Facebook Platform's Rise and Fall Cycle

Situation

Market context (2007): Facebook was in fierce competition with larger social networks like Myspace and Friendster, with Facebook being only about one-fourth or one-fifth their size
Strategic insight: Facebook recognized early that direct network effects would create user lock-in - the more friends on the platform, the stronger its defensibility
Distribution challenge: Facebook needed to accelerate growth to outpace competitors and achieve escape velocity
Platform approach: Facebook launched a third-party platform called "canvas" that allowed developers to build applications within Facebook

Developer value proposition: Facebook offered developers access to:
- A "canvas" area where they could build any app or game
- Complete monetization freedom (initially)
- Powerful distribution channels including notifications and news feed placement
- Access to Facebook's growing user graph
Incentive structure: Facebook only wanted sidebar ad real estate in exchange for these benefits
Result: Created a "mad gold rush" of developers building social applications and games

Monetization changes: Facebook began taking a percentage of revenue generated within the canvas
Distribution throttling: Gradually reduced access to organic distribution channels (notifications, feed visibility)
First-party absorption: Developed their own first-party applications for high-value use cases (events, photos)
Platform deprecation: Eventually shut down most of the platform's developer value

Short-term growth: The developer ecosystem drove massive user growth and engagement for Facebook
Competitive advantage: By the time Facebook began closing the platform, they had built such a lead that competitors couldn't catch up
Developer impact: Many companies built on the platform were severely damaged when distribution was cut
Market dominance: Facebook achieved its goal of becoming the dominant social network
Cycle completion: The entire platform cycle from opening to closing happened over approximately five years

Platform cycles are predictable: New distribution platforms follow a consistent pattern - opening for growth, then closing for control and monetization
Timing is critical: Early platform adopters reap disproportionate benefits before the platform closes
Competitive dynamics drive the cycle: The cycle isn't driven by "evil" intentions but by competitive pressures and growth requirements
Exit strategy is essential: Companies building on platforms must anticipate the closing phase and develop an exit strategy
Cycles are accelerating: These platform cycles are getting shorter and shorter, giving companies less time to capitalize
Prisoner's dilemma: Even knowing the risks, companies can't opt out - if you don't participate, competitors will gain the distribution advantage
Distribution power: The case demonstrates how distribution platforms can create massive winners and losers, often more decisively than product quality alone