A number of recent events suggest a potentially significant evolution of Web 2.0 from a business perspective. Those who fail to notice these early signals may find themselves sidelined as Web 2.0 continues to unfold.
Om Malik did a posting late last week on “Web 2.0: The End of Innocence” which nicely summarized some of these early signals:
The Web 2.0 story so far has been about taking APIs, mashups, low cost infrastructure and building applications that are then offered to customers for pretty much free, backed by an ad-supported business model. Think of this as the tie-dyed-free-love hippie phase. The Web 2.0 conference held in San Francisco in Fall 2006 was its Woodstock.
A lot of good things happened, innovation blossomed, but now we are entering a more pragmatic phase, where the large players like Google and Amazon who distributed the API elixir are taking control back.
APIs (Application Programming Interfaces, for my less techie readers) – especially open, standardized APIs – have been a key building block of Web 2.0, allowing one set of developers to leverage a growing array of functionality already available on the Web and bootstrap their way into delivering more value to Internet users. Rather than investing time on building applications or databases already available, developers have been able to focus on building truly distinctive functionality.
This has had a host of business implications. It has dramatically reduced the investment required to establish an online service offering. As a result, it has led to a proliferation of start-ups, all vying for audience attention (viral marketing diminishes in power as the viruses multiply) and, for those seeking to scale their offerings, investor dollars. For the large Internet players, Web 2.0 has been a great distributed innovation lab – watch and see what sprouts, then acquire the interesting players.
This has lulled many Web 2.0 entrepreneurs into a false sense of complacency. Many, if not most, of the Web 2.0 start-ups are features masquerading as businesses. Business models? Fuhgeddaboutit! Their founders have little intention or ambition to build self-sustaining businesses – their exit strategy is to be acquired by one of the cash-rich gorillas. Business strategy: feed off the functionality of others long enough to get bought out, then start all over again.
Well, recent actions by some of the large API providers like Google, Amazon, MySpace and Firefox suggest that there may be another, less welcome, exit – having the API rug pulled out from under you or, almost as bad, finding out that your friendly API provider has just introduced a service that competes directly with your own. Neither event is conducive to nailing that big acquisition exit deal. Apparently, the large Internet players are wearying of the high acquisition premiums for attractive Web 2.0 companies and are increasingly deciding to grow their own copy when they see an interesting venture.
Here’s the lesson that I draw from these recent events. The only sustainable edge in Web 2.0, as in all businesses today, is to get better faster by working with others. This isn’t a sprint where you can come out with a nifty new feature or service and then sit back until the buyer knocks on your door. Web 2.0 is a powerful bootstrapping opportunity. It is most likely to pay off for those who take the resources available and rapidly build viable businesses with some reasonable barriers to entry – especially relative to the API providers you are bootstrapping on.
There are basically two ways to do this. First, you can accelerate the innovation in the services you offer so that you are constantly one or two (or more) steps ahead of those tempted to copy you. Second, you can find ways to use your service offerings to build trust-based relationships with your users, ideally with some powerful network effects that will make it very difficult for later entrants to pry these people away from your service. Ideally, these two approaches can be integrated by motivating your users to enhance your services themselves so that the more users you have the better your services become – the essence of Web 2.0.
In addition, you should explore the potential business trajectories of your API providers and try to make sure that you are not standing in their way. At best, you want to be on the periphery of their field of play. When a supplier of anything decides to compete with its customer, it can be challenging for the customer.
For the large Internet API platform providers, there is also an important caution. Sustaining a straddle between a platform business and an end-user business may become increasingly challenging. If you become too greedy in terms of expanding into the end-user businesses of companies using your API platform, you may find that your platform business becomes less attractive. Before you start eating the young that are nourished by your APIs, you might want to be sure there are no other food sources to sustain you.
I suspect that sustaining the right balance in the Web 2.0 ecosystem over time will hinge on a new development – charging relatively nominal fees for API use. This will put increasing pressure on API users to come up with viable business models and reduce the incentive for API providers to compete with their API users.