Show Me the Money behind Web 2.0
by Aner Ravon

Oren Friedman is a good friend who lives and works in Vancouver, Canada. Oren is a brilliant, well rounded person who also happens to be a successful Internet professional. Oren wrote me this:

“I’ve been following the blog for a while, and while I agree with many of the technology/product views, I’m somewhat clueless on some of the business aspects of web 2.0 (the word “bubble” comes to mind).  Ultimately, you’re looking at either clicks (advertising) or subscriptions (premium accounts).  Nothing new there.  And as the ICQ folks learned firsthand, consumer loyalty is fickle at best - here today, on to the next one tomorrow.  So, other than “great user experience”, “features”, “interfaces” and so on, what is needed is the switching cost component, the lock-in mechanism.  Think eBay, which have the best lock-in mechanism all around - market liquidity.  And look at blog sites - a dime a dozen. All over the place. With search engines as the ultimate “meta directory” (brrr… shivers), very few, if any, blog sites can actually introduce switching costs into their business model.  Would social / sharing sites be any different?  What is the value of all these services anyhow?

Will tagging do the trick?  Some would argue that flickr introduces switching cost by virtue of the network it creates. Maybe.  Maybe not.  It seems to me that bubble-like thinking is around us again - “cool” services on the front-end, hoping to get bought out on the back-end.  With many ventures these days, I’m missing the “here is how we’ll make money from consumer activity”, as opposed to “here is how we’ll take money from some VC or better yet, get acquired and become somebody else’s problem….:.

Just my 2 cents.  and yes, I still prefer email to blogs, just as I prefer voice to SMS…”

Ouch! My response to these fine arguments can be long and exhausting, so I will try and phrase my interpretations in as simple way as I can. My analysis of web 2.0 and of its business sense is three fold – Macro level, Micro level and personal level. At the macro level, the revolutionary impact of Web 2.0 cannot be underestimated. To me, it represents the birth of the real “Internet SME market”. Lowering of the barrier to entry is fundamental. We sometimes treat it as a disadvantage to businesses, but that is because we’re stupid. The low barrier to entry allows the creation of big businesses from the bottom up and not only from the top down. If you appreciate monopolies you probably object to that. Another Macro level perspective can be the socio-political one. I don’t think the new hype around social networks is a fluke. The feuling of value in correlation to the growing number of community members (Skype, MySpace, Linkedin - classic examples) is only natural when it comes to bottom up building. The internet is not that different than any other scene. Here, too, people get lost between the corporate giants and feel belittled and proletarian. Web 2.0 allows people to express themselves, to try and pursue their own American dream and to not “work their way up the J.C Penny corporate ladder”. They get their back wind from belonging to a growing commuity of similar, yet different, fellow members. Take me, for example. I can write and publish my own writing and I don’t have the quit my job for it! I can also nurture my own business quietly if I’d like to and then pursue it when it’s ready. This is the psychological motivator behind capitalism and interestingly enough it is driven by social factors.

The Micro level is just as important,. After all, you asked me to show you the money. Again we see how the low barrier to entry has a huge factor. Imagine your dream were to open a restaurant. You could open your own chef restaurant, your own theme restaurant or your own fast food place. If you are somewhat successful, you can try and aim at developing your café to a chain, in an effort to get acquired by Starbucks. Nothing wrong with that strategy and many people who don’t go to business schools practice it and do well with it. Still, 90% of restaurants will shut down in less then a year because (a) that’s how the market is and (b) most people who open restaurants know very little about the business. Still, 10% will sustain a living and one out of a hundred, perhaps, will make someone or some people very rich. To me, web 2.0 is just about that.

I totally disagree about “clicks and premiums” being the revenue generators of the modern internet. Yes, they provide the bread and butter today, but it won’t stop there. There are many business models that will eventually be commonly understood and that have not yet substantiated. For example, the “coming to life” of social networks – real life events, clubs, parties, retail and trade networks. It’s already what the online dating industry is about. I strongly believe that’s only the beginning. If you ask me, THAT’s where the big money is, not in clicks and premiums. Think about eBay and Skype. I am no insider to either, but I can definitely envision a new, cost effective, voice based trading media. It’s more personal and it will definitely create new markets and improve current ones. I can’t say eBay will be the one to make it all reality but in the end it will be, and that’s huge, huge, huge.

Now, we still need to think about the factors that make a web 2.0 business a successful one. I totally agree with your switching cost point, I just don’t think it’s all that rational. What we sometimes fail to grasp is the simple fact that life is not just about money. People spend a lot; as a matter of fact most of their income to purchase goods that have less than tangible value – popularity, fantasy, amusement. The creator of a web 2.0 business is not necessarily looking to get filthy rich. Sometimes having fun is enough. Sometimes making a descent living is enough. Many times these translate to Cinderella stories. Nokia didn’t start with a strategy and neither did Coca Cola. While I don’t think this is necessarily good business practice,  I do think passion and personal preference are core factor of every business strategy.

I have drawn the following tips, which to me represent the often underrated essential ingredients increasing switching cost:
• Make it look good – people appreciate beauty more than we think. Believe it or not, but moving from an elegant web site to one that looks like crap is difficult.
• Make your users identify with you – be personal, be human, don’t be corporate. Don’t under estimate the binding power of guilt.
• Be trendy – yes, sounds bad, but oh so true. People travel in herds and they like to be at the hot places. Be cool, hire cool people, signal a cool message.
• Focus on providing value, not on making money – think about what your users would like, not about what you can sell them. Value eventually will be translated to money if you’re smart and if you provide value, they will be happy to pay. If you’re not, don’t open a business.
• Be aggressive – don’t stop with your first successful service. That’s the only way to battle switching cost. Give your crowd a reason to come back again and again and again.
• Don’t be greedy – don’t over advertise, over price, trick people to pay and so forth. 

Finally, Oren, about your preference to email over blogs and voice over SMS…dude, you’re simply old Today’s imcomers treat email as you treat fax machines – elderly respect. It works but it’s clumsy and you look for a better alternative. 

Aner Ravon
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