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Google+ and Facebook’s natural monopoly in social networks

Google+ and FacebookNatural 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.

  1. Omak says:

    So maybe it’s because I have this topic in my mind, but one could argue that “communities” (in the old fashioned, place-centric meaning of the term) had some sort of natural monopoly, at least when viewed from a certain vantage point. Because it sure is a lot easier to live in the place you grow up in, where you developed a large social graph with a significant degree of mutual benefit, ranging from family to watch the kids, friends to hang out with, people you know of to conduct business with and seek employment from. Lots of transaction costs disappear because of better information. And the value creation can be easier, because you know who to ask for money and they know you, your potential customers know you, and you probably have good connections up and down the supply chain (eggs, flour, wagons). And it worked for a long time, most people lived within this particular social ecosystem, and many would have argued that it was good enough and little would be better.

    But I’ll assume now that few of the people reading (including our host) live in the same place we grew up in, and have pursued other activities outside of our original home despite all of the challenges which have come about from abandoning the village (which can be significant–especially once the kids get added in, huh?). So despite all of the Grandma’s thinking we’re crazy for leaving town, we do it anyway, and society benefits for a set of other reasons, because the circumstances change, because there are other (new) components in the value creation network, and because technology (among other factors–like different social compacts) can disrupt the old equations and sources of value and friction.

    Back to the matter at hand, Facebook may indeed enjoy a “natural” monopoly for the moment, which certainly does it make it difficult for Google to enter the marketplace. It must be important, though, because this is essentially Google’s fourth attempt (don’t forget Orkut). What I suspect Google really wants to do is blow apart what gives Facebook it’s (current) monopolistic power: the proprietary social graph. If Google can reduce the value of Facebook’s particular social graph to zero (by building one which is more open and making it portable) than they seriously undercut Facebook, at least as a monopoly. And in the end I think that’s a good thing, because while there is huge value building upon the social graph (as you point out), that value is more stable, not to mention flexible and secure, when built on something not owned by a particular company, or at least owned in a more open way (and don’t argue that Facebook’s graph is open: if it was, you could use your Facebook graph within G+).

    So while all of the people who see Facebook as the secure place and thinks us techy people are crazy to wander off into the new G+ cities, and even if G+ isn’t the eventual settling place for us wanderers (though it does seem to have better momentum and compelling use than prior attempts), the period of Facebook as a natural monopoly will come to an end at some point, when the current social benefits wear thin. And given the pace of technology, I suspect that point is far closer on the horizon than most would of us would even suspect.

    Apologies if I stole your next piece…I’m very focused on avoiding some of the very tedious work associated with moving (away from my current village).

  2. gabriel says:

    I’m not sure about your definition of a “natural” monopoly. I think the reality is that there are always forces encouraging the rise of monopolies naturally. There are also actors who are attempting to reinforce and expand those monopolies. People are lazy and in general are happy to accept the “okay” solution in most categories, be it cars, food, or operating systems. The question of choice is a really interesting factor in how monopolies come about. On the one hand people ostensibly want choice, but they also can easily become overwhelmed by too many choices. On the balance I think this works in the favor of monopolies.

    Anyway, I think people are somewhat missing the point in painting G+ as just a direct competitor in the social networking space to Facebook. It’s no accident that G+ is integrated into every part of the Google ecosystem and they’re clearly leveraging that integration effectively. The integration and their promotion of Circles as first level objects has already lifted them past dead on arrival given that they’re at 10 million+ users in the first few weeks. Whether or not they’ll cross the chasm and pick up the Grandmas is still in question, but we’re not gonna see G+ go the way of Wave or Buzz.

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