Thoughts on Web 2.0 Companies

I am particularly interested in companies that do not have a business model based solely on the Internet. For instance, without a web component, companies such as Amazon, Prosper, and Zipcar are in effect, a bookstore, a bank and a car rental company. They could still remain relevant without a web presence. However, their approach to their business is to concentrate on web technology in ways that enable them to outperform their brick-and-mortar equivalents. These companies exhibit some key characteristics that I like.

First, these kinds of companies have a sense of tangibility to them. Doing business with them directly affects your physical reality. For instance, when you buy a book through Amazon, a package arrives in the mail containing it. When you take out a loan on Prosper, your bank account correspondingly increases when the loan is funded. When you reserve a vehicle through Zipcar, a car is waiting for you in the parking spot specified. Contrast this to Facebook, where friending someone results in gaining access to their information. Nothing truly happens in the physical realm. I can respect the power of information-only business models, but I just cannot seem to shake the sense of unease that they impart in me.

Second, because of their nature, companies such as Amazon, Prosper, and Zipcar will make some iota of money from every transaction that is ever undertaken by a customer, even the very first. Obviously, this does not necessarily correlate to profit, but it does seem to be a simpler way to eventually get there. Making money from the very start is an important characteristic of a company to me. It seems to encourage slower growth and offer more opportunities to make adjustments based on your customers. Certainly many people have made an immense amount of money by building huge audiences very fast and then selling advertising for them. However, I think what is overlooked is how much of an investment it really takes to build up and more importantly, maintain, a target-able audience. The advertising business model is glamorous, but I do not think it is for me.

Third, these types of companies are subject to physical constraints. There is only so much warehouse space for books. There are only so many delivery trucks in the world. There are only so many parking spots available. These businesses are subject to the natural forces of supply and demand. If a ZipCar sits in its spot unused, it is costing the company money because it is depreciating in value and it is taking up a rented parking spot. Therefore, a surplus of ZipCars is a liability to the company and carefully monitoring the number of ZipCars necessary to fulfill local demand is of the utmost importance. Contrast this idea with search results. If a search engine constantly returns a surplus of search results, is it a liability to the company or advertisers? Not particularly. Information has become so cheap to store and transport that it is often cheaper to simply return all potentially relevant information available rather than exert the energy needed to be sure all results are relevant.