Lenny's Podcast: Product | Career | Growth
00:15:09 · Brian Balfour
And so you kinda need the help of an ecosystem in order to gather more of that moat, and that typically comes down to third party content creators or app developers and other businesses. And so they all establish, like, a third party platform, right, that has some incentives built in. And usually, the value exchange is, hey. You develop on top of my platform. Right? You add more use cases, you know, more engagement, like, all of these things to my platform. And in Exchange, I'm gonna give you something in return. And usually that thing that's in Exchange is I'm gonna give you some new form of distribution for your application and for your business. But what essentially happens as we go over time is that we go into step three, which is the closing period, which is at some point, all of these companies end up starting to lock down the platform. And this tends to happen for reasons of monetization and growth. Right? They either competitively don't want somebody to use their own you know, platform to disrupt themselves. Like, we saw that in the early Twitter days with things like Vine and Periscope. Right? Like, shutting those things down unceremoniously. Right? Or they need to find ways to monetize at a deeper and deeper level because all these companies, like, they have to grow. And, you know, Google's the classic example here of just more and more real estate has either been taken up by either ads or their own, you know, first party applications. And so that's the key is, like, they close it down by doing one of two... By one of a few things. They either shut it down entirely. Two, they develop their own first party applications to absorb the the highest use cases. Or three, they artificially depress the organic distribution that they gave you in the step prior to push you towards paid mechanisms in order to monetize. And so I think we should go through, like, multiple examples here, but that's kind of, like, the core essence of of the four steps, and so I'll I'll pause there.
00:17:12 · Lenny Rachitsky
[00:17:12] S0: Awesome. So it's essentially figure out what's gonna make... Create defensibility long term. What's your moat? Bring everyone in. Hey, everyone. Welcome to to Facebook. Everyone joins Facebook and then, okay. And all the developers build on Facebook to bring in more people on Facebook, and then they're like, okay, now you gotta pay. There's a toll. And... But you love this so much and you're so hooked. All your friends are here. You may as well stick around. That's right. Amazing. Okay. So, yeah, a few examples would be great.
00:17:38 · Brian Balfour
[00:17:38] S1: Yeah. So you you just hit on the first one. The fur... This is the first one that I always think about because this is where I learned about this cycle very early in my career. Like, one of my first companies was during the whole, the Facebook platform boom, you know, social gaming, all of those applications. And I lived the full cycle. In a very short period, I lived the the glory days and the... Just the absolute horror days, and and it was very painful. But this is exactly what happened. So let's go through the four steps. So step zero. Facebook was in a brutal battle with MySpace, Friendster, and a few others. People forget this. People forget that there was actually, like, a bunch of competitors at that time. And in fact, those competitors were bigger than Facebook at the time. They had more users back in 2007 when Facebook launched their third party platform. But one of the key things is that Facebook was very early to the insight about the direct network effects and that there's going to create real lock in that. The more friends, the more of the global network that was on there, the more that it was just gonna feed and and hit this escape velocity. And so at the time they launched their platform, I think they were maybe like one fourth, one fifth, the the size of, you know, something like me... MySpace or even Friendster Orkut. Like, some of these are some of the names at that time. But they opened up their third party platform. And what was the value exchange? They went to third party developers, they said, okay. We've created this canvas. They used to call it the canvas. And they were like, you could put anything in the canvas that you want, an app, a game, whatever. You can monetize in any way you want. We just want this sidebar real estate on the ads. That's that's what we're really interested in. And so there is this mass... Mad gold rush on that Facebook. Oh, sorry. The other part of that was not only will you put it there, we're gonna give you access to all of these notification channels and feed to get distribution for your application. That was that was the other piece of it. And so you had this mad rush of developers coming in, and you had this huge, like, social application, social gaming boom. People just grew incredibly virally very fast.
00:19:45 · Brian Balfour
But eventually, essentially, what happened over time is they kept peeling back that value exchange. They first were like, ah, actually, you know, that... Those dollars that you're you're making inside that canvas area, well, we want a percentage of that. Right? And so they changed that. And then they figured out their ad, like, their ad systems, and then they started peeling back. You know, they started suppressing access to all of the organic channels that they had. Eventually, they went all the way towards absorbing the highest, you know, use case into their own first party platform, things like, first party applications, things like events, photos, all those types of things, and basically shut down the platform, for dead. And these companies that have basically built on top of this platform, know, the other thing is by the time they started closing all those things down, all those competitors that we talked about, they were so far ahead at that point because they had built off the back of all these developers coming, adding use cases, bringing more users onto the platform, like identifying that mode. They were so far ahead, it didn't matter. It didn't matter what the other folks did at that point. That's what kind of really gives you confidence to start closing down. But there's so many other examples of this, right, if if we go through it. Right? So
00:21:02 · Lenny Rachitsky
[00:21:02] S0: Before you get other examples, just something I'll highlight here. One is the moat they they identified in theory was the friend graph, I imagine. Just like once we have all your friends, you're not gonna wanna go anywhere. I imagine it's also important to note, you may not... This is kind of like a natural thing that would happen if you build the thing and it grows and you're like, oh, maybe we should change strategy. I imagine not everyone even knows this is what will happen and they kind of organically evolve their strategy? Or do you think everyone's just like, this is our gonna be our plan step one, two, three, four?
00:21:31 · Brian Balfour
[00:21:31] S1: I think a different version of that question is I think some people could sit here and interpret this as all these folks are evil. Right? And and that's not what I'm saying. Right? Like, that's actually not what I'm saying. I wanna be very I wanna be very clear on that, because I think, you know, a lot of the... A lot... This cycle happens because of competitive and capitalistic, like, dynamics and pressures. It's it's the same environment that enables, like, creating amazing new companies, right, here in The US. So... And and there's there's, like, two sides of the coin. And so you go through this cycle because it's a competitive environment. You're trying to figure out how to beat competitors, and this is one of the strategies to beat competitors. But at some point, like, you just have to continue growing. You still have... You have to grow those dollars. Like, the the market does not reward flat companies. If anybody's noticed, like, you have to keep growing, and so they have to keep finding ways to grow as well as prevent their own disruption. Right? They they can get so big, and they can give access... So much access just of distribution to new developers. They don't want to enable, their own disruption as well as, like, that they need to keep growing. And so my guess is anybody who is kind of sitting in their shoes, you know, owning their platform is gonna follow the exact same playbook and the... In in the exact same reasoning. And, you know, look. Sometimes it happens also because it's actually is the best thing for the user. Facebook's channels did get super spammy and, like, all of those things, and that was part of the reason, you know, they they play this. But let's be honest. It wasn't the only reason. Right? Like, a lot of it was a lot of it for was was for these other reasons. And so I don't think it's evil. It's just you need to know how to play the... You just need to know how to play the game. That... That's competition. That's business. They're playing you, so you need to play them. Like, that felt like that that might be a little little sadistic or something, but but that is that is business. That's... You're you're in a game of competition.