Why does it matter that Twitter is supplanting RSS?

The other day I claimed that Twitter is supplanting RSS, and that long term that’s a bad thing.  Andrew Weissman had a very reasonable response:

Twitter is the most open application people are currently using. It’s open on the way in and the way out. The variety of applications using the Twitter api are astounding in that they cover many use cases.

Given that, why will Ashton and Oprah someday care?

The problem is Twitter isn’t really open.  For Twitter to be truly open, it would have to be possible to use “Twitter” without an any way involving Twitter the institution. Instead, all data goes through Twitter’s centralized service.   Today’s dominant core internet services – the web (HTTP), email (SMTP), and subscription messaging (RSS) – are open protocols that are distributed across millions of institutions.  If Twitter supplants RSS, it will be the first core internet service that has a single, for-profit gatekeeper.

Why would this matter to Ashton or Oprah?  Imagine if Microsoft Exchange server wasn’t just an instantiation of SMTP but was a centralized service that all email had to pass through.  A single institution is never as reliable as a system distributed across millions of institutions.   Nor is it as secure – for example, a distributed denial-of-service attack can much more easily bring down one service than the entire internet.

But most importantly, having one company control a core internet service hinders competition and therefore innovation.  To continue the Microsoft Exchange analogy – do you think in that world we would have such a diverse email ecosystem if everyone had to go through Microsoft to build stuff?

And this is all true while we are still living in the fantasy land where everything involving Twitter is free.  At some point Twitter will need to make lots of money to justify their valuation.  Then we can really assess the impact of having a single company control a core internet service.

Software patents should be abolished

The alleged societal benefit of patent law is that it creates a financial incentive to innovate.  The societal drawback is that it reduces competition, reduces the spread of innovation, and creates deadweight legal costs.

Perhaps patents are necessary in the pharmaceutical industry.  I know very little about that industry but it would seem that some sort of temporary grants of monopoly are necessary to compel companies to spend billions of dollars of upfront R&D.

What I do know about is the software/internet/hardware industry. And I am absolutely sure that if we got rid of patents tomorrow innovation wouldn’t be reduced at all, and the only losers would be lawyers and patent trolls.

Ask any experienced software/internet/hardware entrepreneur if she wouldn’t have started her company if patent law didn’t exist.  Ask any experienced venture investor if the non-existence of patent law would have changed their views on investments they made.  The answer will invariably be no (unless their company was a patent troll or something related).

Yes, most venture-backed companies file patents (I have filed them myself), but this is because 1) patents can have some defensive value, 2) they can grease the wheels of an acquisition (mostly because big companies want a large patent portfolio for defensive purposes), and 3) occasionally failed startups will get funded by investors whose intention is to go around suing people (hence providing “downside value” for the initial investors).

Articles like this recent one in New York Times promote the urban myth that the main beneficiary of patents are lone inventors whose idea is stolen by the big guys.  I have no special knowledge of the situation referred to, but I find it hard to believe in 1995 the idea of tying GPS to mobile devices wasn’t obvious to anyone in the field.   Almost all software and technology patents that I’ve ever come across are similarly obvious to practitioners at that time.  In theory obviousness is grounds for disallowing patents, but in practice patent examiners grants tons of silly patents.

Take the case of Blackberry and NTP.   NTP is a “patent holding company” – a patent troll – whose sole purpose is to sue people.  Now, I’ve been around long enough to know that the idea of mobile email is as old as email itself.  What RIM did was they actually went and made it a reality.  They figured out how to make a simple device that people loved, how to market it, and how to convince investors to give them money for what probably at the time seemed like an overwhelmingly difficult project.  The founders of RIM are the heroes of the story.   They didn’t need to sue anyone because they built a product and made money by actually selling a product people wanted.

How did having patents help society here?  NTP never tried to build any products.  No one is claiming RIM took the idea from them.  The only beneficiaries here are a company that never built anything and a lot of lawyers.

Software/internet/hardware patents have no benefit to society and should be abolished.

The inevitable showdown between Twitter and Twitter apps

People usually think of business competition as occurring between substitutesproducts that serve similar functions for the user.   Famous substitutes include Coke and Pepsi, and Macs and PCs.

In fact, especially in the technology sector, some of the most brutal competition has occurred between complements. Products are complements when they are more valuable because of the existence of one another – e.g. hotdogs and hotdog buns, PCs and operating systems.

There is inherent tension between complements.  If a customer is willing to pay $2 for a hotdog plus bun, the hotdog maker wants buns to be cheaper so he can capture more of the $2, or lower the price of the bundle and thereby increase demand.  (For a great primer on competition between complements, I highly recommend this Joel Spolsky post.  I’ve also been writing about complements, here and here).

Microsoft is famous for destroying companies that offer complementary products, either by bundling complementary apps with Windows (Windows Media Player, MSN Messenger, IE) or aggressively competing head-to-head against the most popular ones (Adobe, Intuit).  The surviving 3rd party apps are usually ones that are too small for Microsoft to care about.  The best (selfish) economic situation for a platform like Windows is lots of tiny complements that have little pricing power but that make the platform itself more valuable.

One of Google’s main complements is the web browser and desktop operating systems, which is why they built and open sourced the Chrome browser and OS.  Google’s other big complement is broadband access – hence their excursions into public Wifi and cellular spectrum.

So what does all of this have to do with Twitter?  At some point, significant (non-VC) money will enter the Twitter ecosystem.  I have no idea whether this is will be by charging consumers, charging businesses users, search advertising, sponsored tweets, licensing the twitter data feed, data from URL shorteners, or something else. But history suggests that where there is so much user engagement, dollars follow.

For the sake of argument, let’s suppose Twitter’s eventual dominant business model is putting ads by search results.   Who gets the revenue when a user is searching on a 3rd party Twitter client?   Even if Twitter gets a portion of revenue from ads on 3rd party apps, there will always be an incentive for them to create their own client app, or to “commodotize” the client app by, say, promoting an open source version.

I’m not saying this will happen in the immediate future.  First, Twitter and a lot of app makers* have raised a lot of money, so aren’t under (much) pressure yet to generate revenues.  Secondly, some of the lucky Twitter apps will get acquired by Twitter.  I think this is what many of their investors are hoping for.  But those that aren’t so lucky will eventually find their biggest competitor to be Twitter itself, not the substitute product they see themselves as competing against today.

* when I say Twitter apps, I mean any product, website, or service that eventually makes money and depends on Twitter’s API.

Google and newspapers: the false choice of opting out

First let me say I love Google.  I think Google created one of the greatest inventions of the past century and continues to give back much more value to the world than they “capture” in revenue.

Secondly, I think Google itself has almost nothing to do with the decline of newspapers.  That is due to, among other things, 1) the newspapers losing their classified business to Craigslist and others, 2) the internet making geography irrelevant and hence causing newspaper competition go from 1 or 2 papers per market to thousands.

That said, I am bothered by the arguments I hear in internet circles of the form:

Premise 1:  X can stop working with Y at anytime.  (NYTimes could opt out of Google search results / Google news at any time)

Premise 2:  X would lose out if it did that (NYTimes would lose traffic and revenue if they opted out of Google).

Conclusion:   Hence Y is helping X.  (Google is helping the NYTimes and the NYTimes should stop whining.)

The conclusion doesn’t follow from the premises.  The NYTimes might in fact be better off in a world without Google.  More specifically, they would be better off if the search engine market were genuinely competitive.

The power dynamics between Google and the newspapers has the same dynamics of any buyer-supplier market.

Newspapers, like all websites, are suppliers of content to Google.  In most markets, with genuinely competitive buyers and suppliers, the revenues are shared between buyers and suppliers in proportion to their relative bargaining power.  Their bargaining power depends on how fragmented each side of the market is – how many genuine alternatives each company has.

Normally there is some reasonable level of interdependence between buyers and suppliers, hence the revenue split is positive and non-negligible. Pepsi and Coke are always jostling with their bottlers about the percentage split but in the end each side usually makes a profit.

And in situations where the relative bargaining power is severely imbalanced, there are normally business mechanisms for correcting the imbalance.   For example, before Staples was founded, office supply stores were mostly mom-and-pop shops that were tiny relative to their suppliers, and hence had very little bargaining power.  The central business concept behind creating Staples was to “roll up” these shops and thereby increase their bargaining power with their suppliers.  In doing so, they were able lower their costs and increase their margins even while lowering their prices.   One of the primary reasons companies merge is to increase bargaining power with respect to buyers and suppliers.

As a “buyer” of web content, Google has incredible dominance, so much so that the price they pay for that content is zero.  If the NYTimes decided to opt out of Google tomorrow, Google users would barely notice.  (Perhaps the only content site that would matter and hence in theory could bargain with Google would be Wikipedia – but even Wikipedia only accounts for ~2% of Google click throughs).  On the flip side, the NYTimes would see a massive decrease in traffic and hence ad revenues.  Google has so much power they can split 0% of the revenue for organic traffic (and of course charge for paid links).

Now imagine a world where search engines are truly competitive.  I know it’s hard – but imagine there are say 20 search engines, each with 5% market share.  And suppose they differ primarily according to which content sites they index.  (I am not saying I’d prefer this world – I’d actually hate it – but please bear with me for the sake of argument).   On the content side, suppose there are only a couple of newspapers left – maybe the NYTimes, WSJ, USA Today, and the Financial Times (which, btw, will probably be the case in a few years).  In this situation the newspapers would have enough leverage to get the search engines to pay them for inclusion in their organic listings.  I know that in my own case if two search engines were nearly identical except one included my favorite newspaper and the other didn’t, I’d use the one that did.  I suspect a lot of other people would make the same decision.

There is nothing inherently un-monetizable about newspaper content.  Like all goods and services, if newspaper content has value to people and is scarce (it’s not scarce today but as more newspapers go out of business will become increasingly so), they can eventually generate sustainable revenue (albeit probably operating at a much smaller scale).  The revenue can come either through consumers paying directly or buyers like Google sharing revenues, or some combination thereof.

For the moment, and for the foreseeable future, newspapers (and all content sites) just happen to be in a dreadful bargaining position with respect to Google.