Web 2.0, The New Old?

August 21, 2006

There seems to be at least 17 startups taking on the A-Team of the desktop applications, and possibly another hundred thousand teenagers creating their own little Web 2.0 application-du-jour in communities like entrepreneur extraordinaire Mark Andressen’s Ning.

Since the software-as-a-service business model is mainly only attractive for smaller to medium companies, why are there so many web 2.0 applications popping out everywhere?

I believe the catalyst has been a generational change. Web 2.0 is not anymore an emerging phenomena only found among geeks playing with XML, and asynchronous HTTP requests. The generation of young adults in their early- to mid-twenties have grown using the internet as a routine. They learned how to collaborate online using Yahoo!, how to use Google to find the solution to their assignment or homework, how to download MP3s using eMule, etc. and most importantly how to skim through the rubbish to get the very simple: content. The internet is just one more thing they use in their lifes, just like a phone. Given that they have grown on it, doing homework and making friends on the web, it is the collaborative aspect of the internet what possibly makes software-as-a-service interesting. It's Wiki-Extreme if you let me put it that way.

Okay, so you have a market. You have entrepreneurs. How do they meet each other? Most of the startups doing Web 2.0 services will fail (I hope this is not a surprise!) and only those that are able to see beyond the collaborative, minimalistic aspects of the software-as-service business model will be able to survive. Simple usability, Apple-like design and aesthetics, and a beta-always badge are requirements to be in the Web 2.0, but fulfilling functional requirements are at the end of the day what makes an application work. Collaboration is fine, but not all business processes are suited for collaboration. So, what's the new old?

  • Information lock-in is the biggest simple asset these startups should leverage. They will need to lock in their customers into their proprietary document/workflow formats, to avoid switching. It's a market with almost no barriers of entry, and the only protection they will have is information lock-in.
  • Web 2.0 software-as-a-service should offer the products for free right now (yes!). The marginal cost for you to give the application to an additional user is close to zero, so your only short-term objective should be to create a large customer base, bigger than your competitors. As the market develops, the number of players will be reduced, but you will have your customers locked-in.
  • As the market matures, you will need to start making money (uh?). Seriously, don't expect to make a business out of AdSense! So how do you make money? Your best returns will come from premium services targeted those companies to who software-as-a-service is borderline to not being competitive anymore, and would be tempted to go for traditional solutions ala Microsoft Office. For these customers you will need to offer the extra mileage: better backups, better training, consultancy, etc.
  • Price accordingly: free for most, pay for a few. The more free customers you have, the more the few will be willing to pay to ensure format compatibility.

These are nothing but the good old economical principles that apply to the web 2.0 information economy. Not surprising.

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