Web 2.0 progress is held back by Web 1.0 business models

I’ve often wondered how web 2.0 is really different from web 1.0. Most seem to agree that web 2.0 was an evolution in which we went from portals and destination to data and interactions. Web 2.0 is about interaction, social media. Everyone connecting in one big network. Data is the currency. It’s all true and sounds great to me. But why do we then still have huge destination sites? Why is there still a battle over users, eyeballs and visitors? Why is Facebook essentially a vacuum service, sucking everything in, and letting nothing get out? Why does Techcrunch report Friendfeed has a million unique visitors? We mash data up, connect it everywhere, but still force people go somewhere to fetch it.

If you think about it, the sexiest services right now are nothing more than old fashioned destination sites with some conversation added to it. In terms of business models, nothing new there. Business wise it’s not web 2.0 but web 1.0++ in disguise. I believe that the main reason behind this is that, although technology wise we have innovated many aspects of the web and its services, our online business models haven’t evolved with this change.

Just to be sure, I’m not talking about the huge impact online business models had on offline business models (e.g. tradition print getting killed by online media). I’m talking about online business models that existed say 5-8 years ago, compared to the models used now. Essentially investors and web entrepreneurs seem to be web 1.0 thinkers. They think in terms of destinations, eyeballs, unique visitors, traffic, advertisement, CPC, CPM. All of these elements have been around in online business models for ages. Nothing new there.

As a result of this there is no fundamental revolution taking place, it is more of a logical evolution. A tiny step given the potential that is really out there. Don’t get me wrong. The way the web presents itself to us, and the endless possibilities for us to connect online, has changed our online experience considerably. The question remains though. What if business models would evolve with that technological and behavioral change? What if we would stop thinking in terms of advertisement display or cpm, and would focus on other value drivers? What if we would care less about keeping users sucked into a database, and set them free because you don’t need to hold on so tightly to make revenues? It is this ‘old school’ thinking that inhibits us from starting true revolutions. Technology wise we can revolutionize our experience on the web. Business wise we are held back and forced to take smaller steps.

One could argue it is because current web business models are perfect and need no change. But that seems  incorrect as many companies have problems creating sustainable revenues. My biggest concern however is that current (often advertised based) business models are in most cases network centric instead of user centric. By that I mean that the business model works when the network that is being exploited gets larger. As a result the company executing that business model is forced to think in network value. I prefer business models that focus on user value. It is the cleanest and simplest business model. It works out best for the user (as he gets most value), and the company (as they receive revenues based upon that user value).

But here is the catch. Since 99% of current business models are network based and most web investors and entrepreneurs are trained to think that way, we can’t easily make the switch to a user value business model. And because of that we are stuck in our own trap of web 1.0 business models and unable (yet) to unleash the full potential of our technological capabilities to create user value. We end up with more destination sites and customer lock in. Customer lock in fits really well, wouldn’t you agree?

There are counterexamples of companies that did make that switch (e.g. 37signals, smugmug) and generate sustainable revenues. But we need more leadership in this direction. We need investments that step away from current practice and take a more user-centric approach. It would set us all free and help us build a User-Centric web.

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20 Responses to Web 2.0 progress is held back by Web 1.0 business models

  1. ajag says:

    Hear hear!!

    I think the economic downturn will force people to think about this theme more. CPM and display ads are not the answer. Facebook response rates show us that. IMHO there is a bubble in CPM pricing especially in niche markets.

    Will twitters business model (when it arrives) show us how it can be done?

    I just hope the engagement model doesn’t take to long to show itself.

  2. Hi Alexander!

    You are right 100% on the questions you are putting on the table. I really wished for more hints on potential solutions, just hints not the final solution.

    There is one point that’s driving my attention these days that’s related to your statments: “Essentially investors and web entrepreneurs seem to be web 1.0 thinkers”. Maybe this is happening because we are in a hurry to make “easy money” and in such a situation taking a smal departure from the the cow path it is most efficient way to get the result. Hopefully this current global crisis will do a litte bit of cleaning of people in this space just looking for opportunities for easy money.

    It wa just yesterday I wrote a tweet: “While everybody is talking about Wall Street greediness, many are forgetting to mention the Silycon Valley technocrats greediness”

  3. felix says:

    I think that much of this stems from the notion that people don’t really want to pay for things on the web – it can be difficult for a new startup to begin with a paid user scheme. Ad driven ones are easier to digest – since free makes it easier to develop a userbase. I guess I’m wondering if it’s a business level mindset that’s keeping things where they are or whether it’s an economic fact of life (or consumer mindset, from a different perspective).

  4. @ajag Not sure if this holds true for every business, but display ads are the easy way out right now. However, it turns out not to be easy.

    @Piero I don’t know if if is greed honestly. I’m sure there are a few out there, but I think it is mostly related to the idea that free services create reach and larger numbers of users. And you end up choosing for advertisement because you do need to make money in the end. But making money just because you are forced to isn’t the right driver. You need to make money because people value your service. Big difference imo.

    @Felix This is definitely an issue. But then again, there are enough counterexamples where people are willing to pay. It’s simple. Provide a user real value, and he will (in general) be willing to pay for that value. I feel that in many cases companies take the easy way out. Answering questions on the issue of providing users real value are simply much harder😉

  5. Pat Kitano says:

    Looking at this more practically (or cynically), 1.0 business models simply leverage 2.0’s traffic building potential. Then, they layer on value-add services to their new 2.0 users. And this makes business sense. The Real Estate 2.0 sites, like Homegain.com and Trulia.com, are a good example – draw in real estate agents who are attracted to 2.0 tools for marketing purposes with a plug and play toolset, and build in subscription pricing. It seems inevitable to me.

  6. Webomatica says:

    Largely agree. I had hoped web 2.0 would have fixed more of the bugs in web 1.0. Maybe – in true Microsoft manner – there will be a renewed focus on stability – and less frilly features – in the 3.0 version.

  7. Jason, that is a cliffhanger. Now I want to know what “Largely” means😉

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  9. Macroshift says:

    Alexander:

    I enjoyed your commentary and curiosity. I suggest for one of your next blog posts you present/explore a hypothetical Web 2.0 business example/model that employs one of the possible business models you could conceive of that moves beyond Web 1.0. There are hundreds of potential examples to conjure so I don’t think you have to disclose your favorite ones or give away any trade secrets.

    This blog post is more about disclosing the fact that this gap in business models exist. You may be on to something.

    It would be interesting to see your thoughts put into the suggested example. You could then draw contrasts more clearly between the two, 2.0 vs 1/0 models to illustrate your point.

    To be fair, I offer one example of a business model that may fit your analytical intents. I would like to know if this meets your full Web 2.0 test.

    This company, CourseAdvisor was run by a friend of mine (though not started by him). CourseAdvisor was purchased recently by the Washington Post which also owns Kaplan University, a legitimate for-profit and online university. http://www.courseadvisor.com/

    My understanding of that model:
    CourseAdvisor uses unique search algorithms to find likely students for for-profit universities through interactive web encounters. The company is then paid a substantial fee for these leads by the for-profit universities, whose tuition rates more than compensate for the fee paid to CourseAdvisor.

    The targeted student is generally a non-traditional student, someone who sees that they need a degree to get ahead in their career field, but who also have job and a family to support. Traditional universities do not provide the needed flexibility or support comparatively for this massive student population (speaking about the USA market).

  10. Macroshift thanks for your comment and compliment. Hmm, don’t know if I’m on to something, have been writing about this theme many times, because I simply feel that too many startups use the easy path to eyeballs and advertisement (everyone seems to wanna become the next Facebook or Google). And that model is simply not based upon user value. It is based upon network value, big difference imo.
    Your CourseAdvisor example is definitely a good example, as is Monsterboard, eBay, Amazon, SmugMug, 37Signals, tv.winelibrary.com. There are many companies out there that go beyond the eyeballs and focused on the user value.

  11. WordPress is another good example, Flickr, if you start looking around there are many examples of working models😉

  12. Ian Hendry says:

    Alexander

    A very interesting post. It has encouraged all sorts of thought at my end so let me see if I can articulate some of them.

    First of all, we need to strip apart business models and technology models. The fact that destination sites are where even the user generated data reside is a technological issue — the internet is just a transport, the servers connected to it are where the data are. This is not a business model choice, it’s a technological fact and can’t be budged. I can’t see an alternative to this, so this model will rule until the internet really is re-invented to do things we can’t understand today.

    That given, Web 2.0 services such as Twitter enable access to the data but through a vast number of other media. This includes other websites and also client-based applications. There is still a need to go to the Twitter databases to get the data (technically), but it doesn’t require a user typing in the web address — it appears to come to them.

    The problem with this model, though, is that unless Twitter can charge for API use or an overall service subscription, it’s hard for them to make money using conventional methods, as people can use the service away from their site. I agree that conventional click-through ads won’t work so well with Web 2.0 for a number of reasons, so perhaps subscription (so-called “freemium” models) are the way forward? It’s the model we have gone with for WeCanDo.BIZ.

    And this brings me nicely to my final point, the “shake out” of Web 2.0 services. If subscription was the future then this would surely sort the wheat from the chaff, as who would be prepared to pay for fundamentally useless Web 2.0 sites? To get money from users you need to illustrate value. There is little doubt in my mind some services have been born of fad and grown from curious users signing up, without the site owners or users putting any thought — or, indeed, caring — about the long term. If subscription was the ONLY revenue model, this would surely flush the ill conceived stuff out?

    Ian Hendry
    CEO, WeCanDo.BIZ
    http://www.wecando.biz

  13. Ian, thanks for taking the time for a lengthy response. Some things that come to mind when reading it:
    – Destination might not be the right word used by me. There is always a place to go to. I meant it to mean a place that sucks you in but has no intention to let you out. Facebook and Facebook connect are obvious examples. No way out, only in.
    – Twitter should have gone for a model that monetizes the API imo. Would have inhibited initial growth and I can only suspect that is why they didn’t do it. They could have been the one service that serves them all, now they get competition form anyone that decides to build their own
    – If people would have to pay for value it would probably remove the need to produce services that provide no real value. It doesn’t always have to be like that though. The Freemium model combines the power of free with premium payed services. Good example of an alternative and working business model

  14. Joe Buhler says:

    Excellent article and very valid argumentation. The same is true in my area of interest and expertise which is online travel. It is commercially still dominated by the original players who all came on the scene in the late ’90s and are now part of what could be called the legacy system. The most innovation happens by new entrants who are introducing the much needed tools to make online travel planning – as opposed to the purchase of a service like an airline seat or hotel – a much less frustrating experience.

    It will be interesting to see how the existing players react and cope with what is a much more complex playing field.

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  17. Nick Rice says:

    The hard part is monetizing the value. If Facebook charged $9/mo, I wonder how many users they would lose? 37signals is a great company with great products, but they hardly dominate the spaces their products play (with the possible exceptions of very small niche audiences without enough critical mass to make a difference).

    Business models are based on dollars trading hands and right now advertising seems like the easiest, if not best, way to do that. I’m not sure what would happen if YouTube radically scaled back the features in a “free” version and offered a full featured “fee” version. What % of Flickr users are Pro subscribers?

    On a related side topic, I use AdBlock Plus w/ Firefox and was surprised at how many ads are actively filtered out. I have a hard time using most commercial sites like LinkedIn and all of the news sites without ABP turned on. This type of plugin is even better than being able to skip through commercials on my DVR. What impact does (or will) it have on the current ad-based business model?

    Great thoughts btw.

  18. Dan Bevarly says:

    Alexander – so how about coming at this from a different industry viewpoint and apply your hypothesis there.? Take government. Specifically govt-citz, citz-govt and govt-govt communication/collaboration models.

    While this industry, with its inherent bureaucracy and incremental approach to change, has shown its resistance to Web 2.0 solutions –excluding political campaigns, it does provide an environment that strips away the business and technology models Ian mentions.

    User value measurement here is not a revenue-based model. Look to government to provide the next generation you’re seeking. Sounds preposterous perhaps, but a number of institutional and economic factors are providing a path to follow.

    Web 2.0 is not indistinguishable from Web 1.0 here, because Web 1.0 really never got a foothold before social media put its canopy over the entire Web.

  19. Pingback: 5 reasons why a User-Centric business model always wins « Alexander van Elsas’s Weblog on new media & technologies and their effect on social behavior

  20. didier says:

    Are we connected or socially disconnected…I personally believe that technology has reduced our social capital—the
    relationships that bind people together and create a sense of community.
    Consequences include decreased civility, loss of behavioural boundaries and increased crime. We must find ways to deal with our profound loss of
    social connectedness.Even though technological advances have contributed significantly to the problem of isolation, the emphasis on individualism in today’s society has

    compounded it.

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