Dan Lyons has written how every company will start spinning itself as well placed to benefit from a recession/downturn. Like him I detect a similar whiff of panic from companies who know deep down that they may not have a plan even after their cash runs out, layoffs or not. Raising capital is not a business. In this climate revenue is what counts and to get that you need this:

• Focus: You need to be very focused on a single product. When it has some traction then you can fold it out in ways which build upon the core product – not radical, unconnected departures. We had to make a decision whether to continue with Zoimusic and one of the reasons for suspending it was that it was, presently, too far removed from Zoiads. With the resources we had it would have been a distraction so we focused everything on getting our viable project, Zoiads, launched.
• Business model: No longer a luxury but a necessity. The old Web 2.0 way of users, …, profit! is at an end. If you can’t convincingly explain how revenues will scale with users then you are in trouble.
• Innovation: A genuinely new offering. Nothing is completely different from everything else, when Google came along there were other search engines. That said it had an important element, PageRank, which made it stand out from others. It has to be a genuine difference to stand out from the myriad of other startups. There is no future in doing basically the same thing as everyone else. Ad networks are the classic example. Selling banner inventory on websites is basically an old media business model transposed to the web. Anyone trying that is not entering a recession or a depression. It is the end.

The end isn’t nigh

Finally, how bad are things really? I remember the last recession in the UK and it was exacerbated by stunningly high interest rates (15% at the peak) which prolonged the agony and made things worse. This time rates are at 4.5% here and are poised for a number of cuts. Combined with the drop in oil prices and inflation this means that ordinary people who keep their jobs, which is most people, will actually be better off in the fairly near future. I know this because I have a mortgage and the one thing which affects me most month to month is the interest rate. I’m not saying people will start rushing to the shops straight away but they will have incrementally more money than in the past 12 months.

Things look a lot worse because we are going through a fundamental realignment in the world economy. The banking system is about to change and, more locally for tech startups, online advertising, content distribution and mobile are all about to come of age. It looks scary now but it is a necessary stage to get to 21st century capitalism. A lot of the squealing at the moment is the equivalent to the horse and carriage operators around when Brunel built the first railway. Those who know they have nothing new to offer like to pretend everyone is doomed but that is false.

The companies who will get through it and prosper are the ones who realise how the world has changed and build products adapted to it. And we won’t really know that until we are on the other side. What is certain is that we are at the beginning not the end and that there are great opportunities to be had for those brave enough to take them.

The coming recession is going to burn away a lot of web 2.0 startups. In fact I’d say we are seeing the end of web 2.0 altogether. I think it was a period of great experimentation, lowered costs and returning VC confidence following the first bust allowed entrepreneurs to experiment with the social web without the pressure of turning a profit. In a way it was the private sector equivalent of DARPA which allows scientists complete freedom to innovate. The Internet itself was one of DARPAs projects and in the same way I expect a lot of great businesses to trace their roots back to web 2.0.

The key concept from web 2.0 is individualisation, putting the user in control. Whereas before web 1.0 was about the passive user web 2.0 was about users engaging with the web and tailoring it to suit them. You hear a lot about advertising as a good or bad business model. It really depends on how you are implementing it. Mimicking old media and web 1.0 by trying to build a large user base then forcing ads they don’t really want to see on them as ‘payment’ for the content is not a good business model. What you should really be doing is finding a way of making the ad relevant to the individual user and showing it to them when they want to see it.

In that sense the company with the first web 2.0 business model was Google. It offered something genuinely different to advertisers – a snapshot of what a user was thinking at any one point – so that they could target their advertsing far more effectively. The reason none of the web 2.0 companies is making a profit is because they have rethought the service but not the business model. The company that cracks that won’t have to worry about any recession.

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It is interesting that the most successful tech company since the dawn of the Internet makes most of its cash from something as simple as text ads. Yahoo is still in the bits and pieces high traffic ad blasting business, the reason Google has taken every other tech company to the cleaners in recent years is that it is the only company which has fundamentally changed the way advertising works.

Online video doesn’t really make money because it doesn’t really change much from the original model. How is watching an episode of the Office on Hulu with an ad break that much different to watching it on TV? It’s on demand but from the advertisers perspective it is not much different. They look at the demographics of the viewers and blast them all with the same ad. They may tinker with better contextualisation but the model is essentially the same just with slightly better tools. The fact is that when people watch a TV show they want to see that show, not an ad. Advertising something they put up with, not something useful to them.

Content and hardware

Investors are piling money into online video hoping for big returns as their startups become the new broadcating giants. I think those investing now are going to lose their shirts for two reasons, content and hardware. At the moment getting content deals is absurdly difficult and those that manage it are tied to astonishing price levels. Content owners are wary of cannabilising their existing revenue streams and are choking online video with patchy deals and high prices.

It will take time for them to be convinced that online can produce substantial revenues and they will be wary to back it. The only impetus for change will be seeing their content distributed for nothing by pirates. Judging by the time it is taking the music industry to embrace new models it will be some time before that happens. Film has the added insurance of the big screen and the communal experience which people will always want.

Hardware is also nowhere near where it needs to be for online video to be a viable mainstream business. Watching video on a computer screen is not a good experience. Until we get easy to use, smart set top boxes attached to the Internet and capable of delivering online services direct to the TV the ordinary person will stick to broadcasts and dumb DVRs. The Netflix/Roku and Apple TV/YouTube deals show the way forward but it will be years before these go mainstream.

Pic: gunthert

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