the reflexions insider

Recently the ever-snarky tech/finance blog Silicon Alley Insider held a contest to propose how to fix what they called Digg.com’s “broken business model” (”broken” because Digg lost $2M on $6.4M in revenue, a staggering loss by any standard). The winner would have his or her proposal (and resume) delivered personally to Digg founder Kevin Rose and CEO Jay Adelson. The winner was Keith Cowing, an MBA student at Cornell, who suggested among other things that Digg generate revenue by selling sponsored posts on the home page and data to marketers about its users. Probably something Digg should consider but it’s hardly a revolutionary thought and not exactly the kind of model that will transform underperforming web 2.0 properties into revenue generators.

By and large the “web 2.0″ crop of business models has been disappointing. There are no shortage of examples. YouTube, purchased by Google for $1.65 billion, has a revenue model that’s “so secret, even Google doesn’t know what it is.” While Google doesn’t publish financial information about YouTube, its impact on revenue has been described as “not material” in a regulatory filing (read: “we’re hemorrhaging money on bandwidth fees, thanks for asking”).

And of course there’s Twitter which, not only having to shell out for bandwidth and servers, has positioned itself to pay the mafia rates associated with SMS gateway and messaging fees leveraged by wireless carriers. Oh, and it makes zero revenue. As in, your little cousin’s lemonade stand generates more revenue (and at this point, is probably a better investment). Nevertheless, having recently declined a buyout offer of $500 million in Facebook stock (the value of which is admittedly questionable at best), its backers remain confident that Twitter will pay off - although one expects the payoff to be in the form of an acquisition rather than a fundamentally new business model. Yet again, hardly a revolution.

But there’s hope. And from my perspective there’s a need to return to a basic truth: deliver value, and revenue will follow. What’s lacking is a sense of how value can be extracted from the vast pools of content and data that are freely accessible yet are hardly usable. With all the whiz-bang AJAXy coolness of web 2.0, there’s still a basic lack of intelligent applications that deliver meaningful, valuable data based on context, preferences, and relationships. Linked, structured, and queryable content is where real value can be culled. Companies can capitalize on SaaS-driven API’s, advertisers can deliver hyper-relevant communications, consumers can find what they want more efficiently, and researchers can merge data from what have traditionally been separate yet related silos of information.

I’ve heard Organic’s Marta Strickland (who contributes to the Three Minds blog) say that “Web 3.0 will make music out of web 2.0’s noise” - I think this is a terrific analogy and there’s no reason it can’t translate to financial statements.

The challenge is laying the framework for this next generation of revenue models. I believe it will be driven by a combination of open standards and forward-thinking trend-setters who understand that interoperability and cooperation are key. I’m convinced that “linked data” (for lack of a better term) will provide the key to a new generation of yet-unseen business models. Let’s just hope we live to see it.

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