Posted by: Ben | November 20, 2008

Misunderstood Web Businesses

Yahoo!, Facebook, and Amazon are working on the next revenue streams and business models. Only a small percentage of people and investors actually understand this.

Yahoo! is understood to be a site that uses its webmail, search engine, news, and gossip photos to attract eyeballs for banners and advertisements.

Facebook is understood to be a social networking site without a business model. It needs to monetize, and all it seems to do is be a time sink that lets you chat with friends and non-friends who won’t stop stalking you.

Amazon is understood to sell books and music and maybe some other things over the web. Particularly savvy people might know that Amazon is moving a lot of its products to Kindle for distribution, so that you can download a book immediately for a much cheaper price onto Amazon’s e-ink reader.

But these descriptions only scratch the surface of what these companies are doing.

The Next Wave

Let’s look at Yahoo! first. Jerry Yang just announced he would step down, which quite a lot of people wanted. Why? How does this serve the company? Yang co-founded the company with David Filo. Another guy came in and ruined the company by trying to make it a media company.

As a result, Yahoo! fell behind while Google and Amazon and other web companies took off. But Yahoo! still has some of the most popular properties online.

When Yang returned, Yahoo! cut down its operations, fired some people, and began transitioning to a more open data platform, called the Yahoo! Open Strategy. Yahoo! is a member of the OpenSocial Foundation and supports OAuth, OpenSocial, and REST for enabling the transferring of information between web sites. In a way this is part of what some have called Web 3.0, or read-write-execute. (Web 1.0 was read, Web 2.0 was read-write)

Therefore, what investors think Yahoo! is doing is something that died with the dotcom bubble. What it’s actually working on is at the forefront of the coolest stuff on the web right now. The problem? It’s not recognizable, it’s not monetizable yet, and it’s not standardized and adopted enough to allow for generativity amongst new start-ups and other sites. It also has entirely too many employees; does it really need 14,300?? But this stuff is absolutely integral to the next iteration of the internet, so Yahoo! will be right in the thick of it.

Facebook

Facebook is pervasive enough now that even people most disconnected from the internet are now creating profiles. But people think all it’s doing is being another Friendster or Orkut. Just social networking.

What’s going on under the hood? Something radical for the current internet. Facebook is working on Connect, which is similar to Y!OS but is far more closed in at this point.

It’s also working on Beacon, which enables users to show what they’ve purchased to their friends, serving as trusted buying recommendations. Essentially this is allowing each individual to be able to extend the power of his reputation and brand so he can influence advertising. Check out this presentation I did on Facebook Beacon for my class this semester.

Facebook is actively working on building a social graph that it thinks it can extend to its Applications, allowing anyone to build an app and use Facebook’s resources.

Eventually, Mark Zuckerberg, founder of Facebook, must certainly believe these will not only monetize Facebook, but become standard advertising and distribution streams in the future internet.

In fact it is evident in interviews with him (including this fine one in the latest GQ, the link of which was sent to me by Kevin Donovan…thanks!) that he knows this is the future of the internet.

Says the GQ article’s author, Alex French:

Facebook is gradually rolling out Connect, the product previewed in Zuckerberg’s July f8 keynote speech. (It currently works with CNN, MoveOn.org, and CBS, among others.) But the technology is clearly an attempt at seizing control of digital identity in the way that caused Sean Parker to see dollar signs when he first met Zuckerberg. Connect will essentially work like this: You log in once, to Facebook, and then everywhere you travel on the Web, that log-in travels with you. Such a system has potential advantages for users. Web sites will use your Facebook data to create new features—e.g., if you visit Citysearch, you’ll be able to click a tab and see which restaurants your friends have recommended. “You’ll have a seamless sign-on process and seamless access to your data everywhere you go,” says Parker. “And you’ll control who has access to your data. I don’t think Microsoft would’ve been trusted to perform that role, but Facebook has earned that trust.”

You can see why I have such a fascination with Zuckerberg and Facebook — this is what I’m looking for in Galapag.us.

Once again, like Yahoo!, Facebook is far ahead of where its users and stock-market gurus think it is.

Amazon

I think what Amazon is doing right now is the closest to being monetized. In early October, I wrote about Amazon as an investment. Since then, the stock has gone from around $80 to a closing price today just under $36. So it’s almost buyable under ideal conditions, I think.

But what Amazon is doing is not just selling books, music, and everything else. Well, it IS doing that. It’s selling everything else. Amazon is selling books at a cheaper rate that go on its Kindle reading device. It’s selling MP3s. It’s offering excellent reviews of products from its users.

But not only that, Amazon is using all of its data centers and processing speed and bandwidth to re-sell at a pay-as-you-go rate to all the individuals and small business and large businesses that want to put up their businesses online too. In other words, Amazon is enabling a business climate and operating space for entrepreneurship and innovation.

Read the slideshow I put together on cloud computing; Amazon is right in the thick of it. In fact, Amazon offers services for hosting data, crunching data, and now, content delivery networks in its recently-released CloudFront.

The cloud is the future of computing, Jeff Bezos being an early adopter of it and among the top competitors in that space. Who knows what he’ll do next? Can he cloudsource his logistics networks for business services in the same way that UPS has (UPS having moved into helping businesses with streamlining their shipping processes and pleasing their customers)?

But this is completely unnoticed. In a #daytraders channel I frequent, people were bashing AMZN. I asked them if they knew the Kindle. For one, they all said the Kindle would fail because people prefer books. That’s a myth that will die soon. Offer a device that gives you superior features to a book, with a fairly similar feel and dimension, and people will switch. Especially when they can edit and change the text as they do on a computer, and when they can interact with the content more.

Then I asked these daytraders if they knew about cloud computing and Amazon’s Web Services (AWS). Again, no. So all this stuff Amazon is doing, and supposedly very knowledgeable potential investors have no clue about it!!

Bad Marketing?

So is what’s going on here just a case of bad marketing? I’m not sure. I’m pretty sure businesses have caught on pretty quickly to the fact that you can have the cloud do all your computing for you so you don’t have to waste a lot of capital expenditures on server equipment. They’ve been a bit slower in figuring out how to leverage Facebook’s applications and fan pages for their social branding. And Yahoo!’s stuff? Forget about it. Very few people know what they’re doing.

A new infrastructure for generativity is currently being built. It will take some time for people to adjust, for there to develop a market, for coders and entrepreneurs to begin to exploit it. But it will be fabulously fun and useful to see what products come out of it all.

I’m excited, but it’s early in the game. However, I’m always looking for early-mover investment opportunities, and these web companies show that down the line, there will be a lot of them. It is particularly tempting if, instead of just being a consumer, someone such as myself is looking to be a bootstrapping entrepreneur in that space. I’m licking my chops.

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