What Powers Web 2.0 Economy?

Steve Rubel reckons the current Web 2.0 cconomic is a vicious cycle:

The Web sites and blogs that cover Web 2.0 -- sites that I really love -- are largely supported by ads from startups that also are hoping to capitalize in the rising interest in online advertising. This creates a vicious cycle that's unhealthy for the earning potential of bloggers who cover Web 2.0.

When I read the CNN article this morning on the success of various Web 2.0 entrepreneurs, the question "what powers the Web 2.0 economy" jumped straight out from my mind. There's certainly a lot of money talk in that CNN article. Personal publishing sites are valued at millions of dollars. Blog networks bringing in several millions a year. Where do the revenue come from?

Advertisement. And? That's about it. Well, mostly.

Where then do the advertisers come from? From Steve's article he is worrying that a big chunk of advertisement revenue is coming from the other start up companies. No. They are not cheap reciprocal link exchanges -- those start up companies actually pay for the advertisement so they can grab a premium spot on those "Web 2.0 technology review sites".

Guess who the really paid for the advertisement? Other than the very venture capitalists who are funding these start ups? Duncan Riley said in his blog post:

History is a guide, and with a pile of money going into Web 2.0 reporting blogs it really puts the gamble into venture capital funding, doesn’t it.

When VC's start to gamble their money, what do we have? Bubble, maybe not as badly inflated as last time, but the Bubble 2.0 is surely building up, relying on ads revenue from other start up companies funded by other VC's who are also trying to squeeze into this crowded game.

Fortunately it is not the whole picture of Web 2.0 economy. It is not a closed system and there are indeed advertisement revenue from sources other than the start up web companies. CNN article mentioned a few old-school enterprises, i.e. Intel, that are shifting their marketing expense from traditional media to the web. We are hoping that those traditional brick-and-mortar business can eventually power the Web 2.0. But at the same time, a traditional company will only be willing to pay for advertisement if it can bring in enough leads/sales to justify the cost. Number of consumers stays pretty much constant -- so in order to fuel Web 2.0 economy, traditional companies have to cut marketing expense from other traditional media.

So, who are the biggest losers? TV? Radio? Dead-tree version of news paper? On the other hand, if you think it costs zilch to launch a Web 2.0 media site, how many Web 2.0-style sites can a traditional media company build, with their money and existing resources? They too are moving into this space to reclaim back the ads revenue they are lost to the start ups.

From what I can see, the prime time has already passed. There are already zillions of blogsites, personal publishing houses, social networks and Ajax-filled craps out there (and 2 more born every second) trying to ride on the back of Web 2.0 economy. Guys, enjoy it while you can. Meanwhile, start planning Web 3.0.