2006 Trends to Watch Part V: Crash 2.0

Spend some time reading Michael Arrington's terrific TechCrunch blog and you'll learn about one innovative Web 2.0 start-up after another after another. Most of them share three traits: they're social, they're built with Ajax and their business model is dependent on advertising.

The startups, however, aren't the only ones who are enthusiastic about free ad-supported Web apps. Take Microsoft. In November Microsoft unveiled Windows Live and Office Live. Both of these too will be primarily supported by advertising. They are designed to complement, rather than replace their desktop brethren. At the time Bill Gates said: “This advertising model has emerged as a very important thing.” That certainly made people stand up and take notice.

Unfortunately, the reality is that for all of the hype this year around online advertising, it is not growing as quickly as the Web 2.0 market hopes. In fact, just last week JupiterResearch projected that online display and search advertising spending will grow at an average annual rate of 10% between 2005 and 2010. This spells trouble for startups hoping to capitalize on online advertising. There won't be enough to go around - at least right now. Their window is closing.

The result is that we're going to see a shakeout among the startups that are hoping to build a business around online advertising. Those who have established a sizable audience footprint and have started monetizing it I am sure will be fine. I have no doubt Google, Yahoo and Microsoft - the axis known as GYM - will no doubt succeed. However, for everyone else planning to build a yet-to-be-launched business that's built on online advertising, the noose is tightening. VC investments in unproven ad-supported ventures next year I bet will slow and we'll discover the Long Tail -- at least as far as online advertising is concerned - is not growing as fast as we would like.

Technorati Tags: 2006, Advertising, Trends