O'Reilly signals Free Web 2.0 party is over?

On Techmeme - Saw this article on CNet, re Tim O'Reilly's talk at Web Expo New York:

"(These are) pretty depressing times in a lot of ways," O'Reilly said in an address that first had looked like it would simply be a starry-eyed discussion of enterprise opportunities for Web 2.0. "And you have to conclude, if you look at the focus of a lot of what you call 'Web 2.0,' the relentless focus on advertising-based consumer models, lightweight applications, we may be living in somewhat of a bubble, and I'm not talking about an investment bubble. (It's) a reality bubble."

There is a limit to Ad funding for Web 2.0 businesses. Allow me a little fag-packet analysis here. The total global Ad industry is c $0.5 trillion, the online biz globally is about 10% of that at most, and the 80/20 of that goes to Google, Microsoft, Yahoo and AOL. That leaves about $10bn for everybody else, and much of that (say 80/20 again) is being hoovered up by existing high quality and/or high volume existing web assets, leaving in the order of $2bn for everyone else. Assuming every Web 2.0 startup wants to be worth at least $100m, and assuming that is on a 10x multiple of revenues, that means every successful company is running at $10m ad revenues pa. Thus, $2bn / $10m = c 200 startups can live on Ad funding globally on average. Even if I'm 10x out, so its 2,000, you can see that 100% Ad supported business models are not a majority play. And Advertising overall is likely to be in the decline for a few cycles now.

Tim also pointed out another issue, that of allocation of resources in the current market:

"And what are the best and the brightest working on?" O'Reilly asked, displaying a slide of the popular Facebook application SuperPoke, which invites you to, among other things, "throw sheep" at your friends.

"Do you see a problem here?" he posed, showing another slide of the popular iPhone app "iBeer," which simulates chugging a pint. "You have to ask yourself, are we working on the right things?"

What O'Reilly is talking about here is a typical example of what happens if everything is free - in those sort of markets, there is no way to extract extra value from delivering quality, so cheap-to-produce cr*p drives it out.

( At the O'Reilly Web Expo in Berlin I'll be talking about this and other Limits to FreeConomics - which after this week I suspect have become a lot closer to home )