Some Differences Between Open and Closed Networks

I was thinking about some ways to identify closed versus open networks.  How do you know the difference?  Both have advantages and disadvantages.  I think because we are human we tend to view optionality and openness as “good” things.  Instead of thinking that way, think in terms of positive economics versus normative economics.

There are a few things I thought of.

• In a closed network, often the leaders of the network recruit new members to the network.  They will shower them with affection and praise in order to get them to enter and join.  There might even be a negotiation that takes place where things are promised to the new member.
• In an open network, the ethos is give before you get.
• In a closed network, there will be barriers to entry.  There will be some sort of ritual that everyone will have to go through in order to be in the network.  Think about a college greek organization’s time tested method of initiating new members.
• There doesn’t have to be a “hard physical” ritual to enter a closed network.  It might be a rite of passage like a purchase.  Buy an Apple computer, you enter their closed garden.  Sign up for a Facebook account and get some friends.  Network effects and their policies lock you into a walled garden.
• Closed networks have hierarchy. The hierarchy might not be earned but bestowed.
• Open networks can have hierarchy, but the levels of hierarchy are earned by performing tasks that are important to that network.

As a startup, it’s important to think about how you structure your business to achieve the goals and outcome you want.  Strategically, it might be better for the company to create a closed network.  Facebook would not be nearly as profitable if it were open.  That’s not to say open network companies are not profitable.  Exchanges are open networks and they are wildly profitable.

It just depends on how you execute and attack the market.