Interesting things are going on in social networking right now, with all the major players trying to extend their services beyond their own sites to third-party sites (see here and here). One interesting thing about Google’s Friend Connect offering is that it allowed you to access your Facebook friends, as well as friends from other social networking sites. Now, in the name of ‘privacy’, Facebook has banned Friend Connect from doing this.

The basic issue here is whether social networking platforms want to compete with each other as ‘closed’ platforms, where a user of a platform can only access users of the same platform, or as ‘open’ platforms where a user of a platform can access users of all platforms. For competition between similarly-sized platforms, openness actually reduces the intensity of competition, and so platforms should prefer to be open. With open platforms, a price rise hurts the platform that raises its price less than with closed platforms, since the users who do not switch to a competitor as a result of the price rise can still access those who do switch, so the value of the platform to the remaining users does not fall. Openness increases the incentive to raise price (softens competition), which should increase profits. Of course, social networks currently compete in non-price dimensions for users, but the basic idea still holds.

On the other hand, openness makes the industry more stable and less prone to ‘tipping’ towards one platform or another. Thus while openness softens competition, it also makes it less likely that a single network will emerge as dominant. Whether a platform wants to be open with its competitors or not depends on whether it thinks it can win the battle for dominance in the long run. If not, better to be open with your competitors and accept a slice of the pie rather than no pie at all. If yes, better to be closed so as to try to force your competitors out, and eventually you might get to eat the whole pie.

It’ll be very interesting to see how this plays out. Expect to see a lot more strategic manoeuvring before it’s over.

Just as The Economist predicted, social networks are starting to open up their services to outsiders, to provide something like a “social operating system” for the wider web. Competition between social networks is driving this. The leader this time was MySpace, which announced a data availability initiative (couldn’t they come up with a more sexy name?) that allows third-party sites to interact with MySpace data in some ways. Following close behind was Facebook, which has announced a similar initiative.

The interesting thing about these initiatives is that they are likely to reduce traffic to the main Facebook/MySpace sites, as people will be able to perform some social networking tasks on third-party sites. The big question is what this means for the social networking business model. If this trend continues, it starts to make the ad-supported model look shaky, unless the social networks can somehow push ads out to third-party sites as well. However, there may be other revenue opportunities, such as identify verification.

From the ever-excellent Journal of Computer-Mediated Communication, a study shows that at some point there are decreasing returns to the number of friends you have on social networks:

A central feature of the online social networking system, Facebook, is the connection to and links among friends. The sum of the number of one’s friends is a feature displayed on users’ profiles as a vestige of the friend connections a user has accrued. In contrast to offline social networks, individuals in online network systems frequently accrue friends numbering several hundred. The uncertain meaning of friend status in these systems raises questions about whether and how sociometric popularity conveys attractiveness in non-traditional, non-linear ways. An experiment examined the relationship between the number of friends a Facebook profile featured and observers’ ratings of attractiveness and extraversion. A curvilinear effect of sociometric popularity and social attractiveness emerged, as did a quartic relationship between friend count and perceived extraversion. These results suggest that an overabundance of friend connections raises doubts about Facebook users’ popularity and desirability.

Read the whole article (for free) here.

This video is doing the rounds at the moment, making fun of the privacy aspects of Facebook:

Personally, I’m not a privacy nut and I don’t think Facebook is evil. But let me toss out this idea: Facebook is the biggest reputation system the world has ever seen. Forget about eBay, its reputation system only tracks your behaviour in online auctions. Facebook tracks your behaviour in the real world and reveals it for all (or at least all who you care about) to see. Of course, Facebook itself isn’t tracking you, but your friends are, and they’re publishing that information. Put unkindly, Facebook is a platform that enables a user-generated big brother.*

One interesting thing is how this will affect people’s behaviour. As the video points out, Facebook links your stupid behaviour at that party to future things, like potential girlfriends. This raises the cost of stupidity and thus people will behave less stupidly (I am assuming that the decision to behave stupidly or not is a rational one of comparing costs and benefits …). Anyway, social networking websites encourage conformity and punish bad behaviour — the crowdsourced morality police.

Another interesting thing is that you can use Facebook to commit yourself to good behaviour. Suppose you want to behave well but can’t trust yourself not to have one too many drinks and do something stupid at a party. The solution is simple, surround yourself with lots of Facebook friends and arm them with digital cameras …

* I know, I’m being unfair, Facebook has pretty sophisticated privacy settings that let you finely control your information. I’m over-dramatising to make a point.

Paul Buchheit makes a very interesting observation about Facebook: it knows who you are. In online commerce, it’s difficult to know someone’s true identity because identities can easily be faked. This creates asymmetric information problems and impedes transactions. Auction sites like eBay use reputation systems to try to solve the problem, but what if you don’t have a reputation in the first place?

One way for an honest person to get around this problem is to do something expensive that would be unprofitable for a conman. So banks have expensive buildings to signal that they’re not going to run away with your money. If they were, it wouldn’t be profitable to build the expensive building in the first place.

Paul’s idea is that you can use Facebook to signal your identity by building up a credible network of friends. Building friends is costly, especially ‘high quality’ friends who have entered a lot of data into their profiles and have confirmed details of their relationship with you. Dishonest people could build fake networks, but it may not be profitable for them to do so compared to honest people.

So one way that Facebook can make money is by verifying people’s identities. I imagine they could calculate something like an “identity score” for each person, which measures how likely that person is who they say they are. People with more friends are more likely to be genuine, and the quality of links between friends could be taken into account too (e.g. how often two friends share things on Facebook). This could be calculated recursively, taking account of the quality of your friends, and your friends’ friends, and so on. Facebook can then sell these kind of metrics (with their users’ permission of course) to trading sites like eBay. I think it it’s a great idea.