More musing about open multisided platforms

The Wall Street Journal, in today’s print edition page C8, has an article headlined Facebook’s software boon. [The link should lead to a summarised version of the article that has not yet been paywalled.]

The article discusses the purchase of Where I’ve Been (a Facebook application) by Expedia (or, more accurately, Expedia’s TripAdvisor unit) for $3m, or $1.30 per Where I’ve Been ‘customer’. Which is all very fine and dandy. But it then goes on to discuss something else. I quote:

What’s in all this for Facebook and its youthful founder Mark Zuckerberg? When a company pays a college kid in his boxers a few million to acquire his creation, no money lands in Facebook’s coffers. And when the application is rebranded it effectively becomes free advertising for which Facebook, again, gets nothing.

It’s not yet clear how Facebook will exploit this bonanza. Charging software developers some sort of advertising fee to promote their wares on the site may prove irresistible. The worry is that this might change the character of the site. One of Facebook’s attractions is that it’s more collegiate and less overtly commercial than Rupert Murdoch’s ad-filled MySpace.

One solution that would allow Facebook to capitalise on the ferment would be for the company to take equity stakes in the applications in exchange for allowing them on the site. In so doing, Facebook would have an incentive to promote them without cluttering up its interface. Now there’s an application Facebook’s own developers should be designing.

I think two of the sentences above are telling.

“What’s in all this for Facebook….?”

“It’s not yet clear how Facebook will exploit this….”

These are the wrong questions to be asking, questions that are typical of Web 1.0. Questions that show a lack of understanding of The Because Effect.

We have to move away from the mindset in the article, which represents the economics of scarcity, to one which represents the economics of abundance. We have to move, more particularly, away from models which create artificial scarcities in order to support economics-0f-scarcity structures.

Facebook will actually make money on a double Because Effect. Because Of the people who use Facebook, and Because Of the applications they use.

Because Of is the answer, not With. Any specific application is a model of scarcity in this context, and the application developers can make money With the application. The ecosystem of applications, the open multisided platform, is a model of abundance, and the ecosystem providers need to base their business on that abundance basis.

From what I’ve seen, the guys at Facebook understand all this, so I do not expect to see artificial scarcities created. Instead, I will expect to see advertising-driven revenues. I will expect to see transaction fees, but more on an all-you-can-eat basis rather than a dish-at-a-time basis. I may even see vanilla-for-free and sophisticated-at-a-premium models. Or maybe a combination of these.

Taxing the application developer is the equivalent of American Idol having entrance fees and making voting free. There are smarter ways to make money. Facebook needs the app developers. The app developers need Facebook. It’s a symbiotic relationship, a community.

4 thoughts on “More musing about open multisided platforms”

  1. Dear JP.

    I am a CEO of a IT software who happens to write a column daily. Yesterday I discussed what I thought to be the profound implications of this deal.

    Summarizing: I would like to see more Web 2.0 companies sold by financial value calculated by their cash flow rather than the strategic approach used here with the simply math of about a buck the user of this application.

    Why I would like to see Web 2.0 companies with cash flow? Because I thought this is the particular difference with Web 1.0: Real companies with real revenue, with ongoing financial value.

    Companies valued at 1 dollar the user, with amazing potential technology were what soon destroyed the IT market at the beginning of the century.

    Mario Ruiz

  2. I am not sure that labelling this as Web 1 or Web 2 is a useful categorisation. For me the defining characteristics are the freedom to publish, the freedom to search, the freedom to converse, interact or pursue relationships. These freedoms have always been the foundation of the Web and are the reasons for the Web’s runaway success. These freedoms tap into very deep human needs.
    The wise companies are the ones that provide applications that multiply , enhance or at least are congruent with these freedoms. While the rest, obsessed by the gatekeeper or tollgate mindset try foolishly to ‘monetize this’ or ‘exploit this’. I say foolishly because by restricting the freedoms they are working against the reasons people are fascinated with the Web and so will fail.

    Your model is an abundance versus scarcity while mine is freedoms versus controls.
    I stress this distinction because it brings home a stark reality, the freedom the user has to instantly change his allegiance. This means that to retain loyalty you have to provide real, enduring value that does not restrict freedom. And you have to keep adding to that value. Google and Facebook are doing this, they are continually adding value around their core franchise, to maintain the loyalty to that franchise.

  3. Peter, I agree entirely that the issue has more to do with the opposition of freedom and controls, rather than the economics of abundance or scarcity. (Indeed, I find the very concept of an economics of abundance to be as suspect as any other utopian ideal; but that is another story better told by H. G. Wells or Isaiah Berlin!) On the other hand I also subscribe to Justice Holmes proposition that freedom of speech is not the freedom to should “Fire!” in a crowded building. Thus, I believe that we need to approach freedom and controls not through opposition but though some form of dialectical SYNTHESIS. Given the Sophos poll reported on CNET today under the headline, “Half of employers restrict Facebook,” synthesis strikes me as the best path for deriving benefit for social networking sites while remaining cognizant of their risks and liabilities:

  4. lately many Internet web 2.0 company s are for sale, it may be that entrepreneurs are panicking, as the mortgage industry collapses and the economy appears to be taking a turn for the worse: Bottom Line; Eventually, most Facebook apps will be a worthless venture.

Let me know what you think