15-Year-Old Miracle Article: The Debate Over Web Bubble 2.0
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15-Year-Old Miracle Article: The Debate Over Web Bubble 2.0
This is not the first time we've explored the essence of the internet, and clearly, it won't be the last.
Navigating Web3 tides with focused insightsBy Yang Yungao
Originally published on Sina, August 2006
As the Web 2.0 wave continues to heat up, Sina Blog 3.0 launched on July 4. Yet a media industry insider told reporters, "Web 2.0 is almost over!"
Li Xiang, Gao Ran, and Mao Kankan would certainly disagree. These three young entrepreneurs born in the 1980s appeared together on CCTV’s Dialogue program in May discussing Web 2.0 startups and how venture capital firms are showing strong interest—they clearly reject any pessimistic outlook.
Clearly, opinions about whether Web 2.0—or even today's internet—faces a bubble crisis vary depending on one's position. While many worry about a Web 2.0 bubble, it hasn't yet inflated enough to burst. And now Sina has introduced its 3.0 concept. Is this inflating an even bigger bubble?
"The Web 2.0 craze is actually fueling the formation of a new internet bubble," said an internet analyst. Web 2.0 itself marks a revolutionary shift in the internet, but the problem lies in excessively high expectations and people’s eagerness to profit from it. "This round of internet bubble will burst by the end of this year or early next year," he predicted—even refusing to be named because "making such a prediction would invite criticism, as you might be seen as threatening many people’s livelihoods."
Once livelihoods are at stake, even if an internet bubble truly exists, stakeholders can only see what amounts to "the emperor’s new clothes." Compared with the first internet bubble in 2001, the new wave—the so-called Web 2.0 bubble—is quietly swelling amid widespread anticipation. Like the tulip mania of the 17th century, where tulips became more than just flowers in investors’ eyes, the internet within the bubble has taken on mythical significance. The bubble is a game—an unspoken game of musical chairs among knowing participants.
The Web 2.0 Fetish
On February 23, 2006, the "Report on the Current Status and Trends of China's Web 2.0" was officially released. It revealed that most ordinary internet users knew little about Web 2.0—73.3% of respondents were unfamiliar with the term.
How did Web 2.0, a concept still unfamiliar to most people in 2006, become hot in 2004 and scorching in 2005?
Web 2.0 was originally coined by Tim O'Reilly, president and CEO of O'Reilly Media. He argued that network effects driven by user contributions are key to market dominance in the Web 2.0 era. To date, however, there remains significant disagreement about what Web 2.0 actually means.
To most people, Web 2.0 is roughly synonymous with blogging. A commonly used definition describes Web 2.0 as a new generation of internet model centered on social software applications like blogs, social networking (SNS), and RSS feeds, enabled by new technologies such as XML and AJAX.
At the bustling Web 2.0 conference in San Francisco in October 2005, Mary Meeker, Morgan Stanley’s queen of internet investment, declared enthusiastically: "The change has just begun. We believe everything that happened in internet business during the first decade was merely a rehearsal. The opportunities and transformations ahead will be enormous." In contrast, Thompson, general manager of the UK Royal Television Society and the BBC, sounded a grave warning: "A shocking moment has arrived. The second wave of the digital revolution will be far more disruptive than the first. The foundations of traditional media will be violently shaken, sweeping us beyond broadcasting."
At that time, Google launched its distinctly Web 2.0 flavored services “Co-op” and “Notebook,” News Corporation began another round of Web 2.0 acquisitions, and “blooks” (blog-based books) flourished in the U.S., while investment fever raged. Web 2.0 reignited enthusiasm among tech giants: the BBC announced it would abandon traditional broadcasting and go fully digital; even Coca-Cola, Nike, and Kodak in the U.S. announced plans to build their own social websites to enhance customer service.
This Web 2.0 frenzy continued six months later in China. On April 8, 2006, at the first-ever China Web 2.0 Conference in Beijing, small website founders seeking funding were everywhere. Many had joined this global movement. Jack Ma led Yahoo China into the Web 2.0 arena, CCTV International announced a restructuring, and a new wave of social website development all revolved around one core idea: "Web 2.0."
Amid this frenzy, theoretical frameworks are often hastily introduced to rationalize irrational exuberance. Morgan Stanley used technical language to frame this reinvention as "UGC (User Generated Content)/Personalization/Community Building." Enthusiasts invoked philosopher Thomas Kuhn’s concept of "paradigm shift," arguing that Web 2.0—and indeed new economies in finance, media, and entertainment—are undergoing such a shift. They described three major value transitions from the early 20th century to the 1960s–90s, and then to the 2000s: the business focus evolved from "company–competition–consumer"; business models progressed from "production-oriented → market-oriented → experience-oriented"; operational priorities shifted from "mass market → niche segments → one-to-one"; and consumers transformed from customers into active participants.
It must be acknowledged that internet economics is indeed a "concept economy." Terms like "portal," "search," "pay-per-click ranking," and "e-commerce" have each spawned entirely new business models and successful companies. Platforms like Flickr, MySpace, YouTube, and Facebook in the U.S., and Mop, Wangyou, Tudou, Douban, and BlogCN in China, have indeed inspired imagination and creativity. Many college students, armed with ideas and technical skills, launch small websites, slap on the Web 2.0 label, and head to events like the first China Web 2.0 Conference in April hoping to become the next Ding Lei.
Smart entrepreneurs like Gao Ran naturally wouldn’t miss the Web 2.0 trend. He described his Mysee livestreaming web TV service as the illegitimate child of Web 2.0 and television.
The convergence of these entrepreneurial streams created the Web 2.0 bubble, further driving the formation of the broader Web 2.0 bubble.
No Angels, Only Capital Wands
Gao Ran, founder of Mysee.com, quickly became a media sensation thanks to mainstream coverage. His success owes much to one person—Jiang Xipei, chairman of Jiangsu Yuanfeng Group.
With Jiang’s tacit cooperation, Gao Ran repeatedly told a touching startup story, reminiscent of Xianglin’s wife. Here’s the plot: As a university student, Gao showed talent in social and business activities. He once pitched his business plan to Jerry Yang, seeking Yahoo’s investment, but failed. Then he turned to Jiang, with whom he had a personal connection. However, Yuanfeng’s board rejected the proposal, citing excessive risk. Undeterred, Jiang personally invested 1 million yuan from his own pocket to support Gao’s startup.
Jiang instantly became an angel investor. Angel investors—originating in the U.S.—are individuals who provide seed capital to startups. In Silicon Valley’s investment ecosystem, some institutions focus on late-stage investments, others on early-stage, but before early-stage comes angel investing. The earlier the stage, the higher the risk—but also the potential return.
What did Jiang gain from investing in Gao Ran? At minimum, Gao’s inspiring story served as high-reputation, free advertising for Jiang—possibly worth more than one million yuan. Any future commercial win-win between Jiang and Gao is a separate matter.
Jiang is an exception—he isn’t a true angel investor in the strict sense. As Guo Fan Sheng, chairman of Hikvision, remarked: "Jiang’s investment isn’t angel investing—it’s charity." He challenged Jiang: "If you only had one million yuan, would you really give it to him?"
Obviously not. Jiang could afford it because he had money. Likewise, Mysee opened smoothly because capital was abundant. By extension, because capital flooded in, companies like Mysee sprouted like mushrooms after rain. The driving force behind the second internet boom? Money.
"At least $3 billion will flow into China in the second half of this year," said Zhou Hongyi, founder of 3721 and an angel investor. "I know of no fewer than 30 funds entering China right now, each managing $100 million to $200 million."
Going further back, during the peak of Web 2.0 in Q4 2005, no less than $100 million in venture capital flowed into local startups every month. DCM Silicon Valley allocated 20%-30% of its global investment to China. SoftBank Ceyuan alone invested $200 million in 15 companies in 2005.
In Q1 2006, over 40 international VCs entered China, totaling 2.6 billion yuan in investments. Fifteen internet deals amounted to nearly $150 million (about 1.2 billion RMB), accounting for half of total investment. These figures come from a report by research firm Zero2IPO. The report noted that in 2005, 233 Chinese companies received a total of $1.057 billion in venture funding. Overseas and domestic venture firms raised $4 billion for the Chinese market that year—a record in China’s VC history. After the U.S. and Israel, China became the world’s third-largest startup and venture investment hub.
The "China Story" has become the centerpiece for fundraising in the U.S. Just as entrepreneurs pitch to them, these investors must repeat the China narrative overseas, bolstered by the success stories of Shanda, Baidu, Focus Media, and Suntech.
After the internet boom and bust of 2000, the industry and venture capital rebounded with Ctrip’s successful IPO in 2003. In 2004 and 2005, the first wave of VC funds was largely deployed. 2004 saw the highest VC exit returns—$800 million—while 2005 marked the largest fundraising year—$4 billion—ushering in the second wave of VC deployment.
Amid expectations of RMB appreciation, large amounts of hot money poured into China, flowing not only into real estate but also masquerading as VC into Web 2.0 internet companies, telecommunications, biotech, chemicals, and new materials. Industry insiders joke: Business class flights from Silicon Valley to Beijing and Shanghai are packed with VCs, billions of dollars circling above China, waiting to land. With so much money chasing too few good projects, VCs started fighting each other for deals.
The VC industry itself is rapidly consolidating. People from DFJ, Legend Capital, and Walden International formed Sequoia China. A group from Intel Capital went independent. Huang Jingsheng, former managing director of SoftBank Asia, joined Bain Capital. First-generation internet entrepreneurs like Zhou Hongyi, Shen Nanpeng, Guyu Yongqiang, and Lin Xinhui have all moved into VC. Even Tian Suining, previously semi-official, left China Netcom to start his own fund.
Fueled by this flood of capital, internet stars like Gosun Mobile, A8, Eyoyo, and Mop are obvious, but newcomers like Jingpin Study Network, Wealink, and Pengpeng Network have also emerged overnight—Mysee being just one example. Gao Ran claimed to have secured tens of millions in funding and said, "Several companies are pursuing us—we’re deciding which one to choose." Though such claims may be exaggerated, they do convey one truth: There’s simply too much money!
But are these companies and projects truly that valuable?
Bubble? Bubble!
Li Jianguang, VP at IDG Technology Venture Investment, said IDG has already invested in many Web 2.0 sites, including Tudou and Zhongso. But even they aren’t sure if it will pay off. "Investing in 1.0 businesses was somewhat predictable since we could follow proven U.S. models. But there are very few successful Web 2.0 companies in the U.S. to learn from."
Xie Wen, former CEO of Hexun.com, shares this view. He believes that maturing a business model, market, and user acceptance takes hard work—three years is not long. Web 2.0 startups need time to mature.
Others are more optimistic, arguing that after the first internet bubble, the industry has become better at spotting bubbles. Today’s internet companies are more mature, entrepreneurs focus more on viable business models, and veteran investors have deep industry experience. They cite evidence: from MySpace earning $120 million in revenue in 2005, to China’s 2005-born online magazine Gogosun making around 20 million yuan in pure profit from subscriptions—all suggesting Web 2.0 startups have new business models distinct from Web 1.0. They firmly believe investment banks like Morgan Stanley, Goldman Sachs, and Merrill Lynch won’t willingly fund a second "bubble."
This scar-healed-and-forgotten optimism strongly supports new websites continuing to burn cash without profits. Entrepreneurs carefully cultivate a concept seedling—from early angel investors to successive rounds of VC—lengthening the funding chain. With ample capital, the internet industry appears prosperous again. But the short-term inability to profit makes it look more like a lush vine flower with no roots.
Internet investors naturally deny any bubble, just as entrepreneurs do. Aligned in interest, they inflate the bubble and aim to cash out swiftly before it bursts.
Gao Ran said on CCTV’s Dialogue that he sought funding before doing anything substantial—not after achieving results. If someone offers the right price, he’ll sell the site. "I’m just a speculator," he admitted.
The internet has become a tool—acceptable to both entrepreneurs and VCs. In fact, along the investment chain, entrepreneurs and VCs serve as tools for each other, leveraging mutual strength to achieve their goals. This explains why VCs prefer low profiles instead of naively singing the praises of the internet. In reality, both entrepreneurs and VCs are nervously watching the landscape—especially those talking about bubbles.
"The bubble will start bursting in the second half of next year," said Wang Wei, VP at a financial firm and former director of Sina’s wealth center. "Nowadays, people start websites with just tens of thousands of yuan—this is a classic bubble phase." His calculation is based on the typical VC investment and exit cycle, adjusted for macroeconomic factors. "Right now, VCs are pouring in, but the pace is already slowing." He believes, "This bubble isn’t essentially different from the last one. The difference is that the internet has entered a winner-takes-all phase, making survival harder for new entrants."
There are even more pessimistic views. "The internet bubble will burst before next year’s financial reports come out," asserted an internet analyst confidently. "What has the internet earned? Advertising, games, MVAS (mobile value-added services)—right?"
He argues that advertisers haven’t significantly increased spending on online ads—a problem overlooked by internet companies. Game market growth hasn’t met expectations. MVAS growth is limited and weakly tied to the internet. "Capital patience is thin. Once the wind shifts, no one can stop it," he says. "Markets are growing fast, but people are too greedy—their expectations exceed even rapid growth rates."
Supporting his view are data points: "Look at growth rates, market concentration, and VC investment scale in online advertising, gaming, e-commerce, and MVAS. These three indicators tell you a lot." "Even in markets with increasing concentration, growth offers little hope for SMEs."
Regarding Web 2.0, he believes it ultimately becomes media-focused, competing for online ad dollars. "People thought they’d earn service fees from users, but realized they still needed advertisers. Ad budgets grow slowly, so expectations fall short."
He adds that IM (instant messaging), equally hyped, only became profitable in 2004 after a decade—thanks to MVAS. "Everyone’s too restless—of course there’s a bubble."
Beyond industry insiders and analysts, Wang Shaolei, a professor at Nanjing Normal University’s School of Journalism and Communication, also subscribes to the "bubble theory"—though based on intuition. "Raw numbers aren’t always useful," he says. "Internet economics revolves around clear concepts like Web 2.0 and SNS, so some level of bubble is beneficial."
"But I don’t believe it will collapse as catastrophically as last time," Wang Shaolei adds.
Although some argue bubbles can only be confirmed after they burst, bubbles do exhibit typical characteristics: rapid price increases, sustained expectations of further rises; subjective belief in a "paradigm shift"; influx of new investors and entrepreneurs; intense public and media attention, etc.
Netcraft released its June 2006 Web Server survey, revealing a historic figure: 3.96 million new websites were added that month—the largest single-month increase ever, surpassing March 2003’s 3.3 million. This surge was largely driven by blogs. Blog services grew strongly, with Google’s Blogger adding 660,000 new users (domains). Blogs exploded globally, with the fastest growth seen at Germany’s Intergenia AG and Japan’s Excite.co.jp. Researchers warn this is strong evidence of a new internet bubble.
Returning to the Essence of the Internet
The internet has become like pouring beer. "The first pour creates a lot of foam. When you pour a second time, tilt the glass and let the beer slide down the side—there’ll be less foam, but still plenty of bubbles."
How to avoid bubbles? Many believe the internet must integrate with traditional industries. They argue the internet greatly improves economic efficiency but isn’t itself part of the economy.
Data supports this view. According to CNNIC, by 2005, China had approximately 668,900 websites, with enterprise websites forming the largest segment—60.7% of all sites.
China’s e-commerce momentum comes from enterprises, and 99% of Chinese companies are SMEs.
Thus, despite numerous concept-driven startups making noise, these may just be surface-level bubbles, not representing the mainstream of internet economics. Conclusion: A Web 2.0 bubble exists, but its burst may not cause damage as severe as last time.
In fact, the internet is no longer just a supplementary tool for the economy. Human needs have expanded from "food, clothing, shelter, and transportation" to include "knowledge"—making internet economics an incremental part of the real economy, or even a component of it. Moreover, understanding of the internet’s essence and meaning—from carrier to entity, from information to entertainment, from attention to experience—has deepened.
As for Web 2.0 or other concepts, Chen Tong, senior vice president at Sina, feels the concept itself is unimportant. "What matters is that users have massive real demand for technological applications. Internet companies should focus on which platforms best meet user needs."
Chen gave a striking example: Sina was initially created to provide a technical platform for Wang Zhidong’s Chinese software. Within months, they discovered users cared more about non-technical topics. Forums they launched soon dwarfed traffic for the software itself, prompting Sina to launch content channels—realizing that interactive, user-generated formats like forums weren’t ideal for news presentation.
Early Sina evolved from a classic Web 2.0-style site into what is considered Web 1.0.
Ding Lei, chief architect at NetEase, once stated that the three major portals could replicate Web 2.0 services anytime—and do them better. Ding believes internet companies should focus on fundamentals, centering on consumer needs as the core value proposition, satisfying those needs rather than waving flags labeled 2.0 or 3.0.
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