Political crusades, censorship and bullying their smaller competitors will drive users away from the internet giants

David James

The increasing censorship by the tech monopolies is rightly prompting protests from those who see it as an attack on free speech. What has been less noticed, however, is that the social media companies are adopting one of the strangest, and potentially most self-defeating, business strategies ever devised.

They are telling a large slice of their customer base – possibly as many as 100 million in the US and tens of millions elsewhere – to get lost. It represents a massive opportunity for new players and it seems a near certainty that citizen Donald Trump – who is very much a business person and not so much a politician – will be looking closely at it, as will many others.

[David’s prediction was actually right on the money – this was published just the day after he submitted his article – ed.]

It is common for monopolies or oligopolies to treat their customers with disdain, although they usually spend some of their marketing budget pretending otherwise. What never happens, though, is for monopolies to tell a large number of their customers to go away.

It is the equivalent of JD Rockefeller, owner of the infamous monopoly Standard Oil, refusing to sell petrol to anyone who voted for the Democratic party. What it confirms is that these companies have become political entities rather than businesses, a change of direction that will inevitably weaken them.

The social media company most vulnerable is also the most aggressive. Twitter has deplatformed Trump and is removing, at a rapid rate, users it deems to be ‘contravening the terms of service’ or ‘violating community standards’, or whatever. The company is valued at $US57 billion yet its sales are falling and it only started to make profits in 2018, when it recorded a $US191 million profit.

By 2019 it was back in the red and in 2020 it came in with a massive $US1.4 billion loss. Although the share price has almost doubled over the last year – as Keynes said, markets can stay irrational longer than you can remain solvent – the vulnerability is unmistakable.

Such counterintuitive share price movement is not entirely without logic. Investors typically attempt to price the future value of a company, not the present. Social media companies get high valuations because investors expect that they will continue to grow: increase their customers, sales and profits. That is far less likely to happen when you tell a large portion of your customers to look elsewhere.

Facebook and Google are far less vulnerable than Twitter but they also have high valuations. The basic metric used to assess shares is the price-earnings ratio (PE). Facebook’s PE ratio is 35 and Google’s is 30, which are very high for mature companies. Roughly, it means that it will take, respectively, 35 and 30 years to pay back the value of the shares at the current level of profitability.

The only way that makes any sense is for these companies to continue growing, which was already difficult enough. Facebook boasts having over two billion users and Google over four billion users. They already saturate the market; there isn’t much upside. Achieving growth becomes even harder when you deliberately turn away customers. Indeed, it is a deliberate choice to shrink.

Google’s and Facebook’s shift in attitude towards customers is an object lesson in what happens when businesses get too big and underlines why effective anti-trust law is crucial for economic and social health. On the way up, they were exceptionally innovative; so effective at providing better value to advertisers that they destroyed much of the world’s mainstream media industry.

Yet now that they are in a position of power the focus has shifted. They have become increasingly concerned about aligning themselves with politicians and government to get legal protection for their market dominance. When Mark Zuckerberg donated $US400 million to ‘help’ local election offices in the recent US election, the commercial rationale was unmistakable.

To date, new competitors have been relatively small and, some, such as Parler and Telegram, are being openly attacked with blatant anti-competitive tactics by what is surely one of the worst cartels ever. Aggressively doing whatever is required to take out the competition is, of course, another typical behaviour of monopolies.

That is where Trump, and those associated with him, may prove to be significant. The biggest barrier to entry in the digital media space tends not to be the technology but the marketing. That is what Facebook and Google at one time excelled at; it was key to their success. Marketing is labour intensive and costly, which makes it difficult for would-be competitors to gain traction.

If there was an enterprise associated with Trump, however, marketing costs would be far lower. He already appeals to tens of million of supporters who are being told they are not wanted by the tech monopoly. He represents so-called ‘populism’, which is to say he is very popular.

That is what powerful political and corporate elites, and social media companies – ‘GloboCap’ – find intolerable and are attacking in what is being accurately described as an American coup. It is hard to imagine that the potential market pull associated with providing an alternative to what amounts to an attack on democracy will not be exploited commercially.

This is not to suggest that the social media giants will go out of business, although Twitter may get into real trouble. But it is worth noting that very few companies, even giant monopolies, last longer than 20 years. Many get acquired, which invariably works out badly (an example being AT&T’s acquisition of Time Warner, which will probably result in CNN being sold).

The most common reason businesses fail is that, when faced with new competitive threats, they are unable to innovate because they have become habituated into repeating what made them successful in the past.

That is exactly how Google and Facebook succeeded. When they offered advertisers a more cost-effective option than just space on a page, or a time slot in a program, almost no newspaper or television company was able to respond with a new way of providing value for their advertising customers. They simply went into a tail spin.

The tech giants seem unassailable now; Google and Facebook are two of the most highly valued companies in the world. But no company is invulnerable, and what the social media giants are doing to their customers is, from a business perspective, extremely unusual.

They are no longer just offering users the opportunity to “stay connected with friends and family, to discover what’s going on in the world, and to share and express what matters to them,” to quote Facebook’s ‘vision statement.’ They are telling them what they can, and cannot, say. They are even trying to shape what they think.

It seems a near certainty that well-capitalised business interests will be noticing this – and preparing to eat their lunch. That could significantly affect what at the moment is looking like a descent into an information dictatorship.