Why Facebook Wants To Be Regulated?

The recent Cambridge Analytica scandal has ended up putting companies like Facebook in hot water. The common man has now become aware of the fact that companies like Facebook have access to a lot of personal data. They have also become aware of the possibility that Facebook could use let third parties access some of this information. This resulted in a public outrage over the information Facebook holds about common people. Politicians were quick to jump in to score some brownie points. Mark Zuckerberg was summoned by Congress. It is now likely that Facebook and other social media companies might end up being regulated.

However, is regulation something that companies like Facebook want to avoid? The reactions from the Facebook founder, Mark Zuckerberg prove that Facebook is somewhat eager to be regulated. This comes as a surprise to free-market advocates who believe that big businesses want to avoid regulation as much as possible. Mark Zuckerberg seems to be embracing regulation and even rooting for it! In this article, we will have a closer look at how Facebook is likely to benefit if more regulation is increased in the social media space.

How Regulated Markets Work?

Dominant firms are always in favor of regulated markets. Mark Zuckerberg was quoted by journalists talking about regulation even before the Cambridge Analytica scandal broke out. He was of the opinion that there is no question that social media firms need to be regulated. However, the correct model of regulation is something the firms and the governments should figure out together.

This should come as no surprise. Facebook is in favor of regulated markets because such regulations will prevent the inflow of competitors into the market. This will allow Facebook to develop an even more dominant monopoly wherein they do not really need to care about the thoughts or opinions of their customers since the customers will have no real alternative. The real reason regulations are being considered is not to prevent Facebook from misusing customer data in the future. Instead, these regulations are meant to create an intervention that reduces the threat from new players.

Regulations Create Barriers To Entry

Regulations work in a favorable way for the incumbent firms. These regulations create new rules and regulations that newer firms need to comply with. The compliance happens on two levels, i.e., once during the inception of the firm and then during the course of conducting regular operations. In both these cases, the incumbent firms have several benefits over the new competitors.

  • Since companies like Facebook are already on the market, they do not need to obtain licenses from regulators. These licenses can be extremely expensive and add to the costs faced by newer firms. Hence, there is an inherent difference in the cost structure wherein the incumbent firms have a sustainable competitive advantage.
  • The costs of compliance can also be extremely expensive. These costs are not distributed asymmetrically. This means that this cost affects incumbents as well as existing firms in a similar manner. However, since established firms like Facebook have a much bigger turnover than competing firms, these costs add up to only a small percentage of their costs. On the other hand, they can significantly add up to the costs of the new firms.

To sum it up, regulation changes the cost structure of the industry to be in favor of incumbent firms. This is the reason why all regulated firms in the world tend to be monopolies or closely controlled oligopolies. Facebook wants to ensure that the social media market also becomes a monopoly. Hence, it is itself lobbying to introduce regulation.

Facebook Can Have An Undue Influence On Regulators

Facebook is known to have deep pockets. Its ability to influence politicians is well known. Facebook spends billions of dollars on lobbying and controlling politicians. This is opposed to zero dollars that most startups would be able to spare for this kind of activity. It is, therefore, no surprise that when these laws are written, Facebook will have a tremendous influence. The common man is not going to spend time trying to figure out if these regulations are fair. The media will not publish articles about this because they will receive payoffs from Facebook. Simply put, Mark Zuckerberg wants to legislate his opponents out of existence. He knows that there are no real competitive barriers in the tech industry. Hence, anybody can create a website that may someday rival Facebook. Regulation is an effective way to prevent this from happening.

Facebook Is Not Immune To Competition

Many proponents of Facebook have been saying that Facebook does not need to do this since it has virtually no competition at the moment. However, these people do not realize how the tech industry works. When Orkut and MySpace were ruling the roost, Facebook was just a tiny startup. However, over time Facebook has come to become the dominant player. Similarly, someone else could also overtake Facebook! These are just pre-emptive measures being taken by Facebook to maintain its dominance. Also, it needs to be understood that Facebook is losing several customers in the sub 25 years demographic. Competitors like Snapchat are quickly catching on. Facebook needs to consolidate its monopoly power in order to continue to be the number one social media firm in the world.


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The article is Written By “Prachi Juneja” and Reviewed By Management Study Guide Content Team. MSG Content Team comprises experienced Faculty Member, Professionals and Subject Matter Experts. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to ManagementStudyGuide.com and the content page url.


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