Social networks: Open vs closed competition
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.




