The Net's New Age

Technology that aims to revolutionize how surfers use the Web is fueling a new wave of Internet investment and challenging established media

In a small deal that signals big changes on the Internet, Google announced Mar. 9 that it has acquired a Silicon Valley sensation called Writely. The online word processor is still in the testing stage, but it's attracting attention as a free alternative to relatively expensive desktop applications like Microsoft (MSFT) Word.

But the transaction stands out for bigger reasons. Writely is one of dozens of companies that are infusing once-static Web pages with the power, speed, and features of sophisticated desktop applications. And by combining these online applications with the new wireless and broadband communications ability of the Web, they are redefining the Internet itself.

With an application like Writely, people can do much more than store documents online. They can also collaborate, often in new and unique ways. Groups can work together on a document, making changes that appear in real time and doing so without the need to reload the Web page.
MAIL MADE EASY. Such innovations are fueling a new Internet boom that rivals the growth of the mid-to-late '90s. Referred to collectively as Web 2.0., the new technologies are drawing a fresh influx of dollars to the Net.

Investors are backing the development of new companies like Writely and social bookmarking site del.icio.us, which was snapped up by Yahoo! (YHOO), giving rise to a new generation of entrepreneurs, such as 31-year-old del.icio.us founder Joshua Schachter (see our BW Online slide show). Established Web giants like Google (GOOG) are tapping Web 2.0 to spawn new avenues of growth, create jobs, and usher in an age where the Internet emerges as a credible rival to established media and communications companies. The Web 2.0 designation covers a broad range of tools and applications. There are new tools like del.icio.us, which allows users to store their bookmarks at a Web site, "tag" them with category names, and share their lists of favorite links with friends or the public. Del.icio.us even keeps track of most popular Web pages, much as Billboard ranks top tunes. Other up-and-coming Web 2.0 companies include edgeio.com, a new way to distribute classified ads.

Another example is Google's Gmail service or Yahoo's new e-mail system Y Mail, which is in the testing stage. Users can now move e-mails from one folder to another by dragging and dropping them across the screen, just as if they were using a desktop application like Microsoft Outlook. Older forms of Webmail forced users to wait for the page to reload every time they moved e-mails, added an attachment, or opened a new message. These programs operate just like Outlook, except they're free.

A FEW SIMPLE CLICKS. Not to be outdone, Microsoft has its own raft of Web. 2.0 applications, Windows Live. The software giant has just outlined some ambitious targets for the project, including an aim to host 20 million users of its new e-mail service by June (see BW Online, 3/10/06, "Memo Outlines Microsoft's Plans").

A lot of the innovations are powered by a new kind of Internet technology, much of which was developed by Microsoft itself. Many, but not all, Web 2.0 companies use a software platform known as Ajax. Until now, you had to reload a Web page every time you wanted to save a change. If you want to add a news feed to your homepage at a Web 2.0 site like netvibes, all you need to do is make a few clicks.

There's no need to save the page and wait for it to reload, as you would if using older homepage platforms like My Yahoo. That's because Ajax, used to create netvibes, can save new information on your page without having to re-save the entire page with all the older data that didn't change.

MASS APPEAL? Web 2.0 and its antecedents have been a topic of conversation among entrepreneurs, bloggers, engineers, and other industry insiders for years. But now the new Web is working its way into the mainstream. Led by giants Yahoo and Google, the changes will be apparent over the next few months.

"Today, these are real niche applications," says Brad Garlinghouse, vice-president of communications products at Yahoo. "The exciting thing is that Yahoo is taking Web 2.0 to the masses." He said the new version of Y Mail will be the world's most widely used Web 2.0 application.

The implications reach far beyond the Net. The new Web is changing the business model for media and communications companies. Traditional players in these markets have built their businesses on a foundation of brand and content, forming a customer base and marketplace. In the Web 2.0 era, they'll aim to cultivate a community of users on the Web, according to Troy Young, executive vice-president and chief "experience architect" at Organic, an online advertising and consulting firm.

YOUR NEWS, YOUR WAY. The new business model begins with a platform and set of user tools based on Web 2.0 technology. It's used to attract a community of users, which in turn create a marketplace on the Web. "The content and brand emerges at the end of the cycle and it's created by the users," Young says.

The biggest news site, measured in terms of users and page views, is Yahoo. True to Web 2.0 form, Yahoo started with a set of Web communications tools and added news feeds. While traditional news organizations may turn up their noses at such commodity content, it's wildly popular with tens of millions of users who simply want to know what's going on in the world on a constant basis.

Even Yahoo's customizable news features are still relatively primitive by Web 2.0 standards. With the exception of the new e-mail program, it's not making much use of true Web 2.0 technology. By contrast, Newsvine.com allows users to create their own home pages and columns and comment on every story. Top stories are selected according to user patterns, not by editors. Users even get to keep 90% of the ad revenue that their home pages generate.

GATEKEEPERS NO MORE. The changes are upending long-established hierarchies in the news business. The core news operations of The New York Times (NYT) and The Wall Street Journal have relatively small audiences on the Web, but they're adapting quickly. And where they're not building, they're prepared to buy. Witness the New York Times' recent purchase of About.com and the acquisition of Marketwatch by Dow Jones, parent of the Wall Street Journal.

Expect to see the barriers between so-called Old Media and newer forms continue to crumble. "We want to work with traditional news organizations, syndicating their content," says Newsvine CEO and co-founder Mike Davidson, a veteran of Disney's (DIS) ESPN unit. "It doesn't have to be us-against-them."

But if incumbents in news, media, and other markets are to flourish, they will have to make changes. Their roles as gatekeepers and repositories of centralized content are fading. "Power is shifting toward the individual, operating at the edge of the network and away from the giant companies at the center of the network," says Michael Arrington, chairman of edgeio.com and the founder of techcrunch.com, a popular blog that tracks Web 2.0 companies. Adds Arrington: "It's a paradigm shift for everyone on the Internet."

"THERE'S SO MUCH CASH." Just as Newsvine is challenging news sites such as cnn.com, edgeio is targeting the established online marketplaces. It searches blogs for entries that have the keyword "listing." Then it organizes them at the edgeio Web site by geography and category. Arrington says it's cheaper than eBay (EBAY). And it eliminates some of the anonymity of Craiglist, which may be a desirable feature for many kinds of businesses.

Another sign of the Net's new times: demand for Web 2.0 companies is on the rise. Schachter and the other founders of del.icio.us didn't need more than an angel round of investors, allowing them to keep the lion's share of the proceeds of the Yahoo deal. Although Yahoo wouldn't comment, one person familiar with the matter says the outfit paid $27 million. "There's so much cash and opportunity, people don't often need venture capital funding," Arrington said.
Once again, the pace of Internet innovation is on the rise. Markets are being changed, and fortunes are being lost. And in that sense, Web 2.0 is very much like Web 1.0.

Microsoft's New Search Engine Challenges Google

Microsoft has launched a new search engine that it says is better and faster than previous versions and will give Google a run for its money, reports PC Mag. The beta version of the engine is set to debut at http://www.live.com/, as is a Windows Live Toolbar beta. "To say we'll get to overall number one in a few months is a bit bold," Microsoft Microsoft Search Senior Product Manager Justin Osmer is quoted as saying. "But, maybe we'll be number one in some market metrics."

Microsoft could soon lead in local search and relevancy, Osmer said. Morepver, Microsoft will be using its own picture and video search technology rather than a third party's and will improve in those areas.

The new engine also will also have greater scope, including search, news search, RSS feeds, email search, local search and searching of MSN Shopping and MSN Spaces.

Live.com is intended to replace MSN.com.

Google: Revs Will Reach $100B; Eyeing TV, Radio, Print, Direct Advertising

After Google's CFO, George Reyes, made comments that prompted a sell-off of Google stock earlier in the week (all he said was that sales growth rates would slow, given Google's size), the online behemoth was under pressure to reassure investors - and did so splendidly - writes the Times Online. Google's top leadership gave a super-upbeat presentation to analysts, saying the company would expand into every area of media and set as its objective revenues of $100 billion a year. Those remarks should worry many in the traditional media business.
Google said it aims to become a presence in every part of the $800 billion global advertising market - from television and radio to print and direct marketing. "We see ourselves in every one of those segments.... It will be possible in the next few years," Eric Schmidt, Google's CEO said.

Google execs said the company would increase sales by improving search engine and ad quality by investing in infrastructure and new technologies.

The stock gained after the presentation, going past $386 a share, up from below $340 earlier this week - but still 20 per cent off the $475 high earlier this year.

Google derives more than 97 percent of its revenue from search-related advertising. It has 40 percent of the U.S. market for web searches and 60-80 percent of most European markets, according to comScore.

Google Tries to Reassure Wall Street

Google shares may have fallen toward earth in recent weeks, but its executives still think that the sky's the limit for the company's growth opportunities.

With the share price down 20 percent from its high this year and investors increasingly skittish, Google offered a detailed and sober appraisal yesterday of its finances and strategy, a presentation meant to reassure investors that as a rapidly growing company, it still saw boundless opportunities to expand its Internet services and advertising network.

The meeting, in Mountain View, Calif., Google's headquarters, was a sharp contrast to 2005's gathering, which investors found frivolous and lacking in substance.

Last year, instead of hearing from Google's chief financial officer, analysts were treated to a presentation by the company's chief cook, Charlie Ayers, on the lunch menu for the meeting.
This year, the chief financial officer, George Reyes, was the master of ceremonies. Dressed in black, he gave a long recitation of Google's past results, as finance chiefs customarily do at such events.

Jordan Rohan, an analyst with RBC Capital Markets, said that Google's presentations were more polished and professional this year and that executives addressed the questions most in the minds of investors.

"The company appears to have matured significantly since its first analyst day a year ago," Mr. Rohan said.

"Investors have been successful," Mr. Rohan said, "in communicating with the management they can't be this funky renegade company."

Keeping to Google's stated policy, neither Mr. Reyes nor any other executive offered specific financial predictions or other quantitative insight into the company.

But Eric E. Schmidt, the chief executive, quickly sought to counteract the impression that Mr. Reyes had given investors on Tuesday implying that some of Google's opportunity revenue growth might be slowing.

The company's shares rose as Mr. Schmidt began to speak, and they closed at $376.45, up 3.2 percent.

Mr. Schmidt defined Google's opportunity as increasing its share of the worldwide market for advertising of all types, not just online, which he estimated to be $600 billion to $800 billion.
The company's advertisers "don't want to be just on text ads and just on Google," he said. "They want to be everywhere on all sorts of media."

Google has started selling advertisements in print publications and has bought a company that sells radio ads. And it said that it hoped to find a way to sell television ads as well.
Mr. Schmidt teased the audience with what might be an audacious goal: "building the systems and infrastructure of a global $100 billion company."

Then he added, "I'll give you the choice of whether that is $100 billion in market cap or revenue."

Since Google's market capitalization is already $111 billion, Mark Stahlman, an analyst with Caris & Company, said he took that to mean $100 billion in revenue. That is perhaps a bit of a stretch for a company that had revenue of $6 billion last year. (Mr. Stahlman, who is especially bullish on Google's stock, predicts that it could reach that level in five years.)

While Google executives seemed to take the analysts more seriously this year, they remained dismissive of competition from Microsoft and others.

Marissa Meyer, vice president for product management, disputed claims by Yahoo and Microsoft that the results from their search engines were as relevant as Google's.

Ms. Meyer listed several new technologies, including one that corrects for what seem to be mistakes in search queries. If someone searches for "CBS Alias," the system will now guess that they might be looking for information about the television program that is actually broadcast by ABC, and it will show results for the query "ABC Alias" as well as what the user asked for.

"We think the gap with the competition is as large as it has been," Ms. Meyer said.

Alan Eustace, the vice president for research and systems engineering, asserted that Google's worldwide computer network was much more powerful and efficient than any other Internet company's.

"We don't think our competitors can deploy systems cheaper, faster or at scale," he said. "That will give us a two-, three-, five-year lead."

Mr. Reyes tried to assure investors that Google was more than a bunch of unsupervised engineers playing volleyball and riding around on scooters. He detailed a strategic planning process that the company follows and listed financial measurements it monitors, like the average revenue it receives for each search. But he warned the analysts not to ask for specifics on any of those figures.

"We do follow and closely monitor these metrics," he said, "but we are not prepared to share them with you at this point in time."

Mr. Reyes took pains to indicate that growth was not slowing as much as some investors feared, underlining rapid worldwide expansion.

"The question I get asked a lot is, 'Is international expansion slowing?' " he said. "The answer is no."

Mr. Schmidt also talked about Google's payment system, which it recently introduced.
He reiterated that it was not meant to allow one person to transfer money to another, in competition with PayPal, part of eBay, which has been Google's largest single advertiser. Rather, he hopes that it will allow advertisers on Google to let users click and buy products right from the ads.

Mr. Stahlman, the analyst, said that in the informal conversations, Google executives were unusually forthcoming. In particular, he noted that the second half of the presentation was delayed 30 minutes because a crowd of investors surrounded Mr. Schmidt. "Eric was answering everyone's questions," he said.

When asked about the Google's biggest single opportunity, Mr. Stahlman said Mr. Schmidt cited advertising on cellphones.

"They had much more meat than they ever offered before," he said of the meeting.