The evidence shows that Google & Facebook — by far the world’s most dominant Internet gatekeepers – are not an Internet advertising “duopoly,” but worse, two separate Internet advertising monopoly platforms, one in search advertising and another in social media advertising.
That’s because search and social media advertising are not competitive substitutes for each other, but are proving to be synergistic advertising complements to each other in company marketing campaigns, because generally search advertising excels at lead generation and local business visibility while social media advertising generally excels at building brand awareness and interactivity with consumers.
Tellingly, after beginning to directly compete in social in 2011 and in search in 2013, Google and Facebook both abruptly, coincidentally, and effectively stopped competing directly with each other in both the search and social media markets in 2014.
Apparently, they either jointly agreed in 2014 to divide up the marketplace and no longer directly compete with each other to maximize their exceptional mobile growth and profitability; or they concluded independently — from their initial directly competitive forays into the other’s core markets — that the other commanded unbeatable monopoly network effects, so not directly competing with each other would maximize their exceptional mobile growth and profitability.
This profound lack of competition among the world’s two most dominant Internet edge platforms is highly relevant to: the EU antitrust charges against Google in search, mobile, and advertising, and the EU’s privacy investigations into Google and Facebook; antitrust authorities’ antitrust investigations of Google and these markets in the U.S. and around the world; and also the FCC’s core competitive assumptions underlying its Open Internet Order, and its proposed Title II ISP privacy rules and Set-Top Box unbundling rules.
I. Google & Facebook’s Exceptional Market Power
Google-YouTube and Facebook are the #1 and #2 Internet platforms in the world in terms of monthly visitors and page views per Alexa.
Google and Facebook are the only Internet platforms with the market power to rapidly grow revenues, when most all large capitalization companies are producing ~flat to declining overall revenues (excluding Amazon, and the China market leaders).
Google has 80-90+% market shares in multiple markets and Facebook is dominant in the social media market because its only real consumer “competitor” is Twitter, and relative to Twitter, Facebook has ten times the revenues and 3 times the growth rate.
Google commands the following users respectively: Search ~2b; YouTube >1.4b; >Maps ~1.3b; >Gmail ~1b; Play > 1b; and Chrome >1b. Last quarter, Google grew its ~advertising revenues at a fast ~25% rate in constant currency terms on a large ~$80b annual revenue base while touting mobile as its key revenue growth driver.
Facebook commands the following users respectively: Social Networking 1.7b; WhatsApp 1b; Messenger 1b; and Instagram .5b. Last quarter, Facebook grew its advertising revenues at a very fast 59% rate on a ~$20b annual revenue base, also touting mobile as its key revenue growth driver.
Google and Facebook now have an extraordinary market capitalization of $0.9 trillion, driven in large part because expectations that Google and Facebook do, and will continue to, dominate mobile Internet ad spending, which is projected to comprise 88% of worldwide ad spending growth by medium per Zenith Optimedia projections.
72% of global online advertising (excluding China) passes through Google and Facebook’s advertising platforms, and is estimated to grow to 87% share by 2020 per the Financial Times.
“Google + Facebook = 76% (& rising) share of Internet Advertising Growth, USA” per Mary Meeker’s influential annual Internet Trends report (p. 44).
II. In Internet advertising Google & Facebook are not direct competitors but complements
While Google and Facebook both mediate two-sided markets between Internet users and companies who seek to market to Internet users, they intermediate two very different core markets: Google search mediates the world’s organized information and Facebook mediates the world’s social media sharing.
It is effectively a settled antitrust market definition that search and social media are separate markets, because antitrust authorities have repeatedly concluded search advertising is a separate market from other forms of Internet advertising for over nine years. (See: 2007 FTC Google-DoubleClick; 2008 DOJ Google-Yahoo; 2010 DOJ Microsoft-Yahoo; 2010 Google-AdMob; 2011 DOJ Google ITA; 2012 FTC Google staff report; and 2016 EU Search Advertising Statement of Objections.)
Most recently, the EU’s Google advertising antitrust charges defined Google’s advertising markets of dominance as: “online search advertising” and “search advertising intermediation.” Thus, if the EU were to conclude Facebook was dominant in a defined advertising market in the future, and if they were logically consistent with their Google advertising market definitions, Facebook likely would be dominant in online social advertising and social advertising intermediation.
Thus those that describe Google and Facebook as an Internet advertising “duopoly” are incorrect.
For antitrust purposes, Google and Facebook more accurately are not direct competitors because search and social media advertising are not competitive substitutes of each other, but synergistic advertising complements to each other in company marketing campaigns, because search advertising generally excels at lead generation and local business visibility while social media advertising generally excels at building brand awareness and interactivity with consumers.
III. Google & Facebook Became Direct Competitors & then Coincidentally Stopped Competing
Consider this suspicious timeline of major Google and Facebook direct competitive actions.
In April of 2011, Google Larry Page became CEO of Google again, and his first major initiative in June 2011 was to launch Google+, Google’s comprehensive social sharing alternative to Facebook.
Reportedly, Facebook CEO Zuckerberg took the Google+ announcement “as an existential threat” and “he declared a companywide “lockdown” to respond.
The author of a new book on Facebook described that day by explaining “that Facebook employees received an e-mail the day Google Plus launched, instructing employees to meet up for an announcement where Zuckerberg explained to Facebook’s employees that they were engaged in a zero-sum contest and challenged his team to ensure victory.”
Bottom-line: Facebook’s CEO Mark Zuckerberg viewed Google+ to be a very powerful direct competitor to Facebook.
By December 2012, Google boasted on its blog that: “Today Google+ is the fastest growing network thingy ever. More than 500 million people have upgraded, 235 million are active across Google.”
One month later in January of 2013, Facebook directly and competitively responded to Google with launching in beta a search engine offering called Graph Search that searched Facebook’s corpus of a trillion posts and also integrated Microsoft Bing’s search capability into Facebook’s Graph Search.
This Facebook-Bing search offering was a direct competitor to Google Search and was rolled out to all U.S. Facebook users by the end of 2013.
At the end of 2013, Google Chairman Eric Schmidt admitted missing the social wave was his fault: “The biggest mistake that I made was not anticipating the rise of the social media phenomenon.” This suggests he continued to believe Facebook was a direct competitive threat to Google.
In February 2014, Facebook paid $19b to buy WhatsApp, a cross-platform mobile messaging app with ~450m users.
The Telegraph’s reporting of the purchase explained that Google CEO Larry Page offered WhatsApp more than the Facebook $19b offer and said that WhatsApp was a “big threat to Facebook.” WhatsApp founders reportedly turned down Google’s higher offer because they thought Google only wanted to keep WhatsApp out of Facebook’s hands and because Google did not offer WhatsApp a board seat like Facebook did.
This indicates Google still considered Facebook to be a direct competitive threat to Google at this time.
Then something big apparently changed behind the scenes (either jointly or independently) that had Google decide to effectively exit Facebook’s social media market as a competitor in April of 2014 and Facebook to decide to effectively exit Google’s search market as a competitor later in 2014.
In April 2014, Google’s head of Google+, Vic Gundotra, departed Google suddenly as Google ended the forced integration of Google+ into all other Google products and services and as Google moved one thousand Google+ employees into mobile roles at Google.
In December 2014, Facebook then quietly dropped its Graph Search alternative offered by Bing per Reuters.
In sum, Google and Facebook went from being intense direct competitors to each other by early 2014, to quietly stopping direct competition with each other by the end of 2014, by Google internalizing Google+ and by Facebook internalizing search to be only within Facebook (and not as a Bing search offering in direction competition with Google search.)
Since Google and Facebook stopped their substantial efforts to compete directly with the other, and since each became de facto internet advertising monopolies in the complementary markets of search advertising and social media advertising, they have jointly enjoyed monopoly-scale share gains and profits in the Internet mobile space.
Is it a coincidence that:
- Google and Facebook now dominate most every facet of the mobile Internet: search, operating system, app store, apps, usage, advertising, etc.?
- Facebook apps comprised 62% of all app downloads in May 2016 (per Sensor Tower Data)?
- “Giants of the app store, like Facebook, rake in 94% of total app store revenues” (per July 2016 BI reports)?
- “Online news sites get 80% of their readers from two sources: Facebook and Google” (per Statista’s June 2016 data)?
- Google and Facebook’s profits now roughly exceed the revenues of the rest of the global Internet advertising industry combined?
The Bottom-line: The public facts indicate that Google and Facebook are not “duopoly” competitors, but two separate Internet advertising monopoly platforms, one in search advertising and another in social media advertising.
Tellingly, after beginning to directly compete in social in 2011 and search in 2013, Google and Facebook both abruptly, coincidentally, and effectively stopped competing directly with each other in both the search and social media markets in 2014.
Either they jointly agreed in 2014 to divide up the Internet advertising marketplace and no longer directly compete with each other, or they concluded independently that the other commanded unbeatable monopoly network effects that necessitated an exit from the other’s respective core market – in order to achieve exceptional mobile share gains and profits.
Why did Google and Facebook stop competing against each other?
Internet advertising badly needs competition.
Scott Cleland served as Deputy U.S. Coordinator for International Communications & Information Policy in the George H. W. Bush Administration. He is President of Precursor LLC, an emergent enterprise risk consultancy for Fortune 500 companies, some of which are Google competitors. He is also author of “Search & Destroy: Why You Can’t Trust Google Inc.” Cleland has testified before both the Senate and House antitrust subcommittees on Google and also before the relevant House oversight subcommittee on Google’s privacy problems.