July
14
This is the second post of a series of posts that predict a complete change on web 2.0, a crash of web 2.0 or a new web 2.0 redefined business model.
In the last post “Hosting 2.0: The future of Web Hosting ”, I wrote an introduction for a personal theory of how the web 2.0 is going to soon collapse due to a business model that turned the internet into a non profitable business. Bear with me here, I’m not talking about ecommerce, blogs or forums, I’m talking about the big websites like MySpace, Facebook, YouTube, Twitter, etc. In this post I’m going to write how it all went wrong.
Why Hosting 2.0? 
My theory is that to save web 2.0 and make it profitable again, lies on a hosting solution.
But before telling you about my theory, I need to write about the business model that messed it all up.
The Business Model
Please know that the next statements are based on real facts and by understanding how the internet works.
Business Model of the 1.990’s:
To understand the huge mistake made by investors and websites with web 2.0, I want to write about the business model followed by Amazon, eBay and Yahoo.
These websites broke every paradigm that the internet used to have in the 90´s. They broke them because they became very big very fast. No one was expecting that a website could grow so fast, with hundreds of employees and a net income of millions of dollars a year.
The answer was very simple: “Let’s go public”. Investors got their hands on the stocks of these websites and took them to another level. Yes, the market crashed, people lost millions and it took them 2 years to get back on their feet. But look at them now, these companies are still Fortune 500 companies.
Business Model of web 2.0:
Like I said on the last post, today’s websites have a different philosophy, they concentrate on building a solid user’s database and then they find a way to monetize it. Investors thought that it would be better to set a pricing number depending on the number of users and the potential of advertisement for those users. It sounds like a reasonable idea right? Well let’s look at some examples:
MySpace:
MySpace was the first successful social network of the internet. MySpace changed the way people looked at the internet, by understanding that the Internet was an infinite space with a place for all its users. MySpace was able to gather more than 100 million before being acquired by News Corp. on July 2.005 for $580 million. In 2.006 Google signed a $900 million with MySpace.
Source of Revenue: Private Advertising.
Today’s Status:
- Less Users (Facebook and Twitter stole a big group of users) and no growth.
- More Hosting Costs: More videos and pictures are uploaded every day by the same number of users.
- Last June they fired 30% of their work force outside the US.
- Profitable? Yes, but News Corp and Google are far from recovering their investment.
YouTube:
YouTube was the first video platform with an improved video streaming technology and friendly interface. With YouTube, millions of people around the world started uploading and watching videos every day. In October 2.006 Google buys YouTube for $1,65 Billion.
Source of Revenue: Private Advertising (Adsense), Featured Videos, TV Commercials.
Today’s Status:
- Hundreds of thousands of videos are uploaded each day.
- Millions of videos are watched every day.
- Profitable? Some companies say that Google will lose $480 million on YouTube on the year 2.009.
YouTube spends around $700 million on hosting every year. The number keeps growing with every new uploaded video.
Facebook made a big difference with its programmer’s platform, picture tagging and easy to use interface. In October 2.007 Facebook got a $15 Billion valuation. This same month Microsoft invests $240 million equity stake in Facebook. On May 2.009 a Russian firm invests $200 million on a $10 Billion Facebook. Yesterday (Monday, July 13th 2.009) Facebook got a $6,5 Billion evaluation.
Source of Revenue: Private Advertising.
Today’s Status:
- More than 220 million users (Twitter has started to take over).
- Everyday millions of pictures are uploaded. This means more hosting costs for the same number of users.
- Profitable? Microsoft lost more than 50% of their investment in just a year and a half. The Russian Firm lost 35% of their investment in just 2 months.
As for today, Twitter is the new hot topic. It has millions of users, which most of them stopped using MySpace, Facebook or another social network. Only 10% of the users on Twitter represent 90% of all the tweets. Where is the other 90% of the users? They deserted because they found out it was a useless tool.
Yes, experts may say that Twitter Search is going to be the best search engine ever. Oh really? Are you going to trust on a Search Engine fed by spammy messages from no trusted sources?
Last year Twitter rejected a $500 million offer from Facebook.
Source of Revenue: Not defined. Private Advertising?
Today’s Status:
- Growing everyday but with users that use Twitter once.
- Profitable? Probably, but with very high hosting costs.
So, as an investor I ask you: Would you ever invest on one of these companies, with astronomical hosting costs and knowing that in a few years a new website will take over all your users?
And another question: Do you think that there’s enough online advertising for MySpace, YouTube, Facebook, Twitter, dozens of other social networks, millions of blogs and millions of other websites?
Web 2.0 in Wall Street?
Amazon, eBay and Yahoo went public for 3 reasons:
- Solid and Profitable Income.
- Solid and reliable users.
- Solid projected growth.
These 3 companies achieved their solidness for one reason only: “Nothing in this world is free”.
These 3 companies were able to show solid numbers, reliable numbers and risk free numbers to their share holders. Amazon and eBay made it by selling products online and Yahoo with its online directory, advertising and other “non free products”.
MySpace, YouTube, Facebook and Twitter don’t have solid users, a solid income or a solid projection. Wall Street? Never! Or at least with todays web 2.0 business model.
On the next post I’m going to write about possible solutions for changing web 2.0 and making it a profitable business.
If you can’t see the WOP, click here: Web 2.0 Business Plan
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Benjamin Cip (1)
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JoseGregorio (1)
Wow… very good points you make for each company. I can definitely see your point of view and don’t plan on investing in any of them
I think a lot of the devaluation has to do with the economy in general, but who knows if we will ever come out of this slump. Also, the Internet is ever changing and there is a good chance none of those 2.0 companies have staying power as no one (at least not me) knows what the distance future holds for the Internet. We will see. Great Post!
I don’t think is the economy Doug. I think that investors and those websites got greedy and now they’re paying for it. I think the internet will change and very soon my friend. Thanks for the comment Doug.
Wow, at first I thought where is this going but the more I read the more I agreed with you. The business model I would use if I could would be to build the next Twitter and sell it too Google. Lets see the bought Blogger, and YouTube, and…
Hi Boris, the problem is that Google can’t keep buying websites with no future. Did you read their losses for this year? $480 million. You can’t invest on a business that’s going to be a pain in the ass. Read the next post and you’ll find out about my theory
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Brilliant post.
Alfredo, I totally agree with your theory.
And as per investing in them is considered, at least not after reading your post..!!
Eagerly awaiting your next post..!!
haha well at least you read my post before having an opportunity to invest in those websites. Thanks for the comment Saurabh
This is a good post. I wonder, how the net will be in the future =)
Thanks Blinkky, I hope you like my theory on my next post
I’m thinking that we’re actually coming close to the end of the web 2.0 era. I think we should be getting ready for web 3.0– the internet era. This would be where everything we do in live can be done through the internet… This may include school, jobs, and live in general…. What do you think Asswass?
I don’t know if we’re still ready to do absolutely everything through a computer. I guess we’ll get to that with web 5.0. I read that web 3.0 is going to be smarter and faster in choice making. For example, instead of browsing around the Internet for a new car, the browser will already know your personality and likings, so you won’t have to browse, with one search you will find what you’re looking for.
Wow, i had no idea Facebook offered Twitter $500 million. Nice post. Thanks.
Hi Ben, Thanks for leaving a comment on my blog. Yes, Facebook offered Twitter $500 million last year. The problem was that I think only 10% was going to be paid cash. The other 90% was negotiated with Facebook stock. Twitter of course rejected it and lately there has been rumors of Google oferring a little bit more. In my opinion, Twitter doesn’t cost more than $500 million.
I would agree my point was that the guts behind Twitter are the guys that build Blogger and then sold it to Google. Now, That a good business model for them, just not Google!
You’re right Boris, thanks for the comment
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