I want to expand a bit on my ‘what facebook is up to‘ post from a couple weeks back.

Plaxo announced that the launch of Pulse this week, which Michael Arrington dubbed the ‘Open Facebook‘.  One of the relatively few criticisms of Facebook is the blogosphere is that it is a ‘walled garden‘ or ‘roach motel‘ for data– information goes into Facebook, but you can’t get it out again.  The conventional wisdom is that this violates the spirit of the Internet, which was build on open standards so that anyone could share information with anyone else, and that in the end, openness always wins out.

Personally, I don’t think Pulse is going to overtake Facebook anytime soon.  Plaxo started life as a way to keep your address book up to date, and earned a reputation for spamminess as it had a tendency to email you every time one of your contacts changed something on their profiles.  Nonetheless, it raises a very interesting question: is it possible for any open social network to overtake Facebook?

Users and Data Streams

Quoting Wikipedia, Metcalfe’s Law states that “the value of a telecommunications network is proportional to the square of the number of users of the system.”  This same logic has been applied to other domains where network effects are important, like operating systems and (lately) social networking applications.  As you’ll notice from the Wikipedia article, a number of people have made various objections to Metcalfe’s law, saying that it over or underestimates the additional value a network receives from each additional user, though everyone seems to agree that the effect is at least superlinear.  My quibble with the way Metcalfe’s law is applied is that the unit of analysis isn’t right, at least when it comes to platforms like operating systems or social networks: the value doesn’t increase with the number of users, it increases with the number of data streams.

For the telephone network, the number of users and the number of data streams is essentially the same– each person has one voice.  But in the context of software, a single user can correspond to multiple data streams.  On Facebook, I control data streams of messages, photos, links, and games of scrabulous.  The day that Facebook opened up their platform to third party applications, the value of their network increased significantly– and would have increased if they hadn’t ever added a single additional user.  Naturally, the fact that the network increased in value from the multiplicative impact of the additional data streams brought more users (and hence more streams) into the network, which increased the value of the network even more, which brought more app developers, which brought more users, etc.

Open networks do not win out over closed networks by default– the fact that Windows is still very much the dominant operating system indicates that the value of all of those third party applications that have been developed for Windows over the years has not been overcome by the more open Linux platform.  Rather, open platforms often win out because it is generally easier to add data streams to an open platform than it is to a closed one.  For example, the original AOL was a true walled garden: third party developers could not create applications that would run inside of AOL nearly as quickly, cheaply, or easily as they could create new web sites using HTML and free tools like apache and perl.

Social Networks, Identity, and one hundred billion dollars

One of the things that people have been pointing out as a favorable aspect of Pulse is its support for OpenID, an open standard for single sign on across the Internet that has been slowly gaining momentum over the last few years.  The goal of OpenID is to prevent any single company from dominating identity on the Internet, and there have been several calls for Facebook to support OpenID.

I’m going to make a bold prediction: Facebook will never truly support OpenID, because Facebook wants to be the centralized single-sign on source for web applications.  My friend Sean is a firm believer in the idea that ‘social networking is a feature‘– not an application in and of itself.  I believe Facebook feels much the same way– social networking is a feature that lots of applications and sites should have, but there isn’t much value in those sites creating their own, closed social networks, any more so than those sites would derive much value from building their own credit card payment services or even their own supply of electricity.  Rather, those sites should pay Facebook to provide the social networking infrastructure for their sites, with Facebook acting as the one true ’social utility’.

Here’s an example to clarify what I’m talking about.  Let’s say that an online clothing retailer wanted to integrate social shopping features to their site.  When you sign in to their site with your Facebook ID, you can see what other friends are shopping at that site right now, chat with them, see what they recently purchased, etc., etc.  Meanwhile, when you login to Facebook, your News Feed contains information about where your friends are shopping and how they are spending their time online.  Facebook can leverage their network, the platform, and the News Feed to become a traffic director for the Internet (ala Google or Yahoo) and gain control over some incredibly valuable marketing data.  For any kind of community or commerce site, not being a part of the Facebook News Feed would become equivalent to not belonging to Google’s index– it’s as if you don’t exist at all.

I think that Facebook’s current valuation should be roughly equal to the product of two numbers: 1) the cash value of controlling and managing online identity, and 2) the probability that they will succeed.  The challenge is that no one really knows what the first number is (aside from “a lot”), nor do they know what the second number is, although it seems like Facebook has a much higher probability than any other player out there.

Can an Open Network Beat Facebook?

Right now, I don’t believe that an open network, starting from scratch, can catch up with Facebook.  My concern is that an open network is going to have more “friction” associated with adding a data stream than a closed network like Facebook has.  Photos, events, and link sharing are fundamental data streams for people using social networks, but a new user at Plaxo will need to configure access to multiple services to provide those features, whereas they are built-in to Facebook.  It seems like every open network service will need to be tightly integrated with these service providers in order to match Facebook’s ease of use, but if that’s the case, I don’t know how “open” the network really is.

More likely, in my opinion, is that one or more of the other big players– Google, Yahoo, Microsoft, Amazon, and eBay– will figure out what Facebook is up to, although not necessarily before it’s too late to stop them.  The pivotal company, in my opinion, is Amazon– they’re savvy enough to see what’s what and have a large enough user base to be a kingmaker for social shopping and online identity.

I see two possibilities: in case one, Amazon and Facebook form a significant alliance that involves Amazon taking an equity stake in Facebook, Amazon building social search apps on top of Facebook identities, and significant data sharing between the two companies.  In case two, Facebook provides identity and social shopping support for a wide swath of Amazon’s competitors, almost certainly including Barnes and Noble.  I believe Facebook is more likely to go with the second option, since Amazon has a significant investment in their own ID system and platform that they might not be willing to sacrifice.  The concern is that if Facebook’s partneships with Amazon’s competitors works out, it will drive Amazon into an alliance with Google, Yahoo, or Microsoft that could counter Facebook.

That said, If I’m Mark Zuckerberg, I’m willing to bet that the Big Five, each with their own positioning and interests with respect to online identity, won’t figure out how to place nicely with each other until it’s too late (if ever).  It’s not an easy bet to make, but the stakes are so high and the game is so nervewrackingly fun, I don’t see how he could help but go all in.

Labels: social networks

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