Web 2.0: A Strategy Guide

Preface

YOU ARE ALREADY AN INTEGRAL PART OF THE WEB 2.0 BUSINESS ECONOMY. Every time you click on Google, Wikipedia, eBay, or Amazon, you are sparking “network effects.” If you use a Flickr-enabled cell phone or tune in to iTunes podcasts or check Yahoo! Finance for stock quotes, you are creating monetizable value for businesses—even if you don’t actually buy anything.

Web 2.0 realizes and goes far beyond what Web 1.0 started. It opens tremendous opportunities as business models catch up to the technological possibilities. So many people are connected to and contribute to the Internet now that economies of scale not only lower costs, they create value.

Companies are developing business models that involve creating appealing destinations on the Web where people with shared interests can form communities. When people come together over the Web, their efforts are multiplied rather than simply added together.

Yet whether you are a seasoned business professional or a digital native, the stories about exactly how the new Web 2.0 business models work and make money may seem quite fuzzy, or even downright counterintuitive. The questions are clear:

• How is Web 2.0 different from the Web 1.0 dot-com boom and bust?

• How does Google offer “the world’s knowledge” to searchers for free and still make more than $10 billion in revenue,^[1] grow 68%, and have a stock market valuation of close to $200 billion?

• What could possibly make Flickr—a two-year-old photo-sharing startup—worth $40 million to Yahoo!, a video-sharing YouTube worth $1.6 billion to Google, a social networking site called Facebook worth the equivalent of $15 billion to Microsoft?

• Is Web 2.0 about corporate blogging, wikis, and podcasting, or something else entirely?

To answer these questions, you’ll need some analytical tools—not just buzzwords and hype—to understand how successful Web 2.0 companies do what they do, and the economic mechanisms at work. As you walk through the real-life business stories in this book, you’ll see how customers can provide value as well as cash. There are lots of ways companies can make money from that value, not just by selling goods and services directly to users. These are network effects, and you’ll see them in action in almost every case.

A growing number of CEOs and executives from more traditional industries are becoming champions of Web 2.0, with hard numbers to back up their enthusiasm. Yes, Web 2.0 matters for Fortune 100s, big businesses, enterprises, multinationals, and even countries. Don Tapscott, coauthor of the Enterprise 2.0 book, Wikinomics (Portfolio Hardcover), states, “It’s the biggest change in the organization of the corporation in a century....” In short, Web 2.0 is powering up the knowledge and network economy, starting with users, consumers, and digital natives, and accelerating as it transforms knowledge workers and businesses globally:

• Cisco chairman and CEO John Chambers is betting his company on collaboration and Web 2.0—“The next wave will be about collaboration and Web 2.0...this will drive productivity for the next decade...if you don’t understand the power of this collaboration, you’ll get left behind as a company, as a country.”^[2]

• A.G. Lafley, CEO of Procter & Gamble, made his consumer product company a Web 2.0 innovation success story by raising new product development success to an astounding 80%, compared to the industry average of 30%. Now more than 35% of the ideas come from outside—via collaborative web sites, such as InnoCentive, providing access to millions of contributors, not just the 9,000-person research and development staff.^[3]

• “Enterprises have been ringing our phones off the hook to ask us about Web 2.0,” according to Rod Smith, IBM’s vice president for emerging Internet technologies.^[4] IBM has a massive installed base and global Linux and open systems development ecosystem and partnership community, as well as a $50 billion services engine.

• Motorola is one of the biggest adopters of web collaboration tools with 4,400 blogs, 4,200 wiki pages, and 2,600 people actively tagging content and social bookmarking, under an initiative called Intranet 2.0. Toby Redshaw, Motorola’s vice president in charge of Enterprise 2.0 technologies, says that the company is now more effective at finding people with know-how and expertise: “It actually lets people see new relationships—to see maps of what smart people and like people have done.”^[5]

• Enterprise 2.0 companies with success stories range from Bank of America, Wells Fargo, Boeing, FedEx, Morgan Stanley, and Pfizer. According to Forrester Research, companies are adopting Web 2.0 technology for business productivity (74%), competitive pressure (64%), specific problem solution (53%), partner recommendation (53%), employee request (45%), and bundled service (25%).^[6]

This book digs deeper and makes concrete the buzzwords that are starting to fly around. It provides the theory and practice behind collective user value (Chapter 1), monetizing network effects (Chapter 2), capitalizing on social networks (Chapter 3), dynamic capabilities (Chapter 4), and collaborative innovation (Chapter 5). You will understand why even managers and executives of big companies and multinationals must think differently about strategy and revenue-sharing in a Web 2.0 world. Especially in a “flat world” where “size matters not,” small- and medium-size enterprises (SMEs) and even one-man local businesses or projects can use these business models to advantage.

If you feel like you missed something about Web 2.0 economics or that you somehow walked into the middle of the conversation, you’re not alone.

First, the Web 2.0 business revolution has exploded in a similar way to the “tipping point” that ignited social phenomena as diverse as fashion trends and popular fads, new movies and videogames, environmental awareness, and the diffusion of literacy through Sesame Street. Critical mass matters, and the Web has reached that critical mass. Free web services, viral distribution, and active uploaders have compounded to create powerful cross-network and social network effects. These are all almost instantaneously monetizable and trackable through advertising and targeted pay-per-click marketing.

Second, even recent M.B.A.s have a hard time pulling together all the necessary pieces of the Web 2.0 business model. Business model analysis is sometimes covered in corporate strategy classes but more frequently in entrepreneurship classes. Per-user economics (originally based on subscriber economics and lifetime value) is sometimes covered in marketing classes, but again, more frequently in entrepreneurship classes. Offline advertising and television, newspaper, and print media revenue models are briefly covered in core marketing and advertising and promotion electives, but online advertising, web analytics, pay-per-click advertising, and targeted or behavioral online advertising are rarely covered.

This book brings together all of the relevant frameworks and analysis tools from several disparate disciplines to give you the overall big picture of Web 2.0 business and economics. It will give you a lens through which to see more clearly and make sense of what’s transpiring right in front of us.

What Is Web 2.0?

Google this question and look at the first 10 organic search hits out of the possible 65 million web pages returned. If the results haven’t changed since the time of this writing, the first-ranked entry is the Wikipedia entry. The second-ranked entry is Tim O’Reilly’s article, What Is Web 2.0?, the online posting of his classic white paper and accompanying conference that coined the term.

The third- and fourth-ranked listed web sites are short YouTube videos that are well worth watching for two very different visual contexts and views. “What is Web 2.0?” is a techie perspective on Web 2.0, explaining how rich user experiences and the interactive, social Web are made possible by Ajax, RSS, and web services. The video account is accurate, though the presenter gives a dry mini-lecture with colored markers on a whiteboard.

The other YouTube video, “Web 2.0: The Machine is Us/ing Us,” is a digital anthropology professor’s perspective on Web 2.0, explaining how a shift as small as XML separating content from form so that knowledge can be exported and syndicated without complicated code could result in an explosion of uploaded user content. Billions of clicks a day contribute to the collective Web and a rethinking of ourselves—through sharing, collaborating, and trading. We visually accompany the author through a fast-paced web and blogosphere journey—keywording, hyperlinking, and clicking to the beat of techno music.

These YouTube videos provide two ends of the spectrum of Web 2.0 definitions. The technical folks tell us that techniques, architectures, and technologies have combined to trigger a phase transition—from a Web 1.0 collection of static web sites to a Web 2.0 platform for a new generation of dynamic social web applications and services. The social sciences folks show us that “we are the Web” and that right now—whether you call it Web 2.0 or not—people are shaping the Web and the world’s digitized collective knowledge in unexpected directions through their uploads, content, and billions of clicks a day. By the way, the “machine” is using this super large data set, algorithmically and automatically data-mining it to aggregate and amplify its feedback.

Browsing through the Web 2.0 definitions online reminds me of the well-known story of the blind men and the elephant. Some definitions emphasize the technical aspects of Web 2.0; to me, that is like saying, “The elephant is like a column.” Yes, the legs are necessary for the elephant to be able to stand and move, just like any other infrastructure or architecture, but Web 2.0 is so much more than the technology.

Other definitions emphasize the interactivity of users: Web 2.0 is read-write. Earlier versions of the Web were more passive and encouraged only downloading, whereas the new applications are more interactive and dynamic, encouraging users to be more involved and upload content onto the Web. To me, that is like saying that “the elephant is like a fan” because of the movement and shape of its large ears.

Some people argue that Web 2.0 is only Ajax and the use of this kind of “JavaScript on the Web” for applications such as Google Maps. This is like saying “an elephant is like a snake” because of its narrow, short tail. Others say that Web 2.0 is the social Web—blogging, wikis, mashups, and podcasts, defining one buzzword by several others—and it is identified by its best-known and widespread applications and web services. This is like saying “an elephant is like a turnip” because of its tusks.

Of course, the four blind men could not see the elephant in action. If they did, they would probably have observed it eating, as an elephant does almost constantly: 16 hours a day. Being a vegetarian, an elephant needs to ingest enough small leaves, branches, fruit, and bamboo to sustain itself and grow to 10–12 feet in height and nearly 4 tons of mass. Perhaps this is where Web 2.0 is most like an elephant.

Unlike the elephant, however, Web 2.0 has a long tail. This is the phenomenon whereby business can make more money by selling lower volumes of hard-to-find products than by selling larger volumes of popular items. (The “long tail” refers to the shape of the demand curve.) Monetizing the long tail—encouraging the nutritious leaves of small- and medium-size advertisers who are new to online advertising—is how Web 2.0 converts the Web into wealth. John Battelle, in his book The Search: How Google and Its Rivals Rewrote the Rules of Business and Transformed Our Culture (The Search) (Portfolio Trade), puts it eloquently: “Google made billions, one nickel at a time.” He was, of course, referring to the Google AdWords advertising platform where do-it-yourself advertisers can pay a minimum of 5 cents per keyword click for paid search advertising. What’s new about Web 2.0 is that both businesses and individuals can make money by providing services to customers for free.

My Executive M.B.A. students suggested that a more appropriate description and writing of Web 2.0 could be W2W or “Web to wealth.” Unlike the first generation of dot-com web businesses that poured vast amounts of venture money into acquiring new customers and unsustainable market share in the hopes of an initial public offering (IPO), Web 2.0 companies have figured out a profitable path to growth and advertising-based monetization of network effects and the infinitely diverse needs of long-tail users worldwide. This is the picture of the “whole Web 2.0 elephant” and how its business models provide both customer acquisition and monetization of its considerable network effects.

Tim O’Reilly, whose eponymous Web 2.0 conferences gave the name to the phenomenon, summarized Web 2.0 as follows:

Web 2.0 is the business revolution in the computer industry caused by the move to the internet as platform, and an attempt to understand the rules for success on that new platform. Chief among those rules is this: Build applications that harness network effects to get better the more people use them

See http://radar.oreilly.com/archives/2006/12/web_20_compact.html for more.

You don’t have to be a technologist to understand Web 2.0. It’s not about the underlying technology but about the new ways that it enables large numbers of people to come together to work, share, and build. The network effects that O’Reilly cites are at the heart of Web 2.0 business opportunities, and most of this book will examine the ways that network effects can help you make money.

Who Is This Book For

If you’re managing your own business, portfolio, or several groups and projects, you need to know how the Web is changing business and your competition. You may be an executive positioning a major strategic move or acquisition, a small-business owner looking for ways to expand, or an entrepreneur planning your next startup. You may be intrigued by all this Web 2.0 talk, or ready to jump in with a new venture or project.

You don’t need to know anything about programming or web development to understand this book. A familiarity with basic business concepts and the general structure of the Web will be helpful, but you don’t need an M.B.A. or a degree in computer science. There are some twists and turns to the story, often as old expectations break down in the face of new approaches, but they shouldn’t be difficult to grasp if you have an open mind.

You also don’t need to work for a startup, or even a Web 2.0 company. Although the details of the stories explored in this book may not fit your situation, the broad picture applies to a wide variety of companies and projects.

What You’ll Learn

You’ll learn about how to make money by monetizing the network effects the Web makes possible. Real-life business stories will demonstrate how those pieces work.

Your tour of Web 2.0 will start with lessons from the photo-sharing site Flickr, a classic user-driven business that created value for itself by helping users create their own value. Flickr’s early moves will demonstrate how a business or technology can build momentum and traction with online collective user value. You’ll see how Flickr’s six innovative collective user value strategies not only grew their community but also contributed to their bottom line and cash flow. We’ll also contrast Flickr’s experience with that of Netflix, a company that took advantage of many Web 2.0 community concepts but whose core business of a DVD lending library cost a lot more than Flickr to get started.

Next, we’ll examine Google, the best-known Web 2.0 success, exploring the ways that it makes money with a model based on free search. We reveal a whole new set of positive network effects that you probably never thought about before and show how Google has used them to catapult itself to dominance in its field. A key deal with AOL illustrates exactly how important the growth of that user base was to Google, propelling it far ahead of its competitors. You’ll also see ways that Google’s services make those benefits accessible to others who want to apply Web 2.0 solutions to their problems. Google isn’t merely a company to emulate. Google is a company that has changed the rules for doing business on the Web, opening up opportunities that you can take advantage of.

The next step in our guided tour takes us to Facebook and LinkedIn, where we’ll examine social network effects. Ever wonder how Facebook grew to 55 million users so quickly? Or how they are monetizing social network effects, social influence, and viral distribution of applications? Why LinkedIn changed the nature of business networking? Why small numbers of hubs and connectors online can activate increased value for all users in your community or installed base?

Once you’ve learned to recognize and take advantage of network effects, it’s time to apply that understanding to knowledge-based companies of all sizes, including the Fortune 500s and multinationals. We look at the dynamic capabilities and competence syndication of companies like Salesforce.com, IBM, and Amazon. Businesses can tap into the Web as a source of indirect revenue, using creative new approaches to monetize their investments. Amazon, for example, lets its customers help other customers find their ways to products that they might be interested in, building a level of trust that’s hard to find even in a well-done catalog. Amazon has built on that combination of community and technology to develop other services, such as its S3 and EC2 hosting services. In other cases, it may make sense to use all the community to build, well, a community. IBM has applied these lessons to its Linux evangelism, making Linux more accessible to the potential 14–16 million open systems developers emerging in China and India.

Web 2.0 isn’t strictly about the Web, either. It’s also about collaborative innovation and online-offline sharing. Apple’s iPod and iPhone include physical, web, community, and licensing ecosystems to produce a complete experience that is proving extremely popular, and changing the nature of the music and cellular industries. Jajah’s long-distance calling business is simpler, but it also takes advantage of relationships with existing companies in the “old version” of the telephone industry and the viral potential of users marketing to their friends.

Finally, you’ll find out how to transform your business, examining specific practices for integrating Web 2.0. There are lots of possibilities to explore, and lots of decisions to make, but when you’ve finished this journey, you’ll be ready to apply Web 2.0 to your own situation.

Tip

If you want even more opportunities to learn about Web 2.0 and related business subjects, explore the Endnotes and Bibliography at the end of the book.

Implementing Web 2.0

This book examines the “why” of Web 2.0 more than the “how,” focusing on strategy rather than tactics. For a more implementation-centered perspective, you might want to start with Tim O’Reilly’s article What Is Web 2.0? at:

http://www.tim.oreilly.com/news/2005/09/30/what-is-web-20.html

If you need more detail on the tactical side of Web 2.0, John Musser’s Web 2.0: Principles and Best Practices (O’Reilly) explores the eight patterns Tim describes in much more detail, and it includes a checklist of questions to consider while implementing a Web 2.0 strategy.

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Acknowledgments

This book was a voyage of discovery, with many adventures, fascinating views, and unexpected obstacles along the way. My thanks to:

• Tim O’Reilly and executive publisher Mike Hendrickson for championing this project and seeing its breakthrough potential

• My editor, Simon St.Laurent, for making this book readable

• Dean Rolf Cremer of China Europe International Business School (CEIBS) and former Deans Dave Hodges and Hal Varian of U.C. Berkeley

• The many executives, managers, M.B.A.s, and alums who have challenged my thinking and shaped my ideas through discussions, conversations, seminars, and workshops at Yale, Harvard, Berkeley, Wharton, CEIBS, INSEAD, Chalmers Sweden, École Polytechnique, ENPC, HEC, ETH Zurich, University of St. Gallen, University of St. Petersburg, Russia, and the World Economic Forum retreat

• IBM, Cisco, GE, Intel, Procter & Gamble, Booz Allen Hamilton, The McKenna Group, The Silicon Valley Strategy Group, WDHB, Société Générale, PPR, and Bouygues

• The Silicon Valley venture capitalists and CEOs of portfolio companies who shared their experience and insights through more than 50 M.B.A./Ph.d. entrepreneurship field projects

Despite the help, advice, and encouragement received from so many, any shortcomings or errors remain entirely my responsibility.

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^[1] MarketWire, “Google Revenue to Exceed $10 Billion in 2007,” March 2006, http://www.emarketer.com/Article.aspx?id=1003885 (accessed Feb. 2008).

^[2] Steven Deare, “Cisco CEO sings praises of Web 2.0 future.” ZDNet Australia, April 27, 2007, http://www.zdnet.com.au/news/software/soa/Cisco-CEO-sings-praises-of-Web-2-0-future/0,130061733,339275139,00.htm.

^[3] J. Nicholas Hoover, “At Procter & Gamble, The Good and Bad of Web 2.0 Tools,” Information Week, June 23, 2007, http://www.informationweek.com/story/showArticle.jhtml?articleID=200000229.

^[4] Robert Hof, “Web 2.0 Has Corporate America Spinning,” BusinessWeek, June 5, 2006, http://www.businessweek.com/technology/content/jun2006/tc20060605_424102.htm.

^[5] Ibid.

^[6] R. Todd Stephens, comment on “P&G Web 2.0 Success Story,” Forrester report cited on Collaborage: Enterprise 2.0 Implementation Overview blog, comment posted on Nov. 27, 2007, http://www.rtodd.com/collaborage/2007/11pg_web_20_success_story.html.