web 2.0 revenue models: Show me the money!

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Synopsis

This article discusses revenue models for web 2.0. It shows how PageRank is an indicator of web 2.0.

It also discusses how conventional communities are not Web 2.0. The content is a part of my forthcoming book

mobile web 2.0. This article was also posted internally in the web 20 workgroup, of which I am member.Thanks to the members of the web20workgroup for their feedback. Also, Robert Scoble commented on this article and blogged about it on his blog. You will find more links from Robert’s blog as well for web 2.0 business models. Thanks for your comments on this blog and you can also contact me at ajit.jaokar at futuretext.com

Subsequently, the article also made it to techmeme also ZD Net (athough they spelled my name wrong!) also, I have recieved emails of thanks for VCs indicating how useful the article is to seperate the hype from the facts with web 2.0 – and that was its goal!

Introduction

Last week, I was featured on CNN in an article by Grace Wong entitled Follow the web 2.0 money.

The whole subject of making money with web 2.0 is quite critical. Ironically, a couple of weeks before, when I spoke at Seoul on Mobile web 2.0, I remarked that: If I ever got a dollar every time I was asked the question: ‘Is there money in web 2.0’? I would not need a revenue model myselves! But sadly, I don’t get a dollar each time .. :(

However, that still leaves the question .. Where is the money in web 2.0’?

The next time anyone asks you that question, remind them(and yourselves) that the greatest money making idea on the web is based on web 2.0 .. We all use it. We are all addicted to it. We can’t do without it! And it’s not even patented as far as I know. And that idea is .. Page Rank . PageRank is perhaps the best example of building and monetising a hard to create data source. Let us consider why Page Rank is ‘web 2.0’.

PageRank as web 2.0

I said previously that you can view web 2.0 as the Intelligent web. In fact, if you switch the order of the seven principles and consider that the second principle(harnessing collective intelligence) is the core principle and that the other principles feed into it, then web 2.0 becomes a lot clearer. Now, consider page rank in context of harnessing collective intelligence and the seven principles of web 2.0

a) Page rank uses the web from first principles(web as a platform)

b) It uses data as its core element(data is the next Intel inside). Data in this case, is the millions of

links that it tracks

c) There is no software release cycle. Its all updated continuously and dynamically

But most importantly .. PageRank ‘harnesses’ intelligence based on user input driven by the long tail (millions of small contributions from users as opposed to a few significant contributions from ‘important’ users) and creates a ‘hard to acquire’ body of knowledge plus a means of monetising it. So, to me, PageRank is an excellent example of a web 2.0 service. So, why is there so much doubt about monetization of web 2.0? Firstly, there is a lot of hype. There is not much we can do about that except to know that web 2.0 is more mature than web 1.0(and we are all wiser as well!)

We discussed PageRank as an example of how to create a unique digital asset. In revenue terms, perhaps it is easier to tell ‘what not to do’ to reinforce the concepts of web 2.0 revenue models.. To explain these ideas in terms of familiar concepts, I have used the example of a Digital community. Most of us have, at some point, joined such a community. By ‘community’ here I mean, members have a profile, they can chat, they can rate profiles/content etc

Communities != web 2.0

So, is such a community ‘web 2.0’? My view is : No. Here’s why

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a) No tail:

Web 2.0 is all about monetising the long tail. Often, sites do not monetise the ‘long tail’ : To recap, long tail needs lots of small contributions from many users(often contributed implicitly). To do so, the site must

1) Firstly, attract the long tail(many members)

2) Secondly, capture content from the long tail in a form that can be aggregated

A membership of thousands can’t lead to a valuation of millions! You need the numbers make money from to be web 2.0(i.e. the long tail)

b) No harnessing of collective intelligence

Merely having the numbers is not enough. A site may have the numbers but may not be harnessing collective intelligence. Comments on blogs/articles don’t count unless they can be aggregated into something valuable. After all, let’s not forget that an ‘Amazon review’ is a comment. But there is a huge difference between ‘a comment on a blog entry’ and a ‘review on Amazon’. For starters, reviews on Amazon can be aggregated into ratings (Nine good reviews out of 10). Further, reviews on Amazon can be ‘discovered’ easily(for example against a specific book). Finally, and most importantly, the customer values those reviews; either in their raw form(text) or in their aggregated form for example: ‘Four stars’. The customer may not always value simple comments on a blog/site.

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c) Going for the ‘head’ at the expense of the ‘tail’, but still headless ..

When sites do not monetise the ‘long tail’ they attempt to monetise the ‘head’ i.e. the ‘few’ rather than the ‘many’. This is often at the expense of the long tail and is an attempt to apply offline model to an online world On first impressions, focussing on a few paying customers sounds like a good idea. After all, the few who are the ‘target customers’ are ‘high net worth’. They have money. So, surely they should pay a ‘premium’? The problem here is two fold :

• Firstly, the few(head) do not necessarily want to go ‘online’ ; not at prices to support the site’s

business anyway and

• Secondly, from the site’s perspective, focussing on the head is often at the expense of the long tail

This reminds me of web 1.0 days when I knew someone who was attempting to create a trading site for merchants trading in diamonds. The business plan had some ‘key features’, which included extensive security systems and some inbuilt trust mechanisms(a kind of rating/recommendation system). I don’t know much about the diamond industry : but one of my close childhood friends belonged to the Palanpuri Jain community . Their extended family have been diamond merchants for generations. From what I know based on actual discussions with my friend over the years, diamond merchants have a different mindset.

Take trust: Diamond merchants have an excellent system of trust. The best ever. They call it ‘family’!.

Security? same solution. Try convincing them that ‘web cams’ are a better way than ‘face to face’ interaction. And finally, and most importantly, try telling them how much it all costs when you have outlined the above ‘benefits’ .. This is not to say that they are technology averse, it is merely to point out that there is no value add in this situation. Years later, I mentioned the incident to a Jewish friend in London and he said that the exact same reaction would be expected from diamond traders from the Jewish community; and for the same reasons.

While I have not seen another such ‘Diamond merchant’ proposal, I have however seen many instances when people go for the ‘head’ and not the ‘tail’. I think it’s a hangover from the dot com days .. in the later half of the dot com years, people insisted that sites were B2B, whereas B2C was considered a pariah. In the same way, people have a (false) sense of security when they think that they have identified a group with ‘money’. Whether that group is interested in paying you any or not is another matter!

So, a model of targeting the ‘head’ does not quite work and it is actually contrary to web 2.0. Not only is the ‘head’ not interested in paying and may sometimes not see the value,(think diamond merchants) but more importantly; if you orient the site towards the head; you cut off the tail. For instance: if you wanted to work with a few, large customers; you would create agreements and contracts and have a high joining fee for the site. All this will alienate the vast bulk of members(the long tail).

d) Closed systems: restrictive memberships

For the same reasons as above(it targets the head and not the tail)

e) No mechanism for quantifiable implicit contributions See (b)

f) No aggregation of user feedback See (b)

g) Proprietary technology : Restricts the membership growth and restricts interaction between members.

h) A hidden agenda(slapping a fee): This is a valid web 1.0 model, but not a valid web 2.0 model. The script goes something like this: Start a ‘free’ site, invite many people. Create buzz. Build up the numbers. Insist that you are ‘free’ but plan on slapping a membership fee for premium services. This is a valid model but it is not web 2.0 in itself if there is no harnessing collective intelligence, catering for the long tail members etc

i) Too narrow: Targeting a small subset of the population(a specific country, group etc) rather than ideally, the whole world!

j) Social contributions without a goal: User generated content/social contributions are huge – but without a goal – they are just ‘noise’. For instance, everyone understands what ‘Linux’ development is. Not so common perhaps is antbase.org (‘A site that does for ants what bird watching has done for birds), which is also excellent. In both cases, there is a clear goal. Without that goal, you have noise. Lots of contribution, but no real direction.

So, what works?

Show me the money!!

Show me the money – As Jerry Maguire would say!

Here are some ideas that do

I have used information from some excellent work done by Dion Hinchcliffe and specifically one of his blogs ‘Creating real business value with Web 2.0’

a) The resurgent adverting model driven by rich media and broadband. Once dismissed, the ad

sponsored model is back with a bang! The software industry is about a $40 billion a year industry.

Advertising is worth about ten times as much and its all moving online(hence witness newspapers in

financial quagmire).

b) To re-emphasise, the monetization of the long tail is critical in a web 2.0 business model

c) Gaining control of a hard to create data source and then being able to successfully monetise it(for example: www.craigslist.com)

d) Web services including mashups: amazon.com is the best example. Currently estimated to be earning Amazon $211 million a year. The Amazon web services model ‘decentralises’ the store by converting the store itself into an open, easy to use platform.

e) Serving the large number of small customers through using the web. Examples include SugarCRM and salesforce.com

f) Give something valuable for free . This idea comes from Nat Torkington from the O Reilly web site(seven principles of web 2.0). Another way to look at it is that the successful companies all give up something expensive but considered critical to get something valuable for free that was once expensive. For example, Wikipedia gives up central editorial control in return for speed and breadth. Napster gave up on the idea of “the catalog” (all the songs the vendor was selling) and got breadth. Amazon gave up on the idea of having a physical storefront but got to serve the entire world. Google gave up on the big customers (initially) and got the 80% whose needs weren’t being met.

Finally, there is the question: Should web 2.0 have a revenue model as the VCs see it? (which is not to say that web 2.0 does not have a revenue model)

The web is a great leveller. This means, many more people will become financially richer but a it will be difficult to be very rich. With web 1.0, inspite of the boom and bust, many countless people actually made money and created a viable business(My company Futuretext itself, is one – because the web enabled digital printing (with optimal batch sizes of 500). Prior to that, you had to print litho. Litho implies a huge upfront investment and a minimum batch size of around 2000)

Indeed, PageRank is so unique that, although very common, it is almost impossible to emulate. Web 2.0, in general, is oriented to creating big winners – hence VCs will always be attracted to it because web 2.0 companies have a clear barrier to entry if they become dominant players in their sector.

Seek comments:

Image soure: The doberman http://www.fordogtrainer.com/pics/dog-harness/nylon-dog-harness/doberman-nylon-police-harness-big.jpg

Headless chicken: http://www.roadsideamerica.com/attract/images/co/COFRUIchicken2_carter.jpg

‘Show me the money’

- from the movie Jerry Mcguire (1996)