What if Web 2.0 went bankrupt?

This post is a spontaneous contribution by François Roque (better known on twitter by @imposture), emeritus blogger (Derrière le Paravent Suédois) and author of the 2007 novel “The Roch Syndrome” (published in French).  For François, Web 2.0’s absence of a profitable business model combined with a high stock appreciation, reminds him of the “Internet Bubble” after it’s implosion!

“What if Web 2.0 ended?  Gone, done, nada!

All of our Facebook and Twitter accounts would be deactivated, the majority of blogs would be closed, the “influencers” would be stripped of their business assets, virtual “friends” would no longer RT, DM and poke.  Hilarious cat videos would no longer be able to travel the world in 30 seconds!  In short, somewhere between 200 and 500 million moral and physical persons would be deprived of their playthings.  Between the two of us, it would be a nice break wouldn’t it?  We could take time to read real books with real pages that we can turn, compose more than 140 characters at a time, write correct sentences and see each other In Real Life.  Quite simply, we would return to a “normal” mode of communication on a more basic level—with looks, gestures and smiles…

Flash back to the late 90s: The Internet Bubble has just exploded and millions of dollars have gone up in smoke.  What did we speculate on?  On the illusion that everything would take place on the Internet, with new, dematerialized services that were created in this large “global village”. An economy of abundance was founded on business models that took into account contacts and “subscribers” and not merchandise and actual transactions because it counted on an Internet connection.

We valorized companies not on concrete assets but on their corporate value.

A start-up could value a subscriber at $1000 based only upon what it sold the subscriber and what the subscriber would sell.  If the company had 100,000 subscribers, then it could easily be bought for $100 million.  Who cares if the company’s turnover was only a few hundred thousand dollars?  The result: Time Warner discovered that AOL had next to nothing ($50 billion in losses); Vivendi Universal lost 16€ billion; Cisco lost 2€ billion.  Have things changed 10 years later?  No.  Why? The same causes produce the same effects.  To wit:

For the past 4-5 years a new unit of measurement has appeared: the account.

It could be an account on Facebook, Twitter— or any newfangled site that’s developed the latest strategy.  But beware, there is a fundamental difference between the subscriber and the account: in the 90’s, the subscriber had to pay for his subscription, now you can create an account for free.  Even the term “account” doesn’t seem so accurate. I deposit money in my bank account.  In my Facebook account, I deposit photos, videos, apps, more photos, more videos, and even more photos.  My Facebook account is saved in the hard drive of an army of servers, but compared to my bank account, I am beholden to nobody! This is typical of the 2.0 web: everything is free, no one asks for anything.

In 2007, Facebook was valued at $15 billion, thanks to the generous $240 million investment made by Microsoft to secure 1.7% of its capital.  At the time of the investment, an account was valued at $250. Once again, we see the same unreal ratios that we saw during the first Internet bubble.  If there is anyone out there who can clearly explain to me Facebook’s business model, I am all ears.

Facebook’s balance sheet is protected like a State secret: in 2008, rumor had it that its turnover was $150 million, for 200 million accounts, meaning .75€ per head in annual revenue.  You might as well invest in a bakery.  To finish it off, add 50€ million in losses—how else can you afford the mass of servers that allow the pokes, the photos, the videos and the wall posts to continue?  And let’s not even talk about the bandwidth.

These digital cowboys, and the bankers who are backing them, seem to forget a basic rule of business: when a service is free, the “customer” has no commitment and can leave at a moment’s notice—as soon as he feels that the grass is greener elsewhere. This is what’s happening on Twitter, digital financing’s latest joke. What is the business model of a site that has no advertizing?  A mystery.  So could the web 2.0 bubble burst? Theoretically, yes, if you believe that history– and mistakes– repeat themselves.  Take note of the frenzied mergers and acquisitions that are built on hot air—which is exactly what happened when Facebook, afraid of Twitter’s dominance bought Friendfeed, another free service that aggregates feeds.  Apparently it was purchased for $15 million in cash and some $32 million in Facebook stock.  A stock that today is worth practically nothing.

The second reason is linked to the enormous size of the “market”.  Its hugeness excites the imaginations of various Internet visionaries, leading them to throw caution to the wind and to continue funding and refunding these startups.  All this does is grow an economy where consumption of technical, financial and human resources is inversely proportional to results. In this system, managers of influential sites (Facebook, Twitter) are constantly changing their economic strategy.

The mysterious business model of giants like Facebook, the moribund Myspace or even Twitter makes one think of the problems of social security: too many users and not enough contributors.

Even the advertising market can’t sustain this economy.  Advertising investments can’t be stretched to infinity (even in a good year, investments grow incrementally) and what’s more, businesses would have to radically shift their media planning budget from TV, radio and press to the Internet.  To think that in the future billions will be invested in Web 2.0 services whilst maintaining equivalent budgets in television is naïve.  One media will most certainly lose.  For the moment, television still offers brands a “coherent” advertising platform and measured audiences.  Television is still an enormous meeting place that Internet has not yet been able to match.

So can we imagine for a second that this all stops from one day to the next? Perhaps one day, the financers will go knocking at Facebook, Twitter, Dailymotion (which brought in 4.7€ million for 14€ million in losses) and numerous other blogs in an attempt to collect on the millions and billions invested that brought only losses: a classic event that happens on the eve of a crash. Just because this scenario seems extreme doesn’t mean it won’t happen.  Or will it?

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