After the Great Recession: What Will The Internet Look Like?

As we plunge further into the Great Recession, it’s natural to wonder, like Alice falling down the rabbit hole, what the world will look like when we land.

Other bubbles have left behind an excess of infrastructure that would later come in handy: railroad tracks, telegraph lines, Internet fiber. What will we have to show for this one? Some have suggested little more than a string of weedy Gulf-Coast ghost towns.

It’s hard to accept that that’s it. For all that we’re going through, we have to believe that we’ll come out changed in some important way, hopefully for the better.

So here on the Redfin blog, we’re publishing a series of posts on how different parts of the world we see flying by are different than the ones we had before: the Internet, the startup economy, the media and the real estate industry. Today we start with the changes that we have already begun to see on the Internet.

The Return of Software
It will come as no surprise that we are glad to see startups consider business models beyond free ad-supported sites. In July last year, we had complained that free software had become “Silicon Valley’s new religion,” an “adolescent anarchism” codified into a broad ideology that couldn’t apply to every sort of online business, particularly those that don’t reach a huge audience. Now 37Signals has joined the charge.

The reason for this is the pressure on startups to generate meaningful revenues now, even at a modest scale. It was easy once to raise money on the idea that your business would work at Yahoo’s scale, particularly if your goal was to get bought by Yahoo.

Google encouraged this behavior, by rewarding sites with more traffic that presented information in a generic way its indexing robots could understand, free of charge, rather than in the context of an application or for a fee. But now that fewer companies are buying and venture capitalists are wary of footing the bill, startups have turned to the most direct way to get money: from their users.

The iPhone App Store: Proof That Consumers Will Pay for Software
Consumers are ready to buy, buying software fast-food style on the iPhone, and shelling out for premium subscriptions on sites like Picnik and Animoto. And e-commerce businesses are enjoying a new vogue too. Three venture capitalists have approached an e-commerce company we know of in the past week, even though it isn’t raising any money now. Already, one entrepreneur in our building has recently shifted from a pure ad-driven model, and at least two others we know are planning to as well.

Commerce is How Software Makes Things Better
This is good news for the economy. Direct commerce is the simplest way for the web to do what technology is supposed to do: make something cheaper and better, usually by cutting out a middle man, not by creating a new one. Even though transactional businesses scale more slowly than media sites, they generate more revenue per website visitor — based on our experience in online real estate, by a factor of at least three to one.

Media Sites Become Web Applications
And it’s good news for software too. There’s a reason it’s hard to build great ad-supported software. For most ad-driven websites, the goal isn’t necessarily to engage an audience in the completion of any particular task so much as to redirect it toward a purchase on an advertiser’s site.

This is why, to take just one example from our world of online real estate, many ad-driven sites only show one photo of a home for sale, where we show 15. We want you to stay on Redfin until you buy the home. The media sites have to let you visit their advertiser’s site for more info.

MySpace and Facebook: Media Site vs. Web Application
This difference in approach is why MySpace can be a bit of a disaster zone for users but makes plenty of ad money, whereas Facebook is a powerful “social utility” that can’t get top-dollar for its ads. MySpace as a media site is just one page after another, like the New York Times as written by your teenager, on drugs. In Facebook, the pages are components of an application, working together so well that you never want to leave, even if it’s to visit an advertiser’s site . It’s no accident that MySpace is based in the media capital of the world, Hollywood, while Facebook is in the software capital of the world, Silicon Valley.

I’ve often wondered why Facebook doesn’t just charge people to stay on its site, since that’s clearly the intent of their web development, and it’s clearly what their users want to do too. A Flickr-style fee for storing additional photos or messages could perhaps generate more than $1 billion in revenue, in a way far less intrusive to its users than Facebook’s past ad-related blunders. Maybe that will happen soon, too.

This is not to say that you can’t build beautiful ad-driven sites, or that you can’t make money from those sites. The web is by far the world’s most powerful advertising medium. But it’s much more than that, too.

But what do you think? When this Great Recession has done its worst, what will the Internet will look like? Will the revenue pressure on web startups make it more mercenary, and less fun? Or will it just make it better? It’s hard not to believe that  a little less media and a few more web applications will make the Internet richer, and better.