Web 2.0: A new dot.com bubble in the making?

The rapid expansion of Web 2.0 does not necessarily herald 'dot bombs'

The dot.com bubble burst - numerically at least - seven years ago this month when the NASDAQ Composite index peaked at 5,048 - more than double its value just a year earlier.

What followed was a bloodbath of layoffs and consolidation caused in many cases by "dot bombs" -- companies launched with great exuberance to grab as much Internet real estate as they could without mounting a successful revenue model.

In 2007, new Internet technologies have prompted another rush by start-ups and industry stalwarts to tap the burgeoning energy associated with Web 2.0 wikis, blogs, podcasts, widgets and social networks to quickly extend their Internet real estate.

Cisco Systems, for example, this year has acquired two firms that focus on social networking, while venture capital is flowing for newly-established firms like Eons, which is making a social network for the 50-plus crowd, and Geni, which is building a social network for families.

But while the Web 2.0 phenomenon may have some things in common with the Internet bubble, experts note that there are also stark differences, including the low cost of entry for companies launching blog, wiki or social networking businesses, and the maturity of infrastructures like broadband that needed to support many Web 2.0 technologies.

The main difference, however, is that this time around consumers are driving the adoption of the technologies rather than companies trying force their Internet sites and wares onto users, according to industry observers.

Indeed, instead of parking on the Web 2.0 sidelines to wait out a possible bubble, companies should be embracing the new technologies or risk losing out to competitors, said Andrew McAfee, an associate professor at Harvard University who coined the term Enterprise 2.0.

"What if they decide to ignore this phenomenon and their competitors don't and are able to harness this energy we see on the Web with Web 2.0," he said. "If the competitor can harness that internally and with its community of customers and suppliers ... how much trouble would that first company be in? How unpleasant a scenario would that be? That is a key question for managers."

McAfee, like others interviewed for this story, doesn't expect that a rush to create Web 2.0-based systems will lead to a new dot.com-like bubble that will burst under the stress of failing businesses. "The first go around was so big, and there was so large a collapse that I have trouble believing either the up or the down will be as big this time around," he said.

In addition, he said, venture capital investments in the new firms are generally far lower than those made during the late 1990s, and the companies receiving funding "typically have more than a Power Point" business plan, he added. "Maybe sometimes they don't have revenue ... but they have a product, some customers and adoption."

Internet pioneer goes 2.0

As the cofounder of Netscape Communication and co-author of the Mosaic browser, Marc Andreessen has had a front-row seat for the growth of the Internet. In late February, Ning - a company he cofounded to host social networks for users - completed work on its second major release. During its first two weeks of availability, users used the new release to create 15,000 social networks, he said.

While corporations have historically been the gatekeepers for content about their businesses, a new generation of users is now squarely in charge of generating content about those companies, he said.

"It is like the old joke that asks, 'Where are they going? I am their leader, and I must catch up to them.' In a lot of cases, consumers are racing ahead of the businesses trying to serve them," Andreessen said. "We think there will be millions of social networks and everyone will be using them over the next five years."

Gina Bianchini, Ning's CEO, added that the risks of moving into the Web 2.0 world are much lower than those facing companies creating Web-based products in the 1990s. Such early development efforts required costly projects to build up corporate IT infrastructures to support the new offerings, she said.

"We're seeing companies use Ning for literally US$30 a month," she said. "If you get burned on something that costs your company US$30 a month, that is very different from get burned by something that costs US$50 million."

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