A Reflection on the Web 2.0 Inflection

Yahoo's warning (and likely associated earnings miss next month) may be a signal of Google sucking the oxygen out of the room.  Or it may signal a real weakening in ad spend.  Here's a disturbing logic chain. Combine this latter possibility with the decline in the real estate sector. One might conclude that the three year old media-spend-driven recovery of the consumer Internet is about to wind down. 

• The weakening real estate sector is a further drag on consumer spending and the economy as a whole. 
• Media spend tends to lag consumer spend.
• Therefore, expect to see disappointing earnings forecasts for Q4/Q1 from consumer and media companies.
• Venture capital investment tends to lag public valuations.
• So expect to see capital to become scarce for Web 2.0 media-supported companies by mid-next year, especially the least monetizable ones (i.e. social [anything]).

Maybe I'm wrong.  Maybe YHOO's pain is Google-induced and not market softening.  Maybe real estate isn't the driver most people think it is.  Maybe the war in Iraq will become less of a drag on the economy. Uh huh.

But suppose this does come to pass, whither the erstwhile venture capitalist just trying to eek out a living? Where does the market turn when momentum and speculation end?  It turns to value and fundamentals.  Expect VCs to turn back to the future and re-discover the enterprise market, where customers means buyers and CPA doesn't mean Cost Per Action.

Today there is an emerging sector variously called Office 2.0 or Enterprise 2.0.  There are a lot of interesting companies in the sector already. (You can see a bunch at the Office 2.0 Conference next month.) For the most part, these are companies that solve simple, non-mission critical problems using AJAX, tagging, and many other Webby 2.0 concepts.  It is still a Petri dish of ideas looking for real, high value business problems to solve.  But some of these companies are beginning to find repeatable  sales processes, particularly in the mid-market where the IT departments are leaner and regulatory controls are less severe to combine to encourage more end-user empowerment.  Once this becomes apparent, and once the media roof begins to leak, if not cave in, I suspect we'll see a rebirth of VC interest.

We now know that "2.0" can magically make old feel new.  Seeing this market inflection, some pundit somewhere will not resist the temptation to proclaim the Renaissance to be Enterprise Software 2.0. This proclamation will be followed with road maps for  ERP 2.0, Security 2.0, Document Management 2.0, Supply Chain 2.0, etc.  These products and services will be delivered by Channels 2.0.

I am not kidding. Just wait.

Comments

[christopher baus]

I was thinking the same thing when I saw Yahoo!'s warning. Maybe it is the end of this ad driven cycle.

[Alex Iskold]

Spot on. This party cycle is coming to an end. I can tell this from other indicators including traffic to the site and lowering quality of web 2.0 news posts. I think we've picked a few months ago.

Alex

[Andrew Fife]

I'm holding out for Cryptine 2.0

[Mark Mawhinney]

How about Fax 2.0 (FoIP)?

[Nic Brisbourne]

The drivers for continued growth in internet advertising are just too strong for there to be anything much worse than a short term blip unless we hit a full blown recession (IMHO). I have posted on this a couple of times in the last week at www.theequitykicker.com. Your points are good though and I will update my last post with a link here.