Web 2.0 - Over and Out

Many of us in the VC community have been quietly wondering about the state of Web 2.0 innovation. We aren’t seeing much. Startup activity remains strong, but the consumer web landscape seems to be populated with the same bodies with different skins.  Another video deal here; another social networking deal there, and social [feature] everywhere.

The apogee of this Web 2.0 hit me on Friday when I was having lunch with my daughter in San Francisco.  There was a conversation at the table next to us between a 30-something and a 50-something, The younger was explaining to the elder that they had web site with the following attributes

• Users can share any kind of information from files to photos
• Storage isn’t expensive, so we don’t police it today, yet
• Users can invite their friends; that’s how we get new users
• We launched a few months ago and are doubling every month
• We haven’t quite figured out our revenue model, but we think it is freemium (“Let me explain what that means…”)

Of course, this is the generic Web 2.0 company template. Overhearing the dialog felt like the 2007 version of Joe Kennedy getting stock tips from his shoe shine boy. Web 2.0 is in the water, drink up.

We now know the fourth quarter of 2006 witnessed the mainstreaming of Web 2.0.  It began with the YouTube acquisition, followed by a rather incumbent-centered Web 2.0 conference, culminating with the coronation of user-generated media as Time’s Person of the Year.

The notion of Web 2.0 as a wave is now rather long in the tooth, as cycles go. I believe Tim O'Reilly and John Battalle first coined the term in early 2004.

I thought one way to check the energy dissipation around “Web 2.0” would be to look at Web 2.0-centric media.  Three properties that one can reasonably say are pure plays in the Web 2.0 mainstream are Techcrunch, Gigaom, and Technorati.

[Note: the following Alexa data is NOT consistent with other sources.  Please see my subsequent post for additional data from Quantcast.com and Compete.com]

[3/28/07 Update: See this post by Frank at DeeplyGreen showing that Alexa data actually is corroborated by authoritative site data after all. Nice job Frank.]

Say what you will about Alexa ratings’ accuracy, all three of these properties show a similar falloff in Reach from their Q4 peaks, all notably right around the Web 2.0 Conference.

I am not suggesting that Web 2.0 services are losing steam.  On the contrary, the concepts are quite main stream.  Take the poster child for user-generated participatory content - Wikipedia (below).  It's a monster.      

Much of the "easy" innovation seems to have been wrung out of the Web 2.0 wave.  Web 2.0 was cheap - thanks to open source, simple - thanks to RSS/REST, and distinctive - thanks to AJAX and Flash.  It helped more than a little the Google has continued to entice us all with the abundant profits in Internet advertising.

Now the hard work begins, again.  The next wave of innovation isn't going to be as easy.   The hard problems in the WWW are no longer usability or ease of everyday content  creation.  These problems are solved. Digital cameras, SixApart, WordPress, and digital video cameras showed us how ease it could be.  Now the hard part is moving from Web-as-Digital-Printing-Press to true Web-as-Platform.  To make the Web a platform there has to a level of of content and services interoperability that really doesn't exist today.   

The Web today still resembles MS-DOS more than MS-Windows.   Every website is an island, an island that knows nothing about any other website.  This is no different than the world before the Windows Clipboard.  All 640KB of memory was available to whatever application was running.  The point of integration was the User.  As it is today.  Ask anyone who uses a SaaS application.

I am not alone in observing where the world is going.   The hard problems in the vision of a true web-as-platform  involve  all the usual hard computer science issues.  How can we normalize information from disparate sources to make it interoperable?  How do we get to a lingua franca without waiting for moribund standards (think CORBA and SOA)? How can we then manage the transition of legacy information and services into this world of interoperability?

VCs have always made money at finding the ideal point of friction between the Present and the Future.  Profits accumulate in the gap between What Is and What Is Possible.  Web  2.0 is now firmly in the category of What Is. 

The only thing I can say in defense of "Web 2.0" is that it's not "Venture Capital" (from Google Trends).

Comments

[Chris Saad]

I love your quote Peter "VCs have always made money at finding the ideal point of friction between the Present and the Future. Profits accumulate in the gap between What Is and What Is Possible. Web 2.0 is now firmly in the category of What Is." - beautiful.

I agree that Web 2.0 is here but I don't think that websites are just islands anymore. We have the tools and the will to convert them into a connected ecosystem and that is already happening as part of Web 2.0. Microformats/APIs/Screenscraping - it's all here.

The next big hurdle will not be Web 3.0 - but rather Media 2.0. Helping the rest of the Media catch up.

Manual Trackback!
http://www.touchstonelive.com/blog/2007/03/web-20-nothing-to-see-here-moving-right.html

[Neville]

Here is an indication of one way things may be different going forward: 'Launch late to launch often'.

[Scott Eblen]

If you’re looking for other ways to check energy dissipation around Web 2.0, you might be interested in this visualization of the wave of interest around social networking. It compares VC investments in social networking companies to trends in the Financial Time and Google Trends.

http://www.libraryhouse.net/blog/2007/02/05/anatomy-of-the-social-networking-wave/

[michael arrington]

I think everyone's traffic is WAY up across the board. Alexa has nosedived for a lot of the web 2.0 sites in general, which is frankly probably a much needed correction.

I think the thing worth discussing is whether innovation in general is slowing. I don't think you believe it is. If you do, you're definitely out of the club.

[E.D.S.]

Brilliant post!

Thanks for this great insight.

[Ed]

I totally agree. In fact, I never really got that excited about "web 2.0" in the first place because out of all of my friends (mid 20's to mid 30's) and all of my family (whole scope of ages) no one knew what it was! In fact, most of my friends have never heard of flickr, are not really interested in being "social" online and really only use the internet in a "web 1.0" fashion.

This is kind of encouraging because it means there are huge numbers of people we still have a chance to impress with some web product. It's very easy to get caught up in the headlines on techcrunch (etc) then rush out an download some open source project and mash it up into the next million dollar business, but I'm not sure it will always generate as much interest as it does now. I hope the move from "2.0" sees online products that don't rely on advertising as their income and that we move towards generating income from paid services or selling or other revenue streams, why? Because that might just force developers into making something that is worth paying for rather than the throw away free signups to everything which people are just getting tired of... (and which most of society never bothered with in the first place)

[Bradml]

This is a very interesting concept, but the next generation of web applications are moving out of the browser, so that will bring a wave of new creations not yet thought to be practical.

My money is one Microsoft for the next 3 or so years, after which their technologies are going to become useless in the strive for cross platform usability and they will be pushed back into the corner they are currently squished into with Google.

[David Jackson]

Fascinating post, Peter. Thank you.

A reflection of the lack of innovation you discuss: many Web 2.0 businesses are clustered in the same markets, for example technology media content. Michael Arrington and Om Malik broadly compete with CNET, Nick Denton (Gizmodo), Jason Calacanis (Engadget), Yahoo's own tech content and a million other blogs. At some point the market will reach saturation if it hasn't already.

And (excellent) blogs like Tech Crunch that focus on companies rather than gadgets are reminiscent of The Gilder Report in the last bubble. If the financial markets implode, the excitement will drop out of the startup market very, very fast.

The challenge for anyone not playing in the "Web 2.0/Tech Media" market (as defined by its main proponents) is that it's hard to get buzz, because too many people use Alexa stats and number of RSS subs to measure a company's success. After all, what else is there to use?

But Alexa is skewed to technology and therefore under-reports stats for other sites. For example it shows Seeking Alpha's most popular sector as Internet Stocks, but in fact our most popular sectors are Energy Stocks, Retail Stocks and ETFs. And many people still haven't heard of RSS. We send over 300,000 emails per day, and most of our readers want the info on their Blackberries and by email, not in an RSS reader.

[Mat]

Peter. I agree that the easy wins seem to have been.... well, won! In consumer services at least.

I still think that there are fresh tracks to be had in enterprise services, especially for processes that span organisations.

Having said that, we will no doubt continue to be surprised by how many "obvious" web 2.0 services are launched and become huge in the next few months and years - I call these "WhydiddnIthinkofthat 2.0".

[Mike Volpe]

As a member of a startup team, I could be scared by this. But I actually embrace it.

Having lived through the first dot-com boom and bust working at a couple startups in San Francisco, I think it is good that people are coming back to sea level, especially since valuations and expectations did not rise as high this time, so they should not crash as hard either. There are a lot of companies building good products that bring value to their customers and the customers pay cash money for this value. And those companies that are creating and capturing value get totally lost in the web 2.0 marketing blitz and blogging frenzy of all the social networking websites and Digg-clones.

So, thank goodness we're coming back to reality. Maybe now people will not think I am crazy for joining a company that sells hosted software to businesses rather than a social networking website for left-handed golfers.

[Paul Forster]

Web 2.0 related jobs have also been on a tear. Indeed.com has about 2,200 jobs in its index containing the term. Here is the steeply rising trend:
http://www.indeed.com/jobtrends?q=%22web+2.0%22&l=

It will be interesting to see if it continues rising, plateaus, or falls in the coming months.

Paul

[Mukund Mohan]

Peter
What's your thought on the alternative position going around that some of these Web 2.0 companies (non VC funded) are lifestyle choices for some of the founders and will be around for some time regardless making a small profit and chugging along?

[Steve Poland]

I'm excited to see the use of Microformats more and more -- that'll help transfer info between sites (to an extent).

[Peter Cranstone]

We've done some innovating.

We solved the problem of adding a GPS signal to the browser data stream. Now you can do local search based on GPS location. Not very Web 2.0'ish however it's the first time the problem has been solved (inside the browser).

The simplicity of the achievement lies in that it reduces the friction involved in mobile search. The Search engine now has Location to use to drive context. The other part of the innovation is how we did it. We figured out how to inject the data into the HTTP header request (not a trivial task). Once this problem was solved it's easy to figure out how to add more data to the stream heading to the server.

Specifically for us we added more "Who am I" information and "What" device am I on information. This absolves the customer from having to type in data and informs the web server the nature of the target device it's talking to. This is critical so that content can be appropriately formatted. Finally just to make life easy for the developers we've opened up the browser extension API's so now ANY Web 2.0 developer can value add his customers mobile services without needing to understand hard core DOM programming.

The server side module (Mod_LBS) is built around another innovation we pioneered - mod_gzip. I'd expect almost ALL of your portfolio companies are using in their IT infrastructure. It's a simple Apache module that accelerates content to a customers browser, whilst conserving bandwidth.

Mod_LBS is the first Apache module ever to put the L in Location from any connecting device. Checkout the live demo's on our web site.

Cheers,

Peter

[Charlie]

I'm sure lots of people said there was nothing left to be done in the search market before Google came around, too.

If you have a lot of sites getting traffic, and not a lot of monetization, doesn't that mean the opportunity still exists for innovation around business models? Or, have we reached the limits of human creativity around business and are just destined to collapses again because no one can think of anything besides paying for stuff or clicking ads.

[Chad Jackson]

The next wave of web innovation will be formed around the model of "web as a relational database". Read/WriteWeb recently described the phenomenon here...

http://www.readwriteweb.com/archives/web_30_when_web_sites_become_web_services.php

[Marc Beharry]

Chris Saad seems to have a good understanding of the overall picture.

Web 2.0 is a concept and the current stepping stone in the evolutionary process to the future where media is completely integrated and user-interaction becomes effortless.

I personally enjoy seeing small innovations emerge one-by-one, from all types of people.

VC's need to keep an open-mind and remember technology is still in its infancy.

[Joe Duck]

Very provocative thoughts Peter. I don't envy you trying to pick the few gems from an ocean of mediocre projects, usually run by very clever and enthusiasic tech folks with business disabilities.

You seem to suggest otherwise, but I'm wondering if the next wave of innovation may need to come from outside the bubble box of Silicon Valley. When I'm down there if often staggers me how insulated many of the folks are from the 99.9% of the people who use the applications they develop. Microsoft reaped huge benefits from this "tech priesthood" status but those days may be gone.

[RYK]

well I think we have just about seen the tip of the iceberg as far as browser based applications go. Web 2.0 was about both building user to user interactive applications on the browser as well as user get user marketing.

Above all web2.0 showed that we don't really need the OS anymore, its all about the browser. It marked the end of the release of desktop applications.

Most web 2.0 applications so far have been low tech consumer applications, fun kind of stuff. Now I think more high tech applications AS WELL as business applications will now be produced pure play browser side.

[Seth John]

Compete.com shows exactly the opposite trends. According to their data, all three of these companies have seen traffic rise since 2007. What gives?

[Sean Tierney]

Peter, agreed that most Web 2.0 projects are now some copycat permutation of a social network / digg / video sharing clone. How about this though for a technology to raise some eyebrows: the ability to offer SaaS applications only delivered on-site within a company? All the convenience advantages of SaaS with none of the privacy and connectivity drawbacks hosting them remotely...
We just built it -> http://www.JumpBox.com

Sean

[Laurel Papworth]

Web 2.0 is cheap - as you pointed out - precisely BECAUSE the internet has come of age. Innovators don't need big money. Why get involved with Angels when mum and dad will put a hundred grand in? By the time a venture capitalist has heard of it, it's all done and dusted.
If VCs aren't hearing of great projects it's because they are schmoozing with the same-old same-old entrepreneurs. Go hang around a WebJam evening or similar. At WebJam, we give 15 presenters 3 minutes each to do a show and tell. I never see (Sydney Aust) VCs there, which considering the calibre of working prototypes and newly launched products and services, is amazing. Yet I hear complaints all the time from VCs that they have money in their pockets but nothing to spend it on.

Web 2.0 innovators don't know how to get to the VCs and don't know why they need to. The general impression with young innovators is that VCs only invest in each others projects - one of the reasons you see the same faces again and again is because those guys know how to open the door. Another impression, probably correct, is that venture capitalists only invest in projects with *large* quantities of money. But there's no need to build a Netscape from scratch - the tools are there now, its a matter of innovating on top of Web 1.0.

And yes, the innovations ARE out there. Perhaps Venture Capitalists need to innovate too - after all, a Web 2.0 savant would probably look for a Citizen Venture Capitalist solution, similar to Citizen Banking (Prosper, Zopa). Anything happening in that area?

[screenwalker]

Excellent post.

Nevertheless the first thing that came into my mind when cross reading the article and looking at the charts that it's a bit like "Elliott Wave for VCs".

I did read it again and I do agree with your point of view regarding the web site examples (without Wikipedia) you're pointing to. Those might have just been riding out the "wave" a bit too long and will now start to share the path of many early blog writers that did not successfully commercialize their position or moved out of a (time-limited) niche.

But I'm confident - please forgive the comparison - that those like in the late 1990s who did find new solutions that are actually disruptive / innovative and have a real commercial potential (read: they make money also longterm) will succeed when what is now called Web 2.0 will hit the Enterprise desktop. There are a few players moving towards this and those are not mentioned here.

One should also not leave the overall change of the IT / IS Industry outside of this equation meaning the struggle to reposition itself that many major players will face over the next years. The spectrum here ranges from media/consumer products at one end over software services and new enterprise architectures to Software commodities at the other.

Overall I believe we will see a new breed or type of vertical as well as horizontal solutions and systems replacing today's landscape mid-term. If the so called web 2.0 does away with the monolithic players and increases the benefits for the buyers of solutions this would be quite something. But I believe its just one step within a transition that more likely will last a few more years.

And when looking below the surface it becomes clear that such an environment is not very beneficiary for VCs that are only looking for short or mid term (<5Y) exit strategies or simple models of return.

[srini @ StickerNation.com]

if web 2.0 is so "over", why can't I code it then ? why do i have to wait while pretentious snobs like most of those listed in the recent business 2.0 "next net" piece get treated like rock stars for very boring "innovations" such as a new way to text message all of your friends at the same time, ooo ?

no, web 2.0 is still in its screaming, boring infancy. any punk rocker could outcool any of the web 2.0 geeks, but this stuff isn't easy to code ourselves yet. i'm thankful the technologies exist, they look awesome and seem to work great. i want them to be so mainstream that i can cut AJAX apps and code PHP forms in the next version of Dreamweaver, but i would imagine that might take a while. For now, this incredible set of technologies is still in the hands of the self-appointed "digital elite" of my generation, which is why the ideas you have been subjected to suck.

the point of the TIME article was to underscore that APPLICATIONS aren't cool; PEOPLE are. it's the PEOPLE-CENTRISM of services like Myspace and YouTube that make them worth their audiences' time. it's the opportunity that Amazon turns up by not making its site the obviously-most-fun place to hang out online, and it is the opportunity that i intend to embrace. Give great technology to gadget-crazy yuppie kids and they'll churn out infinite pabulum every time, like monkeys trying to crank out Shakespeare.

The folks behind YouTube and Myspace are obviously real people and not mere yuppie automatons; you can tell by their PR, just like you could with the Google kids. They cared about people and built them something neat that let them do something new, and people started caring about them back. Both of these services took the "open source" model for its spiritual insight and applied it to their communities. Their very names - MYspace, YOUtube - suggest a oneness with their audiences which is to be applauded. Other firms who put their technology before the people it is meant to serve are doomed, or at least ought to be sold to some unwitting behemoth quickly before the hype dies down.

[Steve Morsa]

Right you are, Peter...

So much "video this" and "social that"...here a digg clone, there another mashup...

So how about something completely and truly different...say, a new form of advertising (paid match) where companies will--once available--be able to quickly and easily (so SMB friendly) select and bid directly on the demographic and psychographic traits and characteristics (keytraits) of their most desired customers...instead of problematically on the words we all type into search boxes...

...and hey; like paid search, it'll even have a nice revenue stream (since that's it's sole purpose).

Call it PPC 2.0 if you wish; just please don't call it Web 2.0...