Network Effects and the Decline of Facebook

Let me start with a story. You have a friend, let's call him Paul, who used to work for a big shot consultancy. A few years ago, the consultancy was undergoing a periodic cost-cutting exercise; Paul happened to be on the bench and was let go. He didn't immediately find another full-time job, but he found a series of short-term contracts to pay the bills until something else turned up. And of course he changed his profile on Linked-In.

Three years later, he's still in the same position. You receive a notification from Linked-In, asking if you would like to congratulate Paul on the anniversary of his losing his job. Doesn't really seem appropriate, does it?

One of the problems of social networks is maintaining a reasonably signal-to-noise ratio. When most of the notifications on Linked-In are to tell you that someone you barely remember is attending some random event, it's tempting to switch off notifications altogether.

And Facebook notifications can be even more annoying. Many years ago, Bill Gates quit Facebook because of the volume of friend requests he was receiving. Taylor Buley cites this as an illustration of Beckstrom's Law. 

The best-known model of network effects is Metcalfe's Law, which states that the value of a network is proportional to the square of the number of users. Beckstrom's Law is a more advanced model, and includes the net value of the transactions on the network. Thus subtracting the aggregated costs of belonging to the network, including all those bothersome requests and notifications.

This week, the Facebook shareprice crashed. In his analysis of this event, John Naughton suggests that the value of Facebook depends not on the absolute number of users, but in the rate of change, and this is what explains Mark Zuckerberg's obsession with growth (as shown in Ben Grosser's montage "Order of Magnitude"). If user numbers start to decline, then the virtuous circle suddenly turns vicious, leading to a downward spiral.

What is also clear from this event is the extent to which Facebook's commercial success is dependent on other players in the ecosystem. Access to Facebook services is almost entirely channelled through devices running software from three other tech giants - Apple, Google and Microsoft.

And with Microsoft's recent acquisition of Activision Blizzard, we may expect more shifts in the balance of power between them. According to Microsoft's announcement (18 January 2022)

This acquisition will accelerate the growth in Microsoft’s gaming business across mobile, PC, console and cloud and will provide building blocks for the metaverse.

 

Your move I think, Zuck.

 

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Dina Bass, Five Reasons Microsoft Is Making Activision Blizzard Its Biggest Deal Ever (Bloomberg,18 January 2022)

Taylor Buley, How To Value Your Networks (Forbes, 31 July 2009) 

Michael Hiltzik, Is this the beginning of Facebook’s downfall? (LA Times, 4 February 2022)

Natasha Lomas (@riptari), On Meta’s regulatory headwinds and adtech’s privacy reckoning (TechCrunch, 4 February 2022)

John Naughton, For the first time in its history, Facebook is in decline. Has the tech giant begun to crumble? (The Guardian, 6 February 2022)

Wikipedia: Beckstrom's Law, Metcalfe's Law

Related posts: What makes a platform open or closed? (May 2012), Making the World more Open and Connected (March 2018), Metrication and Demetrication (August 2021)

Uber Mathematics 5

Continuing a series of posts on Uber's business model.  Much of this material also applies to Lyft and other similar operations. For previous posts, see https://rvsoapbox.blogspot.com/search/label/Uber

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Another thing about Uber is that it operates as a two-sided platform, matching passengers with drivers. Two-sided platforms can only operate successfully if there is sufficient demand on both sides - people looking for rides, drivers looking for work.

As I noted in an earlier post, Uber might initially have been able to recruit more drivers than it needed, in order to provide a high quality of service to its customers. Many people may have signed up as drivers based on unrealistic estimates of the likely earnings, costs and overheads, but obviously this is not sustainable for long.

So if Uber's pricing model can't pay the drivers enough to make the job worth doing, who would be surprised that Uber is now facing a shortage of drivers? While Uber customers experience increasing prices and worsening service levels.

So after years of what they regarded as unfair competition, traditional taxi services are now returning to popularity in large cities such as London (black) and New York (yellow).

But this has also resulted in an excess of demand over supply. In recent years, traditional cab driving has been hit by a triple whammy - competition from Uber et al, environmental regulations forcing older polluting vehicles off the road, and of course the COVID pandemic forcing many potential passengers to stay at home. So there is now a shortage of drivers and vehicles across the industry.

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Will Dunn, Why is there an Uber shortage? (New Statesman, 8 November 2021)

Caroline Tanner, Why yellow cabs are (again) your best bet in New York City (MSN, November 2021)

James Tapper, Black cabs roar back into favour as app firms put up their prices (Guardian, 30 October 2021)

The Hungry Tapeworm

This week, three American companies announced a joint venture to sort out healthcare for their own employees. Ambitious, huh?

This is not the first time large American companies have tried to challenge tho market power of healthcare providers. According to Warren Buffett, "the ballooning costs of healthcare act as a hungry tapeworm on the American economy". Intel and Walmart are among those that have previously ventured into this area. In 2016, 20 companies including Coca Cola, American Express, IBM and Macy’s joined the Health Transformation Alliance (HTA). So why should anyone take this latest attempt seriously? Only because the three companies are Amazon, Berkshire Hathaway and JPMorgan Chase. And Amazon (need I remind you?) eats everyone's lunch.

• 2010: Amazon Is Still Eating eBay's Lunch

• 2012: How Amazon ate Sears' lunch

• 2017: Hey Walmart, Amazon is eating your lunch

• 2017: Amazon Eats Google’s Lunch

• 2017: Why Amazon is eating the world

John Naughton sees this as a typical play for a data hungry tech giant, based on two hypotheses.

• Transactional data will lead to transactional efficiencies. The joint venture starts with the three companies experimenting on their own employees, who will "tell Amazon and its algorithms what works and doesn’t work". 

• "Mastery of big data might yield clinical benefit".

As Pressman and Lashinsky note, the experiment is based on a pretty good sample of Americans: "a diverse workforce spanning low-wage normal folk to the most elite of our society".


Amazon is obviously a major player in the data and analytics world, but so is IBM, which is playing an important role in the HTA. Not only is IBM a corporate member, but IBM Watson Health will do the data and analytics. According to Pharmaceutical Commerce, it will "aggregate participating HTA member companies' data, enabling insights both into outcomes of medical interventions, as well as wellness initiatives to improve employees’ health".

And what about Google? Google Health was discontinued in 2011, following a lack of widespread adoption. Perhaps data isn't the whole story.


But Amazon is not just about data. In an article published before this announcement, Zack Kanter attributes Amazon's strategic dominance to SOA. "Each piece of Amazon is being built with a service-oriented architecture, and Amazon is using that architecture to successively turn every single piece of the company into a separate platform — and thus opening each piece to outside competition."

Moazed and Johnson discuss the platform implications of the healthcare announcement. They argue that "platforms thrive with fragmentation, not consolidation", and that "the new platform needs to offer enough potential scale to outweigh those risks, otherwise manufacturers may be too afraid to join". Sarah Buhr sees this as an opportunity for smaller players, such as Collective Health.

Three employers, even large ones, probably won’t have enough muscle to negotiate fair prices for healthcare and pharma. But if Bezos can create the right expectations, and provide a flexible platform for smaller players ...

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Health Transformation Alliance sets its 2017 agenda (Pharmaceutical Commerce, 9 March 2017)

Amazon alliance takes on ‘hungry tapeworm’ of healthcare costs (Pharmaceutical Technology, 1 February 2018)

Sarah Buhr, Collective Health Wants To Replace The Health Insurance Industry With A Software Program (TechCrunch, 11 Aug 2014)

Sarah Buhr, Amazon’s new healthcare company could give smaller healthtech players a boost (TechCrunch, 30 Jan 2018)

Paul Demko, Amazon's new health care business could shake up industry after others have failed (Politico, 30 January 2018)

Zack Kanter, Why Amazon is eating the world (TechCrunch, 14 May 2017)

Paul Martyn, Healthcare Consumerism: Taming The Hungry Tapeworm (Forbes, 30 January 2018)

Alex Moazed and Nicholas L Johnson, Amazon's Long-Awaited Health Care Platform (Inc, 30 January 2018)

John Naughton, Healthcare is a huge industry – no wonder Amazon is muscling in (Observer, 4 February 2018)

Aaron Pressman and Adam Lashinsky, Data Sheet—Why Jeff Bezos Just Might Crack the Health Care Challenge (Fortune, 31 January 2018)

Jordan Weissmann, Can Amazon, Berkshire Hathaway, and JPMorgan Revolutionize Health Care? (Slate, 30 Jan 2018)

Wikipedia: Google Health


Updated 5 February 2018

Regulating Platforms

On Friday, Transport for London (TfL) declared that Uber was not fit and proper to hold a private hire operator licence. Uber's current licence expires next week. However, Uber can continue to operate in London until any appeal processes have been exhausted. (TFL Press Release, 22 September 2017)

By Saturday afternoon, a petition in Uber's favour had raised half a million signatures. Uber seems to put more energy into campaigning against evil regulators than into operating within the regulations, and was evidently already prepared for this fight. (You don't send out messages to millions of customers at the drop of a hat without a bit of forward planning.) As Emine Saner writes,

"Calling for better legislation certainly is not as exciting as a glossy app, or whipped-up social media reaction, but it may make your trip home safer – and would be a better use of online petitions."

The protests follow a number of well-worn arguments

• Many users of the Uber service (especially young women) have become dependent on a cheap, convenient and supposedly safer alternative to public transport and expensive taxis.

• Many drivers have borrowed heavily to invest in the Uber business model, and fear being thrown into penury.

• This is an anti-competitive and technologically backward move, prompted by entrenched interests. And as TfL is itself a transport operator, it is not appropriate that TfL should regulate its competitors.

None of these arguments can be taken completely at face value.

• It is true that many women believe the Uber model is safer than the alternatives; however, some women have been raped, and other women have had extremely scary experiences. Uber is accused of failing to carry out proper checks, and failing to report serious incidents.

• Uber service is cheap not only because it cuts costs and exploits its drivers, but also because it is subsidized by Uber investors. This looks suspiciously like predatory pricing rather than fair competition. Analysts such as Izabella Kaminska argue that Uber will only become profitable when it has driven its competitors out of business, at which point it will be able to increase its prices. Like much of Silicon Valley, it appears to operate according to the Peter Thiel anti-competition playbook. Even Steve Bannon has been heard arguing for closer regulation of what are effectively monopoly platforms.

• Technology companies such as Uber sometimes describe themselves as "disruptive". While it is true that disruptions sometimes yield socioeconomic benefits, the belief that disruption is always good for competition is based on ideology rather than evidence. Regulation is generally opposed to disruption.

• And as Stephen Bush points out, it's not as a digital start-up company that Uber has fallen foul of regulations, but as an old fashioned minicab operator. (As John Bull explains, Uber London is just a minicab company; the app is operated by Uber BV in the Netherlands. This corporate separation helps Uber to finesse both regulation and tax.) Persuading politicians and economists to see Uber as a shining example of technological progress is just "a very, very clever marketing trick".

I'm quoting Steve Bannon because I'm just amazed to find something I agree with him about.  Regulating platforms is not the same as regulating regular companies, and the general art of regulation needs a kick up the proverbial. However, that is no reason to diss the current regulations or regulators, who are doing the best they can with insufficient regulatory mechanisms and resources. Experience from other cities shows that if Uber can't get its act together, there are plenty others that can.

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John Bull, Understanding Uber: It’s Not About The App (Reconnections 25 September 2017)

Stephen Bush, The right are defending Uber, because they don't really understand it (New Statesman 22 September 2017)

Martin Farrer, Nadia Khomami et al, More than 500,000 sign petition to save Uber as firm fights London ban (Guardian 23 September 2017)

Ryan Grim, Steve Bannon Wants Facebook and Google Regulated Like Utilities (The Intercept, 27 July 2017)

Hubert Horan, Will the Growth of Uber Increase Economic Welfare? (September 14, 2017)

Izabella Kaminska. For references see earlier post Uber Mathematics 2 (December 2016)

Sam Levine,'There is life after Uber': what happens when cities ban the service? (Guardian 23 September 2017)

Jason Murugesu, Night bus or black cab - what will save stranded Londoners post-Uber? (New Statesman 22 September 2017)

Andrew Orlowski, Why Uber isn't the poster child for capitalism you wanted (The Register, 26 September 2017)

Emine Saner, Will the end of Uber in London make women more or less safe? (Guardian, 25 September 2017)


Related posts (with further references): Platform, Regulation, Uber

Inspector Sands to Platform Nine and Three Quarters

Last week was not a good one for the platform business. Uber continues to receive bad publicity on multiple fronts, as noted in my post on Uber's Defeat Device and Denial of Service (March 2017). And on Tuesday, a fat-fingered system admin at AWS managed to take out a significant chunk of the largest platform on the planet, seriously degrading online retail in the Northern Virginia (US-EAST-1) Region. According to one estimate, performance at over half of the top internet retailers was hit by 20 percent or more, and some websites were completely down.

What have we learned from this? Yahoo Finance tells us not to worry.

"The good news: Amazon has addressed the issue, and is working to ensure nothing similar happens again. ... Let’s just hope ... that Amazon doesn’t experience any further issues in the near future."

Other commentators are not so optimistic. For Computer Weekly, this incident

"highlights the risk of running critical systems in the public cloud. Even the most sophisticated cloud IT infrastructure is not infallible."

So perhaps one lesson is not to trust platforms. Or at least not to practice wilful blindness when your chosen platform or cloud provider represents a single point of failure.

One of the myths of cloud, according to Aidan Finn,

"is that you get disaster recovery by default from your cloud vendor (such as Microsoft and Amazon). Everything in the cloud is a utility, and every utility has a price. If you want it, you need to pay for it and deploy it, and this includes a scenario in which a data center burns down and you need to recover. If you didn’t design in and deploy a disaster recovery solution, you’re as cooked as the servers in the smoky data center."

Interestingly, Amazon itself was relatively unaffected by Tuesday's problem. This may have been because they split their deployment across multiple geographical zones. However, as Brian Guy points out, there are significant costs involved in multi-region deployment, as well as data protection issues. He also notes that this question is not (yet) addressed by Amazon's architectural guidelines for AWS users, known as the Well-Architected Framework.

Amazon recently added another pillar to the Well-Architected Framework, namely operational excellence. This includes such practices as performing operations with code: in other words, automating operations as much as possible. Did someone say Fat Finger?

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Abel Avram, The AWS Well-Architected Framework Adds Operational Excellence (InfoQ, 25 Nov 2016)

Julie Bort, The massive AWS outage hurt 54 of the top 100 internet retailers — but not Amazon (Business Insider, 1 March 2017)

Aidan Finn, How to Avoid an AWS-Style Outage in Azure (Petri, 6 March 2017)

Brian Guy, Analysis: Rethinking cloud architecture after the outage of Amazon Web Services (GeekWire, 5 March 2017)

Daniel Howley, Why you should still trust Amazon Web Services even though it took down the internet (Yahoo Finance, 6 March 2017)

Chris Mellor, Tuesday's AWS S3-izure exposes Amazon-sized internet bottleneck (The Register, 1 March 2017)

Shaun Nichols, Amazon S3-izure cause: Half the web vanished because an AWS bod fat-fingered a command (The Register, 2 March 2017)

Cliff Saran, AWS outage shows vulnerability of cloud disaster recovery (Computer Weekly, 6 March 2017)

Two-Sided Markets

There has been a lot of buzz around two-sided and multi-sided markets lately.

• Wikipedia: Two-Sided Markets

• Harvard Business Review: New Research Explores Multi-Sided Markets (March 2006), Strategies for Two-Sided Markets (Oct 2006)

• Emergic: Overview, Pricing, Examples, Business Application

In his HBS March interview, Andrei Hagiu identifies Wal-Mart as an example of an organization that is transforming from a traditional merchant into a two-sided platform. Let’s look at the (asymmetric) structure of this transformation.

The traditional retailer acts as a hub in the food supply chain, aggregating food supply from fields and factories, and distributing food to workshops and private kitchens. This is essentially a positional strategy: the retailer seeks to establish and maintain a strategic position within a value chain, as the bottleneck/hinge point between upstream and downstream. Within the positional strategy, the business drivers are understood in terms of the economics of scale and the economics of scope.



But if we shift from a value-chain perspective to a service-oriented perspective (effects-ladder), we can see that the retailer is providing a service (=delivering value) downwards as well as upwards - it is a food distribution platform for farmers and manufacturers as well as a food supply platform for consumers and catering companies.

So instead of drawing the merchant in the middle, we can draw the merchant as a new kind of platform providing various kinds of market interaction.




This takes us from a positional strategy to a relational strategy. No longer just focused on the economies of scale and scope, the relational strategy emphasizes how economies of governance are generated in relation to two kinds of demand context. The big question for a company such as Wal-Mart is how to balance the exploitation of each of these forms of asymmetric advantage.

 

See also

Philip Boxer, Asymmetric Demand is Multi-Sided Demand (October 2011)

Richard Veryard, SOA as Multi-Sided Platform (September 2009)

Data Ownership and Trust

This month, I've been looking at some complicated questions of data provenance, data protection and copyright, prompted by a tricky but fascinating client problem - how to convert a legacy archive into a network of information services. (Among other things, this involves dividing material according to the ownership of the content.)

So I was particularly interested to see the following three separate items appear in my blogreader today.


1. Identity Theft and Brand Damage

A UK charity had its donor list stolen by a hacking gang, which then proceeded to beg funds from the same donors. Source: Silicon.com via Emergent Chaos

This is being described as a security breach


2. Software as a Service

"If information about you is stored on your own computer, it's generally not available to others unless they are able to hack your machine or serve legal process on you. In contrast, if information about you is stored on Google's computers, the law generally treats it as Google's, not yours." Cindy Cohn via Tecosystems

This is being described as a privacy issue.


3. Platforms and Stacks

Alexa (part of Amazon) is exposing its index for commercial reuse, via a series of web services. Source: Jon Battelle via Simon Bisson

This is being described as a ground-breaking innovation


There are undoubtedly new business risks that emerge whenever we make a significant change in platform. (That's not to say we shouldn't change, merely that we need to do it with our eyes open. As Stephen O'Grady puts it, "the point here is not to be alarmist, but rather to build awareness".) The new technologies of interaction carry the potential of new forms of sociotechnical intimacy, which may take a little getting used to.

Most importantly, sociotechnical shifts like these may cause us to rethink whether we really own the data (or knowledge) we thought we owned. If an email platform can use email content to target advertising, if a communication platform can analyse message traffic to identify friendship clusters, what else is fair game?

Ultimately this comes down to an important strategic choice. Do we want intimate relationships with intelligent service providers, who can interpret (and customize) both content and context to provide deeper service value? Or do we want arms-length relationships with service providers that don't know us from Adam? Where does the platform stop and the true service begin?