This is the second in a 3-part series, by Bernard Lunn, on the new Web. Part 1 was The Whatchamacallit, Post Recession Phase Transition.
Recessions change consumer behavior, drive weak businesses and models to the wall and enable new businesses and models to thrive. This recession is likely to have a greater impact on Web ventures than past recessions for two reasons:
- This is the first recession where the Internet is the primary driving force for almost every business, big and small as well as millions of free agent individuals. In the last recession, many traditional businesses breathed a sigh of relief that all the craziness was past. You would have to have your head buried very deep in the sand to take that view now. Online is the only way forward. This makes the stakes very high for everybody, not just a few people in tech/media.
- Globalization is kicking into a higher gear during this recession. America is at the epicenter this time and Asia is the best hope for a growth engine. In the last recession, globalization meant large companies cutting costs by outsourcing. In this recession, globalization means revenue opportunity and it means cost cutting by individuals and small businesses through “personal outsourcing“.
This means that the stakes are high for a lot of people. During the Dot Com era, a few visionaries were surrounded by financial opportunists who convinced public market investors to become VCs. After the crash, engineers and real entrepreneurs reclaimed the Net and celebrated that as Web 2.0. That sense of being an elite community, where everybody knows anybody who matters and knows what they are doing, is about to be obliterated by the Main Street Web.
There are two consolations. First, we can finally let go and stop trying to follow every feed from everybody. Second, the Main Street Web will have sustainable business models that allow millions of people to make a good living and a few people to get rich beyond the dreams of avarice.
The Dot Com era handed the power to individual consumers to research prices. That was a massive and irrevocable shift in the balance of power between buyer and seller. The Web 2.0 era, social media, extends that power. We can now collectively research prices and, even more important, we can take action collectively. In a recession, when everybody gets real about saving money and making additional income, we will use this power. Social media taught everybody that we had the power - we could write as well as read, create as well as consume, take action to change the world as well as observe changes in the world.
In the new web era, we will use that power to make a living
That is why I call this new era the Main Street Web. This is a nod to Geoffrey Moore’s Crossing The Chasm, the point in the adoption cycle when technology goes mainstream. The Main Street Web is about people who don’t care about technology or media, they just use it. Above all it is about really simple business models that work in the physical world as well as online world. The Main Street Web will empower small business and level the playing field with big business.
The Main Street Web is all about revenue, fixing the one big weakness of Web 2.0
This is not just about revenue for the founders/investors who own the site, but for the millions of ordinary people who use it. This will be the “show me the money era“. The way for Main Street Web ventures to make money is to help other people to make money. This is when the digital sharecroppers revolt and new entrepreneurs will come forward to give them a fair shake. In a recession everybody needs revenue. Small businesses need revenue. Digital free agents need revenue. The only people who don’t need revenue are employees with a solid paycheck from a big company, and as layoffs hit the news they will also be doing a bit of moonlighting and looking at options.
Boring technology, exciting business
Clay Shirky vividly describes, in Here Comes Everybody, how technology gets socially interesting at the same time as it gets technically boring. The basic tools of Web 2.0, such as forums, blogs, Skype, SMS, RSS and social networking have now passed the early adopter phase and crossed into the mainstream. Ordinary people are using social media to change their world.
Shirky focuses on social change and does it brilliantly. He does not focus as much on the lower levels of Maslov’s hierarchy of needs. Specifically, level 2, safety. In a recession, people focus on getting more income and reducing costs.
People cannot be duped into selling products for free
Web 2.0 was a non-commercial wave. A few people made $ millions selling their social media start-ups to Google, Yahoo, Microsoft, eBay and Amazon. But everybody else was told “here is a great new way to have fun and it is all free”. The few attempts to monetize were weak and embarrassing, because entrepreneurs and investors, desperate to justify nose-bleed valuations, seized on the only source of large amounts of cash, the good old-fashioned “massconomy” Fortune 500.
We went, in a heart-beat, from “this stuff will change the world” to “yippee, this is new way to sell mass produced products to consumers online”. That is the Dot Com era on steroids vision that made Facebook’s Beacon a massive embarrassment. “Coca Cola wants to be your friend” is not the next phase of the web!
If digital creations are free, how do digital free agents make money?
This era also taught us that all digital products (code, data, writing, video, photos, music and so on) tend towards “free to air”, because the Internet is a giant free copy machine. There is still room to sell subscriptions to large companies as they will use these services to replace the layers of legacy products and the massive maintenance and management teams dedicated to serving them. There are still huge enterprise budgets up for grabs in legacy replacement by SAAS (Enterprise 2.0, if you like). But for consumers and small businesses, the monetization of digital products will be through advertising or e-commerce.
There is plenty of advertising $$$ that wants to go online. The gap between 20% of time spent online versus 5% of ad $$$ spent online is still the big wave driving all this. The problem is not availability of budget, it is effective ways to spend it.
Most of that advertising will not be for more free digital products - that would create a shell game. (Yes, in the final days of Web 2.0 there is a lot of that shell game going on). So eventually we have to have some physical products that users crave/need/want.
“Green e-commerce” and rising gas prices
This is where it gets interesting and a bit more complex. Digital products are simple. The whole process of creating craving and fulfilling craving takes place online. Physical products have to travel in the real world, using trucks and planes and they need to be handled by lots of people. With rising gas prices, trucker strikes and increased awareness of eco damage from carbon emissions, the e-commerce 1.0 model looks seriously flawed. The Internet is brilliant at surfacing the long tail. You can find that wonderful extra virgin olive oil from a small producer in Italy. But ordering a single bottle, picked and packed just for you by the same people who grow the olives, sent on a transatlantic jet and finally delivered 24 hours later just in time for your dinner party? Some people can afford to do that, but it is no longer hip. The rest of us cannot afford to.
E-commerce 1.0 is the unprofitable part of Amazon (all those expensive warehouses with inventory). It failed dramatically at Webvan. It was always a problematic model. High gas prices and eco awareness just dealt the coup de grace. A new “green e-commerce” is needed. Orders need to be aggregated and delivered through a local hub and spoke supply chain.
Mom & Pop get hip
Luckily we already have a local hub and spoke supply chain. They are called independent retailers, the ones sprouting up again in the Main Street cracks left by the big box chains. Those big box retail chains, with their standardized supply chain processes, create long delays between spotting a trend and meeting it and limit their ability to to customize and localize. The independent shops - the once derided Mom & Pops - have the agility and direct, real customer relationships to prosper with a bit of help from new online infrastructure.
Independent retailers thrive by aggregating long tail demand at the local level
This has to be about long tail products, what ordinary people call exotic or special or unique. This can mean hand-made, which is what Etsy is doing. It can mean local food from sustainable agriculture farms. Or custom motorbikes, fancy cashmere sweaters and other cool stuff that mass affluence has taught us to want and expect. This is about the emerging global micro-brands.
Independent retailers make a living by offering products that you cannot find in the big box chains. Most have adapted to the waves of Wall Mart, CVS and other bland megastores by selling what the big guys don’t have. Sure they have to offer some basic staples as well, but consumers go to the independents because of the fun of finding something different and special. And having a human connection with somebody who knows your name or at least your face. You cannot - thank goodness - replicate that, automate it, or turn it into a platform.
It is a marriage made in heaven. The Internet is very good at long tail. Independent retailers need long tail products to differentiate.
The Internet is clearly good at surfacing long tail products. With a little extra technology, the Internet could connect some dots to deliver tremendous value (read “extra income”) to the 3 key players in this emerging Main Street Web - the independent retailers, the digital product creators and the global micro brands.
The elusive revenue model for social networking?
This is where social networking sites may find an enduring revenue model. Possibly. They have already found what does not work - helping friends to sell massconomy products to their friends in a glorified online Amway scheme. What would be much more in keeping with the peer ethos would be to enable friends to get together to buy cooperatively. General Motors really, really wants to spend more ad $$$ online because the young car buyer is getting so hard to reach in other media. Say 1,000 Facebook users, all of whom wanted a new car, agreed on a specific model so they could bulk order and get a discount? GM would be happy, after getting over the enraged calls from the dealers. They would find ways to keep the dealers happy, the buyers have to pick the cars up somewhere local.
That sounds good, but the problem for social networking sites is that this is not about friends. If I want that discount on a new car, I don’t really care who my fellow buyers are. They don’t need to be friends. In fact it would be pure coincidence that my needs happened to coincide with the needs of my friends.
So this is about content more than about friends
But the content has to be structured to enable this to happen. Which sounds like a reasonable mission for all that cool Semantic Web stuff brewing in start-ups. This is where that implicit web and social browsing technology seems to be headed.
Get local (even “hyperlocal”)
It also has to be local. Remember, it has to get delivered in a way that makes sense for carbon/gas cost.
What on earth does “hyperlocal” mean? Is this “hype about local”. Or “what techies call local to make it sound cool?” “Local” is good enough.
Local, as a tech/media opportunity, has tended to mean local advertising. Remember Microsoft Sidewalk? over $100m spent to take on the $100 billion local advertising market. This was one of many attempts. The problem is that Craigslist took the air out of that market. Traditionalists continue to use Yellow Pages and local newspapers, but they are fighting a losing battle, while Craigslist moves rapidly into the mainstream and Google has a shot at a big chunk.
Everybody else will have to work a bit harder to deliver value to local businesses. Selling ads alone won’t cut it. Small businesses are used to a simple world of orders and margins. How many of these will you buy at what price? This has to be e-commerce and not just ads. But it has to be green e-commerce, aggregating long tail demand at the local level.
Now that enough people are online, the chance of finding other people locally who are interested in that product becomes a bit more reasonable. It needs some smart software to surface demand at that level of specificity - for that long tail product in that area and wanting it now - but given the scale of the prize, the technology will come.
Enter the digital content creators
This is where the digital content creators come in. They find the cool stuff, write about it, take pictures, interview the workers who make it, review it, create videos to explain it. They can do this on behalf of the global micro brands, being paid to create marketing materials directly for Giovanni’s Olive Oil. This will happen through free agent webs and exchanges. Or they can do this as independent micro-media, writing/videoing about the subject they are passionate about in a commercially independent way (an expert on Olive Oil who may write a negative review of Giovanni’s Olive Oil)
Adding some structure to the content provided by the digital content creators is where semantic web technologies can help. What has been described as “SEO 2.0” means that the long tail media expert tags the content semantically, so that Giovanni and his competitors can more easily find which long tail sites to advertise on. Which means that the provider of the toll booth - Google primarily - may not be able to charge quite so much. Yahoo seems to be focused on this opportunity.
Get real about ROI and monetization - its called revenue and orders
The next step is to make the monetization much more direct. CPM is a hold-over from traditional media. Re-reading the very entertaining Burn Rate, it was weird to see the Web cognoscenti in 1995 saying that CPM was not going to last, knowing that in 2008 it is very much alive and well. CPC is better, but most small businesses don’t have the engine to monetize clicks. Cost Per Action sounds better, but what Giovanni really needs is Cost Per Revenue. Or to put it more simply, orders.
More importantly he needs orders in a reasonable volume for delivery to a specific retailer.
Which means that the olive oil expert with his rich media blog has to also have an API that syndicates that data to all the places on the web where people who might be interested in olive oil hang out and also ensures that he makes some money when orders get placed.
That is one scenario for how this could play out. The goal of aggregating long tail demand at the local level is not simple to achieve. So this scenario may not be what happens. But I am convinced that emerging phase of the Web, what I call the Main Street Web, will be about:
- Simple revenue models, orders not clicks, suitable for small businesses and individuals.
- Leveraging and empowering independent retailers to compete with big box stores.
- Enabling global micro brands to grow and take bigger share from the massconomy.
- Reducing costs by cutting out physical intermediaries such as distributors.
- Reduced cost for seller, lower prices for buyer and more income for digital content creators from new technology that reduces the toll booth fee from the platform operator (known today as Google).
Small business - the neglected middle child
Small business has been the neglected middle child - neither big companies with big budgets nor billions of individual consumers. Entrepreneurs don’t know whether to treat small business as a scaled down enterprise or a scaled up consumer. That will change. Small business is on a major upswing.
Before the Internet and during the Dot Com era, entrepreneurs spent a lot of time courting big companies, as that was the quickest way to get a return on R&D. That style of enterprise selling went out of fashion in the Web 2.0 era for good reason. It is very hard to build sustainable advantage selling to large companies. This is the lesson learned by anybody who sells to Wallmart. You become a commodity vendor and the big company is always looking to replace you with a cheaper alternative and you have very little leverage when that time comes. Better to have 10,000 small clients than 10 big ones.
So we moved to the opposite extreme and sold to consumers. In a consumer recession thats a problem.
Small business is due for a comeback, powered by the Internet
In 1955, Fortune 500 companies accounted for around 1/3 of GDP in America. By 2000, that share had risen to 2/3. To put it another way, the share of the economy controlled by large companies doubled from 33% to 66%.
Imagine a world where the Fortune 500 share of GDP went back to 1/3 and small businesses got back the 1/3 they lost in the last 50 years. That maybe about to happen for 4 reasons:
- Coase’s theorem and the Internet. Coase’s law could become as famous in tech/media as Moore’s law. The main point is simple. Large firms exist because transaction costs make it cheaper to organize within the firm. The Internet obliterates transaction costs, fundamentally threatening the single rationale of economies of scale.The glue holding together big companies was the fact that external transactions cost too much. The Internet changed that.
- Mass Affluence and the hunt for “special”. Big companies are great at mass production. Small companies are better at meeting the wealthy demand for niche, special, exotic and customized.
- The decline of Fortune 500 as employer of choice. There used to be a trade off. You could the take security of a big employer and face a bit of boredom or choose the wild, scary ride of a start-up, the risks of small business or the uncertainties of the free agent life. Waves of reengineering, downsizing and other restructuring translated to workers as a simple message; dont rely on us for your paycheck any more. Profit follows talent.
- The availability of capital. Yes we are in a bit of a funding squeeze right now but that is cyclical. The longer term trend is much deeper pools of capital, packaged through many intermediaries hunting for the spark of innovation
Dancing with gorillas
Looked at from this context, the online platforms that have the toll booth are critical to the health of the economy and the ability of millions of people to make a reasonable living. That is not only a phenomenal opportunity for the big platforms (the “gorillas”) but also an awesome responsibility. Healthy competition is critical. We cannot afford for one company to have the same power that Microsoft had in the PC era.
The final post in this series, “Dancing with Gorillas”, looks at opportunities for entrepreneurs in the emerging Main Street Web in a world dominated by a few big companies such as Google, Microsoft, Yahoo, eBay and Amazon.
Image credit: bettlebrox