The social utility
If you study economic cycles you can watch the evolution of a disruptive technology throughout its lifecycle from a specific product, to a competitive industry. The last phase in the evolutionary chain is often the formation of a utility. For example, over a couple of centuries we’ve seen the evolution of electricity from a curiosity, to a business, to a group of public companies. Along the way there are the inevitable mergers and acquisitions to enable a winnowing field of competitors to achieve the scale needed to compete in very large markets.
It wasn’t just the electric industry that went through this evolution. The telephone, gas, and cable industries did in their own ways. Local or reginal utilities that provide sanitation and water still dot the landscape too. Banking is in a similar position that is manifests differently. In fact, any industry that attracts the term “too big to fail” is showing signs of utility status.
When your business becomes so big that it affects large segments of society it can’t be allowed to fail lest it crater the economy or cause massive disruption injuring many people. At that point government has a compelling interest in preventing failure and along with that comes regulation of the riskiest corporate behaviors.
The latest example to hit the radar might be social media which has completed many steps of the lifecycle with blistering speed in just over a decade. This speed notwithstanding, we are now at a point where what happens in social media affects all of us.
Regulation is a thorny issue wrapped in individual freedom. But it is also a logical way out of an impasse. The recent interference in the US election, which all the American intelligence agencies have confirmed, is a proof point that social media is now a utility and needs some form of regulation.
In a recent article in Wired, “Bad Actors are Using Social Media Exactly As Designed,” writer Joshua Geltzer makes the point that popular social sites including Facebook, Twitter, and Air BNB, all provide tools that enable users to find and segment groups that are best subjected to targeted messaging. His point is simple, the bad actors didn’t pervert social media or hack its code. They simply used the tools provided to mount a campaign to upend a US election and there’s evidence of similar activity elsewhere.
By this measure, social media is now too big to fail; it is too essential to a large segment of society and its potential excesses must be managed so that it does not consume the society and the users who depend on it. Geltzer’s article clearly, but inadvertently, makes the case,
When Russia manipulates elections via Facebook, or ISIS recruits followers on Twitter, or racist landlords deny rentals to blacks and then offer them to whites through Airbnb, commentators and companies describe these activities as “manipulation” or “abuse” of today’s ubiquitous websites and apps. The impulse is to portray this odious behavior as a strange, unpredictable, and peripheral contortion of the platforms.
But it’s not. It’s simply using those platforms as designed.
So, what would a social media utility look like and how would it be different from what we see today? First off, social networks should be regulated with as light a touch as possible. Grandmothers sharing baby pictures shouldn’t have to change their use habits, for example. Second, to achieve positive ends, regulation should be implemented at two distinct levels, the source and the periphery.
At the source, regulation comes down to access for any person or entity with a beneficial and productive need for the utility’s services. In the electricity markets this means stable pricing for all and a commitment to serve as a common carrier. It wouldn’t be much different with social network regulation; the key is beneficial and productive use.
Common carrier law began in railroads and shipping. In return for its use of public lands and roads, the carrier commits to serve all parties equally. In broadcast industries (radio and TV), slices of electromagnetic spectrum play the role of roads that the broadcasters use as grants (licenses) from the people. In transport, the waterways are also owned by the people, so are the roads, and railroads have historically received government help because they provide a useful service to society. It goes on, but you can see that source regulation amounts to giving all participants a fair shot at using the public’s assets and insisting on beneficial and productive use.
Regulation at the periphery takes on a different cast, notably in America where so much of modern utility regulation evolved. A great deal of peripheral regulation occurs through certification and licensure. People interested in careers involving one of the utilities often serve apprenticeships, learning from a master before earning journeyman’s status. They must also pass tests to prove their knowledge and skill.
Barbers, beauticians, and other personal services professionals go to school and sit for certifying exams. Other professions are similar. Doctors, dentists, lawyers, and many others must take many years of education, pass tests, and serve different forms of internships before practicing on their own.
The point here is that we already regulate the day to day best practices of many industries. We do it with a light touch and in the interest of the culture and the society functions quite well despite, or more likely because of, this light approach to regulation.
Perhaps the time has come to consider lightly regulating parts of the tech industry, something we have never done. But the age of information and telecommunication, a 50-year economic cycle called a K-wave, is reaching its natural endpoint and that’s often when utility status and regulation has come to the forefront in prior cycles.
Elevating social media use to professional status, seems a logical thing to do. Establishing a certification or licensing process plus capturing a user’s license number when accessing some of social media’s higher functions would give an uncomplicated way of keeping bad actors out of the networks or at least making them traceable. In case you are wondering this is the basic process of getting a building permit.
This approach need not apply to lower level personal use. But trying to reach millions of people on a social network is functionally like climbing a utility pole and messing with the wires. For this one should need certification.
Last point, part of certification in any industry is training in the ethical use of the tools and techniques of that industry. As a society we have not engaged in such a dialog for social networks yet, but one is overdue.
In 1906 President Theodore Roosevelt signed the Pure Food and Drug Act into law. It had been a long time coming and corporate interests had done their best to derail and delay reformers who advocated the contents of the act. The meatpacking industry had been a major focus of reform as was the over the counter drug industry, each for different reasons.
Meat was unwholesome especially in the warm weather. Cattle were driven by cowboys to railheads in Kansas City Missouri and then transported live by rail to Chicago which became a major distribution point after the American Civil War. Meat packers slaughtered cattle in Chicago and shipped to markets in the east. This prompted the need for refrigerated railroad cars or reefers. At first, reefers were cooled by ice and not necessarily very well. People in the east got sick from tainted meat and Upton Sinclair’s novel, The Jungle was a story about abuses in the industry that led to unsafe products.
Over the counter drugs contained high quantities of alcohol and opioids and their makers over promised what they could do for patients. Newspapers, which relied on advertising revenues from the drug companies, were enjoined from expressing support for legislation regulating the drug industry on pain of losing their ad revenue.
Muckraking which we might call investigative journalism today, came into its own and crusading journalists like Sinclair and many others published exposés of abuses that led to the Pure Food and Drug Act as well as the Federal Meat Inspection Act which Roosevelt signed into law together.
A century later, the meat supply still has occasional problems, but no one tries to hide the truth and both producers and regulators work to correct issues when they arise. Also, producers rigorously test over the counter drugs both for safety and efficacy before going to market. Libertarians and conservatives might want to complain about the added costs involved or the rights of participants in free markets in other situations, but they are largely silent here.
The social networking industry today is in a similar position to meat packing and pharmaceuticals more than a century ago. Our news is full of stories such as Cambridge Analytica stealing 50 million Facebook profiles while that company did little to protect its users. The US intelligence services all point to Russian active measures in interfering with the 2016 presidential elections by using the tools available with social networks as they were designed.
All of this is awakening many people to the understanding that social networks are not free because they collect a fee in kind; namely consumer data which they use to model profiles and sell to advertisers. Some have suggested that in the face of these revelations that Facebook might be doomed or that social networking in general may be. But nothing could be further from the truth.
Social networks are at the same place that meatpackers and drug companies were in 1906. Regulation was and is a way to enable the people to influence markets in such ways as to not interfere with any single company. Regulations apply equally to all those regulated and businesses should, after a period of adjustment continue as they were in the newly regulated markets.
My two bits
Regulation can take many forms. I’ve previously advocated for treating the social networks as utilities and that’s certainly one approach. Another is simply to put forward legislation like the Pure Food and Drug and the Federal Meat Inspection Acts of 1906. The Pure Food and Drug Act ultimately spawned the Food and Drug Administration which regulates industries without treating them as utilities.
The history of regulation in the US and much of the west has involved setting standards and fines for violation. Government agencies randomly sample many aspects under their direction and in some cases government meat inspectors work at slaughterhouses. But the regulation and enforcement is largely something that individuals take on because they are good for business.
The point is that regulation can work well with business and it doesn’t necessarily mean the end of an industry or crippling rules. A level playing field is good for all and often increased the size of markets.
Social networks, and the Internet more generally, need some regulation right now for the good of the society they serve. There are approaches and models that we can adopt. The current issues we face are not unique in history and we should heed its lessons.
Time to call it—the social utility has arrived. That has important consequences
Taming the world’s wild web and figuring out Facebook
Facebook is big, profitable, growing, and at a crossroads. The little social network that started in a Harvard dorm room is no longer the cute app that people can use to hook. It’s going through its terrible two’s as in its second decade and there’s plenty of evidence that the world wants it to use its indoor voice and to play nicer in the sand box.
Several recent news items provide background.
First, governments all over the world are trying to rein in its anything-goes approach to its presence on their turfs. In the West we might think a lot of the right to free speech but that’s far from a universal truth especially in the East. An article in the New York Times highlights Facebook’s fungible approach to free speech in repressive societies like Vietnam where according to authorities, the social network
“…had agreed to help create a new communications channel with the government to prioritize Hanoi’s requests and remove what the regime considered inaccurate posts about senior leaders.
It’s hard to tell what’s worse the company’s stand on the first amendment in this country or its capacity to be easily rolled over on the subject by foreign dictators. It seems they’ll do anything to gain market share with which to sell ads. Facebook is happy to aid and abet repression while at the same time it stonewalls investigations into how its service was leveraged in the 2016 election.
Perhaps most dangerous to life as we know it, Facebook is not in control of its sales process or its platform. In the mad rush to sell, sell, sell their algorithms inadvertently sold questionable ads to people fronting Russian institutions during the 2016 election. After denying it for months, the company finally came clean admitting as much last week. In the process they gave up a number of ads to the authorities and cancelled the accounts of fake individuals. So much for fake news, there are now fake people to worry about.
Reporting in the New York Times as well as most major media outlets says that
“Facebook has identified some 2,000 other ads that may have been of Russian provenance,”
and CNN chimed in that “…we may not be able to set the number at 2,000, it could be higher.”
Worse, it’s clear that law enforcement doesn’t know what it doesn’t know. Another Times story says that
“The users who purchased the ads were fakes. Attached to assumed identities, their pages were allegedly created by digital guerrilla marketers from Russia hawking information meant to disrupt the American electorate and sway a presidential election.”
The times also said that we still don’t know what the ads looked like, the content, who paid for them, and how many Americans interacted with them. There’s even more to the story and it’s easily pursued through the links provided in this story.
This is important because it profiles a company and an industry that grew fast, reaps huge profits and is poised to influence how we live and it is being coy about its legal rights and responsibilities.
This is a difficult road to tread. On one hand we have federal law, the Electronic Communications Privacy Act xxx 5, which prohibits government from unduly spying on electronic communications. While that might seem reasonable, should the protections of this law apply to foreign governments intent on disrupting a US election at the same time that the Federal Elections law prohibits any spending on American elections by foreign entities?
In many cases, social networks like Facebook, Twitter, and the other social sites like What’sApp, WeChat, Snapchat, YY, VKontakte (Russia), QZone (China) are awakening to their responsibilities in free societies, or have reached critical mass to impose significant strictures on the free flow of information around the world. It’s a situation that cries out for the “R” word, regulation, before freedom of speech becomes a quaint memory.
Some of my friends say this is no different from the US having tried to influence elections overseas for decades. They are right about US attempts but the US always did so in an above board way. We identified ourselves for instance as the Voice of America. We didn’t invent fake news we simply reported the truth, which was often bad enough. In the 1960’s former Illinois Governor and UN ambassador, Adalia Stevenson, told the Soviet Union, “I offer my opponents a bargain: if they will stop telling lies about us, I will stop telling the truth about them.” That’s the fundamental issue.
In disguising their efforts to upset the 2016 US election, the Russians hid their efforts in social media, inventing fake identities and made effective use of psychological research to plant ideas that divided the American people. They didn’t need to hack into voting machines (though they did some of that too).
In the aftermath a bigger set of questions arises for free societies and for heretofore unfettered social media companies like Twitter and Facebook. Is there a point beyond which appearing to protect cherished values like free speech does more harm than good? More specifically, is there missing nuance to such positions?
Other societies such as the EU are chafing under the open rules of a Vox Americana and are they are organizing to circumscribe not only Facebook but the other big American companies that make up what they’re calling GAFA or Google, Apple, Facebook, and Amazon.
Various governments have serious objections to how these companies operate and it would not be surprising in this era when they are, for the most part, maturing into their colossal world-girding selves, to see some initiatives to regulate or even break up these behemoths. It would be smart if the GAFA members plus Über and a few others, decided to short circuit the uproar and develop a set of rules to live by that go beyond not being evil, whatever that means. But that’s not how free markets typically work.
Social’s swan song
Microsoft’s acquisition of LinkedIn for more than $26 billion raised a lot of eyebrows for good reason. True, the acquired company is valuable and generating revenue but like most of the social networking space, it is far from healthy and one wonders if Microsoft could have gotten a better deal.
According to a colleague at the Enterprise Irregulars, Ross Mayfield, Ellen Levy reported that the deal can boast a number of superlatives if you look at it right, among them,
- The largest sale of a consumer Internet company in history;
- The largest sale of an enterprise software/cloud company in history;
- The third largest sale of a technology company since 2001; and
- The largest acquisition ever made by Microsoft.
With those attributes you might expect that LinkedIn is in a really hot sector and everybody wants to get it at any price. It looks like a regular feeding frenzy. Well, hold on big guy, here are some other numbers to consider.
Facebook announced revenue in Q1 2016 at $5.2 billion and profit of $1.51 billion tripling its year over year comparison according to a BBC News article that you can read here. Good for them.
But now consider Twitter, which according to CNN Money has lost a cool $2 billion since 2011. I wonder if this can be construed as an illegal campaign contribution to The Donald. At any rate, Twitter has never turned a profit. Yikes!
Then there’s LinkedIn. According to a Reuters article from February 4 of this year that you can find here, “LinkedIn Corp forecast first-quarter revenue and profit below Wall Street estimates as growth slows in its ads business and its hiring services face pressure outside North America, dragging its shares down 28 percent after the bell.”
The article goes on to say that, “Online ad revenue growth slowed to 20 percent in the fourth quarter from 56 percent a year earlier as automated ads offered by Alphabet Inc’s Google make its traditional ad displays less attractive to advertisers.” Finally there was this, “Its revenue forecast of about $820 million also missed analysts’ expectations of $866.9 million by a wide margin.”
Suddenly it looks like social media has become a winner take all market accentuated by Metcalf’s Law which states that the value of a network is directly proportional to the number of nodes i.e. users in this case. Why use anything but the biggest network unless it’s specialized as LinkedIn is because of its sales and HR focus.
This is happening despite the high acceptance of social media in everyday life, just ask The Donald. Social has rapidly become the thing everybody loves to use and no one wants to pay for. The advertising business model that most companies rely on doesn’t help.
Advertising has its limitations. There is a huge pool of money available for online ads but huge is not infinite. Just as there is lots of music available, people only want to pay for hits. If you combine Metcalf’s Law, which tends to limit the number of viable networks in this space and add in the reality of the fickle consumer you have an instant recipe for a declining market, which is what we see.
Don’t worry, social media is too important to go away. It’s so important that it has commoditized its market into a virtual singularity. That’s the bad news too. The social market looks like it can support 2 styles; say Facebook’s and Twitter’s. There might be additional vendors in the space for a long time especially if larger companies buy them and they function as loss leaders. That’s ultimately the vision I see for any social company not named Twitter or Facebook.
End of an era? LinkedIn goes to Microsoft
Microsoft announced the intent to buy LinkedIn for $196 per share today or more than $26 billion. It’s a huge deal and a great payday for the social networking company specializing in making it easier for business people to connect. But why do this deal and why now? This calls for a lot of speculation but perhaps we can make some sense of it.
Like other major software companies including Oracle and Salesforce, Microsoft sees itself as an essential platform for enterprises at all levels. The more functionality it can provide to its users, the easier it will be to keep them at home rather than roaming the Internet looking for something new. In addition, the availability of a familiar face such as LinkedIn has great appeal for many customers.
But also, we may be witnessing the consolidation of the social networking space. Brands like LinkedIn, Twitter, and Facebook, and others such as Plaxo and MySpace, all got started around the same time—about ten years ago. Since then each has found a niche and many rely on an advertising model for revenue and growth.
Those models are limited by network constraints, however. Each might be flexible and have great people working there but as Metcalf’s Law stipulates, the value of a network is directly proportional to the number of nodes on it. In our case nodes can be thought of as people and while we might all have Twitter and Facebook accounts, the number that also have a third network is smaller for the simple reason we can only track so much.
So the advertising potential of networks is similarly limited. There is a large revenue pie for ads on social networks but it isn’t infinite and as is often the case, the early participants like Google continue to capture the lion’s share of revenues. In such a situation, if LinkedIn can be relieved from the need to generate so much ad revenue growth by simply becoming a valuable addition to the overall Microsoft value proposition, so much the better. The situation is similar with other vendors that offer social and collaboration functions as part of their value propositions, like Salesforce and Oracle.
All this is to say that the age of social media is likely entering a mature phase. We can see which ones will be able to have a stand-alone future and which ones won’t. This doesn’t mean social networks and social media are becoming passé—just the opposite. They’ve become so valuable that they are becoming commodities and it’s hard for commodities to reap soaring profit growth (that’s why they’re commodities).
So, good for Microsoft and LinkedIn, I think they are better together and their association seems to signal an inflection point in social networking. The strike price of $196 per share is significantly below last year’s peak of nearly $260 but also significantly above Friday’s close of $131.08, just about right in the middle. Is everybody happy?