All booms eventually go bust
Web 2.0 will too, but, as I wrote last year, this time it will be different. The boom companies aren't publicly traded stocks like they were in 1999, they are VC backed companies. VCs are very experienced at handling risk and failure. No one is going to lose their college or retirement savings in this bust cycle.
The Financial Times has a story today "Web 2.0 Fails To Produce Cash"
Many members of the Web 2.0 generation of Internet companies have so far produced little in the way of revenue, despite bringing about some significant changes in online behaviour, according to some of the entrepreneurs and financiers behind the movement.
The shortage of revenue among social networks, blogs and other "social media" sites that put user-generated content and communications at their core has persisted despite more than four years of experimentation aimed at turning such sites into money-makers. Together with the US economic downturn and a shortage of initial public offerings, the failure has damped the mood in internet start-up circles.
Bubble Cycle - Bubbles go through predictable cycles. Bubbles emerge from the ashes of despair. It takes a while to gain momentum but eventually greed overtakes fear and we are off on another bubble adventure. Stage one of a bubble is when most smart money declares we are NOT in a bubble...it is different this time. Stage Two is more dangerous. Many people agree that we are in a bubble, but it will last another year or two, and there is still money to be made. The third stage is when the bubble has burst but most people are in denial and think it is a temporary set back. The fourth stage is when everyone agrees the bubble has burst and life will never be the same. My guess is that we are now well into Stage Two of the bubble cycle.
Advertising Revenue Math - How much traffic is needed to generate $1M in ad revenue? It all depends on how well you can target your audience and how much you can charge for CPM rates. For social network sites let's assume an average CPM of $0.40. You would need 2.5 Billion page views per month to earn $1M in ad revenues. That is 2,500,000,000 page views...how many sites generate that traffic?
Extrapolating Success - Facebook, MySpace, and a few other social network sites do generate significant traffic where the advertising numbers do work out very well. Some investors make the leap of faith that the next "shiny object" idea will enjoy similar success. In the rush to do a deal, it seems that few of them stop to do the math on what it takes to get there and calculate the odds of success. This is another one of those cases where there will be one or two winners and a hundred broken hearts.
Who do you see as the winners...and losers?
So well articulated. I couldn't have said it any better except that I would add one more intangible argument to the tangible math argument that you so eloquently mentioned, and that is that the majority of people, especially those who are vocal and tend to generate content, hate ads and therefore ignore them. Furthermore, even those who do tolerate ads are drowning in millions of ads. Therefore, regardless of the reasons, the great majority of ads are ignored. So, even if websites do produce the unattainable traffic that you computed, the ads can't produce any real leads, which eventually catches up to marketers who can't demonstrate any respectable ROI.