I attended a couple of hours of the Money:Tech conference organised by O’Reilly Media in New York today. Tim O’Reilly himself - originator of the phrase Web 2.0 - was the keynote speaker, and was followed by a chat with Jim Cramer, host of Mad Money, founder of TheStreet.com, etc. etc. The conference was about Web 2.0 and financial services, and O’Reilly started out by talking about Web 2.0 and what it means to him. Ovum certainly has a definition of it, which revolves around four parts - social, business, content and technology models which define Web 2.0 services and sites. However, O’Reilly has a simpler definition, which stays away from specific technologies and services, and is simply this:

Web 2.0 is really about harnessing collective intelligence. It’s about creating a network-effects driven data lock-in with accelerating results to the winners. [I'm paraphrasing based on my notes but that was the gist]

In this way, O’Reilly says, it’s similar to Sun CEO Scott McNealy’s “red-shift” concept - that is, as you start to successfully differentiate yourself in something, your lead over the competition begins to grow ever more quickly. It’s all about creating business models which thrive off network effects - examples, according to O’Reilly, include Google (where the network effects come from the number of links people make), eBay (where the critical mass of buyers and sellers is the biggest barrier to competitive entry), Amazon (where he suggests the reviews are the key network effect) and so on. The value lies in accumulating data which leverages network effects in such a way that it is very hard for competitors to emulate what you have done.

Another major theme at the conference was open source software, and a debate during a panel session focused on whether open source adds or destroys value from a market. There were arguments on both sides, but it’s pretty clear to me that it destroys value for existing players, since it replaces proprietary products priced at a premium with free open source products. At the same time, it creates new opportunities for players which didn’t have the in-house resources to develop their own software, and it reduces the cost of doing business for everyone, which increases liquidity and therefore provides broader benefits.

So, how does all this apply to the OpenSocial program, the Social Graph API and efforts to create data portability? Do these effectively do to value in the Web 2.0 world what open source is doing in the software world? Does Facebook’s value proposition go away? Part of the answer may lie in something else O’Reilly talked about, which is Clayton Christensen’s “law of conservation of attractive profits,” which states:

When attractive profits disappear at one stage in the value chain because a product becomes commoditized, the opportunity to earn attractive profits with proprietary products usually emerges at an adjacent stage.

This would suggest that when open source enters a market, the value flees to the adjacent markets. And when data portability enters the Web 2.0 market, value will flee away from the Facebooks and MySpaces and to - where?

I would argue, as I’ve suggested in other entries, it flows to those best able to make use of the new technology - data portability - to create new services which thrive off it. I think this is the logical conclusion, and it’s another reason why Facebook, MySpace and others need to create value in something other than the information they hold about their users, because that will soon become commoditised and easily duplicated. They need to leverage that data in ways others can’t because of special sauce they themselves have concocted. It’s not clear to me that they have figured this out yet, hence (perhaps) their resistance to full data portability. But they’d better figure it out quick or that value really will go to someone else (and who would bet against Google here?).

The endgame for social networking has two elements - input and output:

• Input: One place to enter all data which will show up on all profiles. I want to enter my email address, my favourite music, my photos, my friend lists etc. in one place and one place only. Currently I have to repeat these tasks and others every time I log in to a new site
• Output: The ability for my one set of personal information and social network data to be presented on a multitude of different front ends, with the ability for me to customise which information appears where and to which groups of people.

Facebook is slowly getting to the second part with its forthcoming friend lists privacy options, but of course that will only apply to Facebook and not to any other social networks. Moli is geared up to doing the second part very well too. Mahalo appears to have a function which will kludge together different profiles into a single setting, which mimics some of the benefits of the first option but doesn’t really bring it all together, and doesn’t allow me to enter my data once.

The Google OpenSocial initiative will hopefully push us further down the road towards the achievement of both goals, but ultimately it should be relatively easy to do the first given all the APIs available for social networking sites today. The second shoudn’t be too hard either, for the same reason. Ultimately, I think that either the single service provider or perhaps two separate service providers who can provide this backend and front end to the social networking world will be kings, not players like Facebook, which will merely sit in the middle, watching data fly through from and to other places.