Is Google's acquisition of Web word processor Writely a harbinger of more acquisitions? Dozens of Web 2.0-style start-ups certainly hope so.
The Web search giant last Thursday confirmed it had bought Upstartle, which produces the hosted word-processing service Writely.
Though a small purchase--Upstartle employed only a handful of people--Google's move is significant because it further highlights the company's interest in Web-based productivity applications, which could be considered an desktop software.
It's hard to pinpoint which Web start-ups could be bought next. But analysts and entrepreneurs expect Google and competitors like Yahoo, America Online and Microsoft's MSN unit to continue scooping up smaller, niche companies and products to fill out their offerings.
"The general pattern is that big companies let the other companies do the innovations for them," said RedMonk analyst Stephen O'Grady. "Smaller companies can do innovation in a more agile fashion outside the boundaries of a large company, and they get acquired."
The deal has also rekindled speculation over Google's future plans. Observers note that a document-creation service like Writely could complement to provide online storage.
The company has not explicitly said what it intends to do with the Writely service, one of a growing number of services often grouped under the Web 2.0 moniker.
Though it lacks a precise definition, Web 2.0 generally refers to Web services that let people collaborate and share information online. In contrast to the first generation of Web offerings, Web 2.0 applications are more interactive, giving people an experience more akin to a native desktop application as opposed to a static Web page.
In the area of Web applications, the last two years have seen an explosion in Web services aimed at consumers or small businesses. These services, many of which are still in beta, span many areas and companies. Here's a sampling:
• Online Calendars: One of the more active areas, with offerings from 30 Boxes, CalendarHub, Trumba, Joyent, Kiko, Planzo and Spongecell.
• Productivity application suites: Full-blown applications bundles offered by the likes of HyperOffice, gOffice and ThinkFree.
• E-mail and collaboration: Examples include Goowy, Zimbra, Meebo (Web-based instant messaging) and Jotspot (hosted Wikis).
• Project management and personal organizers: AirSet, 37signals, Zohoplanner and Stikipad.
• Multimedia social software: Includes sites like the popular Flickr photo sharing service, Riya (photo search), You Tube (video sharing) and Podbop (music podcasting).
Why the sudden boom in Web 2.0 companies? There are a few reasons, both technical and business related, say investors and analysts.
More people have high-speed Internet connections, making applications such as photo, music and video sharing feasible. The underlying software to build Web services is being upgraded as well, lowering technical barriers that existed only two years ago.
The large number of Web 2.0 start-ups also reflects how small companies can get started relatively quickly and cheaply. Productive development tools and low overhead--in the form of relatively cheap hardware and open-source software--make launching a company without a lot of upfront investment more realistic, according to analysts and entrepreneurs.
The business models used for Web-based applications generally focus on advertising or subscriptions.
Online productivity software company gOffice, for example, funds its free hosted applications with Google ads. Some analysts expect Google's Writely offering to introduce ads, much as its GMail service does.
Meanwhile, some companies, such as 37signals, seek monthly or annual subscription revenue.
Boom or bubble?
With the list of Web 2.0 companies growing daily, some question the long-term viability of these new ventures and whether a dot-com-like bubble is forming.
Ross Mayfield, CEO of social software company Socialtext, said that too many new start-ups are building themselves up to be acquired, or "flipped," rather than establishing themselves as companies that can go public and continue growing.
"The problem is when you build to flip, you may be focused but shortsighted. Essentially, you lose IPO (initial public offering) as the exit option, and M&A (merger and acquisition) opportunities you can't foresee," Mayfield wrote in a blog posting entitled "A Flip/Flop Bubble of Microventures?"
Similarly, venture capitalist Peter Rip of Leapfrog Ventures said consumer mashups are intriguing and fun, but solid business models around the notion of sharing information are few and far between. "I see some real problems in turning mashups from an interesting parlor trick into a real business," Rip wrote in a blog.
Still, a number of small Web companies have been acquired over the past two years.
Yahoo bought photo-sharing site Flickr as well as Konfabulator, which makes desktop application "widgets," or add-ons. Google has bought several companies as well, including Blogger, photo-sharing company Picasa, and mapping company Keyhole.
RedMonk's O'Grady expects that many more Web 2.0 companies will need to be acquired, or they will simply burn out. That's because growing a hosted Web application beyond a few hundred, or even a few thousand, users requires substantial resources and technical expertise.
"To roll out a Web application to a wide audience, there is enormous difficulty scaling," O'Grady said. "The likes of Google and Yahoo have the sizable infrastructure and experience with scaling. When you combine that with the innovation at smaller shops, it's a pretty interesting combination."