Web 2.0 – Profitability?

I was going to discuss some thoughts on Web 2.0 profitability, and I think some readers on this blog will be familiar with my disdain for “get the eyeballs, revenues will come” mindset (have been hurt once on that!). Am beginning to hear more and more of that again… Some entrepreneurs point to Adsense as the default business model, but thats probably not enough — do the math, the numbers are too small.

So what could be the model? One that I am beginning to develop some conviction for is towards experiences so far in monetizing high affinity communities. In an offline model, we already have experience in monetizing a Harley Davidson club, or Rotary, and so on. Some thoughts basis that:

1) The key to these communities is not the size (the key to “enabling technologies”, such as tagging, will be size), but sharpness.
2) Once you have sharpely focussed communities, what you sell on top of them has to be much higher value than adwords. Amazon’s expected “Productsense” model could be one, as also the ability to “click-to-talk” enabled by VoIP providers. Affinity driven products and services would be the key, and relevance will need to move far beyond adsense.
3) Think of this — if you had a community of Harley fans online, what would you sell to them? and how can you now take that example, and generalize the technology? I think seeds of those enabling technologies are beginning to emerge today.
4) Due to high concentration of value, the enabling businesses will not all be automated — especially, the part where “relevance” gets captured (the hosting part may be automated, as a contrast). Tagging is an example.
5) I still think there will be a mix of “interest-centric” and “user-centric” communities, and hence the ability to “follow a user” across interests could be another possibility — this is same as trying to derive user profile from content being browsed. The current intent-based-paradigm will get far sharper, and/or evolve into user-based-paradigm.
6) High affinity should imply lower customer acquisition costs, though that by itself might not be an exit driver.

So the problem to be solved is
a) What creates high affinity communities on the web (I do not think the early experiments in Web 2.0, such as myspace, are the answer)
b) How does one maximize value per member with sharpely focussed communities

I dont know whether I am catching up here, or crystal gazing 🙂 so any comments are welcome!

Alok

13 Responses to “Web 2.0 – Profitability?”

  1. Alok: You made some good points, but I am not sure if the focus on Web 2.0 as such is relevant. Web 2.0 is nothing more than maturing of the web technologies that have given rise to some new social features, opened content via RSS and several others that we all know of. From a revenue and sustainability perspective, I believe, it doesn’t matter if one calls a new company Web 1.0 or Web 2.0. For example: the guys at Newsvine “stressed” from day one – ” we are not a web 2.0 company. we are just a better news service.” And Newsvine has everything Web 2.0 one can think of. They were right in not branding themselves as 2.0 because recently Web 2.0 has come to mean simple, cool, fancy colored “features” than products that can help build a business. For any startup, the focus on the user pain point they started to solve is critical. If they did the due diligence to ensure that the pain point was a big one, and the market potential by solving it is strong then that user base who loves the service for solving their pain point can be up-sold and advertised a lot in a focused manner. Focusing on affiliate marketing driven model that ensure ads most relevant to its user base are shown and intergrated well into the website, rather than just slapping the adsense code, can deliver sustainable revenue. You also can a stronger understanding of what is working and what is not, and further optimize the ads. I am not sure if 3rd party ad networks can address this problem as the requirement may vary from customer to customer. Each company may be able to build out the best ad startegy for its specific community.

  2. Web 1.0 redefined information dessimination. Ads a special form of information dessimination became the basis of web 1.0 revenue models.

    Though transactions were transformed by web 1.0 the concept of transaction did not undergo a sea change. Same way money got transformed in some way but the concept of money was left undisturbed.

    Web 2.0 redefines the dynamics of the community. Money( or the concept of money) plays an important role in glueing the communities together and so that they can acknowledge and celebrate the interdependance. My guess(or bet) is web 2.0 will disturpt the concept of money itself. The communities and the palyers there will increasingly produce value which cannot be readily translated to traditional dollar, cents, rupees, or traffic. And with some help from technolgy, new methods of capturing the value will evolve. Reputation is just a starting point of the evolution that is already happenning.

    My bet again is the concept of arbitrage will be left untouched by the web 2.0 wave.
    Creating arbitrage opportunities between communities and inventing platforms that perpetuate such opportunities will form the basis of web 2.0 business/revenue models.

  3. Ashwin says:

    Web2.0 is going the same way as Web1.0. But hey, i love the bubble and want it back. So i am going to club all these old wine in new bottle types into a new parallel category, bubble2.0 companies.

    So here are other people talking about more bubble2.0 companies, like Dr. Chad at http://chadwilliams.blogspot.com/2005/10/web20-is-financing-bubble.html, Rajesh Jain at emergic.org

    I am already tap dancing to the bubble2.0 tune!

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