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Wed 12 Mar 2008 05:58 PM

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View from the Valley: the Web 2.0 side-effects

There is plenty of capital chasing Web 2.0 ideas, but do the current crop have the means to turn ideas into profitable businesses, asks Karthik Sundaram

Say Silicon Valley and you can't be faulted for conjuring up visions of millions of dollars in venture funding, IPO, and cashing out as millionaires. At the heart of the Valley is this incredible engine called venture funding-good money that will easily (and many times, compellingly) follow not-so-good ideas. If you are familiar with poker, you know that only one winning chip is all you need. Venture capitalists are the same; needing only one big win while they fund through nine other commodity ideas.

While venture funding is tantalizing from afar, owing a few millions in debt is definitely not as attractive. There are about ten start-ups a week being funded in the Web 2.0 space. If you apply the simple economics of demand-and-supply, it is quite apparent that there are more dollars than there are ideas, and hence, we will soon see an environment that harks back to the 1.0 era: entrepreneurs diverge from solving problems to building feature-sets; and good ideas turn rare, while commodity takes over. In the end, only a handful makes it to the top, while the rest flounder in pathetic ignominy.

The Web 2.0, as we know it, is the manifestation of a dramatic change in software development and delivery process where consumers no longer even realize that they are using a product, but are intense and large consumers of the software as a service.

Even as mobile phones and PDA devices offer rich audio and video features to users, high speed connectivity and always-on availability help the consumers to use these connectivity tools to be in instant and constant touch within their circles. When devices and programs are connected to the Internet, the applications that reside in them and over the Internet are no longer software artifacts-they simply become ongoing services. This has significant impact on the entire software development and delivery process.

Web 2.0 tools have given users tremendous power: to publish, to connect, and to propagate-all without having to know how to write a single line of code.

As an outsider looking in, I am observing a few side-effects of the Web 2.0 influence:

Content is king, but could be phony:Social media tools like blogs and user-driven publishing create a new danger to the information world: that of content validation. Web 2.0 tools have made it easy for anyone to become a content producer, and this has in turn made it difficult for the reader to validate whether the content is really true. Remember the Fake Steve Jobs blog? It was a blog created by a Fortune editor, and readers came to believe the content originated from Jobs himself. With content producers growing by millions every month, repetition, plagiarism, and false information will scuttle the better good of the social web.

Where is the money?The creators of Web 2.0 applications are currently suffering a common problem: they expect popularity to generate revenue. Most applications are built for fun, freemiums do not convert into paid premiums, and consumers of such software-as-a-service do not really care if these tools cease to exist. Some of the revenue streams being promoted are:

Advertising: reminiscent of the Web 1.0 days, eyeballs are back in fashion, and advertising is supposedly going to become a strong revenue model. We know how this failed the first time, and there is really no reason to believe it will work the second time.Subscriptions: Free-to-paid-premium is another design to cash, but most applications are still catering to some fun needs, and users truly do not see a reason to cough up for a premium service. I assume that the millions on Facebook will simply cease to grow profiles on the site if the company charges them to make new friends or download a new application. Commissions: None of the applications are providing any transaction capabilities, and we do not see this possibility to happen any sooner. Context comes of age: As content proliferates, web technologies have finally managed to tame it into contextual intelligence. Unlike print media, where ads and content exist in glorious ignorance of each other (you canactually put an adult entertainment ad next to a story on faith), online content-to-advertising relationship has come of age. There are many companies that are producing tools to analyze web content on the fly, and creating granular intelligence on page ranks, content, and weights, thereby helping advertisers place their ads in relevance to the content. This is supposedly increasing the possibilities of user click-through, thereby driving revenue to the publisher, increased brand awareness for the owner, and higher recall for the consumer.

In all this, I am also seeing a unique element: as increasing number of users create profiles and build self-temples, most of the Web 2.0 applications can become powerful repositories of granular user information. Perhaps a combined Salesforce-Oracle entity will start consuming these sites for the fabulous CRM data, and eventually show a way to some money. Sigh!

Karthik Sundaram is the president and CEO of Purplepatch Services LLC, a Silicon Valley based marketing communications agency specializing in technology companies, IT services companies, and BPO organizations.

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