Milestone Group Quarterly: October 2006
Articles
Milestone POV - Web 2.0:
Is it Real or Just a Pretender? Chris Kocher, Milestone Group Principal
Welcome to the Web 2.0 whirlwind. Lots of buzz, some hefty hype, a dollop of frothiness and, underneath it all, there appears to be a lot of real substance. This is a big topic and it deserves as much attention since it’s going to be around for a while - at least until Web 3.0 arrives.
Although it’s hard to put a finger on exactly what makes a company or offering part of Web 2.0, there are a few characteristics that are often present, including:
- They are self-publishing, or the consumer may be the creator of content (e.g., Flickr and Wikipedia)
- They expand their communication reach by exploiting the network effect of large numbers (e.g., Plaxo and Pandora)
- They tap into the power of social networks and user interactions (e.g., MySpace, Freindster and LinkedIn)
- They exploit users’ definitions of relevance instead of machines (e.g., del.icio.us, Digg and Collarity)
- They combine new digital media technology with existing content (e.g., YouTube)
The result is a virtuous circle from which greater value, more usage, and growing user populations emerge. Underlying all this, of course, are real technologies embodied in blogs, RSS, wikis, podcasting, and tools such as AJAX. Web 2.0 offerings are also notable for giving users more control over their experience and much greater ease of use, commonly known as: “drop dead simple.” This is evident in the more straightforward, friendlier, large icon-heavy, visual interfaces sported by Web 2.0 sites like Plaxo, Typepad, and LinkedIn.
Significant to Web 2.0 is the emphasis on “people powered search relevance” – that is, users increasing the findability of web content for themselves and others via bookmarking, tagging, or rating, as opposed to a purely algorithmic search processes. Clusters of like-minded searchers are grouped to increase the accuracy of first generation search tools. Companies like Collarity simplify this model by providing community-generated relevance without requiring users to actively define or rate content. Their system follows the philosophy of John Battelle’s “database of intentions” and distills search relevance purely from the collective actions of individuals and communities.
How Big is Web 2.0?
One leading indicator of the scale of Web 2.0 is venture capital investment in the space. In the first half of 2006, VC firms invested $262 million dollars in forty-nine Web 2.0 startups in the U.S. According to VentureOne, VC investments in this sector are expected to double their 2005 level to nearly $400M in 2006. Consumer-oriented Web sites accounted for twenty-seven deals and $165 million in the first half of 2006. However, there is a sizable component (about 37%) of Web 2.0 investment focused on business offerings. We see this further taking root, as new initiatives and conferences – Enterprise 2.0, Office 2.0 and Communications 2.0 (for PR professionals) – emerge on the scene. Other forecasts from Price Waterhouse Coopers are even more bullish.
Although $400 million is a credible investment from the VC community, it is modest in comparison to the $13B they’ve invested in US startups in the first half of 2006. Even though many people consider Web 2.0 as having the early makings of a bubble, the median deal size for the period was $4.4 million versus a median of $7.5 million for all venture deals. Based on this view, Web 2.0 appears to be a strong emerging sector, tempered with moderate valuations and solid growth.
My assessment is that Web 2.0 gets an A for general media attention. With front-page stories on the founders of Flickr and Digg in Newsweek and Business Week, there’s clearly mainstream interest in the subject. With Anousheh Ansari blogging from the International Space Station, Web 2.0 truly has reached a new high (if not the final frontier). With YouTube experiencing 100 million videos viewed a day, MySpace with more than 90 million active users (as of September 2006) and a Pew Internet Survey reporting 12 million adult bloggers in the US, it’d be hard to argue against the reality of Web 2.0.
Also, these impressive usage numbers are not just a US-centric fad. A Reuters report from the end of September shows that 2 million unique users in Australia for MySpace; Britain is adding 25 thousand member profiles a day and MySpace France is in a public testing phase. And if that’s not enough, MySpace is rumored to be developing a version to run on mobile phones.
Is Web 2.0 a Bubble Ready to Burst?
So overall, it appears that Web 2.0 is pretty real. But the question still remains, is it being over-invested and is there a bubble here? With valuations for Facebook being tossed around at $1B and RBC Capital Analyst Jordan Rohan indicating that MySpace could demonstrate a value between $10-20 billion dollars (Yahoo News 9/27/2006), it is right to ask the question. I’m not a financial analyst, but I’d say the Silicon Valley cappuccino may be getting a bit overheated and at the very least the non-fat milk of the Valley’s lean last few years is developing a rich frothiness to it. Only time will tell. We may be high on the peaked curve in Gartner’s hype cycle and headed for the trough of disillusionment, but I prefer to take a long-term view. Determining whether a correction is imminent or whether Web 2.0 is ticking along nicely, requires us to place it in the context of the three stages of technology evolvement that have developed over the years: adoption, divergence and value innovation.
First comes the period when the technology is exploited by early adopters to do things better, cheaper, faster. Next is a period characterized by finding new ways to use the technology and to provide new value for users. Finally, comes the evolutionary stage where changes in behavior, in systems, in processes, as well as in products and businesses become rearchitected in order to take advantage of the technology. I think we’re just beginning to see this latter phase now.
Looking back on early Web phases with its mantra of “better, cheaper, faster”, we saw primitive online database-like marketing, electronic collateral, and other substitute applications. We even saw some new ways to adopt the technology that typically occurs in stage two of technology adoption - capabilities like eCommerce, digital media and entertainment that used the Web in new ways with existing components.
Now, with Web 2.0, we’ve been launched into a far-from-final, phase, one where doing business and interacting are rearchitected to take advantage of the technology. We see blogs, RSS, AJAX, podcasts as the underpinning to a new way of using technology to communicate and collaborate. And we’re experiencing it not just on the consumer side, we’re also seeing businesses adopt AJAX, Service Oriented Architectures (SOA), web services, and mashups. It all adds up to new functionality that can be rapidly delivered, makes the whole system more valuable and provides a richer experience.
Is Web 2.0 Really Different?
Obviously, there are new technologies, but are the business models any different? Aren’t we still seeing the same ad-supported, the same commerce-enabled and the same subscription-based models? Although some leading edge companies are spearheading variations on business models like Maxager with its unique value-based pricing tied to its customers’ revenues and ROA improvements, most companies are using variations of old per user/seat pricing, with Salesforce.com as a case in point.
Perhaps it’s more useful to look at all of this as a function of Long Tail. In Chris Anderson’s book, Long Tail, he says it’s useful to, “Think of these falling distribution costs as a dropping waterline or a receding tide. As they fall, they reveal a new land that has been there all along, just underwater.”
Although some of these Web 2.0 ideas and businesses don’t seem that new, it’s also true that many of them have been exposed by new technologies that reveal opportunities not previously economically justified. And now all these new opportunities are bubbling to the surface. Where does Web 2.0 go from here?
Good question. Wikipedia describes the vision behind Web 3.0 as a “semantic web” with emphasis on descriptive data and various mark-up languages and descriptive framework technologies to provide meta-descriptions of content. It may be that before that occurs, though, we’ll see a Web 2.3 or Web 2.7.
I see a movement toward more development in integrating presence, location, mobility and related areas using GPS, RFID, sensor networks, and mapping tied together with machine-to-machine communication.
As good as Google is, search can be better. What would happen if the Web could look at your behavior, understand your interests, not just within one community, Web site or proprietary area but across the entire Net? What would it be like to be notified of news stories of interest or products on sale without having to actively set up feeds, and subscribe to eNewsletters? What would it be like to be notified of areas of interest without having to self-identify your interests to every Web site and entity?
It’s an interesting vision, but there are social obstacles to achieving it. As the Web becomes closely tied to social behavior and interests, it will also come under the watch of interest groups tied to those areas. So as exciting as presence and location may be, privacy and security issues may start to rein in advancements or at least slow their adoption. In the same way, areas like presence and relevance may spearhead new capabilities, only to be pulled back by governments. All told, the forces of social institutions may serve to moderate growth and adoption as these new applications and offerings begin to mirror society.
And although I’m convinced that these views can be realized, a lot can happen between now and then. Certainly, there will be lots of broken companies, bankruptcies, dead wood, walking wounded and a new Google or two in this sector. But with over 200 companies trying to compete with YouTube, for example, there is certain to be some massive consolidation and M&A opportunities in the not too distant future. Success in markets like this can be highly dependent on timing and as Paul Saffo from the Institute for the Future once advised, “Never mistake a clear view for a short distance.”
Perhaps a good place to wrap up this discussion is on an uplifting vision of the future from Scientific American with which many of us can identify: “Nothing less than a new generation of society – a state of things in which every individual, however secluded, will have at call every other individual in the community, to the saving of no end of social and business complications…”
But alas, it’s not Web 2.0 that is the subject of their utopian bliss. This passage was written in 1880 and the writer is waxing prophetic over the telephone.
Chris Kocher The Milestone Group’s Chris Kocher covers sales management for fast growth technology companies. His experience working at, and with, major technology brands has allowed him to join his marketing expertise with a deep functional knowledge in enterprise software, CRM, Supply Chain, Collaboration SW, ASPs, MSPs, Security, Communications & Networking, Utilities, EAI, and Web Services.
He also has functional experience in managing P&Ls, marketing, product management, engineering, QA, acquisitions, business development, joint ventures, M&A, channels/distribution, OEM sales, support, training, documentation. During Chris’ 10 years at Hewlett-Packard, he defined and brought new technologies to enterprise and mid-market companies including the first laser printer, HP's first office systems, all in addition to developing programs for HP’s networking products, first PCs, and third party software programs.
While a vice president/general manager at Symantec with P&L responsibility, Chris grew his business unit from $12-25M and from 25-70 employees. He built a management consulting firm that accelerated revenues and valuations for over 60 companies. His partnerships with VC firms on portfolio companies, such as Kleiner Perkins, Redpoint, Mayfield, Trident, Vanguard, Red Rock, Viventures, Convergence.
Chris is an MBA from Columbia University and is well-versed in the needs of early stage companies, with respect to business strategy, fundraising, market positioning, sales channels, business models, technology acquisitions, sales and turn-around in order to increase valuations. |
