The Digestion Phase: How We Got Here And Where We Are Going Next
Everything is cyclical. From stock markets to our daily lives we see cycles; on the macro scale of
economics and on a micro level of entomology there are cycles. Technology is no exception:
it follows the ups and downs, taking the big companies, startups and venture capitalists on
an emotional roller coaster ride.
Everyone knows that there are cycles. What we do not know is how long any particular cycle will last. We know of the patterns, but we don't know the details. Only a handful of people will ever predict exactly when the tide will turn (sometimes using science, but mostly using luck). The rest of us, realize it later, some time after it happened.
It is clear by now that the latest wave of technology, which started in early 2003, has peaked. We have entered a digestion phase. It is not a burst, nor a recession. Rather, a digestion phase is a period of time for us to reflect, to integrate, and to understand recent technologies and how they fit together. It is the outcome of this phase that will decide if we continue to slide or if we rebound and start climbing back up. The deciding factor will be the true value of the technologies that we created.
How Did We Get Here?
The current state of the tech market is the consequence of an explosion of the social web. It started in with the handful of companies and a few verticals and rapidly spread to thousands of startups and niches. The key drivers of this explosion were:
- Broadband - facilitated rich media (video, photo, podcasts)
- Ajax - pioneered rich web experiences
- Social Networks - connected people online
- Blogs - created a new channel for information dissemination
Remixed together these drivers became a strong foundation for the new web era. By seeing the power and value of sharing information, people embraced new and open ways of interaction. The feedback loops created by social networks and blogs led to more content creation. The popularity and rapid spread of new technology among early adopters resulted in a strong base for these new ideas to spread.
The main thing that was created during the latest innovation phase was social networks. They took different shapes and forms. From generic, general networks like MySpace and Facebook to specialized verticals like YouTube (video), Flickr (photo), Bookmarks (del.icio.us), Flixster (movies), Last.fm (music), MyBlogLog (blogs) and Twitter (chat) the web sites focused on connecting people via content. In each vertical there was either a single strong winner or a couple that stood out from the pack.
Encouraged by the early success entrepreneurs and the venture capitalists rushed to launch more startups. Some were just blatant clones of the existing web sites, some where unique and different. In any case, by the end of 2006 there were so many things announced and launched that it was virtually impossible to keep up with what was going on. 2007 started quieter, news on the major tech blogs slowed down just a bit. It was time to pull back, so we took a deep breath and entered the digestion phase.
What Are Suppose To Do Now?
The point of a digestion phase is to think. If the value created by the companies is greater or equal to the money put into them, then we are fine, we can continue to grow. If the technologies that we invented will be used not only by a few hundred thousand people, but by millions, then we are fine, we can continue to grow. And if these new tools work well by themselves and together enhace our online life then, great, we are in good place.
But if the answer to some of these questions is a no, then we need to pause. If the answer to all of these question is a no, then we might need to take a step back. In the worst case scenario, it may mean that we will slow down and maybe even slide back. We may not like this, but this is just how all cycles work.
How do we assess the value? Ultimately the measure is dollars. Can these new tools generate enough money to justify themselves? On the surface, certainly yes. After all the social factor in all these tools is so strong and so many people seem to love these tools and spend time using them. In reality, things are not so simple. Even monetizing a phenomenon like Facebook is not simple, a site like Digg is even harder.
Mark Pincus had a brief post on his blog in April 2006 commenting on MySpace revenue. According to his post, the 2006 revenue forecast was $200 million and most of it was based on monetizing banner ads. But a recent post on ZDNet suggests that MySpace revenue has climbed significantly since then. The post explains that 2008 revenue will exceed $800 million, making the site's half a billon price tag well justified.
Google will need to work much harder to justify its $1.65 billion acquisition of YouTube, but Wall Street loves Google regardless, so this equation may be entirely different. And if CBS plays the Last.fm card right, they will have an interesting opportunity to play in the hot online music market, but they need to figure out best way to turn this network into dollars (text and banner ads might not work given the culture).
Refactoring The Social Web
Another characteristic of the digestion phase is a cleanup. Because we rushed to create a lot of new stuff,
we might not have done all of it quite right. For us to be able to build on existing
things, the foundation needs to be solid. In software engineering, Martin Fowler coined a great term - refactoring.
It means improving the software without changing what it does.
The digestion phase gives companies a great chance to improve their services. These improvements may include performance and scalability changes, user interface enhancements, the creation of an API, and compliance with standards. This is the time to simplify and to remove things that are not needed.
Thinking Ahead
We are not quite ready yet for many more new ideas, but they are brewing anyway. Because every year technology is moving faster and faster, new things will happen sooner rather than later. And each digestion phase is becoming shorter and we are becoming more used to exploring, embracing, and internalizing new technologies. Digital Life, Attention Economy, Intelligent Machines, Semantic Search and Web Sites as Web Services are just a few new ideas that we are already are thinking about.
There is a little doubt however, that these new ideas will prove to be at least as powerful as the previous ones. If the latest wave proved anything it proved that there is a virtually limitless amount and passion, enthusiasm and creativity coming from the tech community. The power of ideas and the ability to turn them into useful things is what propels us forward as a society. It is exciting and humbling to realize what we are capable of.
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Good post. Thanks!
Posted by: PJ | August 22, 2007 10:03 AM
A great, thoughtful post.
(btw, you're missing a 'b' for 'embracing' in the second to last paragraph...)
Posted by: Will | August 22, 2007 10:16 AM
Very insightful, it will be interesting to see what will remain of social networks when we're 5 years from now, or even 2 years.
Posted by: Wouter | August 22, 2007 10:30 AM
Are you implying that you're "one of the lucky few" who correctly predicts when this particular tide will turn? ;)
I mean, this post feels right at the gut level, but I'm left wondering where your supporting data is that points to an overall slowdown.
Some entrepreneurs and VC's think virtual worlds/games will be the next big thing on the web, bigger than social networks and social news site were over the last few years. They point to Disney's $700 purchase of Club Penguin last month as proof.
I personally have no idea and don't have the balls to make my own prediction.
Posted by: Eric | August 22, 2007 10:37 AM
@Will: Editor's fault! Fixed, thanks!
Posted by: Josh Catone | August 22, 2007 11:07 AM
Great post, and I agree with you that we are definitely in a digestion period. Hopefully the outcome will not pull the rug out from under the thousands of Web 2.0 startups.
Posted by: James | August 22, 2007 11:13 AM
Excellent post.
Of the "available" companies you cite above, Facebook is the only one that makes sense a standalone site/business. At the right price, Flixster could make a good Yahoo acquisition -- it would drive greater engagement within Yahoo Movies and monetize those users through biz dev deals with VoD services and/or Netflix/Blockbuster signups.
With all due respects to Digg and Twitter they are features not products, and easily imitated at that. Twitter has a lot of buzz but seems more like a Google's experiment than a legitimate product (and still hasn't gained traction with only 50K monthly uniques, at least according to quantcast.com).
Posted by: Ryan | August 22, 2007 12:03 PM
Good post. Thanks too!
Posted by: –ú–æ–Ω–∏—Ç–æ—Ä–∏–Ω–≥ –ò–Ω—Ç–µ—Ä–Ω–µ—Ç–∞ | August 22, 2007 12:08 PM
Good article. But it leaves me to wonder if this "Web 2.0" technology is not just the proper application of the "Web 2.0" Dotcom boom age? We obviously figured out how to use web.
Posted by: Sheraz Mahmood | August 22, 2007 12:14 PM
great post but there is one thing you forgot to mention:
RSS
two of the "key drivers" use RSS and is a naterual extension to an "always on world"
Posted by: sebey | August 22, 2007 2:42 PM
A great read and analysis on the saturation of the Web 2.0 world.
Posted by: Yi-Wyn Yen | August 22, 2007 3:33 PM
Alex,
I always enjoy your posts. Your pieces themselves are great examples of thoughtful "digestion" in a blogsphere littered with the latest headline on some partnership or funding round. Working in the "industry", sometimes I get sick of all this web 2.0 madness. Thanks to you, I now have a euphemism for it! "Digestion". I'm already feeling a lot better -- Ha!
Posted by: Bryan | August 22, 2007 4:10 PM
Great post!!!!
Posted by: HighFivez.com | August 22, 2007 7:51 PM
I totally agree that we're in a digestion period (I generally tend to agree with most of what Alex says) - it all ties in to your points on the attention economy. With all the choices available to enhance a digital life, it seems sometimes that we (or at least some of this generation) may be on the verge of a hiccup, with some or many deciding that despite that glut of social networks and ways to share your life online, very little of it can satisfy some very basic human needs - caring, nurturing, empathy, the search for meaning in one's life and so on. Most of the best of web 2.0+ is still incredibly superficial, and there may be a backlash against that down the line. I mean, can anyone imagine a website whose USP is that it gives actual meaning to anyone's life? Hmmm... now that would be a semantic web...
Posted by: Andy Pipes | August 23, 2007 1:03 AM
I see what you are saying, I just don't agree. First of all the impact of VC investment on overall technology development and innovation is very small - probably a lot less than 1% of total R&D spend in the world is VC money being spent. If you are sitting in Silicon Valley and look around you and not much further it is easy to assume that there is a direct correlation between the amount of money that VC's raise an in-turn spend and the level of technology innovation in the world. The valley is an edge case because of its high density of startups that depend on investment capital.
If you look at the four technologies you described, not one of them was developed using venture money. In addition, each of those technologies, besides broadband, was developed during the '00-'04 period. Even if you look at the social networks on your list, not one of them had their initial build or innovation funded by venture capital. VC is about commercializing innovation, and is an interim step.
Besides that, I wouldn't call 2007 quiet compared to 2006 either - the amount invested in early stage technology companies in the last quarter is the highest it has been since Q1 2000. A good technologist and/or entrepreneur is able to develop innovative new technologies regardless of market conditions. You can stake that it is a bit harder, but work doesn't stop when VC's slow down on investments. If anything happen between '06 and '07 it was just that a lot of the noise was turned down as many companies or products folded and not as many half-baked companies were started. Innovation is always there, the other stuff that comes along with a warm investment environment is just development that wouldn't have worked anyway.
You can have economic growth without there being a bubble, bubbles, their associated bursts and recessions are the exception. So when you talk about it being not a bubble, or not a recession, it just means that we are seeing normal and healthy economic growth.
There are more than enough research that show that technology innovation is not only constant, but has always been increasing. It is wrong to link the level of innovation and technology development to the amount of venture money being spent. There are two different issues here, and I am not sure which one you refer to as being in a 'digestion phase' - there is technology innovation, and then there is early stage company investment, there is no big-impact link between the two
There are two distinct trends. The first is that the level of development and innovation is always increasing, essentially because all new innovations build on previous new technologies and innovations. The second is that the time between an initial innovation or concept and mass-market adoption is always decreasing. It is within that delta that startups serve their purpose.
Posted by: Nik Cubrilovic | August 23, 2007 2:07 AM
Excellent! Web2.0 Rulez!!
I think we will also be able to Build on the existing Plumbing + Wiring put into place by these Fantastic co.'s. None of us wants to go back to the Old Grey Gulag days of MicroPoop + IBM!!
;PPP
Rock On Google + Flickr + Yahoo! + all the small Innovative Web2.0 Startups that led the Way!!
Posted by: BillyWarhol | August 23, 2007 6:10 AM
Alex-
Outstanding observations! The explosion of online content, sheer number of online services, e-commerce volume, and types of media (voice, data, video) all point to a possible inflection point.
Economics as you point out will determine the next shake-out. It's pretty clear that there are a few sites that have risen to the top in terms of profitability and will be here to stay given their explosive adoption rates (Facebook, MySpace, YouTube). So the winners during the next inflection point of growth could be:
1) Startups that effectively harness the investments made by the winners of the last 4 years. Powerset and Spock, for instance, have used Wikipedia, LinkedIn, GMail, and Facebook as their starting points rather than build a data infrastructure from scratch.
2) Creating new categories that didn't exist before (remember WiFi in 2000?). Tim O'Reilly's "alphaGeeks" will be instrumental in making this happen. Given the current computing platform transition from a narrowly defined client-server model to a universal web-architecture is far from over, there's plenty of opportunity for new spaces to be created across the networking, software, and hardware industries.
Posted by: Sajjad Jaffer | August 23, 2007 11:48 AM
Hello haters......If technorati is monetizable, so is Digg. Diggs users are combination of college kids & tech people. Thats 2 lucrative target audiences. I haven't looked at the alexa ratings...but whatever techcrunch did in terms of onsite adverstising seems to be working. Why can't digg follow the same model, at least in the short run??? Although, as a user I would prefer it didn't
Posted by: Nathan Ketsdever | August 25, 2007 11:19 PM
I disagree with some of the specifics, but I think you're on the right track with the title and big themes.
The notion of refactoring is important, because once you look at "social networking" as the critical component to any new web service (activity), then you want to re-do nearly all of your web activities on a social platform.
If you can build a social platform with better set of social viewing, social sharing and social networking core services, then you can layer new activities on that platform.
Movie reviewing, just like rating stories or just about anything else, is better when you do it socially. But no one needs to run out and buy flixter or digg. Twitter shows that message passing needs more avenues than email, IM, or blog posting. But no one needs to buy them, either.
Instead, it comes back to building a better core set of "social services" then we build the activities on top of this platform. We'll see that sharing songs (a la last.fm) is great, but there are more media that we can share too.
With a sufficiently robust platform built on the learnings from one-off networks, we can eliminate the activity silos that plague our experiences and data today.
And Nic's point that innovation is increasing will curiously align with your thesis that it feels like we're in a sort of doldrums now.
Posted by: Israel L | August 27, 2007 12:05 AM