Saturday, March 15, 2008

What's Web 2.0 worth?

Catching up on an interesting week.

Social networking site Bebo sold itself this week to AOL for $850 million. Some see it as a validation of the Web 2.0 market, including Microsoft’s seemingly foolish October investment in Facebook that implied a $15 billion valuation for the latter firm (as compared to the $500 million News Corp. paid for MySpace back in 2005).

From the one presentation that I saw in September, Bebo is a cool company with an aggressive push towards the mobile Web 2.0. However, as far as I can tell, it’s thus far a niche player that doesn’t lead in any national market. Although popular in the UK, it’s a distant fourth in the US after MySpace, Facebook and MyYearbook.

One way to look at this is that AOL is buying a fading star because it can get it cheap. Another is that the owners want to cash out, and the VCs are thrilled to get a 9x return in after 22 months.

The network effects are pretty strong here, so it’s not clear how a #4 property gains market share. Small entrepreneurial companies tend to lose their focus and drive after acquisition by a big company; Exhibit A is the AOL-Netscape merger. In fact, AOL has demonstrated a reverse midas touch over the past decade, squandering the tremendous market share advantage it once had from its walled garden and dominance of dialup service in the US.

On the other hand, Hotmail, MySpace and YouTube have continued to grow since their acquisition. So it’s possible (if not likely) that the AOL acquisition could be good for Bebo.

IMHO Bebo needs to dominate a niche rather than strive to be #2 or #3 in various national markets around the world. The idea of cross-promotion and integration with AIM seems the most plausible, but a lot depends on how much talent (and motivation) remains at Bebo after it gets gobbled up.

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