Bursting of Web 2.0 Bubble Unlikely to Cause Damage on Web 1.0 Scale

CNET’s News.com provides an interesting feature article today as industry movers and shakers — along with many ambitious aspirants — prepare to get together at the third annual Web 2.0 Conference in San Francisco.

The article quotes a variety of industry players, including entrepreneurs, investors, and market observers. A consensus emerges that, yes, exuberance over Web 2.0 is forming a bubble-market mentality that will inevitably burst, but that the resulting damage won’t be on anywhere near the scale of the first Internet bubble.

While there are similarities between this bubble and the last one — too many companies and too much money chasing limited market opportunities, a surfeit of marketing exaggeration and hyperbole, recruiters’ irrational behavior, and so forth — there also are significant differences.

Many of the entrepreneurs involved with Web 2.0 went through the Internet boom and bust, and they learned from their experiences. The business model with many of today’s Web companies is more than an afterthought. What’s more, the costs involved with starting a company today are much less than the money required to get a company off the ground during the first boom.

As the News.com article notes:

New businesses today have access to free open-source software, relatively cheap hardware and powerful development tools. With more Web sites providing programmatic access to outsiders, developers can also build mashup applications that combine information from multiple Web sites.

Add it all up and the money and effort to launch a Web company has gone down substantially, compared to only a few years ago–a shift with implications for both entrepreneurs and their financial backers.

Naturally, this development is changing the investment philosophies of at least some venture capitalists, which are recognizing that earlier, smaller plays are required in the Web 2.0 world.

The question remains, though: How much of Web 2.0 is real and sustainable? I think some of those quoted in the article are right when they say the Web programming and technology innovation occurring today will prove beneficial and useful to enterprises and consumers well into the future.

Still, I also believe that most Web 2.0 companies are doomed, especially the expanding plethora of companies chasing consumer-oriented markets. A few winners have emerged already, such as YouTube and (for a while, at least) MySpace, but the ratio of winners-to-losers will not be compelling from an aggregate investment standpoint. Chasing the caprice of consumers, whose most valuable commodity is time, is always a dangerous game, as various youth-oriented social-networking sites are discovering.

As for Enterprise 2.0, practical innovations are accruing and more value will be delivered. Web-based applications, or software as a service (SaaS), are becoming more compelling and will gain further favor with businesses. Real money can be made here, and business metrics, such as cost savings and return on investment (ROI), can be applied. Salesforce.com and others have demonstrated that the market can be lucrative.

Even in the enterprise, though, opportunities are limited. Incumbents and other major players will see the opportunities and they’ll leverage their existing enterprise assets — as Microsoft, Oracle, and IBM are doing — to ensure that they get a piece of the action.

As always, investors in startups must focus on business fundamentals and market realities rather than be swept away by euphoria and hype. Many useful services and technologies will arise from Web 2.0, but only a few of the companies being born today will survive the tests of the market and of time.

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