In “Web 2.0 Needs Business Model 2.0″:http://earlystagevc.typepad.com/earlystagevc/2005/08/web_20_needs_bu.html Peter Rip argues, as have others, that the Web 1.0 business model doesn’t work in Web 2.0.

The big enabler [of Web 2.0] is the atomization of web content and the growing ability to query by machine rather than by humans…

Leaders (Google, Yahoo, MSN) in the consumer Internet have begun publishing simple procedural descriptions of how their web site can be invoked by a machine, rather than a human. And some interesting mashups have resulted.

But there is a problem and both Google and Yahoo know it. Both restrict the use of their APIs to a small number of uses per day and strictly for non-commercial purposes. …That is because the value driver is no longer the human action, at least not directly.

One action and multiple participants, some of whom I will never visit directly. The Web 1.0 business model doesn’t work in Web 2.0.

So far so good. But this absolutely does not mean Web 2.0 is entering into uncharted business territory. Every physical widget you buy in a brick and mortar store is an remarkable “mashup” of components delivered at low cost through a complex, worldwide network of suppliers, manufacturers, markets, middlemen, resellers, and retailers. Everyone gets paid at every stage, and no technical wizardry or brilliant flashes of insight are required to make this happen.

The fact that we think monetizing mashups is hard in Web 2.0 is a sign of the immaturity in the online services marketplace compared with physical marketplaces, nothing more. For example, Peter discusses the challenge of allocating revenue across the value chain for mashups.

A variation on the advertiser-pay model would be to allocate revenue from a Cost-per-X (click, action, call, etc.) event across the mashup production chain. But this still has a serious problem. The problem is one of allocation across multiple players. If a mashup has 3 websites and results in a $1.00 action, how should the $1.00 be allocated? In absolute amounts or pro rata? The absolute sum may exceed $1. The pro rata model is subject to gaming by sites setting artificially high prices.

When I buy a car or a magazine, traditional markets have no problem whatsoever allocating the purchase price across a vastly more complex value chain. It would bizarre to talk about a parts supplier “gaming the system” by charging too much for parts. Unless the supplier had a monopoly, manufacturers would go elsewhere for their parts. If the cost of the parts exceeds the whole of the revenue, then the mashup isn’t adding enough value, or the market will push the price of the parts down.

With the right information services marketplace, redistributing viable advertising revenues across information supplier would be no problem.

This immaturity of the online services marketplace takes several forms: a lack of automation for the web services commerce, a scarcity of information suppliers, and a lack of transparency of web services pricing.

Web services have been designed to participate in a high volume of information transactions, but not for a high volume of economic transactions. Imagine if an online bookseller allowed you to browse their catalog of books but then required you to call a bizdev employee every time you actually wanted to buy a book! This is how many web services work today if you want to use them for profit– even Google’s search API. (Amazon’s API, of course, is an exception, because the data helps sell their product.)

Web 2.0 needs online web services that are designed with an ecommerce model for purchasing their services. I should be able to go to a supplier of online maps, enter my credit card information, and use those maps for any reason I want in my mashup, paying per hit to the service

I should be able to choose from dozens or hundreds of different online information services for web search, maps, and so forth, versus the near monopoly power held by the key players today.

I should have transparency of prices– I should be able to go to a search engine and compare the prices and rating for different information sources.

None of this is rocket science. It just requires treating web services like a business instead of a research project, and designing them accordingly.

It also requires participants in the economy to stop trying to own the entire value chain. That approach didn’t scale in the traditional economy, and it won’t scale online.

Web 1.0 treated the middleman as something to be eliminated. Web 2.0 must learn to love middlemen and find ways to efficiently incorporate them into the online economy. This applies whether equally well whether you’re trying to revamp the online hiring marketplace or sell books.