Big Internet is Web 2.0’s OS — so Who Owns the Apps?

Written by Alistair Croll, Coradiant co-founder and VP of product management who blogs about online user performance and networking.

[qi:073] Earlier this year, Facebook’s Mark Zuckerberg decided to let people build applications atop his social networking site. Many of the attendees at this week’s Web 2.0 conference in San Francisco agree that it was a great strategic move, putting Facebook far ahead of competitor MySpace.

But letting people build applications atop a large web site is also an indicator of something bigger. For many of the largest web sites – including Facebook, but also eBay (EBAY), Salesforce (CRM), Google (GOOG), and Amazon (AMZN) — turning into a platform makes them the web’s version of an operating system.

And when web sites become operating systems, interesting things happen.

Desktop operating systems, such as Microsoft’s (MSFT) Windows, make life easier for the applications that run on them. Windows handles printing, file management, copy-and-paste and other functions, primarily so the applications don’t have to. Early versions of word processors (like WordPerfect for MS-DOS) had to drive printers themselves. But today, a word processor simply says, “Print this,” and the operating system takes care of the rest.

Over the years, the line between what’s part of the OS and what’s part of the application has shifted, and as such, OS vendors have continued to add functions. Sometimes this competed directly with existing companies, for example:

• Microsoft tried to develop its own terminal services, which would have competed with Citrix’s (CTXS) Winframe, but eventually licensed technology based on Citrix’s Metaframe

• Stac Electronics successfully sued Microsoft over its disc compression features, which competed with Doublespace, in 1994.

And many of Microsoft’s antitrust deliberations asked whether new functions were punitively monopolistic, or simply legitimate extensions of needed functions.

Big Internet companies are making themselves the OS of the web 2.0 world. In addition to the fundamentals — operating a web application, storing data, handling logins — each company has a core expertise. In Google’s case, it’s page ranking and relevance; Facebook maps social relationships; Salesforce knows about customer relationships; and eBay has an auction and reputation engine.

This specialization happened in the early days of the desktop OS, too: Apple (AAPL) offered font management and displays that made it the platform of choice for those building desktop publishing tools. Specialization dictates the web platform on which you’ll build: Building atop gives you immediate access to millions of client-vendor relationships, while eBay’s API gives you buying and selling tools.

In the case of many social network applications, the main expertise is the social graph, the models of relationships amongst friends, co-workers, and so on. Myspace, Friendster, Facebook, LinkedIn and others all have these maps, and they’re considered these companies’ “crown jewels.”

Facebook application developers must agree to fairly onerous terms of service. For many, this is terrifying. Effectively, the applications exist at the pleasure of the Internet OS. Imagine (as Oxford’s Jonathan Zittrain pointed out in a Wednesday session) that Microsoft required every developer who wrote a Windows application to do the same thing. Development would have been stifled.

Right now, the lure of access to the social map and a turnkey platform are so valuable, most people don’t mind. But a fight is brewing.

Some of the applications being written for Facebook, such as iLike, are better monetized than Facebook itself, generating music referral revenues that amount to a significant share of Apple’s iTunes sales.

And developers are clamoring for open access to Facebook’s social map — and retrieving what they feel is rightly theirs. At the same time, this data is at the core of Facebook’s value, and the company needs to control it. Taking a page from Microsoft, many of the Internet OS companies are immunizing themselves against future lawsuits with onerous terms of use.
The coming tug-of-war will mirror the antitrust woes of operating systems vendors. Meanwhile, companies that want to build applications for social networking sites face two options, neither of which looks very appealing: Start from scratch or give up their rights as developers.

To Zuckerberg’s credit, he is trying to create a “level playing field” between Facebook’s own apps and third-party ones. But once Facebook creates a competing application that generates advertising revenue — something Zuckerberg hinted would be coming in the next 3-6 months — a jilted developer is sure to cry foul. And then we’ll see the battle between application developers and operating systems play out again.