Closed Innovation at Facebook

In 2010, Facebook introduced the “Open Graph”. In Mark Zuckerberg’s own words:

“Today the web exists mostly as a series of unstructured links between pages. This has been a powerful model, but it’s really just the start. The Open Graph puts people at the center of the web. It means that the web can become a set of personally and semantically meaningful connections between people and things.”

The “unstructured links” Zuck refers to are a clear jab at Google. While Google has built its business on publicly available data, organized through links, Facebook’s model is closed. This is a huge advantage for Facebook, since exclusive data can be a tremendous competitive edge. The downside, however, is that closed doors prevent valuable data from getting in. Open Graph changed this by offering slices of Facebook’s data in exchange for data from the outside. This offer of open innovation allowed Facebook to build greater integration with external services, which, at the time, were more likely to provide Facebook with a fair trade. Then, in 2017, it was discovered that Cambridge Analytica had used Open Graph to harvest more than 50 million user profiles, for the purposes of election manipulation.

Facebook started shutting down parts of its Open Graph in 2015, but not after significant damage had already been dealt. Regulation in the form of GDPR in Europe has already forcibly locked down data sharing. This issue comes with hard trade-offs. Decreased data sharing improves privacy but entrenches incumbents. Instagram was launched off the back of Twitter’s exportable social graph. Later, Instagram’s growth was further accelerated by piggybacking off Facebook’s social graph. Now, amusingly, Twitter has been slaughtered by Facebook, which acquired Instagram in 2012. This rapid growth, and surprising takeover, would not have been possible without open networks. Open networks can compromise monopolies, and now all social networks hold their user data under lock and key.

We can observe a general trend from open innovation to closed innovation. When Windows launched, it was the ultimate open platform (not in terms of how it was built, but by how it was used). Developers could build anything on top of the Windows operating system and sell directly to users. Windows was a business that only captured a minority of the total pie. Apple started to shake this model. Their App Store, for example, captures a tax on all app sales. By facilitating the relationship between users and app providers, Apple can claim a majority of the pie. Now, Facebook has taken this trend to the extreme. By commoditizing content creation and completely controlling consumption, Facebook can own the entire pie. Furthermore, if we look at the cross section of these companies individually, we can infer that open innovation is powerful when you’re the underdog, but less valuable when it’s time to build your moat and collect maximum rent.

Is this trend harmful? I would argue not necessarily, and certainly not for the incumbent. By closing innovation, Facebook can better control the user experience. We’re shifting focus from distribution, which hinges on exclusive distributor-supplier relationships, to user experience, which Facebook can curate exclusively. Uber followed a similar model by commoditizing dispatch vehicles so that it could focus on hailing, pricing, and dispatch. The powerful network effects of Facebook and Uber’s businesses mean that they can sustain massive growth despite offering suboptimal service. As it turns out, you don’t need the best service (one driven by open competition), you just need the service that everyone uses.

It’s worth noting that the tradeoffs of open innovation are not as simple as I represent above. I’d like to hear some counterexamples from my classmates, but here are a few. Google, despite having first mover advantage and the best engineers in the world, is getting trounced by AWS. Amazon’s technology stack was architected from the ground up to be service-oriented. Jeff Bezos made this a requirement for all projects, whether they were externally accessible or not. This made the leap from a closed system (services for Amazon) to an open one (services for everyone via AWS) incredibly seamless. By planning for open innovation, they were able to transform their infrastructure into a generalized computing platform. It’s not clear when, if ever, open innovation will cease to be effective for Amazon’s business model. Another interesting twist on open innovation is the blockchain. By tying the value of the applications to the underlying protocol, we can hoard value in the underlying platform even if (and especially if) the platform is open. Typically, monetary value is concentrated at the application layer (e.g. the founders of Google are much richer than the inventors of tcp, http etc.), but blockchain flips this on its head. Since applications make the underlying tokens more valuable, and the value of the tokens is greater than the combination of all the applications built on top (due to speculation), we can encourage open innovation while still concentrating value in the platform.

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17 thoughts on “Closed Innovation at Facebook

  1. This article does a great job of demonstrating the trade offs between open and closed innovation. After the Cambridge Analytica scandal, Facebook users were exposed to how their data is used within these “private” ecosystems and though its difficult to monetize, users realized that there is true value behind their preferences and their footprints left all over the internet. We’re creating value with our clicks and time every day, and I’m glad you mentioned block chain as a disruption to this lock & key moat protected user data model.

    Don Tapscott does a great job describing this simply in a TED Talk found here: https://www.ted.com/talks/don_tapscott_how_the_blockchain_is_changing_money_and_business/transcript?language=en

    Don proposes an ecosystem (13:57) where independent users are in control of their privacy and can actually reap the benefits of their data usage at their own discretion, not within the walls of Facebook or Uber. If we’re in control of our transactions and digital histories, will these services have new incentive to improve experience? Will this decentralization allow new players to enter the market?

  2. Great piece, thanks for sharing. Some of the examples you mentioned – Facebook, Uber – with suboptimal customer experience and platforms that have thrived in the market are fascinating because they illuminate the ever-changing and perplexing mind of the consumer. Consumers do not, in fact, always want the best product. They will not follow just quality. And are incredibly resistant to change once something has entered their habitual lives. You see this outside of software often – in the win of VHS over superior technology, DVDs over superior technology, Apple iPhones over superior technology (at least in the US and globally for a long period). It is interesting to see the both positive and negative effects this has on innovation and companies themselves.
    For example, as you mentioned FB and Uber have been able to absolutely dominate their fields of social media and car-services respectively. However, by entrenching themselves so deeply and refusing to incorporate open innovation in their external products it appears to have transmitted to their internal cultures as well. The closed innovation mindset of FB and Uber has prevented them from creating any meaningful products outside of their core markets. FB is ONLY social media. Uber is ONLY car-services. While both have attempted to expand and have a broader impact on consumers lives – they have been unable to change their perception or creatively enter any other market. Their closed innovation has completely hampered any diversification or new market potential for either player.
    In opposition, Amazon, Salesforce, Google, and Square are all examples of open innovation focused companies that have been able to continually layer onto their core offerings – and in the case of AMZN and GOOG veer entirely left from their core. By aligning their initial user products with open innovation and never compromising this to build economic moat they have fostered this innovation within their own development teams – and as a result they have been able to move into completely new markets with extremely high quality and creative products. I think this provides a huge advantage to open innovation platforms – they have not only diversified and derisked their revenue streams but they have continually created the highest quality products for consumers. Time will tell – but I think this long-term competitive advantage of open innovation platforms will allow them to outlast and out prosper closed innovation companies. I wouldn’t be surprised to see a few “network” effect companies lose their edge, lasting value has to be created through quality and constant improvement.

  3. Great article comparing open and closed innovation. Alexander mentioned Apple as an example of open innovation, but I’d like to dive deeper into the Apple Watch in comparison with its current competitors. I believe the Apple Store will enable Apple Watch to dominate the tech wearables industry in the future as Apple will be able to crowd source new innovations and act as a platform to deliver content to its users. Compare this to Fitbit or Garmin, who operate in a closed innovation system, and it is difficult to envision these individual companies being able to compete on innovation.

    It will be interesting to see how much data sharing will occur within open innovation in the future, and how that data can be then used in artificial intelligence and machine learning.

  4. What a click-bait title (joking, but it clearly worked on me), but great read with excellent examples and points of view. The point you brought up about blockchain flipping the traditional value creation structure upside down is something I hadn’t thought of before. Given its enhanced value-hoarding effectiveness within an open platform, should we expect to see more open-source structures in the future, or will the control benefits of closed systems still entice creators to at least begin with those kinds of systems? Also, how will the new value structure impact the creation of applications on these new platforms? It seems that one of the reasons we have seen such a large proliferation of apps over the past few years is due to the “instant-wealth” dream that infected so many developers. Will it be more difficult to attract these kinds of products if the value is now possessed by the owners of the platform?

    Regardless, I am super pumped to hear that I may, in fact, not lost all of my money from my Ethereum speculation…

  5. Thanks for the article. Based on the highlights between open and closed innovation, I feel closed innovation really starts to make sense at substantial scale and when ideas or information can travel frictionlessly. You then have huge interest in locking out your competitors and keeping status quo on the market (while pushing your engineers to work on new products). I think in the market of tangibles it’s much harder to attain closed innovation, mainly because much fewer dominant players exist and therefore on average you are constantly worried about what your competitors are doing, i.e. what your customers currently want. Open innovation sounds like an easy solution, where the only thing you need to get right is the process of adapting, testing and improving. Furthermore, I think as a society we should in general stay away form closed innovation loops as we will never be able to tell whether it’s working for our well-being, or keeping us away from more efficient, fairer solutions.

  6. It is very interesting that you described a trend from open to closed innovation – something I have not observed before. In terms of individual companies, it is true that generally when they are younger and have more to gain, they tend to be more susceptible to open innovation, but when they have a large enough network, they choose to close the innovation. I really like how you listed examples of tradeoffs of open innovation in your last paragraph. Below are some generalized thoughts I had on the tradeoffs based on the examples:

    A few factors might influence the decision of companies to be more open when they are younger / smaller. One is that once they gain a sufficient scale, they are able to get similar quality of insight from closed network, whereas in early days they need to rely on the environment to provide enough inputs. Another factor is that many tech / new media companies are founded on the premise of openness and transparency, regardless of whether there are contrarian content or malicious usage on there (or maybe those can be controlled more easily). As they scale, they are less able to control the contrarian content, and at the same time receive more public scrutiny on their social responsibility to filter such information / use of information in their network. As a result, they have to resort to either spending a lot of capital in controlling the network, or closing the network.

    The risk of closing off the network is not just that your system will learn from less data, but also that your system might have limited variety of data to learn from. Especially if you couple closing off the network with controlling the network, you have a situation where the network itself (in this case Facebook) becomes the entity that decides what people in this closed network will receive. This is risky for the people involved in the system (as the system might be biased), as well as for Facebook (as they might lose competitive advantage to newer fresher perspectives sooner).

  7. Really enjoyed the piece. Closed innovation makes a lot of sense when you have a position of total leadership and access to resources plus data. This can be very powerful to sustain and even increase your competitive advantage. I think open innovation just has a different use case and is very helpful when you do not possess the capabilities, financial resources, a culture of innovation, and/or time to develop new technologies to keep being competitive. For me, one common example is when we see companies setting up corporate venture funds to invest with more agile startups to jointly develop new technologies/products. This also works through minority investments + later acquisitions.

  8. Your piece presents an interesting perspective I hadn’t heard before. In class we haven’t considered gaining more value from going from open to closed innovation, but for Facebook this makes sense. I worry that this also gives companies like Facebook far too much power going forward. Their lack of accountability re: Cambridge Analytica was disappointing — they knew of the data breach for too long without doing anything to inform their users. Going forward, our government will have to treat tech companies like Facebook less like technology companies, and more like the media companies that they are proving themselves to be. Great read!

  9. Great Article! I enjoyed learning about the tradeoffs of open and closed innovation. My main concern with closed innovation is the ability of companies (like Facebook) having too much control and like you mentioned “offering suboptimal service.” I believe every company should be providing the most optimal service for their customer and competition is key to this. Closed innovation allows companies to be complacent in their ways and stop innovating on new and interesting products/services.

  10. What a great article, I really enjoyed it. One of the things I really struggle about open innovation, is on the challenge for big companies to create competitive advantages while sharing a chunk of their know-how. After reading this article, I’m seeing how big companies, leaders on innovation, have the same concern and end up monopolizing the innovation inside them. I wonder how much benefit does this bring to society. On one side I understand your point on how they are able to control user experience. On the other side, I feel like user experience could also be optimized in an open innovation environment.

  11. Great article – thanks for sharing Sgt. Piggy. I think you rightly point out at the end of your essay that the judges are still out whether there is a clear overall evolution from open to closed innovation. There are big trends in both, and oftentimes these trends reverse.

    I agree with Thomas that, as you also briefly touch upon when describing Facebook’s strategy, closed innovation mostly makes sense when you dominate a market or have proprietary data / access. To this perspective I tend to see open innovation as better for consumers: the more competition, the better the consumer offering. With companies like Google, Facebook, Amazon and Netflix contuing to gather (and keep) data, the power balance in our corporate world is severely distorted. Though, I am optimistic. New technologies will continue to emerge. I personally believe blockchain holds huge potential to reverse the trend for more distribution of data (and thus power).

    Only the future can tell what will happen. I am curious and eager to continue this discussion.

  12. Great article. You raise an important point on controlling the user experience and gaining the maximum profit vs. what is beneficial to society. I believe in Microsoft’s model of democratizing technology and therefore am a big believer of open innovation. Open innovation allows innumerable users and app developers to leverage what you have created and use it in several innovate ways. A technology built on open innovation is more deeply embedded with society and typically has a wider reach and larger impact.

  13. Great article with an interesting spin on the benefits of closed vs. open innovation. You mentioned the control of user experience that FB has by using a closed system. Are there tradeoffs that come with this? I thought the blockchain example you used was also interesting; as more organizations leverage blockchain in the future, will they have any challenges moving toward an open system again? What will be required to make this shift?

  14. Very interesting article. I think an under appreciated aspect of open-innovation is the ability to create complementarities with other products and companies. As you mentioned with Windows, their open platform was a likely driver in their huge success especially compared to Apple. In Apple’s case, I think their closed platform really hurt them and is a reason they struggled until the advent of the iPod. But even the iPod was a transition for Apple from a closed platform (Mac OS) to an open platform (iTunes), in the sense that any (for the most part) artist could contribute their work to the platform. In fact, Apple didn’t make any money on iTunes but the complentarities between iTunes and the iPod sparked Apple’s turnaround.

  15. Great article. I really enjoyed learning about some of the tradeoffs between open and closed innovation. The Cambridge Analytica scandal really showed the tremendous downsides of companies being cavalier about their data management. I really believe that user experience can be improved in an open innovation environment, but for social media companies, it seems that there is almost unlimited downside towards products such as Facebook’s “Open Graph” when left unchecked. I’m curious if anyone has answer to Ian/Kub’s question above, how can we move towards more open systems in the future?

  16. Very well written piece on a highly relevant topic! It’s clear you’ve offered some nuanced insight based on personal knowledge and experience. Some questions: when you say Facebook is “commoditizing content creation and completely controlling consumption” such that they get the whole pie, I wonder to which pie you refer? The content Facebook owns is certainly highly valued by 3rd parties, but Facebook is not the only source of this information (Google’s search analytics is arguably more valuable when matched with generally available user demographic data) nor does it own hardware; I found it to be a stretch to compare to Apple’s app platform to which companies really do need access to execute their digital strategies. Secondly, I find it a little difficult to understand the balance between desiring to protect user data and still seeking valuable business development opportunities — if integration slows, how will Facebook grow in the future? If it plans to deliver all services and value itself by building new applications on its platform, I think experience becomes critical. I agree that user share may be more important than delivering CX excellence, but the threat of new entrants looms (e.g., from large platforms used in different countries) if you’re not customer obsessed. I will say that as customer experiences become even more invasive in peoples’ lives (e.g., VR, increased data sharing / over longer duration), the need for control and oversight is increasingly more significant (both from security / legal and moral perspectives). As for blockchain, do you view the speculative nature of the underlying protocol’s value as an indicator that it could go the route of the widely used protocols of today? In other words, as blockchain and its application become more ubiquitous and a few winners emerge, will the true value generators be the applications or, as you suggest, will the value of the currencies themselves be most substantial?

  17. On the tech side, another example of open innovation is the general Open Source movement, which has been around since the very early days of computing (if you’re using a Mac, the operating system itself is built on an Open Source version). A couple key licenses come to mind when balancing the tradeoffs between commercial viability and abuse of open innovation: GPL, Apache, and MIT. At a high level, MIT is the most lenient when it comes to using open-source/open innovation for commercial uses, while GPL is most strict – if you use open source material to create another product, you have to open source that product as well. This restriction I believe has led to its restricted adoption among Open Source acolytes, and which is why we don’t see many computers running Linux in the consumer space. More info found here for those who are interested: https://exygy.com/which-license-should-i-use-mit-vs-apache-vs-gpl/

    When thinking about open innovation risks, I think the delineation has to be drawn around if/how customer data is shared. Data that is personally identifiable (PII) should be closely guarded and monitored, while data that is anonymized should be more lenient. We should attach the same level of rigor around PII in open innovations as we do around customer transaction and bank data!

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