March 13, 2006 4:00 AM PST
Google deal highlights Web 2.0 boom
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Many Web companies are now publishing XML-based programming interfaces, which allows developers and, in some cases, end-users to combine information from different Web sites in "mashups." Popular mashups are those that let people take information, such as real estate listings, and display it on a mapping service, such as Google Maps or Virtual Earth.
The large number of Web 2.0 start-ups also reflects how small companies can get started relatively quickly and cheaply. Productive development tools and low overhead--in the form of relatively cheap hardware and open-source software--make launching a company without a lot of upfront investment more realistic, according to analysts and entrepreneurs.
The business models used for Web-based applications generally focus on advertising or subscriptions.
Online productivity software company gOffice, for example, funds its free hosted applications with Google ads. Some analysts expect Google's Writely offering to introduce ads, much as its GMail service does.
Meanwhile, some companies, such as 37signals, seek monthly or annual subscription revenue.
Boom or bubble?
With the list of Web 2.0 companies growing daily, some question the long-term viability of these new ventures and whether a dot-com-like bubble is forming.
Ross Mayfield, CEO of social software company Socialtext, said that too many new start-ups are building themselves up to be acquired, or "flipped," rather than establishing themselves as companies that can go public and continue growing.
"The problem is when you build to flip, you may be focused but shortsighted. Essentially, you lose IPO (initial public offering) as the exit option, and M&A (merger and acquisition) opportunities you can't foresee," Mayfield wrote in a blog posting entitled "A Flip/Flop Bubble of Microventures?"
Similarly, venture capitalist Peter Rip of Leapfrog Ventures said consumer mashups are intriguing and fun, but solid business models around the notion of sharing information are few and far between. "I see some real problems in turning mashups from an interesting parlor trick into a real business," Rip wrote in a blog.
Still, a number of small Web companies have been acquired over the past two years.
Yahoo bought photo-sharing site Flickr as well as Konfabulator, which makes desktop application "widgets," or add-ons. Google has bought several companies as well, including Blogger, photo-sharing company Picasa, and mapping company Keyhole.
RedMonk's O'Grady expects that many more Web 2.0 companies will need to be acquired, or they will simply burn out. That's because growing a hosted Web application beyond a few hundred, or even a few thousand, users requires substantial resources and technical expertise.
"To roll out a Web application to a wide audience, there is enormous difficulty scaling," O'Grady said. "The likes of Google and Yahoo have the sizable infrastructure and experience with scaling. When you combine that with the innovation at smaller shops, it's a pretty interesting combination."
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