Facebook Conundrum: Will it Tolerate a Red Pill Application?

Suppose I build a skeleton social networking app, call it "XSpace" for convenience. Maybe it has a couple of clever, unusual features, but there's nothing much there, and no users.

Now I build a Facebook application called "Red Pill."

If you add the Red Pill app, and give it permission, it will export data from your profile into storage on XSpace. None of this data is published or shared or anything else that would violate the current Facebook TOS. In fact, at this stage, it's a lot like FriendCSV, a current friend data exporter app -- it's actually a strict subset of FriendCSV, since the data is not actually downloaded as a file, just stored in a private spot in XSpace. (The FB Terms of Service prohibit storing user data for more than 24 hours, but this is less of an issue than it seems: we'll talk about this later)

Now I add a feature to Red Pill called "Take Me"

Take Me brings you into the XSpace app, with all of the social graph structure already in place, from everyone who has installed Red Pill, even if they've never "taken" it.

If a lot of people run Red Pill, then the core value of Facebook -- the network itself and to a much lesser extent the profile data -- is replicated into XSpace.

What happens next?

In the Facebook-success scenario, XSpace becomes an interesting alternative world to Facebook, linked by Red Pill "tunnels," and mirroring some parts of the social graph. Maybe a nice symbiosis evolves or XSpace is subsumed into a pure traditional Facebook app.

In the Facebook-failure scenario, something kicks off an exodus from the 'book. Whether it's a change in functionality, rules, service level, or just "cool factor," a mass of people pop the Red Pill and just start logging into XSpace instead. They keep all their original friend and profile data, so it's a smooth transition. Maybe XSpace also implements the Facebook API (it's a small, public API after all) so that Facebook apps can run in XSpace as well...

It is only a matter of time before the "Red Pill" and "XSpace" show up. That's the risk you take building a platform with a API -- it's actually to be expected, even desired.

But in the world of network-effect applications, there's a twist: these apps do not derive their value from being "the best implementation of the platform" (typically the way a platform implementer tries to assert value). Instead, the value is page views driven by the social graph itself and by the apps on the platform. Since both of these areas can be trivially replicated in XSpace, there's not much left. That is, there is no core value-add (aka Sustainable Competitive Advantage) left to Facebook as such.

Could Facebook cut off (or dial down) the API? Sure, but at the risk of slower growth and possibly aggravating users and developers who might like to play in someone else's open sandbox. And if they were too late in doing so, the move could actually spark the emigration to XSpace.

Could Facebook assert intellectual property rights over the data? Maybe, but facts cannot be "owned" as intellectual property. So the fact of my having a friend relationship to someone, or having met them in a class, or being married, are all things that no one owns. There is some user-generated content that the user has "signed away" rights to, but we're not talking about that. I.e., we are not proposing scraping out and re-using any content outside the core profile facts (age, name, etc.) and social graph.

Could Facebook complain about XSpace storing user data more than 24 hours? Maybe, but it depends on how the boundaries of the systems are defined, and in any case the better solution is for Red Pill to pull updated user data every 24 hours rather than archive the old data. If the app is ever cut off from retrieving this data, then it will keep the last snapshot, and then who cares, 'cause it's "game on."

As long as Facebook's valuation can be reinterpreted as an artifact of a Microsoft marketing expenditure (i.e., not a true investment, as some have suggested), this doesn't matter to anyone except maybe Microsoft.

But if Facebook is looking at taking really big money in, or eyeing an IPO, they'll be forced to think about cutting some of the Matrix exits. What will they do? What can they do?