Is 'Web 2.0' Another Bubble?

Carl Bialik from WSJ writes "Two tech VCs, Todd Dagres and David Hornik, debate whether there is a bubble in so-called Web 2.0 companies looking to cash in on a resurgent online ad market. In the WSJ.com debate, Hornik writes: 'Venture capitalists will rationally stop investing in ideas that don't bear fruit. Those that do bear fruit will gain traction and either be acquired or go public. Those are the traits of a rational market in my mind.' Dagres responds: 'I think the Web 2.0 space will have a higher mortality rate than other segments of the overall media and technology industries. There are far too many MySpace and YouTube genetically challenged clones. All but a few will fail. The winners are generally the ones that get in early and out before the bubble bursts. There are rare examples of bubble companies making it through the bust and going on to become successful and valuable companies. By the way, the combined cash flow of Spot Runner, LinkedIn and Facebook is less than that of one Costco store.'"

Comments

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[mandelbr0t]

If you have to ask...

Web 2.0 looks to me to be the same as the .COM bubble. There's a bunch of hyped technologies, a bunch of consulting companies monopolizing the HR, a bunch of VC firms with slush funds to melt, and very few people that actually understand any of it. I don't see any changes to marketing or project hype; a presentation to my 2004 technical college class sounded like it was written by c.2000 .COM gurus. All in all, it seems to me that the Web 2.0 bubble is based on the same psychology as .COM: "Anybody who understands the technology is too dumb to understand the business".

Let me try and expound on that last statement a bit; it is based on personal experience, not some knee-jerk reaction. I got hired as a consultant about 9 months before the .COM bubble burst. I knew a crap-load about CGI and server-side scripting and HTML and Unix and Apache and so on. They seemed to pay me well, until I took into account the down-time between contracts. Moving out of the IT industry didn't seem to be an option as long as I was in the recruiters' databases. On the bright side, I'm not so dumb about the business any more. The business is effectively this: "I don't know how to implement X, but I know how to bully some techie dweeb into implementing it for me for a tenth of what it's worth."

All of the latest marketing and hype for Web 2.0 seems to have this same negative attitude about tech. dweebs. Geeks become slaves, IPOs go through the roof (but you can't afford the shares on a geek's salary) and companies sell vapourware. Projects go over budget, get extended, fire their entire team, hire more expensive consultants and extended again. The last contract I was at was still suffering from this crap. The product had been in development for 4 years by 2-3 people full-time, and I could still write a better version in 6 months by myself.

If there was an obvious decline in corporate corruption, I'd say that Web 2.0 might not be such a bubble. AJAX and other "dynamic" approaches do offer a better end-user experience. Broadband content is commonplace. Blogging is popular. But the overall negatives vastly outweigh the positives. We need to stop thinking about technology as a short-term investment strategy, and consider the overall societal impact. I'm not in it for the IPOs myself; I hope those that are start to listen to the geeks. "Don't make me angry; you wouldn't like me when I'm angry" :P

mandelbr0t

Irrelevant

[denoir]

Ultimately a bubble or not is irrelevant. Today investments in Internet technology are considerably higher than they were during the peak of the IT boom. A boom-bust cycle is perfectly normal for the early stages of just about any technology. Short term expectations are usually inflated but the long term impact is consistently underestimated.

Information technology is developed at an exponential pace - and we are nowhere near a saturation.

Re:Web 2.0 Url Please

[Giometrix]

"Well then, whats so new and cool about Web 2.0? I've been using slashdot way before they coined the phrase."

Some businessmen somewhere realized that they can use "community produced content" to drive their sites rather than having to pay for writers and editors to produce content.

Our boss just gave us the "we will move toward web 2.0" speech in our "year and review" meeting. Free, up-to-date content (via forums) was the reasons he gave for moving toward "web 2.0".

That's all fine and dandy. Except that achieving a GOOD community driven site is not easy. You really need to reach a critical mass of users before your site's community will generate good, useful content that will attract more readers (and thus grow your community, and ad dollars). Would slashdot be as appealing to you if the community was only a handful of people? The news comes late, and you don't even get the whole story. The whole reason you come here is for the community's feedback to the stories. Most sites don't achieve anywhere close to this level of success, and their forums lie dormant with at most a couple of posts.

Eventually managers will realize that the promise of free "web 2.0" content is not as easy to achieve as they thought, and the pendulum will swing back toward "web 1.0."

Re:Figures dont lie...

[Sparohok]

Costco earns a profit margin of about 2%. The profit margin of Facebook is probably negative.

Costco earns an operating margin of about 3%. The operating margin of Facebook is unlikely to be higher than about 30%.

So, whatever metric you use, your statement is almost certainly incorrect, whereas Mr. Dagres made a statement that is plausibly correct.

He's not doing bullshit financial analysis. In fact it is textbook financial analysis to use cash flow statements as a bullshit detector. The cash flow statement is a good reality check that will show up problems in a business that aren't obvious in the income statement. As quoted in the article -- "I'll take cash flow over gross margin -- I can eat cash flow."