Betting Your Business on the Back of Another Company

The world is full of very successful businesses that have been built by tapping into a market created by a different business. What are the risks of building a business on the back of another company’s success?

Stepping outside technology for just a moment, consider that many baseball stadiums of lore were in urban neighborhoods. And many still are. Around those stadiums are bars, restaurants, parking lots, and other businesses that thrive largely because of the crowds (okay, some teams are too pathetic to draw large crowds but this is just an example) that attend 81 regular season home games. Now consider what happens when the team is moved to another city, or builds a new ballpark in another location. Ouch, there goes a micro-economy.

Now back to the tech sector. How many apps are being built to run on the iPhone? How many businesses are thriving because of Facebook? It seems to me there are few, if any, risk mitigation strategies open to companies totally reliant on either or both Facebook and the iPhone app store.

Facebook has been relatively consistent compared to Apple. Sure, Facebook has changed their GUI, and changed their application Ts and Cs, but by and large, Facebook has been a somewhat consistent and predictable environment for application developers. But … what happens if, one day, Facebook decides to reclaim some or all of the huge monetization economy created on its platform?

For a more immediate and relevant example, consider the iPhone app store. Just this past week, Apple began disabling a whole class of applications, and from what I have read, without prior notice, without a clear set of guidelines, and to some extent inconsistently. While some may applaud Apple for barring apps that are sexual in nature, and many argue the vast majority of the affected apps were boorish or rip-offs, these actions should give anyone considering building an iPhone app cause for concern.

Effectively, there are no current regulations on the actions taken by the likes of Apple and Facebook. They are businesses and may operate their businesses as they see fit, so long as they break no laws. Thus, I suggest, “app developer beware!”

Consider Zynga. Today, many believe Zynga is positioning itself for an IPO. Zynga has a business that, today, is not totally dependent on Facebook, but I simply cannot imagine the impact on the company’s valuation if Facebook were to decide to eliminate games applications from third parties.

Years ago, I worked for a company that produced the first commercially available web server for the Windows platform. As has happened to many other companies, when Microsoft decided to offer its own web server, for free, that highly promising line of business imploded.

I am not offering any solutions here. I am simply observing that the owners of any business that is built on the back of another must understand the risks that accompany a lack of control over the actions of that other company.

1 Response to “Betting Your Business on the Back of Another Company”

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