Sunday, May 13, 2007

Web 2.0: Now and Next

What is Web 2.0? How popular is it? Who is making money off it? How is it leaping the synapse from startup to incumbent? What are its risks and opportunities for business? Where is it heading?

What is Web 2.0?

Web 2.0 – a web of collaboration among individuals -- is a marketing buzzword introduced in 2004 which has gained fairly wide acceptance. Web 2.0 companies includes some successes – such as video-sharing site YouTube, the user-written online encyclopedia Wikipedia, the photo-sharing site Flickr, and social networking sites like MySpace and Facebook, on which users can interact with each other in a virtual setting.

Web 2.0 has become much more refined – in 2007, for example, a Web 2.0 Awards conference cited 41 different categories including:

How popular is Web 2.0?

Web 2.0 is much less popular than the hype. According to a study by the Pew Internet and American Life Project, only 8% of people in America really do a range of Web 2.0 activities.

Who is making money off Web 2.0?

The sellers of these startups and their venture backers are the ones making money off of Web 2.0. YouTube’s founders sold it for $1.65 billion in 2006 to Google (venture firm Sequoia – which invested roughly $11.5 million for 30% of the company, made an estimated $400 million from the sale); Flickr’s founders made an undisclosed amount – estimated between $15 million and $35 million -- selling to Yahoo in 2005; and in 2005 MySpace’s founders made $580 million selling to News Corp.

How is Web 2.0 leaping the synapse from startup to incumbent?

These acquisitions demonstrate how Web 2.0 is spanning the synapse from startup to incumbent. The reason for the incumbent interest is that rapid growth in the number of users of Web 2.0 sites. For example, YouTube’s user base leapt from 0 to 19.1 million between August 2005 and August 2006. More recently, in March 2007 Cisco Systems bought online videoconferencing company, WebEx, for $3.2 billion; Sun Microsystems has been wooing Web 2.0 startups with free software and cheaper computer servers; America's second largest ISP, Comcast, announced a deal to give its 12 million Internet (and cable) customers access to Zimbra's Web-based interface for e-mail, calendars, contact lists and instant messaging.

What are Web 2.0’s risks and opportunities for business?

Many companies are using Web 2.0. A recent survey by the Economist Intelligence Unit found that 85% of C-level executives see the sharing and collaboration aspects of Web 2.0 as an opportunity to increase revenue and/or margins. Companies have initially focused their Web 2.0 efforts on the creation of online communities that can help with product marketing or product development. Companies are also establishing blogs or wikis to initiate conversations and share knowledge inside or outside the company.

But Web 2.0 also creates significant business risks: increasing exposure to viruses and malware and damage to corporate reputation through the release of embarrassing information about employees.

How does Web 2.0 increase risk of virus and malware infection? An executive from Secure Computing noted that Web 2.0 applications like blogs, wikis and social networking sites allow users to post code in chat sessions and other areas. In some cases, hackers corrupt legitimate technologies for their own gain. For example, encrypted HTTP (known as HTTPS) was supposed to ensure sensitive data wasn’t transferred "in the clear" over the Internet. However, attackers can also use secure connections to transmit malware.

And Google researchers have found that Web 2.0 opens up new opportunities to compromise users’ computers. In particular, Google surveyed billions of sites, subjecting 4.5 million pages to in-depth analysis. 450,000 were capable of launching so-called "drive-by downloads", sites that install malicious code, such as spyware, without a user's knowledge. A further 700,000 pages were thought to contain code that could compromise a user's computer. To address the problem, Google has started an effort to identify all web pages on the internet that could be malicious.

What reputational risks does Web 2.0 pose to companies? Former BP chairman, Lord Browne’s former lover posted his personal thoughts on Facebook – accelerating Browne’s departure from his job. And organizations are growing nervous about sensitive information finding its way into the public domain, through the growing network of blogs and social networking sites. At the same time, individuals looking for corporate jobs are worried that views they’ve posted online get them fired if the company runs an internet search of their name.

Where is Web 2.0 heading?

The key to Web 2.0’s future will be whether startups can generate sufficient growth in the number of users to attract the interest of incumbent media companies. With concerned about the decline in advertising revenue to newspapers and TV, established media companies could view Web 2.0 startups which can attract rapidly large numbers of users as attractive acquisitions because they could take up the slack.

One example of where Web 2.0 might be heading is Joost, a start-up that delivers television programming over the Internet. Earlier this month, Joost received $45 million in financing from venture capitalists and content partners including
CBS and Viacom. Joost was founded 18 months ago by Skype’s co-founders and has signed up 500,000 users. Joost distributes shows in traditional television formats, like 30-minute or hour-long programs. It collects demographic details of its users and analyzes the profiles to help its 45 advertisers to tailor content to distinctive viewer segments.

But there’s also the chance that many Web 2.0 companies will fail. Web 2.0 has attracted significant amounts of financing -- $262 million in the first half of 2006 alone. But in late 2006, several venture-funded startups have either closed their doors or slashed staff. One is Browster, backed with $6 million in 2005 by VC firms Advanced Technology Ventures and Vanguard Ventures, which is now widely believed to have ceased operations. Even mobile Web 2.0 startup Motricity fired many workers, despite being heavily funded by leading VC firms.

Given its business risks and the low cost of entry, it appears unlikely that companies will invest significantly in Web 2.0 technologies as they did during the first Internet wave in the 1990s. Thus Web 2.0’s future depends on its ability to reinvent the media industry.

Only a handful of these companies are likely to gain such traction to leap the synapse between startup and incumbent.


Blogger Francesco DeParis said...

As unlikely as it seems from the outset, I think traditional media companies (TMC) will ultimately rule the web 2.0/New Media space. TMCs will surely become the next VCs.

3:41 PM  
Blogger Boris said...

An outstanding analysis and summary - thank you.

8:54 AM  
Blogger "The Captain" said...

Surprising there are so few comments. Boris is right. Fantastic summary.

2:15 PM  
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