There was no doubt that 2006 was a wonderful year for anyone into Web 2.0 (See Michael Arrington’s favorites list and Dion Hinchcliffe’s Best 2006 Web 2.0 software list) and there was plenty of venture capital thrown at some of the more promising companies (i.e. Digg recently pulled in another $8.5-million). What should be interesting in 2007 is whether the Web 2.0 landscape begins to see an evolution/maturation in business models.
In other words, there are plenty of cool Web 2.0 services/applications that don’t appear to have a path to become businesses, as well as many that seem to be heavily depending on AdSense to generate most, if not all, of their revenue. Will advertising continue to be the economic foundation for many Web 2.0 businesses or will other sources of revenue emerge such as subscriptions and premium services?
If advertising is the major pillar, then you have to ask if whether the pie is big enough for everyone, especially after Google walks away with a big chunk of it. In an ideal world, subscriptions will emerge as a second revenue source but so far few companies seem have to have the chutzpah to ask people to actually pay for services, and/or have a service that people are willing pull out the credit card to buy. The poster-child for the Web 2.0 subscription business continues to be 37 Signals.
In terms of premium service (or the freemium model that Fred Wilson has highlighted), that strikes me as having intriguing potential IF you can convince enough people to upgrade to a paid service from a free service. A good example of a company successfully pulling off the freemium model is Freshbooks, which offers a nice, but basic, free invoicing service as well as a more robust and subscription-based premium service. You could also put Skype into this category, particularly in the wake of its all-you-can-eat North American long-distance plan that was rolled out a few weeks ago.
My feeling is there isn’t enough advertising around to support the plethora of ad-supported services that have been launched and will be launched. As a result, you can expect to see dozens of companies disappearing or selling their assets. In an ideal world, the freemium model will gain more momentum in 2007 because it will suggest people are willing to pay for useful, valuable services. That said, free still rules the roost so I’m not holding my breath.

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