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Consumer internet – the hype is over, now the work really starts

By March 22, 2007 4 Comments

I have been saying for some time that building consumer internet businesses is going to get harder.  I wrote two posts on the subject in January – Consumer internet – the changing nature of the game Part I and (you guessed it) Part II.

My point was that marketing and development costs will rise as services get more complicated and competition increases – leading to increased cash requirements prior to launch.  This in turn will put a premium on getting the service right first time (you don’t want to waste those marketing dollars right?) which might change the existing “launch cheap and iterate” model of building a consumer internet service.

The posts didn’t get many comments (one between the two posts) and when I made these arguments in open conversation the general response was… well, no response.  Just a non-committal nodding of the head.

Being so alone had got me doubting my sanity so it was comforting to read some of the chatter in the blogosphere over the last couple of days that hits to the same point.

Peter Rip has been at the heart of it in Web2.0 – Over and Out:

Much of the “easy” innovation seems to have been wrung out of the Web 2.0 wave.  Web 2.0 was cheap – thanks to open source, simple – thanks to RSS/REST, and distinctive – thanks to AJAX and Flash.  It helped more than a little the Google has continued to entice us all with the abundant profits in Internet advertising.

Now the hard work begins, again.  The next wave of innovation isn’t going to be as easy.   The hard problems in the WWW are no longer usability or ease of everyday content  creation.  These problems are solved. Digital cameras, SixApart, WordPress, and digital video cameras showed us how ease it could be.  Now the hard part is moving from Web-as-Digital-Printing-Press to true Web-as-Platform.  To make the Web a platform there has to a level of of content and services interoperability that really doesn’t exist today.

This is not doom and gloom, though, far from it.  IMHO we are not even half way through this revolution yet.  TV to the web, next generation search and next generation social networks are all areas I see huge value being created.

Peter Rip has the same sentiment when he says:

The web today still resembles MS-DOS more than MS-Windows

The main point of Peter’s post and also of Alan’s (that started me off on this trail) and GigaOM’s is that  the term “Web2.0” is losing its usefullness as consumer internet goes mainstream.  Couldn’t agree more.  I have been avoiding the term for a couple of months now.

Looking at this issue slightly from the other side, this is Jeff Clavier’s reasoning for for choosing to focus his investments in the consumer internet space (check out the full post – it is a fascinating read of his journey over the last three years):

Why the consumer? Because I still could not figure out how to make angel-type investments provide any meaningful leverage/return in the enterprise software space, whereas interesting things were being built for the consumer on a capital efficient basis. So efficient that these companies sometimes managed to launch their service and even generate revenues on very limited outside investment – because hardware, bandwidth and (open source) software costs had decreased by one to three orders of magnitude. And since the burst of the first Internet bubble had drastically lowered salary expectations of early stage startup employees, overall startup costs decreased to a point that a friends and family, or angel, financing of a few hundreds of thousands dollars allowed a company to reach a number of key milestones.

This rationale wouldn’t apply in the same way today.  Hardware and bandwidth continue to head south, but software development costs are rising and salaries are on the way up (to the extent that my non-consumer internet portfolio companies are complaining that competition from this sector is driving their salary costs up).

As I have said before these changes will have a profound impact on how companies in this sector are financed.