Platform Risk & the Walled Gardens

Hayley runs an eCommerce store selling potted house plants. Most of her website visitors arrive from her popular Instagram account where she posts to promote her products. She’s scaled quickly from her humble beginnings of a few posts selling plants from a small inner-city apartment.

Building her business, one thing has flowed naturally from the other. When the plants are wilting she waters them; when a post performs well on Instagram, followers increase. When followers increase, she sells more plants. Do the obvious thing, and the next steps always reveal themselves. 

She’s avoided what’s unnecessary and built a thriving business because of it. She no longer has the stresses and expectations of her previous job - she sets her own hours, doesn’t have to deal with any office politics, and even makes more money. She works on her own terms, with the freedom of time and flexibility in her day that she’s always wanted.

Yet Hayley is to discover her own Epicurean lifestyle will soon reveal the subtleties of its maxims. One day Hayley wakes to find Instagram has released a new update. The release notes state there have been some changes intended to limit hate speech on their platform. She notices this new update has affected her account. For some reason, the algorithm has begun to penalize pictures of her plants. 

Overnight, the amount of likes and comments Hayley would typically see on a new post have halved. She attracts less followers, gets less traffic to her site, and in turn sells less plants. Her revenue takes a hit. It turns out Instagram’s updates aren’t yet a perfect science. 

Scrambling and anxious, Hayley reaches someone in customer support, but all they can tell her is that they’re sorry for her loss. She realizes she’s powerless against the changes made by Instagram. After all, was it really likely a multi-billion dollar company with millions of users was going to be able to help her specific case? It’s not like they’re going to waste their developers’ time patching a new update all due to the sufferings of the owner of a single account.

But for Hayley, the situation is serious. Taking advantage of the location-independent nature of her business, she’s long since moved out of her small inner-city apartment into a three-bedroom house in the country. With few job opportunities around her, she’s at a loss for how she’ll make up the lost profits and meet her newly acquired mortgage repayments. 

If a giant question mark over where she’ll live isn’t stressful enough, Hayley also has a garage full of plants she’s ordered to service her previous sales trend. With orders halved and with no power to reclaim them, all she can do is watch as her stock slowly wilts away with her losses.   

Quite literally overnight, Hayley’s new lifestyle has collapsed beneath her feet. She’s gone from optimistic about the prospects of her growing business, to facing losses on her product order and possibly having to sell her home, while anxiously looking for any kind of work she can find to try to stay afloat. 

The Bottom-Up Cascade

Retrospect is always 20/20. Everything seemed fine, until it was too late. Hayley gave up her job, time and energy to pursue this business. These basic sacrifices have always been part of the contract undertaking any new venture. But the risks she was ultimately exposed to went beyond this. 

Without knowing it at the time, Hayley was exposing herself to the bottom-up cascade. As Hayley now realizes, her large Instagram account was a great traffic source, but ultimately, it wasn’t hers. In reality, she spent two years as a contracted employee for Instagram, with her page providing value and experiences to their users, and in the end gaining no benefit for herself. She was tending to a garden that wasn’t her own; a vassal on borrowed land. 

The worst part is that Hayley has nothing to show for her efforts over the past two years. Her customers were all coming from Instagram. Now they’ve disappeared, her business has gone with them. She has no assets besides a website that’s no longer receiving any traffic. She couldn’t sell her business if she tried. 

Hayley’s story is becoming an increasingly common one. Every year it’s becoming more risky to operate a small business on the internet. Imagine waking one morning to find your ability to communicate with your market has been taken away; that you have zero influence over your ability to access your customers from one week to the next; that you are subject to sudden rule changes that strip you from all future profit, with zero recourse. 

These anxieties are simply a realized awareness of the bottom-up cascade. What makes it so insidious is that it’s so rarely spoken of. Yet simply addressing and understanding it, we can make more informed decisions about how to mitigate it.

Platform Risk Pt. I

What Hayley experienced has been referred to as “Platform Risk” - the risk associated with building a business reliant on a third-party. The ubiquity of stories like Hayley’s has led to this becoming an everyday term for many small online business owners and tech-industry commentators.,,,

But the ills of platform risk were presaged. Tim Wu’s 2011 book The Master Switch: The Rise and Fall of Information Empires was prophetic of the decade that followed. 

Examining information technologies spanning innovations from radio, to telephone, TV and the internet, Wu reveals a common thread between each. Each of these transformative technologies underwent a similar pattern of development: beginning with idealistic notions by their inventors; invariably followed by widespread competition as they first achieved market adoption; and then eventual monopolization by powerful, typically existing, institutions.

The FM radio band was one such technology. Developed by an idealistic inventor with hopes of becoming a powerful and open new communications technology, it eventually saw keen commercial interest from existing power brokers once its advantages became apparent. Litigations, policy changes and ruthless competition from incumbents on the existing AM band, as Wu writes, “quietly campaigned to relegate FM radio to irrelevancy”

As would be the case for many innovations to come, the once transformative potential of the FM band was blunted as it was eventually absorbed into an existing monopoly. 

The development of TV followed a similar path. After the opening of the first TV broadcasting station in 1928, the years that followed saw existing players from the radio industry enter the fray (those same powers that devoured the nascent FM band), followed by fierce competition, regulations and lawsuits. The result was, as with all these technologies, an eventual “comfortable duopoly” occupied by just two networks. 

Looking back into history, it’s apparent there’s a trend for all new information technology innovations to follow a similar pattern. Wu goes on to give further examples of subsequent innovations, from cable TV to the internet, in what he terms “… the Kronos effect: an effort by an existing media power to devour a suspected challenger in its infancy”. 

Writing in 2022, it seems the Kronos effect might actually possess some level of mythic truth. The internet has, so far, charted a similar path over its 35 years as the technologies that came before it. Beginning with open-source protocols maintained by idealistic non-profit groups, the internet’s development could originally be defined by a counterculture ethos; it’s early days having notions of it becoming the ultimate means of connection and expression between individuals. 

These services now provide billions of people from all corners of the world access to powerful and often free-to-access technology. But it hasn’t arrived without problems. Today, the individuals for whom the internet was originally intended now face conflicts with the tech corporations who enabled its now global scale. The early idealism has gradually receded, with the majority of its services now operated by large tech corporations, many born from the same Bay-area counterculture of its inventors.

The individuals who today choose to build on these platforms find themselves increasingly subject to definitive and often arbitrary rule changes by the controlling corporations. 

Without a firm understanding that access to our audiences often lies entirely in the hands of these platforms, we gamble building on shaky foundations, over-reliant and over-exposed to the policies and decisions of an entity that, ultimately, doesn’t put our interests first.

Small online business owners must now be vigilant in assessing potential exposures to platform risk. And it isn’t just limited to Instagram. From diminishing returns for post visibility on Facebook, cut-throat business practices affecting marketplace sellers on Amazon, or the ever-shifting goal posts of the development of Google’s search algorithm, history has so far yielded plenty of examples. 

Facebook

Not long after the release of Wu’s book, the then emerging issue of declining post visibility on Facebook became apparent to those who had built large audiences using the social media giant’s service. In a 2012 article for the Observer titled “Broken on Purpose: Why Getting It Wrong Pays More Than Getting It Right”, author and entrepreneur Ryan Holiday was among the first to draw attention to the company’s throttling of its audience-builders in a high-profile publication. 

Businesses who had depended on access to audiences they had built on Facebook were now being told they must pay to reach them. The result of these changes was outrage from those who had already made large investments into doing so. In the opening lines of the article, Holiday takes aim: “It’s no conspiracy. Facebook acknowledged it as recently as last week: messages now reach, on average, just 15 percent of an account’s fans. In a wonderful coincidence, Facebook has rolled out a solution for this problem: Pay them for better access”. 

Under the false premise of a fair and open channel to connect and build an audience, the slow throttling of post visibility seemed to some as dishonest. In another 2012 article, online entrepreneur Jason Sadler complained of the changes: “We were lured to Facebook under the pretense that we would be offered a free service to connect with other people. I'm just not a fan of changing the rules half-way through the game”.

Unfortunately, many have had to learn the hard way that for these platforms, these sorts of tactics are the game itself. As one 2013 news article on the issue of Facebook’s declining post visibility struck the warning bell: “you are not in control — Facebook is”. 

But the risks associated with relying on a third-party platform for access to your market isn’t unique to Facebook. As it's come to become a controlling interest in online retail, Amazon have also developed practices not always in the interests of their small business partners.

Amazon

As of 2021, Amazon took home ~51% of online retail spending that year, representing 9.2% of all US retail. As the platform grows and represents an increasingly large percentage of online retail spending, store owners now find themselves adopting business models increasingly reliant on access to this captured audience of online shoppers. With the development of its “marketplace” ecosystem, many entrepreneurs and online retailers took advantage of the huge market of attention and users provided (and controlled) by Amazon.

These small online businesses often find themselves in a difficult situation. With Amazon sales gradually coming to represent an increasing percentage of their total revenue, they become exposed to a set of existential threats that only exist on the Amazon platform. 

In one example, pioneers in profitable new or trending product categories have even sometimes found themselves out-competed by Amazon itself, who some claim develop copycat products they then sell at a lower price and promote as much as they want with all the power of their platform. 

In the 2020 Wall Street Journal article titled “How Amazon Wins: By Steamrolling Rivals and Partners”, this practice is detailed, including a high-profile case where successful environmentally-friendly footwear brand AllBirds discovered Amazon to be offering nearly identical versions of their products. AllBirds CEO Joey Zwillinger states in the article “You can’t help but look at a trillion-dollar company putting their muscle and their pockets and their machinations of their algorithms and reviewers and private-label machine all behind something that you’ve put your career against”. 

The comment offered by Amazon regarding the controversy was somewhat terse: “Offering products inspired by the trends to which customers are responding is a common practice across the retail industry”. At this point, it should be expected; you don’t become the largest online retailer in the world without a spirit of competition. In a 2012 interview with Fortune magazine, Amazon founder Jeff Bezos is famous for having himself said, “Your margin is my opportunity”. 

It’s unlikely there will be any challengers to Amazon's grip on online retail, and these practices will likely continue. In spite of European Union Antitrust allegations focused on precisely this intra-platform competition with its own sellers, there are new claims of the company manipulating the visibility of smart-home products which compete with Amazon’s own Echo and Fire product lines.

While an outside observer may easily see the risks of building a model reliant on Facebook and Amazon, for other platforms this risk is less readily apparent. 

Google

Google probably holds just as much of this platform risk as those just mentioned, though it’s seemingly less often acknowledged. At time of writing, tens of thousands of small online businesses have built traffic strategies almost entirely reliant on “organic” sources, or in other words, from ranking highly in Google search results. But this term “organic traffic”, adopted by the multi-billion dollar Search Engine Optimization (SEO) industry, is something of a misnomer. Platform risk is just as easily found here. 

In one example, a 2019 update to the Google algorithm reoriented its focus to favor established authority sources - often large incumbents from the previous world of print - pushing out smaller players and rendering the previously generous traffic source less so than before. While these updates were said to be part of an effort to help combat unreliable information sources, the rollout of sweeping algorithmic changes often proves less than perfect. 

Independent nutrition and supplementation knowledge website Examine.com, long recognized as an authority in the space providing detailed summaries of peer-reviewed articles on the topic, reported in February 2020 that recent Google updates had reduced their organic traffic by around ~90%. Kamal Patel, the site’s founder and operator for nearly ten years, laments in the article, “Alas, it seems that, in Google’s battle against the immense amount of misinformation and outright lies in the health space, Examine.com has been caught in the crossfire”. 

Within their rights to do so, like Amazon, Google also allegedly influences its search results with the intention of stifling emerging competitors. After an attempted purchase of restaurant reviews company Yelp by Google in 2009, CEO Jeremy Stoppelman spoke out at a 2012 Business Insider conference regarding Google’s attempts to outcompete them by reducing their search visibility. Regarding the practices, he said “If you happen to be the gateway for the vast majority of users on the Internet and you restrict information and put your house property ahead of everyone else, you potentially harm consumers … We can all agree that's probably not a good thing.” Whatever Google’s intentions, it’s evident it can be just as risky as the other platforms

The Walled Gardens

What makes platform risk so insidious is it often remains hidden until it’s too late. This is why understanding it’s prevalence and how easily it can destroy a business overnight is so important. How can we avoid the same fate as Hayley?

Comparing the periods before and after the arrival of the internet, it’s clear there’s been a dramatic shift in the way businesses must operate. But this shift is somewhat under acknowledged and is likely a large part of the reason so many find themselves in similar situations. 

Fittingly, the name sometimes used to describe this phenomenon of large, dominant platforms controlling exclusive access to the vast majority of internet audiences has been referred to as the “Walled Gardens''.,,

It describes how these platforms such as Amazon, Facebook, or Google have built their own closed-off data ecosystems, independent from the rest of the internet. By gathering data privately for their own benefit, Walled Garden platforms oppose the “openness” that characterized the early ideals of the internet (or most information technologies for that matter, as Wu’s history retells). 

While incentivizing internet users to gather on their platforms isn’t a problem in itself, their increasingly closed-off character is what earns them their namesake.

One feature of a Walled Garden is the discouragement of users from venturing off-platform into the wider internet. As one 2015 Forbes article described the problem, using Facebook as an example: “Facebook’s goal is, understandably, to keep users happy and engaged in its own garden. The longer we spend there, the more the company learns about us — and the more ads it can deliver.” 

This is the reason platform risk exists in the first place. As they gather more users and deeper insights about their behavior, the Walled Gardens can compound their appeal to new users. At the same time, those who create the content that fuels their growth fall into a corresponding cycle of dependency. 

As these “information empires” inevitably gather power, the height of the walls around their gardens is only likely to increase. While the garden inside the walls grows more verdant, the space outside of them slowly becomes a wasteland. To avoid platform risk, we need a broader understanding of how these Walled Gardens have amassed so much power in the first place. As a small online business owner, it's important to know what you're up against. 

Aggregation: How Walled Gardens Grow

When information is cheap, attention becomes expensive. James Gleick, The Information

There’s a simple way to explain exactly how these Walled Gardens have become so prominent. In a 2015 article “Aggregation Theory”, tech-industry commentator Ben Thompson outlines the strategy large tech companies have used to quickly become powerful centers of audiences and attention. 

It’s helpful to model a consumer market as made up of three interacting parts: 

  1. The suppliers of a service or product. 
  2. The distributors that connect those suppliers to the market. 
  3. The consumers who demand the product. 

A breakdown of consumer markets.

Thompson explains the ways a business can gain competitive advantage and dominate a consumer market are to either:

(i) “gain a horizontal monopoly in one of the three parts”  – completely control any one of these segments of (1) supply, (2) distribution or (3) consumer demand. Or,


(ii) “integrate two of the parts such that you have a competitive advantage in delivering a vertical solution”  – instead of completely controlling any one aspect, gain access to any two aspects: either integrate a (1) supply with a means of (2) distribution; or integrate a means of (2) distribution with access to (3) consumer demand. 

Two primary ways to gain competitive advantage.

This sounds a bit overly abstract. But it's important to visualize in order to understand the shift that has occurred since the arrival of the internet. 

Pre-Internet Business

Historically, the most profitable businesses were those that either maintained (i) “horizontal” monopolies over distribution, or who provided (ii) an “integrated vertical solution” combining distribution with access to a means of supplying it. 

Successful pre-internet business models.

Newspapers, as one example, were dominant in the pre-internet era due to monopolizing distribution for a local news area, while also “integrating” the supply of information and news via journalism. This combined (i) a local distribution monopoly, with (ii) an integrated vertical solution that connected supply. The profits in this case were made by offering advertising to the captured market. 

The publishing industry is another example. By controlling the distribution of books and signing the authors writing those books, publishers could capture profits through this (ii) integrated vertical solution, despite no single publisher owning a complete monopoly over either the supply, distribution or demand for books. 

Other examples include hotels, which integrated (ii) the supply of vacant rooms with the distribution of those rooms via trusted brand names, and taxi companies which integrated (ii) a supply of cars with a distribution system consisting of “medallion” that signaled trust, with a central dispatch process. 

So, the pre-internet era could be characterized by dominant companies controlling either supply or distribution advantages. But with the arrival of the internet, this formula was flipped on its head. 

Post-Internet Business

Whereas an advantage had previously been gained by integrating distribution and supply, this has now shifted to favoring an “integrated vertical solution” that combines distribution with access to end consumers. 

Amazon, Facebook and Google are prime examples of this shift. Instead of firms competing with one another for exclusive access to supplier relationships, the supply side has now become the commodity. 

Content publishers, the new suppliers, are now scrambling to use the distribution methods these companies control in order to access their unprecedented access to consumers. A 2015 article describes this “Faustian Bargain”, with the benefits of additional advertising revenue and readership being offset by a ceding of power: “Media companies don’t really have a choice. They are forced to work with Facebook whether they want to or not, because the platform plays such a huge role in how millions of people come into contact with the news.” 

The lesson to be learned from the Walled Gardens is that the most successful companies today all seek to treat the end-consumer as the new first-order priority. Whichever platform provides the best user experience will end up attracting the majority of their market. As Thompson explains, “… the best distributors/aggregators/ market-makers win by providing the best experience, which earns them the most consumers/users, which attracts the most suppliers, which enhances the user experience in a virtuous cycle”.

In contrast to the examples given of pre-internet companies, this new strategy can be seen in the models adopted by contemporary household-name companies:

Successful post-internet business models.

  • Uber

Infamous for its rapid disruption of the taxi industry, Uber integrated a means of distribution (it’s app) with direct access to consumer demand (app users).

By providing a superior user experience (cheaper fares, more trust and nicer cars) it gained consumer demand and in turn supplanted the incumbent taxi industry.

The result of their successful integration of distribution and demand was the unlocking of an existing, but previously inaccessible supply commodity – the millions of under-used, privately owned cars that fuel the uber app.

  • Airbnb

Similarly disruptive to existing hoteliers, Airbnb again vertically integrated distribution (it’s app) with direct access to consumer demand.

By providing a superior user experience (cheaper accommodation, more options and an “authentic” travel experience) it gained consumer demand and in turn created a brand new, and highly competitive, accommodation category.

The result of their successful integration of distribution and demand was, again, the unlocking of an existing but previously hidden supply commodity – the millions of vacant apartments and spare rooms that now drive the listings on their site and app. 

  • Facebook

As we’ve touched on briefly, Facebook used this same playbook to disrupt the traditional news publishing industry. They control both a powerful distribution mechanism (the news feed) vertically integrated with direct access to consumer demand (their massive user base).

As with the other example, it first gained this demand by providing a superior user experience (a central source of social information, as well as an easy portal to the internet for older users). It has then been able to use this attention advantage to broker publisher supply of news to its billions of users.

The result of their successful integration of distribution and demand created a new supply commodity – the news content previously offered by traditional publishers on their own platforms.  

--

So how are small business owners expected to compete with such large companies? With names like Uber, Facebook and Airbnb used as examples, the idea may seem far-fetched. 

While any person can still create their own website or application, the current situation would have it seem the viability of their venture is ultimately limited by its relationship and access to one of these Walled Gardens. What hope does a small business really have? Like Hayley, you can now set up an eCommerce store in less than a day - but where are you going to find customers? Having known the risks upfront, could Hayley really have done anything differently? If she didn’t build her audience on Instagram, where else would she have done so? 

When Hayley was starting out, there was seemingly little alternative. The early success of her business depended on working behind the walls of one of these increasingly verdant gardens of attention, users and prospective customers. Without first building an audience on Instagram, she never could have started her business in the first place. 

So does knowing what we’ve just covered actually do anything for us? Like Hayley, surely we don’t have any option but to rely on the audiences of these existing companies? With this view, never before has starting a business been so seemingly fraught with danger. 

But a solution does exist. I don’t present this information just to increase your anxiety. There are thousands of successful small online businesses in operation today, all of whom have found a way to compete with the Walled Gardens. 

As they show, there is a way to offset our exposure to platform risk. Like any risk, properly understanding it is the first step towards mitigating it. Now that we understand how the Walled Gardens have amassed so much influence, let’s look at where we can fit in as small online business owners by leveraging the unique benefits of  email marketing.

How to Cultivate a Walled Garden

The Walled Gardens propose a grim future for the internet; there’s no escaping this reality of the current online business environment. But with the right approach, it would have been possible for Hayley to maintain everything she had worked for: her growing profits, delighted customers, and her fulfilling lifestyle of flexibility, wealth and independence. 

It’s all about allowing the audiences of these monolithic internet entities to find a new home in a Walled Garden that you manage and control. Somewhere on their perimeter, there is still space where you can mark out your own patch - your own "20 acres" - to build profitable, sustainable businesses. But this “perimeter”, the exact location of construction, is an important detail. The way we go about finding success with marketing on the internet is by building in the correct location. 

Before finally arriving at the solution, let’s break down some fundamentals to understand this better. When we refer to “the internet” we must remember this is actually something of a catch-all term referring to a collection of distinct processes. 

These processes, the core mechanics for retrieving information over a computer network, are known collectively as the “Internet Protocol Suite” (TCP/IP). TCP/IP is so named as it’s two dominant, defining protocols are Transmission Control Protocol (TCP) and Internet Protocol (IP). 

TCP/IP then has subcategories of all protocols essential to running the internet grouped across four “layers”: 

  1. The Link Layer protocols help establish initial connections.
  1. The Internet Layer protocols help build a network between these connections’
  1. The Transport Layer protocols help to provide a more reliable connection to move data more effectively.
  1. The Application Layer offers more specialized protocols that help translate your interactions with the web into data back down into the other layers. 

The above is a (very) simplified description of the architecture of the internet. The reason I describe this is due to the necessity of understanding where exactly inside this architecture the prevailing Walled Gardens have been built. The important thing to understand is that the various protocols are broken down into four different groupings based on the distinct purposes they serve. 

In a 2016 blog post, Joel Monegro, a partner at venture capital fund Unity Square Ventures, describes exactly this. In the article, he describes his view of the value, from an investor’s perspective, of these different protocol layers; the majority of protocols being “thin” in value and the application layer in particular being “fat”. 

Value on the internet has mostly been created on the applications layer. 

In the post, he describes how in the post-internet era the majority of value created by large companies such as Amazon, Facebook or Google has all occurred within the fourth “fat” protocol – the Application Layer

Monegro describes “As the market developed, [our fund] learned that investing in applications produced high returns whereas investing directly in protocol technologies generally produced low returns.” 

Airbnb, Facebook, Amazon, Instagram, WhatsApp, TikTok and Twitter have one thing in common – they’re all web applications. They all depend on the same tiny slice of the Application Layer. In this case, the value created by these Walled Gardens each sit atop just a few Application Layer protocols - such as HTML and HTTPS. These large companies have built massively valuable businesses on top of just a few handful of protocols used to access and display web pages.

But the Application Layer isn’t limited to just the protocols used by the current Walled Gardens, HTML and HTTPS. 

There are dozens of others, with many so far relatively untouched. It’s exactly in these other protocols where we find those used for the delivery of email - SMTP, POP3 and IMAP. These are all protocols on the Application Layer that have been relatively untouched by the significant value creation seen over the past two decades. 

The inexorable force of Wu’s Kronos Effect has so far failed to swallow up email. This powerful technology, used every day by billions of people, has incredibly stayed mostly immune from the reliable warring of information empires. 

This reveals a new frontier free for the taking. Instead of competing on the HTML and HTTPS layers we can instead turn to new lands. We can do as the old farmer instructs and “cultivate our own garden. With little competition, email presents small online business owners the unique opportunity to build a Walled Garden of their own.

Part 2 next week.

This is an excerpt from my upcoming book Natural Orders: Email Marketing Automation for eCommerce & Small Online Business. Go here to learn more and receive early release updates.

Enroll in a free Email Marketing Masterclass

Learn to convert subscribers to buyers and improve customer lifetime value: