One of the most interesting market directions in recent months in my mind is the way the concept of a location service is evolving. People are using location as a vector to bring information that matters directly to them. A great example of this is Dash.net.

Dash is a GPS device that leverages the activity of its user base and the wider local data pools on the Internet to create a more personalized driving experience. Ricky Montalvo and I interviewed them for the latest Developer Spotlight on YDN Theater:

Of particular note are the ways that Dash pulls in external data sources from places like Yahoo! Pipes. Any geoRSS feed can be used to identify relevant locations near you or near where you’re going directly from the device. They give the example of using a Surfline.com feed built with Pipes to identify surfing hot spots at any given moment. You can drive to Santa Cruz and then decide which beach to hit once you get there.

There are other neat ways to use the collaborative user data such as the traffic feedback loop so that you can choose the fastest route to a destination in real time. And the integration with the Yahoo! Local and the Upcoming APIs make for great discoveries while you’re out and about.

You can also see an early demo of their product which they showed at Web 2.0 Summit in the fall:

The way they’ve opened up a hardware device to take advantage of both the information on the Internet and the behaviors of its customers is really innovative, not to mention very useful, too. I think Dash is going to be one to watch.

The MySpace guys won the latest launch party battle. About 200 people met at the new MySpace house last night in San Francisco to see what the company was going to do to compete with Facebook on the developer front.

They had a fully catered event including an open bar with some good whiskey. The schwag bag included the Flip digital video camera (wow!). There were a small handful of very basic demos on the floor from the usual suspects (Slide, iLike, Flixster, etc.). And the presentation was short and sweet so we could get back to socializing.

Nicely executed.

The party wasn’t without flaw, mind you.

First, the date. Why throw a launch party on the same day as the biggest political event in our time, Super Tuesday? The headlines were on everything but the MySpace launch. The right people knew what was going on, but the impact was severely muted. I was somewhat eager to leave to find out what was happening out there in the real world.

Second, the presentation. You have to appreciate them keeping it super short. Once the drinks start flowing, it gets very hard to keep people quiet for more than a few minutes. But I think most everyone there was actually very interested in hearing something meaty or a future vision or something. Bullets on a powerpoint rarely impress.

Neither of those things really mattered, in the end. The party served its purpose.

It also occurred to me afterward that it would have been a shame if the co-founders and executive team weren’t there. But they were very much in this and made themselves accessible to chat. This isn’t a sideshow move for MySpace. It matters to them.

Contrast this with the standard formula followed by the Bebo guys, and you can see why MySpace does so well in social networking. They embody it as a company.

Now, whether or not they can raise the bar on app quality or improve on distribution for apps is yet to be seen. By giving developers a month to get their submissions in for the end-user roll out they are resetting the playing field. That’s great. But I’m not sure whether the MySpace user experience will encourage the sharing of apps as fluidly as the FaceBook UE. I don’t use it enough to know, to be honest.

As far as the platform itself goes, I’m curious about the impact the REST API will have. I’ve wondered how the social networks would make themselves more relevant in the context of the world outside the domain.

Will the REST API be used more by services that want to expose more data within MySpace or by services that want to leverage the MySpace data in their own environments outside myspace.com? I suspect the latter will matter more over time but that won’t mean anything until people adopt the apps.

Overall, good show. This should help bring back some of the MySpace cool that was lost the last year or so.

What is it that makes my favorite online services so compelling? I’m talking about the whole family of services that includes Dopplr, Wesabe, Twitter, Flickr, and del.icio.us among others.

I find it interesting that people don’t generally refer to any of these as “web sites”. They are “services”.

I was fortunate enough to spend some time with Dopplr’s Matt Biddulph and Matt Jones last week while in London where they described the architecture of what they’ve built in terms of connected data keys. The job of Dopplr, Mr. Jones said, was to “surface coincidence”.

I think that term slipped out accidentally, but I love it. What does it mean to “surface coincidence”?

It starts by enabling people to manufacture the circumstances by which coincidence becomes at least meaningful if not actually useful. Or, as Jon Udell put it years ago now when comparing Internet data signals to cellular biology:

“It looks like serendipity, and in a way it is, but it’s manufactured serendipity.”

All these services allow me to manage fragments of my life without requiring burdensome tasks. They all let me take my data wherever I want. They all enhance my data by connecting it to more data. They all make my data relevant in the context of a larger community.

When my life fragments are managed by an intelligent service, then that service can make observations about my data on my behalf.

Dopplr can show me when a distant friend will be near and vice versa. Twitter can show me what my friends are doing right now. Wesabe can show me what others have learned about saving money at the places where I spend my money. Among many other things Flickr can show me how to look differently at the things I see when I take photos. And del.icio.us can show me things that my friends are reading every day.

There are many many behaviors both implicit and explicit that could be managed using this formula or what is starting to look like a successful formula, anyhow. Someone could capture, manage and enhance the things that I find funny, the things I hate, the things at home I’m trying to get rid of, the things I accomplished at work today, the political issues I support, etc.

But just collecting, managing and enhancing my life fragments isn’t enough. And I think what Matt Jones said is a really important part of how you make data come to life.

You can make information accessible and even fun. You can make the vast pool feel manageable and usable. You can make people feel connected.

And when you can create meaning in people’s lives, you create deep loyalty. That loyalty can be the foundation of larger businesses powered by advertising or subscriptions or affiliate networks or whatever.

The result of surfacing coincidence is a meaningful action. And those actions are where business value is created.

Wikipedia defines coincidence as follows:

“Coincidence is the noteworthy alignment of two or more events or circumstances without obvious causal connection.”

This is, of course, similar and related to the definition of serendipity:

“Serendipity is the effect by which one accidentally discovers something fortunate, especially while looking for something else entirely.”

You might say that this is a criteria against which any new online service should be measured. Though it’s probably so core to getting things right that every other consideration in building a new online service needs to support it.

It’s probably THE criteria.

I attended the Bebo developer platform announcement this morning in San Francisco. The announcement seemed to go down very well based on immediate response, though only time will tell if the expected impact is achieved.

It’s clear that a formula for launching this kind of stuff exists, and I think Bebo did a great job of giving it their own flavor. The overall format Bebo used was standard:

• Invite people to a nice place and give them some free stuff
• Give a presentation including a video showing customer testimonials
• Let the founder or product owner or thought leader present the product
• Parade the partners on stage
• Provide demos for people to peruse after the presentation
• Keep it short

But the nuances in the formula are what make an online platform launch successful.

1. Create an invite-only experience: This is true with restaurants, art galleries, clubs and just about any socially-driven service. Make a select few feel important by treating them differently, and they will then be your advocate. Bebo invited press and partners to a small-ish rooom to give their presentation at the Metreon. Those people then felt responsible for spreading the news.
2. Make it newsworthy: I wouldn’t say that the Bebo platform was a secret, by any means, but the features that make it worth talking about were kept secret until the event. In particular, the crowd seemed very pleased to hear that Bebo decided to emulate Facebook’s success by making their platform fully compatible with Facebook’s.
3. Follow standards: Developers are not generally interested in proprietary environments unless there is a substantial gain to be made by leveraging that environment. Platforms on the Internet should default to known and proven standards, and when they do deviate, there should be compelling reason to do so. Bebo indicated that there might be features in the future that are Bebo-specific such as micropayments, and I suspect the developer community would be happy to customize their apps for Bebo when those features are ready.
4. Prime the pump with partners: An ecosystem is not an ecosystem if it doesn’t have partners. So, don’t launch a service for partners with no partners already committed. But more than that, partners are proofpoints that the wider market wants to validate that what you offer is in fact real. Give them the stage. Make them successful, so others want to follow suit. I wasn’t all that impressed with the NBC Universal app showcased at the Bebo event, but the Gaia Online and Flixster apps were solid. And the 20 or so partners demoing in the back of the room after the presentations were great evangelists for the platform. They were proud to be there and happy to sing Bebo’s praises.
5. Be real: I’m always a sucker for a self-deprecating joker, but Bebo founder Michael Birch backed up the laughs with substance. He admitted that they intend to follow Facebook and do whatever they do which is a totally viable strategy in this space, at this point in time. Of course, he gave himself a great defense should they get pounded by the press, but his approach was very refreshing in a market that’s increasingly crowded full with ambition and arrogance.

Again, the response by developers and then the subsequent uptake by users will be the real indicators of success. But Bebo gave themselves as good a start as any by getting the launch off on the right foot.

The Internet platform business has some unique challenges. It’s very tempting to adopt known models to make sense of it, like the PC business, for example, and think of the Internet platform like an operating system.

The similarities are hard to deny, and who wouldn’t want to control the operating system of the Internet?

In 2005, Jason Kottke proposed a vision for the “WebOS” where users could control their experience with tools that leveraged a combination of local storage and a local server, networked services and rich clients.

“Applications developed for this hypothetical platform have some powerful advantages. Because they run in a Web browser, these applications are cross platform, just like Web apps such as Gmail, Basecamp, and Salesforce.com. You don’t need to be on a specific machine with a specific OS…you just need a browser + local Web server to access your favorite data and apps.”

Prior to that post, Nick Carr offered a view on the role of the browser that surely resonated with the OS perspective for the Internet:

“Forget the traditional user interface. The looming battle in the information technology business is over control of the utility interface…Control over the utility interface will provide an IT vendor with the kind of power that Microsoft has long held through its control of the PC user interface.”

He also responded later to Kottke’s vision saying that the reliance on local web and storage services on a user’s PC may be unnecessary:

“Your personal desktop, residing entirely on a distant server, will be easily accessible from any device wherever you go. Personal computing will have broken free of the personal computer.”

But the client layer is merely a piece of the much larger puzzle, in my opinon.

Dare Obasanjo more recently broke down the different ideas of what “Cloud OS” might mean:

“I think it is a good idea for people to have a clear idea of what they are talking about when they throw around terms like “cloud OS” or “cloud platform” so we don’t end up with another useless term like SOA which means a different thing to each person who talks about it. Below are the three main ideas people often identify as a “Web OS”, “cloud OS” or “cloud platform” and examples of companies executing on that vision.”

He defines them as follows:

1. WIMP Desktop Environment Implemented as a Rich Internet Application (The YouOS Strategy)
2. Platform for Building Web-based Applications (The Amazon Strategy)
3. Web-based Applications and APIs for Integrating with Them (The Google Strategy)

The OS metaphor has lots of powerful implications for business models, as we’ve seen on the PC. The operating system in a PC controls all the connections from the application user experience through the filesystem down through the computer hardware itself out to the interaction with peripheral services. Being the omniscient hub makes the operating system a very effective taxman for every service in the stack. And from there, the revenue streams become very easy to enable and enforce.

But the OS metaphor implies a command-and-control dynamic that doesn’t really work in a global network controlled only by protocols.

Internet software and media businesses don’t have an equivilent choke point. There’s no single processor or function or service that controls the Internet experience. There’s no one technology or one company that owns distribution.

There are lots of stacks that do have choke points on the Internet. And there are choke points that have tremendous value and leverage. Some are built purely and intentionally on top of a distribution point such as the iPod on iTunes, for example.

But no single distribution center touches all the points in any stack. The Internet business is fundamentally made of data vectors, not operational stacks.

Jeremy Zawodny shed light on this concept for me using building construction analogies.

He noted that my building contractor doesn’t exclusively buy Makita or DeWalt or Ryobi tools, though some tools make more sense in bundles. He buys the tool that is best for the job and what he needs.

My contractor doesn’t employ plumbers, roofers and electricians himself. Rather he maintains a network of favorite providers who will serve different needs on different jobs.

He provides value to me as an experienced distribution and aggregation point, but I am not exclusively tied to using him for everything I want to do with my house, either.

Similarly, the Internet market is a network of services. The trick to understanding what the business model looks like is figuring out how to open and connect services in ways that add value to the business.

In a precient viewpoint from 2002 about the Internet platform business, Tim O’Reilly explained why a company that has a large and valuable data store should open it up to the wider network:

“If they don’t ride the horse in the direction it’s going, it will run away from them. The companies that “grasp the nettle firmly” (as my English mother likes to say) will reap the benefits of greater control over their future than those who simply wait for events to overtake them.

There are a number of ways for a company to get benefits out of providing data to remote programmers:

Revenue. The brute force approach imposes costs both on the company whose data is being spidered and on the company doing the spidering. A simple API that makes the operation faster and more efficient is worth money. What’s more, it opens up whole new markets. Amazon-powered library catalogs anyone?

Branding. A company that provides data to remote programmers can request branding as a condition of the service.

Platform lock in. As Microsoft has demonstrated time and time again, a platform strategy beats an application strategy every time. Once you become part of the platform that other applications rely on, you are a key part of the computing infrastructure, and very difficult to dislodge. The companies that knowingly take their data assets and make them indispensable to developers will cement their role as a key part of the computing infrastructure.

Goodwill. Especially in the fast-moving high-tech industry, the “coolness” factor can make a huge difference both in attracting customers and in attracting the best staff.”

That doesn’t clearly translate into traditional business models necessarily, but if you look at key business breakthroughs in the past, the picture today becomes more clear.

1. The first breakthrough business model was based around page views. The domain created an Apple-like controlled container. Exposure to eyeballs was sold by the thousands per domain. All the software and content was owned and operated by the domain owner, except the user’s browser. All you needed was to get and keep eyeballs on your domain.
2. The second breakthrough business model emerged out of innovations in distribution. By building a powerful distribution center and direct connections with the user experience, advertising could be sold both where people began their online experiences and at the various independent domain stacks where they landed. Inventory beget spending beget redistribution beget inventory…it started to look a lot like network effects as it matured.
3. The third breakthrough business model seems to be a riff on its predecessors and looks less and less like an operating system. The next breakthrough is network effects.

Network effects happen when the value of the entire network increases with each node added to the network. The telephone is the classic example, where every telephone becomes more valuable with each new phone in the network.

This is in contrast to TVs which don’t care or even notice if more TVs plug in.

Recommendation engines are the ultimate network effect lubricator. The more people shop at Amazon, the better their recommendation engine gets…which, in turn, helps people buy more stuff at Amazon.

Network effects are built around unique and useful nodes with transparent and highly accessible connection points. Social networks are a good example because they use a person’s profile as a node and a person’s email address as a connection point.

Network effects can be built around other things like keyword-tagged URLs (del.icio.us), shared photos (flickr), songs played (last.fm), news items about locations (outside.in).

The contribution of each data point wherever that may happen makes the aggregate pool more valuable. And as long as there are obvious and open ways for those data points to talk to each other and other systems, then network effects are enabled.

Launching successful network effect businesses is no easy task. The value a participant can extract from the network must be higher than the cost of adding a node in the network. The network’s purpose and its output must be indespensible to the node creators.

Massively distributed network effects require some unique characteristics to form. Value not only has to build with each new node, but the value of each node needs to increase as it gets leveraged in other ways in the network.

For example, my email address has become an enabler around the Internet. Every site that requires a login is going to capture my email address. And as I build a relationship with those sites, my email address becomes increasingly important to me. Not only is having an email address adding value to the entire network of email addresses, but the value of my email address increases for me with each service that is able to leverage my investment in my email address.

Then the core services built around my email address start to increase in value, too.

For example, when I turned on my iPhone and discovered that my Yahoo! Address Book was automatically cooked right in without any manual importing, I suddenly realized that my Yahoo! Address Book has been a constant in my life ever since I got my first Yahoo! email address back in the ’90’s. I haven’t kept it current, but it has followed me from job to job in a way that Outlook has never been able to do.

My Yahoo! Address Book is becoming more and more valuable to me. And my iPhone is more compelling because of my investment in my email address and my address book.

Now, if the network was an operating system, there would be taxes to pay. Apple would have to pay a tax for accessing my address book, and I would have to pay a tax to keep my address book at Yahoo!. Nobody wins in that scenario.

User data needs to be open and accessible in meaningful ways, and revenue needs to be built as a result of the effects of having open data rather than as a margin-based cost-control business.

But Dare Obasanjo insightfully exposes the flaw in reducing openness around identity to individual control alone:

“One of the bitter truths about “Web 2.0″ is that your data isn’t all that interesting, our data on the other hand is very interesting…A lot of “Web 2.0″ websites provide value to their users via wisdom of the crowds appproaches such as tagging or recommendations which are simply not possible with a single user’s data set or with a small set of users.”

Clearly, one of the most successful revenue-driving opportunities in the networked economy is advertising. It makes sense that it would be since so many of the most powerful network effects are built on people’s profiles and their relationships with other people. No wonder advertisers can’t spend enough money online to reach their targets.

It will be interesting to see how some of the clever startups leveraging network effects such as Wesabe think about advertising.

Wesabe have built network effects around people’s spending behavior. As you track your finances and pull in your personal banking data, Wesabe makes loose connections between your transactions and other people who have made similar transactions. Each new person and each new transaction creates more value in the aggregate pool. You then discover other people who have advice about spending in ways that are highly relevant to you.

I’ve been a fan of Netflix for a long time now, but when Wesabe showed me that lots of Netflix customers were switching to Blockbuster, I had to investigate and before long decided to switch, too. Wesabe knew to advise me based on my purchasing behavior which is a much stronger indicator of my interests than my reading behavior.

Advertisers should be drooling at the prospects of reaching people on Wesabe. No doubt Netflix should encourage their loyal subscribers to use Wesabe, too.

The many explicit clues about my interests I leave around the Internet — my listening behavior at last.fm, my information needs I express in del.icio.us, my address book relationships, my purchasing behavior in Wesabe — are all incredibly fruitful data points that advertisers want access to.

And with managed distribution, a powerful ad platform could form around these explicit behaviors that can be loosely connected everywhere I go.

Netflix could automatically find me while I’m reading a movie review on a friend’s blog or even at The New York Times and offer me a discount to re-subscribe. I’m sure they would love to pay lots of money for an ad that was so precisely targeted.

That blogger and The New York Times would be happy share revenue back to the ad platform provider who enabled such precise targeting that resulted in higher payouts overall.

And I might actually come back to Netflix if I saw that ad. Who knows, I might even start paying more attention to ads if they started to find me rather than interrupt me.

This is why the Internet looks less and less like an operating system to me. Network effects look different to me in the way people participate in them and extract value from them, the way data and technologies connect to them, and the way markets and revenue streams build off of them.

Operating systems are about command-and-control distribution points, whereas network effects are about joining vectors to create leverage.

I know little about the mathematical nuances of chaos theory, but it offers some relevant philosophical approaches to understanding what network effects are about. Wikipedia addresses how chaos theory affects organizational development:

“Most of the focus on chaos theory is primarily rooted in the underlying patterns found in an otherwise chaotic enviornment, more specifically, concepts such as self-organization, bifurcation and self-similarity…

Self-organization, as opposed to natural or social selection, is a dynamic change within the organization where system changes are made by recalculating, re-inventing and modifying its structure in order to adapt, survive, grow and develop. Self-organization is the result of re-invention and creative adaptation due to the introduction of, or being in a constant state of, perturbed equilibrium.”

Yes, my PC is often in a state of ‘perturbed equilibrium’ but not because it wants to be.