April 3rd, 2006
Web 2.0 Feels Good, But Where’s the BUSINESS MODEL?
Nathan Torkington likes Doc Searls’ conception of Web 2.0 as a “morality of generosity“:
We give. We are open. We love without expectation of reward, or even accounting. (In fact, when you bring in accounting, you compromise it.) Think about how we give to our spouses, our children, without strings. It pays off, too. But that’s fundamentally not what it’s about.
I hate to be cynical, because this really tugs at the heart strings, but WHERE’S THE BUSINESS MODEL?
Doc also describes a “morality of self-interest”:
This gives us “owning”, “domination”, etc. The Old School. Industrial Age shit. Still prevails in many business plans that are just for killing other companies.
In all sincerity, I really do appreciate the earnestness of Docs’ vision — he’s a good guy, and I wish there were more like him.
The problem is that for-profit business is about self-interest — it’s about making money for shareholders — that’s how capitalism functions. If you want to be “generous,” form a nonprofit and develop a mission statement — maybe the Times will write a story about your “purpose-driven” efforts.
But I’m with Paul Kedrosky on purposefulness as a business trend:
The market here has moved faster and along a more unusual path (community-driven companies) than competitors could respond, so we’re confusing a short-term market dislocation with a trend toward “purpose-driven” companies.
If some people want to use Web 2.0 principles to make the world a better place, that can only be a good thing, and they have my full support.
But from a cold-hearted business perspective, other than Google, there are few if any companies that have figured out how to use Web 2.0 principles to increase profits.
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We are moving towards a period on the internet where only a small number of companies control the vast amount of revenue that is generated in any one area of service offerings. We are also at a point were the likelihood of competing on a revenue basis with any of these large corporations that control most of the key areas grows smaller by the day. If one were to start a business that could possibly be replicated by any of the existing quasi monopolies one would find it very difficult to raise any investment capital from traditional institutional sources. Indeed most of the institutional investors that one would seek out would of course be looking for a return on their investment in a short period of time. This return on investment is usually expected to take the form of an IPO, or an acquisition.
Because of the current situation that sees a handful of companies dominating most internet technology markets; many investors would see any new entrant as a high risk. Most of the quasi monopolies could easily replicate any new technology, and because of this would more than likely not want to acquire any new entrants.
The lack of a market for acquisition will and has led to a shrinking amount of companies that have the financial ability and needed market traction to enter the stock market, and thus return a financial gain to investors. Many times a pending IPO is the prime mover in the acquisition of a competitor by a larger corporation. The acquisition allows the purchaser to acquire the company at a much lower possible price, and it also prevent the company being acquired from attaining the needed capital to expand, grow market share and compete.
While noting the above argument It is interesting and important to realize that the current scenario is not one that is new. Indeed it has played out in history before. One need only look at the old world media industry to see how market consolidation by a handful of quasi media monopolies has led to a lack of investment that would lead to competition. The main difference in the scenario above and the current one that exist in the internet business sector is that the old scenario of market domination, and consolidation has been super imposed as a belief model in an space that it will not fit.
Investment in the previous era of the non internet technology economy was needed to hire people and to purchase the need machines to do the job. You could not create a competing news paper without writers, presses, and distribution. One of the key barriers to entry was the cost of equipment. Because of technologies and in particular the internets evolutionary and revolutionary nature the old world economic barriers to company creation no longer exist. The cost and time that it takes to create an application are so small that the creator does not need to worry about the bottom line or break even points. There need not be a profit motive to create a compelling internet application. Just as an artist paints out of an inner drive to paint, a application developer can create because of a very similar inner drive. I believe that this will create a situation where the current quasi monopolies will ultimately fall to the mass community of application developers that will and have become creators for their own needs as well as for others. Because they have very small over heads and tend to be self funding thorough full time employment, they will be very difficult to compete with. They have an open distribution channel; they have access to low cost creation tools, and they are self funded with their own capital. The large corporations that are currently in the market must support large staffs as well as the expectations of investors that expect profit. They cannot compete against the many no cost and open competitors that are now entering and will continue to enter the market.
It will be seen that taking the revenue possibility away from potential competitors in the evolutionarily and revolutionary platform that is the internet does not decrease entrants, but increase entrants that cannot be competed with on a market share and thus a profit basis.
This kind of paradigm shift was seen early with the struggle of traditional newspapers losing classified readership to online creators that provided the same service at a low to no cost. The new entrants did not need presses and had an open and relatively free distribution channel. The newspapers had to sustain profits to support their existing infrastructure of men and machines, and in most cases because they were public companies had to return profit for investors. The newspapers were slow to go into the online classifieds market because they were under the assumption that for any of their online competitors to continue they would need to make large profits. They also viewed the internet in an old world economic framework that postulates that business are only created and survive when revenue can be generated that makes the endeavor profitable. Once the newspapers did react they discovered that they could not compete or gain any market share from the many classified advertising applications that now existed. Most of the existing classified applications have very little overhead and are not motivated by going public or large profit gains. Most do not have to support large machinery infrastructure or large numbers of employees. Because large profit is not the motive, the newspapers cannot compete.
Newspapers and other media are now seeing this same pattern with blog content creators. The blog creators have low over head and low or no profit expectation and an open distribution channel. Because of this newspaper cannot compete and will eventually become extinct online and possibly the in the off line world.
We are also seeing this in other media. Radio, television and film will be the next to fall to the masses of application creators that can create applications at little to no cost and expect and need low or no profits to keep the application going. No equipment cost, an open distribution channel and users that create the content.
No area of internet technology will be immune from the mass of application and content creators that now have the means and ability to create for creations sake readily at hand. Somewhere below the radar there are many competitors to Google and Yahoo and Microsoft. Sooner rather than later we will see these giants reel.
What happens when you take the profit motive away? When this is done a market is created that is much wider than the previous purely for profit one. Creators begin to quickly create applications because they simply want to do this. They use the internet much like an art gallery or a venue where public speaking is allowed by all members. The new entrants come into the market knowing that they may not profit and this can make their applications much more likeable by users that are no longer trapped into using an application by revenue models that often have as their goal increasing cost of switching. Because this kind of application gains nothing by increasing the cost of switching and gains user traction by sharing its service with others, users will propagate the service by creating content for it and extending it into other applications.
[…] Then a couple of blogs/articles: Web 2.0 feels good, but where’s the business model? […]
[…] Check it, yo. […]
[IMG] What I said here about business and morality has attracted a growing variety of comments, under that post and from Chris Heuer, Jeremy Ballenger, Kate,Scott Karp, Kami Huyse, Randy Holloway, Daniel Berlinger, DParmet, Hugh MacLeod, Mike Abundo and others, including Kevin Marks, who totally runs with it. Outstanding post. Same with Tara Hunt’s, which I just read.
the layers of information production that occur in Web 2.0 applications. The many media and applications that would fit into this very broad category tend to revolve around a few central principles of interaction, but the central one seems to be one ofsharing
I would like to volunteer craigslist as an example of - though admittedly not a pure 2.0 entity - a ‘purpose driven’ site that is profitable. That is, net profit compared to gross, as well as potential for profit. I mean, craigslist could be tremendously profitable, an 800-pound gorilla thundering around Silicon Valley before heading northeast to climb some buildings in New York. But they more or less choose not to in order to provide a better, cheaper, and more egalitarian user experience and service.
Why do 2.0 companies have to have a business model? Their costs are low (certainly not reflective of historical models) and their method of user acquisition is, well, alien to accepted industrial- and even computer-age norms. In my opinion, whether they try to ‘kill’ or ’share’ really depends on who founds them. If they agree with your completely acceptable take on profit. Then again, and I’m thinking on my feet here, we could be seeing the tidal flow of a new generation of idealists, similar in naivete to their aging post-hippy parents, only to see their utopian (digital) convictions ebb (over a decade) as they age, have babies, build nest eggs and worry about MySpace. Has anyone else draw a comparison between the 60s and web 2.0?
[…] the scalable business models. Scott Karp – October 12th, 2006 | Email | Print | Link | Del.icio.us Bookmark | Submit to Digg Categories: Old Media, New Media, Online Advertising, Digital Media, Google,Monetize, Media Economics, Advertising, Media 2.0, Media Value, Business Model, User-Generated Content […]
[…] J’ai ensuite rebondi sur l’article ‘What if media 2.0 is less profitable thans Media 1.0 ?’, sur Publishing 2.0, et sur ‘Web 2.0 feels good, but where is the business model ?’, qui rejoint des interrogations de Marc Simoncini dans le Journal du Net. […]