This is a term coined a few years ago to describe the "new" interactive internet. Evolving web technologies allow people to get more involved with websites — gone are the days when all you could do on the internet is read content - now you can watch videos, play games, join communities, take polls, vote on content, post comments, etc. We've gone from being talked at to being talked with.
From an internet marketing perspective, this is great. There are a huge number of web 2.0 sites out there, all begging people to get involved with them. What this means is that getting backlinks to your site is no problem whatsoever anymore. In the past you had to worry about contacting other website owners, sending out hundreds of emails, arranging reciprocal links.... these days you don't have to worry about that. There are hundreds of resources out there that will put your link onto authority sites that the search engines just love. What's better — as you add new content to these sites the search engines are extremely quick to jump on it, so you get traffic from both people AND the search engines.
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