Today, Facebook seems like the juggernaut crushing everything in its path, most recently Twitter’s Vine app and Yandex’s social app. And in its last quarter, Facebook’s mobile usage surpassed its web usage -- for the first time ever.
This is important because Facebook has now begun competing not just at the social network level, but also at the operating system level. And the company turns nine today so it will have even more mobile influence by its 10th anniversary: Just look at the rapid expansion of its App Center and SDK developer tools for iOS.
This means we won't just have competing platforms, but platforms built on top of other platforms. And that, as you'll see, changes the game altogether.
The Platform Games
#### Andrei Hagiu
##### About
Andrei Hagiu is an Associate Professor in the Strategy group at Harvard Business School. His research focuses on multi-sided markets, including their business strategies and the economic structure of the industries in which they operate (videograms, e-commerce, smartphones, personal computers, shopping malls, intellectual property, payment systems, online TV services, etc.).
On multi-sided platforms like Facebook -- and Amazon, Apple, Google, Twitter, etc. -- value is created through the interactions between affiliated users, developers, and advertisers.
Facebook and these other companies want to control API access and critical user information because it’s that data which unlocks monetization opportunities. Hence the recent API roadkill among all the platform companies: Besides Vine and Yandex, witness Instagram/Facebook blocking features on Twitter (and vice versa); Twitter itself blocking a number of companies; and even Google’s and Apple’s skirmishes over maps.
Yet underneath this competition and desire for API control, there has always been a lot of cooperation. All of the players are dependent -- no, interdependent -- on each other. A better and more usable Facebook iPhone app, for example, surely increases iPhone sales for Apple; Apple would see no advantage in blocking that.
But the game changes as Facebook becomes really popular on mobile. At that point, Facebook’s multi-sided platform for developers and users ends up on top of another multi-sided platform: the underlying iOS and Android mobile phone operating systems. This isn’t just an interesting market configuration -- it has tangible implications as Facebook’s platform starts substituting value away from Apple and Google. Who will control the data generated by the apps then?
It’s about to get ugly, and we don’t know What Would Facebook Do (WWFD).
And we have to think about it, because Facebook is arguably the most ambitious platform of them all -- the fabric of the web is changed because of it. Users and developers depend on it; there aren’t any viable alternatives looming on the horizon, let alone a clear Facebook killer. How many businesses rely on Facebook access to thrive? How many sites require Facebook Connect for user logins? You can’t even login to some sites if you don’t have a Facebook account.
Predicting what will happen in these “platform Hunger Games” isn’t just an academic exercise. Understanding WWFD has important implications for everything from privacy and security and user choice to where the internet economy is going.
What Will Facebook Do? A Lesson from Japan__ __
>We’re in uncharted territory here since platforms-on-top-of-platforms are relatively new.
We’re in uncharted territory here since platforms-on-top-of-platform configurations are relatively new.
Yet we do have one related industry example that could shed some light on this case, and on WWFD. It’s one of Japan’s leading mobile social game developers: GREE.
GREE makes up to four times more average revenue per user (ARPU) than Zynga, and it made $222 million net income in 2011 compared to Zynga’s loss of $500 million the same year. For users, GREE provides the ability to build profiles, compare scores from various games, and accumulate and spend virtual currency. For third-party mobile game developers, GREE provides the highly specialized gaming APIs they don’t get from Apple or Google.
There are other platforms built on top of platforms, and other mobile social game developers, but GREE provides a particularly apt analogy because its platform connects third-party mobile social game developers with users on top of iOS and Android devices. Exactly.
Much like the way Facebook builds rich user profiles and enables the Connect ecosystem, GREE allows developers to cross-sell their games to its registered users as well as access analytics features. In return for these platform services, GREE charges developers 15 to 30 percent of their net revenues. So a third-party developer of a native iPhone game app based on GREE’s platform would pay $30 to Apple and $10-$21 to GREE for every $100 earned in the bottom line.
>We don’t know who will win the platform games as the API battles are just beginning. But it’s going to get ugly.
Seems like a win-win for everyone. But the problem arises when GREE’s APIs make it cheaper for developers to port their games between Android and iOS. By reducing developers’ costs -- “multi-homing costs” in economic terms -- of supporting both platforms, GREE makes it easier to have the same games on both operating systems.
In other words: GREE makes it difficult for users to differentiate between the two operating systems.
Not good for Apple or Google. Neither is the fact that GREE controls users’ gaming data and has a virtual currency of its own that can be used across all games built on its platform. These features are cutting into iOS’s and Android’s profits.
GREE thus provides a preview into what might happen when Facebook becomes stronger on smartphones. So what would Facebook do? Well, it could provide specialized API functionalities like those provided by GREE for *its *developers and users, not to mention leverage its own virtual currency: Facebook Credits.
And Facebook has far more reach than GREE. Given that social applications, and particularly games, are the most popular and highest revenue generators of all mobile applications -- a Facebook multi-sided platform similar to GREE would* *divert *a lot *of value away from Apple’s and Google’s smartphone platforms.
Facebook isn’t alone in considering such a platform on top of a (smartphone) platform. The same is true for Twitter, LinkedIn, and others. Amazon’s Game Circle now contains an extension of Amazon’s Appstore, which distributes applications on Android devices. And in an interesting twist, Google+ has already released a development kit for third-party developers of iOS apps.
We don’t know who will win the platform games as the API battles are just beginning. But it’s going to get ugly: Facebook commands access over 1 billion users and thousands of application developers … their soldiers in this war.
Editor: Sonal Chokshi @smc90
