Networks — Part 3: Operator Networks vs. Open Networks
In Part 1 of this series, we discussed the evolution of networks; in Part 2, we explored how we think of “Network Effects” and the unique way that they serve to sustain or slow the growth of networks — both directly and indirectly. In this article, we look at the differences between Operator vs Open Networks and the contrasting vulnerabilities they face.
Operator networks versus open networks
When we talk about networks, it’s important to underscore that not all networks are alike. The examples we’ve shared — AT&T, AOL, Facebook, League of Legends, Uber, Roblox — are all “operator” networks, or closed networks, as is the case for most commercially developed networks.
In a truly open network, there are no direct incentives for the network developer, and the developer does not extract value from its participants. The best example of a true open network is the internet itself, and all of its underlying protocols (TCP/IP, SMTP).
In operator networks, the developer is incentivized to extract value from the network to make the network grow. Growth means more participants and more interactions between participants, and thus more network value to be extracted.
This value extraction can be direct — the network developer can charge fees from participants for its use — or it can be indirect, where the developer does not charge end users for use of the network, but instead monetizes the user base in another fashion, often by selling data or selling “eyeballs” (e.g., advertising).
Network challenges
Both open and operator networks face challenges that can limit their growth. Open networks are often dominated by early participants, and are also vulnerable to the “tragedy of the commons,” where the absence of a central controlling authority leads to network abuse by participants, lack of maintenance of the network and slow or no response to threats or problems.
Operator networks, meanwhile, tend to encourage exploitative behavior by operators, which in turn leads to weak loyalty from network participants, and even open revolt or flight when exploitation exceeds the threshold of a network’s perceived value.
Open networks
Early participants co-opt value, and no one is incentivized to protect the network long term
Open networks and the tragedy of the commons
While the Internet — an incredibly valuable network with low barriers to entry and high lock-in that only grows as it continues to evolve — is one of the best examples of a successful open network, it also demonstrates some of an open network’s vulnerabilities. For example, the early commercial Internet was dominated by early entrants, not because they had the best product, but simply because they staked claim to the network first. In the 1990s, America Online and other Internet Service Providers were able to use their control of Internet onramps to capture a disproportionate amount of value, building “walled gardens” of content that routed users away from the free and open web. Though the advantages of the open Internet over AOL were obvious for later cohorts of users, the dial-up access giant’s early foothold arguably delayed progress to more advanced Internet technologies for millions of older users — some of whom still use its modem-based dial-and-squawk access platform even today.
(It should also be noted that while the protocols the Internet is based on are truly open, the actual Internet as it exists in the real world is not; commercial entities manage much of its backbone, access providers control its onramps, and governments regulate it to varying degrees. So the Internet is perhaps better understood as a confederation of operator networks supporting a shared open protocol and standards than an actual “open network.”)
Operator networks
Extraction imperative, monopolistic behavior, weak lock-in, etc.
Operator networks and the “extraction imperative”
The challenge with centralized, closed networks is the misalignment of incentives. As a network grows, the motivations of the network operator rapidly run counter to those of its participants. Operators want to make money. When they do so by charging fees to users, they must constantly test the limits of what participants are willing to pay, knowing that charging too much will drive users to competing alternatives. But charging too little can put them in a situation in which they don’t have the funds to support the growth of their network, leading to poor service and user flight.
As a result, many operators turn to indirect fees. Typically, indirect-fee operators will let their networks grow, unmonetized, until they reach a point where network effects are strong and the network is hard to displace. At that point, operators begin to sell access to the network’s users to other customers: Advertisers, vendors, data miners, or combinations of all three. In these networks, initial access is more open, but once a tipping point of scale has been reached, operators are increasingly tempted to exploit both users and customers, a phenomenon called the “extraction imperative.” As a network grows, the negative impacts on participants from this imperative start to counteract the positive impacts of the network effect, until the business is no longer seen as positively benefiting the participants who contribute to its success in the first place. The extraction imperative is seen as an inevitable consequence of flattening growth, because when a platform can’t grow its network, it has to get more out of the network it already owns. The end result can be visualized here, in these charts created by Chris Dixon of Andreessen Horowitz for an article entitled “Why Decentralization Matters” in OneZero:
Better network designs
Is there an option that avoids the issues that are associated with both open and operator networks?
There is. The decentralized Internet, built around the innovation of blockchain, enables the creation of more open operator networks, which are less dependent on a central intermediary. Well-designed blockchain networks allow value to be transferred directly between network participants, rewarding participants for network growth and their contributions to it, while still providing value to developers and incentivizing them to maintain and invest in the network’s continued support. And by ensuring that network participants and developers are both stakeholders in the network and aligning their agendas — both win when the network grows — it avoids many of the circumstances that trigger the extraction imperative.
Games as operator networks
Based on our simple definition of a network as “a collection of participants who are using a given system and the connections between them,” games certainly qualify as networks. Multiplayer online games like League of Legends are self-evidently networks. But so are player-vs.-player online games like FIFA Online that depend on matchmaking. Valve’s Steam distribution channel is a network, as are Xbox Live and Playstation Network — they’re multi-sided marketplace networks with developers offering games for sale to players and players seeking new games to buy. (These games in turn are also frequently networks, which means these platforms are networks of networks.)
Even solo puzzle games like King’s Candy Crush are reliant on networks in a range of ways. As a mobile app, it’s sold via the iOS App Store and Google Play, both of which are marketplace networks that run on mobile devices, which are dependent on cellular networks. Within the game itself, Candy Crush has a system that allows you to request extra lives via your Facebook network, and a leaderboard that shows where you are in the Candy Crush “journey” relative to your friends, encouraging FOMO and increased activity by friends who may be behind you on the path.
So what do game networks look like when they adopt the paradigm of the decentralized Internet? What if a new game platform — let’s call it “Fauxblox” — decided to incorporate a blockchain-based economy? We’ll explore the implications of blockchain on network effects, and on our hypothetical challenger game Fauxblox, in our next set of articles, which will focus on the benefits of Economic Protocol Networks and the optimal ways to design them.
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