them back under the corporate umbrella of A. T and T. So there you go. When we come back. I have one other antitrust case I think it is important to discuss before getting back to Facebook. But first

let's take a quick break. So in an episode about antitrust cases and technology, I'd be remiss not to talk about Microsoft. This case took place in the late nineties, nineties and early two thousand's, and at the heart of it was the allegation that Microsoft was using its power as the world's largest software company to pressure PC manufacturers

to conform to Microsoft's desires. This would be like an oil company demanding that all car manufacturers must make their cars at a certain level of fuel inefficiency in order to sell more fuel, but it went a bit deeper than that. The government also stated that Microsoft was pressuring PC manufacturers to make it difficult to uninstall Microsoft's own web browser, Internet Explorer, and make it harder to install

a competing browser, namely Netscape. The government stated that Microsoft had so tightly integrated the Windows operating system with the Internet Explorer browser that it was effectively muscling out any competing browser, and because at that time, Windows based PCs were dominating the home computer market and meant that consumers would have very little choice. The trial went all the

way to a decision. That initial decision was against Microsoft, with an order to break the company up into two entities, one of which would create the Windows operating system and the other would oversee other software. This decision was overturned on appeal, partly due to the sitting judge having given interviews about the case while it was still ongoing. The courts decided to consider the case again under an adjusted scope. At that point, Microsoft proposed a settlement for the case,

which the government agreed to. Microsoft would be allowed to operate as a single company. In return, Microsoft would abide by certain regulations to ensure competitiveness in the market was still possible. All right, so let's get back to Facebook. Who thinks Facebook needs to be broken up? Now? You can? You can put down your hands. It's a rhetorical question. One of those people is Chris Hughes. And who is he.

He's a co founder of Facebook. Yikes. Now, to be clear, Hughes doesn't work at Facebook, and he hasn't worked there for many years. But when the founder of a company says that, yeah, maybe this company needs to be split up, that's something people tend to pay attention to. Hughes laid out his thoughts in a piece published in The New York Times on May nine, two thousand nineteen. I'm recording this episode on May two thousand nineteen, so the news

is pretty fresh. Hughes. His assertion is that Mark Zuckerberg, whom he considers a friend, has far too much power, and the way he lays it out is pretty convincing. I'll quote a paragraph from the New York Times piece. Quote, Mark's influence is staggering, far beyond that of anyone else in the private sector or in government. He controls three core communications platforms, Facebook, Instagram, and WhatsApp that billions of people use every day. Facebook's board works more like an

advisory committee than an overseer. Because Mark controls around sixty percent of voting shares. Mark alone can decide how to configure Facebook's algorithms to determine what people see in their news feeds, what privacy settings they can use, and even which messages get delivered. He sets the rules for how to distinguish violent and incendiary speech from the merely offensive, and he can choose to shut down a competitor by acquiring, blocking,

or copying it. End quote. Okay, so let's take a look at how this came to pass, and then examined Hughes's proposal to split up Facebook. Now, I've done episodes about the history of Facebook before, so this is not going to be an exhaustive treatment. The social media site got its start back in two thousand four, when the co founders, including Mark Zuckerberg, began building out a basic

social media platform aimed at college students at Harvard. It had a particular focus on dating, but rapidly grew beyond that to involve all sorts of social connections, and originally only Harvard students had access to it, but it expanded to other university campuses. It remained only open to college students until the fall of two thousand six, when the site opened up its membership to anyone. That was the same time that Facebook first introduced the news feed, which

we take for granted now. This is the list of updates from your various friends, and it would be part of what Hughes includes in his arguments for breaking up the company. More on that later. Facebook's popularity was on the rise, and it was in competition with several other social networks. I talked about them recently. One big one was my Space, which had been purchased by Rupert Murdock's company,

News Corps for around half a billion dollars. That gave a lot of folks over at Facebook the confidence that their company was worth even more than MySpace, as Facebook's trajectory was in growth and my Space was already starting to hit some hard barriers. During this time, Facebook was forced to innovate to set itself apart from other social networks. It needed to have the features that users would find most compelling. Competition was good, as it meant that the

company was constantly improving. Sometimes this was in true innovation, and other times it was in finding a way to replicate what someone else was already doing. Zuckerberg led his company to turn down an acquisition offer from Yahoo to the tune of one billion dollars. In two thousand and seven, the company would launch its mobile platform and make available a platform for third party developers to create apps that

could live on top of the Facebook experience. It wasn't until two thousand nine that Facebook reported that it had become cash flow positive. The company began acquiring other companies. It had previously acquired a company called connect You as part of a lawsuit settlement in it bought a photo sharing service called Divvy Shot. Facebook would release Facebook Messenger for Android and iOS devices in two thousand eleven, and then it made the first of its really huge acquisitions.

In two thousand and twelve, Facebook paid and astonishing one billion dollars to acquire a rival social networking service, Instagram. In case you're not familiar with Instagram, it's a mobile photo sharing app. It's kind of like Facebook without all the words. It is focused almost exclusively on sharing photos and short videos among users. It's a popular platform and there are many quote unquote influencers who make their living off of Instagram in various ways, such as hosting sponsored

posts on your Instagram account. It's easier set than done, though, because it requires you get a nice, big following of folks who are engaged with your content first, and those two factors, the number of followers and their engagement with your posts, are what really matter. That's why some Instagram influencers urged their users to comment on posts or even try to spell out a long word in an unbroken string of comments, each with a single letter in them.

Some like me argue that this isn't really meaningful engagement, but it is a great way to inflate the number of comments of post gets anyway. Influencer tactics aside, Instagram was killing it in an area where Facebook was still having issues, namely in the mobile world, and that presented a huge challenge to Facebook. Ever, since consumer smartphones had established a real market in the wake of the iPhones release, more people were using mobile devices like phones and tablets

to access the web. Computer usage didn't exactly tank, but it was clear that the mobile platform was going to play an increasingly significant role in how people interact with content on the Internet, and Facebook's mobile platform had not been performing as well as the company wanted. Instagram had really nailed down an experience that resonated with mobile users, so rather than try to build a tool to go head to head with Instagram or even copy what they

did outright, Facebook acquired its rival. It was a smart move on the part of Facebook. Instagram wasn't exactly on the same level. In October of two thousand twelve, Zuckerberg announced that Facebook had hit the milestone of one billion users. Instagram only boasted twenty seven million. But the Instagram users were on Instagram more than mobile Facebook users were on Facebook,

and the writing was on the wall. Facebook began to integrate many of Instagram's features into its own services, while also pushing to have more Facebook features incorporated into Instagram. This led to an environment that ultimately convinced Instagram's founders to jump ship, frustrated that their work was being shaped by someone else. So that purchase was a big one, but it would be dwarfed by the acquisition of WhatsApp

in two thousand and fourteen. For that service, Facebook would fork over an astounding nineteen billion dollars and WhatsApp is one of those services that a lot of folks in the United States are unfamiliar with, as it didn't have a lot of penetration over here, so that made the

whole thing even more of a head scratcher. I remember when it happened, a lot of folks were saying they spent nearly twenty billion dollars to buy who Now For those who aren't familiar, and I include myself in that category, as I've never used the service WhatsApp as a messaging service. It's tied to mobile phones, though you can use it on a PC if the associated phone is also connected

to the Internet. It was created by a couple of former Yahoo employees, and yeah, I find it kind of funny that a couple of folks who worked for a company that tried to buy Facebook would ultimately find their startup bought by Facebook later on. Because it works over the Internet, it doesn't follow the same protocols as a text message, and so for people who have a limit on how many texts they can send per month before

being charged extra, it's a valuable service. Rather than sending SMS messages, you use the Internet and sidestep those restrictions. In the earliest pitch for the service, users would post a status that would populate out to everyone in that users social network, essentially the friends who were also using that service. This made it sort of like Twitter in a way, except it wasn't doing it through SMS. This

quickly evolved into more of an instant messengers service. He used phone numbers as the log in so there was no need for user names or passwords. If you were logging in on the phone, you were good to go. You didn't even have to give WhatsApp other information about yourself, like your gender, age, or address. It became a paid for service in which users would fork over the princely sum of a shiny dollar per year for a subscription, and the first year was free. This helped cover verification

costs the company was incurring while establishing accounts. The user base grew, and by it was around two hundred million users, and then two thousand fourteen happened. More on that in just a second, but first let's take another quick break. So Facebook comes in and slams down this guard gantuan deal for WhatsApp nineteen point three billion dollars for an app that in two thousand fifteen would become the most popular messaging app in the world with six hundred million users.

So why was Facebook so gung ho on getting WhatsApp? According to analysts, WhatsApp had only earned twenty million dollars in two thousand thirteen, So how the heck did we get to nineteen billion for the offer? Well, for one thing, while the company wasn't raking in mountains of cash compared to a goliath like Facebook, it was the fastest growing

company in terms of users in all of history. That's enough right there to make Zuckerberg take notice, as the numbers of users of his service helped define his company's value. Another factor is that whenever people were using WhatsApp, they weren't using Facebook. There's a limitation of time at play here, and Facebook wants as much of a user's time as

they can get. The more time a user spends on Facebook services, the more information Facebook can gather to serve up targeted ads, and the more money Facebook can get from advertisers. As I've said many times, and I'm not the first person to say this, it's Facebook's users who are the actual product of the company. Or rather, it's

our time and our information and our attention. Facebook can say to an advertiser, Hey, because of these acquisitions, the average user is spending something like two hours out of every day on one of our services. Don't you want your ads to play on that kind of platform. WhatsApp was outpacing Facebook messenger engagement time, and so like Instagram, Facebook needed to figure out how to meet this challenge, and the answer was to buy the threat and make

it part of the company. And just like with Instagram, Facebook would make changes to WhatsApp and place demands on the service that would lead to its founders leaving the company. To bring this back to Facebook co founder Chris Hughes, he asserts that it was a mistake for the Federal Trade Commission or FTC to approve both acquisitions. Perhaps at the time it was understandable as Instagram was still relatively small and WhatsApps revenues were relatively modest compared to Facebook.

But by becoming part of the large your company, Facebook was able to reduce the number of competitors vying for users time and attention. Now Facebook controls three powerful platforms that are slowly merging together into a more integrated experience. This, says Hughes, gives Suckerberg unprecedented control over communication channels. Facebook is in such a dominant position that faces no competitive market pressures to change course, meaning the only thing dictating

Facebook's actions is Facebook itself. Further, when I say Facebook, I really mean Zuckerberg. Remember, Hugh said, Zuckerberg controls about sixty percent of voting shares in the company, so he has majority vote in all matters. He can't even be voted off the board of directors. Because he controls the majority vote, he can ultimately decide what the news feed algorithm favors or dismisses. He decides what you see on Facebook,

not you. And as Hugh's points out, the company has intervened in a few cases to delete messages sent between users. The instance, Hughes sites happened in two thousand seventeen in Myanmar, in which there were cases of Facebook users living there who are advocating for the extermination of the Rohingya people calling for Gina side. Zuckerberg made the decision to have all those messages deleted after they were detected, and it's

hard to argue against that. The consequences of allowing those messages to go through could have led to the death of countless people. But it's also setting up precedent. Zuckerberg actually has the power to determine which messages are allowable. There's no government oversight on his capabilities, and so he could do this all on his own, and there may be a case where the ethical decision isn't so clearly distinguished.

Hugh says that Facebook, Instagram, and WhatsApp should be split into three companies again, and each have regulations that restrict

their abilities to make any acquisitions for several years. Stockholders would retain shares in each of the companies, though the heads of each company would likely be required to divest their management shares in the other two, and Hugh's argues that this would allow for more competition in the space, leading to greater innovation and growth, thus benefiting shareholders down the line. Hughes isn't alone in wanting to see this happen.

There are various organizations like the Electronic Privacy Information Center that feel much the same, as well as lawmakers such as Senator Elizabeth Warren who have called for this kind of action. Facebook has proposed legislators come up with regulations for the company regarding things like privacy and UH and competitiveness, but Hugh's argues that this is not nearly going far enough to counter the potential threat the company poses to

communication and competition. Other companies like Google and Amazon are watching all this very closely, as both of those have also built empires on practices not too dissimilar from Facebook's. In fact, in Warren's case, we may see actions that will lead to numerous tech giants having to spend off part of their companies by federal law, or at least being taken to court for it. Should it happen, well,

in my opinion, I think it should. I think Facebook needs to have some checks and balances in place to prevent it from becoming the de facto arbiter of all communications. Anti competitive practices are harmful, and Facebook's practice of beatum or buy them means that anyone with a compelling idea has little incentive to pursue it unless it's with the hope that Facebook will buy them out of the idea

and they can cash out. Otherwise, you might think, well, I might make this really cool social network king site, but then Facebook is going to pay attention, and then they're gonna copy me, and then they're gonna run me out and I won't have any business at all. Regulations are also necessary, but I feel that Hughes is right on the money. That's not enough to make sure the company behaves in a responsible and accountable way. So will

it happen that I'm not so sure about. Since the nineteen eighties, there's been a shift that has been more favorable toward big business, leading to the establishment of mega corporations, consolidation, and a reduction in competitiveness across numerous markets. It will

take a lot of willpower to reverse that momentum. It will surprise me if the US government takes steps to break up Facebook, not to mention Google and Amazon, but it would be a welcome surprise, as I think it would ultimately be a better outcome for the rest of us. But that doesn't necessarily mean it will actually happen. What do you guys think? Do you feel that Facebook has read to the point where we need to have this concern? Are you worried that perhaps they have too much power

over the way we communicate with one another? The real issue for me is that if you feel that way, you have few alternatives you can turn to to use instead of Facebook. Where do you go? That's where everybody is, and no one else can get a platform to get much traction because they're going up against a giant that can wipe them out pretty easily. It's a tricky thing,

but I'm curious what you guys think. You can let me know, or you can send me any comments or questions you might have to the email address tech stuff at how stuff works dot com. You can dropped by our website that's tech stuff podcast dot com. There you're going to find an archive to all of our older episodes.

You'll find links to our presence on social media, and you will also find a link to our online store, where every purchase you make goes to help the show and we rately appreciate it, and I will talk to you again really soon. Y text Stuff is a production of I Heart Radio's How Stuff Works. For more podcasts from I heart Radio, visit the i heart Radio app, Apple Podcasts, or wherever you listen to your favorite shows.