Facebook takes on Goliath

Facebook got a lot of favorable publicity this week at its f8 developer conference for its ambitious efforts to expand its APIs, and with it transform its influence over its customers and the web.

For most firms, a frontal assault on Google might seem like a bad idea, like David kicking Goliath’s shins rather than pulling out a slingshot. However, because Google has already attacked Facebook (with Buzz), perhaps this is merely shifting from a defensive battle to an offensive one.

At some level, the Facebook model — of relational information interpretation by 400 million volunteer coders — has many technical advantages over the Google model of context-free, semantic-free text searches.

For a young Web 2.0 company, Facebook is also doing relatively well at monetizing its social embeddedness, with revenue doubling annually (to more than $500m last year) and an after tax margin exceeding 25%. However, even if Facebook reaches revenues of a billion or two in 2010, it remains less than one-tenth the size of its newfound rival.

However, the more serious threat to Google is that the success of Facebook is part of the transformation of the openness of the web to a network of browser-accesible walled gardens. If the world’s content is not available on freely accessible HTML pages but inside password-protected silos, then the only content Google can index is that inside its own walled garden.

This process has been dubbed the Splinternet. As my friend and mentor Shane Greenstein observed in his (highly recommended) blog last month:

The Internet should no longer be called a “network of networks”, as it was called two decades ago. That era has passed.

Commercialization has brought with it a new structure, a “network of platforms”. The splintering of the Internet describes the results of platform competition on the Internet.

Sometimes it resembles a horror movie.
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Splintering happens all the time in this market. But it is a symptom of something bigger, not to be understood in isolation.
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At any given moment, somebody will be trying to raise switching costs and deter migration. Designing proprietary standards is one way to do that. So it blocking the use of standards from rival firms.

The entire post is recommended reading for those who care about platform competition, Web 2.0, social media or the future of the Internet.

In some ways, with these fragmented and separate platforms, we seem to be re-creating the pre-Internet ISP era of CompuServe, AOL, Prodigy and Delphi. As with the cellphone, cable TV, Baby Bells and other fragmented networks, it will take consolidation of the various walled gardens into a small number of surviving firms or networks to make these networks useful.

Perhaps Facebook and maybe even Twitter can form networks independent of the Monster of Mountain View. (Other social media companies may be able to continue their regional success).

However, even the most successful Web 2.0 platform winners will need to align into the orbit of Microsoft/Yahoo, Apple, Nokia or one of the other major platform owners — under the time-honored (but questionable) rule that the enemy of my enemy is my friend. Whether this is through acquisition or alliances (as with Microsoft-Yahoo) is one of the many open questions of our SplinterNet future.