IT Credibility -2.0

According the The Economist, while the technologies have changed, and these internet or dot.com businesses are now called Web 2.0 businesses, their business models seem to be treading a well worn path.

That path involves the provision of free services, eventually resulting in attracting enough advertising revenue and then profitability. Of course the provision of free services is a great way of building a following and market share, and crossing the chasm, made famous by Geoffrey Moore’s 1991 publication. It can take some time for this profitability to kick in and so an apt saying within these organisations may be “We may lose a bit on every sale, but we make it up with volume”. The truth for many, is that the profitability never comes in time.

As market share grows, so does the promise and investor confidence, share prices follow upwards until eventually many a business comes tumbling down. So what, if anything, will stop a repeat performance for Web 2.0?

Some Silicon Valley insiders believe that the dot.com bubble burst, not because of inherent problems with business models, but because of the limited reach of the (broadband) internet. Start-ups were not able to reach the critical mass of subscribers that would have led to sufficient advertising volume. This broadband penetration problem has largely been solved since the late nineties (in the developed world at least). This has led to innovative ways of using the web, with interactivity and interaction and businesses such as social networking sites (Facebook, MySpace, LinkedIn, Bebo, Twitter etc.), video sharing sites (Youtube), links and bookmarking sites (Digg, Reddit, Delicious, StumbleUpon) and a variety of blogging platforms. Collectively this new generation of websites are sometimes known as Web 2.0.

However, almost all Web 2.0 sites share their business models with their dot.com forebearers. Almost all of them (with the exception of Wikipedia which has opted for a donation based model) hope to eventually move into profitability on the back of paid advertising. Many have failed along this path, with the one shining light being Google.

So other than broadband penetration, has anything else changed. For instance, have advertising purchasing habits changed? Classic advertising allows purchasers to go to the big end of town and buy the best slots in the biggest rating TV channel/newspaper/radio/magazine that fits within your broad geographical based target market.

The internet affords so many more purchasing options for advertisers, and allows a more targeted approach to advertising. Purchasing of internet advertising occurs best on a micro basis that can target a range of demographic and psychographic attributes. An “old school” macro approach rarely works well. Does this make the purchasing process more complex?…of course, more work?…yes, and if you are good at it, more effective?…absolutely.

Some argue that once the current generation of advertising purchasers move on, and they release those big dollar advertising budgets to those who understand the new world then the true value of internet advertising will be uncovered.

An advertising revenue plus subscription model has worked for TV. In fact it is the only model that really does work for these media companies. So perhaps it is the right model for internet based media businesses too, and the question is not one of if, only of when.

Looking at successes, many internet and Web 2.0 businesses, or business extensions have succeeded. In Australia, Wotif is a great success. On-line hotel and airline booking is a regular part of our lives, as is internet based banking. These and many others are succeeding in creating new value. So it is not all internet or Web 2.0 businesses that we are talking about here, only media based companies. And much of the Web 2.0 hype is based around media organisations, trying to grapple with new media. And on top of that the media industry itself has always been prone to new heights and depths in the market.

So whether this is the right time or not for some of these models only time will tell. At least share prices are not climbing at dot.com bubble rate, and the volume of over-rated plays in the market is a lot less. But if you are purchasing services from these organisations, then perhaps consider spreading your risk to manage the downside should that come.