The ecosystem challenge. Facebook must live with the world it created.

The ecosystem challenge. Facebook must live with the world it created. Much is being written about Facebooks latest changes with most of the focus being on the privacy issues created for consumers, the marketing issues created for brands, and the apparent conflict between innovation of the service and corraling of constituents.

But why this dichotomy and conflict? And what to do about it? The answer lies in the large ecosystem nature of the service. When a product, a company or a brand becomes an ecosystem such as Facebook today or in the past, eBay, AOL, Apple, Adobe Photoshop, Microsoft Windows and IBM SNA- the first responsibility of the company and the most pressure is just maintaining it.

Usually the ecosystem is quite large and the company has its hands full just keeping it working. Assuming that calms down for a few days, the company's next challenge is to moderately advance the system consistently across the board without alienating its massive user and partner base.

I recall years ago when I was at Apple, one day attending meetings with our partner-foe Microsoft on their Bellvue WA campus. A Microsoft Vice President explained to me that they just didn't have time or energy to think much about the Macintosh as an OS competitor. Their primary challenge in life was upgrading 90% of the market reflecting hundreds of millions if installed Windows PCs. To move the installed base forward with even a few features was a monumental task. Worrying about competing with or out-innovating competitors with less than 10% market share paled next to the pressure of addressing 90% of the market.

And so it goes for massive online services. With 500 Million registered users, and hundreds of millions active daily, Facebook must first keep itself running, and then try to incrementally innovate. As we have seen when it moves too fast or too far, the installed base and the ecosystem won't absorb it and will even rebel. If Facebook moves too slow, they expose themselves to being eclipsed by a new competitor or not building a viable economic model. IBM, Microsoft , Apple and Adobe Photoshop addressed this by creating ecosystem based on development platforms for 3rd parties. The primary company took responsibility for the ecosystem while empowering and delegating to 3rd parties the task to innovate through applications built on the platform. Facebook is attempting the same model. By opening the system to application developers on the one hand and any web site on the other, Facebook seeks to extend its ecosystem in both capability and reach, just as Apple and Microsoft have done.

Here then are the opportunities and challenges:

1) The 3rd parties must create substantive value for other members of the ecosystem - in this case consumers and for brands creating economic opportunity through marketing returns. We've certainly seen a huge number of Facebook apps that consumers use and we can expect more. On the brand side, more progress is needed. Some tools and apps enable Brands to have a presence on Facebook, but few have impacted their real marketing goals. LiveWorld's new Facebook Conversation Applications (Forums, Idea Power, Ask & Answer) address this by providing brands with much greater customer engagement than previously available on Facebook. This is accomplished by deep dialogue capability among and with customers, rich media and strong moderation tools. So far brand and agency response is strong.

2) Facebook must manage the balance of supporting the 3rd parties to provide innovation, while advancing the basic ecosystem carefully. This is partly a matter of priority; does Facebook spend its resources helping developers with APIs, tools and marketing support, or working on the basic Facebook system. One might say do both. But that under-estimates the monumental task of just keeping it running Eventually Faceboolk will face the challenge of when to leave innovation to the 3rd parties or to co-opt the innovation itself. If it co-ops too much it will alienate the 3rd parties and damage a core part of the ecosystem. If it relies only on the 3rd parties it risks being beaten by a direct competitor.

As a Facebook 3rd party developer we are sometime asked "Since your application is so incredibly value add to Facebook, aren't you worried that Facebook will do it themselves?" The answer is "We keep an eye on that, but believe we are better suited to focused innovation than the eco-system steward."

3) Culture: Who rules, the company or the ecosystem? - All ecosystems have a culture in which the members participate. For our non-social web examples such as Microsoft or Apple, the company has both strong influence on and some level of control over the culture. But in a social web model such as eBay, AOL or Facebook, the social dynamic is actually stronger than the company that created it. These brands cannot simply control or direct the culture. They are as subject to it just as much as the 3rd parties and end users.

- Facebook's missteps (Beacon, the current privacy controversy) can be seen as Facebook at odds with the culture of the Facebook ecosystem. They desperately want to move the ecosystem forward, but the ecosystem keeps bending the company back to where it was. Facebook must find ways of working with the culture, yet not allowing it to hold things still. Most likely Facebook will just have to keep taking two steps forward,only to take one step backwards. .