Alex Le’s Blog

Slashdot today (Dec 28, 2006) has a link to an article on WSJ about a conversation between 2 venture capitalists. One of them is claiming Web 2.0 is another bubble and the other one claims the otherwise. My take on it: Web 2.0 is NOT another bubble like what happened during the dot-com boom and burst. Why? It’s not general public money that are pumped into the web 2.0 ecosystem like what happened 7 years ago with web 1.0. Base on that fact alone, I can safely back my claim.

To a lot of people who are monitoring and following the news on web2.0, it may seems like a bubble is forming. A classic example: we saw that Youtube got bought with $1.65 bln. How on earth a FREE video sharing site with NO real business plan besides selling ads inventory, e.g. eye-sights, is worth that much? It’s hard to believe. Another speculative number from the WSJ article: Facebook is valued at $500. Sure, whatever. I have to admit that I used facebook once in a while to keep in touch with friends, maybe writing on their walls some b-day notes. The truth is when thefacebook.com’s version for Lake Forest College was available, some of my friends assumed that I had built the site. Because not long before that, I had built www.247lfc.com, an online classified-ads for the college and got some reputations ’round campus — not enough to impress the freshman chicks (I just finished by Sophormore year at the time) but enough to raise a few eyebrows of the faculty and cause dis-comforts to the monopoly on-campus e-follet bookstore. Anyway, to me, fundamentally, facebook is more like a week-end project of a student. Slapping a guesstimate value-tag of anything above a few million dollars is already a hard-to-believe thing, not to mention the ridiculous number of $500 million.

However, these 2 examples above and many not-mentioned cases is not a sign of a forming bubble. They are merely examples of over-valued IT products, which happens to be the expensive merchandise deep-pocket companies like Google, MS, Viacom, etc. want to possess. Women like jewelry and nice accessories. Rich women like expensive handbags and sparkling diamonds. Similarly big companies like to have controversial, widely-known products. If they don’t have anything to brag about, they will buy a product with a premium. But that’s about it about this web 2.0 bubble.

There are a few profound reasons why the wave of Web 2.0 companies is not a bubble.

1. There are not enough big companies out there to cause a massive injection of public cash into the market.
If we look around, we can only name a few really successful companies. It’s true that for every one of those successful companies, there are 10 more of the copy-cats. This is because the nature of Web 2.0 companies: very low barrier to entry. Begin with a javascript framework, slapping on some stripy, shiny, cheerful designs and we have a web 2.0 product or service. However, at the end of the day, the general public generally stays unmoved. People don’t even know about the existence of those companies, not to mention about investing in those companies. I don’t hear anyone mentions alot about IPOs these days, besides the flopped IPO of Vonage last year, and Vonage is not even considered a web 2.0 company.

2. The invested money are by Venture capitalists only, not by general public.
What made the dot-com boom was not the VCs. Yes, VCs commands lots of money, but it was the general public’s interests on the companies at the time that caused the massive injection of cash into the internet. Usually VC’s funding are cost-prohibitive to the general public — I don’t think any VC would accept a small investment of $20,000 from this random old man on the street to so that the guy can participate in the VC’s game. VC’s get funding from rich or uber rich guys because it’s all about the risk/reward ratio: the rich can take more risks so they can play the higher reward game with more money at stakes. The general public are less fortunate, we loose a few thousand dollars in stocks and we will show a disgusting face when someone mentions that company’s name again. The Risk/Reward ratio is of ordinary people are so low that we can’t invest in anything other than ourselves (e.g. paying for college). Since there are not enough IPO’s going around, and people still have the scar of the last burn from the dot-com explosion, the general public are safe from web 2.0 this time. Without the money of the mass, there won’t be any bubble at all.

With that said, where are we heading in the near future? I can see that we will have some consolidations among the copy-cats. Some of the grass will die, or weeded out because the lack of nutritions due to the absence of a real business plan. In stead of seeing 20, or 30 YouTube clones, we will see 2, or at most 3. In stead of seeing 50 Myspace clones, we will hear about 3, or 4, or less.

The overall trend will be the localization of popular services to a per-country basis. Even though MySpace is big in the States, Bebo is leading in Europe, or in South Korea or China, there are major local brands that leave MySpace in the distant trail. Take Ebay: they were just reported to begin waving the white flag, giving up China’s market. So localization is the big trend in the coming year. Successful services or products are ported and modified to work better with the local people. And most of the time, Western companies are very slow in terms of internationalizing or localizing their products and services. Hence, they are likely not able to compete with local companies offering the same or copy-cat products.

Also, I would expect to see more sophisticated Web 2.0 services, instead of the cut-and-paste mashed up services that have mushroomed for the past 2 years. Take the new Yahoo Mail beta as an example: the free webmail serivce behaves more and more like a desktop application with sophisticated features that even a few years ago very few people would imagine. Together with the maturing Javascript frameworks (Dojo, YUI, Google Toolkit, etc.), more soup-ed up applications can be built. A consequence of this fact is building up a web 2.0 application is not a trivial or easy task like what we have seen and experienced: building a working, functional web 2.0 application will require serious planings, engineering of infrastructure, and software design. Such things requires skill and efforts, and they are the results of serious investment in terms of time, money, and human resource. Effectively we will see larger micro-ISV (independent software vendor) putting out applications, instead of a one-man-team or two-man-team like before.

In brief, what currently happens with the Web 2.0 lanscape is low barrier-to entry of AJAX technology leads to the proliferation of new web 2.0 applications. Financial-wise, I don’t see a bubble at all. If there is, then it’s just the beginning, not the end. For me, I’ll hope on the web2.0 wagon and enjoy the ride. It’s too much of a good opportunity to miss out. The thing is, are you ready when the time comes?