Tuesday, February 28, 2006

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!


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