Web 2.0 Needs Business Model 2.0

Web 1.0 was about publishing pages. Documents were the metaphor. And the first business model was the media model. Hotwired.com posted the first banner ad in 1994. Targeting became the way to improve CPMs and response rates -- first by keyword in 1996 then by behavior in 1997. The CPM models of Excite, Lycos, Infoseek, AltaVista and Yahoo of Web 1.0 was replaced by the CPC model by Google and GOTO.com (later acquired by Yahoo). But the value driver remained the same -- human interaction with the web site, shifting from viewing to clicking.

Lots of new trends are part of this composite called Web 2.0 -- RSS, tagging, AJAX, blogging -- to name a few. But the big enabler of all this is the atomization of web content and the growing ability to query by machine rather than by humans. Web services has been the 'next big thing' in IT for about five years now. The complexity of legacy applications, legacy systems, and legacy vendors has pushed Web Services into an alphabet soup of standards.

Meanwhile leaders (Google, Yahoo, MSN) in the consumer Internet have begun publishing simple procedural descriptions of how their web site can be invoked by a machine, rather than a human. And some interesting mashups have resulted. The initial mashups are mostly visualizations of one site's data on another site's maps. Examples are joins of Craigslist and Chicagocrime on Google maps.

But there is a problem and both Google and Yahoo know it. Both restrict the use of their APIs to a small number of uses per day and strictly for non-commercial purposes. That is because the value driver is no longer the human action, at least not directly. Seeing crime rates for Chicago homes on a map in interesting, but if I am considering buying a home in Chicago, I want a map that shows homes below a crime threshold, below an affordability threshold, and with high scoring elementary schools, and less than 30 minutes from my office. That's no longer a cute mashup of two sites. That's an application using chicagocrime.org, realtor.com, and Illinois schools' report cards. One action and multiple participants, some of whom I will never visit directly. The Web 1.0 business model doesn't work in Web 2.0.

New Models for Web 2.0
As technology investor, one thing I have learned (the hard way) is that the current model often morphs into the new model. Rarely does a new model replace the old model in a wholesale manner.

1. Micropayments
The dominant feature of the Web 1.0 'media' model is that it is free to the end user. If this could change, it would all be simple. Every site could publish the value (price) of a query by a machine and the application could collect this from the user.

Rocket J. Squirrel, "That trick never works."
Bullwinkle T. Moose, "This time for sure...Presto!...I gotta get another hat."

Micropayments have been around the corner for ten years - Digicash, Cybercash, etc. But user-pay systems only work for high-value and/or exclusive goods. So, user-pay models will be out there, but they will probably be a small minority of the transactional mashups in B2C markets.

2. Shared Value
A variation on the advertiser-pay model would be to allocate revenue from a Cost-per-X (click, action, call, etc.) event across the mashup production chain. But this still has a serious problem. The problem is one of allocation across multiple players. If a mashup has 3 websites and results in a $1.00 action, how should the $1.00 be allocated? In absolute amounts or pro rata? The absolute sum may exceed $1. The pro rata model is subject to gaming by sites setting artificially high prices.

3. New Revenue Networks
My personal bet is that the YHOO, GOOG, and now ASKJ ad networks will solve this problem by bundling (1) contracts to police gaming and (2) payment settlement systems to enable the shared value model. If so, they will initially 'host' the mashups and extract the lion's share of the value for aggregating the users and enabling the settlement. They will eventually syndicate this model to mashups all over the web, using the same settlement network model.

Then again, maybe not.

Comments

[Digital Media Review]

Peter,

You bring up excellent points.
My take is that the mash-ups are a playground for new ideas that the large web companies will end up implementing. In other words, if you provide APIs, the mash-ups are a free inspirational incubator of what can be done with your product.

For example, I wouldn't be surprised if Google ends up integrating a lot of the maps mash-ups into their product.

Juan Lopez-Valcarcel

[Larry Blumen]

I click what Lopez-Valcarcel is saying.

Why should anybody else be writing code, integrating their stuff into Google Maps for their own pages, or whatever? Google will end up hosting everything, the way they do search.

MyOwnMapDataPoints will be just another URL to them. It will be a searchable item, like crime, delis and the way to buried treasure.

All mongers of value will be paid; but Google will be the paymaster.

[Jon Paul Janze]

Great article and discussion!

For business model, why wouldn't it be something simple like vendors of data licencing commercial access to aggregators of data (as is currently done - think Mapquest)?

The only new part might be a 'cost per query' model (CPQ) rather than CPC or CPM. An aggregator of data or 'mashup' will simply set the consumer purchase price to be something greater than the aggregated data costs from each data supplier.

[Alex Pooley]

I agree with Jon Paul Janze that a pay per use system makes sense.

This is the way it's done in the "real world" where there is a chain of businesses, each charging their cost + profit.

[jon]

If a service provides an api for developers, they should give full access without limitations. Skype, for instance, opens up their channels for applications in their app2app api, they do not have hard limits on the number of channels a user can open up, but they do not fully publish their protocol.