According to the British Competition and Markets Authority (CMA), Facebook accounts for 75 percent of the UK’s social media market. Over the past 10 years, only three companies succeeded in obtaining at least a 5 percent market share of social media users’ time: Instagram (which Facebook bought), WhatsApp (which Facebook bought) and Snapchat (which Facebook tried and failed to buy).

Editor’s note: Following an extensive study, the UK’s Competition and Markets Authority (CMA) expressed concerns in December that Google and Facebook have grown so “large and have such extensive access to data that potential rivals can no longer compete on equal terms.”

This is the third post in a series on the status of competition in the search, social media, and digital advertising markets. It explores the main preliminary findings of a large market study conducted by the British Competition and Markets Authority (CMA) and as well as a December 2019 antitrust condemnation of Google in France for abusing its dominant position in the French market for digital ads. Previous installments can be found here.

The British Competition and Markets Authority (CMA) found that Facebook controls the UK social media market. Initially, the agency concluded that Facebook’s services do not compete directly with Google’s YouTube for user attention because YouTube is more focused on the distribution of audiovisual content, whereas Facebook is focused on social media and communication. Facebook accounts for 75 percent of the UK’s social media market—more than five times that of its closest competitor, Snapchat. As mentioned in the first post, the CMA also estimated that Facebook’s average return on capital in social media is around 51 percent, well above its estimated cost of capital of 9 percent.

The CMA stressed the role of acquisitions and unilateral behavior in maintaining Facebook’s dominance. Over the past 10 years, only three companies succeeded in obtaining at least a 5 percent market share of user’s time: Instagram (which Facebook bought), WhatsApp (which Facebook bought), and Snapchat (which Facebook tried and failed to buy and has been actively demoting ever since).

For the CMA, other platforms such as Snapchat, TikTok, or Pinterest offer only limited fringe competition to and the Facebook family of products, as shown by the fact that almost all users that access Snapchat also access Facebook (the opposite not being true). The conclusions of the agency are that the evidence gathered “suggests that Facebook has significant market power in social media” as none of the other platforms active in the UK’s social media market “appear to impose a strong competitive constraint on”

The CMA also stressed how Facebook’s privileged position is protected by very high barriers to entry. First, social media markets are characterized by strong direct and indirect network effects that create effective consumer lock-in, as consumers want to be in the network where their friends are and app developers, content developers, and advertisers want to be in the network where consumers are.

Second, Facebook has privileged access to consumer data through its extensive data gathering practices, both in its own domains and in third-party websites. Facebook can then use this data to improve its products and to deliver better-targeted ads, increasing its profitability. Finally, Facebook retains tight control over its network—something that gives it the ability to degrade third-party access to its users and, by hindering multi-homing, materially impact the competition offered by different social media platforms.

Importantly, the CMA also stresses how even though Facebook did overtake MySpace (a social network considered to be dominant) in 2004, MySpace peaked around 100 million users. The company would not have achieved anything close to Facebook’s userbase and worldwide dominance, nor the stability of its dominant position for over a decade. For the CMA, MySpace’s failure only demonstrates how the market had not yet tipped in favor of a single, dominant incumbent. The CMA also stresses how Google+’s failure in 2011 shows how even highly sophisticated companies that control a lot of user data can no longer compete with Facebook head-on.

For the CMA, the little relevant entry the market has seen over the past years (e.g. Snapchat, TikTok, etc.) has been mostly on a fringe of differentiated products that pose but for a small competitive threat to Facebook. In particular, Facebook’s incumbency advantage and its capacity to quickly copy competitors’ innovations further hinder entry, as shown by Facebook’s Instagram quickly overtaking Snapchat in the “stories” functionality despite being a later mover

The CMA also discusses how Facebook has used its control over application program interfaces (APIs) and platform interoperability to deprecate potential competitors. Facebook’s blocking of Twitter’s Vine from using the “find contacts” API to expand its userbase—a move Facebook’s CEO Mark Zuckerberg personally approved—would be an example of these deprecating practices.

Finally, the CMA report stresses how user data and access to user-generated content are crucial to increase the personalization of the “news feed” and of ads. Lack of control over user data prevents new entrants from offering equally good social media platforms or to adequately monetize their products, another chicken-and-egg problem.

Somewhat similarly to what it found about Google, the CMA’s final conclusion is that Facebook’s dominance of the market for social media networks in the UK may harm consumers through diminished innovation, lower quality, excessive data collection, and higher prices as companies pass-through increases in online advertising costs.

Filippo Maria Lancieri is a fellow at the Stigler Center for the Study of the Economy and the State. He is also a JSD Candidate at The University of Chicago Law School.

The ProMarket blog is dedicated to discussing how competition tends to be subverted by special interests. The posts represent the opinions of their writers, not necessarily those of the University of Chicago, the Booth School of Business, or its faculty. For more information, please visit ProMarket Blog Policy.