Apple, Facebook, and Twitter are all companies operating in a global economy under the laws of one or more countries, but thinking of them as profit driven entities, making things in competition with other companies doesn’t really help. A for profit company is expected to maximize returns for its shareholders. In that light, Facebook’s move to control the economic activity on its platform through Facebook Credits makes perfect sense, but I was not convinced it was the right thing for them to do.
As I thought about it, it became clear that web platforms really don’t make much. Instead, they create the conditions that encourage others to invest their time and energy to create useful services. The value of Twitter is not in the software that runs on their servers; it is in the content that 180 million people contribute to their network – same with Facebook. Many would argue that Apple makes things, but even there, the full experience of the iPhone has a lot to do with the 200,000 applications that others created to run on the device.
A lot of people have begun using the term ecosystem to describe these big platforms. That captures their decentralized, emergent character, but ecosystems do not have a central point of control. Apple decided to eliminate third party analytics between one release and the next. That doesn’t happen in an ecosystem. The right analogy is a government.
Facebook is a government. Facebook’s users are citizens, and Facebook’s applications developers are the private companies that drive much of the economy. Apple. Twitter, Myspace, Craigslist, Foursquare, Tumblr and every other large network of engaged users (including some services of Google) plays a similar role. We have always tacitly acknowledged this. We talk about these networks as communities, communities have governments.
It is easier to make sense of this spring’s events if you think about large web platforms explicitly as governments. Was Apple’s move an unwarranted extension of state power into what had been private sector analytics, or a necessary and restrained regulatory constraint on companies that may not have been acting in the citizen’s interest? Did Twitter’s announcement of its own URL shortener suggest the state planned to move into an area better left in private hands or are they simply providing basic infrastructure like a highway – a natural state monopoly that benefits everyone.
Once you start thinking about large web platforms as governments, the logical question is what kind of government are they. One thing is for sure – none of these platforms are democracies. They are oligarchies controlled by founders, investors or shareholders. That may not be at all bad. As long as citizens (users) can move freely from one government to another with little switching cost, there is no reason to burden these polities with the inherent inefficiencies of popular democracy. But that does put a special premium on emigration policies and property rights. Do I own my data, can I export it freely? It also suggests that large networks that have strong network effects may someday need other incentives to act in the best interests of their citizens.
So how do the events of this spring look through this lens?
Apple looks like a monarchy. The monarch got angry when he found out that many of the applications that ran on the iPhone collected device information which developers use to improve the reliability and performance of their apps, but that that same information allowed analytics providers to access state secrets, like the existence of a new device – the iPad. He reacted impulsively, as monarchs sometimes do, and banned all analytics providers, without having an alternative in place for developers. Apple argues that the new terms of service for OS 4 are designed to protect the privacy of users but if you saw Steve Jobs react to the question from Chris Fralic at the All Things D conference, it’s pretty clear what drove the new terms of service.
Facebook looks a little like the Russia of Vladimir Putin. Facebook was originally a state economy. The vast majority of the services were provided initially by Facebook. Later, they liberalized their economy with the introduction of the Facebook API. That unleashed a torrent of investment and innovation, but also some bad behavior and unsavory characters. Now the state is reasserting control over the economy with the introduction of Facebook Credits. They would argue this is for the benefit of all citizens and well behaved private companies, and that a common currency and a state controlled monetary policy will benefit everyone. Others might say using the currency as a mechanism to tax everyone in the economy at a 30% rate is aggressive in light of what it actually costs to run this particular state.
Twitter, by comparison, seems to have a more limited view of state power. They can still appear arbitrary and capricious, especially to companies who make URL shorteners, or iPhone clients, but they did not use state power to ban anyone, or to extract a tax. They may well introduce a currency in the future or more restrictive terms of service, but they seem from a distance (we are investors but I am not on the board) to have a qualitatively different relationship with the companies in their economy and the citizens in their state.
In the end, the big networks on the web will all have to find a balance between state power and private initiative. Despite Craig’s progressive personal politics, Craigslist lives the credo “a government governs best that governs least”. They make very few changes to the site, and then, only when users ask for it. Their business model is restrained. They only make money in a few of their 455 cities and only on a few types of postings. The business model emerged as the result of user requests to stop abusive automated reposting by real estate and employment agencies. This restrained approach created a phenomenally profitable business. It also has led to conflicts with their host (real world) governments. A number of headline grabbing attorneys general want Craiglist to assert more state power to eliminate some uses of the service they feel do not fit with broader social norms.
If you accept the analogy of web services as governments, the example of Craigslist offers a couple of insights. First, it’s possible to be fabulously profitable as a restrained government, but perhaps at the expense of top line revenue (or the government’s share of total GDP). And second, that no web service is an island. Web services will compete with each other for the time and attention of their users and for investment from the private sector (applications developers), but they will do this in the context of their host government’s who are also competing for tax revenues and private sector investment.
So as you watch the large web services evolve, think about how they are balancing the relationship between the state and the private sector? What does Facebook’s introduction of Facebook Credits say about its monetary policy? What is Apples foreign policy? Do they act unilaterally promoting their own proprietary standards or do they act multilaterally embracing international standards? What is Twitter’s industrial policy? Do they invest in state owned services or encourage decentralized economic development? The choices these platforms make reveal a lot about who they are, and ultimately how well they serve the companies operating in their economies and the citizens who live there.