There's a truism you learn after a few years of investing in tech: Only platforms create sustainable value.
Witness MySpace, which News Corp.
In this context, "platform" refers to technology upon which outside developers can and usually do improve, adding value both to other users and the underlying platform, while creating switching costs where none existed before.
Need an example? Think of Windows. As soon as developers began writing code that users found worthy enough to adopt, Windows became a platform, sending shares of Microsoft
MySpace never really became a platform in the way Facebook has. Users install more than 20 million apps on Facebook each day. Game developer Zynga has created a multibillion-dollar empire primarily by embedding code in the social network.
How many installs does MySpace manage? Just more than 12,000 games a day as of this writing. True, the numbers don't match up because we're comparing apps to games, but the broader point remains: Facebook dwarfs MySpace, and News Corp. boss Rupert Murdoch doesn't like being dwarfed. That's why he dumped the site for a 94% discount.
Back in 2005, Murdoch's $580 million bet looked smart. Within two years, Yahoo!
Today, it's tough to call these two businesses peers. Therein lies the razor's edge of the cloud-computing revolution. For all the value that web-based computing and social media unleashes, there's little hope for any businesses that fail to create platforms. Call them the movement's remember-whens, or also-rans, or if cruelty is more your cup of cocoa, The MySpace Generation. Whatever you call them, don't ignore them. They may be lurking in your portfolio right now.
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The Motley Fool owns shares of Microsoft, Yahoo!, and Google. Motley Fool newsletter services have recommended buying shares of Google, Yahoo!, and Microsoft, and creating a diagonal call position in Microsoft. Try any of our Foolish newsletter services free for 30 days.
Fool contributor Tim Beyers is a member of the Motley Fool Rule Breakers stock-picking team. He owned shares of Google at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. You can also get his insights delivered directly to your RSS reader. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.