All “New” Web2.0 Business Models are Advertising Supported

On the way to the airport, I was thinking about the Mindshift Web2.0 Panel that I just sat in on, asking myself why it is that the most highly regarded web2.0 companies don’t make any money. The holy grail exit strategy seems to be: get acquired by yahoo or google … but that can’t be the only business model, because you also have the facebook and myspace models, and more recently, sources tell me that digg.com is cash flow positive. But these are all ad-supported and in terms of getting “rich,” which is supposedly the unstated goal of most entrepreneurs, it’s yahoo and google that make dollar signs appear in the eyes of most bootstrapped web2.0 ventures.

Of course, I first questioned my underlying premise – is it true they don’t make money? I did some napkin math on flickr just prior to the yahoo acquisition, and based on assessing a random sample for pro accounts, it appeared to me that flickr was not making enough money to be profitable. I know, I know, the value to yahoo was not in cash flow, it was the value of the network, but let’s think about that for a second. The value of the network was small for flickr, it was large for yahoo, which is what commanded the acquisition multiple. So how does yahoo monetize a network. That’s right … through advertising.

So is it true that all web2.0 business models are advertising supported. That depends which internet camp you are in. Is the internet all about software? Or is the internet all about media distribution? I am in the latter camp … and media distribution has been advertising supported for at least the last century. When you also consider that web2.0 attributes, such as social networks and community aggregation, only make advertising more lucrative by commanding more contextual application and a correspondingly higher CPM, then it makes sense that the web2.0 business model is advertising-based.

But what if the internet is about software development? In the absence of shrink wrapping, I think that software is no longer a product that you can sell for money. It is merely an enabler of user experience that helps people get things done. Increasingly, getting things done is about media consumption and community building. Basecamp aside, people are unwilling to pay for most consumer-facing applications. I wonder if that will ever change.

If you rewind the clock all the way back, ebay and amazon.com are web2.0 companies – they create networks to engender trust between buyers and sellers, they use reputation managers and recommendation engines, and they highlight simplicity in their business models (if not in their user interface). And yet, they don’t make money through advertising. Instead, they make money by taking a little off the top of transactions. Ebay aggregates buyers for sellers and amazon aggregates sellers for buyers, but their revenue is transaction-based. But again, the “user-customer” doesn’t pay for this, the “seller-customer does.”

I know that people scoff at advertising, but isn’t that where the business models need to be centered? Or do the business models even matter as long as yahoo and google are collecting the advertising dollars for us?