3 min read

Web 2.0 Business Models

Today’s Web startups are not entirely unlike their dot.com predecessors when it comes to the way they are thinking about making money. The differences for “Web 2.0″ type companies stem not from their preferred business models – models that are very similar to their dot.com counterparts – but in the forces influencing the implementation of those models.

John Battelle made the case for Web 2.0 inaugurating the second coming of the web, the building of a better web (or more aptly, better Internet and web businesses), versus it representing an impending bubble. In his NYT op-ed piece (free registration required), he identified a very different set of variables, which are shaping the progression and development of Web 2.0 companies compared to the dot.com days – more broadband connections, low start-up costs, better search, and lack of IPO pressure.

These factors have powered a number of successful Web 2.0 companies, where as Battelle notes, Web 2.0 is in some ways simply a new way of approaching business. Today’s influences lead to an important distinction. While many of these startups still hope to be snatched up by the likes of Google or Yahoo!, those with the right approach don’t need to be – they have viable revenue streams. Interestingly enough, that makes them even more desirable as potential acquisitions.

There are mainly two Web 2.0 business models today, one based on technology and the other on network effects. Both are closely related and in some ways, rely on the other for true success.

Technology Focused
The technology business model is one primarily based around innovation, offering a compelling value proposition not available elsewhere. These services are extremely useful and can be fully utilized without any investment on the part of a user. Bells and whistles, however, are only available as premium or pro upgrades.

Take Flickr’s Pro Account or SkypeIn as examples. These revenue streams are based on a pricing point that is reasonable to a critical mass of power users, who in effect ‘pay’ for others. It is important to observe that in certain cases of the technology business model, such as Skype, network effects help drive both the adoption and value of the service.

These models also enable the possibilities for partnerships, where those such as FeedBurner can leverage their technology to help manage content delivery for papers like the Houston Chronicle.

Network Effects Focused
The network effects business model is one primarily based on user base and user interaction. Like its counterpart, technology is key for this model but it is not the focus. Instead, technology is important as an infrastructure tool, facilitating the business models of these companies.

Of course, in any network effects business model, the idea behind Metcalfe’s law comes into play – the total value of the service is roughly proportional to the square of the number of ‘customers’ utilizing the service. So for MySpace, if Suzy Q could not connect to Betty B or John S but might be able to do so on another network, she might leave.

Community or network content approaches apply both with MySpace, where the ‘content’ is the thousands of user profiles and in the case of Gawker, where their community content is a network of blogs that attracts high volume traffic and readership. In the latter example though, Gawker can do something in addition to the contextual advertising that MySpace does, they can syndicate their content to third-parties such as Yahoo!.

For those that can sell or syndicate content (of which, MySpace and social networking sites cannot), tightly integrated are open APIs that enable mash-ups. Having others build useful applications on top of their content increases its value. If Google, Amazon, or Craigslist, would charge even a nominal fee for access to their data, they would make a killing. Such a change may not be possible at this point but could be an option for others who pursue a network effects business model down the road.

Of course, the web is still evolving because from my perspective, Web 2.0 is a movement and not a demarcation point. But if you think about many of the new companies out there, chances are they would fit into one of these two models.

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