Platforms and developers, part one: Facebook, Apple and the cottage industry problem

Editor’s note: Facebook and Apple have each built formative platforms for third-party developers over the last year. They’ve created new opportunities for outside companies to make money — but now rivals are also offering platforms to woo developers. Facebook and Apple are both trying to deliver the best applications available (much like an operating system should), but they’ve both been accused of hampering third-party potential through opaque regulations governing which apps can succeed. In a three-part series we’re publishing this week on VentureBeat, venture capitalist and entrepreneur Lee Hower discusses the nature of the dilemma facing platform companies, evidence for how they’ve already shown themselves to behave, and ways they can capitalize on their platform potential.

I’ve been doing some thinking about software platforms of late, in particular the relationship that grows between platform owners and 3rd party developers. It seems like longer, but just over a year ago Facebook launched its F8 Platform and then more recently Apple opened the App Store for the iPhone platform. And of course lots of other software platforms have been built around 3rd party development for decades (operating systems, game consoles, etc).

One meaningful difference versus more established platforms however, is that the developer ecosystem that has emerged around Facebook (and initially w/ iPhone thus far) is largely a cottage industry. What I mean is that the developer community can be characterized as fragmented (large number of very small developers), with relatively low investment in any given app and few barriers to entry. While cottage industry type development may bring some success for a handful of small developers, my hunch is that it may actually be detrimental to the platforms themselves in the long run depending on their strategic ambitions. The implications for platform owners could include low overall investment (mainly in individual apps though potentially also in aggregate) as well as the possibility for bad user experiences (app spam, etc).

Both Apple and Facebook are starting to exert their influence among developers and are changing the rules for the community. Apple pulled the plug on iPhone apps it deemed inappropriate like Murderdrome. And Facebook started picking “great” applications for special treatment earlier this year, as well as redesigning their core UI in a way that impacts 3rd party applications. If I may paraphrase George Orwell’s Animal Farm, all 3rd party apps are created equal… it’s just that some are created more equal than others.

It’s a little ironic that the launch of Facebook’s platform was initially hailed by many for its openness and policy clarity, in contrast to other platforms in the broader widget economy. Josh Kopelman had a good post on this at the time. As a VC I’ve looked at some investment opportunities in startups developing for one or more of the current web platforms, many very interesting but ultimately not a fit for various reasons which typically boil down to potential scale of outcome. And as a die hard free marketer, I fully respect the right of platform owners to set policies and standards as they see fit and recognize the need to strike a strategic balance between themselves and outside developers.

A small handful of companies are developing on a larger scale like Slide, RockYou, Buddy Media, and Zynga with various revenue models. But by and large, these are the exception not the rule and in some cases platform owners have contentious relationships with them. I am by no means “anti small developer” either. Continuous innovation within a platform ecosystem will always require openness and the ability for developers both large and small to participate. New groups of entrepreneurs have launched applications in a highly capital efficient fashion and I’m thoroughly impressed by the value, albeit typically at a smaller scale, that many individual developers have created. But the evolution from fragmented, small scale development to more mature platforms may require the emergence of larger developers, capable of making meaningful investment in applications and ensuring consistency of user experience. What would the Xbox or Playstation platforms be without the likes of EA?

Ultimately though, my sense is that platforms like Facebook are at a turning point… they’re already a wild success in terms of user adoption and significant expectations have been created both for FB and developers. Other platforms built at least in part around 3rd party apps, like the iPhone, Twitter, and others, may reach this point as well in the coming months and years. But if the developer communities remain cottage industries, it potentially means the difference between a platform like Facebook being a mostly-closed (albeit huge) community with “add-ons” versus truly becoming the something like next operating system. A somewhat more concentrated development community may even lead to shifts in the scale or nature of applications that dominate usage on the platform.

I’ll try to expound on this a little more in two more posts, and include some evidence to support my argument here as well as include some analogies to other software platforms…. stay tuned.

Lee Hower is a Principal at Point Judith Capital, where he focuses on early-stage investments in internet and digital media companies. Prior to becoming a venture capitalist, he was part of the founding team and Director of Corporate Development at LinkedIn, and before that he was an early PayPal employee. His personal blog is http://leehower.com, where he is also publishing this series.