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.

  • digiphile

    Adam,

    I'm glad you've taken a considered approach here, and that we've met at the FCC and FTC. A smaller point before I get t the larger one:

    >”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.”

    Actually, there is. It's what Zuckerberg calls your social graph, which is replicated in Facebook. Schools, workplace, family, friends, neighborhoods, etc. You can't take it with you. Someone else has to build it first, and then you'd have to populate it. The only way to do that easily would be to allow Facebook users some measure of data portability and to have interoperability in standards to allow the export. For all sorts of reasons, you can imagine that Facebook has not made that possible. For most people, those “exit costs” are far more than they can bear.

    >”There are plenty of alternatives to Facebook (it’s not unique or life-essential).”

    I'm not sure I agree with you here, especially if you're a business, in government or education. Until Facebook's users really do move on, to Diaspora or pip.io or some other network, all of those entities will have to come to the social network to “fish where the fish are,” participating in the conversation where it is being had.

    Perhaps those entities will create white label social networks tied to their .gov or .edu sites. For many, the ease with which such communities can be populated with users through Facebook Connect (and perhaps personalization) may make that work unattractive at best.

    I won't dig into the issues around regulation of online privacy and the FTC overmuch. At this point, it would be surprising if Vladeck and the Commission doesn't make some move that reflects the feedback from the three workshops and the many comments it has received that address the changing nature of electronic privacy. As you and I both know, however, data brokers, health clinics and credit bureaus probably have more power (currently) over the lives of most citizens than Facebook, however many people have lost work or relationships through ill-advised status updates or pictures.

    What I didn't see addressed in your post is the issue of who “owns” online identity, which goes to the point I made above regarding how you are authenticated to contribute or make transactions online. Identity, or at least its providers, already are well along to being regulated, as laid out in the privacy principles adopted by the feds in creating the OIX. There is a market for identity, currently: I can choose Twitter or OpenID, along with Facebook, in many places. Fiven that Facebook has what, nearly 500 million users, the scale, reach and investment in the social capitol many have made there put it in a dominant position. That could grow into a monopoly. And you and I both know how the government's relevant regulatory bodies has historically acted towards those who occupy such market positions.

    I think people are waking up to the fact that to use Facebook, there will be a tradeoff: interacting in the world's most sophisticated Skinner Box, where interactions, transactions and other phatics are mined for data relevant to those who pay to advertise or market there. The challenge in this moment for many lies understanding the rules of the road for privacy and Terms of Service there, which seem to be based on shifting sands aligned with Facebook's business strategies, as opposed to clearly informing users what skin they have in the game.

    A “Privacy Dashboard,” akin to the ones provide by Google and Yahoo!, might help in that endeavor. To this point, there hasn't been any infographic, movie or tutorial produced there that would help, say, my mother or grandmother understand where, how and why to configure a profile. All they have is infographics like this, which demonstrate how the game has changed:
    http://mattmckeon.com/facebook-privacy/

  • David

    Typo in headline? I think you mean “shouldn't” want it regulated, not “should,” correct?

  • Bob

    In the headline, don't you mean “shouldn't” instead of “should”? That's a big difference!

  • http://www.techliberation.com Adam Thierer

    Thanks for catching typo! Fixed.

  • Barrett

    FYI, the change from should to shouldn't in the name is causng the link from TechMeme to be bad.

  • Bertil

    Hi Adam,

    Came here from danah's post. Came a few times by, but let me (re-)introduce myself: I've been studying that question in my PhD in Economics for more than four years now. I made a lot of points similar to yours there, about heavy-handed regulation and innovation not going along so well, so… thank you for defending that at the FTC and FCC — but Facebook (all SNS, really: we need to adapt the rhetoric to a changing landscape of contestable dominating player) does need so oversight.

    As Digiphile as pointed: there are lock-ins to Facebook, namely whether your friends use it. You usage (as a publication platform) isn't typical; most users tend to use it in a way closer to e-mail — otherwise there wouldn't be all the privacy issues.

    I won't accuse anyone by name but me: I almost forgot to invite some of my best friends to my birthday (and I certainly partially lost track of them) because they do not use the site. Some don't because they don't like the principle of social media, so I would have lost track anyway, but I needed them to have access to event details, although they had no account, via e-mail (a feature Facebook does provide, but they might re-consider with a larger market share); some because of specific features on Facebook, and I would have loved to be able to use their personal twitter account to share, says, status updates (without mixing with my own, professional twitter account).
    It's mostly soft issues, more about being polite than loosing one's job, but this forces people to use the site (to stalk) although they clearly say they “hate it” (being stalked), etc. — given the time spent and the quantity of ads placed, you can't neglect such effects before measuring them it. When you look in detail, those effects are very different with “network effects” that you can expect from a gas-pipe network, highways or telephone lines, but they do have in common that it doesn't make sense for each user to use too many systems. Often having to check daily one's email and one SNS has to be treated as a lot of effort. I know it's ridiculous, but remember: people are so feeble on-line that one-click-to-buy or confirm-your-email-to-comment has order-of-magnitude usage drop.

    Because of all that, to have incentives to innovate beyond 400 million users, a SNS might need the possibility that it's users can connect to their Facebook friends through another site; they'd loose information about those users, unless they offer a more compelling experience: better contextual filter, etc. Details are technical, but there is room for a regulation that is more specific than net-neutrality, and less intrusive and blocking than energy distribution. I had in mind standards not dissimilar to OpenID, OAuth, Activity Streams; specifically, enforcing those standards beyond a certain number of users in the regulator's country, or beyond a threshold in ad revenues. They would be issues with innovative services, but not until they reach, say, 100 million users, so the regulator would have time to thing about think about them before ruining the whole thing.

    Regarding you point about utility and price: yes, of course the usual utility comparison stops here, but it's now widely acknowledged that the ratio of ads-to-content is a type of price, and Facebook has been rather reasonable, presumably mostly because the equivalent of the optimal monopoly price is well below valuation, ie. ideal ad placement for maximum navigability and click-through is rather discreet.
    [The best way to model this is to consider a simple two-sided market of users and advertisers (no “consumer”); users enjoy the service offered and their engagement is sold to advertisers with a ad-to-content ratio; users' reaction drops beyond too intrusive ads. Hence the notion of “users” in digital economics that is an often an odd, non-monetary consumer; freemium models make is even more fun.]
    I'd keep an eye on that, including Ad-blocker software in the analysis because this acts as a control mechanism (too many ads encourage people to commit to learning how to install those, loosing them for good), but I wouldn't worry per se. I'm in favor of few, very intrusive/targeted ads because they make more sense so I assume they'll benefit both the ad-planner and the consumer/user, but I know this experience is not valued the same by all.

  • ST

    More like a bar than a utility.
    Nahh, more like a mall food court.

  • http://pithagora.com fjpoblam

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

    If that is true, then the remainder of your article is pointless, a waste of time, redundant, wasted air. Delete it.

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  • http://visual.alchemism.net Steven

    1. There are no(t yet) equivalents to Facebook, in terms of users. People who would otherwise not use social media are moving into Facebook for communication purposes. Moving to an alternative means bringing all of those people — including Grandma — into a new platform.

    2. Escape is not easy if you are alone in your freedom; otherwise cities would be empty and everyone would live in a log cabin in nature.

    3. You pay for Facebook by allowing it to collect data; you pay Facebook by allowing it to sell itself with your 'brand,' or leasing to it the content generated by your 'brand.' For most (unexceptional) people that cost is close to nothing, but for creative, popular, talented, pretty, etc. folks out there, I'd argue that the revenue is measurable.

  • freerobby

    The most persuasive argument against regulating Facebook is the 535-person body that would be regulating it. I hope that's a non-starter. Ask yourself, do you really trust Congress to prescribe ideal conditions for a social media platform?

    The utility case is less clear to me. I don't pay “good money” for my water. I don't consider my telephone (or my internet access) to be “life essential.” I think by your definitions, a lot of my utilities wouldn't be “utilities.”

  • http://www.zephoria.org/thoughts/ zephoria

    1. Facebook talks about itself as a utility: http://www.facebook.com/press.php Regardless of how we want to interpret it, that's an important point I was trying to make (but seemed to have failed to do so).

    2. I'm not wanting regulation. I'm deeply depressed by it. And I'm even more depressed that Facebook is inviting it because they think they're invincible. And that they're refusing to consider that what they might be doing is problematic. I think that they *will* be regulated and that's what we need to contend with.

  • http://twitter.com/maxniederhofer maxniederhofer

    Facebook describes itself as a utility in the sense of a tool fit for purpose or useful to some end. It does not describe itself as a public utility, in the sense of providing an essential service. Its marcom people picked “social utility” to differentiate from “social networks”, which were viewed as frivolous and not useful. This was part of a drive to “mainstream” the site and make it more appealing to people who had previously resisted social networks.

    Competition will regulate Facebook. While network effects do create switching costs, the original argument that we're pushing bits down pipes with a marginal cost of zero holds true. Facebook is not a natural monopoly. Many, many people are worrying about identity, people/people and people/content relationships right now. There will be a light bulb, a telegraph and, eventually, a Skype.

  • http://www.dailypatricia.com patricia

    I disagree. The internet's person to person communications functionality has always included social networks in addition to other forms of communications like phone, email, etc. In the environment of business over telecommunications platforms, which is what the internet essentially is, this type of functionality is considered a utility. The ability to talk to somebody via Facebook is not much different than the ability to talk to somebody via the phone. Social networks provide a communications service above all, and that therefore makes them a utility.

    That is why people have had such a difficult time monetizing them via advertising. Historically over telecom platforms, utilities are monetized via value added services and subscription fees. Just because 2.0 is too green to understand this doesn't mean it's not true.

  • http://twitter.com/moon moon

    We will all leave Facebook just as we all left the third grade

  • http://www.facebook.com/becky.chandler Becky Chandler

    No one should waste any time talking about whether Facebook is a utility. For one thing a utility is generally something people really need, or at least substantially improves their lives. Facebook is something people would be better without..

    But the worst thing about this intellectual hand writing is it lends credibility and credence to the FCC's decision to play Orwellian word games to get around the DC Appeals Court's ruling that the federal government via the FCC does not have jurisdiction to regulate Internet content.

  • http://profiles.yahoo.com/u/5ZFAOERPPHG26V5F6OJ5MX722E Salomon

    I am behind Patricia's argument above. The nature of Facebook (and Google, for that matter) is such that they can no longer be considered merely a service.

    The number of people who rely on the service is too large for it to be considered a service anymore. The society almost compels you to use it. Back in the history, I am sure that there was a time when you could still say “Electricity? Don't use it if you are concerned about the quality of your wall outlet.” Today, you cannot find a bad quality utility outlet which could allow fire in any Western country. In this sense, Facebook is also changing – very rapidly – from being just any other service into being a utility.

    That being said, the nature of the regulation does not have to be as strict as for other utilities. For example, Facebook can be stipulated by law to be more open to its users, or to protect user privacy more strictly. Regulation does not have to curb innovation by definition.

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