Analysis: Making web 2.0 pay

There's been a boom in so-called web 2.0 companies and Google et al have been scooping up a raft of innovative start-ups but, while no one questions their creativity, doubts remain over their long-term viability. Martin LaMonica takes a closer look.

Google's acquisition of a tiny web word-processing maker turns the spotlight on a growing number of so-called web 2.0 companies struggling to survive - or angling to be Google's next purchase.

The web search giant last Thursday confirmed it had bought Upstartle, which produces the hosted word-processing service Writely.

Though a small purchase - Upstartle employed only a handful of people - Google's move is significant because it further highlights the company's interest in web-based productivity applications, which could be considered an online alternative to Microsoft's dominant Office desktop software.

It's hard to pinpoint which web start-ups could be bought next. But analysts and entrepreneurs expect Google and competitors such as AOL, Microsoft's MSN unit and Yahoo! to continue scooping up smaller, niche companies and products to flesh out their offerings.

RedMonk analyst Stephen O'Grady said: "The general pattern is that big companies let the other companies do the innovations for them. Smaller companies can do innovation in a more agile fashion outside the boundaries of a large company, and they get acquired."

The deal has also rekindled speculation over Google's future plans. Observers note that a document-creation service such as Writely could complement a Google project called GDrive to provide online storage.

The company has not explicitly said what it intends to do with the Writely service, one of a growing number of services often grouped under the web 2.0 moniker.

Though it lacks a precise definition, web 2.0 generally refers to web services that let people collaborate and share information online. In contrast to the first generation of web offerings, web 2.0 applications are more interactive, giving people an experience more akin to a native desktop application as opposed to a static web page.

In the area of web applications, the last two years have seen an explosion in web services aimed at consumers or small businesses. These services, many of which are still in beta, span many areas and companies. Here's a sampling:

• Online Calendars: One of the more active areas, with offerings from 30 Boxes, CalendarHub, Joyent, Kiko, Planzo, Spongecell and Trumba.

• Productivity application suites: Full-blown applications bundles offered by the likes of gOffice, HyperOffice and ThinkFree.

• Email and collaboration: Examples include Jotspot (hosted wikis), Goowy, Meebo (web-based instant messaging) and Zimbra.

• Project management and personal organisers: 37Signals.com, AirSet, Stikipad and Zohoplanner.

• Multimedia social software: Includes sites such as the popular Flickr photo sharing service, Podbop (music podcasting), Riya (photo search), and You Tube (video sharing).

Why the sudden boom in web 2.0 companies? There are a few reasons, both technical and business related, say investors and analysts.

More people have high-speed internet connections, making applications such as photo, music and video sharing feasible. The underlying software to build web services is being upgraded as well, lowering technical barriers that existed only two years ago.

More web developers are using a programming technique known as Ajax, which stands for Asynchronous JavaScript + XML. The end result of using Ajax is interactive web pages and sites that can automatically refresh information from a server. Overall, it makes for a better user experience, say developers.

Many web companies are now publishing XML-based programming interfaces, which allows developers and, in some cases, end-users to combine information from different websites in "mash-ups". Popular mash-ups are those that let people take information, such as real estate listings, and display it on a mapping service, such as Google Maps or Virtual Earth.

The large number of web 2.0 start-ups also reflects how small companies can get started relatively quickly and cheaply. Productive development tools and low overhead - in the form of relatively cheap hardware and open source software - make launching a company without a lot of upfront investment more realistic, according to analysts and entrepreneurs.

The business models used for web-based applications generally focus on advertising or subscriptions.

Online productivity software company gOffice, for example, funds its free hosted applications with Google ads. Some analysts expect Google's Writely offering to introduce ads, much as its GMail service does.

Meanwhile, some companies, such as 37Signals, seek monthly or annual subscription revenue.

With the list of web 2.0 companies growing daily, some question the long-term viability of these new ventures and whether a dot-com-style bubble is forming.

Ross Mayfield, CEO of social software company Socialtext, said that too many new start-ups are building themselves up to be acquired, or "flipped", rather than establishing themselves as companies that can go public and continue growing.

Mayfield wrote in a blog posting, entitled 'A Flip/Flop Bubble of Microventures?': "The problem is when you build to flip, you may be focused but shortsighted. Essentially, you lose IPO as the exit option, and M&A [merger and acquisition] opportunities you can't foresee."

Similarly, venture capitalist Peter Rip of Leapfrog Ventures said consumer mash-ups are intriguing and fun but solid business models around the notion of sharing information are few and far between. "I see some real problems in turning mash-ups from an interesting parlour trick into a real business," Rip wrote in a blog.

Still, a number of small web companies have been acquired over the past two years.

Yahoo! bought photo-sharing site Flickr as well as Konfabulator, which makes desktop application "widgets", or add-ons. Google has bought several companies as well, including Blogger, photo-sharing company Picasa, and mapping company Keyhole.

RedMonk's O'Grady expects that many more web 2.0 companies will need to be acquired, or they will simply burn out. That's because growing a hosted web application beyond a few hundred, or even a few thousand, users requires substantial resources and technical expertise.

O'Grady said: "To roll out a web application to a wide audience, there is enormous difficulty scaling. The likes of Google and Yahoo! have the sizable infrastructure and experience with scaling. When you combine that with the innovation at smaller shops, it's a pretty interesting combination."

Martin LaMonica writes for CNET News.com