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Web 2.0 is so over. Welcome to Web 3.0

Facebook and Twitter may be more popular than ever among users, but what are they worth?

By Jessi Hempel, writer
Last Updated: January 8, 2009: 3:13 PM ET

(Fortune Magazine) -- Financially speaking, Web 2.0 has been a total bust.

Social-networking companies such as MySpace and Facebook have loyal fan bases, but they're not exactly minting money. MySpace's projected $600 million revenue in 2008 falls far short of parent News Corp.'s (NWS, Fortune 500) billion-dollar sales target for the site. Messaging service Twitter has no business model. Video-sharing site YouTube was the only big sale; Google paid $1.65 billion for it two years ago but still hasn't figured out how to make much money off it.

Social media's champions hoped 2008 would be a watershed year for Web 2.0. (That's the term tech publisher Tim O'Reilly coined four years ago to describe a new wave of Internet innovation that let users publish and share content.) Instead, the past 12 months have been a disappointment. Almost no new game-changing companies have emerged since Twitter burst on the scene in 2007, and while it's true existing sites have changed the way we interact on the web, they've failed to deliver new ways to cash in the way their Web 1.0 predecessors, such as Amazon and Yahoo (YHOO, Fortune 500), did.

One reason is that the economic climate for today's web startups is a lot chillier than it was during the first dot-com frenzy. The door for initial public offerings has all but closed: Just six U.S. venture-backed companies went public last year, and none were web outfits. And potential acquirers - from Internet companies like Yahoo to traditional media conglomerates like CBS (CBS, Fortune 500) - have big problems of their own.

Not that being bought is a panacea for social-networking firms. Few of them have seized on a viable business model. Most rely on display advertising - a.k.a. banners - to make money. But marketers have cooled to display ads on the web, and they're especially skeptical of such advertising on social-networking sites.

Fact is, when you're looking at photos from last night's holiday party on Facebook, you're probably ignoring that teeth-whitening ad. And with all the user-generated content, these sites have so many page views that Web 2.0 companies can't command the same rates as, say, portals. Yahoo's news site, for example, can charge more than 30 times as much as Facebook for a banner ad.

Most industry watchers bet on Facebook to develop the silver bullet for advertising on these sites. In fall 2008 CEO Mark Zuckerberg debuted Beacon, first billed as a "social ad" strategy that would monitor and distribute information about a user's e-commerce preferences to his friends. Zuckerberg caught flak from the privacy police, and Beacon was significantly downplayed.

The site recently launched Facebook Connect, which lets users access other sites with their Facebook log-in. Web publishers are excited about it, but for now, the company still relies heavily on "traditional" slow-growing forms of web advertising. Revenues for 2008 are expected to be about $275 million this year, according to several sources, and it is still not profitable.

Accel Partners' Jim Breyer, the largest outside investor in Facebook, remains optimistic. "Thus far the home-run outcomes have not yet appeared, but I firmly believe we will see them over the next couple of years," he says, explaining he thinks these companies are still in their infancy. In fact, Accel just announced two new funds, totaling a billion dollars, dedicated to investing in early-stage social-media companies.

Indeed, the Facebooks and MySpaces of the world could still grow up to be economically powerful. Consider that Amazon (AMZN, Fortune 500) once was just an online bookstore, and that Google (GOOG, Fortune 500) started out simply as another search engine.

But today's Web 2.0 companies may find themselves transformed or even eclipsed by yet another wave of web innovators. New companies are cropping up to expand the utility of the web, creating location-based services and financial payment systems that can be bolted onto existing sites. Often bootstrapped, they are frequently profitable and may get acquired quickly. Even in today's tough environment, these upstarts are the ones raising money and trying to score a life- or business-altering hit. Welcome to Web 3.0.  To top of page

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