This is “Walled Garden or Open Field?”, section 7.9 from the book Getting the Most Out of Information Systems: A Manager's Guide (v. 1.0).
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After studying this section you should be able to do the following:
The approach of keeping users nestled in the confines of a single service is sometimes called the walled gardenA closed network or single set of services controlled by one dominant firm.. In this approach, a closed network or single set of services is controlled by one dominant firm. The prior iteration of America Online was a walled garden, and the term is often used when referring to cell phone providers. While this is changing, U.S. phone carriers were typically able to decide which handsets worked on their networks, which features they could offer, and which services can be accessed (see Chapter 8 "Google: Search, Online Advertising, and Beyond…" to learn how the firm is working to change this, too).
And at first, Facebook was a walled garden. Sitting atop the largest number of social network users, the largest set of online photos, and the largest number of gadgets and widgets, Facebook seems to have found the sweet spot. Network effects suggest that users and application developers will show up first to the place where all the action is. As Facebook continues its influence, its control becomes more and more absolute.
But Google has a different vision. The firm is trying to establish a set of standards that rival Facebook’s APIs. The effort, called OpenSocial, allows a developer to write an application for one service, then let it run on any site that adopts the OpenSocial framework. Google, along with other sites, is also pushing data portability. In the grand vision, users would be able to consolidate all of their social networking information regardless of where it was created. Friends on MySpace, LinkedIn, and Gmail could all be reachable through a single contact list and inbox. Feeds would be consolidated in one view regardless of where these actions were performed. A photo posted on Flickr, a Twitter tweet, an article gets a Digg or bookmark—in theory you could combine these in a single site so that you’d have just one place to look instead of many. And efforts would promote data portability, in theory making it easier to pack up your data and take it with you when you leave one site for another. Other efforts, like OpenID, promise a single sign-on—just one password that could grant access across all compliant sites. It’s a neat vision, one where social networks could grow from anywhere, linked via a sort of connective tissue of openness that lets data and features flow, regardless of where they were created.
Then a strange thing happened—Facebook opened up too. Of course, it’s not playing nice with Google’s standards—it has its own, built around something it calls Facebook Connect—but the service is remarkably open, and getting more so.
According to Dave Morin, Facebook’s Senior Platform Manager, “Facebook Connect has threefold aim: transporting your Facebook identity, making your friends lists portable, and seeing detailed activity feeds from what your friends do across the Web.”C. McCarthy, “Facebook’s Morin Calls on Developers to Connect,” CNET, October 10, 2008.
The ability to transport your Facebook ID is fast realizing a goal that has thwarted firms from Microsoft to Sun to Yahoo!—enabling a single sign-on that can be used for different services across the Web. You can now visit a site like CBS.com, watch a video, and post a comment all by leveraging your Facebook account. Users like this because they can access content without the hurdle of creating a new account. Web sites like it because with the burden of sign-up out of the way, Facebook becomes a Web site experimentation lubricant “Oh, I can use my Facebook ID to sign in? Then let me try this out.” After you post that comment to CBS, it can then squirt back into your feed, to be shared with your friends. The kind of viral activity that spreads Facebook apps can now be harnessed to promote activities outside Facebook’s walls! And this movement can be good for Facebook, as it more firmly plants the site in the center of the user’s online universe. Perhaps leveraging Facebook’s identity makes the Web becomes even more social. When I see a Citysearch review from some random user I don’t know, I’m not sure how much I trust it. But when my Facebook buddy uses Citysearch to post a restaurant praise or pan, I might value that opinion more than any others I’ve read.
Facebook Connect can also be thought of as a way to integrate the Web into Facebook in a way that moves beyond what you can do with in-Facebook apps. Says Zuckerberg, “A lot of people saw [the F8 Facebook application platform] and asked ‘Why is Facebook trying to get all these applications inside Facebook when the Web is clearly the platform?’ And we actually agreed with that… As time goes on, we’re shifting away from Platform inside Facebook and shifting more towards Connection (outside of Facebook).”F. Vogelstein, “Mark Zuckerberg: The Wired Interview,” Wired, June 29, 2009. Facebook Connect just might be a way for Facebook to colonize the Web, growing its sphere of influence as partner, hub, traffic driver, and standards setter.
Facebook Connect also allows third-party developers to create all sorts of apps. Facebook feeds are now streaming direct to Samsung, Vizio, and Sony TVs; through the XBox 360 and Wii game consoles; and via Verizon’s FIOS pay TV service. While Facebook might never have the time or resources to create apps that put its service on every gadget on the market, they don’t need to. Developers using Facebook Connect will gladly pick up the slack.
But there are major challenges with a more open approach, most notably a weakening of strategic assets, revenue sharing, and security. First, weakened assets. Mark Zuckerberg’s geeks have worked hard to make their site the top choice for most of the world’s social networkers and social network application developers. Right now everyone goes to Facebook because everyone else is on Facebook. As Facebook opens up access to users and content, it risks supporting efforts that undermine the firm’s two most compelling sources of competitive advantage: network effects and switching costs. Even with Facebook Connect, it still remains more difficult to export contacts, e-mails, photos, video from Facebook than it does from sites supporting Google’s Open Social,F. Vogelstein, “The Great Wall of Facebook,” Wired, July 2009. and any effort that makes it easier to pack up your “social self” and move it elsewhere risks undermining vital competitive resources advantages. This situation also puts more pressure on Facebook to behave. Lower those switching costs at a time when users are disgusted with firm behavior, and it’s not inconceivable that a sizable chunk of the population could bolt for a new rival (to Facebook’s credit, the site also reached out to prior critics like MoveOn.org, showing Facebook Connect and soliciting input months before its official release).
Along with asset weakening comes the issue of revenue sharing. As mentioned earlier, hosting content, especially photos and rich media, is a very expensive proposition. What incentive does a site have to store data if it will just be sent to a third-party site that will run ads around this content and not share the take? Too much data portability presents a free rider problemWhen others take advantage of a user or service without providing any sort of reciprocal benefit. where firms mooch off of Facebook’s infrastructure without offering much in return. Consider services like TweetDeck. The free application allows users to access their Facebook feeds and post new status updates—alongside Twitter updates and more—all from one interface. Cool for the user, but bad for Facebook, since each TweetDeck use means Facebook users are “off site,” not looking at ads, and hence not helping Zuckerberg & Co. earn revenue. It’s as if the site has encouraged the equivalent of an ad blocker, yet Facebook Connect lets this happen!
Finally, consider security. Allowing data streams that contain potentially private posts and photographs to squirt across the Internet and land where you want them raises all sorts of concerns. What’s to say an errant line of code doesn’t provide a back door to your address book or friends list? To your messaging account? To let others see photos you’d hoped to only share with family? Security breaches can occur on any site, but once the data is allowed to flow freely, every site with access is, for hackers, the equivalent of a potential door to open or a window to crawl through.
Facebook will eventually see stellar growth start to slow as the law of large numbers sets in. The shift from growth business to mature one can be painful, and for online firms it can occur relatively quickly. That doesn’t mean these firms will become unprofitable, but to sustain growth (particularly important for keeping up the stock price of a publicly traded company), firms often look to expand abroad.
Facebook’s crowdsourcingThe act of taking a job traditionally performed by a designated agent (usually an employee) and outsourcing it to an undefined generally large group of people in the form of an open call. localization effort, where users were asked to look at Facebook phrases and offer translation suggestions for their local language (see Chapter 6 "Peer Production, Social Media, and Web 2.0"), helped the firm rapidly deploy versions in dozens of markets, blasting the firm past MySpace in global reach. But network effects are both quick and powerful, and late market entry can doom a business reliant on the positive feedback loop of a growing user base.
And global competition is out there. Worldwide, Facebook wannabes include “Studiverzeichnis” (German for “student index”), a site with millions of users; Vkontakte (“in contact”), Russia’s most popular social networking site; and Xiaonei, Chinese for “in the school,” which is said to have registered 90 percent of China’s college students.
China’s Internet is booming. The nation now has the world’s biggest population of online users and is attracting venture capital to match. Xiaonei, which was sold to Oak Pacific Interactive in 2005, recently received a four-hundred-thirty-million dollar investment to help growth.Andy Greenberg, “Facebook’s Foreign Clones,” Forbes, June 12, 2008. That’s more than any single group has invested in Facebook, and about as much as the firm has raised in total since its founding.
There are over a hundred social networks operating in China.Bruce Einhorn, “Facebook in China? Not So Fast,” BusinessWeek, November 20, 2007. And if competing with clones weren’t bad enough, now there are clones of clones. Wang Xing, who created Xiaonei, has created another social networking service, Hainei, aimed at adults rather than students. Cover up the logo on Xiaonei, Hainei, and the Chinese Facebook (which launched in mid-2008), and you’d be hard pressed to tell the difference. China is proving a particularly difficult market for foreign Internet firms. Google, eBay, Yahoo! and MySpace have all struggled there (at one point, Rupert Murdoch even sent his wife, Wendi Deng Murdoch, to head up the MySpace China effort). And don’t be surprised to see some of these well-capitalized overseas innovators making a move on U.S. markets too.
While global growth can seem like a good thing, acquiring global users isn’t the same as making money from them. Free sites with large amounts of users from developing nations face real cost/revenue challenges. As the New York Times points out, there are 1.6 billion Internet users worldwide, but fewer than half of them have disposable incomes high enough to interest major advertisers.B. Stone and M. Helft, “In Developing Countries, Web Grows without Profit,” New York Times, April 27, 2009. Worse still, telecommunications costs in these markets are also often higher, too. Bandwidth costs and dim revenue options caused video site Veoh to block access coming from Africa, Eastern Europe, Latin America, and some parts of Asia. MySpace already offers a stripped-down Lite option as its default in India. And execs at YouTube and Facebook haven’t ruled out lowering the quality of streaming media, file size, or other options, discriminating by region or even by user.
Making money in the face of this so-called “International Paradox” requires an awareness of “fast and cheap” tech trends highlighted in Chapter 4 "Moore’s Law and More: Fast, Cheap Computing and What It Means for the Manager", as well as an ability to make accurate predictions regarding regional macroeconomic trends. Ignore a market that’s unprofitable today and a rival could swoop in and establish network effects and other assets that are unbeatable tomorrow. But move too early and losses could drag you down.