For our current commentary we have been able to get Dr. Christian Maaß (business development AutoScout24 GmbH) and Dr. Gotthard Pietsch (member of the academic staff at the Chair for Planning and Organisation at the FernUniversität in Hagen), to carry out an analysis of the continuing Web 2.0 hype for our consultancy firm. In the process, Maaß and Pietsch grapple, in particular, with the questions of whether Web 2.0 represents a real revolution in internet-based technologies, content and business models and why the majority of companies active in the Web 2.0 sphere have so far not been especially convincing from an economic perspective. Enjoy the read!

A success story with contradictions: Web 2.0

Since, at the latest, the takeover of the video portal YouTube by Google for (US) $1.7 billion, the business press has reported on an almost daily basis about so-called Web 2.0. This (to put it simply) relates to new and popular internet technologies which implement desktop-like internet applications and which allow users, among other things, to play an active role in publishing content. Web 2.0 applications such as YouTube and MySpace are now among the most-visited websites worldwide. A result of this is that internet-based business models have also been experiencing a renaissance in the wake of these developments. Thus, for the first time since the collapse of the so-called „New Economy“, flows of venture capital to internet companies have increased again – to just shy of (US) $1 billion in 2006 alone. Considering this high volume of investment, parallels with the stock market boom of the so-called „New Economy“ are apparent at first glance. Until now, very few Web 2.0 companies have actually created any revenues worth mentioning. Even the extremely well-frequented websites (such as YouTube) have so far not succeeded in combining the high visitor numbers with an economically sustainable business model. A contradiction is apparent between the so far only limited business profits and the unclear potential of Web 2.0 technologies on the one hand, and the nonetheless high interest in them in practice on the other. Managers of internet companies must deal with this contradiction, however, and therefore need clarity with regard to activities in the Web 2.0 context. Considering this background, we make clear in the following that the discussion about Web 2.0 is being driven not primarily by rational economic considerations and technological innovations, but, above all, by the effect of an influential symbolism.

World Wide Web between the generations

What actually is Web 2.0? This question can only be answered if the so-called „predecessor“, Web 1.0 or the first-generation web (effectively known as the World Wide Web), is briefly described. The foundation stone of the World Wide Web was laid in 1989 at the Swiss research institute CERN. At that time, for the scientists, it was a question of processing documents electronically and interlinking them so that information exchange could take place flexibly, quickly and efficiently. Quite a bit has been achieved in this respect since then. Documents can be accessed today by any standard web browser and are known as hypertext. For this, Hypertext Markup Language (HTML) provides a format which defines the representation of content on the basis of so-called „tags“. The actual website is called up by inputting a Uniform Resource Locator (URL), with which the web browser requests a specific web page via the Hypertext Transfer Protocol (HTTP). The web server accessed in this way sends the corresponding HTML files back to the browser. In the process, the role of the user is mainly confined to pure consumption of the information encoded and connected in the form of hypertext. Web 2.0 is now supposed to link not only hypertext, but „content, places, people, opinions, events (...) and thereby open up a whole new world of productivity, interaction and cooperation with one another“ (Schroll/Neef 2006). Separating Web 2.0 from Web 1.0 is, however, technically not so simple.

Web 2.0: technical revolution or only a mini-revolution after all?

The increasing spread of so-called Rich Internet Applications is characteristic of Web 2.0. This term refers to applications which can be called up over the internet and which, on the basis of their functionality and use, resemble standard desktop applications. Many basic office software functions – such as the use of keyboard shortcuts, for example, or transferring files by Drag & Drop – can also be carried out in this way in internet applications. In particular technologies such as AJAX (Asynchronous JavaScript & XML) play a central role in this. AJAX makes it possible to incorporate only the newly requested content into the existing application rather than loading a completely new web page with each server request (as is the case with traditional HTTP requests). This shortens load times significantly without the slightest trace of loading interruptions, which enables a simple-to-operate working environment and creates the impression of a desktop-like application. Companies use such applications in order, for example, to integrate their customers into the value-adding process. As an illustration of this, the company Spreadshirt makes it possible for its users to design items of clothing on the internet within a specific design framework and to market them through their own online shops (also called „mass customisation“). The integration of users into the value-adding process is certainly not, however, a peculiarity of Web 2.0. Almost 30 years ago, von Hippel pointed out the significance of the internet for customer-driven innovation and the involvement of customers in the value creation process (see von Hippel 1978). In addition, there was already a steady spread of AJAX, mashups and RSS within the context of the „old“ World Wide Web (or the so-called Web 1.0). Web 2.0 thus does not represent a revolution, at least from a technical point of view. At best, it is a continuous further development of Web 1.0 and is thus more of a mini-revolution.

WWW users from consumer to producer

It is not only from a technical point of view that there have been far-reaching and continuous developments in the World Wide Web. In addition, the change in the understanding of the user’s role, from passive consumer to an active producer, which today is mostly attributed to Web 2.0, actually already took place in Web 1.0. In principle, however, an ever greater share of the population is now participating in the publication of content – on the South Korean social networking platform Cyworld, for example, more than 90 per cent of the population under 30 years of age are registered. However, the internet has always had a lively information exchange on forums and newsgroups. The success currently observed with offerings such as YouTube and MySpace is primarily a result of continually falling online costs, the growing availability of broadband connections and the digitalisation tendencies in the media that have been observable for years. Because of these tendencies it is possible, for example, for long videos to be consumed over electronic networks without long loading times, whereas these would often have been distributed exclusively in physical ways in the past (e.g. via video shops or department stores).

So it is clear that users were already actively communicating and interacting with one another in Web 1.0. Thus it can be noted that Web 2.0 does not really represent a revolution even with regards to the interactive dependency between suppliers and users on the internet. Even here Web 2.0 remains more of a mini-revolution. Even O’Reilly, one of the most substantial promoters of Web 2.0, notes: “[The web 2.0] is not something new, but rather a fuller realisation of the true potential of the web platform“ (O’Reilly 2005). However, the use of the term Web 2.0 has been successful in mobilising a large number of participants and acquiring resources (e.g. in the form of venture capital). Clearly, the term represents something other than a simple description of actual developments. In the following, we will make clear that this expression turns out to be primarily a symbol which is connected with a variety of positively-perceived meanings and exerts a significant influence over competition in the internet economy.

Web 2.0 creates reality

As a rule, the term Web 2.0 conjures up different associations among different people. One person may associate the term with various technologies such as AJAX or RSS, for example. Another, by contrast, associates Web 2.0 with a media revolution, in which user-generated content replaces traditional media. These different associations are typical for symbols which have implicit and unconscious effects on those involved. Furthermore, Web 2.0 is also associated specifically with positively-perceived ideas about the free exchange of data, information and knowledge in sometimes spontaneously emerging „communities“. In this sense, according to Tim O’Reilly, Web 2.0 serves to make the „collective intelligence of the user usable“. (citation in Hage 2006). If one goes along with Tim O’Reilly, then Web 2.0 symbolises a networked user community which generates, processes and distributes knowledge worldwide. This symbolic significance is strengthened further by the manifold anglicisms. So, for example, we speak of „social network analysis“, „folksonomies“, „social search & bookmarking“, „collaborative ontology engineering“ or „long tail“. The symbol thus creates a positively-perceived normative framework for communication in and through the internet, in which themes such as individual freedom, pioneering entrepreneurship, general well-being, and, not least, modernity and internationality surface. Web 2.0 thus implicitly constructs a reality which exercises influence on the participants, but which does not correspond fully with the actual development of the internet. Rather, the diagnosis must be made that technologies and business models discussed in this context – regardless of some sceptical voices with regard to their long-term profitability (see Patalog 2006; FAZ 2007; Hamann 2007) – are increasingly associated with a „taken for granted character“. This often goes so far that, when taking investment decisions, the expected financial success is to a large extent pushed to one side or – as in the case of MySpace – the cost positions of the platform are deliberately hidden in the balance sheet (see Hamann 2007). If one asks about the revenue sources and profit prospects of Web 2.0 start-ups, one often only receives general answers such as „someone else needs to take care of business questions“ or „I won’t be able to answer this question for another two years“. The latter was given, for example, by the director of Holtzbrink Ventures during the course of the takeover of the StudiVZ portal for around €85 million (see Spiegel 2007). Such statements should be seen as questionable though, as success-critical aspects such as making explicit the dependencies between objectives and means are not expressly discussed and – as is typical for a rationality myth – empirical examinations with regard to the sustainability of the investments are avoided. There are constant references to monetising Web 2.0 offerings with large memberships through selling advertising space. It remains largely unclear, however, under which conditions this strategy is likely to be successful. The implicit assumption that a large number of page views corresponds to high advertising receipts requires, in the context of Web 2.0, a situational relativisation. Thus, advertisers have so far acted cautiously towards pages with user-generated content – which can be seen as typical for Web 2.0 – with regard to booking advertising space: as a rule, advertisers do not want to place their advertisements in between illegal television extracts and questionable content, which, as before, is still to be encountered on these platforms and can be seen as an important cause of their popularity (see Paker 2006). Apparently, not the „Why?“ but still perhaps the „How?“ of implementing Web 2.0 technologies and applications is the subject of a more precise analysis.

The symbolic intermediary function of Web 2.0

What emerges from the preceding remarks is that the symbolism of Web 2.0 feeds the temptation to ignore critical cost-benefit predictions. This is helped by the fact that managers, as decision-makers in IT enterprises, are frequently subject to „pressure for rapid success“ (see Kieser 1996 op. cit.). Strategic investments in Web 2.0 can often relieve these pressures temporarily, as the marked symbology of Web 2.0 awakens positive expectations with regard to future success potential and, at the same time, opens up opportunities for standing out personally. Other actors, such as business advisers for example, also hope for opportunities from Web 2.0. They indeed so far belong to the central winners of the discussion about Web 2.0 because, with the help of the symbology which has been outlined, they succeed in acquiring substantial consultancy contracts. On the basis of the purely technical requirements alone, this would scarcely be possible, as the underlying technologies have been known for a long time and technical staff do not require much in the way of an explanation of them.

Conclusion: All that glitters is not gold – but sometimes glittering is enough

The discussion about Web 2.0 features a significant discrepancy in the technological and economic development of the internet thus far. On the one hand, great interest and, now and then, high expectations are associated with the underlying technologies; on the other hand, the majority of the Web 2.0 business models thus far have not been particularly persuasive from a financial point of view. This discrepancy can be explained, above all, through the implicit social symbolism of the term „Web 2.0“, which is supported by influential (rationality) myths and which acts as an intermediary for the commitment of various actors in the internet economy. Symbols such as Web 2.0 fulfil apparently important functions in the internet economy and play a prominent role in steering public interest to specific topics, initiating flows of resources and influencing management decisions. Against the backdrop of this marked intermediary function of Web 2.0, the implementation, use and further development of the underlying technologies can still prove to be worthwhile for companies even if the hoped-for successes (e.g. high income from the sales of advertising space) do not appear in the long term. If relevant stakeholders – under the influence of the social symbolism of Web 2.0 and the important standards system – see the technology as likely to be successful and are prepared to make a broad-ranging commitment, IT companies will thus be presented with (short-term) opportunities for a significant improvement in their resource configuration. In such a situation, however, the flow of resources turns out to be not the result of a direct success-inducing effect of the technology deployment, but is based rather on social expectation-effects. This expectation-effect not only links Web 2.0 with a high potential for success, but the underlying rationality myth at the same time creates a growing social pressure on the actors involved to also commit themselves to this area and bring resources into it. In this context, it is relatively unimportant, at least in the mid-term, that the term Web 2.0 apparently suggests things that do not correspond to the internet’s technological state of development; rather, the high expectations placed on Web 2.0 by those involved seek for confirmation and contradictory information is thus to a large extent screened out. In the long-term, however, there exists a risk, which should not be underestimated, of the collapse of many Web 2.0 business models.

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Analysis by Dr. Christian Maaß and Dr. Gotthard Pietsch, 4 February 2009