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Does Web 2.0 = Bubble 2.0?

Financial trends and news by Don Dodge
June 25, 2008 | last edited July 14, 2008 | Comments (10)

All booms eventually go bust

Web 2.0 will too, but, as I wrote last year, this time it will be different. The boom companies aren't publicly traded stocks like they were in 1999, they are VC backed companies. VCs are very experienced at handling risk and failure. No one is going to lose their college or retirement savings in this bust cycle.

The Financial Times has a story today "Web 2.0 Fails To Produce Cash"

Many members of the Web 2.0 generation of Internet companies have so far produced little in the way of revenue, despite bringing about some significant changes in online behaviour, according to some of the entrepreneurs and financiers behind the movement.
The shortage of revenue among social networks, blogs and other "social media" sites that put user-generated content and communications at their core has persisted despite more than four years of experimentation aimed at turning such sites into money-makers. Together with the US economic downturn and a shortage of initial public offerings, the failure has damped the mood in internet start-up circles.

Bubble Cycle - Bubbles go through predictable cycles. Bubbles emerge from the ashes of despair. It takes a while to gain momentum but eventually greed overtakes fear and we are off on another bubble adventure. Stage one of a bubble is when most smart money declares we are NOT in a bubble...it is different this time. Stage Two is more dangerous. Many people agree that we are in a bubble, but it will last another year or two, and there is still money to be made. The third stage is when the bubble has burst but most people are in denial and think it is a temporary set back. The fourth stage is when everyone agrees the bubble has burst and life will never be the same. My guess is that we are now well into Stage Two of the bubble cycle.

Advertising Revenue Math - How much traffic is needed to generate $1M in ad revenue? It all depends on how well you can target your audience and how much you can charge for CPM rates. For social network sites let's assume an average CPM of $0.40. You would need 2.5 Billion page views per month to earn $1M in ad revenues. That is 2,500,000,000 page views...how many sites generate that traffic?

Extrapolating Success - Facebook, MySpace, and a few other social network sites do generate significant traffic where the advertising numbers do work out very well. Some investors make the leap of faith that the next "shiny object" idea will enjoy similar success. In the rush to do a deal, it seems that few of them stop to do the math on what it takes to get there and calculate the odds of success. This is another one of those cases where there will be one or two winners and a hundred broken hearts.

Who do you see as the winners...and losers?

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10 comments

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Matthias Schwarz, 175 days ago

Don, I agree that this is what worked for Google. However, it also shows why it won't automatically work for everybody else: While on Google's results pages, people actually intently look for something, which means that they are mentally, physiologically and emotionally in a very perceptive, receptive and open state of mind. As a result, text-based ads stand a much better chance here to divulge truly relevant content, and both click-thru and impression-based ads pay for both Google and the advertiser. On the other hand, "socializing" web sites put people's brains into an entertainment or "don't bug me now" type of mode, so I contend that most guesstimating ad placements, just because I have a certain age or gender, are mostly annoying and irrelevant. I completely agree with another comment in a different forum here, who stated that social networks appear to be much better suited to brand-building efforts, basically old-fashioned logo and slogan campaigns. In that sense, a banner ad, perhaps?

Don Dodge, 177 days ago

Matthias, One of my favorite expressions is "The next big thing will be the old thing done in a new way". I think that is what you are saying here. Google did many things well, but the two really important things were 1)making search results more relevant, and 2) making text advertisements relevant to the search query. It was teh ad relevancy that made them all the money. Yet, Google hasn't been able to figure out how to monetize YouTube. It is just too random. Then of course there is the copyright problem...

Don Dodge, 177 days ago

Bambi, I agree on the niche site point. If the site is focused on a valuable niche audience the advertisers will pay much higher CPMs. Too many sites are random collections of user generated content that is very difficult to monetize. A couple hundred thousand page views from a valuable niche audience can make a lot of money. The key is to find the advertisers who value the niche audience.

Pierre Coupet, 187 days ago

Don, I do indeed believe that the Web 2.0 - social network phenomenom is currently in the supernova stage and that a lot of these companies are struggling to evolve into virtual organizations. Here is a link to an article, "Evolution of Social Networks into Virtual Organizations", I wrote on that subject: http://www.virtualorganizationinstitute.com/evolution-of-social-networks-into-virtual-organizations.pdf The next shiny object will be the social network--or any other organization--that is able to evolve into a "virtual organization." The reason is extremely simple and, as you have correctly alluded to, "dollars and cents." The current revenue business model for social networks does not really work, however, once they transition to the "virtual organization" business model--hence evolve into virtual organizations--it will be like opening up the revenue floodgates.

Matthias Schwarz, 191 days ago

Nice article, Don! I like to equate the Web 2.0 buzzomania with the nationwide optic fiber backbone build-out undertaken by red hot carriers at the time. Just about everything in a high-tech bubble is related to the promise of something vague... it used to be the promise of 1,000-fold bandwidth demand increases due to some magical killer apps that never materialized, now it seems to be Google and the social networks with their supposed stronghold on the understanding of behavior and interest of millions of people in the advertising-desired age range. I am not advocating that Google is going to go bust any time soon, if ever (their strength lies in their development and growth speed, having exceeded the critical mass necessary to lead the market), but I like to think that targeted (or "content") social networks like Vator.tv stand a better chance in the long run. I mean, look at it for real: The actual Google revolution happened several years ago, when we were in awe of the "how did they do it" precision of their search results compared to competitors at the time, not to mention their bold foray into having search engines read our e-mail (all supposedly to help us by pleasuring me with "relevant" search ads on the same page). Well, here's the reality: I found that certain content analysis is very magic and helpful, such as the automatic link to maps when an address is shown in the text of a message, but to this day I haven't seen the ad relevance getting any better or more useful, not to mention that I have yet to click on one. Now, back to the Bubble 2.0 idea: Maybe they have refined their search precision somewhat and cranked out a large number of widgets and gadgets and yet-unknown midgets, but have I seen any actual new killer app? Not even from Google. Have MySpace and Facebook changed my life, my friends, my responsiveness to advertising? I don't think so. Just like the Financial Times stated - I might do things differently these days but I still do the same things. I think Web 2.0 is closer to Stage 3 of the bubble cycle than its participants like to believe, and unless you start making money soon (that part Google has figured out) you might be sitting on top of the popping balloon.

MyLocator .com, 192 days ago

all those wannabe video search engines will melt. same with those music player apps. same with all those widgets. same with all the dont understand the domain name searchengines that spit out algorithm based mumbo jumbo scrap yard results. please no more websites or widgets everybody. we have enough to work with. <A href="http://www.SuggestionLocator.com" target=_blank>http://www.SuggestionLocator.com</A>

Bambi Francisco , 192 days ago

Winners? I like ad-network models, like Glam and Yardbarker. I like analytics companies. I still believe in user-generated content companies as they can capture a lot of behavioral data, and I believe we are still at the early stages of redefining media production and consumption. Re advertising and getting to 2 bln pageviews, I think the trick isn't focusing on getting those pageviews as much as focusing on getting a relevant audience, and finding relevant advertisers (as well as convincing them) to pay more than 40cents. When we get to the point that you mention Don, then the many niche sites may have a chance at making money without hitting 2 billion pageviews.

Don Dodge, 192 days ago

Relevant ads are useful, interesting, and work well for both the advertiser and the reader. The problem is relevancy. Search engine ads are easy because we have a search term to work with, and because teh user is in "search" mode looking for information. CPM display ads are much more difficult. The reader is in "passive" mode...not search mode. Second, it is really hard to match relevant ads with the content. When we get to the point where we can match ads to teh specific user..not the content they are looking at, then CPM display ads will be very powerful. Interestingly, I think the social networks and all the fun apps are really at the core, collecting attention data and profile data that can be used to better target ads to people rather than content.

David Hoffman, 193 days ago

Re to David's comments, I think the average user at this point still likes shooting the duck and enjoys clicking on the adds. I do however think that the adds creators need to be more intelligent is the way they present the product. What I mean is that after you click you should be taken to the product with no additional adds and be able to buy it. I am not a fan of adds at all and but I do see the value in the revenue that it produces. With my new venture I have had to use them to create a revenue stream other our profile packages. I do agree with David that adds are getting worse; the add industry needs to change the way they present these products and where they present them. But in the end it's becoming the same thing as regular post mail; Blast them with adds and a percentage will buy something.

David Saad, 194 days ago

So well articulated. I couldn't have said it any better except that I would add one more intangible argument to the tangible math argument that you so eloquently mentioned, and that is that the majority of people, especially those who are vocal and tend to generate content, hate ads and therefore ignore them. Furthermore, even those who do tolerate ads are drowning in millions of ads. Therefore, regardless of the reasons, the great majority of ads are ignored. So, even if websites do produce the unattainable traffic that you computed, the ads can't produce any real leads, which eventually catches up to marketers who can't demonstrate any respectable ROI.