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Can we prevent Web 2.0 from being a bubble?

Last week’s column sure hit a nerve.

I heard from a number of readers who are more than a little suspicious that “Web 2.0” is spelled b-u-b-b-l-e, and who want none of it. As one reader, whom I greatly respect, put it: “The industry could use a healthy dose of caution to prevent the heavy Kool-Aid drinkers from spoiling the party (again) for the non-flippers in the group.”

Indeed, in dozens of conversations with start-ups seeking a role at DEMO 2006, the skepticism regarding next-generation Web services and applications is palpable. It’s not that these companies don’t grasp the value of this dynamic application architecture, but rather they don’t always buy into a business model that assumes everything is free – yet will somehow be paid for by advertising.

Today, a parade of companies tout the advertising (Google AdSense) model of revenue building with the equivalent that zeal of hundreds of dot-com business founders flashed the requisite slide optimistically projecting gargantuan revenue coming from “captured eyeballs” and transaction revenue shares. Certainly, some businesses are supporting themselves on Google ads and affiliate marketing fees -- but it’s rare that you can build a really big business around these. And if you can, the business is by definition beholden to verities of the ad network and affiliates.

Worse, these businesses are exposed to the risk of consumer whim. With so many sites embracing ad links as a primary business driver, the model risks overexposure. Just how long will consumers click through? When will we become blind to a right-hand column full of advertising, no matter how relevant to the content at hand? In fact, the more we are exposed to these advertising techniques, the less effective the techniques become – and the less viable the business model overall.
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Last Friday afternoon after a week of hour-by-hour product pitches – many of which included some variation on the “free to consumers; supported by ads” model, I was caught off guard nearly when one start-up had the “nerve” to suggest that their software is so valuable that customers ought to pay to use it. I agreed.

Surely, there will be clever ways in which revenues will be generated and shared among so-called Web 2.0 companies, and the best of these will endure whatever market inflation is afoot. But, as I hinted at the end of last week’s column, the market itself will correct more quickly to re-tune or reject business models that don’t have enduring models. This will happen primarily because a mass market of individuals – an oddly effective oxymoron -- will act quickly to accept or reject new Web-based businesses, constructs and concepts.

The barrier to entry to new Web-based businesses may be fairly low, but the market of individuals has significantly raised the barrier to staying power. Businesses will be proved and disproved in the market, constantly setting and resetting business value, making over inflation more difficult.

This, we can hope, will invigorate entrepreneurs to start companies that test new ideas in the market crucible. This market – perhaps more than investors and “Kool-Aid” drinkers – will set valuations. These valuations will set the price for M&A activity, which we can expect to be robust, even if individual deals are done at more modest prices. That’s how the industry achieves market velocity without creating another bubble.

Chris Shipley is the executive producer of NetworkWorld's DEMO Conferences, Editor of DEMOletter and a technology industry analyst for nearly 20 years. She can be reached at chris@demo.com. Shipley, has covered the personal technology business since 1984 and is regarded as one of the top analysts covering the technology industry today. Shipley has worked as a writer and editor for variety of technology consumer magazines, including PC Week, PC Magazine, PC/Computing, and InfoWorld, US Magazine and Working Woman. She has written two books on communications and Internet technology, has won numerous awards for journalistic excellence, and was named the No. 1 newsletter editor by Marketing Computers for two years in a row. To subscribe to DEMOletter please visit: http://www.idgexecforums.com/demoletter/index.html.

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Comments

David Levine responded 8 years ago: #1

Internet advertising revenues for the first nine months of 2005 totaled $8.9 billion, a 22.5 percent increase over the same period a year ago (source: Interactive Advertising Bureau and PricewaterhouseCoopers). There was a gold rush in the early days to this pile of revenue, which resulted in the consumer expectation that services would either be free or supported by ads. Businesses wanted to create market share as quickly as possible, and then convert a percentage of their users over to a subscription model. When that conversion fails, the only alternatives are ads, or a transaction-based model. As the ad market matures, that naturally requires more reliance on subscription and transaction based models.

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