Implosion 2.0

Don’t look now but 2008 is poised to be the year of the Web2.0 implosion. In brief, consumer confidence is low, retailers are projecting a slow holiday season, Web2.0 is all about advertising… this all leads to one big crash. (Ok, actually, I believe it’s going to be a relatively soft landing in mid-late 2008, but crash just sounds better. Besides, if I didn’t join the hype, I wouldn’t be able to link to this terrific video.)

Retailers have been running scared this entire holiday season. The first Xmas advertisement appeared just a week after Labor Day! The first special holiday season sales were held the weekend after Halloween! Even with Black Friday (the day after Thanksgiving), retailers reported a slow start to this shopping season. And the latest sign is that 8 Macy’s stores in New York stayed open around-the-clock from December 21 through Xmas Eve. Other retailers were holding 64-hour sales hoping that last minute shoppers would save the season.

I think it’s time that we all accept it, with the subprime mortgage problems and the staggering increase in the number of defaults on credit cards, the consumer has carried the economy as long as he/she could. And, the companies that will pay the most are going to be Web2.0 ventures.

What’s scary about Web2.0 is the homogeneity of business models across all companies. Everyone is fighting for advertising dollars. Web2.0 is, more or less, all about user-generated content. This euphemism just means that a few intelligent people built some cool new tools that all the rest of us use to fill the internet ether with our opinions without having to know any of that technical stuff. And, because the typical person has been spoiled with free access to more and more online, it’s just not possible to get end-users (you and me) to pay for these tools. As a consequence, people just won’t pay to produce (which they never should be asked to do) or consume content. So, everyone is jumping on the advertising bandwagon.

Haven’t we seen this all before? Now we’re talking about “unique visitors per month” and “duration of page views”. This sounds like the old “eyeballs” metrics from the dot-com days, doesn’t it? Wikis are the new newsgroups, Blogs are the new personal websites, Social Networks are the new Web Portals: Facebook = Yahoo, Wikipedia = Usenet, WordPress = Geocities, Yelp = CitySearch, MyPunchbowl = Evite, Viewpoints = Epinions, Glam = iVillage.

This raises the question: Can’t anyone actually sell anything anymore? And, unfortunately, the answer is: We don’t know, because nobody’s even trying. An unfortunate rule of all economic belt-tightening is that the marketing budget is the first one cut. As a consequence, those companies that rely on advertising revenue are hurt the worst.

Just as the dot-com bust helped us figure out the right number of online pet stores, Implosion 2.0 will trim the number of social networks and useless Facebook widget builders. And that’s not a bad thing! Everyone’s gotten fat and lazy off of advertising for too long now, and it’s time for entrepreneurs to innovate around other business models.

Web-IV convergence: social networks and applications

The news is coming fast and furious. I thought the dot-com boom was life at Internet speed, but this is ridiculous. It wasn’t all that long ago that Web2.0 was just a bunch of WYSIWYG tools to ease development of web content. In that respect, Web2.0 did for the Internet what Microsoft Word did for computer word processing. (Think back in horror to the days of color-coded key combinations for document formatting with the old WordPerfect.) That is, Web2.0 made it easy for anyone to publish content to the web.

It was only a few short months ago, on May 24, 2007, that Facebook led the next evolution and brought applications to the masses by introducing the Facebook Platform. Web-IV is the ultimate convergence, and this was one of the defining events in taking us from Web2.0 to Web-IV. Think about it, until this point, Web2.0 gave people easy ways to produce content (blogs, wikis) and to aggregate content (mashups). But May 24th marked the day that interactive, feature-rich applications were elevated to that same social status. It became simple for anyone (with just a little technical know-how) to build an application and have it immediately used by the ready and eager masses.

That was ground-shaking, earth-shattering, sea-changing. But, alas, that was sooooo May. Now Google and its posse are riding out trying to tame the wild west of social networking with OpenSocial. And, it’s so much more than just a common technology for developing applications on social networks. Lost in all the coverage is the fact that this is the first significant move to finally, finally bring all the social networks together.

I fully expect OpenSocial to, first and foremost, provide a “single sign-on” level of interoperability to the social networking space. I would be shocked if one of the first applications developed on OpenSocial wasn’t some way to better share information and connections across the various social networks. It’s inevitable.

The natural course of all communications networks have followed the same path. One need only review the history of the telephone industry to understand the phenomenon. First, there are a lot of small network providers, who all fight really hard to protect their “walled gardens.” But, as Metcalf’s Law explains, the value of a network grows as the square of the number of nodes in the network. So, after a while, a small number of dominant players emerge and gobble up all the smaller networks.

So now the question becomes, will Google become the Ma Bell of social networking in our new Web-IV world?

eBay: another stretch

EBay is a terrific, world-changing company. Along with Amazon.com, eBay revolutionized how people purchase goods. eBay and Amazon.com together defined eCommerce. So, while Amazon.com appears to be growing beyond it’s humble beginnings as the Internet’s bookstore and thriving (come back for more on Amazon), eBay can’t seem to grow beyond being the Internet’s garage sale.

EBay has made many wise acquisitions and investments throughout its history. But, when eBay really wants to make a splash and remind everyone that it too (along with Yahoo, Google, Amazon, Netscape) is one of the great dot-com companies, sometimes Meg Whitman reaches.

First, let’s give credit where credit is due. EBay’s acquisitions of Half.com, Shopping.com, StubHub, and StumbleUpon were terrific moves. Each was reasonably priced (Half.com at $318MM, Shopping at $635MM, StubHub at $307MM, and StumbleUpon at a mere $75MM) and, more importantly, enhanced eBay’s core offering. And, of course, eBay’s acquisition of a 25% stake in Craigslist was inspired. It’s probably the single biggest reason that Craigslist is still a private company today, because Craig Newmark knows that he wouldn’t be able to ignore eBay as a major shareholder if the company were public.

However, eBay tends to overpay for targets outside of its core. Take, for example, the two most high-profile acquisitions completed by eBay: Skype and PayPal. Niklas Zennstrom just publicly said what everyone has been thinking for year, that eBay overpaid for Skype. It was folly for eBay to believe that auction participants, or buyers and sellers, would want to talk to each other before conducting that transaction for a Pac-Man lunch box. No, the real motivation for the purchase of Skype was for eBay to “make a splash.”

I spoke with Product Managers at Google (on September 27, 2005) about eBay’s acquisition of Skype. They posed the question:

A number of analysts and observers are suggesting that Google should have acquired Skype instead. Do you think Google should have purchased Skype?

My answer to them was: No, it was the right move. Skype, at that time, had annual revenues of roughly $70M. So, eBay paid 37x revenue for Skype. With ARPU consistently at or under $1.80 per year (calculated from here), that high of a revenue multiple is beyond comprehension.

Turning now to PayPal. Obviously, this acquisition was not a colossal failure. It’s actually been an overall accretive purchase. Given that PayPal had revenues of $216MM at sale and was purchased for $1.6B, with an ARPU of roughly $15 per year, the deal looks pretty solid and fair. However, digging deeper than just the numbers, eBay overpaid because eBay was the one and only legitimate suitor for PayPal at the time. PayPal was the emerging preferred payment mechanism on eBay, and competitors such as Google hadn’t started think about entering that arena yet. (Google Checkout was introduced in June 2006.)

So, in essence, eBay was bidding against itself for PayPal. You would think that that the masters of the auction would know better.

The one common theme to both the Skype and PayPal acquisitions was that eBay bought a “hot” company, and they paid top dollar for it.

Now, eBay is on the verge of another mistake. According to Fortune, eBay is making a foray into social networking with eBay Neighborhoods. The powerseller, Evan Prytherch, quoted near the bottom of the article is right: what possible tie-in does social networking have with boosting sales on eBay. This smells an awful lot like the Web 2.0 version of eBay’s rationale for buying Skype: getting buyers and sellers talking to each other. At least this time eBay didn’t plunk down $2.6B.

Instead of creating yet another social networking site, wouldn’t it have been smarter to dedicate those resources to developing widgets for Facebook or the recently unveiled MySpace platform?