Business 101 on Web 2.0

Russell Beattie woke up on the wrong side of the Internet on Sunday and wrote about a problem with Web 2.0 hype: the absence of profit.

In fairness to the folks at O'Reilly, where Web 2.0 is a major meme, the platform and the path to profitability really are different things, and can be considered separately. You really do need to grok the technology in order to build a collaborative application, and it's sensible to point some intelligence in that direction. But Russell is, I think, exactly right in his central claim: If you don't also think about how to make money, you're just doing charity work slowly. That's not bad, but it's not sustainable.

It's true that there are interesting Internet applications that have turned into real money for their founders. One of my favorites is Joshua Schachter's del.icio.us, the social bookmarking service that Yahoo! bought late last year. Joshua built and funded the service without recourse to either user fees or advertisers. He sold it to Yahoo!, who wanted the page hits. Bully for him.

But del.icio.us was never, under that model, a long-term sustainable business on its own. If Yahoo! had not elected to buy, the service would sooner or later have been forced to shut down, or to convert to a for-pay model. Because its users were trained to expect something for nothing, it's most likely that any such switch would have alienated many, drastically reducing page views and diminishing even the value that Yahoo! saw in the business.

I like free stuff as much as the next guy, but I don't have long-term relationships that are so one-sided. Sure, I'll use a free Internet service, but I won't rely on it, because I assume that sooner or later it'll augur into the ground. I pay for broadband because I rely on it, and need SBC to stay in business from month to month.

I'm posting this on Blogger, and Blogger is free, but it's owned by Google, which is profitable enough on its advertising business to subsidize all sorts of other stuff. Even so, there's a real risk that one day Eric Schmidt will wake up and ask someone in his office why he is losing money on guys like me. I like Blogger, but I don't rely on it.

Russell's key point, I think, is the difference between a business that's built to grow -- one that has revenue that can outstrip expenses -- and one that is built to flip. Building to flip is the 1990s model of entreprenuership: Get in, get out, and make a killing on the greater fool. Building to grow is objectively better, because that growth creates value not just for the entrepreneur, but also for the customer, the employees and the long-term investors in the business.

Go Russell!

Update: Google in China

Yesterday, I posted this article, which drew a long but detailed comment that's worth reading. Today, digg took me to a story in USA Today about legislation sponsored by House Representative Chris Smith of New Jersey. The legislation is intended to keep server machines that are owned by US companies, and that store personal information, out of China. The idea is that keeping the machines physically remote limits exposure to seizure by the government.

My initial post was simplistic; my opinion hasn't changed fundamentally, but it has gotten more nuanced. This is legislation that at least makes policy sense, in supporting the goal of protecting human rights. I still believe that singling out technology companies makes no sense. I hope that Congress considers a broader policy. But I have to admit that Smith's bill is aimed in the right direction.

Links for 13 Feb 2006

Just in time for Valentine's Day: Love that Internet!

• Two kinds of office artillery: high-tech and low-tech.
• Turn your electric toothbrush into a burglary tool.
  
• Google Earth is on the Mac (and the latest download includes virtual fly-through data for Torino).
• A little late, yes, but the 2005 Word of the Year is "truthiness." (Caution, large PDF file)
• Less frivolous: What is your dangerous idea?
• Universe Today tells you what to look at tonight.
  

Pointless outrage.

I've been watching this story for a while, but waiting to blog it until the initial frenzy settled down.

China, a country with a well-documented history of human rights abuses, has imposed some strict censorship rules on its citizens' access to the Internet. China is, simultaneously, under pressure to adopt more democratic political processes. And, of significant interest to companies around the world, China's move toward a market-driven economy has created an opportunity for buying goods from, and selling them to, an enormous population.

That's a complicated mix.

Google, deep in the Internet, has apparently cooperated with Chinese authorities in their censorship of Internet content. That's unfortunate, and is at least a partial repudiation of the company's professed motto, "Don't be evil."

There has been widespread and vocal opposition to Google and to its censorship. Some of the loudest outrage has come from the US Congress, which has criticized the company for "bowing to Beijing."

I'm a believer in the power of the market to effect social change. I was at Berkeley when the movement to divest the University of its holdings in South Africa spread among public and private institutions. That pressure, along with political and other social pressure, eventually led the the dismantling of apartheid as an official policy of the country. Businesses certainly have influence, and ought to use it to advance human rights when they can.

It's unreasonable, though, to expect a business to behave altruistically all the time. This is especially true when other institutions aren't leading the way. There was already plenty of pressure, by ambassadors and individuals, to eliminate apartheid before the divestiture movement began. Businesses supported that pressure, but didn't initiate it.

Google has defended -- or at least explained -- its behavior. I hope that it will do better in the future. I hope that it will help to eliminate censorship and restriction of rights around the world. It has enormous power to do that.

But if there is to be a world-wide movement to eliminate Chinese censorship, it must include the policymakers and governing bodies that wield much more influence than any single company. The US has an enormous trade imbalance with China. We ship lots of raw materials there, and buy back lots of low-cost finished goods. That direct economic support is good for the Chinese people, certainly, but also helps to support the Beijing government.

Congress' demand of Google was, essentially, that it regulate its behavior in China. If Congress expects individual companies to put economic pressure on China, it should show the way. If the regulation of trade is to be a solution, then governments, as well as corporations, need to show how.

Outrage from the floor of the House and Senate are good television, but pointless for directing real change. Asking the private sector to lead the way on a public issue like human rights makes no sense. Sure, let's ask Google to behave better next time. But let's show them how to do it, instead of telling them.