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November 02, 2005

Bubble 2.0 – Why Walls Come Down

Yahoo and Microsoft are combining their instant messaging (IM) networks.  At long last, users of each of these networks will be able to chat by text AND VOICE with users on the other network.  The value of each of these networks goes up for each current and potential user.

But Skype and AOL remain closed networks.  Users of these networks can only chat with other users of the SAME network.

There couldn’t be a more perfect illustration of economic forces at work.  In my last post, I blogged that it is in the short term business interest of the owners of the leading networks to keep those networks closed.  Skype wants you to have to be a Skype user in order to talk on-net with the millions of other Skype users.

But what if your network is not the biggest and not about to get there?  What do you then?  You do exactly what Microsoft and Yahoo have announced they’re going to do.  You combine your network with other networks to give your users and potential users reach equal or better than the reach they would get on the leading network.

The numbers which drove the Microsoft-Yahoo announcement are spelled out clearly in a Red Herring article here.  In August AOL IM had 49 million visitors; Microsoft IM 24.4 million; Yahoo 22 million.  Moreover, both Microsoft and Yahoo saw their numbers slip in August while AOL gained visits.  If that trend continues, users of IM will accelerate their switch away from Yahoo and Microsoft and go where there are more people to talk to.

Note that the combined Yahoo-Microsoft network is almost the same size as the AOL network.  This size lets these companies continue to compete for new users and should help reverse the erosion of their existing user base – if they get the interoperability working fast enough.

Not irrelevant to decision making at Yahoo and Microsoft, I’m sure, is the fact that eBay now owns Skype and its purported 40 million users (this number can’t be directly compared to the monthly visitor numbers above).

Microsoft and Yahoo haven’t fully opened their networks.  They haven’t published specs that would allow any provider of instant messaging to interconnect its users with Yahoo-Microsoft users. They are staying as closed as they can but opening as far as they have to in order to gain large network value for their users.  My prediction is that they will open fully because they won’t be able to provide enough interconnectivity fast enough otherwise to fight off eBay-Skype and AOL.

Walls go up around networks because it is in the short-term interest of the largest network providers to erect the walls.  Walls come down in a competitive market place because the smaller operators need to combine their networks to gain competitive size.  There are other reasons for walls coming down and I’ll blog about them anon.

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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