Consumer internet – the changing nature of the game

I have been thinking for some time that the extreme capital efficiency of many web2.0 businesses is a feature of where we are in the cycle and will start to come under pressure as the sector matures.  So when Max Bleyleben – in his post on Web2.0 bubble debate in full swing pointed me to Tom Evslin on Fractals of Change writing about how marketing costs will go up I decided to post about it.
Tom’s main point is that before the blogosphere got busy it was easy for companies to get themselves noticed for relatively small amounts of money, but now that is getting harder and is starting to require more money.
I agree with that wholeheartedly – one of the reasons I have been able to achieve some success with this blog is that I was one of the first European venture capital blogs, and the first to post something pretty much every day.
Marketing into a void is easy.
Tom also hints that development costs may start to rise.  One of the features of the web2.0 phenomenon has been the use of open source software to launch beta services quickly and cheaply.  A lot of these services have been great steps forward, but are still primitive when compared with where we might end up.  Think about the early blogging tools or the challenges in setting up some of the early personal home page sites.
These services got fantastic traction because they were light years better than the alternative (which was often ‘do it yourself’).  Then they improved based on user feedback and were able to bootstrap themselves very effectively.
The next generation of consumer internet services might need to have more features and a more polished service to get that initial traction – if so that will mean more development time, and more money.
Factoring in an increased need for marketing spend makes the problem worse.  Getting good value out of a marketing campaign means getting the timing right – and the temptation for many will be to delay the marketing campaign until they feel really good about the product – further increasing the cash requirements.
I am generalising a lot here.  Many new consumer internet services will be in new areas and their challenges will be less.  But many will be seeking to challenge the likes of MySpace and Bebo, for example maybe by offering a more immersive 3D type experience.  Doing that will cost money.
I am describing a change in the way consumer internet companies are built and funded and I will have a look at some of the implications of that in a later post.