Mark Choate on the competitive advantages of social software platorms

Mark Choate participated in the same issue of Cutter Journal, where I also published an article on the Entreprise 2.0 paradigm.

In his article, he addresses the question, where is the competitive advantage in a platform, where in theory, people could leave rather quickly, but in fact, their past involvement and investment usually keeps them there. In fact, such platforms accumulate value, in particular ways, which can create sustainable competitive advantage. In the excerpts below, he explains how this works, taking the case studies of Wikipedia and Google.

Mark Choate:

When McAfee refers to “social software platforms”, he has in mind a technical definition of the word “platform” as defined by economists who study what are called two-sided markets. Any business whose product or service provides a link between two distinct groups of users, pooling them into a network, is said to operate in a two-sided market (or two-sided network). Newspapers are one example of a two-sided network, with advertisers on one side and subscribers on the other. Companies who make operating systems also operate in two-sided markets, with application developers on one side of the business and end-users on the other. The product or service offering of a business that serves a two-sided market is called a platform and this platform provides the means for the network participants to interact.

Businesses that operate in two-sided markets are subject to network effects, which is the phenomenon that the value of a network increases according to the number of nodes on the network. The reason I have a copy of Microsoft Office installed on this computer is because everybody else has a copy of Microsoft Office on their computer and if I want to exchange information with them in an efficient manner, it is much easier if I use the same platform. Likewise, advertising in a newspaper is more effective the more subscribers there are to see the advertisement.

The presence of the Internet as a platform has upset the traditional way that companies have benefited from network effects through the ownership of the platform. For instance, newspapers owned the printing press and distribution system and television stations owned the licenses to broadcast within a certain region (with competition limited by government regulation) and some application developers own the operating system their applications run on. In all cases, there is a linkage between the platform and the content that is mediated by way of the platform and the business that benefited from network effects benefited directly because they owned the platform itself.

The importance of the platform was that ownership of it served as a barrier to entry, limiting competition and enabling firms to profit handsomely. The Internet changes this situation in one very important way: the platform itself is based on open standards and, in effect, is now owned by everybody.

If the money was always in the platform, what impact does an open platform have on network effects? Do network effects exist within networks based on open standards? More specifically, can an individual firm capture network effects in a market increasingly mediated on an open platform? The success of Wikipedia and Google can serve as good examples of just how such network effects manifest themselves and how these new technologies have modified the prevailing business climate.

Wikipedia

Wikipedia is a living example of how network effects can confer sustainable competitive advantage in a market mediated by an open platform even though Wikipedia (on the surface) does not seem to act in accordance with the resource-based view of sustained competitive advantage.

The editing process taking place at Wikipedia is transparent. Not only can just about anyone participate, but the history of all the edits and who made them is available. At the same time, Wikipedia makes available all of its content. You can download every article and photograph and import it into your very own Wikipedia clone if you would like to.

Given the transparency of the process and the easy transferrability of resources, once might conclude that Wikipedia does not have a sustainable competitive advantage in the online encyclopedia market. One would be wrong, however.

While I can replicate the content on Wikipedia, I can never replicate the overall value of Wikipedia, for two reasons. The first is that there is a network of users who regularly monitor and update Wikipedia articles and they will continue to do so on Wikipedia’s site, and not mine. Of course, I can continue to copy Wikipedia’s content and maintain a site very close to the original, but with a slight delay and a modest degradation in quality. Even if I were able to make the transfer all but instantaneous, I still will not have replicated the value of Wikipedia because I also need to consider all the other sites on the Internet that link to Wikipedia as well.

It is the degree to which Wikipedia is entrenched in the network itself, the degree to which it is woven into the web that provides its greatest competitive advantage and one that, I suspect at least, will prove to be sustainable because that network is difficult to replicate. Clearly, network effects are still relevant, even with an open platform. The technology is readily replicable and the process by which the content was produce is entirely transparent. As it turns out, it is the weave of the data as woven into the network itself that is nearly impossible to replicate. Much in accordance with the old resource-based view of sustained competitive advantage, Wikipedia has secured it by making the value of its offering very hard to imitate.

Google

Google’s success is dependent upon the assumption that a link from one site to another implied some level of endorsement such that a page with lots of links to it must be better in some way than a page with only a few links to it. Google’s PageRank algorithm (which is how the search results are prioritized) is based in part upon how many other sites link to a given page. If you have two separate pages, both with similar content (as ascertained by word count and position), favor is given to the page to whom more sites link than the other.

When a person participates in a transaction online, a residue is left behind that is meaningful. When one page links to another page, information is embedded in that link, and when a user makes a choice and clicks one link instead of another, there is information about the choice embedded in the action. There is no such residue on books, other than dog-eared pages, smudges and coffee stains, nothing that can compare with the usefulness that that can be gleaned from these fingerprints that are left online.

This has proven to be a remarkably effective strategy for Google, so effective that Google was able to enter the Internet market rather late in the game and very quickly become a leading online business. When Google was launched, Yahoo! was the leading search engine. History has demonstrated that Yahoo’s competitive advantage was not sustainable at all. Why is Google’s story different?

Every day Google learns more about the content that is distributed on the Internet. The knowledge is a consequence of the steady aggregation of knowledge in the form of links created by human beings. As a result, Google’s site makes it easier for me to find the information I am looking for. As Google aggregates this data, the search engine continues to improve. For this reason, it will be very difficult for a new entrant in the market to compete with Google. Even if they were able to reconstruct Google’s software and technical infrastructure, they would not have the years of aggregated data documenting user behavior and capturing those moments of human judgment that Google has already acquired and will continue to acquire.

But what is interesting about Google is that Google isn’t entirely transparent in the same way that Wikipedia is. In fact, Google’s core search algorithm is proprietary and proponents of the Enterprise 2.0 label often say that Enterprise 2.0 firms are moving away from proprietary technology in favor of open standards.

The source of Google’s success is Google’s masterful understanding of the value of the online transaction. They know the value of information and they have taken creative steps to find ways to measure those moments of information exchange that take place so frequently online. Google has not opened up its API to outside developers because of a belief in their part on some intrinsic value in openness. Quite the opposite. They have opened up their API because they have discovered that it is in their best interest to encourage as many transactions with Google as possible, so that Google and Google alone can sleuth through the evidence that is left behind.

Google also isn’t collaborative – at least not in the traditional sense of the word. Google really operates just like any other business. In exchange for a service (like receiving a list of search results), the user gives Google a little piece of information. Google aggregates that information and uses it to improve the search service as well as to create revenue through the sale of advertising. This isn’t collaboration; it’s capitalism.”

Leave A Comment

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.