Monday, August 14, 2006

Web 2.0 is Dead, Long Live Web 2.0

According to TNS Media, the entire U.S. advertising market including everything from newspapers to network TV to online advertising is roughly $140B/year. What is interesting about this number is that if all advertising dollars shifted to the web overnight rather than gradually as it has been, the total market would be $140B. What is alarming about this number is that the valuations of advertising-based "Web 2.0" companies, supposedly based on their potential, far exceeds the valuation they would have if they won all the advertising dollars available! If Google right now had all of the current and future advertising advertising business in the U.S. at its current growth rate, its market cap would be the same.

A lot of people are saying you can't compare Web 2.0 to the dot com, or Web 1.0, since the companies are run by technologists, it is cheaper to start a company, etc. Yes, agreed, you can start a company today without having to buy the Sun/Oracle/Cisco troika of yesteryear, and you do not have to have a massive advertising budget. But what is remarkably similar is the complete lack of business model beyond acquisition by Yahoo/Google/etc.

Yes, the companies that started a few years ago have/will do pretty well. Everything else is a bit of yawner. Point in fact, how many "Web 2.0" sites do YOU use? Does your Mom use? I was on a Web 2.0 panel a couple of months ago at a VC conference for its institutional investors. Reid Hoffman, CEO of LinkedIn, was on the panel and gave a very amusing response when asked a good time to invest in a Web 2.0 company: 2003.

What "Web 2.0" has changed is people's expectations regarding user experience. Sites today need to be easy to navigate, able to tie together data from multiple sources, and support users generated content or tagging. So while in my opinion "Web 2.0" is dead, the effects of "Web 2.0" will live for quite a while as enterprises upgrade their infrastructures to match their customer's expectations. As the CIO of a bank recently told me, they have realized that their website is a bigger channel than their branches, yet they invest far more in their branches than their websites. This is something that is going to change, and Web 2.0 technologies will accelerate that shift.