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.

UniXKCD command line console

My favorite webcomic, Randall Monroe’s brilliant XKCD, is running a command-line version of itself today.  A few commands you might want to try include:

• find
• wget http://xkcd.com/
• Make me a sandwich
• go west

Google renames itself to Topeka

In honor of Topeka, Kansas renaming itself Google in a bid to get ultra-high-speed broadband installed, Google has renamed itself Topeka today.  Although Google is well known for April Fool’s jokes I believe this is the first time any have been on the homepage.

YouTube’s TEXTp mode

YouTube has the option to render most any of its videos in ASCII by adding the &textp=fool parameter onto the URL.  Looking at bandwidth graphs I can’t tell if they’re actually sending ASCII over the wire, or doing the conversion client-side.  Fun trick though.

Bing’s funny cows

Bing has one of their defining pastoral pictures, this time literally bucolic, but with fake cows.  They’ve supposedly been bread to only make non-dairy creamer.  Glad you’re trying, folks.

Why bigger is better for online advertisers

The reason lies in network effects of the online search + advertising industry.  Imagine you’re an ad buyer which is to say you have a service you want consumers to find online.  Unless you’re a huge company, you have limited energy to expend buying your ads.  So rather than buying and managing separate ads from each Microsoft, Google and Yahoo, you’re likely to just deal with a single ad publisher.  The sensible ad buyer will choose the ad publisher which gives them the most value for limited effort. 

Right now the clear choice for an online advertiser is Google.  Because they have the most search traffic, they are best able to reach customers.  Combined with their adsense network, Google clearly has the largest inventory for an ad buy making them the natural choice for anybody not willing to spend a lot of energy managing their online advertising.  This logic underlies the recent acquisitions of Doubleclick, AvenueA/Razorfish/whomever, and now Yahoo!  Network effects in advertising mean that the largest network will be the most sucessful.  So the mergers will continue as far as the anti-trust regulators allow them to until a handful of bitter enemies remain.

This much might be obvious to some of my readers.  But I felt like sharing this analysis since I’ve read nothing in the common press that explains the basic economic motivation of this deal.

Wrinkles, twists

An irony of the network effect comes from the auction nature of keyword buys.  Advertisers bid for the right to get their message in front of customers.  When more advertisers are competing for the targeted eyeballs of consumers, the prices for advertising go up.  This means that prices will tend to be higher on the larger ad networks.  So bargain seekers can get more advertising for their dollar by seeking out smaller networks.  This appears to contradict the logic that bigger is better for ad networks.  But many advertisers are limited not so much by budget but by the ability to reach highly qualified customers.  If you are selling poodle tattooing services in the pacific northwest, odds are you will not hit max out your advertising budget on any of the ad networks simply because not that many people are searching for your services.

I could probably fill pages with speculation about the culture clash between Microsoft and Yahoo and other reasons why it will or won’t work.  But if you’re interested in that stuff, I’m sure you’ll have no problem finding it in the backwaters of the blogosphere.  I can’t help but drop a couple relevant ideas though.  First, from what I hear, the executive management at Microsoft is so dysfunctional right now, Yahoo will provide fertile new ground for their turf wars.  If the top bosses are adept, they will use the many iterations of re-orgs to sluff off ineffective execs to projects where their overall damage can be minimized.  Second, I think I hope Microsoft has evolved enough humility to understand that they’re better off simply shutting down Yahoo’s services than forcing everything to port over to NT servers.  Right, guys?

Disclaimer

I feel compelled to point out that the opinions expressed here are mine and mine alone.  In no way does this article reflect any official position of my employer.  This is my personal analysis of the economics behind the industry I work in.

Economically, companies should be valued at the present value of their free cash flows.  That is to say, project forward all the possible ways the company might behave, and take a probability-weighted average (expectation value) of the total dividends the company would pay in each of these scenarios.  Discount these cash flows by an appropriate discount rate and you’ll get a fair market value for the company.  This is called fundamental analysis.

Now anybody who’s tried their hand at such financial calculations will know there’s a lot of judgement calls involved.  Small differences in numbers like discount rate or growth rates have huge effects on the results, and these numbers are hard to judge.  So it’s definitely possible to come up with a believable (by some) model of future cash flows that will value any currently successful company at whatever huge valuation you want.  But that doesn’t make it correct.  Is Facebook worth $300 per user?  It’s not possible for me to click on a $10 CPM ad every day for 100 years, but maybe they can add more users to grow into that?  Maybe?  It sure seems high.  I think there’s something else going on.

For context, think back to March of 2005 when Yahoo bought Flickr.  IMHO that made Google feel bad because Picassa wasn’t doing so well.  I think they saw this as a big missed opportunity to help organize the world’s photos.  I think this was big on their minds when they paid too much for YouTube.  And Google is still very far from monetizing this investment.  But they now control the dominant way that videos are communicated on the net.  This has to help them feel good about getting closer to their corporate mission of organizing the world’s information.  Since it’s not clear right now how they’re going to achieve that goal for photos.

Now consider Facebook.  Left and right, Facebook’s internal applications are surpassing total usage of th best dedicated net applications.  Their invitation app gets many times more usage than evite, and I believe their photos app is actually well beyond flickr in terms of usage too.  I don’t know where they stand for videos right now.  But it’s clear that they are a force to be reckoned with.  As I’ve written before, their application platform is potentially game-changing because it’s very attractive for information service developers and democratizes the process of product development in a novel and powerful way. 

For all these reasons, I think Facebook has the potential to dislodge Google as king of the hill.  No, Facebook isn’t going to become the dominant search engine, or even the dominant deliverer of internet advertising.  But I think Facebook could become the dominant way the humans communicate with each other using computers.  This could be the leverage they need to claim the crown of innovative thought leader on the internet.  If I were running Google, I’d be concerned about this possibility.  If I were running Microsoft, I’d be excited to get a piece of this.  Any piece.  Because even a tiny piece (like <2%) means that Google can’t take control of Facebook.  And yesterday, Microsoft got their foot in that door.  So, the game is on.  It’s gonna be fun.

Original Web 1.0

Universal access to massive volumes of data.  Being able to search
through masses of data and find what you want.  Connecting people to
huge databases really well.  Key examples:

• Online telephone books
• Web search
• Huge e-commerce sites

But in all of these applications, the data set is static.  User activity will not change the data for anybody else.

Web 2.0.1: Democratizing use of the data

The users of these data make the data better.  They can collectively
organize the data.  (i.e. tags)  They can help filter good data from
junk.  (i.e. voting)  Or they can help you find the data that are most
interesting to you.  (i.e. collaborative filtering).  In other words,
you can interact with the data.

Any "Web 2.0 company" worth their salt has an API that federates out their raw data.  This enables other sites to use the data in new and novel ways.  But the primary problem with this paradigm is that anything built using these API’s is done from the ground up.  Using the gmail POP interface, it’s possible to build a better UI for gmail.  But to do so you need to first build an entire AJAX mail client — no small feat.  Better would be the ability to add features into the gmail UI itself.  But this is really the standard in web 2.0 API’s today.

Web 2.0.2: Democratizing the feature set

The next big trend will be enabling users to make more compelling ways to interact with
the data.  Users can change not just the data, but how other users see
and use the data.  Sometimes this means API’s with UI hooks.  Or other ways to enable new functionality into an existing site.  This kind of platform enables Independent Software Vendors to improve upon the UI’s that the original sites created.

Facebook is doing this by allowing ISV’s to add new communications features to their site.  Google Maps is doing this through maplets that allow developers to create new ways to interact with mapping data from within the fabulous Maps UI.  Right now these are the only two examples of web 2.0.2 platforms that I’m aware of.

Building this kind of API is very challenging.  There are several very different ways to go about doing it.  Here are a couple of ideas:

• Provide a server-server API that includes content generated from the ISV’s servers into the main experience.  Facebook style.
• Allow developers to author XML files that define new algorithms that are interpreted on the primary host’s servers.  Yahoo pipes is a service in this style, but they’re not doing anything to enhance an existing service so it doesn’t really meet my 2.0.2 criteria.
• Allow developers to author javascript plugins to run on the client machine.  Greasemonkey is essentially doing this.  This strategy has the best shot for a lot of applications in the long term, IMHO.  But it comes with some serious problems right now.

Doing this correctly would allow ISV’s to add new features to Gmail.  Think about it — if I wanted to change the way gmail messages were displayed, or how addressing happened, or whatever it was, this kind of platform could provide hooks for making gmail better in a way that a POP interface never would.  And even though a POP-style interface theoretically could do this, there would never be momentum because having a high-level base to build upon means that there are network effects from the extensions.  (Rails achieves a similar advantage over other web frameworks — just having a standard, any standard, means people will build upon that standard rather than argue over which library to use and extend none of them.)

3rd-party javascript

The big problem with this approach is security.  There is none.  You need to completely trust the ISV before you should allow their code to run in the context of your site.  The kind of editorial review required to do this today would completely kill the democratic goal of such a platform.

The world needs a security sandbox to run third-party javascript code inside.  This way primary site hosts could allow ISV’s to run their code on client machines safely.  Here are a few examples of places this kind of tool could be used.

ISV’s could…

• Add UI features to Gmail
• Create alternate ways to share and discuss images on Flickr
• Define new mathematical formulas to run client-side on a web spreadsheet
• Create new playlist selection / shuffling algorithms for Rhapsody

… and much more.  Even better, individual users (not developers) could pick which UI extensions they wanted to use.  Any site which provides such an API has democratized the feature development process in a very important way.  Not only does it provide a distributed mechanism to figure out which features are best, but it allows users to self-segment as to which features work for them.  Without such a mechanism the entire service must have the same features for everybody, which means product designers must play a political game where they’ll never make everybody happy.  Right now I think really only Facebook has solved this problem.

Building a security sandbox is an area that Microsoft could probably do best and fastest.  They are good at code API’s and layered security models,a nd they have a perfect place to do it with Silverlight and the CLR.  They’re trying to position Silverlight as a faster way to run DHTML, which is something else the world desperately needs right now.  But I just can’t imagine them doing anything this innovative or generally valuable.  Doesn’t sell more Office.  Doesn’t sell more Windows.  They don’t even really have many services that could use third party extensions, and they’ve lost touch with the ISV’s who might build such extensions too.  Google Gears could conceivably add such an extension.  There’s precedent there considering the javascript threading extensions they provide.

This will be a difficult problem to solve, I have no doubt.  But I hope somebody with the resources to leverage a solution takes it on, because I think it would really make the world a better place.

Oh, Treo running Windows, how can you suck so badly?

After having my Treo 700W for a while, it started to get noticeably less stable.  First it stopped receiving e-mail.  Then it stopped sending e-mail.  Then incoming calls would cause it to crash (my favorite really).  Then it stopped sync’ing to Outlook, and then it wouldn’t even show up as a USB device on my PC.  Then incoming text messages would cause it to crash.  At that point it was just too much.  The Treo 700W is worse than most WM5 devices because it just doesn’t have enough RAM — somehow Palm failed to implement Microsoft’s recommended minimum memory requirements, which I hear rumors almost resulted in a class-action lawsuit.

Around July I realized that every time I rebooted the thing, it wasn’t storing any new text messages.  After a reboot, June 21st would be the most recent text message it stored.  I wondered if it was just being slow to commit them to memory, but finally I realized it was just full.  So I tried to clear the entire text message store.  I’d let this process run for hours, overnight even, and it would display no progress.  After rebooting, nothing had changed.  I remembered that at some point the "drafts" folder had become corrupt to the point that even trying to display the folder would lock the system hard.  I wondered if that was related.

The Dilemma

So my phone is crashing constantly.  It’s my primary contact database, and social calendar.  I know how to do a hard factory-defaults reset of everything.  But I haven’t gotten it to sync to Outlook since May and I don’t want to loose all the phone numbers and appointments I’ve made since then.  Being Microsoft, there’s no way to get the PIM data out except using Active Sync.  (What’s so hard about exporting to XML or a flat file!?)

So I could rescue my phone by clearing it’s brain.  But my phone is almost part of my own brain, and without backup I’d lose months worth of social data.  Ugh.

The Solution

Here are the steps I took to recover the thing:

1. Copy all files out of ‘My Documents’ folder onto an SD card, and back them up on a real computer.
2. Erase everything in ‘My Documents’
3. Uninstall all user applications.  (Except Active Sync!)
4. Keep plugging it into different Windows PC’s until one of them makes the USB ding-DING noise.  (All my desktop and laptop windows machines have degraded to near uselessness too over the last few months, so this was a challenge.)
5. Make sure that PC has Active Sync and Outlook on it.
6. Create a new Outlook profile (Start->Control Panel->Show Profiles) to back up the phone to without messing with other Outlook stuff
7. Tell ActiveSync to just backup the Contacts and Calendar. 
8. Copy them into Outlook.  (This can take a while of futzing with Active Sync on both sides.)
9. Reset your phone to its factory defaults
10. Active Sync the useful stuff back into your phone.

How do to a hard reset of your Windows Mobile 5 phone:

I’m not actually sure if this works for all WM5 phones, but it works on the Treo 700W.  Here’s what you need to do:
1. Pull out the battery
2. Wait for 15 seconds or so  (look closely at the screen — it slowly fades out even without power)
3. Press and hold the red Phone Hangup / On-off button
4. Insert the battery
5. Keep holding the red button until a screen asks you if you want to reset?
6. Press the up arrow to clear all memory from your phone.

It took weeks to actually accomplish this, but I’m really glad I did because my phone is so much more stable now.  It’s still a complete POS but at least it doesn’t crash every other time somebody calls now.

Next step: get the calendar to sync with google calendar.

• Press Start
• Select Settings
• Choose the System tab
• Run Memory
• Choose the Running Programs tab

Happy terminating!