Web 2.0 Wonderland

There is a lot of talk about “Web 2.0” at places like this. BusinessWeek put out the beginner’s guide last week, but the term is basically just a description of the hundreds of new community oriented sites that use Ajax or similar technologies. Ajax mixes Java script and HTML to enable “drag and drop” and other GUI features formerly limited to desktop software.

Venture capital investment in the sector is increasing, which has prompted some to say that the Web 2.0 phenomenon is comparable to the Dot Com Bubble of the late 90’s. But I am skeptical.

First, there is a lot less money being thrown around. There certainly won’t be Super Bowl ads and billboards in San Francisco like we saw before. Second, the sites getting money have either viable revenue models or nailed down a ton of traffic. And finally, venture capital is going to sites that have the clear ability to be rolled into bigger offerings.

That last point is the most important. I’ve tried a number of these sites and alone their value is limited. Remember the Milk or CalendarHub are nicely featured sites, but they would work better as part of comprehensive Office like offerings. As such, their exit strategies have to be strategic sales to the Yahoos, Googles and Windows Lives of the world.

Not that that isn’t happening. Google has purchased tens of companies like Writely and others in the past year. Yahoo has picked up Delicious and News Corp, in a wise decision to finally focus on the internet, paid what seemed at the time to be a huge premium for MySpace.

The Web 2.0 value creation model seems to look like this. You and your techie bud get a good idea to roll up some internet traffic. You labor away in your garage for a couple of months and, if wildly successful, you build a business like Digg. Google or Yahoo decides it needs to be in your space and they pay you $10 – 20 Million in stock and you go to work for them.

Alternatively, you believe you can go it alone. You find a Silicon Valley VC to give you $20 Million, move into an office, hire 10 or 15 programmers, and pray that the buzz keeps buzzing long enough for some internet newbie to come and pay you a couple of billion.

The second scenario is not impossible, but I’m skeptical that many companies should hold much hope for it. After all, Google and Yahoo are the real buyers here, they have their own traffic, and they can put out new technology quickly and cheaply. Speed to market has value, but of course only relative to price. And other deep pocketed media buyers like News Corp are not a dime a dozen.

All considered, my guess is that Web 2.0 is really just part of the steady transition of functionality from the desktop to the internet and that it won’t produce anything like the bubble we saw in the late 1990’s.

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