Is Web 2.0 a Bubble?

Is Web 2.0 a Bubble?

There is growing debate as to whether Web 2.0 will prove to be a bubble. Many warn the growing industry could suddenly collapse, just as the dot com bubble burst in 2000 and 2001.

Web 2.0 refers to web services that allow users to freely participate in the production and distribution of information, taking full advantage of the interactive properties of the Internet. Several major Internet companies that survived the first bubble like Amazon, eBay and Google have something in common: they pro-actively embraced the concepts of Web. 2.0.

Typical Web 2.0 companies include personal web page sites, blogs, and photo and video sharing sites. A growing number of firms are identifying themselves as Web 2.0, and many investors are directing their funds to Web. 2.0 start-ups. By its sheer popularity, Web 2.0 is playing a tremendous role in boosting the Internet industry.

But major media outlets including the Economist, the Wall Street Journal and the Financial Times consistently suggest that Web 2.0 might end up as the second dot com disaster. Recently some of those worries have become reality, with a few renowned Web 2.0 firms having to restructure.

Is history repeating? The first dot com mania ended in tears mainly because few of the pioneering web companies were able to work out profitable business models. Ignoring that, those companies focused on luring investors, promoting their brands and pumping up their share prices by increasing their subscriber numbers and web traffic. Those were their business goals, and a business with no way to earn profits doesn't last long -- so naturally the bubble burst. Institutional and private investors had forked over their cash trusting in little more than rosy promises, and so sustained a lot of damage.

The Web 2.0 firms, emerging from the residue of the broken dot com bubble, are still faced with the same question -- how to earn profits. In fact that's often the key topic at Web 2.0 conferences -- how to earn profits. Even the wildly popular video swapping sector hasn't figured it out yet: it's still unclear what kind of business model YouTube, the leading UCC website, will develop. Many latecomer web firms that have followed in YouTube's footsteps are facing serious problems.

But today's business landscape is quite different from that of 2000. Web 2.0 firms operate differently from the Internet firms of the past. First of all, Web 2.0 firms usually have low-cost business structures. They use well-known software and standardized technology like Linux instead of expensive products, cutting their development times and costs. They also cut expenses by relying on word-of-mouth "buzz" marketing rather than conventional promotion methods.

The other major difference is that many Web 2.0 firms want to be bought out by conglomerates rather than list on the stock market where the chances of success are slim and the prospects are gloomy. The founders of start-up firms with great ideas and innovative technologies can make a lot of money in a short period. They hand over their firms, including the problems of turning their ideas into profits, to expert managers.

And even if the bubble were to bust, only the start-ups and some fund investors would really get hurt, not individual investors. Back in 2000, many individuals recklessly and foolishly scrambled to invest in unproven Internet companies. In contrast, most Web 2.0 firms deal mainly with investment experts.

When bubbles burst many people suffer, but a new industry tends to grow in cycles of booms and busts. It was innovative businessmen who focused on innovative services that sowed the seeds of revival for the Internet industry in the barren wasteland after the first disaster.

And it was the power of America's Silicon Valley that cultivated those seeds into the thriving tree called Web 2.0. You can think of Silicon Valley as a kind of innovative eco-system of innovative enterprises, venture firms and media companies. Web 2.0 will play a role in distinguishing genuinely strong firms from weak ones and lay the framework for further development. We, too, should give serious thought as to how to create a healthy eco-system of innovation like Silicon Valley.

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