Platforms and web economics 2.0

In my last post, I talked about how as a technology platform, Web 2.0 isn’t that much different than Web 1.0; really, going from 1.0 to 2.0 is more of a marketing indicator that significant new value is being created on top of this platform.

But there are some other aspects to what people mean by “Web 2.0.” Paul Graham calls it “democracy, and not dissing users.” Tim O’Reilly calls it “the architecture of participation.” And pretty much everyone agrees it involves users owning and controlling their own data.

I think that one interesting way to look at this aspect is through the economics of platforms (a great example of an “econometa,” what this blog is supposed to be all about). There are two ways that a platform, or a standard technology infrastructure, can be built:

Private enterprise:
– Many proprietary standards vie for adoption
– One winner attains a lucrative monopoly
– Over time the monopoly expires and the platform becomes a public resource

Public discourse:
– The government or a standards body solicits proposals
– Private companies and individuals lobby for their solution
– A winning platform is selected and designated a public resource

Currently in the U.S. at least there is a tendency to see one of these as “good” and the other “bad” depending upon your political views; I’d argue that there are plenty of situations in which either can be the more appropriate. But one thing is certain: the first way involves a lot more money changing hands. The cost of lobbying is much smaller than the cost of many companies developing and marketing solutions, and the profits associated with being selected to build a public resource is much smaller than the profits associated with holding an ongoing monopoly over that resource.

I’d like to suggest that a part of Web 2.0 is a better understanding of how the private enterprise route towards a platform works, and a decreased tolerance for the power and profits that go to the monopoly winner. This social shift is being accompanied by several economic shifts that reinforce it:

– The ease and low cost of using the Internet to gather together interested parties and work towards a standard without any central authority
– The low cost of building a platform (or an incremental platform component) and applications that use it
– The high number of people with modern browsers and/or broadband who can easily adopt new applications
– The liquidity in the maturing online advertising industry, which allows new applications to monetize utility to users quickly and directly

Taken together, I think that all of this means that the private enterprise path (on the Internet) becomes closer to the public discourse path. In fact, it seems to lead to a “third way” that in many ways exhibits the strengths of each without the weaknesses: a winner can be selected from many different approaches based upon survival in the market, absent huge costs or large concentrations of profits and power, and accompanied by wide discourse.

So yes, I do think it is still possible for new eBays and Amazons to be created, but I think it will be more and more difficult. Instead, models like those adopted (at least initially) by Google and MySpace, which base their value upon utility to the user rather than a lock-in of user data, will become the more certain path to success.

So back to the question in my last post: “should I consider building a new application on a new, proprietary platform?” I think that the bet made by doing so could have reduced risk in this new environment. Charging for the platform itself and maintaining central control over it are becoming less viable; if a company doesn’t work with the interested (e.g. open source) communities, these communities will probably recreate the core value of the platform quickly enough to provide an attractive alternative before the company can gain critical mass. But that doesn’t mean that the basic questions in my last post don’t still have to be answered:

– Is the platform ubiquitous? (e.g. mapping and search APIs? No)
– Will there be onerous fees? (if the platform owner can get away with it, yes)
– Will the platform owner be your competition? (if there isn’t a clear way for them to make money, probably)

So I probably wouldn’t disagree with Greg on the viability of mashups as a serious business model.

One key economic shift listed above that I haven’t elaborated upon is the maturing online advertising industry. I think this is a really important part of the story, but again I’ll have to save it for a subsequent post…

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