Learn from history and take a look at how we viewed Web 2.0 15 years ago

Author: Planet君

Editor’s Note from Planet Daily: Today, the internet world is passionately discussing Web 3.0, exploring innovations in business models and organizational forms, discussing the paradigm shift in venture capital, and examining the forms and applications of the new generation of open internet.

All of this is both new and not new; history does not repeat itself, but it often rhymes. Our discussion of Web 3.0 today is akin to how internet practitioners studied Web 2.0 fifteen years ago.

In 2006, terms like commercial internet and service-oriented internet were still fresh. That year was marked by heated discussions about Web 2.0 in media reports. On one hand, the early internet's blogs, classified information, and vertical portals faced a downturn and capital withdrawal, with massive layoffs at once-popular platforms like Blog Network and Mop.com; on the other hand, platforms like online video, social networks, and e-commerce began to thrive, with giants like Google and domestic players like Baidu and Sina betting on 2.0. People discussed the existence of a bubble but also looked forward to the power of innovation.

However, at that time, people could hardly imagine that fifteen years later, the internet and mobile internet would evolve into their current massive forms, just as our current visions of Web 3.0 might only be glimpses of a larger picture. All we can do is seize our opportunities in line with the trends of the times.

Looking back at history is always interesting. Let’s read the views on Web 2.0 from technology media fifteen years ago. This article is from Sina, authored by Yang Yungao, published in August 2006:

Blogs, podcasts… As the Web 2.0 craze was still heating up, Sina Blog 3.0 launched on July 4. A media insider told reporters, "Web 2.0 is about to be over!"

Li Xiang, Gao Ran, and Mao Kankan (Note from Planet Daily: These three were once the hottest entrepreneurial idols of the post-80s generation. Li Xiang founded Autohome and Li Auto, leading his companies to go public three times, while Mao Kankan tragically committed suicide after a failed startup in 2018) certainly did not agree with this statement. These three young men born in the 1980s were still passionately discussing Web 2.0 entrepreneurship and how venture capitalists were optimistic about it on CCTV's "Dialogue" program in May of that year; they could not accept such pessimistic views.

Clearly, opinions on whether there is a bubble crisis in Web 2.0 and the current internet vary depending on one's position. Many people worried about the Web 2.0 bubble, which had not yet inflated to the point of bursting, while Sina introduced the concept of 3.0. Was it just blowing a bigger bubble?

"The Web 2.0 craze is actually fueling the formation of a new round of internet bubbles," said an internet analyst. "Web 2.0 itself is a revolutionary marker of the internet, but the problem is that people's expectations are too high, and they want to profit from it too much." He even predicted, "This round of internet bubble will burst by the end of this year or early next year." He was reluctant to be named because "making such predictions will definitely invite skepticism, as you might ruin many people's livelihoods."

Once the issue of "livelihoods" is involved, even if there is indeed a bubble in the internet, stakeholders can only see "the emperor's new clothes." Comparing the first round of internet bubbles in 2001, the new round of internet bubbles—namely, the Web 2.0 bubble—quietly expanded in people's expectations. Just like the tulip bubble of the 17th century, tulips were no longer just plants in the eyes of investors; the internet in the bubble was the same. The bubble is a game, a tacit game of passing the parcel among participants.

Web 2.0 Fetishism

On February 23, 2006, the "Survey Report on the Current Situation and Trends of China's Web 2.0" was officially released. The report indicated that ordinary internet users knew very little about Web 2.0, with 73.3% of respondents unfamiliar with the concept.

How did a concept like Web 2.0, which was still unfamiliar to most people in 2006, heat up in 2004 and become extremely popular in 2005?

The term Web 2.0 was initially proposed by Tim O'Reilly, the president and CEO of O'Reilly Media. He believed that the network effect derived from user contributions was the key to dominating the market in the Web 2.0 era. To this day, there is still significant disagreement about the understanding of Web 2.0.

In the eyes of most people, Web 2.0 can be equated with blogs. A commonly used definition is that Web 2.0 is a new generation of internet model centered around the application of social software such as blogs, SNS (social networks), and RSS (aggregated content), relying on new technologies like XML and AJAX.

In October 2005, at the bustling Web 2.0 conference in San Francisco, Morgan Stanley's internet investment queen Mary Meeker said in an inspiring tone, "The change has just begun. We believe that everything that has happened in the first decade of internet business is just a rehearsal; the opportunities and transformations will be enormous." Meanwhile, Thompson, the general manager of the Royal Television Society and BBC, said gravely, "The shocking moment has arrived; the second wave of digitalization is far more destructive than the first, and the foundations of traditional media will be violently impacted, sweeping us out of broadcasting."

At that time, Google launched typical Web 2.0-style search services like "Co-op" and "Note Book," and News Corp began another round of Web 2.0 acquisitions. Blog books (Blooks) flourished in the U.S., and the investment boom was in full swing. Web 2.0 ignited the enthusiasm of more giants; BBC announced its decision to abandon traditional broadcasting and fully digitalize, and even American companies like Coca-Cola, Nike, and Kodak announced plans to build their own social websites to enhance customer service.

This enthusiasm for Web 2.0 continued in China six months later. On April 8, 2006, at the first Web 2.0 annual conference held in Beijing, the venue was filled with founders of small websites seeking investment. Many people joined this global movement. Jack Ma led Yahoo China to showcase Web 2.0, CCTV International announced a reorganization, and even the new round of social website construction revolved around the core concept of "Web 2.0."

In this frenzy, some theories were inevitably thrown out to rationalize this irrational enthusiasm. Morgan Stanley used technical language to describe this reconstruction as "UGC (User Generated Content)/personalization/community," and proponents even invoked philosopher Kuhn's "paradigm shift," pointing out that "Web 2.0" and the new economy, including finance, media, and entertainment, were also facing a "paradigm shift." They depicted that from the early 20th century to the 60s-90s, and then to the post-2000 era, there had been three major value evolutions, with the focus of business gradually evolving from "company-competition-consumer" to "production-oriented-market-oriented-experience-oriented," and the focus of operations shifting from "mass-market-segmented groups-one-to-one models," with the role of consumers transforming from customers to participants.

It must be acknowledged that the internet economy is indeed an "idea economy." Concepts like "portal," "search," "pay-per-click," and "e-commerce" can spawn entirely new business models and a batch of successful enterprises. Companies like Flickr, Myspace, YouTube, Facebook in the U.S., and Mop.com, Wangyi, Tudou, Douban, Blog Network in China have indeed sparked more imagination and creativity. Many college students who had not yet graduated managed to create small websites with ideas and technology, slapped on the Web 2.0 label, and sought funding at the first Web 2.0 annual conference in China in April, hoping to become the next Ding Lei.

Smart individuals like Gao Ran naturally would not miss the Web 2.0 concept; he described Mysee's web TV business as the love child of Web 2.0 and TV.

The convergence of various entrepreneurial streams collided to create the Web 2.0 bubble, further driving the formation of the Web 2.0 bubble.

No Angels, Only Capital Wands

Gao Ran, the founder of Mysee.com, became a hot figure in mainstream media reports. His current success cannot be mentioned without referring to one person—Jiang Xipei, the boss of Jiangsu Far East Group.

With Jiang's tacit cooperation, Gao Ran, like Xianglin's wife, repeatedly recounted a moving entrepreneurial story. The plot is as follows: During his university days, Gao Ran demonstrated a talent for social and business activities; he once pitched a business plan to Yang Zhiyuan in hopes of securing investment from Yahoo, but failed. He then turned to Jiang Xipei, with whom he had a personal connection, but the board of Far East Company deemed the investment in Gao Ran's project too risky and rejected it. Since the company would not invest, Jiang Xipei simply took out his own wallet and supported Gao Ran with 1 million yuan to start his business.

Jiang's identity instantly transformed into that of an angel investor. Angel investors (ANGEL) originate from the U.S. and refer to individuals who provide risk capital for new startups. In Silicon Valley's investment system, some institutions focus on later-stage investments, while others focus on early-stage investments. However, before the early stage, there is the angel investment phase. The further along a company is, the larger it becomes, the more mature the team is, the lower the risk, but the return rate is correspondingly lower.

What returns did Jiang Xipei receive after investing in Gao Ran? At the very least, Gao Ran's entrepreneurial story provided Jiang Xipei with free, high-reputation advertising, the value of which may have exceeded 1 million yuan. As for how Jiang and Gao would achieve a win-win situation in the future, that remains to be seen.

Jiang Xipei is a special case; he is not strictly an angel investor. As Guo Fansheng, chairman of Huicong, commented, Jiang's investment should not be called angel investment but rather charitable investment. He asked Jiang Xipei, "If you only had one million, would you give it to him?"

Clearly not. Because Jiang Xipei had plenty of money, Mysee was able to launch smoothly. Similarly, because there was ample capital, companies like Mysee sprang up like mushrooms after rain. The driving force behind the second wave of internet enthusiasm is money.

"This year, at least $3 billion will be invested in China in the second half," said Zhou Hong, founder of 3721 and angel investor. "As far as I know, there are at least 30 funds entering China now. Each fund will have a share of $10 million to $20 million."

Looking back further, in the fourth quarter of 2005, when Web 2.0 was all the rage, at least $100 million in venture capital (VC) flowed into local startups each month. DCM from Silicon Valley allocated 20%-30% of its global investment to China, and SoftBank Saifu alone invested $200 million in 15 companies in 2005.

In the first quarter of 2006, over 40 international VCs entered the domestic market, with total investments reaching 2.6 billion yuan, and the investment amount for 15 internet investment cases was nearly $150 million (about 1.2 billion yuan), accounting for half of the total investment amount. These figures come from a report by the third-party research firm Qichacha. The report showed that in 2005, a total of 233 local enterprises received a total of $1.057 billion in venture capital. Domestic and foreign venture capital institutions raised a record $4 billion for the Chinese market that year, making China the third-largest entrepreneurial and venture capital country after the U.S. and Israel.

The Chinese story has become a key selling point for investment institutions raising funds in the U.S. Just as entrepreneurs need to persuade them, they must also repeat the Chinese concept overseas, supported by the examples of companies like Shanda, Baidu, and Focus Media.

After experiencing the internet boom in 2000 and the subsequent bubble burst, the successful IPO of Ctrip in 2003 marked the recovery of the internet and venture capital industries. In 2004 and 2005, the first wave of VCs had basically finished investing; 2004 was the year with the highest VC returns, reaching $800 million, while 2005 was the year with the most fundraising, totaling $4 billion, marking the beginning of the second wave of VC investments.

With expectations of the renminbi appreciating, international hot money flooded in, and in addition to entering real estate and other sectors, some of this hot money disguised itself as VC, targeting internet companies with Web 2.0 concepts, telecommunications, biotechnology, and new materials industries. The industry joked that in the business class flying from Silicon Valley to Beijing and Shanghai, all the passengers were VCs, with hundreds of millions of dollars hovering over China, waiting to land. There was too much money, and good investment projects seemed scarce, leading to a farcical situation where VCs competed fiercely for projects.

The VC industry was also accelerating its consolidation. People from DFJ, Lenovo Investment, and Huaden formed Sequoia China, while a group of Intel Ventures people set up their own shop, and Huang Jingsheng, the former managing director of SoftBank Asia, joined Bain Capital. First-generation internet entrepreneurs like Zhou Hong, Shen Nanpeng, Gu Yongqiang, and Lin Xinhua all joined VCs, and even Tiansu Ning, who was once a semi-official figure, left Netcom to start his own VC.

Faced with the influx of funds, internet stars like Rolling Stone Mobile, A8, Yiyou, and Mop.com are self-evident, while some emerging newcomers like Jingpin Learning Network, Wealink, and Pengpeng Network also popped up overnight, with Mysee being just one of them. Gao Ran claimed to have secured investments in the tens of millions of dollars and stated, "There are four or five companies looking for us; we are considering which one to choose." Although the credibility of such "hype" is low, it at least gives the impression that there is indeed too much money!

So, do these company projects really hold that much value?

Bubble? Bubble!

Li Jianguang, vice president of IDG Technology Venture Capital, said that IDG has already invested in many Web 2.0 websites, such as Tudou and ZhongSou. However, they themselves are not sure whether this is a viable venture. "Investing in 1.0 companies is somewhat reliable because there are successful models in the U.S. to draw from, but there are very few successful Web 2.0 companies in the U.S."

Li Jianguang believes that up to now, there is no clear business model for Web 2.0. "Web 2.0 will emerge just like the internet did in 1999 and 2000, going through a very strict consolidation period."

Former Hexun president Xie Wen shares this view. He believes that the maturity of a business model, the maturity of the market, and user recognition require a long and arduous process; three years is certainly not long. The maturation of the business models of new Web 2.0 websites requires time.

There are also more optimistic views, suggesting that after the first round of internet bubbles, the industry has enhanced its ability to discern bubbles. They argue that today's internet companies are more mature, entrepreneurs pay more attention to business models, and seasoned investors possess rich industry experience. They provide examples, such as Myspace's revenue of $120 million in 2005 and the online magazine Gogosun, founded in 2005, achieving about 20 million yuan in pure profit from paid subscriptions, indicating that new Web 2.0 websites possess business models distinct from 1.0. They firmly believe that investment banks like Morgan Stanley, Goldman Sachs, and Merrill Lynch will not voluntarily pay for a second "bubble."

This optimistic view, which forgets past pains, strongly supports emerging websites to continue burning money without making profits. Entrepreneurs have carefully nurtured a seed of concept, from early angel investors to continuous VC involvement, extending this chain longer and longer. With ample funding, the internet industry has shown a new wave of prosperity, but the reality of not making profits in the short term makes the internet industry appear more like a rootless flower flourishing on vines.

Internet investors naturally will not admit to a bubble, just as entrepreneurs will not. They stand on the same side of the interest battlefield, inflating the bubble, and before it bursts, they deftly cash out.

Gao Ran stated in CCTV's "Dialogue" that he seeks funding before doing anything, rather than achieving results first and then seeking investment. If someone offers a suitable price, he would sell the website. "I am also a speculator," he said.

The internet has become a tool. This is something that both entrepreneurs and VCs can generally accept. Even from the perspective of the investment chain, entrepreneurs and VCs are tools for each other; they can leverage each other's strengths to achieve their business goals. Therefore, it is understandable why these VCs prefer to operate discreetly rather than foolishly singing the praises of the internet. In reality, entrepreneurs and VCs are also nervously observing their surroundings, especially the bubble theorists.

"The bubble will start to burst in the second half of next year," said Wang Wei, vice president of the financial sector and former director of Sina's Wealth Center. "Now, with a few hundred thousand yuan, some dare to start a website for fun; this is a typical bubble period." "The basic algorithm is calculated based on the cycle of venture capital entering and exiting, of course, considering some factors of the broader environment. At this stage, venture capital is entering in large quantities, but the momentum has already slowed." He believes, "This bubble is not fundamentally different from the last one; the difference is that the internet has entered a winner-takes-all phase, and it is becoming increasingly difficult for new companies to survive."

There are even more pessimistic views. "At the beginning of next year, before the financial reports come out, the internet bubble will burst," an internet analyst asserted. "What money has the internet made? Advertising, games, MVAS (mobile value-added services), right?"

He analyzed that advertisers' spending on online advertising has not significantly increased, which is a problem that internet companies have overlooked; the growth of the gaming market has not met expectations; and the growth of MVAS is limited, while its relevance to the internet is weak. "The patience of capital is very low; once the market starts to turn, no one can stop it." He said, "In fact, the market has been growing rapidly, but people are too greedy; their greedy expectations have exceeded the speed of rapid growth."

Supporting his judgment are data, "Basically, we look at the growth rates, concentration, and VC investment scale of (online advertising, games, e-commerce, and MVAS). These three indicators can explain a lot." "In a market where concentration continues to increase, even if it grows, it is not good for small and medium-sized enterprises."

When it comes to Web 2.0, he believes that Web 2.0 has ultimately become media-oriented, competing for online advertising dollars, "Everyone thought they were earning service fees from users, but later found out they still had to earn advertising fees from clients. The growth of advertisers' advertising fees is limited, so expectations cannot be met."

He also cited that instant messaging (IM), which is equally hot as Web 2.0, only began to turn a profit in 2004 after ten years of development, relying on MVAS. "Everyone is too impatient; it would be strange if there were no bubbles."

In addition to internet insiders and analysts, Wang Shaolei, a teacher at the School of Journalism and Communication at Nanjing Normal University, also holds a "bubble theory." However, he relies on intuition, "Simple data may not really be useful; the internet economy has obvious conceptual elements, such as Web 2.0 and SNS, so a bit of a bubble is beneficial."

"But I don't believe there will be a collapse like last time," Wang Shaolei said.

Although some believe that a bubble can only be confirmed after it bursts, in fact, bubbles have typical characteristics. For example, rapid price increases, high expectations for sustained price rises; subjective thinking of "paradigm shifts"; the entry of new investors and emerging entrepreneurs; and high public and media attention, among others.

Netcraft released the June 2006 Internet Web Server survey report, revealing a historic figure: the number of new internet sites reached 3.96 million this month, the largest single-month increase in history. This explosion surpassed the 3.3 million in March 2003. This surge was primarily driven by blogs, with Google’s Blogger adding 660,000 new users (domains), and blogs were also wildly popular globally, with the fastest growth occurring in Germany's Intergenia AG and Japan's Excite.co.jp. Researchers warned that this is strong evidence of a new round of internet bubbles.

Returning to the Essence of the Internet

The internet has become an industry akin to pouring beer. "The first pour creates a lot of foam; the second pour will see the beer slide down the side of the glass slowly, with less foam, but still a lot of foam will be generated."

How can we avoid bubbles? Many believe that the internet must integrate with traditional industries. They argue that while the internet greatly enhances the operational efficiency of social and economic systems, it is not an integral part of the economy itself.

A set of data supports their view. According to CNNIC statistics, by the end of 2005, there were approximately 668,900 websites in the country, with the largest proportion being corporate websites, accounting for 60.7% of all websites.

Chinese e-commerce is driven by enterprises, and 99% of Chinese enterprises are small and medium-sized.

Therefore, despite many emerging websites shouting with new concepts, these websites may just be floating bubbles on the surface and do not constitute the mainstream of the internet economy. This leads to the conclusion: there exists a Web 2.0 bubble, but the impact of its burst may not be as severe as last time.

In fact, the internet is no longer simply an auxiliary tool for the economy. People's needs have expanded from "food, clothing, housing, and transportation" to "food, clothing, housing, transportation, and knowledge," making the internet economy a growing component of the real economy, or in other words, the internet economy is also part of the real economy. Moreover, from carriers to entities, from information to entertainment, from attention to experience, people's understanding of the essence and connotation of the internet is deepening.

As for Web 2.0 or other concepts, Chen Tong, senior vice president of Sina, feels that the concept itself is not very important. "What matters is that there is a significant technological application that truly exists for netizens. Internet manufacturers focus on what internet platforms can meet the needs of netizens."

Chen Tong also provided a striking example. He said that Sina was initially established to provide a technical platform for the Chinese software developed by Wang Zhidong. A few months later, it was discovered that the topics people were genuinely interested in discussing were things beyond technology, such as the forums that were later launched, which attracted far more traffic than the products themselves, prompting Sina to decide to push for a content channel, as they found that the so-called interactive, user-generated forums were not the best way to present news.

The early Sina evolved from the most typical Web 2.0 site to what is now referred to as Web 1.0.

NetEase's chief architect Ding Lei once stated that the three major portals could replicate Web 2.0's business at any time and would do it better. Ding Lei believes that internet companies should focus on the most essential things, tightly aligning their value orientation with consumer needs, satisfying those needs, rather than waving the flags of 2.0 or 3.0.