Leigh Prather - stock.adobe.com

Could regulation kill Facebook completely?

Social media companies are under financial pressure, as costs increase faster than revenues due to growing concerns about the price of regulatory intervention

Facebook’s revenues rose near 40% year on year (YoY), profits rose more slowly, but the stock dropped – what’s going on here, what’s a Zuckerberg got to do to please investors?

The clue is that profits rose more slowly than revenues, and that means costs are rising faster than income. That’s not something that can go on forever. It’s also a signal of something that needs to be worried about and considered.

Economists have a few cut and dried rules. The answer to most economic questions is “it depends”, but there are a few that are hard and fast – one of which is that if the price at which something can be sold is set below the cost of production, then there will be none of that thing.

This is the worry behind social media now, that the attempts to regulate it into some desired form makes those production costs higher than the revenues that can be gained.

The basic contention can be seen all around us. Chàvez, and then Maduro, in Venezuela thought that it would be nice if food was good and cheap. They were right, it would be. The problem came when they set the price of food below the cost of production – at which point, there was no food.

Near all economists agree with Assar Lindbeck: “Next to bombing, rent control seems in many cases to be the most efficient technique so far known for destroying cities”.

Set the price to be gained from an apartment at less than it costs to build one and there will be no new ones. Set it at less than the maintenance cost and no maintaining will be done, and so on. That Lindbeck is a Swedish socialist doesn’t stop the agreement with his point.

Driven bankrupt

The US Federal Reserve makes the same point about payday loans. It costs more than a 36% APR to lend small sums of money for short periods of time. If the maximum price that may be charged is 36%, then there will be no such payday loans, which is why there are no payday lenders in states with a 36% APR cap on the price which may be charged.

We’ve seen much the same thing here in the UK recently, with Wonga driven to bankruptcy as the price it could charge was regulated lower than the cost of production.

Whether payday loans should exist or not – or healthy and cheap food or price-controlled housing – is another matter entirely. The point is not a contention or an assertion, it’s a simple truth. When the price is set below the cost of production, there will be none of that thing.

There are two ways to reach this costs and revenue mismatch. It doesn’t have to be the price which is capped, it can be the production cost which is driven up, which is what should be concerning about social media.

There’s an increasing insistence that the model which leads to the simple existence isn’t good enough, that more regulation must be imposed to gain better social media, at the risk of our ending up with none at all.  

There are those who insist that children using Facebook, YouTube or Reddit, for example, should not be exposed to pornography, which is reasonable. But we also have someone running to be US president, Elizabeth Warren, who says that social media must banish those who would misinform about politics. There are others demanding a fact-check of all political advertising, despite politics not being an evidence-based activity.

It doesn’t take much looking around to find others insisting on going further. For example, that the platforms are now publishers and should be subject to the same righteous restrictions that publishers are, such as responsibility for libel. According to some, platforms should be responsible for anything that is being said on the systems, which is only a little further along the line than the common calls that platforms do something about “extreme” content and so on.

Whether we call it the business model or the cost structure, there are some things that are wildly different between social media platforms and publishers. For example, the platform is, by definition, not selecting the content which is published. The entire point is that anyone can say anything, there is no editorial team pruning it.

This is the same as the postal system – the Royal Mail is not responsible for the content of letters, just as a phone company is not responsible for what we say in a call. They are what is called “common carriers”, and they work on the manner in which the information flows, not what the information is.

A publisher is a different beast. They select what appears and so are responsible for it – for libel, official secrets, extremism, aid to terrorists and whatever else regulation tries to control.

Regulation versus economics

The popular demand is that people on a platform budget should be monitoring like a publisher, but this is something the revenue stream won’t support. One way of thinking of it is by asking what the cost would be to BT if it had to listen to every phone conversation to assure conformance with the law. We’d most certainly not be getting free unlimited call time, would we?

We’ve even had an example of this playing out. The general standard is that if a comments section is entirely unedited then that is a platform and is not subject to libel law and so on. But if there is any intervention into filtering, then that becomes publication and the entire panoply of laws rest on the moderators’ shoulders. This is why comment sections have been disappearing from British newspapers, due to the costs of moderation. The costs are now higher than the revenues, so the thing ceases to be produced. 

It is possible that regulation of social media will become such that the economic model underpinning it ceases to work. Perhaps a reminder of the idea that ‘the perfect’ is the enemy of ‘the good’.

At the moment, financial markets are only worrying about how costs are increasing faster than revenues, but the more restrictive – that is, the more costs it adds – regulation becomes, the closer we’ll be to that possibility of regulating it out of existence. Insisting that platforms are responsible, in the manner publishers are, for what appears on their site will do it though.

Take Facebook, for example – the costs of checking what two billion people say each day will swallow those revenues easily enough, and more. At which point, we’ll simply have no Facebook, this being true of any other social media subjected to the same cost pressures.

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