Facebook (NASDAQ:FB) CEO Mark Zuckerberg recently faced a congressional hearing sparked by the revelation that data from 87 million Facebook users was improperly accessed by data firm Cambridge Analytica. The hearing was filled with awkward questions that revealed that lawmakers didn't fully grasp Facebook's business model or its privacy practices.
In the midst of this, Sen. Lindsey Graham, R-S.C., asked Zuckerberg a question investors should have paid special attention to: "Who's your biggest competitor?" Zuckerberg seemed to struggle with his answer, saying that the "average American uses eight different apps" per day to connect to their friends.
Zuckerberg didn't name those apps, but his count likely included at least four that are owned by Facebook: the main Facebook app, Facebook Messenger, WhatsApp, and Instagram. Messenger, Facebook, and WhatsApp are the top three social apps in the United States on iOS, according to App Annie. Instagram ranks first in the photo and video category, ahead of YouTube and Snap's Snapchat.
Graham then asked if Facebook held a "monopoly" on the social networking market, to which Zuckerberg replied, "It certainly doesn't feel like that to me."
However, it isn't that simple. Let's examine three reasons Facebook should be considered a monopoly, and three reasons it shouldn't be.
Three reasons Facebook is a monopoly
Facebook could be considered a monopoly that has too much power for three simple reasons: its dominant user base, its pricing power, and its lack of direct competition.
Facebook is the largest social network in the world, with 2.13 billion monthly active users (MAUs). Alphabet's (NASDAQ:GOOG) (NASDAQ:GOOGL) YouTube is considered the second-largest social network in the world with 1.5 billion active users, but it focuses on videos rather than directly on social connections.
Facebook generates most of its revenue by selling targeted ads and it throttles the number of available ad slots to boost ad prices. Its total number of ads rose just 15% last year, compared to 50% in 2016. Yet its average price per ad surged 29% last year, versus 5% growth in 2016. This tells us that Facebook has tremendous pricing power in the ad market, and that it can easily offset slower ad growth with higher prices.
Zuckerberg told Graham that Facebook's business "overlap(s)" with the businesses of Google, Apple, Amazon, and Microsoft "in different ways." That's certainly true, but none of those companies is Facebook's direct competitor. Google repeatedly tried to gain a foothold in the social media market, but all its efforts -- including Orkut, Latitude, Buzz, Jaiku, Dodgeball, and Google+ -- failed to match Facebook's appeal.
Three reasons Facebook isn't a monopoly
Yet Facebook wouldn't be deemed a a monopoly if we consider three other factors: its market share, the effectiveness of its ads, and its shifting demographics.
Facebook is a major player in internet advertising, but it's still no match for Google. Facebook's ad revenue rose 49% to $39.9 billion in 2017, while Google's ad revenues grew 20% to $95.4 billion. You could claim that Google and Facebook hold a duopoly in internet ads, but you couldn't claim that the smaller player holds a monopoly.
Facebook also isn't the best when it comes to ad effectiveness, undercutting a case for a monopoly designation. A recent Cowen & Company survey of senior ad buyers found that 48% of respondents stated that Google's ads had the highest ROI, while Facebook ranked second at 30%. All other platforms held single-digit percentages.
Lastly in this case against a monopoly label, Facebook doesn't have an iron grip on all its users. The number of 12- to 17-year-old Facebook users in the U.S. fell 10% in 2016 and another 11% in 2017, according to eMarketer. Facebook is retaining some of those users through Instagram, but lots of them are heading over to Snapchat, which Zuckerberg should have named as a growing competitor.
The key takeaway
I don't think Facebook is a monopoly. Facebook is the dominant social network, but it doesn't rule the internet advertising market in the same way the old AT&T controlled the US telco market or Microsoft conquered the PC operating system market.
As long as Google generates higher internet ad revenues and smaller players like Snapchat keep pulling away users, Facebook should not be labeled -- or regulated -- as a monopoly.