Chip Shots by Chip Griffin

The Risk of Highly Dependent Businesses


Over the past few years, a plethora of businesses have cropped up that depend almost exclusively on another company. The most frequent tie-ins include Twitter and Facebook. In recent days, a number of companies that seek to extend Twitter’s functionality have learned the hard way just how risky a business strategy this approach can be.

Twitdroyd and Ubertwitter both faced a shutdown this past week because Twitter no longer felt that it was in their interests to allow them to continue in their current state. I have not been an active user of either service, so I can’t speak to the merits of their products. Ultimately, the quality is irrelevant anyway.

Any business that relies on the existence of another for its own survival places itself at a considerable risk. This is especially the case when there is no contractual financial relationship between the parties. For example, it’s one thing to have one (or very few) major clients for one’s business — that risk can be mitigated by signing long-term contracts. It’s still not a great idea when building a viable venture for the long haul, but it’s not a complete roll of the dice.

However, the trend in the Internet era seems to be to create services that take advantage of “open” API’s to build new products. But if these new services are not appropriately diversified, they can be wiped out entirely in a matter of minutes by whatever other entity they are dependent on.

Now many will argue that things like Twitter and Facebook are “platforms” and therefore it’s OK to base a business on them. After all, it must be in the interest of those companies to foster the developer community around them. And it is — up to a point. But as pressure mounts on the platform companies to generate more revenue and margins, the dynamic changes. In addition, as these social networks mature and achieve critical mass, they no longer benefit as much from the contributions of outsiders.

Others may point out that the world of technology has a long history of software makers providing add-ons for major products like Microsoft Office, Adobe Photoshop, and others. And this is true. But the traditional software model is also quite a bit different because publishers could not typically freeze out an add-on product as easily as flipping a light switch. Indeed, as long as users didn’t upgrade to a new release of the underlying product that would break the add-on, it could continue to survive.

Of course, the other failure in many of these cases is adopting the name of the “host” company as part of the product name. It was always likely that a service like UberTwitter would come under attack because it directly appropriates another company’s name as part of its own. That would never survive a legal challenge. Even those that use some variant of Twitter are likely at risk of at least a forced name change. Why take that risk?

Any entrepreneur who spots a great business opportunity in building upon an existing web service would be wise to think ahead to how to best insulate the new venture from the business whims and legal machinations of other companies. To be best positioned for long-term success, one needs to have as much control over one’s own destiny as possible.

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