Facebook Isn’t a “Utility” & You Certainly Shouldn’t Want it to Be Regulated As Such

by on May 16, 2010 · 23 comments

I have a lot of respect for danah boyd and have had the pleasure to interact with her when we both served on the Harvard online child safety task force, and at other times. She’s a very gifted social media researcher.  But there are three big problems with her argument that Facebook should be treated as a “utility” and regulated as such. (See: “Facebook is a Utility; Utilities Get Regulated.”)

What a Utility Is, and Isn’t

First, and most obviously, the term “utility” has a fairly well-understood meaning in economic literature and Facebook does not possess the same qualities:

  • A utility is usually something thought to be an “essential facility” in that the service or network in question is highly unique and possess few (or no) good alternatives. (Regulators typically require “non-discriminatory access” for that reason.)
  • The service in question is also typically regarded as being something approximating a “life-essential” service, like water or electricity.  (Regulators typically require all to be served in a fairly uniform fashion for that reason.)
  • The service is also something that typically entails significant fixed costs and that requires us to pay good money to use. (Regulators typically impose price regulation for fear of “gouging” for that reason.)

Again, Facebook possess none of those qualities.  
I realize that some people speak of Facebook as a sort of “social utility” or a “social commons” and claim that it is essential to one’s social existence, but that’s just silly.  Life can go on without Facebook. Many of us barely touch the site and still have plenty of ways to find and interact with friends or others. My Facebook page is basically a street sign pointing people to the other places I want them to find me (like this blog or Twitter) or connect with me (like LinkedIn or even just via email). Lots of other Facebook users are like that.  And there are many other ways to “quit without quitting” entirely by minimizing your social presence on the site.

But even if you are an aggressive Facebook user, there’s still nothing stopping you from porting your digital presence over to another site entirely. There are some “exit costs” here, but they are not that significant.  Again, Facebook is hardly a “life-essential” service. And let’s not forget that you don’t pay for Facebook. Not one penny. And most of its competitors don’t charge, either.

So, let’s review:

  • There are plenty of alternatives to Facebook (it’s not unique or life-essential).
  • Escape from Facebook is reasonably easy.
  • You don’t have to pay for Facebook (or most of its competitors).

So let’s stop using “utility” to describe Facebook.  It’s simply incorrect.

“Utilities” are Anti-Innovation

But even if you’re unconvinced and still think of Facebook as a “utility,” here’s why you don’t want it regulated as one:  Utilities are, by their very nature, non-innovative. The whole point of regulating a utility is to get everyone access to it at a cheap rate.  The problem is, there is no free lunch. Regulation is not costless. It entails trade-offs. Regulation is a giant game of economic whack-a-mole: Attempting to control one of the primary variables of price, quantity, or quality inevitably results in non-optimal adjustments in the other two variables.  This is why innovation always suffers in utility businesses. Regulators typically prioritize by regulating access (quantity) and price and then let quality be the free-floating variable.  It’s hardly surprisingly, therefore, that we witness lackluster innovation in utility industries since the incentive to take risks and invest has been greatly diminished. In essence, the regulated utility becomes a “plain vanilla” service.

Now, again, in Facebook’s case, price is not a variable. It’s free! Or, more specifically, it’s ad-supported such that we enjoy the service without paying a direct fee for use. If it was suddenly classified as a “utility” and regulated accordingly, that leaves one less lever for bureaucrats to tinker with.  Regulation in the social networking business will likely be related to the quality variable.  More specifically, to the extent regulation was imposed on Facebook or other social networking sites, it would like be on their data collection practices, advertising business models, privacy policies, etc.

Thus, price quickly could become part of the response for Facebook if it becomes a regulated entity. Namely, the site might – for the first time – impose a fee for service. Seriously, is that really unthinkable? If regulators so undercut the economic engine that powers this and most other Web 2.0-era sites, what else is a site to do?  Do we think sites and services like this just fall like manna from heaven?  Again, there is no free lunch.  Something has to give.

Regulation Tends to Lock Us In

Finally, there’s the problem of “regulated monopoly” becoming a self-fulfilling prophecy.  Again, the irony of people thinking of Facebook as a utility is that Facebook has plenty of competitive (and free) alternatives. That’s not usually the case for other industries we consider “utilities.” But one of the reasons that it typically is not the case for those other sectors is that the very act of imposing “utility” status on a company tends to lock it in as the preferred or only choice. Regulation tends to shelter a utility from competition once it is enshrined as such.  Or, by forcing standardizing or a common platform, regulation can help lock it in for the long-haul.  I think this is less of a concern for Facebook than it is for other technologies or economic sectors, but it’s still worth considering the anti-competitive effects of regulation, because they are legion.

For these reasons, regulating Facebook as a “utility” would be an unmitigated disaster. It would likely result is less innovation by the site or could encourage it to potentially impose fees for a service that has traditional been free to the public.  While I have no problem with danah and others pressuring Facebook to change its privacy policies or approach to other issues / concerns, I do hope they reconsider the wisdom of treating Facebook as a plain-vanilla regulated utility. And if we go the opposite direction and impose regulation, I don’t want to hear any of you complaining when Facebook starts charging $19.95 per month for service!


Addendum: In my haste to post this rant this morning, not only did I make a mistake in the title (doh!) but I failed to address a point I’ve stress repeatedly in other essays calling for “utility” regulation within high-tech markets. Namely, we need to have a sense of historical perspective here and an appreciation for the pace of change in high-tech markets. That is, it’s important to remember that Facebook has only been with us a few of years now. It’s gone from bit player to market leader fairly rapidly but there’s no reason that the opposite couldn’t occur just as rapidly. As I noted in addressing “code failure” arguments in this debate with Larry Lessig, when markets are built upon code, the pace and nature of change becomes unrelenting and utterly unpredictable. So, we need to have a sense of perspective here and not too quickly jump to declare “market failure” and then box a specific technology or provider into “utility” status. Evolution and continued experimentation are good.  Regulation tends to head all that off.

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