Google+ and Facebook’s natural monopoly in social networks
Natural monopolies occur when it is economically favorable to have a single standard vendor for a product or service. In these situations, monopolies tend to appear and maintain themselves naturally. When I say “economically favorable” I mean in the aggregate — the entire economy operates more efficiently because of the standard. Which is unusual with a monopoly — usually monopolies get in the way of theoretically ideally efficient capitalism because their power distorts competition. The monopolist will often create friction in the market by say charging unreasonably high prices. The strange thing about a natural monopoly is that even with a powerful monopolist in place, most people (not all of course!) are better off.
I’m going to give two examples of natural monopolies in high tech. They are not the perfect examples used in textbooks, but I think they are illustrative, and offer valuable lessons.
Natural Monopoly of Operating Systems
Operating systems are a good example of a natural monopoly. As much as we all value choice as a driver of innovation, the plain truth is that almost everybody is better off if there is a standard operating system upon which higher-level applications can be built. Application developers benefit because they have a single clear platform upon which to build. If there were two or three dominant operating systems, application vendors would need to build a separate version of their application for each one in order to reach consumers, which is considerably more effort. Similarly, the standard benefits consumers because they have a single choice which gives them the benefit of all the applications written on it.
Gates & Allen understood this long before most, which prompted them to drop out of school and pursue Microsoft with vigor. Windows succeeded in creating such a natural monopoly, enabling a rich ecosystem of third-party software vendors (ISVs in MS parlance) to create value for consumers without needing to worry about what chipset underlies the graphics card or network adapter their customers’ computers. In this way, Microsoft enabled the creation of value for PC customers and wealth for ISVs, and the monopoly persists in a form to this day.
But all is not rosy in this world. Other companies want to sell operating systems. People want choice. Once entrenched, the monopolist has a tendency to make choices which benefit the monopolist more than the consumer — Microsoft continues to exhibit this behavior even as their monopoly power fades. In classic natural monopolies like utilities, explicit regulation controls the monopolist’s abuse. With Windows, a combination of limited government intervention and competitive innovation ultimately limited their influence.
Social networks as natural monopolies
Online social networks also exhibit properties of a natural monopoly. A well built social networking service like Facebook creates tremendous economic opportunities. Particularly if the service exposes its valuable social graph data through an API that other services can use. Almost any online service can be made more compelling by incorporating social graph data. The existence of a publicly usable social graph dataset provides an economic boost to the entire tech sector.
This boost tends to create a winner-take-all situation. When third-party services rely on a social API service, they reinforce consumer’s use of that service. Third parties’ lives are easier when there is a single standard, because they only need to code to a single API in order to gain the benefits of the social graph. Here the analogy to operating systems is clear. The social network provides a platform upon which others can create value. The value creation process is easier if there is a single standard social network upon which to build. These characteristics make the social networking monopoly natural.
A behavioral characteristic of social networking sites’ users also helps create a monopoly. People enjoy the benefits of having their social network defined online, but they do not enjoy the effort of defining it. Us geeks (everybody reading this and probably most of your friends) are willing to spend hours organizing our friends into circles or searching for people we know to connect with them. Some of us even enjoy it. But for most normal people this very quickly becomes a boring waste of time, especially if they’ve already done this once or twice on different websites. Most people are not willing to maintain multiple social networks. Once they are invested in one, the barrier to switching is quite high.
Implications for Google+ in competing with Facebook
Facebook’s dominance is rapidly approaching monopoly levels. They have crossed the tipping point where they are fast on their way to becoming the de-facto standard for social graph data, if they haven’t already. The nature of social networks as supporting a natural monopoly means that Facebook’s rise will be supported more strongly than it would be otherwise. When considering Facebook’s dominance, we readers must remember our place in the ecosystem as geeks. We and our friends, are the innovators and early adopters who are far more willing to try the new thing, because we see intrinsic value in progress, and are far less perturbed by unrefined products. The fact that recently Facebook’s fastest growing demographic was women over 55 shows that the service has crossed Moore’s chasm and now appeals to the majority of people. As industry insiders, it’s easy for us to forget the bubble we live in — just because everybody we know uses something doesn’t mean it will ever actually take off an be popular with non-geeks. But Facebook is clearly on a path to provide a dominant monopolistic standard for social networking data.
Breaking this monopoly would be difficult for Google even without the advantages of a natural monopoly. People’s natural laziness makes a third social network (after Facebook and Twitter) unlikely to succeed as well. So on the face of it, Google‘s got a very tough road ahead. It’s tempting to declare G+ dead on arrival because of these intrinsic forces, but there are other reasons why I think they actually have a decent shot. But I’ll save that analysis for another story.