I’ve been monitoring web 2.0 developments (with the help of your TechCrunch feed – thanks) for a while, and looking for common threads. I see a tremendous amount of excitement and all sorts of cool ideas. Most seem to focus on integrating with what Fred Wilson calls “edge feeders” (Flickr, del.icious, furl, etc.), adding value and then presenting the results to the consumer.

Increasingly, however, I’m bothered by the basic question: what’s the business model here?

I note that every one of the edge feeders has some kind of caveat that their service should not be used for commercial offerings (ie, you shouldn’t serve ads with your value-add), and all have some kind of access control for content posters (either a name/password or an API key).

Now, I can see how the value-adding guys (mostly bloggers) can get ad-based revenue. But what about the edge feeders themselves (which I think includes Google and Yahoo, BTW)? What they all do is provide not just the content via the API (so others on the edge can run applications that use the API-based content), but they also provide some basic “in-house” applications. Presumably, these help edge-based applications developers understand what can be done with the API-based data, and may also bring in some ad revenue directly.

But ultimately, something has to give. It’s actually beginning to seem very much like the web 1.0 bubble, where everyone assumed that they’d figure out a way to monetize their collection of eyeballs, but then couldn’t deliver. How much would Flickr’s popularity drop (plummet??) if they started charging? Or del.icio.us?

Near as I can figure out, what these edge feeders are doing is trying to stimulate others to invest in applications that are dependent on their API’s. When they get enough of those, and those applications develop a base of loyal consumers, then they’ll start applying some kind of charges.

Well, that’s kind of reasonable, I think. But with the deeply embedded culture of “free” that’s out there, where do we get the confidence that they will survive when they start to apply a fee?

Moreover, when I think about how the charges might be allocated, it gets even more difficult. I mean, if you want to “donate” your insights to del.icio.us, to make them available for use by others, you might not be inclined to pay for the priviledge. On the other hand, if you use del.icio.us to publicize your content, the charge might make some sense. But how will del.icio.us discriminate between altruistic users and profit-oriented ones?

There are lots more specific issues involved, of course. But the bottom line, as I see it, is that these edge feeders can’t continue indefinitely to provide their services for free. (Shades of web 1.0!) But ads don’t fit with API’s, so they’re going to have to apply direct charges. And when that happens, what’s to say that this whole, wonderful, interconnected, web-service-based web 2.0 won’t collapse like a deck of cards?

I’m thinking of making some investments in this area, but this whole thing is starting to make me nervous. Am I missing something?

Regards,

Terry Steichen