We are in the early stages of a major phase transition. Whatever you call it, something new is brewing, and that nasty R word has a lot do with it. It is not the semantic web. That is a part of it, a big piece of the new technology pie, but it feels too much like a solution looking for a problem.
Nobody knows what name will eventually resonate with people. Web 3.0 sounds too derivative of Web 2.0. By the time this new phase gets a name, people won’t want to be associated with the past.
Just as in Web 2.0 era we don’t want to be associated with the Dot Com era. Hype eventually debases what was once a great name. Until then, whatchamacallit will have to suffice.
Web 2.0 emerged after a technology crash, plus a mini consumer recession, and solved the big problem in the Dot Com era which was the cost of audience acquisition. Do you remember how nutty Dot Com was? We would raise gazillions of VC cash in order to advertise in traditional media at high rates in order to get people to our site, so that we could sell advertising at low rates. On top of that we paid people to produce content. How could we have been that dumb?
Web 2.0 solved that cost problem, by getting users to create content and then promote the service to other people. We called that user generated content and viral marketing, and felt a bit smug. We had totally and completely solved the cost of eyeball acquisition. We even called it social media, so that people did not think we were in the grubby business of making money.
So what is wrong with the Web 2.0 picture? When the dust settles, on what issue will we be saying “how could we have been that dumb?”
The dust may take a long time to settle. This is not a technology crash, it is a consumer recession created by excess debt, but it is likely to be longer and deeper than the last recession. 9 million Americans have negative equity, mortgages costing more than the value of the home. Total debt in America is $53 trillion, “that’s $175,154 per man, woman and child, or $700,616 per family of 4, $33,781 more debt than last year”. This may take some time to work through the system and it is likely to impact people’s behavior for a some time after that. That is a lot of people who will be acting more cautiously, spending less.
This matters to us, because Web 2.0 bet on the consumer. Selling to enterprises was way out of favor. The investor view was that selling to enterprises was not scalable, suffered from long and uncertain sales cycles, customers had too much clout and it was full of big firms in a market that was consolidating. All of that was true. So we all bet big on the consumer.
This is not our bubble. Technology/media is not at the epicenter this time, but the shock-waves will impact us all and in fundamental ways. Consumer media depends on advertising and advertising gets cut in a recession. Advertising $$$ will rush to what really works, deserting the marginal propositions. This is likely to be really ugly for a lot of print media, but online advertising will not escape unharmed. From this recession will emerge new models and new winners, just like Google and search advertising emerged from the last one. There will also be a re-assessment of the business models that currently drive Web 2.0.
This 3 part post will try to identify the early shape of the emerging new era and what entrepreneurs can do to position to be winners when the cycle turns positive again.
Part 1, this post, answers the question, what is the fundamental problem with Web 2.0 that will have us saying in a few years “how could we have been so dumb?”
Part 2, tomorrow, describes opportunities around the Main Street Web, when all the Web 2.0 services have gone mainstream and are applied to the way millions of people make a living.
Part 3, the final post, describes “Dancing with Gorillas“, the opportunities for entrepreneurs in a world dominated by a few big companies such as Google, Microsoft, Yahoo, eBay and Amazon.
It has become fashionable to say “build a great service and the revenue will follow” and to deride people who ask about monetization as hopelessly unable to “get it”. Well yes, if you can flip it to somebody else before the music stops, that is a smart model. A few people made tons of money doing that. But investors in the public companies that acquire these services do eventually ask questions such us “how much money does Google make from YouTube or Yahoo from Delicious?
Public market investors are asking questions. Subsidies from massive cash cows obscure the problems with new services for a while. Microsoft could fund many cash burners for a long time and so can Google. But companies with slightly weaker cash cows get hammered. Investors do ask Yahoo how they are monetizing their acquisitions and eBay came under the spotlight for not making enough money from Skype.
This is not about “free is bad”. Free to air, supported by advertising, has been the media business model since radio and TV. That is a valid business model decision on who pays. It is “free to everybody with no revenue model at all” that is a problem. Or free with a weak revenue model. These are end-of-cycle warning signs.
Twitter will be the interesting case study. They have phenomenal traction at probably minimal cost. They have top class VC, so no worries on that score, they can last as long as needed. They are almost certainly not even thinking about getting to cash flow positive as, at least publicly, they are not even thinking about revenue. So an exit is pretty likely and the acquiring company will be thinking about revenue - because their investors are thinking about revenue!
Twitter, YouTube, Delicious and other ” get big first, monetize later” services face four fundamental problems:
The lack of new models is not for lack of trying. Many sound very exciting and some of them even sound plausible. But what is missing is the solid, proven revenue model with at least 4 quarters of great growth that enables a company to IPO to “won’t get fooled again” public market investors. Google had that solid revenue growth when they went public. Since then, what web venture has had an IPO in America? Sarbanes Oxley provide a great excuse, but excuse is all it is. Companies with real and growing revenues have had successful IPO exits, but these have not been Web 2.0 companies
When the dust settles, when the cycle turns again and we emerge from this recession (or downturn or crash or bubble burst or whatever else you want to call it) people will say Web 2.0 was a blast, we built some amazing services and lots of people made money from M&A but how could we have been so stupid as to miss:
Image: aturkus
Part 2: The Emerging Main Street Web; Part 3: Dancing With Gorillas: The New Web Era
Listed below are links to blogs that reference this entry: The Whatchamacallit, Post Recession Phase Transition.
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Amazing post, Bernard! And very timely.
While I agree with your basic points about the Web 2.0 Kool-Aid, it seems very likely that out of all the chaos of the coming "re-alignment", a few major long-term winners will emerge, just as Google, EBay, Amazon et al emerged from the hundreds of companies participating in the Web 1.0 madness. And those are likely to be the ones that have both grown big *and* figured out a viable monetization strategy.
As I argued in a recent post (Web 2.0: The Real Opportunity Lies Ahead of Us), the heaviest users of Web 2.0 services still lie within demographics that represent a tiny percentage of the overall population. This represents a huge opportunity to carry these concepts into the mainstream, principally to (a) non-early-adopter consumers and (b) within the Enterprise.
The big difference this time around, as you point out, is that the Web 2.0 companies have minimal cost structures, so that they have a much longer runway to try to figure out a solution to the revenue problem. In response to your final two points in the article, I would say that:
1. With enough consumer users of valuable Web 2.0 services, sustainable revenue models will emerge (many not depending on advertising)
Posted by: NitinK | April 28, 2008 2:03 AM2. Selling into the Enterprise is a powerful way to translate social media activity into revenues
Nitin, thanks and I agree. See the next post in this series which looks at some of the emerging opportunities. Bernard
Posted by: bernard lunn | April 28, 2008 4:37 AMHow many duplicate business models can a sector support, how many YAVSS and YASN can be monetized? Twitter is the least of it, and they can monetize at a moments notice by creating a simple brand monitoring web API for counting mentions and mined metrics for linguistic markers of redress.
Vertical specialties in the technical domain have been campaigning for VC to get Web 2.0 style ventures and apps out to their communities; so far, a fractional percentage have succeeded, whereas the stupidest ventures that are no more than 'me too' social plays (YASN) and video sharing (YAVSS) routinely walk out the door with VC cake.
Most astoundingly, many of these new clone ventures have been founded by notable 'silicon valley undertakers', serial entrepreneurs that are notorious for burning down (serially) past ventures without a cent of ROI. How do they do it? Why are they raising more capital after so many high viz fails?
I asked one: He said, “I hire friends, I am hired by friends, I make sure that the first order of business when receiving a placement of equity is to find a way to compensate the VC partners"
Posted by: Alan Wilensky | April 28, 2008 5:32 AMhttp://bizcast.typepad.com/clients/2007/11/a-fairy-tale-of.html
Bernard - Terrrific commentary - look forward to the series on this subject matter. Deep in the inner chambers of good companies, these observations have been ruminated many times over - a trait that totally bypassed as Alan Wilensky calls them "undertakers" in silicon valley (serial crash 'n run artists and VCs).
These VCs made a conscious decision to take what was left of their limited post dot-com era mental faculties and let themselves be influnced by baseless opportunities - with a singluar trait of "sign up the crowds in these frothy moments (and let the acquirers of their hype machines figure out the business model)". They threw away money given to them by fiduciaries (limited partners) of instituional funds (which is even more pathetic than the acts of the VCs themselves).
Posted by: G | April 28, 2008 7:57 AMGreat post!
We are absolutely SPOILING users with free. I suspect US will be the last market to have mainstream subscription models and digital goods.
The revenue-eyeball gap between online vs offline media is the biggest challenge. Intuitively it's an absolute mystery: you're moving to a medium with more niche content, better CPM economics stink?
Posted by: Q dub | April 28, 2008 9:29 AMFirst off, great post, Bernard.
THIS is why I read RWW! You don't get analysis like this on T***Crunch.
I have long wondered why ad-supported seems to be the only revenue model that people consider. I, for one, am HAPPY to pay for a service that I find valuable.
That brings me to my one minor issue with one of your points that subscriptions are hard to sell:
To me this is a false choice. By this logic the value proposition of any subscription service is either "saves you money" or "is addictively fun"?
Really? What about "provides a valuable service?"?
I subscribe to Flickr, TypePad and a few other services. And none of them are to save me money or because they are simply addictively fun. They provide REAL VALUE to me that I am happy to pay for.
Bernard, I think "saves money or is addictively fun" is a pre-Mainstream mindset.
I think web companies MUST start thinking in terms of providing REAL VALUE that MAINSTREAM consumers will perceive and pay for.
If that means they have to suck it up, hunker down and wait for the froth of free services desperate to collect users regardless of whether the users pay them anything to subside, then so be it!
I think eventually consumers will be willing to pay fees for valuable services.
But first they must perceive the services as pain-killers, not vitamins!
And I think there is another value proposition in there other than "saves money" or "is addictively fun". :)
Posted by: kayvaan | April 28, 2008 9:51 AMBernard,
Posted by: Trevor Speirs | April 28, 2008 10:06 AMGreat post. RWW is one of the best blogs in the business at writing thought provoking analyses that effectively summarize and look forward on important issues affecting the technology industry.
The revenue model is something that is bugging me as well. It is tough to make an ad model work when your ad network is taking 50%+.
I wonder if a consumer subscription model for premium services can work if we structure it as a "Micro-subscription" (monthly fee of under $2)?
Virtual goods (or services) micropayments could also be an interesting avenue.
Of course for the last two to work, we need to revamp our financial transaction models (no flat fee +% on a transaction - just a set %)
I think the micro payment angle can work now that the internet reaches such a vast audience. Before we would charge a subscription fee of $10 because we could only expect to reach 1 million consumers and get a conversion rate of 5% ($10 x 1MM x 5% = $500,000).
Now, we can reach 100MM consumers. If we lower our price we may be able to increase the conversion rate ($1 x 100MM x 10% = $1MM).
Of course, there are other critical variables (variable costs), but it could be worth it for a new start up to explore these micro revenue models.
Awesome post.
Posted by: Eric Willis | April 28, 2008 10:21 AMMore on underpricing ourselves:
Traditional magazines charge a subscription fee and STILL show a ton of ads! Like I said, we are spoiling users with unsustainable expectations.
Somebody stop kool-aid tap.
Posted by: Q dub | April 28, 2008 10:47 AMTotally disagree on the monetization thing. Monetizing scale is *way* easier than scaling monetization.
Posted by: pwb | April 28, 2008 1:13 PMGreat post. It seems like so many people fail to ask a fundamental question - how are you going to make money? There are so many examples of funding to get usage and monetize it later (you mentioned some good ones).
We were pitching a well-known Sandhill VC several months ago. We were showing him GroupSwim, which is SaaS based enterprise software, and he admitted he had no interest in the enterprise space. He looks to fund companies that bring 100,000s of users in a short period of time. We asked him how they make money. He then started waving his hands around and saying they look for things that "wiggle" over here and companies that "wiggle" over there. When they see some good wiggling, they figure out how to make money out of it later. I'm not making this up; I thought I was in the middle of an SNL skit or candid camera.
We are old fashioned. We provide a great solution that adds value and expect to get paid for it.
Posted by: Jason Rothbart | April 28, 2008 4:57 PMLooking forward to reading the other articles in this series. It'll be interesting how things shape up in the next few years as more and more people start really using the web and seeing the opportunities.
The advertisers will need to be innovative to catch people's attention while the owners of web-sites, blogs and other services will try to earn money to pay for their overhead and even, to make a profit from all their users. I don't think the traditional methods in advertising will work since people are used to these services being "free".
Posted by: jacl | May 1, 2008 7:19 AMlol @ the "wiggle" comment. I'd kill to have a VC guy get behind some of our stuff. It's wiggling all over the damn place!
Posted by: Jack Humphrey | May 6, 2008 12:29 PM