In March 2000 the original dotcom Bubble 1.0 burst. With hindsight there were lots of reasons that it happened: vastly overvalued stocks in companies that didn’t sell anything and lost cash in truckloads; massive oversupply of advertising space; and the relative naiveté of the incumbents.

In 2004 Tim O’Reilly declared the coming of Web 2.0, “the business revolution in the computer industry caused by the move to the internet as platform, and an attempt to understand the rules for success on that new platform.”

Web 2.0 has more to do with the success of Google than with anything else. And Google’s success depends on Adwords.

The Internet is primarily used for two things: communicating with people, and finding people to communicate with. The former can be achieved via email and chat forums, and the latter through search. Right from the beginning, as the Internet grew phenomenally large, search became essential. Google’s approach has won.

Search is expected to be free. Google’s genius was in linking search terms, and user interests, via a dynamic algorithm that allows companies to reach you with relevant adverts. It is this, more than anything else, which has allowed Google to leap away from Yahoo. Google also cleverly shares their revenue with websites who host their ad-streams.

And it is this shared revenue model that has boosted Web 2.0. Websites with no conceivable revenue model now make money by hosting Google Adwords. Suddenly companies can offer user-created content in ever-expanding formats: video, music, chat, blogs, diaries, encyclopaedias, hobbies, socialising, favourite things … you name it, you got it. An ever-expanding network of social grooming allowing the world’s (mainly American) youth to connect. Like highly evolved chimpanzees doing the simian equivalent of picking flees out of each other’s fur; compassionate connection, social grooming, to keep the world safe.

But, you see, the Internet isn’t the thing. It’s just the package.

The music industry did see the Internet coming but didn’t know how to deal with it. Music is sold in boxes. Music companies sell boxes, not music. First they sold records, then tapes, then CD’s. How do they make money when the music isn’t in a box? How do they keep control of the ownership of that music? So they shut it out and attacked peer-to-peer network sites. It wasn’t until the battle was lost that they agreed, over a barrel, that Apple maybe had a point with their iPod. And it has worked brilliantly for them.

But even that isn’t going to work in the long run. You see, you don’t necessarily want to own the music either. You just want access to it. If you could pay a usage fee, or even a flat monthly rate and then have broadband access to any music at all it would open up a world of opportunities. New groups would simply upload their music into the database. Self-created PodJs would establish radio stations – like current bloggers or podcasters – and introduce you to new music you like. You could make your own, share with others. A whole new industry.

And you don’t necessarily need the Internet for this at all.

What people want from the Internet is becoming more easily achievable through their cellphones. What happens to Internet music downloads when your iPod can do it directly? Social networking makes more sense on a small device or phone that is always with you than on a computer which is fixed in space. And the nature of that small device changes the way you interact.

Politicians in developing countries famously arrive late at parties once everyone else has already decided to leave. “I started my own blog,” says Ebrahim Rasool, Premier of the Western Cape, “but all I get are responses from white males. We need to do more to democratise the Internet.” I enquired as to what his children use: “SMS and MXit,” he responded. In other words, what a democratically elected leader should be doing to engage directly with his people is fiddling with his cellphone.

In South Africa, a nominally poor country, there are more users of MXit – a cellphone chat-service – than there are Internet users. The vast bulk of MXit users are from the poorer end of society. And MXit charges for every single message sent. Clearly the “freeness” of the Internet is trumped by the cellphone’s convenience.

The reason this hasn’t cannibalised the Internet just yet (although it certainly has done so in South Africa) is simply a matter of politics.

In Europe and Japan, the other two important Internet markets, local governments have given protections to their historically state-owned telecommunications companies; the companies that offer fixed-line communications. In response the cellular companies have become dynamic and offer astonishing technologies. In many parts of Europe and in Japan cellular services are cheaper than the fixed telephone services. The same is true of South Africa.

Not so in the US where the government physically dismantled their monopolies and created real competition. It is no surprise that Apple, basing their iPhone on US expectations of phones, has none of the specialist services (especially 3G) that European and Japanese consumers take for granted. But it won’t be long before the US catches up and the youth who so eagerly use MySpace now flock to an American version of MXit for cellular chat and interaction.

And then all those companies that depend on Adwords for their revenue will be in big trouble.

x-posted to whythawk.com