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Summary:

Wedbush Securities says we are seeing the rise of the “Second Internet,” and the companies that are growing and succeeding share certain attributes — including an understanding of the social web — and are rarely the same players who succeeded in the earlier phases of the web.

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What is the thread that ties together the rapid rise of companies as different as Facebook, Zynga, Twitter, The Huffington Post and Quora? Wedbush Securities, a brokerage firm that analyzes the valuations of private companies, says they are all players in what it calls the “Second Internet.” Wedbush says there are certain attributes that allow such players to grow and thrive while more traditional players — including some of the leaders from the early days of the Internet — fail to prosper and gradually recede into history. The most important of these attributes, the firm says, is an understanding of the value of the social web.

The social nature of this new wave of Internet companies is such a major factor that Wedbush also calls it the rise of the “Social Internet” in a new report on the sector, and says successful companies are powered by similar features, including:

  • Platforms open their API to developers
  • Continuous and rapid pace of innovation (see Facebook)
  • The company/brand must listen to the dialogue and participate with customers
  • Customer contribution is a large percent of the value/experience
  • Every customer has a personalized experience
  • Social graph connections drive discovery rather than search

The report looks at the value of Facebook — comparing the growth of the company to the growth of Google — as well as the rise of other key players such as Quora, The Huffington Post and Zynga, and how each of them effectively took over from a leader of what it calls the “First Internet.”

So by the brokerage firm’s reasoning, The Huffington Post took over from CNN, Quora took over from Yahoo Answers– which in turn took over from Encyclopædia Britannica — Zynga has taken over from MiniClip, which took the place of former leader Electronic Arts, and Jive Software has taken over (or is taking over) from Google Docs, which took over from Microsoft Office. One of the few early Internet companies that seems to have what it takes to bridge this gap is LinkedIn, the firm says (although some might argue the opposite).

As part of the report, which also looks at the rise of players such as BranchOut — the Facebook-based business network trying to give LinkedIn a run for its money in that market — Wedbush also looks at Facebook’s potential market value, and comes to the conclusion that the company could be worth $234 billion by 2015. That’s up from a recent private-market valuation of about $75 billion and would put Facebook firmly in Google territory.

According to the analysis by Lou Kerner, who also does secondary-market valuations of private companies like Facebook and Twitter for the website Second Shares, the giant social network could actually have even higher profit margins than originally forecast (as high as 50 percent, he says), and could grab an even larger share of the growing market for online social advertising and marketing dollars (as high as 15 percent of the global market, the Wedbush analyst estimates).

There are some caveats worth keeping in mind when reading the report, of course. For one thing, some of the leaders it identifies could easily be replaced by something else. Quora, for example, may well have peaked in terms of awareness and growth after a recent surge in popularity, and it’s not clear whether it can continue and become mainstream in any real sense. And when it comes to Facebook and Zynga, the firm is part of a hot private market for the shares of those companies, and so has an obvious interest in making them appear as desirable and highly valued as possible (Kerner also owns shares in Facebook).

That said, however, reports like this one help put the spotlight where it should be: on companies that have been able to take advantage of the social nature of the web — what at one point was being called “Web 2.0″ — and how that has allowed them to grow at a speed that hasn’t been seen since the early days of Google. Sometimes we are so close to these events and companies that it’s easy to lose sight of how big a transformation they have helped create in our online lives.

It also helps reinforce how difficult it is for even early Internet leaders to adapt to and take advantage of these changes, as Google is trying to do by bolting social features onto its services through moves like its recent +1 launch. Leading in one wave is no guarantee that one can lead in another — and in some cases may make that even less likely to happen.

Post and thumbnail photos courtesy of Flickr user Luc Legay

  1. Jamie Zartman Thursday, March 31, 2011

    As I commented to BBC’s Matt Frei, “Big Brother” is becoming “Big Social”

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  2. The title of this piece is misleading because these ‘features’ must be architected into guts of Internet so it’s an iterative process not a second internet per se.

    I also think Wedbush Securities is borderline hyperbole but hey thats their business so suggest you keep in mind the caveats because competition across the board is going to be intense and good !

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  3. Hi Matthew. Sounds like Wedbush have been reading the Fluidinfo business plan! :-) Seriously, we’re enabling pretty much all of those points, and in what I think is a unique way. Happy to discuss.

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  4. Thanks; but, I’d rather have access to Internet 2. Ask any conehead working in a government lab about “real” broadband speed.

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  5. It’s probably worth mentioning that Lou Kerner owns shares of Facebook. To his credit, he does disclaim this information in his reports, but let’s take what he says with a gain of salt.

    I spent several years as a sell-side equity analyst. The conflict of interests when you publish on securities that are part of your portfolio are huge. This is the kind of thing that got Henry Blodget banned from the securities industry.

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  6. But, Mathew, TechCrunch says Quora is like, up there with God.
    I am fascinated reading what you wrote here. Although I don’t question your argument, or the Wedbush report, what I do question is how much of a direct impact the 2nd Internet companies are really having, outside the narrow US prism. MS Office is still a monopoly, and doesn’t like going away any time soon. I live in India where literally 4% of the people have ever logged on to the internet. But millions of computers do run MS software (some of it even paid for :D). I guess what I am saying is that these companies seem to be showing a very US-centric impact, if any at all, unlike earlier, more established firms.
    Great article, thanks.

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  7. You are actually describing ‘digital dictatorships’ and personally I don’t think social is social yet either which I’ve explained here http://blog.famebook.com/fameb… That is at the heart of this whole debate. Our homes, digital or otherwise are our castles and entrance should ALWAYS be by invitation only. Anyone that is complicit in breaking in or planting bugs in my digital ‘house’ will never garner my respect or loyalty, however ubiquitous they appear! (Whether that’s the ‘landlord’ or the ‘brand’ friends he accumulates under some spurious implied permission!) To that end, the second internet may actually be the eye of a storm which simply hasn’t passed yet!

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  8. How exactly is the concept of “the second Internet” different from Web 2.0? It sounds like the author is startled to discover that innovation (especially in information technology) can cause rapid changes to the competitive environment. It’s been clear for several years to anyone that has been paying attention that social (and mobile) technologies will be playing a more and more vital role on the web, and that anyone that not paying appropriate attention to these areas may be at risk.

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  9. The only notable evolution the internet has seen is increased bandwidth (larger files/video) and wireless access (mobile). Internet 1.0 was just as much about social and social exploitation as internet 2.0. As for the bulk of current websites – they haven’t evolved much.

    Internet 1.0 = message boards
    Internet 2.0 = fancy message boards

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  10. The projections on Facebook seem too simplistic. Can someone please suggest any research on effectiveness of Facebook advertising? 0.05% CTR (http://mashable.com/2011/01/31/facebook-half-click-throughs/) is abymsmally small even with highly focused markets of 10-50M users. Aside from local business advertising (a good business, I know) I haven’t heard of significant success with FB advertising. Has anyone else?

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