2. Cuil

3. Hakia

4. Worio

5. Ubiquity

Ubiquity for Firefox from Aza Raskin on Vimeo.

6. Semanti

If you've got more examples of semantic data collection tools, list them in the comments below.

Cuil: Good, But Not Great

This week a new search engine called Cuil launched out of stealth-mode. As some had predicted, it seems Google's announcement about the size of its search index was a preemptive move to take some momentum away from one of Cuil's main features: the size of its index with 120 billion pages. As Cuil's team features quite a number of Google alumni, comparisons with Google's search are inevitable. In our tests, however, Cuil performed nowhere near as well as Google.

See also: Wow, How Did Cuil Get So Much Publicity on Day 1?! and Yahoo BOSS Should Capitalize On Cuil Damp Squib Launch

Why British Telecom Bought Ribbit, The Web Telephony Platform

Communications company British Telecom (BT) has acquired innovative web telephony platform Ribbit for a reported $105 million. BT has been sniffing around the Bay Area for startups to acquire for some time and this one is a great fit. Not just because both companies are in the voice market but because as a means of folding click-to-call functionality into any web application - Ribbit is fascinating. BT was supposed to be a big mover and shaker in the communications industry of the future, but it hasn't worked out that way so far. Can Ribbit move the needle for BT? We think it could in a big way.

Google Acquires Omnisio

Maybe to counter some of the bad news around YouTube this week, Google just announced the acquisition of the Y Combinator funded video annotation and mashup company Omnisio. According to Google, the acquisition of Omnisio will allow them to keep pushing the envelope of what is possible with online video. Neither Google nor Omnisio have commented on the price of the acquisition, but it is clear that the Omnisio team is going to join YouTube.

Yahoo Music Does The Right Thing: Issues Refunds to Customers

Last Thursday, we reported that Yahoo Music was going to shut down its store and DRM licensing servers on September 30, which was basically going to leave anybody who ever bought music from the Yahoo Music Store without a license to play their music. Now, however, Yahoo has announced that it will issue a refund to its customers for the full value of their purchases. Yahoo is also looking at making copies of the music its customers bought available to them as MP3s without any DRM.

The Bigger Questions Behind The Scrabulous Shutdown

As of this week, Scrabulous, the wildly popular Facebook Scrabble game, is no more. If you try to login to the app now you'll get the message "Scrabulous is disabled for U.S. and Canadian users until further notice." You have the option of entering your email address to receive further information about developments in the matter. While Scrabulous fans are certainly angered over the app's shutdown, the unanswered question still looms: did Hasbro have to do this?

SEE MORE WEB PRODUCTS COVERAGE IN OUR PRODUCTS CATEGORY

Web Trends

Some Web Apps Work Better Together

How many new websites can you fit in a Volkswagen Beetle? Sometimes it feels like that's what we're trying to do these days - but all these new applications and services don't have to be crammed into our heads and lives as separate things to try out and remember. Many new technologies work best in concert; the functionality of one application can be vastly improved by using it together with another one. Here are some of our favorite examples of apps that work best together, followed by some favorite workflows from friends of ReadWriteWeb. We hope you'll share your favorite combos in comments, too, so we can all learn some new things.

Peering Into Microsoft's Cloud

On July 24th, Microsoft held their annual Financial Analyst Meeting (FAM), an event where many of Microsoft's top executives come together to talk about the company's progress and achievements. At this year's meeting, Microsoft Chief Software Architect, Ray Ozzie hinted at Microsoft's cloud initiatives, a part of their Software + Services (S+S) strategy. While Ozzie did not reveal either codenames or ship dates during his speech, there is still some information we can piece together to help determine what Microsoft's cloud will look like.

Brandstreaming: What Is It & Who's Doing It?

If there's a hot new social media trend happening, you can bet that companies are trying to find a way to use it too. It happened of course with blogging, it happened with Twitter, and it is now happening with FriendFeed and other lifestreaming apps. Indeed RSS vendor Pheedo has coined a neat term for this: brandstreaming. It defines a brandstream as "a consistent flow of content created by a brand". According to a recent report, 53% of online users are consuming content outside of a publisher's site - through the use of widgets, RSS readers, social networks and mobile devices.

What Startups Can Learn From Haruki Murakami

Alex Iskold is a big fan of Japanese writer Haruki Murakami. The genius of Murakami is in his discipline, focus and determination. He seems him as a virtual Zen master - an embodiment of wisdom, passion, skills and exceptional will. The elements of his work and life story are inspirational and (here's where ReadWriteWeb comes in) particularly applicable when you're running a startup. Therefore in this post, we take a look at what modern technology startups can learn from this Japanese literary master.

The Google Knol Threat to Content Businesses - a Wiki Plug-in Might Level The Playing Field

Does Knol (our review) make Google into a “content company”? Mahalo founder Jason Calacanis made a compelling case this week. You can say he is conflicted, because his Mahalo venture has a lot to lose if Knol succeeds. Or you can say that he knows of what he speaks, because he is in the eye of the storm. Jason’s view that Google is the closest we have to an operating system for the web makes sense. His comparison to how Microsoft, an earlier generation operating system vendor, invaded the application market that had belonged to their partners, rings true. This is what dominant tech companies have always done.

SEE MORE WEB TRENDS COVERAGE IN OUR TRENDS CATEGORY

That's a wrap for another week! Enjoy your weekend everyone.

None of the search start-ups since then has made me change my mind. None of the cool new user interface features or ways of expressing your search intentions matter one iota, if the core search proposition is not better from day one. Well, enter the latest contender: Blekko.

Yet new search start-ups continue to get funded, even in what is a less frothy funding environment. Cuil(l) raised $33m. Looks like they blew it. In contrast, Blekko raised only $5m in two rounds. It is still in stealth mode and one assumes they'll will play the hype game a bit more cautiously after the Cuil debacle.

The proposition that launched countless search start-ups was “if we can get just 1% of the search market we will have a very valuable business“. That maybe true, but getting 1% has proved elusive. The reality is you either win big or fail totally in this game. There are no hedged positions in search. It is a really “non-trivial” technical problem.

Assuming the game is defined as the search infrastructure game. I think that game has been over for some time. The barriers to entry are just too high. An entrepreneur pitching VC now has to answer the “how do you avoid the Cuil problem?” Yahoo BOSS is the perfect play in the new game, with search infrastructure players offering their platform to developers. Hundreds of start-ups can make a decent business within less than 1% of the search market if the infrastructure is provided by somebody else. You don’t build operating systems, do you? You don’t build search infrastructure, do you?

You don’t, unless you believe that you really have disruptive technology. Blekko is one the few remaining plays building search infrastructure. They must think they have that disruptive technology.

Blekko seem to understand the complexity of the challenge, from comments on their Blog (as their site says nothing, their founder’s Blog is best source of insight into what they are up to):

“Search is an absolutely fascinating problem to work on for a bunch of reasons. For one thing you have to scale the thing before getting the first user. You can’t just start with a server or two and add more when the users come. Step 1 is to copy the internet onto your cluster. Step 2 is to analyze it..

The componentry is remarkably deep.

Search is like 7 hard problems wrapped into a stack. Distributed systems, html analytics, text analytics/semantics, anti-spam, AI/ML, frontend/UI. And scale…”

His Blog is well worth a thorough read if you are in the search game or just like hard technical problems. (As a historical footnote, Skrenta’s notes on Cuil, written well before the launch, make interesting reading).

Later on he says:

“you don’t need a million servers and half of the phd’s in the field to build a search app. It takes 20 people and $5M of hardware…if you know what you’re doing.”

I totally buy the “It takes 20 people” people bit. All my experience in software has confirmed that Frederick Brooks was totally right in the Mythical Man Month that small teams always outperform large teams. I cannot imagine what more than 20 people would do other than get in each other’s way.

Its the “you don’t need a million servers” bit that I am less certain about. Google invests $ billions in server farms. You have to have something fundamentally and totally disruptive. P2P enabled Skype to take on AT&T and Verizon. That was fundamentally and totally disruptive technology that enables such a compelling value proposition that they got millions of consumers using them. That is why I was excited to see Faroo attempt this with P2P, but I can see that they fail at the critical “has to be better than Google the day it launches” test.

Purely incremental improvements to the economics of crawling + indexing will not enable a new consumer search play. Saying “we only need $1 billion in infrastructure cost to compete out of the gate with Google and Google spent $3 billion” does not cut it with investors. Nobody will fund that $1 billion. However, incremental improvement is a great pitch to the big infrastructure players. If you can say “I can take 20% out of your infrastructure costs with my patented technology”, you will get your phone calls returned by Google, Yahoo and Microsoft. And one of them may offer to buy you for a big fat premium to prevent their rivals getting access to the same technology.

That is very, very different from launching a new consumer search engine.

In summary, I see 3 possible search plays in search today:

1. Build search applications on top of Yahoo BOSS or equivalent offerings from Google or Microsoft. There is room for hundreds of niche, vertical start-ups, using search as a feature not as the only proposition. I think Yahoo has a great shot at this as Google will suffer from cannibalization fears, so they won’t open up as much as Yahoo. Microsoft will undoubtedly play here as well, they are best at technology for developers.

2. Hard core search infrastructure technology sold to Google, Yahoo and Microsoft. That’s tough to get right as the technology has to be really, really good, the patent has to be rock solid and you have be good at playing poker with the big guys.

3. The totally disruptive Skype style venture that nobody has heard about.

Unfortunately for Cuil, this could be a great opportunity for Yahoo BOSS (Build Your Own Search Service) to shine.

Cuil clearly understand that this is a scale game. You have to search as much if not more than the competition. Thus their PR about “the world’s biggest search engine”. For a start-up to compete on scale right out of the box is strategically…weird is the word that comes to mind. Particularly if you don’t have some disruptive technology that changes the economics. They understood the need, PR delivered, execution failed. They must have known it would fail. Surely?

Let me try this pitch on the next VC I meet. “To win we have to be as big as Google, Yahoo and Microsoft the day we launch, if not we don’t get any adoption”. I don’t think I would get the check, but maybe I don’t have the magic touch.

Enter BOSS

Why is this a big opportunity for Yahoo BOSS? Yahoo already has the scale in crawling and indexing. They already find those “obscure” searches that Cuil missed. The cool stuff on Cuil, the 3 panes and the Explore by Category, can be built by self-funded start-ups in their garage. These will probably be vertical, it will be search embedded into other apps. It is search as infrastructure. Come on Yahoo, you have Icahn off you back, make this work!

Another reason is that the founders made some big claims about challenging Google. The New York Times article states that Cuil promises to be "more comprehensive" than Google and give users "more relevant results".

Having ex-Googlers at the helm and making big claims is nothing new. They were also coming out of stealth mode, which helped the PR. But perhaps what made the difference this time was that some key industry pundits made some big claims themselves about Cuil.

Danny Sullivan, who runs SearchEngineLand and is generally considered to be the most respected search blogger around, is quoted in the NYT as saying: "This is the most promising thing I've seen in a while". He did qualify that by saying: "Whether they are going to threaten Microsoft, much less Google, that's another story." And his own post on SEL goes deep into this very question - well worth reading.

The big claims of Cuil were expounded on in the official PR. The title of the company's press release says it all: Cuil Launches Biggest Search Engine on the Web. In particular, the size of Cuil's index was talked up as its main claim to greatness - 120 billion web pages. But the whole press release is an exercise in Silicon Valley hyperbole. Here's just the intro:

"Cuil, a technology company pioneering a new approach to search, unveils its innovative search offering, which combines the biggest Web index with content-based relevance methods, results organized by ideas, and complete user privacy. Cuil (www.Cuil.com) has indexed 120 billion Web pages, three times more than any other search engine."

When you throw around terms like "pioneering", "significant breakthroughs", "ideal search engine", "complete user privacy", "next generation approach to search", ... well you better have a good product to back that up.

Some of the initial blog coverage of this story extended the hype. I must applaud Cuil's PR people for managing to get such overwhelming launch coverage, initially positive - although after bloggers actually started using the product the tone of the coverage changed accordingly.

The fact is, Cuil is a very ordinary product right now. In my own tests last night, I was left underwhelmed. Our official post today summed up our views: this is an average product that does not live up to its own hype, the NYT's hype, or the hype bestowed upon it by noted bloggers and those who thought they got a "scoop".

I still don't get it though - how come this startup got blanket coverage from tech news heavyweights, some of whom should know better than to buy into the hype? Did any of those publications actually test Cuil before writing up its greatness?

- 83% watch video clips, up from 62% in the last study in June 2007
- 78% read blogs, up from 66%
- 57% of internet users are now members of a social network
- RSS consumption is growing rapidly up from 15% to 39%
- Podcasts are now mainstream digital content, listened to by 48%

Social networks have been "a key driver for the growth of social media":

- 22% of social network users have installed a widget or applications
- 55% have shared photos
- 22% have shared their videos
- 31% have started a blog
- The world’s biggest social network is MySpace with 32% weekly reach followed by Facebook on 23%

The report also states that social media is a global phenomenon:

- Top markets for blogging – China 70% of internet users write a blog, Philippines 66% and Mexico 60%
- Top markets for social networking – Philippines 83%, Hungary 76% and Poland 76%
- China is the world's largest blogging market with 42m bloggers versus 26m in the US

Those last stats will be an eye opener for many, because the US web tech market gets most of the attention of the blogosphere and mainstream media. But with China having 42m bloggers compared to the US's 26m, there is large scope for social media to flourish there - even despite China's political issues with social media.

CreateDebate is the newest debate site to hit the web. It moved from private beta to public late this morning and offers an extremely slick interface for online debate. Debates on CreateDebate can take multiple forms. They can be open ended questions, such as "Who had the best NFL draft?" or they can be head-to-head debates, such as "Is drug abuse a criminal or health problem, Yes or No?"

Users can vote in two-sided debates and add arguments in each. Arguments are voted up or down Reddit-style with the top arguments displayed at the top of the page. Users can also add rebuttals to arguments which can be further voted upon. Debates that are time sensitive (such as "Who will win the Democratic nomination for president?") can be set to expire. CreateDebate can also be used for simple yes/no polling on non-contentious issues.

One unique feature of CreateDebate is that each debate has a "research" page that pulls in news from RSS or Atom feeds. Whoever creates the debate can add new sources to the research page and news stories can be automatically made into the focal point of a new debate.

Riled Up! is a more simple debate site that uses the head-to-head format. Debaters are asked simple yes or no, or X vs. Y questions and asked to support a side. Choose wisely, because once you've picked your side, you can't go back.

Similar to CreateDebate, users vote arguments up and down and can post rebuttals, which can be tagged as supporting, neutral, or opposing.

Wis.dm is really a question and answer site that many have compared to Yahoo! Answers, but because it favors yes/no questions, it is actually more akin to the debate sites here. Wis.dm is set up very simply : Someone asks a yes/no question, users vote, and people debate the answer in an unthreaded discussion forum below the question.

The free form nature of the actual debate makes it a bit harder to follow everyone's position than on more polished debate sites, but Wis.dm is easily the most used of the sites in the round up. Its simplicity makes it very approachable and probably contributes to its mainstream appeal.

outQuib is a social network focused on debate and discussion that we reviewed in January. Debates on the site take the form of a poll with multiple response and forum-style commenting. But the focus of outQuib is really the social aspect -- debates are used as a means of connecting like minded people who can form groups on the site.

Jyte is a product of JanRain, makers of MyOpenID, and I get the idea that it is really more of a proving ground for their OpenID products than it is a serious startup. Jyte allows people to make claims (like, "Tiger Woods is the best pro golfer of all time.") and then people can vote to agree or disagree.

Users can also add comments to the debate (arguments for or against) and give each other "cred" points in areas they think a particular user is especially credible -- though it appears that cred points don't really amount for much other than bragging rights.

Conclusion

With the US presidential election kicking into high gear over the summer and coming to a conclusion next fall (barring any repeat of what happened in 2000), debate sites can probably expect to see a bump in traffic as people head online in search of places to argue their opinions. Which of the sites above is your favorite? Did we miss any? Let us know in the comments below.

It's a small but interesting site and the basic premise here is something that could be expanded beyond restaurants alone, something the company says it intends to do. I like it a lot.

BooRah uses affiliate services to display menus, make reservations and offer big discounts for restaurants in a long list of cities. These added features are a very nice touch, especially the menu display from AllMenus.com.

Semantic Analysis

The reviews that get processed are identified by semantic analysis identifying food blogs among 100,000 blogs being indexed. That number could be bigger, but it's unclear what percentage of those indexed blogs are in fact food blogs.

Inside the review excerpts you'll find food terms, like a particular dish, identified and linked out to a search results page displaying that same item in the same location you're currently looking at. That's really nice, so if I'm reading a review that says some place's dolmas are alright but aren't the best in town - I'm one click on the word dolmas away from finding out where in town is said to have better ones. Yelp lets you search for terms in a city of course, but making it one click automatically is nice.

I wrote a review this morning and the parsing is a little funky. The key term in my review is "raw," which should be discernible since the culinary category is "organic." Instead, BooRah pulls out a link to "cooked stuff" for searching. That's the opposite of what a user would want in this, admittedly niche case. Food, like many other niche topics, needs strong long-tail analysis - doesn't it? Maybe it's unrealistic to expect semantic analysis to be strong in outlying, long-tail use cases - perhaps full text search ala Google is going to serve said user better. I hope not, though.

Yelp doesn't do a lot of what BooRah does. The final bit of semantics I found on the site was a "semantic cloud" for selected cities. That gives you a good idea what kinds of foods and issues people are talking the most about for a given location and lets you click through to read those reviews.

Further Differentiation

The site searches for reviews across a lot of different sources, depending on the location. Yelp is not included, which is a real shame, but sites like CitySearch, Yahoo Travel, Tripadvisor and many more are included. In some locations the local newspaper website is included in review sources. You can easily filter between sources or chose to just look at food review blogs.

Reviews can also be written on the BooRah site itself. When you sign up for an account you're prompted to select between 3 different charities, presumably ad revenue you generate will be shared with those charities. That's a nice touch. I don't see Yelp doing that, do you?

RSS feeds for new reviews of restaurants in a particular city? I'll subscribe to that! I'd like to have some more granular control of such a feed: new reviews, new restaurants or new restaurants with 3 or more reviews. Yelp has pretty limited RSS feeds.

Finally, the Boos and the Rah's are probably the biggest differentiator here. It is hard for systems like this to recognize things like sarcasm or other peculiarities of human communication - but BooRah seems to be doing a fairly good job in the little bit that I looked around it. I really like the way it pulls out emotive quotes from reviews. My initial skepticism has subsided, but I'll be keeping a close eye on this feature as I use the site more.

Seeing positive and negative reviews around three different parts of a restaurant (food, service and ambience) really is far better than just seeing a number of stars. This method of displaying reviews scales for the individual user, far better than stars and full text reviews do.

The Down Sides

BooRah has been around for a little while but it still feels like its database could be better fleshed out. The user experience is very good, but (for example) the slideshow viewer is broken right now. I don't know about on the iPhone, but on Windows Mobile the site is effectively unusable for me. That's a real shame, as Yelp Mobile is fantastic.

Not including Yelp in the reviews being indexed seems like a pretty big downside. Maybe most of the world doesn't need to read the musings of the yuppie restaurant-philanderer 2.0 crowd, but as one of those myself - I like Yelp reviews. At the same time, it is nice to read what the rest of the world has to say too. In fact, I'm going to try using BooRah instead of Yelp for awhile - when I'm at home on my laptop at least.

Shortcomings aside, combination of semantic indexing and natural language sentiment-processing is a very interesting one. I look forward to BooRah getting better and bringing the same strategy and feature-richness to other niche topics.

Disclosure: I have a consulting relationship with a somewhat related, still-unlaunched, service provider.

YackTrack is a conversation tracker, automating the search for the comments that many content producers currently have to seek out on their own. After searching for a similar service that does this and not finding one, Rob decided to build his own.

Using YackTrack is simple - just enter in the URL whose comments you want to see and and click "Search for URL." YackTrack scours the net to find comments from services like Digg, Disqus, FriendFeed, Mixx, StumbleUpon, Technorati, and WordPress. Each supported service has its own separate section so you can follow the conversation that takes place on that site.

YackTrack's Web Site

There are still many things people wish that YackTrack could do, but Rob says those are coming. Specifically, his future plans include registration and saving URLs to track, RSS and email notifications, more supported services, and, based on initial user feedback, maybe a WordPress plugin as well. He also hints at something even bigger, saying "My future plans are fairly straightforward, except for one part that I would prefer not to talk about yet."

Despite these big plans, Rob seems humbled and surprised by the attention the service is receiving, especially considering the service only launched yesterday. He's worried that his server, never tested to withstand a huge traffic influx, won't be able to handle the load we send. (RWW has been known to crash startups' servers before). "This is not a large beast like FriendFeed or Twitter," he says. Maybe not yet, Rob, but I'd buy some extra servers and bandwidth just in case.

However, the signs are that Japanese Twitter usage is set to explode in popularity - Twitterlocal shows that Tokyo is currently by far the city with the most Twitter usage.

Twitter itself hasn't released any stats, but Google Trends is another to show a large Japanese presence on the service, both in location...

...and in language:

And in many ways this trend is logical, given Japan's history with succinct writing - from haiku to text messaging. As the AFP recently noted, "the Japanese are among the world's most avid users of cellphones, which they use to pay for train fares, shop, watch television, read novels and, of course, to send messages to one another."

Could Japan be the first country where Twitter usage becomes mainstream, rather than just being popular among geeks - as it is in the US and english speaking countries? Judging by these early stats, that's a good bet!

image: TrendsSpotting

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.

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?”

This could be a long and deep recession

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.

The phase transition trilogy

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.

The Web 2.0 problem is not on the cost side, it is on the revenue side

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!

4 problems with get big first, monetize later

Twitter, YouTube, Delicious and other ” get big first, monetize later” services face four fundamental problems:

1. The standard revenue models are hard to apply once a service has got a lot of traction. There is push-back from people who have grown used to the service without ads. Advertising that is not useful, that is simply an interruption, will alienate users. Yes, we have spoiled users with a “free and no ads” value proposition.
2. Innovative services may need an innovative revenue model, so that the advertising is useful and is not viewed as simply an irritation. But innovating on both fronts is hard. The big budgets are allocated conservatively based on proven models, standard ratios and lots of competing sites to choose from. Cost Per Click and search was a “made in heaven” combination, since the advertising could actually be useful to searchers and advertisers were incentivized to make their ads useful. Since then what ad model innovation has moved beyond experimental to deliver $100m plus revenue lines? Online advertising is still fundamentally either CPM or CPC, with a bit of unfashionable but possibly highly effective Affiliate Marketing.
3. Subscriptions are tougher to sell to consumers in a recession (even if we want to sell subscriptions even more in a recession). This is even harder when your competitors, who have drunk deep of the “don’t worry about monetization Kool Aid”, are giving the same thing away. Hard, but very rewarding for those that succeed. When the give-it-away crowd run out of money, the subscription business may return to favor. However to sell subscriptions you need one of two propositions. Either you can say “our monthly subscription saves you money” (e.g. Sales Force vs Siebel) but that is usually a business proposition, less often relevant for consumer services. Or you can make your service addictively fun in a market without a free alternative, which fits some game/entertainment models.
4. The supply and demand problem. Yes we are spending more time online. So ad $$$ will flow from traditional media to online media. The gap between time spent online (20%) versus ad $$$ spent online (5%) is still “big enough to drive a truck through”. But the supply of content, created by users or programs at virtually no cost, is increasing way, way faster than online attention time. So the total ad $$$ is continuing to increase, but it is being spread a lot thinner. Particularly when you subtract Google’s revenue from the total.

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:

1. We bet everything on selling to consumers who were betting everything on treating their house like an ATM on the basis that property prices would rise forever. Oops.
2. We never invented a model that effectively translated social media activity into revenue. Without that it was just an expensive playground. Double oops.

Image: aturkus

Part 2: The Emerging Main Street Web; Part 3: Dancing With Gorillas: The New Web Era