squared99

Lately there’s been lots of talk about Web 2.0, it’s failure to generate revenues, and questions on whether we are in the latest bubble. (For the record I’m going to use Web 2.0 very broadly to describe web ventures including social networks, user generated content, AJAX, etc…)

This article on e-consultancy.com is a good summary of what I’ve been reading.

I think the answer to whether we are in a new bubble is pretty clearly yes. And I think it’s incredibly easy to see echoes of the dotcom bubble reflected in the current one. Yet, it seems like all the same mistakes are being made.

Some of the worst features of the original dot com bubble are back, like – Who needs a business model? We’ve got lots of hits! Many 2.0 sites lack a definitive business model and rely on fuzzy numbers.

The buzz word back then was “hit” and this hit represented an “eyeball” and that eyeball represented ad-space. Or somehow those hits meant customers.

In the first bubble a hit was counted for every item on a page that downloaded, so that lots of graphics, stylesheets and javascript files pushed up those hit numbers. Play around with the site caching settings and you’d do even better. And so the bubble grew…

Eventually a few people clued in and set the bar at a “visit” but, it was too late, the bubble was bursting.

We see these same approaches now. An explosion of Web 2.0 sites are generating huge volumes of traffic, yet in many cases, there is no business model. And it’s pretty much admitted by owners when they use the term “monetize”. In other words, we have no idea how to make money from all these people but we’re trying to figure it out.

This bubble uses the terms “page views” and “unique visitors” rather than hits, but these aren’t necessarily a better measure. Again people are relying too heavily on ad-revenue as the core model.

No doubt lots of traffic is a good thing but the volume of traffic needed to generate enough ad revenue to cover costs needs to be massive. Even the big success story of Web 2.0, Facebook, is not generating significant revenue (let alone profit) in relation to its traffic numbers.

Numbers Game 2.0
So it’s all about the numbers. And you need to know how to read them and what to ask.

“We have millions of page views!”
Page views is dangerously close to the old dog, “hits” and it’s almost irrelevant because of some new interactive techniques used in Web 2.0. AJAX approaches in particular can load multiple pages asynchronously when a visitor opens a single URL. Those AJAX loaded pages can even be loaded over and over if you have features that auto-refresh on the page. So let’s just be careful about page views.

“100, 000 unique daily visitors!”
Great! What is it weekly? Monthly? Yearly? How many of those are new or returning? What was it 6 months ago?

The immediate impression is 100,000 new people visit the site every day, but they could be same audience returning every day. Even the monthly number could be very close to the daily number. For example if the site got 110, 000 unique visitors in the month that’s not as impressive as saying 100,000 daily. This daily number leads you to assume they get 3M unique visitors a month which may not be true.

However, an active audience of 100,000 loyal visitors can be a fantastic thing. Often those loyal visitors are called “members” and if they are visiting the site every day the service is onto a good thing! But we still need to ask about member behavior and really nail down what the value of that member is.

“We get 4,000 new members a day!”
Members: What do they do on the site? How much do you earn from each one? How much do they spend? How much did it cost to get that member?

We still have to careful with the term “member”. It is incredibly relative and depends on what the “visitor” had to “do” to become a “member”. Many sites set the bar extremely low, by just asking for an unverified email address and a password. Bingo – they’ve got a new member. And that’s pretty easy when they’re using the favourite tactic of the moment – “Sign up now and get free stuff!”

Filling a space with lots of people with the promise of free things does not prove a business model. By offering free beer I could probably get a lot of people to sign a form and then come to my free kegger in a warehouse but, I’d still need to find a business model to earn money from it. To get someone else to invest in my “free beer plus empty warehouse idea” I’d need to present a profit earning business model, market opportunity analysis, etc… But on the web it is OK to shoot first and ask questions later.

Make a Better 2.0
It’s not just about traffic. If you have a business model you need less traffic to generate revenue. Your growth will not be as steep or explosive, but as membership steadily grows so does the revenue.

It really comes down to starting with a business model and building your product and service around it – not bolting it on when you’ve got lots of traffic. Once you do this your members will bolt – they didn’t join your site to pay for anything. They go to the empty warehouse offering free beer that’s right next door. That’s the beauty of a community. They will remain loyal and be your greatest advocates as long as you all agree from the very beginning where your site is headed.

Reality 2.0
It is ironic. None of these massive sites are generating enough revenue to be profitable. Yet traffic is still used by VC’s as a benchmark for investment. What the???

Just like the original bubble there is a focus on traffic and not a business model. Unless a start-up presents explosive traffic growth, it is hard to generate VC interest.

And who are the 2.0 companies that get attention in the media? The one’s who got investment because of their big traffic. So of course we’re hearing that 2.0 is failing. It is. Without an underlying business model you’re in trouble.

Over the next six months the inevitable shake down will happen. And 2.0 sites with steady growth, loyal members and a business model will rise to the top.

Phase 1: we collect underpants. Phase 2: ??? Phase 3: Profit!.
This article was written in 2001 yet how familiar does it sound? Are we in a bubble? yep.