Tuesday, May 27, 2008

Web 2.0 just like Web 1.0

In addition to the obvious entrepreneurial and financial speculation, the dot-com era of the 1990s had two main characteristics: leveraging an information technology infrastructure that promised (and did) transform society, and a wide range of business model experimentation.

From an academic standpoint, the latter is perhaps more interesting. In talking with friends, the idea of articulating (or analyzing) a "business model" is relatively recent: in 2002, my friend Hank Chesbrough published one of the most oft-cited articles. Although Hank’s work ties back to Xerox PARC and has traced the evolution of corporate R&D to create the field of open innovation, most of the other business model research of the past decade has focused on e-commerce.

And why not? The old business models were pretty simple: make something, sell something, produce a service. There were a few wrinkles — multi-level marketing (aka a Ponzi scheme), referral networks, etc. — but for centuries most of the value in the economy was tied to a face to face transaction that led delivering a tangible good into someone’s hands. Information goods changed all that.

The fun part of the dot-com era was all the experimentation. New combinations were invented, some producing Internet giants like Google, eBay and Amazon. The tragic part was all the money investors lost betting on dot bomb startups that never stood a chance, like PeaPod or Pets.com.

Now we have Web 2.0, the amorphous neo-dot-com startups of the past five years. Because of my master’s student 2007 project studying Web 2.0 in the mobile phone industry, I’ve been tracking Web 2.0 more closely over the past year. And there was certainly a sense of déjà vu all over again.

I’ve done consulting for a dot-com and several open source startups. With or without Web 2.0, these business are good at creating value and less so at capturing the value. In particular, if you want profits you first need to get a growing, dependable source of revenues.

This morning, from 5300 miles away, the FT has pronounced that the emperor has no clothes. A few excerpts:

Many members of the Web 2.0 generation of internet companies have so far produced little in the way of revenue, despite bringing about some significant changes in online behaviour, according to some of the entrepreneurs and financiers behind the movement.
“There is going to be a shake-out here in the next year or two” as many Web 2.0 companies disappear, said Roger Lee, a partner at Battery Ventures.
“If you look at some of the valuations, you wonder what fantasy of revenues they’re based on,” said Mitchell Kertzman, a partner at Silicon Valley venture capital firm Hummer Winblad.
A companion article looks at the failure of the widget economy — the ability to create value by stitching together Internet services with tiny pieces of software. Here’s a few excerpts:
The difficulties of the widget companies point to a broader problem that has beset the crowded Web 2.0 landscape. The wave of “social media” companies that has arisen since the middle of this decade, many of them characterised by user-generated content and new forms of communications, has changed the way millions of people interact and entertain themselves online.

Yet, by their nature, these new forms of behaviour are proving extremely difficult to turn into hard cash.
I’ve told the story many times about how a friend (until recently a VP at Apple) wanted to short eBay but his wife wouldn’t let him. We both should have realized eBay’s key advantage: in addition to network effects (more buyers brings more sellers and vice versa), its revenue model is secure. Its users are paying real money to buy real goods, and eBay skims its take off the top.

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