Mod4: Social Technologies

4.1 Market Opportunity Statement

Almost everyone has heard of the “social web”, or “web 2.0”, and even those that haven’t are almost certainly using it in some significant fashion without being aware of it. In simple terms, web 2.0 has transformed the web from a catalogue into a conversation – a giant step forward for the Internet’s core value proposition. The essential web 2.0 concept is that the greatest value of any website is created continuously and collectively by its users. Whether it is within blogs, wikis, FaceBook, YouTube, Twitter, or more commercial sites like Amazon, the social transformation of Internet experience is huge, irreversible, and continuing rapidly.

From a venture capital perspective, the wild peak of investment interest in social networking ventures has already come and gone. Amazing investments were made in companies with almost no business model, and amazing prices were paid for companies with no apparent revenue. When have we seen that before? After such peaks comes sober market growth and solid business integration. Wild things are still happening, but venture analysts are continuing to look hard for ways that the social web can create true value for traditional enterprises and across existing markets.

  • Have a look at the pitch for CrowdTrust Technologies, the web 2.0 collective intelligence company championed by your instructor, David Vogt.
  • Review a “web 0.0” article claiming there is no possible business model in web 2.0 (attached below by special permission of Mark Anderson).

Learning is a fundamentally social activity, so it’s natural – in fact inevitable – that the social web will transform learning in ways that we can’t even imagine right now. This is an enormously important emerging market for learning technologies. Lots of people are already talking about “Learning 2.0” (see also Stephen Downes on this subject). Many others believe that the social web will catalyze learning and learning ventures as dramatically as the polymerase chain reaction (PCR) catalyzed biotechnology and biotech ventures. The key questions are: “can these social learning potentials be proven in effective new products and services?” and “who is the customer and why will they pay?”


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Last week I suggested that there is less to Web 2.0 than meets the eye. Soon thereafter I got a call from Richard Waters, of the FT, an excellent journalist from my favorite newspaper (both are true). He wanted to talk about whether past investments had created a bubble (I said “no”), and whether Web 2.0 companies today compared with the Y2000 tribe that died on arrival (I said yes, they both depend(ed) upon line item revenues from online ads”).

In moving past the “Web 2.0 is a toolkit, broadband is a global trend” ideas, a few new thoughts occurred to me that seemed worth sharing in today’s discussion. Even though many/all of today’s Web 2.0 companies don’t make any money, are they bubble material? No, they’re hoping to accumulate eyeballs. Will they do IPOs? No, they can’t afford
to wait that long, since someone larger will do what they’re doing. So they have to sell out?  Seems so, with Google at the top of the acquiring list.

Sound familiar? If we track online ad revenues, which have replaced VC investments and IPO money as the only real source of liquidity for this crop of startups, it’s immediately clear that all (perhaps 80%) of the ad money goes to the top ten sites, several of which are just different faces
of one company.

In other words, the universe of liquidity paths available to newcos is something like seven buyers. Seven customers is, in my mind, the wrong number. If that’s all you’ve got going, you’d better call this crop “Web 0.0.”

Don’t misunderstand: I am the fellow who coined the term “River of Money” to describe the movement of up to $200B into online advertising, and I’m also the guy who lobbied the Senate to help make it happen. But I don’t want to be naïve about the near-term result: Google is getting rich, and everyone else is helping. Is it possible that our River of Money is a thousand miles deep and forty feet wide?

Even within Google, this is a problem, as almost every other non-search-ad product falters, dies, or just drifts along. Yesterday, for instance, the company’s much-vaunted free office apps were supposed to go up to $50 per year for use; cancellation (or postponement) of that price increase sends the message that the company didn’t believe customers would pay for it.

If the rest of the Web 0.0 world has seven real customers, Google has just one real revenue line. (It looks like two on its sheets, but it really isn’t.) What does it all mean? It would appear to mean that, even though the amount of money available to these companies as a group is mammoth, it is funneled so tightly by use and eyeball count that very, very few bank accounts are getting bigger in the process.

Today the AeA (formerly the American Electronics Association) released its annual report on the technology industry; let’s look at what this Cyberstates report captured, and what it missed. Tech industry employment was up 2.6% YTY to 5.8MM people; 147K jobs were added last year, vs. 87.4K in 2005. Average wage is $78.7K. Computer scientist unemployment was 2.5%, EE’s were 1.9%. William Archey, AeA CEO, was quoted in a Seattle Post-Intelligencer story: “Our own kids are not going into math and science, and we can’t hire foreigners like we did for the 50 years before 2001. This could be a disaster.”

What the report misses is where the real money is going, particularly as it leaves the “old” tech sector. I am not saying that investment in Net companies is over – in fact, this segment showed a 31% increase YTY to $1.3B invested for the quarter, the highest total in five years. But keep in mind that the venture folk have their own serious issues, like too much money raised per partner, and so are investing much more money per year, and more per company.

These trends were confirmed again today with the release of the PwC/NVCA/Thomson Financial MoneyTree report. A Seattle Times story by Tricia Duryee pointed to a six-year high in funds invested in Q1, topping out at $7.1B (in the U.S.). Isn’t it a bubble? I’d suggest that those Web 0.0 companies without a clue of getting purchased may be bubbling a bit, but the VC community has been too recently burned, and so this time round is spreading its risk across a more diverse landscape.  Dow Jones VentureOne and Ernst and Young released a similar survey Monday.

The real story? Biotechnology has just unseated software as the prime investment target, with the former pulling down $1.5B in the quarter. That’s a first, and it fits the trend IL mentioned last week, away from 0.0 vaporware into Real Things with Real Customers. Clean Tech, a new category, is up 41% to $264MM. Other winners: Energy, Telecom, Media and Entertainment, IT services, Networking, Electronics, Computers/peripherals.

And that, my friends, is why I’m calling it Web 0.0.

One journalist said to me recently, “All my editors want me to write about is Google.” Maybe those editors should be asking about all of the sectors which are outgrowing that group. Certainly, Google has a whole universe of ad-buying customers, so it has at least one operation of interest. But what of the thousands of companies outside the Top Ten? Perhaps it’s time for editors to redirect their interest to companies with more than seven ultimate customers.

Are such criticisms true of even the best of Web 0.0 sites? The Twitter site just received the Best of the Web Award from the South by Southwest conference last month. Are they, at least, making money from real customers? And if not, where is the money coming from?

Or is this just Blogging 2.0, with 20MM bloggers in the world and almost no one leaving their day job?

In a story this week at the, Jason Pontin quoted Obvious Software CEO Evan Williams on his plans for Twitter: “People seem to like it,” he says, adding that he wants to expand Twitter as quickly as possible. He candidly acknowledges that he doesn’t know how Twitter will earn money — although he speculates that direct marketing on the network has commercial potential.  “It’s sort of a classic Internet thing, trying to make something popular,” he says. “I’m not terribly worried about the business, because I’m confident we can extract value, and I’m funding all of it right now.”

He can afford to do so. Mr. Williams is a serial entrepreneur who made his fortune by selling Pyra Labs, the creator of Blogger, a popular blog publishing tool, to Google in 2003. Maybe that River is only twenty feet wide.

Your comments are always welcome.


Mark R. Anderson
Strategic News Service LLC