Facebook Home, Android, and competition: a dialogue

Two of our experts, Link Hoewing and David Young, recently had an email conversation about Facebook Home, the mobile ecosystem, and the shifting profile of competition in the mobile sector. Below is a transcript of their conversation, edited for clarity.

Link Hoewing: The evidence that dynamic competition is real shows in the recent announcement of Facebook Home, a new operating system “skin” for Android devices that integrates a user’s Facebook account deeply into the device’s software (e.g. using Facebook to manage contacts, photos, and as the default messaging app). Facebook Home demonstrates that innovation and experimentation with new business models in the Internet ecosystem are a major part of how competition works. Companies enter new markets in ways never anticipated. For example, in the case of Facebook Home, the new service puts into question what is and is not an “operating system”. It is morphing before our eyes. While Facebook was at pains to say its new “Home” service operates at a layer between apps and operating systems, in reality it works like – and to the consumer will seem like – the phone’s OS. So Facebook is entering the OS market without really making what we’ve in the past called an “operating system.” Google and Apple now face even more competition from Facebook than before.

David Young: Great points about Facebook Home. One of the key aspects of the dynamic competition model is that companies often do gain advantage in the market place, but because innovation and change drives competition in the Internet ecosystem, no company can really take anything for granted for long. I think this is also important with respect to who has leverage and how we look at the concept of the “open Internet.” Facebook Home (FBH) is only available on the Android operating system because the Android business model is “open” and allows FBH’s software to assume a new role in Android devices. Apple’s iOS is not the same from a business model standpoint. Some call it “managed” or “more controlled,” but regardless it doesn’t allow customization like Android does. Facebook’s ability to do something similar on Apple devices is constrained. Is this a problem?

No, because in the competitive market, consumers who care about FBH will buy Android devices. If Apple loses enough customers, perhaps they’ll open up to FBH. Now what if the next generation of Android didn’t allow FBH to work? Would that be a problem? Again, probably not, because it would open the door for Windows, Blackberry, or even some new OS to emerge that attempted to give the consumer what he or she obviously wants.

Link Hoewing: David, yes, right on. This kind of exclusivity that we’re seeing between Facebook Home and Android (or Facebook Home and handset maker HTC, which is selling devices with FBH preinstalled) is not necessarily a problem and in fact can spur innovation. The iPhone/AT&T deal was one that got roundly criticized by some but it did two things: it spurred demand for smartphones and mobile data services, and it gave us incentives to work with alternative suppliers – Android and Google in this case. What everyone forgets is that technology markets, being particularly competitive and innovation-driven, don’t need much help. If there are ways competition can emerge, it will. Quite often, that’s exactly the case. It may take time, and not every company in the market place will always win, but the dynamism of today’s technology market  spurs innovation and lots of new alternatives – the consumer is the winner in the end. Many believe “openness” (however defined) means exclusivity or proprietary services are bad. But that is generally not true, especially where consumers have choices, as they do in the Internet ecosystem.

These are issues that deserve more attention; understanding how innovation drives competition is a key issue for policy makers.