Tech Bubble #2: To Burst, Or Not To Burst?
by
on October 17, 2007,
So Bubble 2.0 isn’t news to anyone’s ears any longer. Talk of it is downright tired and redundant. So what? How 'bout we look it over once more, for kicks, m’kay?
The New York Times today published - on its front page, above the fold – a story delineating some points that back some solid speculation of an impending bursting (the bad kind) of the party balloon that is Silicon Valley and all its derivatives. I think they’re worth taking a look at.
First, it’s worth mentioning the voices that have gone on record as downplaying the severity of the situation in the tech sphere, among them Marc Andreessen (famous for his part in Netscape way back when, and most recently, Ning) and Roelof Botha (a partner at the venture fund Sequoia Capital). Botha considers the fact that costs of doing business being as low as they are shows that a different outcome from the one seven or eight years ago is likely, and a good one at that. Andreessen finds that “the high prices represent a rational desire to stake a claim in the potentially huge markets of the future,” noting that he sees no bubble whatsoever.
Tim O’Reilly, the alleged original source of the Web 2.0 term itself, says the bubble is so, however. And when Tim speaks, lots of people listen. He thinks the bubble is inevitable bound to pop, due to the replay of irrational betting which occurred throughout the Valley before.
The signs that the New York Times sees as hints of trouble ahead are numerous. There’s the widespread suggestion that Facebook, the second-largest online social network on the globe bears an estimated valuation half that of Yahoo!, a company with a prolific history stretching past a decade and an employer of 38 times the number of workers. And Google, recently having seen its stock jump past the $600 mark on the NASDAQ exchange, now shows to be “worth more than IBM, a company with eight times the revenue.”
Brad Stone and Matt Richtel expound further on the finances of some of the Valley’s finest, highlighting the purchases of both Skype and YouTube by eBay and Google respectively. Both businesses were purchased for north of $1.5 billion, while neither has managed to offer significant returns on the buyers’ investments. Despite Skype’s 220-million-strong usership, it only managed to rake in some $90 last quarter, while Citigroup estimates YouTube will take in just $135 million next year. Not this year. Next year. A period in which the Web video industry is expected to grow far larger than already has been the case.
So is overvaluation sweeping the world of tech, or not?
I myself wish to argue the middle ground. It’s clearly evident that there have indeed been instances of overvaluation. Yet at the same time there’ve been ample signs of caution taken by investors, which might just save them from themselves, as it were.
And it should be said that a good deal of somewhat high-priced ventures do in fact live up to their valuations. Some of course don’t do so immediately, but the gems of the Valley receiving attention by most investment firms are attractive for a reason.
The tech space is quite a bombastic one as of late. There’s no denying that. Lots of green going around, no doubt. And some investments for sure have been irrational. But overall, the atmosphere seems a little safer for all involved than the one that hovered over Cali prior to Y2K. Safe because most everyone is a good deal more conscious of things than they were years ago.
So, good thing for The New York Times to do the industry-wide profile it did, especially one so prominently placed upon its pages. Perspective is certainly necessary to maintain the sanity. (Or at least keep the insanity to a manageable low.) But there’s certainly little reason to raise major alarm, I think.
How about you?
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Bighorn
kalipso
Opensource 
Michael Fidler 
Nice write up Paul. Now I see why people have been talking about the bubble 2.0 syndrome again on Twitter today. I think the bubble will never burst because of market correction and because of the low amount of money that is needed for investment. Couple million here couple million there. Were not seeing companies invest 100s of millions of dollars.
I also believe that there is quite a bit of over valuation taking place. How on earth could these sites and services be worth that much?
One of the challenges trying to handle a handle on Bubble #1 vs. Bubble #2 is the landscape is different. It’s easier and less expensive to launch a start-up now, which means there’s less need to get venture capital or do an IPO. There’s also far more advertising online now than six or seven years ago, which again means companies can do more self-financing by attracting advertising as opposed to raising private or public equity.
Jeff,
Yes, there is something of a half-and-half thing going on, where some newsmakers seem to go over the line, but a good many play within the bounds of realism.
Mark,
Companies definitely can try to rough it out with little (or at least minimal) outside investment. But take a look at the argument posed here:
http://profy.com/2007/10/15/online-ad-dollars-supply-may-never-catch-up-with-demand/
I’m not so sure there’s enough advertising to go around, what with the rapid growth of the Web business industry as a whole.
What’s certain is that, on the whole, we’re looking at a complex picture that’s far from a full sketch.
Thanks for your post. Off the charts valuations for startups with no business model to speak of puts us right back into pre-Bubble behavior. But that might not be so bad as web leaders, bloggers, and journalists point out in a debate you are welcome to join:
A Burst Bubble is Just What Web 2.0 Needs
http://www.auditoriumA.com/blog/a-burst-bubble-is-just-what-web-20-needs.html
By the way, now would be a good time to create a viral flash game where the object of the game is to burst the bubble and inside the bubble is web 2.0. I think it would be a catchy game and garner a good bit of interest
I would do it but don’t have the skills.
There’s a difference between the kind of company that can survive in a long-term benign environment funded by absurdly easy credit, and one that can survive a more general downturn of the sort that the sudden turning off of the private equity industry is likely to cause.
Given that most Internet-related businesses, and especially the newer ones, definitely represent discretionary, and usually luxury, spending, it seems reasonable to suppose that they are much more exposed than most companies.