Freeman

THE CALLING

A Battle that Everyone Wins

Google versus Facebook

JULY 14, 2011 by STEVEN HORWITZ

The battle is on. No, it’s not Hayek-Keynes Round Three (as much as we might hope for that someday). It’s Facebook versus Google+, and folks are already taking sides. Rather than make a case for one over the other, which this early in the process would be silly anyway, I want to say a few words about what this budding rivalry tells us about competition more generally.

Google appears to have created a legitimate challenge to Facebook’s dominance over the social networking market. Haters of Facebook are already predicting its demise once people realize how vastly superior Google+ is. Facebook defenders are arguing that it will take too long for enough people to sign up to make it dense enough, or that Google’s privacy protections aren’t so great, or that the software is too buggy, or any of a bunch of other things. The Google+ folks are convinced it will “kill” Facebook, while the Facebook partisans keep pointing out the failures of prior Google innovations, such as Google Wave.

Beneficial Unintended Consequences

All this bickering misses the bigger picture, which is that whatever the outcome of this competition, we will all be winners thanks to the beneficial unintended consequences of competition. Competition, as F.A. Hayek argued years ago, is a discovery process through which firms learn what their customers want and customers learn what sorts of products and features best serve their needs.

Part of what drove Google to create a competitor was the belief that Facebook lacked or poorly implemented some features and that providing them competently would attract people. The most obvious of these is Google+’s “circles,” which give users easier and more precise control over which friends see or don’t see particular things they wish to share. Facebook does not allow users to direct posts to subgroups of friends, and Google believes enough users find this sufficiently frustrating that they will jump to a network that does. This is just one example.

Google’s innovation will produce one of four outcomes: 1) So many people think “circles” are valuable that they jump to Google +, leaving Facebook to become the next MySpace, consigned to the back corner of the Internet; 2) most people don’t find that “circles” or other innovations add sufficient value, so Google+ becomes the next Google Wave and dies a quiet death; 3) Facebook realizes the value added by “circles” and introduces something similar (note Facebook’s partnership with Skype, a preemptive strike against the video chat capabilities of Google+); 4) some people prefer “circles” and others prefer Facebook so the two coexist like the Coke and Pepsi of the 21st century. The important point is that no matter which outcome emerges, most people will get what they want.

What Do We Want?

The beauty of competition is that it is how we find out what people want. Google’s executives are not certain that users will prefer “circles,” although they are confident enough to roll out the software. The only way they will know for sure is the market test: Will the differences with Facebook be attractive enough for people to join up? It’s also worth noting that this is not an either-or choice – just because you think Google+ is better doesn’t mean you have to give up Facebook. It’s possible they will turn out to be complements not substitutes. Some people drink Coke and Pepsi.

The broader lesson here is the importance of freedom of entry. Having had the market largely to itself for so long, Facebook may well have become unresponsive to users. Google’s ability to create a meaningful competitor is what will force Facebook to innovate, even if Google+ fails in the long run. This is why we need to be wary of complaints about firms being “too big.” If a firm like Google couldn’t leverage its size and unique market position to pose an effective competitor to Apple in the smartphone market or Facebook in the social network world, we would lose the competitive threat that keeps incumbents innovating.

The irony is that breaking up a large firm to avoid monopoly can enable monopolies elsewhere by removing that firm as a competitor. As the battle of the new century unfolds in the months to come, we should all celebrate that free entry and competition have their way and that we will all learn what people want in social networking. That’s a battle that everyone will win.

ABOUT

STEVEN HORWITZ

Steven Horwitz is the Charles A. Dana Professor of Economics at St. Lawrence University and the author of Microfoundations and Macroeconomics: An Austrian Perspective, now in paperback.

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