October 9, 2020 Reading Time: 4 minutes
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Entrepreneurs open up shop with dreams of profoundly changing how us consumers do things. Yes, monopoly profits are their goal. Thank goodness they’re the goal. They’re trying to win our business by virtue of making our lives so much better that we cease patronizing their competitors.

Really, what’s the point of going into business unless it’s to achieve market dominance? How obnoxious for a wannabe entrepreneur to hog precious capital if the goal is mediocrity. How is that helping consumers? Think about it.

Hard as this will be for the overly sensitive to accept, monopoly profits are a triumph. For consumers. Think about that for a second. Or maybe more. Monopoly profits signal that a previously unmet market need was met brilliantly, or a whole new need was fulfilled that existing businesses never knew existed.

It’s a reminder of antitrust law’s near-matchless stupidity. Antitrust lawyers quite literally want to penalize entrepreneurs for either exposing competitors as inept, or for creating an all new good or service that existing market participants were clueless about. Translated, antitrust lawyers are anti-consumer.

Antitrust officials never, ever discover a monopoly ahead of time. Stop and think for a few more minutes why the previous assertion is true. If you’re confused, remember that “monopoly” signals control of a product or service. The latter is realistically only a consequence of an entrepreneur yet again creating an all-new product or service, or creating an all-new way of delivering an existing product or service. It’s a sign that the entrepreneur devised a way of doing something that was uniformly rejected by other commercial players. Indeed, a business wouldn’t be a monopoly or have immense “market power” if its business plan were admired, or the source of rapid imitation by others.

Since antirust officials by definition cannot detect monopoly profits ahead of time, they’re as a rule looking backwards. And in looking backwards, they’re penalizing the successful for having had the temerity to push aside the mediocre.

Which brings us to Facebook. Those who probably don’t know any better think it should be forced to sell Instagram, WhatsApp and other business lines that have combined to make Facebook one of the world’s most valuable companies. By now, readers should be wise to the absurdist nature of the antitrust breakup calls. If not, please read on. There’s an absurd pattern with antitrust.

To see why, consider what Facebook paid in order to acquire Instagram in 2012. $1 billion. A huge number, but a small fraction of Instagram’s speculated worth today. Which is the point. That Instagram “only” fetched $1 billion in 2012 is a reminder that market actors in the then nascent social media space didn’t have a clue about the company’s potential. Facebook did, or at least it had an idea of its potential. But if the broad market had shared Facebook’s 2012 optimism about Instagram, then it’s safe to say the cost of acquiring it would have been well north of $1 billion; that, or the marketplace would have been drowning in Instagram look-a-likes.

Though Facebook seeks market dominance like any other company does, the fact that it acquired Instagram for a small slice of its present value is the surest sign that Facebook’s market dominance is likely ephemeral. Instagram once again sold for $1 billion in 2012. That it did signals that Facebook’s competitors weren’t terribly impressed with the acquisition. They, like antitrust officials, only discovered that Facebook fulfilled a wildly unmet need after the fact. Translated, we should be cheering on Facebook for having seen what others didn’t, all the while knowing that a lightly regarded company of the moment will soon push Instagram aside, and eventually Facebook itself. Market dominance is a consequence of it being incredibly difficult for entrepreneurs and businesses to understand evolving consumer needs. That’s why today’s brilliant companies are frequently not tomorrow’s.    

After that, it’s worth pointing out that as opposed to Facebook’s ownership of Instagram signaling immense “market power,” the actual truth is quite the reverse. Facebook acquired Instagram, WhatsApp and other apps because it understands what the antitrust ankle-biters plainly don’t: the present of commerce rarely predicts the future. When the 21st century began AOL and Yahoo were the gold standard for internet companies. In truth, they were sitting ducks. They had no idea what was about to hit them. How could they have? Mark Zuckerberg was only in high school at the time.

Zuckerberg and others pushed AOL, Yahoo and other mediocrities into the proverbial dustbin, at which point it’s not unreasonable to speculate that Facebook, Google and others like it are the sitting ducks of today. Rest assured that Zuckerberg gets this. Which is why Facebook is such an aggressive investor in new ideas, and purchaser of existing ones. If Facebook doesn’t evolve, it will die. Bank on it. Though Facebook has described a forced breakup as a “nonstarter,” Zuckerberg is way too smart to think Facebook will still be Facebook in 3, 5 or 10 years if it rests on its Instagram and WhatsApp laurels. Its $736 market cap confirms the previous assertion.

Indeed, $736 billion is blood in the water for venture capitalists who see the money that can be made by rendering Facebook the AOL or Yahoo of the 2020s. In short, Facebook’s market cap is the surest sign that hundreds and realistically thousands of well-capitalized companies are vying for ways to knock the Palo Alto giant off its perch. History says one of them will unless Facebook discovers new business lines that elongate its relevance in ways that its existing business lines surely won’t.

Which is what’s so funny and sad about the federal government’s focus on Instagram and WhatsApp. It’s as though antitrust officials want to advertise their ignorance. If Facebook is to remain dominant and relevant, readers can rest assured that it will remain on top precisely because Instagram will eventually be yesterday’s news within Facebook; the photo and video-sharing juggernaut of the moment eclipsed by business lines or apps that market participants are presently dismissive of, undervaluing, or both.

Reprinted from RealClearMarkets

John Tamny

John-Tamny

John Tamny, research fellow of AIER, is editor of RealClearMarkets.

His book on current ideological trends is: They Are Both Wrong (AIER, 2019)

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