Web 2.0 surges
A truly disruptive phenomenon, Web 2.0 is democratising the internet, bringing great opportunities to businesses that interact with their customers
To understand the future of the Web, pay attention to what your kids are watching. This was the recent advice from an investment bank that concluded the first ten years of the internet from 1995 to 2005 were just a warm up for what is about to happen. It added that the Web’s growth will spark many opportunities for new ventures, and some tough challenges for existing business models.
MySpace and YouTube, two social networking sites that have come from nowhere to build huge audiences, are good examples of the potential of today’s internet. Neither existed five years ago, yet today they are among the few biggest internet businesses by users and by valuation.
Now that the Web’s technical infrastructure is in place, it is able to advance towards its enormous potential. Most importantly, the increasing penetration of broadband is enabling the expansion of commerce on Web 2.0, a phrase coined to describe the second generation of internet services. As people across the world sign up to broadband, online businesses are gaining global audiences. It is estimated that there are now 180m broadband subscribers globally, and the number is growing at a rate of 45% year-on-year.
But Web 2.0 is also about qualitative change#especially increasing user interaction. One of Web 2.0’s basic premises is that the wisdom of crowds adds intelligence to websites. So, sites are becoming far more interactive, with visitors often contributing and editing content. The ultimate example of this is Wikipedia, the free online encyclopaedia carrying more than 1.6m articles that anyone can contribute or edit.
Evolutionary and revolutionary
Explains Daniel Waterhouse, the 3i Sector Partner who focuses on Web 2.0 and consumer technology investments: “In some senses Web 2.0 is just an evolution of Web 1.0 but it is also revolutionary. The revolutionary bit is partly the YouTubes and My Spaces of the world, where there is a whole new play on involving the user in putting the content together.
“But the revolutionary bit is also the potential for the small guy to find an audience and monetise this. I can ‘blog’ and put Google Adsense on it and make money.”
In addition to broadband’s increasing penetration, a host of other technical innovations are enabling the Web’s development. Open APIs (application programming interfaces), that allow websites to interact with one another, are an important technical enabler. Another significant innovation is AJAX (shorthand for Asynchronous JavaScript and XML), which allows desktop applications such as word processing and spreadsheet programmes to be used on the Web rather than the desktop. This is helping to transform websites from information distributors to online computing platforms.
Unlike Web 1.0, Web 2.0 is highly commercial. Youthful entrepreneurs with good ideas are building big businesses very quickly. YouTube and MySpace were both started by young teams who understood the potential of the Web. MySpace is now the internet’s third most visited site, while 85% of all U.S. college students have signed up to YouTube.
Even small niche sites, such as the 50 million blogs (short for weblog) in existence, can earn advertising revenue through online advertising agencies such as Google Adsense. This posts advertising on relevant sites and rewards the sites’ owners each time someone clicks on the advertisement.
And many retailers are finding that their online sales are growing far faster than those in their shops. With broadband penetration high and rising, and large numbers of people now comfortable to conduct transactions online, so retailers, travel agents, listings companies, auctioneers, dating companies and so on are all finding that e-commerce is booming.
Demonstrating quite how vast the world of online commerce has become, for 2006 the value of online transactions was estimated at US$1.23tr . And the four biggest internet companies made total revenues of US$30.9bn .
How to succeed in Web 2.0
As one of the leading venture European investors in internet businesses, with an extensive portfolio of investments across the United States, United Kingdom, France, Germany and the Nordic countries, 3i has great experience in what it takes to build a successful internet business. In the last year alone, 3i has made early and late stage investments in Demand Media (which is building the next generation of Web media companies), Fotlog (the world’s largest photo blogging site), Aggregator (TV over broadband), Home Décor Products (e-commerce) and Garlik (online personal data management) among others. It is providing these young businesses not only with capital but with advice on strategy, building the team, developing business models and making valuable contacts.
There is a rich collection of business models that work. They may come in the forms of web communities, online media and entertainment, e-commerce, advertising/site analytics, search engines and web infrastructure/technology providers. Any site that draws a mass audience is likely to be interesting to advertisers. At the same time, providers of technical solutions to the online video or blog sectors are seeing surging demand for their products and services.
According to Waterhouse, who is a board observer for some of 3i’s portfolio companies, succeeding in tapping Web 2.0’s vast potential requires speed and concentration. “It is about having a laser focus on consumers, listening to them and not trying to do too many things,” he says.
Looking forward, change is likely to accelerate. Broadband usage is still expanding enormously. China, India and Russia are only now starting to build their internet infrastructures. And mobile internet usage is in its infancy. According to some estimates, revenues from search engines will grow by US$11bn over three years, and those from the non-search engine advertising market by US$7bn over the same time period.
What is more, the children are watching less television, and spending more time on the internet#chatting to their friends on social networking sites, watching videos, downloading songs and so on.
Web 2.0 defined
Web 2.0 is a phrase coined by conference organisers, O’Reilly Media, in 2004. It refers to a perceived or proposed second generation of internet-based services#such as social networking sites, ‘wikis’ and communication tools #that emphasise online collaboration and sharing among users. (A wiki is a website that allows users to add, remove and edit online content.)
As such, it loosely defines the second generation web businesses and services that have evolved in the past five or so years.