Saturday, December 8, 2007

Kev's Thoughts On... Business Model Evolutions for the Ever-Changing Web Landscape

As I dwell more on Web 2.0 and the numerous ways companies like Facebook, Google and News Corp try to monetize users’ actions on the internet, a recurring analogy keeps coming to my mind, one that gives me a real-world perspective and helps me better understand what is going on in the online landscape.
The Internet, in essence, is another dimension of real estate and the international property market.
There are many others who have described the same similarity, so it is nothing original, but I find it important in helping me think about the next directions Web 2.0 is going. Please excuse the crude simplicity of the analogy and my layman’s knowledge of the industry as I try to make my points.

A quick recap of the Web 1.0 world finds that the era was littered with Portals, Store-fronts, Exchanges and Personal pages. Portals like ol’ AOL are like universities requiring tuition or special paid-admission malls. A one-stop-shop for information, purchases and even socializing. This is the classic fee-based or subscription-based business model.
Store-fronts like Amazon, and Victoria Secret are similar to the real-world Wal-Mart; massive business vendors that see millions of customers walk through its doors everyday. Exchanges like Ebay can easily be compared to the NYSE. Both of these kinds of properties are transaction-based, whether it is real goods and services or information. This business model subsequently is still successful today.
The personal pages or simple business marketing websites that exist on the Internet are like mom & pop stores, or residential homes. More often than not, they are built out of necessity or social fascination, often not having a business-model in mind and usually do not make enough income to even pay for itself. There is nothing wrong with not having a business model, as many people start pages for social reasons. I just had to include it as an observation of another type of online property.

So in the Web 1.0 world we see littered around a handful of paid-admission malls, universities, Wal-Mart-like vendors, NYSE-like exchanges, mom & pop stores and residential homes.

I should add that Search-Engines also emerged during this time, and with the help of its poster-child, Google, propelled the Ad-Supported business model to preeminence. However, Search-Engines are merely another type of property as well, more like a very important highway that is surrounded by billboards.

Ads have since moved from static banner ads to relevant text-based click ads, and now experimenting with contextualized interactive video ads.

Now that we are in the Web 2.0 world, where user-generated content is all the rage, how have online ‘properties’ transformed? The new web stars such as Facebook, MySpace, YouTube and LinkedIn are much more like cities. These are properties that are built on the social community, the collective power of the many, and develop their own unique character and charm depending on their constituents. This is a far cry from malls, vendors and exchanges of the last era. Unlike a Wal-Mart or NYSE where visitors are attracted by the architecture and goods offered by the creator of the property, the cities of Web 2.0 attract inhabitants because of the organic ability to develop niches and community ‘flavors’. Think New York City’s SOHO or Tokyo’s Harajuku.

These online cities have begun to build their business model around what has worked best in the past, namely the Search Engine’s success with Ad-Supported revenue. The online ‘NYC’ helps pay for itself by having billboards in Times Square and the online ‘Tokyo’ has expensive advertising properties in Shibuya. So now Web 2.0 cities like Facebook and MySpace can breathe easy because it can monetize itself by placing user-specific, targeted ads in and around its site for the numerous citizens inhabiting their property.

It seems quite fine and dandy. So isn’t it a smart move to invest in building a massive social community since you know with those numbers you’ll be able to profit off the advertising revenues?
It may be, but it will cost you first. Online cities are just every-bit as much of an investment as building a real city. Just replace the construction cranes, zoning rights and subway systems with software developers, servers and bandwidth costs.
Even after all of that expenditure (in the Web 2.0 world most likely spent with VC money), it may all still be worthwhile if you’re sure you will be the next, say, Facebook.

Here lies the problem: Online properties are extremely transient.

In New York, Tokyo or anywhere else in the real world, inhabitants must either buy or rent property, and usually the payment for only one property is all anyone can afford. Not so online. A netizen who has been around long enough likely has a space in several social network properties simply because it is free to sign up and maintain. Those that love the online equivalent of NYC’s Upper East Side and Tokyo’s Akihabara can online, actually have a place in both communities, and another place in Shanghai, Dubai, London and Moscow for that matter. It’s almost like the ‘golden horde’ effect, coined by Thomas Friedman as he described the movement of global investment capital flows. Like so, netizens will quickly migrate to the next new and coolest community, because the financial costs are nil and the social drivers are everything. And while maintaining a space is free on most online properties, value is not derived by how many open accounts a Facebook or a MySpace has. A site’s value is instead derived from the share size it can grab of the only thing that is finite to a user: her time.
Can you imagine if one year Disney World was full during the summer vacation season, but the summer after it was completely deserted because everyone went to the new Universal Studios that opened across the street? Or going back to our analogy of NYC, if in the course of a few years all its millions of inhabitants migrated to San Francisco just because it became more interesting?
Online properties are extremely transient. It wasn’t so long ago that Friendster was the place to be, or Xanga. And for those that can remember just a few years earlier, Asian Avenue or Black Planet?
Suddenly the Facebook or MySpace or YouTube doesn’t seem like such valuable property anymore. The only reason why the real Times Square is one of the most expensive properties in the world is because people can guarantee it will be trafficked by millions day-in and day-out for many years to come. Even Google, arguably the most trafficked and valuable property online does not have the same level of entrenchment and therefore cannot stay still. Google’s value will immediately diminish if it misses the next revolution in search or even lets another start-up be the first in the arena. And that is a real possibility. Just look at Yahoo or MSN not even ten years ago. Whether its Semantic Web or something else, all the online properties in the Web 2.0 world must find ways of keeping user traffic in their sites. Only then will the ad-supported business model stay afloat.

Enter Widgets & Apps. Online social communities are continually allowing open APIs for third party developers to create interesting sociable programs for netizens to use within the online properties. These Web 2.0 cities encourage people to build interactive attractions within their property to make it all the more interesting for online inhabitants to stay. In my eyes, Widgets & Apps are like the Starbucks of the real world. People just can’t get enough of it, and there is one on every corner of every block. I believe we are entering an age where the Widget/App will gain more and more importance and influence in the online world. As more and more developers shift from trying to create their own social community to creating the next great App, more interesting, and powerful products will appear.
While this might be good news for online cities, since all of these Apps will exist within their domains and work to keep inhabitants from migrating, there is one fallacy. We have seen and heard of Google’s OpenSocial, an initiative attempting to standardize development protocols so Widget/App developers can easily make their software compatible with any number of participating online communities. The problem for the online cities like MySpace, LinkedIn and Ning is that pretty soon the Apps that are supposed to make their property unique and ‘sticky’ for the inhabitant will be available in every other online city, completely neutralizing any ‘social advantage’ one online property would have over the other. Just like how you can find a Starbucks or McDonalds on almost every corner in New York or Tokyo, so too will emergent App makers like Slide, iLike and Google Maps be found on every single social network in the world.
So while OpenSocial may have an adverse affect for Social Networks, it will at the same time be a catalyst for the App’s continued rise to stardom. These Widgets & Apps are still property mind you, even though they are at present still trying to figure out the right business model. As of now Apps are still compulsively obsessed with the ad-supported business model that both the Social Network and the Search Engine love so much. As a property you can think of ad-support Apps like a Starbucks on every corner giving away free coffee but hoping you’ll buy their recommended CD of the month. Or like McDonalds giving away Happy Meals hoping you’ll buy a toy.

We are now on our third generation of online properties who have survived and succeeded based on an Ad-supported business model. Will it change? Perhaps. But its hard to move an entire industry that are true believers that traffic = ad dollars. Widgets & Apps have a unique opportunity to play with their business models that social networks and search do not: These new programs are transient and user-perpetuated, almost viral in nature. They can go in and out of Social Networks, Blogs, and many other online properties of the both the Web 1.0 and 2.0 eras. And while social networks continue to shift and collide like tectonic plates, jockeying for a bigger piece of the user’s online presence, Apps will be in every one of the properties, becoming increasingly more interactive, and capturing more and more of what’s really important: the user’s attention.

As an entrepreneur what kind of property would you rather create? A New York City, or a Starbucks Corp?