kidmercury

For those of us in the Internet business world, one of the seemingly unending debates is "open vs. closed": whether open systems will be more profitable than closed ones. There is a lot of confusion as to what open and closed really mean, and that is perhaps the biggest issue of all. So I'll address this issue in this blog post. I'll focus on using non-technical, "real world," examples, which I think most folks will find easier to understand.

First, forget about the Internet for a second. Imagine you are in charge of a given country's immigration policy. Do you have favor loose immigration policies, or do you favor strong restrictions on immigration? Loose immigration policies -- meaning those that make it easy for immigrants to come into your country, placing few barriers on them -- could bring greater opportunities for your economy. For instance, if doctors and engineers emigrate to your country, well you just got more doctors and engineers! This increases potential for innovation and cost-reduction in those niches. Conversely, though, you could attract "bad" immigrants who take more value than they contribute -- immigrants that are basically parasites looking for free services from your government.

Loose immigration policies designed to make it easy to enter your country can be thought of as an open system.

Restricted immigration policies that make it difficult to enter your country can be thought of as a closed system.

So what's better, open or closed? And what works on the Internet?

The answer, of course, is balance: a system that is too open means pure chaos; one that is too closed means insufficient diversity (which translates to reduced economic opportunity).

Now, let's tie this back to the Internet.

Think of sites like YouTube and Twitter. On both those sites, anyone can join -- the cost of "emigrating" to the network is zero. This clearly creates value; how much fun would YouTube or Twitter be if no one was on it?

But by the same token, do we really need all those people on there? And of course, by "people," I mean any person/robot that has an account. The easier it is to join a network, the easier it is to spam it, as anyone who has been on Twitter can tell you.

So perhaps these networks are "too" open. Or, perhaps they are not open in the ideal way. Like immigration, the issue of network openness is rich and complex, and can be dealt with in many ways, depending upon what one's objectives are.

Open Does Not Equal Free

Another common misperception is that open == free; meaning if something is "open" no money is going through it, and hence there is no opportunity for profit. Open and free are commonly associated together because the more it costs to join a network, the more closed it essentially is in the sense that fewer people will have the economic means and/or incentive to join. Again, we should think in terms of balance, rather in stark "open vs. closed" terms, and should look for the structure that maximizes economic value.

And there is the key issue: maximizing economic value. The way to create more economic value is through greater openness, which is why you see more and more networks having reduced barriers to entry, often going so far as to make it easy for people to join, and to give them incentives to join. Ultimately, the most valuable systems will be those that strive to be as open as possible, and to create economic incentives to expand the network. The classic example is Google: it's a very open system; lots of web sites can get indexed, anyone can use the network, and it's pretty easy for advertisers to get started as well. The true genius, though, is Google AdSense, which lets Internet publishers put those crappy, cheap-looking Google ads on their site. This expands Google's revenue and expands the number of properties in Google's advertising index.