People usually think of business competition as occurring between substitutes – products 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.
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