Web 2.0 - Where is the Business model?

As many of you know, there is a second generation of web-based businesses that are making the dreams of .com boom a reality. What is different? Well actually... not much. Many of the concepts that are proven to be successful in capturing buzz today, were available in the late '90s. For example, Skype (an internet-based VOIP service) is not the first to market. There were a series of Internet Phone products prior to Skype. Companies like FaceBook, mySpace and other social networking companies are not exactly "new" either. There were many websites that allowed you to join communities and post your thoughts. But again, they weren't able to capture the attention of the mass market. I am sure some of it is due to timing, and the lessons learned from Web 1.0... but I question whether we have actually followed through with the most important lesson of Web 1.0 - where is the revenue coming from?

When I look at the overwhelming success UGC (user generated content) sites over the past few years (Digg with news, FaceBook with college kids, mySpace with ???) - I see the classic paradigm of the Internet. You can deploy a great service to lure the masses, but once you try to monetize the user base - you put at risk the user experience that made you popular in the first place. The idea of the "Free Internet" has been the limiting factor for many great ideas. Once something isn't free, it becomes yesterday's news. We saw this phenomenon happen in browser wars, P2P file sharing and of course to web-sites today.

So the question is - Can you monetize the masses? The lazy entrepreneur would quickly shout out "Advertising". But I question the viability of this as a revenue model. Sure, you can make money throwing up some banners and pay-per-click ads on the right side (ala Google). But in reality - even websites with thousands of visitors find it hard to turn traffic into real money. Why? Two reasons. First, the top 100 sites on the web dominate the ad budgets. 90% of the money being spent on "premium advertising" is going to a very small percentage of web publishers. Second, the mass market is not advertising yet. Much like only the top websites get the big as dollars, only the big advertisers are making massive ad buys. So even though you seen billions of dollars being spent on internet advertising, the money is going back and forth between the people who live at the top of the mountain.

So that leaves the other option - Pay-Per-Click advertising. Forget trying to tap into the budgets of the big advertisers and leverage a channel like Google Ad Words or Yahoo Overture. Unfortunately, the picture becomes more bleak. First of all, these guys pay out a very small percentage to their publishers. The model is completely in their favor. They are selling an over-priced ad to an ad buyer, and delivering the ad to a new channel at no cost... and when someone clicks on the ad they take a small percentage and pay for the right to show ads on your site. In my opinion, the cost/value proposition is inverted, and some degree mis-represented to both the advertiser and web publisher. Without digressing into a rant against these guys, I just summarize in saying "Pay Per Click" as a revenue model is a nice way to get beer money from your popular blog, but it is not a revenue model.

So - how are all these Web 2.0 companies going to make money? In my mind - there are only two paths. The first path is to build a large enough base of users and either partner with one of the big guys. For example, YouTube became the dominating force in online video - but I question they could ever monetize their traffic on ads alone. When Google bought them, it gives them the foundation to build a revenue model. If YouTube stayed independent, they would be forced to insert ads into videos (which would destroy the user experience) or charge a ridiculous amount of money for those 2 or 3 banner ads (which would barely cover their bandwidth costs). As part of the Google family, they are simply another block of content that will be distributed through their heavily traffic ad-supported network.

The second path to money for these companies - is to build a community of buyers and sellers. What do I mean? Well, look at some of the examples we have talked about. FaceBook and mySpace - clear leaders in the online community space, but not a community of buyers and seller (yet). Today, its a bunch of kids building content, and sharing thoughts and ideas (and of course pictures of them getting wasted at the football game). They are not selling anything, and no one is really looking to buy. It is simply a social community. Look at YouTube, same thing.

So what do I mean by community of buyers and sellers? It is a business network. Where people become part of the community with the desire to do business (either act as a buyer or seller). A classic example of this - is eBay. eBay was the first example of how you can build a community that has mass appeal, and attract users who are looking to transact, and not just post content or chat.

Another example (which I have a personal bias for since I am an investor) is FastPitch. FastPitch is a destination for small businesses to share leads, market their business and network within their own communities. FastPitch drives revenue through premium membership services that allow small businesses to extend their web marketing and highlight their business in the online community. There is a clear value proposition for a fair price.

So its time to conclude this blog into a point. My point is this - I think we have learned many lessons, and thus Web 2.0 is definitely a stronger, faster, better Internet - but I still feel it has some "bugs" - so I encourage everyone to avoid buying into the "vision" of Pay-Per-Click Internet - because it will eventually be revealed as what it is - high-cost, low value web-based version of classified ads. I am not saying PPC ads will die - but I hope for everyone's sake that the web publishers take back the wheel - and not let the Google's and Yahoo's of the world monopolize the advertising dollar.

Whatever happens... we can all rest assure that Web 3.0 is right around the corner.