Is 'Web 2.0' Another Bubble?

Carl Bialik from WSJ writes "Two tech VCs, Todd Dagres and David Hornik, debate whether there is a bubble in so-called Web 2.0 companies looking to cash in on a resurgent online ad market. In the WSJ.com debate, Hornik writes: 'Venture capitalists will rationally stop investing in ideas that don't bear fruit. Those that do bear fruit will gain traction and either be acquired or go public. Those are the traits of a rational market in my mind.' Dagres responds: 'I think the Web 2.0 space will have a higher mortality rate than other segments of the overall media and technology industries. There are far too many MySpace and YouTube genetically challenged clones. All but a few will fail. The winners are generally the ones that get in early and out before the bubble bursts. There are rare examples of bubble companies making it through the bust and going on to become successful and valuable companies. By the way, the combined cash flow of Spot Runner, LinkedIn and Facebook is less than that of one Costco store.'"

Comments

Is that a lot or a little?

[ScentCone]

By the way, the combined cash flow of Spot Runner, LinkedIn and Facebook is less than that of one Costco store.

I mean, have you seen a Costco on a Saturday before a ball game?

Re:Is that a lot or a little?

[Colin Smith]

I mean, have you seen a Costco on a Saturday before a ball game? And people say Americans have no culture.

There is no such thing as Web 2.0

[phrasebook]

And the only bubble to burst is the term 'Web 2.0'. The sooner the better.

Re:There is no such thing as Web 2.0

[ultranova]

It's hard to take a source seriously, though, when stuff like this found:

Don't think of applications that reside on either client or server, but build applications that reside in the space between devices. ("Software above the level of a single device")

What does that even mean? From a development perspective, what practices enable me to write software "between" devices?

It means a combination of server and specialized client software. World of Warcraft, for example. Or, possibly, P2P programs like Freenet, BitTorrent or Gnutella; after all, a single Gnutella servent is completely worthless, it is only when you have several communicating with each other that the network becomes useful. Or even the Internet itself - the network as a whole is certainly distinct from any single server or router, and can't really be said to reside in any one of them.

Mind you, this concept is anything but new; in fact it applies to all social constructs too, and in fact to anything that has more than one part.

Federal Reserve

[P3NIS_CLEAVER]

It's a bubble because the FED is printing too much money. Eventually foreign investors will figure it out and the dollar will go down the toilet. You've been warned.

A bad thing?

[Potor]

If the Web 2.0 is about user-generated content, is it a bad thing if it can't be monetized easily? I mean, I thought the point was our Web, our way?

High Startup Cost

[Bonker]

While I agree that we're probably about to have a minor watershed of dead web 2.0 companies, something that's often neglected is that websites are relatively inexpensive to maintain when compared to a brick and mortar location. You pay for bandwidth, new development, and storage.

If managed correctly, this is far less expensive than maintaining a 'real world' location.

If I were an investor, I wouldn't write off the Web 2.0 companies as a whole, but I would be leery of things like high salesman salaries, a large management to production employment ratio, and an absence of realistic business plans.

We still have the best of the Web 1.0 bubble with us, and they're profitable. Five, ten years from now, we'll have the best of the Web 2.0 bubble with us and will be speculating about which of the 3.0 companies are next to go.

tagging beta: yes

[mandelbr0t]

If you have to ask...

Web 2.0 looks to me to be the same as the .COM bubble. There's a bunch of hyped technologies, a bunch of consulting companies monopolizing the HR, a bunch of VC firms with slush funds to melt, and very few people that actually understand any of it. I don't see any changes to marketing or project hype; a presentation to my 2004 technical college class sounded like it was written by c.2000 .COM gurus. All in all, it seems to me that the Web 2.0 bubble is based on the same psychology as .COM: "Anybody who understands the technology is too dumb to understand the business".

Let me try and expound on that last statement a bit; it is based on personal experience, not some knee-jerk reaction. I got hired as a consultant about 9 months before the .COM bubble burst. I knew a crap-load about CGI and server-side scripting and HTML and Unix and Apache and so on. They seemed to pay me well, until I took into account the down-time between contracts. Moving out of the IT industry didn't seem to be an option as long as I was in the recruiters' databases. On the bright side, I'm not so dumb about the business any more. The business is effectively this: "I don't know how to implement X, but I know how to bully some techie dweeb into implementing it for me for a tenth of what it's worth."

All of the latest marketing and hype for Web 2.0 seems to have this same negative attitude about tech. dweebs. Geeks become slaves, IPOs go through the roof (but you can't afford the shares on a geek's salary) and companies sell vapourware. Projects go over budget, get extended, fire their entire team, hire more expensive consultants and extended again. The last contract I was at was still suffering from this crap. The product had been in development for 4 years by 2-3 people full-time, and I could still write a better version in 6 months by myself.

If there was an obvious decline in corporate corruption, I'd say that Web 2.0 might not be such a bubble. AJAX and other "dynamic" approaches do offer a better end-user experience. Broadband content is commonplace. Blogging is popular. But the overall negatives vastly outweigh the positives. We need to stop thinking about technology as a short-term investment strategy, and consider the overall societal impact. I'm not in it for the IPOs myself; I hope those that are start to listen to the geeks. "Don't make me angry; you wouldn't like me when I'm angry" :P

mandelbr0t

Re:tagging beta: yes

[mandelbr0t]

Projects go over budget, get extended, fire their entire team, hire more expensive consultants and extended again? Examples? This sounds like a company looking to embrace Open Source, not some Web 2.0 thing. Hmmm. Actually, it was a company that embraced Microsoft. And they did that because they got tired of Sun. I'll admit that there's some truth to many of the points you brought up, but I stand by my corruption argument. And, in a strange way, you've proven the "geeks don't know business" argument.

Try being a little cynical for a few minutes, and stay with me. The issue in this particular case was not how quickly the project could be done; in fact, there didn't appear to be much interest in creating a working project at all. The reason for this is simple: a project manager 4 years ago made a prediction about cost and timeline. There is also no possible way he could be wrong; the company committed to the cost and timeline when the prediction was made. And the project manager's MBA trumps my experience. It also turns out that this was a security project; cutting corners on such a project would be detrimental to the company. Again, we're not talking technical details. The actual security of the project is secondary to the appearance of security. The possible timeline of the project is secondary to what the project manager determines the timeline actually is.

It turns out that geeks can get rich in this scenario too. IMO, you'd have to be unethical to play along though. Effectively, you are being given money to delay the project or come up with reasons why it's infeasible in its current form. Personally, I prefer being given money to make technology work instead of making up stories. Of course, after a project has been managed this way for 4 years, you don't have to try very hard to find reasons that it's infeasible in it's current form. Unfortunately, only the project manager gets to decide when the project actually gets axed. Development on such a project is miserable; you get punished for writing good code. Maybe some people can put up with that, but I can't.

mandelbr0t

Irrelevant

[denoir]

Ultimately a bubble or not is irrelevant. Today investments in Internet technology are considerably higher than they were during the peak of the IT boom. A boom-bust cycle is perfectly normal for the early stages of just about any technology. Short term expectations are usually inflated but the long term impact is consistently underestimated.

Information technology is developed at an exponential pace - and we are nowhere near a saturation.

Re:Irrelevant

[Citizen of Earth]

“Wall Street is always the last one to the party, drinks the most, then has a huge hangover.” — peter penguin

Just ads!?#@!

[recharged95]

"surgent online ad market"

Really, if all web2.0 is about ad supported services, then we are truly heading for a bust. Ads are like having prostitiution support your schools. Also, features such as "more collaboration" is great, but it not a revolutionary thing.

Great, another fine use of all those MBA degrees on Wall Street.

Pretty much

[TodMinuit]

I'm reminded of a Slashdot comment from a ways back:

The new dot-com business are like donkeys chasing a carrot on a stick. They just keep on walking, never getting any closer to the carrot, but expending a lot of energy (money). They need some company to come along and give them the carrot.

I call this "The Paul Graham Business Plan".

So will there be a Web 3.0?

[TheWoozle]

Or will we call it Web2008? Maybe WebXP? How about WebDuo2?

=P

To point out the person pointing out the obvious.

[nick_davison]

'I think the Web 2.0 space will have a higher mortality rate than other segments of the overall media and technology industries.'

Wait a moment, the characteristics of a fast moving segment of the business world is that it moves faster than the other segments?

Wow. I wish I could be an analyst.

My prediction for 2007: Thirsty people will continue to buy water.

web 2.0

[dheera]

there is no "bubble" in web 2.0.

the point of websites such as facebook, youtube, digg, etc. are not to stay aronud forever. instead, the point is to take advantage of technologies and trends today (broadband, social networking on the web, etc.) to create something interesting for people.

sure, ad revenue off a website is nothing compared to a costco store. but for paying a few hundred bucks to get your site colocated or hosted and then running ads, you can sit back, relax in a chair, and watch money pour into your bank for doing essentially nothing -- IF you made a hit site, that is. And if you didn't, oh well, small investment, a few bucks of hosting. big deal. and if you really made a hit, perhaps someone will buy you out and give you even more money and start taking care of your lawsuits.

i think the real characteristic of web 2.0 sites is low initial risk, and lots of money if you do it well. and then sooner or later your website gets superseded by something else, just like google took over altavista, just like firefox and ie took over ncsa mosaic, and so on. when that happens, you just move on with life, happy that you did something cool for a few years, and happy that you can retire with enough money already.

it's not about keeping the bubble forever. it's all about making a really pretty bubble for as long as it lasts, and then retiring.

Re:Web 2.0 Url Please

[Giometrix]

"Well then, whats so new and cool about Web 2.0? I've been using slashdot way before they coined the phrase."

Some businessmen somewhere realized that they can use "community produced content" to drive their sites rather than having to pay for writers and editors to produce content.

Our boss just gave us the "we will move toward web 2.0" speech in our "year and review" meeting. Free, up-to-date content (via forums) was the reasons he gave for moving toward "web 2.0".

That's all fine and dandy. Except that achieving a GOOD community driven site is not easy. You really need to reach a critical mass of users before your site's community will generate good, useful content that will attract more readers (and thus grow your community, and ad dollars). Would slashdot be as appealing to you if the community was only a handful of people? The news comes late, and you don't even get the whole story. The whole reason you come here is for the community's feedback to the stories. Most sites don't achieve anywhere close to this level of success, and their forums lie dormant with at most a couple of posts.

Eventually managers will realize that the promise of free "web 2.0" content is not as easy to achieve as they thought, and the pendulum will swing back toward "web 1.0."

Old news...

[UOZaphod]

There's already several items regarding this showing up in my mashup, and I wrote about it in my blog, and I talked about it extensively in my podcast, and I updated the wiki. ...sorry, I can't go on. If I spew any more stupid buzzwords I won't be able to tell if I'm puking or not.

Figures dont lie...

[Lanoitarus]

By the way, the combined cash flow of Spot Runner, LinkedIn and Facebook is less than that of one Costco store.

Cash Flow != Profit.

Costco has a incredibly high cash flow and an absurdly minimal margin. So do grocery stores. Facebook, on the other hand, has what im willing to bet is a pretty high margin on its fundamental product. This has to be one of the most utterly stupid, biased, half truth lines ever.

Heres an equally accurate (and equally misleading and biased) half truth in the other direction:
Facebook has nearly 50 times the profit margin of a Costco, walmart, and target combined. Clearly Retail is a bubble about to burst.

Id take Reaganomics over this kind of bullshit financial analysis any day.

Re:Figures dont lie...

[Sparohok]

Costco earns a profit margin of about 2%. The profit margin of Facebook is probably negative.

Costco earns an operating margin of about 3%. The operating margin of Facebook is unlikely to be higher than about 30%.

So, whatever metric you use, your statement is almost certainly incorrect, whereas Mr. Dagres made a statement that is plausibly correct.

He's not doing bullshit financial analysis. In fact it is textbook financial analysis to use cash flow statements as a bullshit detector. The cash flow statement is a good reality check that will show up problems in a business that aren't obvious in the income statement. As quoted in the article -- "I'll take cash flow over gross margin -- I can eat cash flow."

Re:Figures dont lie...

[unother]

It's not cashflow per se which determines the viability of a business; but in the world of finance cashflow will help determine exactly how liquid an operation is. His metaphor is, admittedly, a bit stretched... but when you compare the mindshare and proposed prospects these companies PR and Financial Advisors snow you in with, he is using a decidely utilitarian and "Old Economy" (note, this is no longer disparaged) method of determining potential for future health.

You see: CASHFLOW is the incomings and outgoings on a day-to-day basis. If you have healthy cashflow, well, you can live on a small margin; you merely push product. This is why the Wal-Marts crushed the K-Marts, and the Best Buys crushed all the local electronics chains that once existed back in the 80s (like Crazy Eddies). Cashflow is a good initial predictor of the future health of a business. Since this is a commodity model we are all following, healthy cashflow means you can constantly freshen and upgrade and moreover bargain for your next deliverables. In the end, cashflow is vital. If cashflow chokes, commodity models self-destruct. This too is why Wall Street is wary of Wal-Mart's recent rumblings about retail; and again, why all those 80s electronics chains folded dramatically and everywhere at the end of the decade.

Furthermore, cashflow is most heavily influenced by direct receipts collected by a company. Lack of cashflow suggests a potentially imperilled business model. And to be frank, I remember online advertising being the end-all and be-all for most sites by mid-2000. Advertising, however is cyclical: companies advertise if consumers are spending and pull back if they are not.

In the end, sites like those are never receiving much cash from their consumers; most of their users are "free" users. This is okay for a collosus like MySpace; they will inevitably monetize it, but if not, so what? With Fox as corporate parent, they are essentially an advertising subsidiary anyway: just one in the new media arena. Just as you don't pay for your Fox affiliates programming, you don't pay for MySpace's programming.

What these sites face without deep pockets is a sudden implosion once cashflow becomes the slightest bit restricted. This was the failure of the Web 1.0 companies. Many of these new ones are not as free-spending but have only marginally more secure business models. Yes, Technorati, I'm looking at you and your refrigerator salesman.

Real Web2.0 Profits

[LilBlackDemon]

The real profits of Web2.0 come directly from the areas we don't think they're coming from. People are very likely, because of the supposed anonymity of the internet, to post things publicly that they normally would not discuss in person. Also, they are more willing to post their tastes publicly than would normally be discussed.

When was the last time you read someone's favorite books, movies, or TV shows off of a Facebook or Myspace profile? What about the comments on some recent product purchase in a blog (that's even what my blog is about)? What goods could you see in the background of the latest hot YouTube video? Ever wonder why your Gmail doesn't want you to delete old messages, even if they're useless, but instead "Archive" them?

"Web 1.0"'s advertising-driven model was about getting users to click on their ads. Companies would throw ads everywhere, with the hope that people would bite. Web 2.0 is more about gathering background on customers so that retailers and manufacturers can market more successfully to them. The ads on digg can look at what you've dugg in the past, so that they can have a more informed base for what they're going to pitch to you. It's one thing to say that a sporting goods company should advertise on ESPN.com and a software developer on Slashdot, but if you take your market research further than you can advertise for the perfect place to go after your team's next home game on ESPN.com or where you can find some good reference books for your language of choice on Slashdot.

It's not about getting in and getting out. It's about the data you collect. And if these companies are smart then they can bill on a subscription model for their customer information databases and be in business for quite some time. This is because background data is vital to marketers, and they will pay exorbitant amounts of money for the data. This should more than offset the operating costs of a website.

Re:Federal Reserve HEY MODERATORS!

[argoff]

It's a bubble because the FED is printing too much money. Eventually foreign investors will figure it out and the dollar will go down the toilet. You've been warned.

I'm sorry, but this should be modded +5 insightfull, not -1 offtopic. The fed printed up a bunch of money, used it to buy US bonds (to finance the war in Iraq), and now people are supprised that the price of every commodity across the board has doubbled in the last 5 years. Well, hint hint, they haven't - in "real" terms it's the dollar that's gone down in value far more than the commodities that have gone up. The only problem is that they loaned out so much freaking money that now society is saturated in more debt than it can pay back. By any standard, the US is bankrupt.

Well, guess what. They only have one choice: "print up money and buy stocks" and that's exactly what they've been doing. But it will fail for the same reason that any central planned economy fails, and it will be very very ugly. Forget stocks, people should buy gold and prepare for the US dollar not to be a currency anymore. It really is that bad.

Re:Web 2.0 Url Please

[The_Wilschon]

http://calendar.google.com/
http://www.flickr.com/
http://www.wikipedia.org/
http://del.icio.us/
http://docs.google.com/

You might try Tim O'Reilly's explanation, since he coined the bloody term in the first place.

Oh, and of course you heard of and used web 2.0 sites before anyone called them web 2.0. Think about it. Tim O'Reilly didn't sit around and think, hmm, let's come up with something we could call web 2.0. What would it be? And then went and made a bunch of people start implementing his ideas. It is descriptive, and the term to describe something (as happens pretty much always with history) came after that which is described. There had to be a web 2.0 before anyone could recognize it as something different from what came before and name it.

5 Web 2.0 URLs

[neelm]

flickr.com
technorati.com
digg.com
youtube.com
wikipedia.com

Not one of those sites provides it's own content - all content is users generated "for free". Every one of those sites allow you to publish the content on your own site "for free". You can keep up to date with new content without visiting the sites "for free".

If you don't understand the difference between this and nytimes-registered-users-only content, then it's no surprise you don't get the difference between the old web and the direction the web is going.

If you think Web 2.0 has something to do with AJAX, you need to read more sites than just /.

Re:I hope Web 2.0 is another bubble

[Euler]

Low unemployment does not mean high numbers of people employed. People move to other geographic areas, other careers, retire early, or stop looking for work. I live in a city that has 'improving' unemployment numbers. But that is because tens of thousands of people have left the area. Actual employment numbers have not increased.

High-skill jobs do go unfilled because the requirements to fill the job are unrealistic. i.e. someone with 10 years experience in .Net with a master's degree who will work for under $40k per year. If the job really needed to be filled, the market would make it happen by paying the right price.

Re:Federal Reserve HEY MODERATORS!

[Colin Smith]

I reckon you're basically on the right track, but it's very unlikely to result in armageddon. What'll happen instead is that china, japan, opec etc will get tired of losing money on their dollar reserves and will diversify (are already diversifying) and start selling the US bonds, the dollar will fall further, interest rates will rise further.

It will however balance out. China, Japan and OPEC can't simply dump 2-3 trillion dollars worth of bonds, they would be insane to do so. Instead they'll simply make Americans pay their debt. The US is just going to be saddled with high interest rates and high inflation for a while. At the end the dollar probably isn't going to be such a favoured reserve currency and Americans will have to work that little bit harder, just the same as the rest of the world.

They do currently have another option. Stop printing money and start running a surplus budget.

Oh Btw, the big problem isn't Iraq, that's just causing a gradual slide, it's the retirement of the baby boomers, we should start to see the effects fairly soon.

Like, sooooo 2006

[plopez]

It's all web 3.0 now. 2.0 was a flawedconcept, go with 3.0. It is the most reliable, most secure, largest ROI and lowest TCO http://www.iht.com/articles/2006/05/23/business/we b.php

It leverages collaborative synergies in an open and proprietary way to deliver value for interactive component architecture.

It is so now, so modern so YOU! The smart set are 3.0!

Seriously, does anyone doubt me when I say that IT is just like the fashion industry?

That's why in 6 months I hope to be done with it.

Silly Canadians

[SRA8]

Silly Canadians. You have enormous oil reserves. Guess what that means? It means we Americans will find some "evidence" or another to invade your country and take all your resources. All that war booty inflow will help us pay the debt on our treasury bonds for decades to come.

Re:Web 2.0 Url Please

[The_Wilschon]

user driven content

I think you said it yourself right there. It is a wiki. Wikis are very much web 2.0. Wikipedia is web 2.0 whereas brittanica online is web 1.0. This comes straight from Tim O'Reilly (and I think he might well be considered the authoritative source here, since it is his buzzword after all), in the page I linked previously.

Re:Federal Reserve HEY MODERATORS!

[Opportunist]

As long as the US has the ability to "tax" foreign countries, all is well.

How? By having the de facto international currency. Take a handful of dollars and you'll see that they are accepted as legal tender pretty much everywhere on the globe. Yes, even in countries like Iraq or North Korea. For the simple reason that those countries need Dollars for international trade, too.

Pretty much every country on this planet has Dollar reserves. The price of internationally traded goods is given in USD, and more often than not paid in USD too.

This allows the US government to effectively "tax" other countries. An inflation in the USD has actually very little consequence for the stability of the USD, simply because many countries have to follow it, because their stock in USD becomes less valuable, too. If another currency had been printed in the amount the USD has been in recent years, the only thing left to do would have been to devalue it because the inflation would have been running rampart.

The USD, though, only lost very slightly towards many currencies, and even there only towards currencies that are not tied to it altogether. Currencies of countries that hold almost all their foreign reserves in USD have been "stable" towards the USD. We're talking here a loss of about 20% towards the Euro or Yen, when effectively it "should" have lost closer to 70%.

What keeps the USD afloat is the fact that it is the guiding currency in international trade.