A couple of posts in the last day or so have (or should have at any rate) sent a shiver down the spines of tech industry watchers. First came Om’s post. Om discusses earnings and profit announcements from many of the online advertising players and notices a levelling off of advertising revenue. He also reminds us all that it was only 10 or so years ago that a similar hype around low (or no) revenue model businesses that we’re seeing around some Web 2.0 start-ups resulted in the first dot com burst.

Then over on Smoothspan, Bob discusses the fact that while Google’s revenues are still on the up, their profits are not. And at the end of the day in a recessive portion of the economic cycle it’s profit rather than revenue that keeps investors safe.

So two questions;

  1. Are things going to get worse?
  2. What does this mean for web businesses?
  3. Where is the escape chute?

Are things going to get worse?

While I’m no economist, it would seem that we’ve only seen the tip of the iceberg in terms of flow on effects from the US sub prime fiasco. I’m an eternal pessimist but I have to answer an emphatic yes to question one.

What does this mean for web businesses?

We’ll see a flight firstly to viability and then to quality. Funding options for businesses with no real monetisation model will dissipate. Investors will move from riskier stocks to more proven models. Companies will be forced to cut costs as a foil to reducing revenue.

Where is the escape chute?

For businesses fully committed to low/no revenue models, hoping for a big payout come eyeball to dollar conversion day – there is no real solution. For businesses that have a solid revenue model but are seeing a decline in these revenues – don’t panic.

I talk to web businesses all the time and most are relaying tales of falling revenues and cancelled contracts – you’re all in the same boat. Hold on, cut costs and ride out the storm is the only sage advice I can give.

For those looking at going out and starting a start-up – now more than ever you need to think carefully about where your revenue will come from, how exposed it is to falling expenditure on non-essential services and how cash intensive your biz dev strategy will be.

Scary times huh?

(Oh and in a final plug for SaaS – in this environment OpEx is always easier to justify than CapEx – SaaS vendors have a big advantage in this respect)

Ben Kepes

Ben Kepes is a technology evangelist, an investor, a commentator and a business adviser. Ben covers the convergence of technology, mobile, ubiquity and agility, all enabled by the Cloud. His areas of interest extend to enterprise software, software integration, financial/accounting software, platforms and infrastructure as well as articulating technology simply for everyday users.

6 Comments
  • Or to quote a CIO I was talking with recently SaaS as OpEx is easier to sneak under the radar

  • Dang economy!

    I just launched an online gallery for NZ artists ( http://www.artklick.co.nz ) and have spent all my money on site redesign to get it good enough to launch to the public…..

    What’s the solution? Tattoo NZ artwork on my legs and raise $1,000,000 of course…

    Just have to be creative when you have less money for marketing πŸ™‚

    Great blog Ben πŸ™‚

    PS I grew up in the Hurunui township!

  • Getting the revenue model right is key, and at times like these only the sustainable will survive.

    Actually, there has been an interesting conversation going on over at SaaS Blogs about pricing models

    http://www.saasblogs.com/2008/07/02/when-should-software-be-sold-pay-per-use/

  • Falafulu Fisi |

    Are things going to get worse?

    I got a feeling that it is going to get worse. One just has to look at crazy multi-million dollar funding of those useless Web-2.0 startups with almost all their business model is to target online ads. These crazy fundings of useless Web-2.0 startups are being constantly hyped up at Read/Write/Web and TechCrunch blogs. Startup fundings that have been covered at both RWW and TC have no other business models to gathering revenue apart from online ads, and this is the reason I believe that things got worse.

    Useless (well most of them) Web-2.0 startups and their backers are jumping on the bandwagon, since they’re only have one thing in mind and that is, they hoped that their startups will be gobbled up by a bigger vendor. There is no real desire in most Web-2.0 startups to develop something that is revolutionary, ie, life-changing for users or help them lift productivities in work environment, etc,… All Web-2.0 startups are doing is, ME TOO. Look at the proliferation of useless Social Networking sites which is something completely time-wasting for users (without them realizing it because they’re suckers/naives) and it is unbelievable that VCs are jumping in the hypes.

  • Falafulu Fisi – I totally agree – You are on the money! (or is that stock?).

    I’ve already been thought a dot com bubble and don’t like the idea of going through another. There are many young businesses that don’t recognize the signs, but to those who have been through a bubble, the signs are everywhere and obvious.

    What is coming will hit like a ton of bricks for those who aren’t prepared – so keep trim, have sensible business models, avoid hype and watch the cashflow!

    Oh! and watch this: http://snurl.com/323jb

    (Let it be said that I predicted what’s coming back in Dec, 2007) πŸ˜‰

  • Great post.

    As a SaaS vendor, I am totally biased, so I’ll say that upfront. But in a liquidity / credit crunch, it just makes economic sense that people want OpEx, not CapEx.

    However, I also agree that it is irresponsible and ignorant to assume that this downturn won’t affect even cash flow positive companies, so we should all buckle up for a rough ride. πŸ™‚

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