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October 31, 2005

Bubble 2.0 – Why There’s a Wall Around Your Garden

You, the user, almost always benefit by having a network you are participating in be open.  The leading service providers whose networks you use almost always benefit by keeping networks closed.  How well each service provider copes with the conflict between its interests and those of its users will determine which service providers survive and prosper and which fall by the wayside.  So far, it is not clear that being open is a good business strategy – at least in the short term - for any provider with a substantial lead over its competitors no matter how much we users might wish differently.

If you’re making phone calls, you want to be able to call everyone else no matter what network she is on and you want everybody else to be able to call you.  If you are posting a resume, you want it be visible to every potential employer no matter whether he looks at craigslist, oodle, or monster.com.  You would like the search engine you use to be able to search not only the web but the results of every other search engine.  You’d like to be able to exchange instant messages with everyone, not just those on the same IM network that you’re on.

If you’re running Skype, the biggest of the VoIP networks, your greatest asset is the fact that your network is the biggest.  If you open it up, you create more value for each of your users by making them better connected but you lose the proprietary value that presumably caused eBay to pay billions for your company.  Not surprisingly, Skype does not allow any interconnection with other VoIP networks.

With Skype closed and much bigger than any competitor, a person who wants to start making and receiving calls from his computer has almost no decision to make – you can reach many more people and many more people can reach you if you’re on Skype than if you’re on any competitive network.

If Skype we’re open to interconnection, they’d also be open to the dreaded “N+1 competitor”.  A new VoIP network starts up.  It can’t be cheaper than Skype which is free for on-net calls but it might have a better user interface, better sound quality, or just get touchtone signaling to work better.  If NewNet can interconnect with Skype so that its users can make free calls to Skype customers and receive free calls back from them, then NewNet is offering users all the value they would get using Skype plus an additional something.  Assuming NewNet can publicize itself, new users will choose NewNet and not Skype.  Ouch.  There goes that valuation.

craigslist has a brilliant strategy of selling job listings in the San Francisco area and giving other types of ads and even job listings in other locations away free.  They have a critical mass of eyeballs for their ads because they have so many listings that there’s a good chance of finding not one but several choices in what you want.  They have a critical mass of listings because they have so many readers.  They’ve created a successful marketplace for their users and a successful market position for themselves.  Recently search guru John Battelle reported that craigslist has asked oodle to stop “scraping” and rerunning craigslist ads on oodle’s classified ad aggregation site (oodle has reportedly complied).

oodle is an n+1 competitor.  Because it scrapes ads not only from craigslist but also a variety of other sources, it ends up being the better place to look because it has more ads.  Once oodle get more visitors than craigslist, why should a San Franciscan pay craigslist to run a job listing.  She just lists on a cheaper or free site that oodle also picks up.

Skype has been what we network types call a “walled garden” from the beginning. craigslist is just beginning to build a wall.  Google, whose bots crawl everywhere on the web it can, does not let itself be crawled.  It’s a very big walled garden.  The instant messaging services of Microsoft, AOL, Yahoo, and Skype have been notoriously not interconnected.

All of these providers build walls because it’s in their business interest – at least in the short term - to do so, says I, but there are opposing views:

Skype gives some technical reasons for opposing interoperability.  Sounds a lot like the arguments AT&T used back in the day when they argued that it wasn’t safe to attach devices made by anyone else to the phone network.  If eBay wants to make Skype safely interoperable they can pay me an outrageous consulting fee or they can probably get better advice from Jeff Pulver of FreeWorldDialup fame for free.

SiliconValleyWatcher in a post here buys the argument by craigslist that oodle’s bots were using up too many cycles by scraping craiglistings and therefore degrading the experience for other users.  “In my view, craigslist acted fairly and responsibly because it is protecting its community from resource-hungry bots that give back a fraction of what they take,” says Tom Foremski.

I think craigslist is “protecting” its users from greater exposure that they would gain through oodle.  The math which justifies this user-protection assertion by craigslist and Foremski is flawed in that it gives oodle no credit for reducing the strain on craigslist resources by diverting readers from the need to look at craigslist.  When someone finds what they want on oodle – only if they find what they want – they then click through to craigslist.  If they don’t find what they want, craigslist is “spared”.  But craigslist doesn’t want to have eyeballs diverted.  That, I think, is their motivation.

Certainly Skype and craigslist have a right to set the term of use for their services just as we have a right to use them or not.  Does the conflicts of interest between users who want to be on the largest possible network or interconnected system of open networks and network providers who want to retain value for themselves by remaining closed means that we are doomed to walled gardens?  Nope.  Stay tuned for why not.

Last week I asked “Who Owns My Content?” and answered myself here.

See this post for more on Skype’s strategy pre-acquisition.

I blogged here that eBay overpaid for Skype but also here that eBay may be your next phone company.

This post posits that Bubble 2.0 (aka Web 2.0) may be a better bubble.

This post is an introduction to Bubble 2.0 and suggests some ways to invest in it.

This post talks about extra-value networks although this post casts doubts on Reed’s Law for determining extra value.

This post is about The Long Tail and this post is specifically about the contributions of amateurs to The Long Tail.

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