Dotcom:The new breed of web services indicates a return of exuberance to everything net-related, but can they turn a profit? asks John Collins
Last October's purchase of video sharing website YouTube by Google for €1.5 billion was a landmark event in the Internet industry. On the one hand you had supporters of the new breed of services, dubbed Web 2.0, who said it was a validation of the new models. In contrast there were plenty of other observers saying it was confirmation that Web 2.0 is really just Bubble 2.0 and the irrational exuberance of the turn of the century has returned to everything Net related.
Whichever side of the fence you happening to be viewing the deal from, €1.5 billion still seems an incredible amount of money for a company that was only founded early last year even if it does serve up 100 million video views per day.
In fact it makes the $440 million that Rupert Murdoch's News International paid for the MySpace social networking site last year start to seem like a bargain.
Along with other major social networking sites, Bebo.com and Facebook (whose founder reportedly turned down a $1 billion bid for his company from Yahoo), MySpace is the public face of Web 2.0 for most Internet users, particularly teens and those in their early twenties, who use the sites to connect with their friends and discover new music and movies.
The term Web 2.0 was coined by technology publisher Tim O'Reilly in early 2004 to describe the resurgence of the Web following the dotcom bubble. It covered companies as diverse as photo-sharing site Flickr (sold to Yahoo in 2005), collaborative encyclopedia Wikipedia, and blogging platform Blogger (acquired by Google in 2003).
At face value, the Web 2.0 movement is displaying many of the signs of being Bubble 2.0. Company valuations seem to have little correlation to their revenues or profitability. Venture capitalists are actively seeking out Web 2.0 companies to add to their portfolios. Salaries for programmers with the necessary skills in Java and the other languages favoured by Web companies are soaring - by as much as 25 per cent this year according to one British survey.
But a lot has changed in the years since the original dotcom boom of the late 1990s, both in terms of technologies and business models.
Fast cheap computers and widespread broadband availability has meant that services which would once have had a niche appeal can now go mass-market.
The costs associated with setting up a new venture have dropped significantly as well. Speaking at a conference in Dublin this year, Silicon Valley investor Jeff Clavier said the average company start-up costs of $3 million for Web 1.0 companies had fallen to just about $100,000 this time around.
A reliance on open source software, and encouraging users to advertise the service and other forms of viral marketing, mean that most new Web 2.0 companies are not seeking the sort of multi-million euro investments that venture capitalists focusing on the technology sector are used to making.
They are also not ramping up by hiring lots of staff but instead are relying on user generated content to populate their site. Think social bookmarking service del.icio.us, news filter Digg, and the aforementioned Flickr and YouTube.
But site owners have to walk a fine line between how much they capitalise on this content and giving their users control over their own data which may in turn make it too easy for them to migrate to copycat services.
And that's before you even mention the copyright issues associated with users sharing material they don't have the rights to.
For most Web 2.0 ventures the business model is usually pretty simple - targeted advertising. Google, a love-hate figure in Web 2.0 circles but clearly a major force to be reckoned with, pioneered the idea of displaying advertising that was relevant to what the visitor to the site was searching for. It now provides that facility to publishers of other sites and services. In its latest quarterly results the company shared $825 million of its $2.69 billion in revenues with other sites that displayed ads on its behalf.
E-commerce and subscriptions for premium services are also accepted components of business plans once again.
First-time around, the advertising money just wasn't there to support some of the ambitious plans being touted. This year it is expected that online will have captured 8 per cent of the total US advertising spend, a figure that is projected to rise to 13 per cent in five years (unfortunately for start-ups Google and Yahoo command 58 per cent of that revenue).
In Ireland the most optimistic estimates put online at 3 per cent of the total advertising market.
That hasn't prevented a healthy crop of Web 2.0 companies developing locally such as PXN8, Nooked, Infacta as well as mobile players like Alatto and Zinadoo, which are already playing in international markets.
Well-attended conferences have been organised by Enterprise Ireland and IT at Cork - the latter falling foul of Tim O'Reilly's lawyers who claimed the rights to conferences using Web 2.0 in their title.
Of course, now that Web 2.0 has become a tag guaranteed to attract interest, many software companies are simply jumping on the bandwagon.
Does the world really need another site to recommend articles read elsewhere à la Digg, Newsvine, Kick.ie and a host of others? How different is Zoomr to Flickr if you just want to share your pictures with friends?
While there is no doubt that the Web and mobile technologies are becoming more embedded in people's daily lives, the jury is still out on how many of the second generation of internet companies can turn consumer interest into consistent profits.
