Friday, June 27, 2008

Why Web 2.0 Is No Bubble: Corporations Are Willing to Pay for It

seems to want an answer to the question "When will Web 2.0 startups
start making money?" The implication is that unless we can answer the
question, the "bubble" of Web 2.0 will burst and all of us who believe
in this stuff will be revealed as fantasists.

The fact is, it's incredibly hard to make money as a Web 2.0 startup aimed at consumers.

There are hundreds of these companies, and they all clamor to brief
us at Forrester. Each has its own twist on blogs, social networks,
ratings, user generated video, or whatever. It's hard to get people to
pay attention to a new tool, and the value of the tool depends on lots
of participation -- the classic chicken-and-egg problem. Your
competitor is always one twist ahead of you. Some of these startups
will succeed but the odds are one in a thousand -- you need just the
right idea, at the right time, with the right push or set of potential
customers, and you need to take off with such velocity that you leave
the competition in the dust.

Once a startup like this does take off, there's that other
pesky little problem -- monetizing the success. Google transformed the
online world by first generating huge traffic, then finding a business
model. But Google's success was based on a fantastically clever
advertising mechanism that was automated, attracted new advertisers,
and served searchers nearly as well as it served advertisers. Facebook
hasn't yet unlocked that advertising gold mine, and flubbed up its most
prominent try with Beacon. Twitter has no business model yet. Ning has
hundreds of thousands of visitors, but still runs Google AdSense ads. And these are the successes. No wonder people are skeptical.

A few of these companies may (and likely will) unlock that genie as
Google did and take off. But for any given startup, the odds are

The amazing thing is that there are a class of startup companies
making good money right now from Web 2.0. They're not flashy and they
don't grow like mushrooms. But they've got all the business they can
handle and they are growing. I am talking about companies
that serve corporate social application needs. This isn't the typical
Web 2.0 business paradigm, since serving corporate customers means lots
of client service, which is people-intensive -- it doesn't lift off
miraculously like a pure technology startup. In fact, in many of these
companies, the technology itself is positively mundane. But the
startups grow because they deliver value for which they can charge a
premium and get customer loyalty. The customers of these companies
don't defect when something shiny and new comes along, because they
like the service they're getting.

Here are some examples, listed by the objectives they help companies
accomplish (for more on these objectives see Chapters 4 through 9 of Groundswell).

Listening. Communispace
now has hundreds of private communities that its client companies are
using to learn about their customers. It succeeds because it's unlocked
the key to running and moderating these communities effectively, and
grows despite charging $150K or more per year per community. The other
class of listening companies are the brand monitoring companies, and
the track record here is great. Research giant Nielsen bought BuzzMetrics. Another research giant, TNS, bought Cymfony. J.D. Power & Associates bought Umbria. MotiveQuest, which is still independent, has typical clients happily paying $30K and up to work with it.

Talking. Talking with the Groundswell is tricky,
but there are plenty of agencies ready to help you with it. After
building dozens of campaigns and sites, Blast Radius was bought by mega-agency Wunderman. Brains on Fire ignited the spectacular success of Fiskateers. The digital divisions of companies like Edelman also compete in this space, as do the big Web service companies like Avenue A/Razorfish (now part of Microsoft).

Energizing. Ratings and reviews are the easiest way
to energize customers to sell others, and the companies that provide
them are taking off. Bazaarvoice's clients have generated over 10 billion customer reviews. PowerReviews works with over 200 retailers. And ExpoTV has built a business around consumers creating reviews on video.

Supporting. Support forums work -- they please customers and they reduce costs. Lithium
has an impressive client list including Dell, AT&T, Comcast, and
Sprint. The community space is crowded, but other companies with
growing client lists include Jive Software, Awareness, and Mzinga/Prospero.

Embracing. Startups that enable clients to source
ideas from their customers have a bright future, because
customer-generated innovation is hot right now. bought
Crispy News and turned it into Salesforce Ideas, which powers idea sites for Dell and Starbucks. And Innocentive
is growing rapidly, with 50 companies including Procter & Gamble
offering prizes of $10,000 or more to innovators that can solve their

While many were distracted by sparkly consumer-facing startups,
these companies were building and growing solid businesses. Look how
many of them were acquired! This is no bubble, because companies that
deliver business value to clients have durable growth potential. Could
this be the Web 2.0 business model everyone is looking for?

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