Looking for Bright Spots

While the gloom and doom has been the prevalent sentiment so far (see Part I), a few folks dared to share more optimistic views (see this post on Webmonkey, for instance). We also decided to chip in our two cents and look for some bright spots in the sudden darkness descending on the web industry. Here are a few ideas:

The most cheerful news, perhaps, came two weeks ago from Google. Following up on its long-time promise that on-line advertising fairs better in tough times than traditional ads, Google announced a healthy 31% revenue growth in the fourth quarter. This surely is a welcome sign for the web industry at large as online ads remain the monetization vehicle of choice for many if not most of its outfits. Pundits, however, were quick to point out that Google is different from the rest of the industry in that it extracts the bulk of its revenue from search advertising. The latter, of course, remains the most attractive and fastest growing segment of the online ads market. Regardless, we agree with the underlying logic that as corporate advertising budgets tighten up more money will be shifted to the Web, which in many cases provides a more effective and cost efficient way to reach the customer.

Another bright spot was a sharp increase in user activity recorded by professional social networks, such as LinkedIn and Xing. The rational here is simple – as people become less secure about employment, they take steps to improve their chances of finding a new job in case they need one. Hence, users spend more time updating their profiles and working their personal connections on LinkedIn, Xing, etc. In addition, new members from hard-hit industries join the networks in hordes. New memberships from the financial industry, for instance, have doubled on LinkedIn recently. Ideally, the networks will be able to ride the momentum, expand their value proposition to members, and create new revenue sources. This seems to be the idea behind the latest move by LinkedIn to offer a set of business applications to its users.

On the Enterprise 2.0 front, Forrester just two weeks ago reiterated its forecast that financial services firms will increase their reliance on social media and interactive marketing to attract new customers. To succeed, the firms will need to offer an improved Web experience that builds upon the Web 2.0 philosophy. Whether this trend will translate into bigger spending on Web 2.0 apps remains an open question. In another report issued on October 9, Forrester suggested that while the overall interest in the enterprise Web 2.0 solutions continues to grow, vendors should expect an erosion of profit margins due to commoditization, bundling, and the entry of traditional software players.

A somewhat related idea that has been bounced around within the distressed Wall Street IT community bets on the repeat of the SarbOx effect. As stricter regulations make their way into the financial industry (which at this point is dead certain to happen), they will fuel demand for new software compliance tools. Many of these tools are likely to be web-based, thus creating new opportunities for the vendors.

To wrap up, there is no doubt in our mind that the pendulum once again has swung for the web industry. Belts will be tightened, pragmatism will return, and a few high-profile firms may well go under. What hasn’t changed, however, is the excitement and almost unlimited possibilities that the web brings about transforming the ways people live, play, and work. So, by the time optimism returns and new ideas once again start to get traction among users and investors alike, we hope that someone out there comes up with a better name for the new wave of web-enabled innovations rather than Web 3.0.

Microsoft has traditionally been a company that sells packaged software for personal computers. However, as several companies have recently created online environments for running applications, Microsoft has quickly changed their strategy to compete with this new model (which is now often called “cloud computing”). As described in MIT’s Technology Review, “a computing cloud is made by linking together any number of generic Intel-class computers so that they act like a single large, distributed computing platform. And, an application running on a cloud can more easily scale up for larger audiences and is more resistant to failure.” This makes cloud computing economical, reliable, and scalable. Also, cloud-based applications are typically easily accessed using a web browser.

Microsoft has started small, by simply integrating several of their online applications into a common area: www.live.com. This area includes mail, messenger, and Internet storage components. Their next step will be to create basic services that others can build applications around. These services will probably be revealed in the cloud based-operating system that Microsoft plans to announce in the upcoming weeks. However, as previously mentioned, Microsoft will not be the first to provide an online application environment. Amazon’s EC2, Salesforce.com’s Force.com, and Google’s AppEngine platform already provide cloud-based environments and already have a number of applications created for their platforms. However, most of these environments are still fairly limited in what they can do.

One difference between Microsoft and the other cloud computing providers is that Microsoft will likely try to leverage its significant resources in the packaged software arena. As Computerworld reports, Microsoft envisions a setting where desktop applications are augmented by Web-based functionality. For example, people might do the bulk of word processing using desktop software and then do light editing of Office documents using other devices such as public Internet kiosks.

The Financial Times reports that many users may be drawn to the cloud model because it will enable them to pay low monthly subscription rates for applications, based on how much they use the applications. These applications will also require less maintenance from users (for example, updates will be run from the providers end) since they will not be installed on clients’ computers.

Stay tuned for the Microsoft announcement of its cloud OS in the coming weeks. If successful, it will likely change the way that you interact with their dominant workplace applications in the not so distant future.

It comes as no surprise that over the last few weeks a host of articles and blog posts have pronounced Web 2.0 dead or near-dead. As people come to grips with the fall of seemingly infallible institutions and the ensuing erratic behavior of the financial markets, they start to wonder what exactly all this means for them and their businesses. This time it was the  Web 2.0 crowd’s turn to look deep inside itself and reflect on the bleak prospects that the industry is facing in the coming years.

Since a lot has been said on the topic by all kinds of well-informed people, in this post we’ll resort to summarizing their opinions, ideas, and speculations. In Part I, we’ll review the apocalyptic projections of the pundits regarding the fall of Web 2.0 and tease out the reasons behind it. In Part II, which will appear in a few days, we’ll take a more positive note and look at a few bright spots in the otherwise dismal Web 2.0 landscape. So, let’s get going.

Part I: The Dot.Com Bust 2.0

It all started on September 27, when Jason Calacanis of Mahalo (a Web directory) circulated an essay to his email list titled “The Startup Depression”. In the essay, he predicted that as many as 80% of the currently existing VC-funded start-ups “will shut-down or go on life-support…within the next 18 months”. This was not exactly what people wanted to hear. Most were contempt with the “concerned but upbeat” attitude that ruled the latest Web 2.0 Expo in New York, but this…

More bad news followed shortly. On October 7th, Ron Conway, a prominent Silicon Valley investor, sent an email to his portfolio of start-ups warning them to expect lean times ahead and giving advice on how to weather the storm. That same week, Sequoia Capital held a meeting with its portfolio companies where, reportedly, it delivered a presentation titled “R.I.P. Good Times”. Similarly to Conway’s email, Sequoia’s message was simple – the VC funding will dry up in the nearest future. Web start-ups need to dramatically cut down their burn rate and look for additional funding sources wherever they can.

The gloom started to settle in. Michael Arrington of Techcrunch proclaimed “an ignoble but much needed end to Web 2.0” and provided a must watch video of the Silicon Valley “farewell party”. Over at CNet, a list of “endangered” Web 2.0 companies had been compiled. The list includes, among others, such outfits as Skype, MySpace, Twitter, Pandora, and Second Life (can we at least get a bailout for Twitter??? – thanks to Curtis Ferree for the joke). Jeremia Owyang offered, as usual, an insightful and to-the-point comparison of the dot.com bust of 2000 and the “Web 2.0 doh” of today. And to top it off, Harvard Business School’s Tomas Davenport beat down on the notorious inability of Web 2.0 to deliver tangible business value. “Will we have time for Second Life when we have to take a second job?” he pondered.

This list could be continued but the key point seems clear. The meltdown of the financial markets has led to the tightening of the VC financing, which it turn is about to burst the latest Silicon Valley bubble and kill off a number of potentially cool projects without a clear business model behind them. While this by no means is a cause to cheer, we agree with Rob Hoff of BusinessWeek that the Valey, pehaps, is just entering a new evolutionary cycle. This cycle will once again eliminate the weak species and free up the talent to work on projects with higher probability of survival – read, business success.

To be
continued…