Web 2.0 Business
Models
 Ken Yarmosh
Expert
Author
Published: 2005-12-01
|
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.
Conclusion
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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About the Author:
Ken Yarmosh is a
consultant who helps organizations get the most out of their
technology investments. He works with technology users and
creators across various industries, focusing on technology
education and strategy. With over 7 years IT experience, Ken
has worked with small businesses, non-profits, federal
agencies, and multi-million dollar companies. His online
efforts include acting as the Editor for the Corante
Technology Hub and authoring the TECHNOSIGHT blog.
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