How does Web 2.0 make a profit?

It’s an important question, one which not enough people are asking. After all, people are in this to make a living, not just because it’s cool, aren’t they?

I read a great article today called Web 2.0, Revenue Models and Profitability on The Drama 2.0 Show on the subject. It’s well worth sharing because it makes some really strong points questioning the viability of some of the most talked about online businesses out there at the moment.

The central theme of the article is that

“Not only are most of the hottest Web 2.0 startups unprofitable, quite a few lack viable revenue models altogether. “

It’s tough to disagree when it puts them in the context of their Web 1.0 peers such as Google, eBay and Yahoo, all of whom are, and were, profitable within a few years of starting out.

I remember being party to the dotcom boom and bust of 2000 in the UK when the likes of Clickmango came and went in less time than it takes Royal Mail to deliver a 1st class letter. This was when a savvy operator with a van could asset strip a dotcom of its shiny new iMacs in candy colour on a daily basis and turn a nice gig doing so.

Everyone talks about as the defining failure of the period, which to some extent it was, but at least it was brilliant and now looks to have been way ahead of the curve as both a web site and a shopping experience. I look back now and think that maybe they were right about a lot of things. Certainly there’s lots of functions that other people have adopted that they were one of the first to attempt.

The rule for business plans in those days seems to be “make sure you’re profitable within the first three years”. Or at the very worst “get them drunk, but make sure they sign”.

Compare that to the noise of Web 2.0 evangelists and companies who are all about conversation and community and making the web a better place. There’s taking your time to grow a business and then there’s arsing around on the internet pretending that what you are doing can become a business.

A lot of people seem to be dangerously close to buying into the latter which in my view will lead to a dotcom bust far worse than the last. In 2000 we’d only sacrificed our time and energy as unrecoupable expenditure, this time we may find that sacrificing our personal information is cost we’re not as happy to write off.