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October 9, 2008

Web 2.0: Chronicle of a death foretold

By Peter Kirwan MM blog

The recession will have some positive side effects for Big Media. Among them: a massive cull of the tech-flavoured start-ups that aimed to siphon off a large portion of the media’s advertising revenues.

The business models underpinning social media and user-generated content are in big, big trouble.

Funding is drying up. The space available for experimentation in media planning is closing down rapidly. The cult of free looks decidedly vulnerable.

First, funding. This week, one of the Valley’s most respected venture capitalists told the FT that many 2.0 start-ups would end up “splattered on windshields and radiator grills and be forgotten”.

In the Valley, angel investors and private equity firms are disappearing from the start-up scene. The idea of the IPO market recovering any time soon is risible.

Doubt about the revenue potential of social media has always existed. Now, it’s chronic and widely-discussed. Here’s Roger McNamee, a lionized Valley VC, talking to the FT this week:

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“We all have huge hopes for the user-generated content space, but it turns out not to be very significant economically. All of Web 2.0 rounds to about $1bn of revenue in Year Five. The web has struggled to produce meaningful businesses since Google.”

Social media never solved the credibility problems it provoked in the eyes of advertisers. Now, almost certainly, it’s too late (at least this time around). Here’s what Will Price, the chief executive of a US start-up called Widgetbox, had to say about this back in May:

‘Real [advertising] spend [on social media] has been held hostage by that lack of analytics and what we’ve been relegated to is fighting for experimental budgets that don’t require clear proof of value.”

If this was true during the boom, what will a recession look like? Going forward, everything (apart from residual print and TV budgets) will require “clear proof of value”. The pool of experimental ad revenues is shrinking rapidly.

As a result, the cult of free (championed by Chris Anderson of Wired) faces its sternest challenge. Suddenly, and rather miraculously, ad-funded web sites are becoming unfashionable. Paid content? It’s the new black. As one VC puts it: “Free is over; I am only interested in investing in services that customers pay for.”

Here in the UK, there are signs of denial. At the Guardian this week, 2.0-watcher Jemima Kiss wondered aloud whether we might expect “a shake out of some of the weaker business ideas”.

It’s going to be a damn sight worse than that.

This time next year, I predict, the $30m that Guardian Media Group allegedly handed over to buy Rafat Ali’s Paid Content will be spoken of in the same hushed tones in which chroniclers discussed sightings of unicorns during the 15th century. (My point: Paid Content is a great site. Perhaps it’s also a good business. But everyone knows that $30m was daft money.)

In this respect, two things are worth noting. The first is how negative Richard Waters, the FT‘s highly-regarded Valley-based tech correspondent, has become about ad-funded social media.

Recently, Waters has taken to musing about the “fundamental bankruptcy of the web 2.0 economy” and the “sickening sense of unease” that now surrounds the Valley’s start up scene.

And then there’s the current situation at Facebook, the company that more than anything else defined the social media boom of the Naughties.

Even Jemima Kiss has been alienated by the site’s recent (and ill-judged) revamp. But if Valleywag is to be believed, even more serious problems are afoot. Meanwhile, at Breaking Views, the judgement is that the world’s largest social networking site “risks becoming a piece of Silicon Valley history”.

Welcome to the future. The breaking of web 2.0 will look a bit like the dot com crash of 2000 — only this time, everyone will be scared.

Yes, some bright prospects will survive and prosper — as Google did last time around. But the winners will be few and far between.

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