John C. Dvorak writes today in PC Magazine about the impending "Web 2.0" bubble. "Web 2.0" refers to social networking and user-generated content websites like MySpace, Facebook, YouTube, and Flickr. "Bubble" refers to the overvaluation of these companies and the eventual collapse of the Web 2.0 business model once investors pull their money out.

Why will they pull their money out? Lots of promises without the coincident profitability. The original "dot-com" bubble burst because companies promised a lot of stuff without generating a lot of money. Says Dvorak, "We were told that you'd be buying sandwiches over the Internet and having them delivered the next day by FedEx." There actually were several dot-com startups that delivered groceries that you purchased online. And while these were very whiz-bang companies, not enough people bought into their promises of changing the world to make them profitable. People don't want to buy groceries online; they want to go to the store and see them!

The Web 2.0 bubble, says Dvorak, will be worse. But why? He cites several reasons, but I can think of one big one: advertising. Advertising is fueling the Web 2.0 phenomenon. It's traditional advertising, like context-sensitive search results (such as Google Ads) or big, flashy banners on MySpace. The inherent assumption in advertising theory (if there is such a thing) is that the existence of an ad is prima facie evidence that revenue will be generated from that ad, because a person who sees an ad will necessarily buy whatever is advertised.

This ignores a few things: (1) some people aren't morons (that is, they don't automatically buy whatever is shown to them in an ad); and (2) not everyone sees the ads that you place there (due to pop-up blockers, ad blockers, or TiVo). If people can avoid advertising, they will. And I cite Second Life as my example. Second Life was touted as a revolution: you could do business in a virtual world without ever paying the fixed costs that having a business entails. Need to have a meeting? Have it in Second Life! Companies with advertising to do jumped onto this, creating stores and marketplaces in Second Life where users could purchase branded stuff.

The problem is: no one cared:

But the sites of many of the companies remaining in Second Life are empty. During a recent in-world visit, Best Buy Co.'s Geek Squad Island was devoid of visitors and the virtual staff that was supposed to be online.

The schedule of events on Sun Microsystems Inc.'s site was blank, and the green landscape of Dell Island was deserted. Signs posted on the window of the empty American Apparel store said it had closed up shop.

McGuinness said Starwood's venture into Second Life did accomplish something. Feedback from denizens gave Aloft ideas for its physical hotels.

The point is that, given advertising or none, people choose no advertising. Or no branding. Or no shopping. Advertising encourages people to buy things they need, but once everyone has everything he or she needs, advertising moves into its next phase of existence: convincing people to buy things they don't need. Convincing them that there's a void in their life that can only be filled by Banana Republic jeans, Budweiser, or Chevrolet. In the United States, shopping is a past-time. In Second Life, not so much. In an episode of The Simpsons where giant, metal advertising characters came to life and tried to destroy the town, Lisa observed that if you don't pay attention to them, they'll go away. It appears that Second Life has also learned how to use advertising's silver bullet: when no one responds, the advertisers move on.

This is Second Life, but it could be the rest of the Internet, which is much more predicated on advertising revenue than Second Life. In fact, advertising revenue is probably the number one business model, with subscriptions close behind. Advertisers pay Google or Facebook to place their ads on the page, in the hope that visitors will be attracted to these ads and then purchase the products. The entire model operates under the assumption that all ads that are put out there will be seen by consumers; and, as a correlation, all consumers who see those ads will go out and buy the products. As I said at the beginning of this article, those two assumptions are flawed, and when companies realize this, they'll pull some of their billions out of the Internet. Ad-blocking software is very prevalent, and all modern browsers (Internet Explorer 7, Safari, Firefox) offer popup-blocking options. Just because an ad is placed on a website doesn't mean that it will ever be seen. I have popup and ad-blocking software on all my web browsers: I hardly ever see advertisements.

Web 2.0 gets its money from these advertisements. That's why Rupert Murdoch paid $500 million for MySpace, and why Google paid $1.6 billion for YouTube. It's the prospect of reaching an advertising audience. But what if that audience won't see the ads, or won't click on them? The advertisers will pull out, and suddenly the social networking sites will go back to being mere social networking sites, devoid of advertising. This is a good thing for users, but a bad thing for Web 2.0 proprietors, who depend on that revenue to keep the sites going.