One of the oldest business phenomenon is the continued atomization of the value chain from one integrated entity into loosely coupled federation of value added participants. Outsourcing of non-core business processes is one example.

The same thing is starting to happen on the internet especially to the so called “Walled Gardens.” It might seem from what I am about to write that I think these walled gardens are screwed, I actually would argue for the opposite (unlike most people). That for a subset of walled garden internet companies that have created many-to-many relationships between its participants; the future is still quite bright.

First generation Attention Aggregators are search engines that have developed significant edge competencies that enabled them to quickly and effortlessly aggregate value (be it content, services, products, or anything else) from the “edge” of the internet and the so called walled gardens to create comprehensiveness and increasing economies of scale. These edge companies (whatever the next incarnation might be) are here to stay and have carved out a valuable slice of the value chain as the ultimate arbiter of relevancy, interestingness, not to mention comprehensiveness. Their role in the internet economy is attention aggregation (where I go to look for stuff first) and traffic switching (tell me where do I go next). This is an incredibly important function and deservedly so they will and is extracting value for providing this service.

Too many people belittle the importance of what I called Presence Aggregators . . . they believe value will flow to the edge and the long-tail will eventually help Attention Aggregators extract all the value. I disagree, Presence Aggregators, in a very simple sense, are “websites” that Attention Aggregators sent traffic to. More specifically Presence Aggregators are the “containers” of value (again - content, services, or products). It is a “symbiotic relationship.” Whether the so called Presence Aggregators are walled gardens or not is really a semantics discussion.

The difference between MySpace (what most would call Walled Garden?) versus TypePad is almost minimal . . sub domain vs. sub directory vs. own domain name. . . RSS enabled vs. not . . . . customizability . . . etc . . . My point is that there are functional differences but not structural ones where a subset of walled garden companies could become more open via improvements to the software/site/business model. Yes, I do agree that one sided Presence Aggregators (such as cnn.com) are in for a round of value destruction and the transition will be much harder. But those that have created many-to-many relationships will have an easier time (relatively) managing the encroachment of Attention Aggregators.

Traditionally true walled gardens have acted both as Attention Aggregators and Presence Aggregators . . . aggregating value, traffic, and users in one swoop hoping to keep all the pieces together in an infinite loop. Those days are over. Walled Gardens must make the transition to being value containers instead. . . Presence Aggregators must focus their attention on aggregating the long-tail be it facebook, myspace, wordpress.com, or even a web hosting company. Attention Aggregators, by definition can not and should not get into the business of aggregation through “ownership”. . . they need to continue to improve on their edge value extraction/indexing competencies. Gather.com has gotten a lot of crap lately for being a “walled garden” . . . I don’t think that is what they are trying to do . . . (there are functional issues with the site for sure. . . but being a walled garden is not one of them). GoogleBase is Google’s strategy towards long tail presence aggregation. . . which is NOT dependent on (but complementary to) their search business.

Will Attention Aggregators eventually dominate the entire internet landscape? I don’t believe so . . . a lot of people believe so by pointing to Google’s incredible growth, margin, & size . . . I would attribute that to Google’s virtual monopoly in search. Given fragmentation of Attention Aggregators (say in a particular vertical), their ability to extract value from Presence Aggregators will decrease as well. I look at the hard good distribution business as an example (imperfect example because hard goods distribution lacks edge competencies, and exponential economies of scale). Aggregation is great but it is also a commodity (anyone can index websites or buy products) . . . it is through merchandizing and branding (same function as relevancy and interestingness!!!!) that aggregators scale and grow . . . Thus if a distributor has a virtual monopoly (Walmart) the value creators or containers (P&G) will be in an much inferior negotiating position. . . but that could easily flip (such as movie studios vs. movie theater chains) based on simple capacity and fragmentation dynamics.

In the end, the value of walled gardens WILL diminish no doubt because an additional industry has risen to dis-intermediate it from its end users. That, however, doesnt mean all walled gardens are screwed. Those that focus on aggregating the long-tail, providing valuable service to value creators, and (very important) encourage framentation of attentiona aggregators in their space will be able to hold on to most of their value.