NEW YORK CITY (By Steven Levy and Brad Stone, Newsweek) March 29, 2006 issue — A little over two years ago, even the most sensitive entrepreneurial radar could not pick out two pairs of people on opposite ends of the West Coast starting companies that would make plenty out of nothing. In Santa Monica, Calif., dot-com survivors Chris DeWolfe and Tom Anderson were hatching the idea of taking on biggies like AOL and Yahoo with a Web site consisting only of stuff that people would bring to it. And up in Vancouver, B.C., married collaborators Stewart Butterfield and Caterina Fake were just figuring out that the online game they were developing might work better as a way for people to share their digital photos with each other.

Now both fledgling companies are leading a charge of innovators making hay out of the Internet's ability to empower citizens and enrich those who help with the empowerment. The southern California guys head MySpace, the prime hangout for 65 million (mostly young) people, and thousands of rock bands, movie stars and marketers begging for their attention. Canadian-born Flickr, by building a 2.5 million-member community solely around a passion for sharing photos, has become a poster child on how a well-executed Net effort can make big changes in people's habits. Welcome to the new tech boom.

Oh, and unlike the old boom, where entrepreneurs couldn't get to the IPO broker's office quick enough, these crafty duos have already taken the money and stayed. Yahoo has snapped up Flickr to bolster the portfolio of services it offers to its half-billion users. And the new owner of MySpace is that wild and crazy (like, um, a fox) digital punkster, Rupert Murdoch—hedging his bets on what might be the next Net-powered media upheaval.

The massive success of MySpace and the exemplary strategy of Flickr are milestones in a new high-tech wave reminiscent of the craziness of the early dot-com days. This rebooting owes everything to the enhanced power and pervasiveness of the Web, which has finally matured to the point where it can fulfill some of the outlandish promises that we heard in the '90s. The generic term for this movement, especially among the hundreds of new companies jamming the waiting rooms of venture-capital offices, is Web 2.0, but that's misleading—some supposedly Web 1.0 companies like eBay and Google have been clueful about this all along. A more fitting description comes from Mary Hodder, the CEO of a social-video-sharing start-up called Dabble. (Since Dabble has not yet launched, I can't explain exactly what that means.) "This is the live Web," she says.

What makes the Web alive is, quite simply, us. Our presence, most often conducted at the speed of broadband, is constant and mandatory. Thanks to our activity, the Web has replaced phone books, and is in the process of replacing phones. It's the place that answers our questions in four tenths of a second and ships us funny clips that mix the "Back to the Future" guys with the "Brokeback Mountain" soundtrack. It's the main news source for the non-arthritic population, and a megaphone for those who make their own media. As we keep offloading our activities to the Web and adding previously unmanageable or unthinkable new pursuits, it's fair to say that our everyday exist-ence is a network effect. That has made some splendid opportunities for smart, nimble new companies, and threatened the existence of old ones now afloat in the mainstream.

There's a litany of characteristics of what makes something go on what may be best called the Living Web. Here's the latest start-up crib sheet:

The smartest guy in the room is everybody. Tim O'Reilly, an early promoter of the Web 2.0 idea, says, "The central idea is harnessing collective intelligence." This sounds lofty, but is actually happening all the time on the Web. Every time you type in a search query on Google, what's happening under the hood is the equivalent of a massive polling operation to see which other sites people on the Web have deemed most relevant to that term. Magically, it yields a result that no amount of hands-on filtering could have managed. "It's clear that the Web is structurally congenial to the wisdom of crowds," says James Surowiecki, author of a book ("The Wisdom of Crowds," naturally) that argues that your average bunch of people can guess the weight of a cow or predict an Oscar winner better than an expert can. That's why some people believe that an army of bloggers can provide an alternative to even the smartest journalists, and that if millions of eyes monitor encyclopedia entries that anyone can write and rewrite (namely, the Wikipedia), the result will take on Britannica.

Tom Sawyer was an early adopter. When Mark Twain's creation connived his buddies into painting the fence for him, he didn't call it "user-generated content." It took the Living Web to figure that one out. Obvious example: Craigslist. With its spartan interface, the online community bulletin board has a threadbare 1950s Eastern European feel. But millions rely on its classified-ad-type listings for jobs, apartments, concert tickets and sexual hookups—and those same millions provide the postings, without which Craig would be unlisted. "The fact that our site is almost completely self-service and community-moderated allows our tiny staff of 19 to manage the seventh largest Web site in the world," says CEO Jim Buckmaster. (Craig Newmark, its founder and namesake, concentrates on customer service.) And the same economics that allow Craigslist to thrive (it takes fees from only a fraction of its users, and is otherwise free to all) has made the list an unintentional, though devastating, competitor of newspapers that charge for classified ads.

Similarly, YouTube, a year-old start-up whose 25 employees work in offices above a San Mateo, Calif., pizzeria, is competing toe to toe with giant media conglomerates by having its millions of users supply it with the 35,000 videos added to the site each day; visitors to the site view 30 million videos a day. The big guys have noticed—Google Video now lets users upload videos and even sell them, and Microsoft has a project code named Warhol that will ask users to send it videos beginning this summer.

Once users supply content, Living Web sites ask them to organize it. Two years ago Joshua Schachter began del.icio.us, a way for people to store and share their favorite Web-browsing bookmarks online. Instead of organizing them himself, or even creating a standard taxonomy of categories, Schachter used something called user tagging—people simply labeled the bookmarks by any name they wanted, and eventually the group as a whole effectively voted on them by either adopting those tags themselves or rejecting them. And now del.icio.us has been gobbled up by Yahoo, which hopes to extend the tagging principle to all sorts of its services.

It's all one Web. The most effective sites on the Living Web have porous boundaries and are happy to act in concert with other sites, even competing ones. This process is greased by an explosion of cheap geeky software tools known as the Web's "connective tissue." Though they sport exotic acronyms and obscure code names, what they do is clearly valuable. Ajax provides Web-based applications with the same flexibility of programs that run on your computer. RSS lets you "subscribe" to targeted information from a Web service in the way you subscribe to magazines. (And no blow-in cards.) "Opening your APIs" means you're allowing other services to integrate information from your database into their sites. The purest expression of this free-for-all attitude is the wonderful mash-ups, where clever hackers take live information streams from two or more sites and blend them together for illumination or sometimes just for a laugh. An example is the mash-up that displayed vacant apartments offered on Craigslist on a local Google map.

It's not an audience, it's a community. Many adults heard about MySpace for the first time last year, when Rupert Murdoch's News Corp. paid $580 million to buy the company—a figure that raised some eyebrows, but now seems like the bargain of the young century. Simply by word of mouth, it is spreading through the youth world like head lice at a kindergarten. Just last Monday the site had its biggest day, signing up 270,000 new members, the rough equivalent of adding all the residents of St. Paul, Minn. "Every Monday it usually goes up," says its nonchalant cofounder Anderson, who just turned 30. "Talk to me any Monday and we have probably set a new record." One of these Mondays, he expects MySpace to pass Yahoo as the traffic leader on the entire Web.

Before MySpace, a lot of people thought that "social computing"—Web sites built to benefit from connections between participants—was a hot area, but Anderson and DeWolfe understood first that people, especially younger people who grew up with a mouse in hand, would get more out of it if they could express themselves by putting all their information where friends could see it. So they concentrated on building a site that easily allowed users to create their own little online treehouses, adding photos, videos, music and blogs. Then the users can build their network of friends—everyone gets Tom Anderson as their first—and some wind up with thousands. MySpace in the 2000s is what the malt shop was in the 1950s—if the malt shop could hold 65 million adolescents, many of whom had no qualms about showing pictures of themselves half drunk in their underwear.

Before the Living Web, celebrities trying to get access to media had to cope with editors, television bookers and program directors. Now musicians, celebrities and fame wanna-bes start their own MySpace pages to get close to audiences (in early: R.E.M., Tommy Lee, Nine Inch Nails). For comedians the road to stardom used to begin on Johnny Carson's couch. But when a fairly obscure comic named Dane Cook fanatically began grooming the MySpace page he began in December 2003—approving every "be my friend" request until his network approached a million friends, and relentlessly plugging his CDs and appearances on his page—his career took off. He's hosted "Saturday Night Live," cut an HBO deal and has a hit album. "That [success] tends to get attributed to MySpace," boasts Anderson. "All the comics are superpumped to be the next Dane Cook." Bye-bye, Johnny, Jay and Dave. Heeeeeere's collective intelligence.

MySpace has spawned a growing list of imitators. Fastest rising is Facebook, created by Harvard sophomore (now dropout) Mark Zuckerberg, who began the site as a casual way to help his Harvard classmates keep in touch. Within weeks more than half the student body had signed up. Now Facebook has 7 million users at 2,000 schools blogging to each other, connecting friends and posting pictures of last night's party. Zuckerberg, 21, hopes that MySpace kids will graduate to his site. Other companies plan to circle around MySpace like pilot fish. "Our goal is to build instant messaging for power users of other social media," says Dalton Caldwell, the 27-year-old cofounder of iMeem. Even headier competition lies ahead. Google CEO Eric Schmidt says that he doesn't understand why people think his company wants to be the next Microsoft. "Everybody thinks we're building operating systems, PCs and browsers. They clearly don't get it," he says. So where does Google want to go? "Look at MySpace," he says cryptically. "Very interesting."

But while MySpace is preparing to pass Yahoo as the No. 1 site, one of Yahoo's recent purchases still stands as the paragon of companies hoping to accelerate into Living Web stardom. That's Flickr, the photo-sharing site created by Vancouver philosophy major Butterfield and dot-com vet Fake. At its first release two years ago, Flickr is in some ways the ultimate user-centric site—its customers even helped shape the direction of the company as it moved from an online game to an instant-messaging service with pictures to what it is now—a way for people to upload their photos and share them with the entire community of users. This small shift from previous online photo sites, which stored your pictures in the hope that you'd order prints, changed everything. What was once the digital equivalent of a shoe box became a vibrant community built around photos and a vast collaborative effort to produce an infinite scrapbook.

"We were very small and very poor," says Fake, "so we built a lot of features that were deliberately viral." A big boost came from bloggers, who appreciated that Flickr had a one-button command to "blog this," and a photo would instantly appear on their site, hot-linked to the shot's real home on Flickr. They also made sure that their site worked well with other Living Web applications—Flickr photos are one of the prime ingredients in Web mash-ups. After Fake and Butterfield saw del.icio.us, they added tagging, and that proved to be a way to let the community organize millions of photos in a useful and sometimes provocative way. Because tagging is so flexible, when others see interesting tags they sometimes apply them to their own photos or even try to take pictures that will fit those categories. For instance, the existence of a Flickr tag "squared circle" leads members to look for such patterns in their surroundings, and take pictures when they perceive them. Users will often form "groups" to share their art (in this case, "squared circle," now with 3,500 members and more than 26,000 pics).

Some Flickr photographers have not only become renowned among the membership, but have gotten professional gigs (Flickr shots are the basis of a recent Visa ad campaign). But the most remarkable thing about Flickr is that the willingness to post pictures publicly—so ingrained in Flickr culture that you have to opt out to avoid it—creates a panoramic effect. Fake calls it "the culture of generosity," but knows that for some people, shedding privacy like that is a stretch. But since Flickr members go along, if you want to know what a distant city looks like from the ground, the site will provide you the views. When news happens anywhere in the world, it's common for the first photographs not to be sent via news wire, but posted to a Flickr site. (This phenomenon first occurred during the September 2004 Australian Embassy bombing in Jakarta; at that time Flickr had only 60,000 users, but three people posted shots of the devastation.) That's why Butterfield calls Flickr "the eyes of the world," and says that eventually, with geographical tagging, its users will easily be able to see photos instantly "not just of world events, but somebody wiping out on their bike down the street from you."

Flickr was a good business, too, as many users chose to pay the $25-a-year fee for unlimited photo storage and relief from advertising on the site. But that's not why Yahoo bought it for an estimated $35 million. "With less than 10 people on the payroll, they had millions of users generating content, millions of users organizing that content for them, tens of thousands of users distributing that across the Internet, and thousands of people not on the payroll actually building the thing," says Yahoo exec Bradley Horowitz. "That's a neat trick. If we could do that same thing with Yahoo, and take our half-billion user base and achieve the same kind of effect, we knew we were on to something."

The Living Web means that there may be plenty of opportunities to become the next Flickr, and hundreds of start-ups are trying to do just that. At Tim O'Reilly's recent Emerging Technology Conference, it seemed that 1,200 people had signed on to some collectively generated business plan: starting a company in a spare bedroom, outsourcing the programming to some Indian company they found on the Web, getting content from users and then having users organize the content by tagging, pocketing money from Google ads placed on the Web site and, finally, selling the company to Yahoo. (Bad news: Yahoo's Horowitz admits, "We can't buy everyone.") The lock-step fervor turns off some Valley veterans. "When people say to me it's a Web 2.0 application, I want to puke," says venture-capitalist Guy Kawasaki. On the other hand, he admits that plenty of the ideas make sense. "People do want to share. They want collaboration, full time. They want all that kind of stuff."

Less than a decade ago, when we were first getting used to the idea of an Internet, people described the act of going online as venturing into some foreign realm called cyberspace. But that metaphor no longer applies. MySpace, Flickr and all the other newcomers aren't places to go, but things to do, ways to express yourself, means to connect with others and extend your own horizons. Cyberspace was somewhere else. The Web is where we live.