The Web 2.0 Deadpool
There are so many new web 2.0 websites begin created that the majority of them are doomed to fail and will innevitably wind up in a web 2.0 ‘deadpool’. Everyday there are atleast a dozen or more new sites that is intended to perform even the most mundane of tasks as long you can slap a web 2.0 logo or spin to it.
Why is everyone looking for the next big thing when the odds are so far stacked against them? Thge answer is obvous. To get rich. Virtually every web entrepreneur will sell out for the right price, and that is precisely what all of these web 2.0 entrepreneurs are doing. A group of coders will get together, create a site, perhaps apply for funding, do a little PR and then wait patiently for a buyout.
While many small web 2.0 sites have been aquired for millions of dollars, the supply of sites vastly exceeds the demand. However, since our perception is that these sites are so easy and cheap to create surely is is worthwhile taking a small gamble and building one in the faint hope of being aquired?
The above statement is false for a few reasons. Creating web 2.0 sites actually isn’t particularly cheap nor is it easy. Unlike web 1.0 sites web 2.0 sites are large and complex and involve creating user platforms. Users have to have an interface from which they can interact with a widget and or other users. In addition, users often demand customization and personalization. So not only does the coder need to provide a novel application, but he must also facilitate an interactive and customizable environment.
Hiring coders can become prohibitivley expensive, and adding additional members to a development team will dilute your stake in the company. If five programers create at site and it gets bought out for $10 million each will get $2 million, and after taxes your stake may only be $1 million. Not exactly life changing but good. However, if a VC funds the company your stake will be even smaller. Perhaps you will only get $1 million before taxes.
$10 million dollars isn’t small change though, and thus aquisitions of those sizes are rare. If the site doesn’t get squired which isn’t often isn’t the case the founders are left with a site that will probably fail. As I wrote before Web 2.0 sites thrive on large userbases and networks. Due to the ever gorwing number of Web 2.0 participants achieving the minimum sized network required for self sufficiency is very difficult. If the site doesn’t cross that required threshold it will fail. Meanwhile, expenses are mounting; advertisng and coding in particular. Without a sufficiently large network, web 2.0 sites are usually unprofitable.
In the next two to four years, we’ll notice an ever growing web 2.0 dead pool consisting mainly of sites that were created to be aquired, but weren’t. What does this mean for entrepreneurs?
1. Don’t build a site for the sole purpose of selling out
2. Create a site that is profitable WITHOUT a large nework. A simple website consisting of various articles and adsense ads can be very profitable since it costs very little money to maintain and run.
3. Keep expenses at a mionimum. Only increase spending if you have a plan for directly transforming that added expense into some form revenue & profit.
Are the most popular websites at risk for being displaced?
In some of my posts I predict that facebook will be worth a trillion dollars in valution and that there will be never be any viable competitors for facebook, digg, youtube, and myspace. Those web 2.0 social networking sites in addition to google will continue to dominate the internet for an indefinite period of time.
However, a common refuting argument is that popular websites are displaced by newer, better sites and thus once popular websites eventually loose their appeal. The most example used is how friendster, alta vista, yahoo, classmates.com, and lycos-all once dominant sites were displaced by better sites. Alta vista, lycos, and yahoo was displaced by Google. Friendster and Classmates lost signifigant marketshare to Myspace and Facebook.
So by that logic isn’t the demise of the current popular websites; facebook, myspace,google innevitable? Acuatlly such a fate isn’t innevitable. The argument that the marketshare these websites will be sized by a newer better websites is flawed. For example, yahoo mail and hotmail still have dominance of free email market for the past decade in spite of the fact there have been thousands of competitors offering more feature laden free email services. But why do hotmail and yahoo mail STILL dominate, and by such a large margin? And why will myspace,youtube,facebook, and google CONTINUE to reign for quite possibly the lifetime of the internet?
The reason those areguments are flawed and can’t be applied to facebook, myspace,youtbe, or google is because the total ‘pool’ of potential internet users has already been exploited. Ten to seven years ago the internet was still emerging and most Americans didn’t have internet access or expressed much interest in using the internet. Only a small majority of Ameircans had heard of search engines or social networking. Lyco, Yahoo and Alta Vista were able to sieze a smll amount of marketshare, but there will still tens of million of Americans who had never heard of search engines.
Then Google came along and began to capture the remaining market share that Alta Vista, Lycos, and Yahoo had not yet siezed. As more Americans went online this created more marketshare for google. Eventually google achived a large enough userbase where it reached a ‘critical mass’. At this point, google began to graw users away from yahoo, alta viosta, and lycos. Presently almost every American has internet and is aware of the existance of search engines. A new seacrh engine trying to compte with Google will encounter an insurmountable challenge of finding marketshare since unline in 1998 when google emergered there are virtually NO more internet users who have NOT heard of search engines to market to.
The same process also applies to transition of Friendster Classmates users to Facebook and Myspace. Since the virtually the entire ‘pool’ of internet users is already aware of social networking there is no more room for any new enties into that market. It would take a massive marketing budget and a superior product for any new social networking site to be able to stand any chance of displacing Myspace or Facebook’s lead.
Centralization sucks
Everywhere you turn, in the newspapers, to TV you read about the continued, unrelenting success of four specific social networking sites; Myspace, Digg, Facebook, and Youtube. You maybe have also read about how a growing number of Americans have broadband access and are engaging in inteactive, content generation in the form of crating online profiles or videos. Sounds like a great opportunity for internet entrepreneurs? Could this be a repeat of the 90’s internet boom? Maybe there is room to create a web start up capitalizing on social networking.
Or um maybe not because internet traffic has become increasingly centralized, and it’s a trend that shows absolutely zero sign of abating. The reason why Digg, Facebook, Myspace, and Youtube dominate the headlines is because 90% of all social networking based traffic goes to those sites. Smaller social networking sites include linkedin, redit, and perhaps twitter. Trying to create a social networking, web 2.0 website to compete with these established sites is virtually impossible regardless of your budget, and this is due centralization.
The reason why centralization is such a major issue regarding Web 2.0 and social networks is because those type of sites thrive on large networks, and as a network grows more people join the network, thus creating a positive feedback loop. A new site hoping to enter the web 2.0 social networking scene will probably fail because he lacks a sufficent network size intorde to trigger a positive feedback loop. Who is going to join a facebook alternative which only has 1000 members? Or visit a youtube competitor that only has a couple thousand videos when Youtube has millions?
But didn’t myspace and facebook displace the previously reining social netowrks; classmates.com and friendster? If centralization is such an impediment how were those sites able to to thrive, eventually displacing marketshare from those already established sites?
The reason why is because in 2004 when myspace and facebook were laucnhed social netowrking hadn’t grown into the phenomenon that it is today. Millions of Americans used social neworking sites before 2004, but the total pool of potential internet users who hadn’t joined a social networking site was huge. Since 2004 that pool has been draining rapidly. Facebook, myspace, youtube, and even digg have become ubiquitous. Those sites have such a large network of users that analogous to a black hole or a powerful drain they suck or centralize the total pool of internet users to thier sites.
As opposed to web 1.0 which didn’t revolve around social networks centralization wasn’t such a big issue because sites could thrive without a huge userbases. The dirtibution of traffic was more uniform instead of a winner take all pattern, which we are seeing with Web 2.0.
As these these four social networking sites (facebook, youtube, myspace, digg) continue to tighten thier stanglehold, this increases the barrier of entry for new social networking based sites. Unlike 2004 virtually every young American know knows about myspace, facebook and a majority are member of one of those sites.
In conclusion:
Web 2.0 and social networking, as opposed to Web 1.0 sites thrive on large social networks and socially generated user content (such as youtube videos).
In order for a social network to become successful & establish a positive feedback loop it must attact a large userbase from a pool of internet users. This is often achieved through marketing. Once a threshhold is reached a viral positive feedback loop triggers, and marketing can cease.
Currently the pool is drying up because myspace, digg, facebook, and youtube have most of the marketshare, and this market share continues to grow with each passing day. This is called centralization.
As a result of centralization the barrier to entry is very high (and continues to rise), and subsequently establishing a thriving web 2.0 social networking site that achieves a positive feedback loop has become exceedingly difficult and financially impractical.
Facebook could be worth 1 trillion dollars
With the recent aqusition of a paltry 5% of facebook by Microsoft for a staggering $500 million dollars the potential for facebook’s valuation is unlimited. Within the next ten years facebook could easily have a valuation exceeding a trillion dollars by capitalizing on all aspects of online and offline based media.
Microsoft was only able to sieze 5% of facebook for a whopping $500 million. What this means is that this 3-year old website is worth $10 billion. At the current rate of growth that figure could easily double to $20 billion by 2009. But facebook will easilly exceed $100 billion in valuation in four years. Here is why:
Lets assume myspace has 200 million users and will add an aditional 200 million by 2010. Since facebook has just 40 million users that leaves room for 360 million more users, assuming facebook and myspace are able to carve out equal market share. Given that facebook is worth $10 billion with 40 million users it would be worth $100 billion with 400 million users, which could be the theoretical upper limit for the number of members of an online social netowork. But the limit could be as high as 600 million which consists of 280 million internet accessible Americans, 70 million Europeans, and a combination of other regions such as Asia making up the rest.
With that many users the potential for revenue is mindblowing and unprecedented. Facebook already makes $100 million a year with its 40 million members. 400 million members would translate into $1 billion in yearly revenue ussuming facebook doesn’t add any aditional monetization.
Utilyzing its huge userbase facebook could easily create a youtube competitor as well as it’ s own payment processor to compete with paypal. Facebook could also launch an auction based system to compete with ebay, which could be facilitated by the payment system.
If facebook is able to overtake ebay and paypal that will add an aditional $100 billion in market capitalization. And if facebook is able to overtake google’s online advertising lead by offering webmasters (and facebook users) a way to monetize websites though contextual ads we could easily see an additional 200 billion in market capitalization.
Ebay, Yahoo, Google, and Amazon all have a combined market cap of around $500 billion. Fox (along with myspace) , AOL/Time Warner, and Viacom have a market total of $250 billion. Provided facebook is able to overtake these industries its final market cap will be around 1 trillion if you include the 100 billion from facebook’s orginal outlay. Microsoft is also in facebook’s crosshairs.
Facebook has thousands of developers working on custom facebook widgets to create an interactive interface where facebook users can conduct work and converse without having to use micorsoft based applications. Instead of having to spend $400 on a Microsoft Office suite a facebook user could just use an ad-enabled Facebook Office instead for free.
Other possible routes for expansion include an itunes type music downloading system, and video downloads for various TV shows.
Another more feasible path is that facebook goes public in 2008 with an IPO valued at perhaps six billion. It is quite possible that given the hype the stock could surge 1000% or more within a year ands keep rising. Each aquision and entry into a different marketplace such as auctions or payment processing would add tens of billions of dollars in market capitalization.
Does this seem far fetched? Maybe. But do keep in mind that we’re entering a new era of technology and humanity. The times are changing as we cross the rubicon to type1 civilization status. The world is becoming increasing interconnected and mega network sites such as facebook will benefit. Yahoo, Altavista, Aol, and Juno used to dominate the internet scene. What happened? They were replaced by a bigger and metter network.