I got in an interesting conversation earlier this week while at a dinner with Sarah Lacy and a number of active D.C. technology participants. At one point in the conversation we began discussing the concept of “ad supported” businesses. If you hang out in the internet entrepreneur circles, you can’t talk to five people without one of them telling you about their hot new business which will of course be advertising supported.

I will not suggest that an advertising supported business model doesn’t work, I just know that the majority of people chasing an advertising supported business model are doomed from the get go. The biggest problem? They expect that an investor is going to give them money early on in the life of their business. The funny thing is that recently I’ve actually met a number of people who have been given a small investment to try to make their ad supported business work.

Many of these investments just don’t seem rational to me though. Since when were investors throwing out money to let people with an idea throw shit against a wall? As far as I know, smart investors base much of their investment decision on the team running the company, not the idea. This post isn’t about making bad investment decisions though, the real question I have is how much longer can the new wave of internet startups be supported by advertisers?

We’re All Building Media Distribution Companies

On the web I’ve realized that there are really two primary types of companies: distribution platforms and media companies. This is an oversimplification of internet companies but most internet startups can be placed somewhere along the distribution/media spectrum. A blog for instance (that attempts to generate revenue) constantly needs to balance between distribution expansion and media creation.

All the micro-blogging platforms are pretty much distribution platforms where the users build the media. Facebook is the same way. The largest startups are ultimately distribution platforms. Google for instance doesn’t create media for the most part, they simply provide the media producers that they index a massive distribution channel.

The path to billions is through building a distribution platform. The only problem is that a distribution company (platform) is only as valuable as the media that they host. Widget platforms, social platforms, micro-blogging platforms, you name it; they all need quality content.

Market Saturation Has Arrived

At this point in the market there are way too many distribution channels. The widget platforms, social platforms, video platforms and the internet in general have become saturated with distribution platforms. I would compare the race to build platforms similar to the race to develop worldwide broadband access at the end of the last century.

Suddenly the price of broadband internet access dropped exponentially as well as the cost of storage and those two things together led to the commoditization of data storage and data transfer. I would argue that the race to build social networks and other data platforms on the web for the purpose of distribution have done something completely different: they’ve commoditized advertising (or at least have built a massive ocean of cheap advertising).

If I ran a billion dollar company (or even a multi-million dollar company), I could find a limitless pool of cheap advertising. Right now the only thing that can successfully generate meaningful advertising revenue on the web is search. Search is still the only thing that can measure intention and nobody has figured out a better way to reach people.

Honestly, do we need a better way to advertise to people or do we just need better businesses to advertise? The one place where I am betting something will arrive is via social advertising, but even that has yet to be perfected. Facebook and others are betting heavily that social advertising will transform the industry yet again.

Novelty is Gone, People Want Quality

If you think about it, there has been a novelty factory for the internet. Less than 15 years ago I began navigating the web via bulletin board services. The concept of live chat was mind blowing. Even e-mail was mind blowing at that point. Bulletin board services were frequently limited in their reach though and soon enough AOL blew down the walls and made a global platform where I could easily connect with people on a global scale.

Chat rooms proliferated and users kept on “connecting”. We are still obsessed (myself included) with trying to make sense of the “social web”. Just this afternoon, in a post on FriendFeed, Steve Rubel pointed me to a post on Twitterholics which highlights a new service called Twitter StreamGraphs. This tool will make a beautiful chart of words typically associated with an arbitrary word found on Twitter. A sample chart is below.

While the geek in all of us loves to observe beautiful charts that we hope provides some sort of meaning, I think that much of the discussion on these new platforms resembles the chatter found on the newsgroups and chatrooms of the past. While it isn’t pointless, it adds little value to the average Joe. In other words, it is a lot of inside jokes. As such, I would suggest that many of the people racing to create the next distribution channel (”platform”) may want to reconsider their business model.

While there is money available for innovation, there is little space for new players innovating media distribution on the web. So why aren’t advertisers spending heavily on social media platforms? In my opinion I think much of the content doesn’t have a high perceived value to advertisers. It’s much better to go advertise on the “database of intentions” than next to next to a site where I go into much detail about what I ate for dinner last night.

On Google, relevant content (and frequently quality content) is rewarded with traffic. At this point I would suggest that it may be much better for startups to start focusing on quality content rather than the next distribution channel. While somebody is bound to start the next Google, quality content always has some sort of intrinsic value.

Will Ad Supported Platforms Last?

The question still remains: is there still room for ad supported platforms? I think I’ve made my position pretty clear but I’d love to hear what the readers think. Is there more value in investing in quality content production over distribution? Can quality content actually be rewarded in a world with limitless distribution?

It’s no secret that among social platform developers Facebook still reigns king. On MySpace though, while there may not be top applications like Top Friends which has close to 38 million installs on Facebook, the top application has over 6 million installs which would rank it among the top 30 applications on Facebook. As Ian Swanson said in my podcast with him last week, he has been seeing the MySpace platform gaining traction.

Additionally there is buzz that MySpace will soon begin adding features that help applications grow virally. Initially there were a lot of restrictions in place but as the restrictions decrease, applications are experiencing more traction. This strategy contrasts Facebook’s in which the platform was completely viral and there were no restrictions on viral growth. Over the past year, Facebook has placed an increasing number of restrictions on developers.

In my opinion this will help MySpace build more positive relationships with developers. While it took some time for the platform to gain traction, MySpace is increasingly become a platform that can compete with Facebook when it comes to reach. While the types of users differ across both platforms it is clear that the MySpace platform has become a viable competitor to the Facebook platform.

The quality of applications are also increasing. Just last night I was playing a flash version of the extremely popular Guitar Hero game. The application has attracted over 160,000 users and the quality is pretty damn good. I spent a good 30 minutes trying to improve my skills. While it’s not as good as the real game it is definitely a fun time.

As the MySpace platform matures I’d expect to see higher quality applications appear and a growth in the application install base. What has your experience been with the MySpace platform? Do you even use MySpace?

OpenSocial developers have just gained access to a whole new platform: iGoogle. iGoogle is the startpage for millions of users across the web. While it isn’t as robust as Facebook, the ability to distribute your application through more channels is always a good thing. The applications also include a canvas view that provides more space for applications in contrast to the standard widget-sized currently provided.

The canvas feature is a drastic change for start pages overall as widgets have become the standard. For me this means that we are witnessing the convergence of social applications as widgets. Once two distinct entities, widgets and social applications had separate roles. Now, widgets and social applications are rapidly becoming more ubiquitous and distribution channels are becoming more streamlined.

This means that developers can now reach more people with less effort. The only problem remaining is that lack of viral channels on iGoogle. A while back I contacted Tariq Krim, CEO of Netvibes, to suggest that they add social features to their startpage. At the time he didn’t understand my suggestion (could have been lost in translation) but in a matter of months, Netvibes enabled the sharing of startpage widgets across their platform.

Erick Schonfeld suggests that iGoogle may slowly become its own social network. That’s due to today’s addition of friend updates to the iGoogle homepage. The web is rapidly becoming more social and while all of these standards and features are a complete mess, soon enough much of this will hopefully become more straightforward and slowly we will see the centralization of social identity management on the web. For now, developers have another platform to play with. Check out the video below to learn more.

One of the biggest problems with MySpace applications has been the lack of viral distribution. Facebook launched with no restrictions and the only platform to come close to Facebook in regards to application growth is hi5. Unfortunately MySpace did not build in many viral channels as to avoid a backlash by users to due spammy applications.

According to one MySpace developer (who I found thanks to Justin Smith), the first viral channels will be opening later this week or early next week. Max Newbould announced that MySpace would be adding notifications by April 30th. This may be the first step toward MySpace becoming a viable platform competitor to Facebook.

As of now, no other platforms have had as transformative an impact as Facebook. Many have predicted that MySpace would be the social platform to change that trend. Following a substantially less buzzed about platform launch (in comparison to Facebook), many have been disappointed. A number of developers I have spoken with suggested that MySpace and the other platforms were not a huge priority because no viral channels had been implemented that would distance the leaders from the rest.

The new updates are likely to change all that. While this will be the first viral channel that MySpace adds, it won’t be the last. Over the coming months we will see the platform adjust to user and developer feedback. As such we are still very early in the social networking site platform wars. The upcoming notification by MySpace is just one step along the way but it could be a game changing addition.

Last night OpenSocial applications went live on Orkut starting in India. Given that India is one of the most popular networks on Orkut, this is pretty big news. In contrast to Facebook which had overloaded profiles thanks to the influx of over 20,000 new applications, Orkut is limiting users to adding up to 25 applications to their profile. “In the coming weeks” Orkut applications will be going live worldwide.

Orkut was one of the only remaining social platforms to not go live. This means that you can now develop applications for Facebook, Bebo, MySpace, hi5 and Orkut. These social networks comprise the largest demographic base. There are other platforms that are also leveraging the OpenSocial standard but for now these are the largest of the pack. Facebook continues to lead the way with the most rapid user adoption and the existence of large ad networks that can drive users at launch time.

OpenSocial is still in the early stages and there is much development that still needs to be done. It is an unproven platform but based on the feedback received from early users, it has made it substantially easier to port applications across multiple networks and has reduced overall development time. As of yet, I have no details on the viral channels available to Orkut developers but should have an update later today.

While hi5 may not have beat out Facebook for the number one social platform, they have taken the spot of number two. Eric Eldon points out that the hi5 platform has been more successful in attracting users. Rock You, for example, has received a whopping 2 million installations since the launch. Compare this to Myspace where the total number of installations for the top application is just over 100,000. While the hi5 platform doesn’t appear to have launched their application directory yet, the apps have been spreading virally.

hi5 proclaimed that there were unlimited invites for applications at launch hoping to add to their developer base. While there is no word on how many applications have joined the hi5 platform, my guess is that it is still well below 1,000. Eric Eldon also questions the value of many of these applications. Right now there is some debate as to how valuable branded pokes on Facebook and other social networks are. RockYou claims that because millions of users have sent pokes to other users, that there is some marketable value behind all that.

I’d have to see statistics showing that branded pokes have resulted in an increase in sales before I think these marketing campaigns are valuable. As to whether users feel like they have been spammed on hi5, it appears not. Eric Eldon states, “Hi5 has instead come out with a new notification system specifically for applications. This means that there is little risk of users feeling spammed by applications messages, because they can just ignore invites, etc. if they don’t want to deal with it.”

Currently, it is still early in the platform race and it is difficult to declare a winner but hi5 has definitely taken a risk by opening up their platform to make it really viral. MySpace on the other hand has provided practically no viral features aside from displaying in user profiles. Once MySpace opens up their platform a little more, I would look for them to become a viable competitor to Facebook and rapidly surpass hi5.

If managing your applications on three platforms wasn’t already enough for you, two more platforms will be going live next week: Orkut and hi5. While there are few details as to viral distribution on Orkut, hi5 has provided details about their viral distribution channels. Of particular significance is that “there are no limits to how many friends a user can invite.” This sounds similar to the Facebook platform when it launched.

These launches will be more significant than the Bebo launch considering that hi5 and Orkut are the 8th and 10th (respectively) most visited sites on the web according to Alexa.com. With no limits on invitations for friends we may see a similar gold rush to those applications that launched on the Facebook platform. Both platforms will launch using the OpenSocial standard bringing the total number of potential users via OpenSocial far greater than Facebook.

Add together MySpace’s platform and Facebook’s viral distribution channels and hi5 is setting up to be a significant launch. Next week will surely be a big week as the reach of social platforms is set to almost double. For one person, attempting to monitor all the action on all the platforms is extremely challenging but extremely exciting. For development teams building on each of the platforms, being ready for launch on all sites is not only challenging but close to impossible.

This first quarter of this year has been transformational for the social platform space.