I’m getting a bad feeling about Web 2.0. A little over a year ago I praised VCs for their restraint in investing in Internet startups and even suggested that maybe they were under-investing (see “Time to Dream Again,” August 2005). But my thinking was based on the assumption that investors would try a variety of business models. With each passing day we hear about yet another Internet company that wants to shake up the world but is built on the unstable foundation of advertising.
The latest big idea idea is Zecco.com, which is backed by early Skype investor Morten Lund and others. “The time is ripe for a disruptive approach aimed at the U.S. brokerage industry,” Lund says in a press release. “There is absolutely no reason consumers should accept paying anywhere from $10 to $20 for a service that is easy to provide at no charge at all.”
Take a wild guess at how Zecco is going to provide trades for free. Oh, could it be advertising?
Jeroen Veth, the 37-year-old founder and CEO of Zecco.com, exclaims in a press release: “Our model is different. We run a lean operation, use the latest technology and rely entirely on word of mouth, guerilla marketing, viral campaigns and public relations to get the message out. As a result we can look at the $2 per trade as the cost of doing business—and still turn a tidy profit.”
The success of Skype notwithstanding, Lund is buying into the same hype that fueled the first Internet bubble. The notion that you can turn the brokerage industry on its head by subsidizing free trades with ads is loony.
Mind you, there will be lots of Internet companies that will be sustained by ads (see our cover story from last month: “Dawn of a New Ad Age”). But there isn’t enough advertising at present—or even over the next few years—to support the number of Internet startups relying on ads as their chief source of revenue.
There are encouraging signs that brand advertisers are embracing the Web, like Cingular’s decision last month to sponsor a battle of the bands on YouTube. But it’s going to take a long time before those sorts of advertisers really buy into the Internet. Spending for online ads (display, search and classifieds) currently accounts for 6.7% of the overall U.S. advertising market, and will grow to just 8.6% of the total by 2011, according to JupiterResearch.
Instead of writing a check for yet another ad-supported Web company, VCs should be insisting that Web 2.0 entrepreneurs do what they’re supposed to do—come up with new ways of doing business. Applying what has been a successful business model for TV, radio, magazines and newspapers to the Internet isn’t innovative. It’s lazy.