iSight - Web 2.0
An Internet for business
When the World Wide Web exploded on the scene at the end of the last century it was followed shortly afterwards by an equally startling crash. Thousands of speculators got their fingers burnt and only a handful of the many companies that blossomed survive to this day.
This time the rebirth of the Internet is not being accompanied by the same kind of hype and hullabaloo but the differences are not just cosmetic. The first Web bubble popped because, like most bubbles, it contained little more than hot air. The initial wave of speculators had no idea what a Web economy should look like, but everyone believed unshakably that this would be the next big thing. Consequently, everincreasing sums of money began to change hands and the sparks were fanned into flames. Some great companies like Amazon, eBay and Google have risen from the ashes but for most it became too hot to handle.
The truth is that, from a business perspective, Web 1.0 was not a great success. Like early version software, Web 1.0 was riddled with bugs, short on genuinely useful features, and prone to frequent crashes. Some of this was the fault of early Web service providers, but a lot of it was simply down to the prevalence of bad software.
But hype was not the only cause; bandwidth was also to blame because it was provided primarily by slow dial-up connections. As Patrick Sheehan, a lead partner at 3i, explained, “The infrastructure wasn’t there to give the necessary great user experience – click and wait is not good enough. But the main problem was that the whole financial dynamic behind it made failure inevitable. It’s no different to the boom that surrounded the railways or the building of canals in England. People saw a disruptive communications medium and the stock market became over-inflated – collapse was almost inevitable. There were too many companies that lacked real business models and, consequently, were not inherently sustainable.”
The crash of the dot-coms has made the new generation of Web investors more cautious. Fortunately technology has moved on to make the capital outlay required for a start-up much lower. Although Java 2 Enterprise Edition (J2EE) and Microsoft .NET are excellent corporate platforms, theydo not lend themselves readily to the entrepreneurial climate of Web 2.0. It is still early days, but the growing support behind the AJAX development environment shows that the Web world is starting to mirror the real business environment. Bricks and mortar companies are talking about wanting to be able to concentrate on their core businesses and not on the technology infrastructure, so the virtual companies are crying out for simpler site development tools to de-skill the process and lower the initial start-up threshold and expense.
Alongside AJAX, there is also the development of RSS feeds and blogs (Web logs). These are allowing businesses old and new to enrich the experience for their customers. RSS allows news and other information to be freely distributed and blogs can support dialogues on how services can be improved. Any company taking advantage of these channels can immediately accelerate their customer service reactivity and modify their delivery systems in a more agile way.
Writers still tend to speak of Web 2.0 as a future goal but the truth is that the change from Web 1.0 to 2.0 is indefinable. The change is a gradual growth and we are witnessing this segue from one perception of Web services to the next. Already companies are showing what can be done, and one of the most fruitful areas is the on-demand services or software as a service (SaaS) market.
Companies like Salesforce.com, RightNow and NetSuite are growing reliably from quarter to quarter by offering pre-purposed customer relationship management (CRM) packages over the Internet. This would have been inconceivable with dial-up but the growth of broadband has fuelled the reciprocal growth of this market sector. Recent moves from Siebel, SAP and Oracle, the traditional software package dinosaurs of the CRM world, show that they realise that they must evolve to embrace this market if they are also to show stellar growth themselves.
On-demand services not only offer de-skilling by giving easier access to complex software but also fulfil the demand to take the technology pain away. The software is hosted remotely at the companies’ datacentres so the IT headaches of hardware provision and maintenance and software upgrading are removed from the customers’ domain. This allows NetSuite, for example, to offer a comprehensive business bureau service handling financial management, CRM and Web site creation – a veritable business environment in cyberspace.
But SaaS is still a “Web 1.5” application. In many ways it has its roots in application service provision (ASP), an application hosting model that was badly discredited by the failure of so many of its pioneers in the dot-com crash. The new companies have built on the harsh lessons from the past and created services which have an important attribute sought by all Web 2.0 companies – stickiness. This means that once a customer is brought on-board they are likely to stick there as long as the provider responds positively to changing and growing demands.
Sheehan believes “stickiness” is one of the attributes he looks for in a prospective Web 2.0 investment. “A sticky customer base is something we look for so that once a customer is using it they are unlikely to go somewhere else,” he said. “This is usually an operation where the customer builds up proprietary data which would not be easy to move elsewhere.”
He moved on to point out that the investor community can still fall back on traditional rules of thumb to test the worthiness of a potential investment. “It’s much easier to feel comfortable with a business that’s growing very fast. If you can’t define growth in terms of revenue you can define it by the size of the community it has built,” he said.
Community is a key word related to the stickiness concept. The Web means that a customer can be brought closer to the company and to other customers in an assisted and self-help environment – an online user group. Feeling that they are a part of some kind of larger movement will breed loyalty within the community.
Sheehan’s requirements go beyond this. “Clearly we want companies that have some ongoing durability and this means they have to see the pace of change as a challenge as well as an opportunity,” he explained. “We always like to back exceptional and creative connoisseurs – ideally people who can demonstrate that they have a track record. The sort of company where increasing size creates a competitive advantage is generally more interesting. It’s very nice to have companies that really understand their business metrics and have a discernable business plan but the concept has to be intrinsically simple and easily explained. If it’s hard to explain then there’s probably going to be problems.”
The recent acquisition of MySpace by News Corporation, owner of The Sun and The Times newspapers, is a good example of what established companies are looking for. MySpace is a community of people who want to create a combination of small Web sites describing themselves, with tools such as blogs that allow them to share their views, aspirations and worries with fellow MySpacers. With these and other features, such as intra-community messaging, they can invite friends to share their space and create their own site to form a chain of friends of friends into a larger community.
News Corporation intends to use this to develop social networking sites linked to their newspapers. Initially this will be the MySun readers network because the demographics, partially based on theexisting MySpace user profiles, imply that these readers are more likely to embrace the concept than readers of The Times or The Sunday Times.
Within the 3i sphere, companies that Sheehan is happy to recommend include Sulake, PriceMinister, Fotolog and Poliris.
Sulake, a Finnish online gaming company, takes the concept of multi-user gaming to a new dimension – replacing conventional fantasy gaming with a more realistic, socially-oriented virtual world. Here, the object is not to destroy imaginary enemies, but to make new friends around the hotel pool or just wander through the landscape to meet new people and become acquainted. It is an approach that adds a club-like element to online game-playing – one that, Sulake hopes, will appeal to a larger, and more committed customer base.
PriceMinister is a French online marketplace which offers a trusted third party service for payments and provides buyers with purchase warranties. It has over 3 million registered users offering over 15 million items for sale. Currently there are over 10,000 sales per day.
Another French company, Poliris, is leading the way as a publisher of online real estate listings in Europe. Estate agents pay a monthly subscription fee to post their listings on one of Poliris’s two web sites and the company is now looking to expand its business beyond the four million French visitors the sites entertain each month.
New York-based Fotolog is an internet portal with over a million users creating their own online photo journals that can be shared with anyone around the world. Sheehan concluded with both encouragement and caution: “Today, the Internet is a large and rapidly-growing industry whereas first time round it was much more speculative. There are plenty of promising opportunities for investors but it’s still developing and many small bubbles may grow and burst. Caution, built on the lessons of the past, and low investment requirements will ensure that these have minimal effect.”