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Web 2.0 Bubble May Be Worst Burst Yet
athloi writes with a link to an editorial by John Dvorak over at the PC Magazine site. Rather than his usual tilting at windmills, Dvorak turns his attention to possibility of another big internet economy 'pop': "Every single person working in the media today who experienced the dot-com bubble in 1999 to 2000 believes that we are going through the exact same process and can expect the exact same results — a bust. It's déjà vu all over again. Each succeeding bubble has been worse than its predecessor. Thus nobody is actually able to spot the cycle, since it just looks like a continuum. I can assure you that after this next collapse, nobody will think of the dot-com bubble as anything other than a prelude." It certainly seems like another burst is imminent; will this one be worse than the original, or have less of an impact?
Dvorak is crying that the sky is falling; so, based on his track record, everything must be just peachy then.
Good.
Simon.
Physicists get Hadrons!
People get giddy with their money and spend it foolishly, yes; however, this time around I think it's a bit different. People within the top tier of sites are actually making money, creating business plans, etc. Services that are offered are actually useful and when they aren't, they get eaten.
It's not like the 90's where anyone with a basic idea and a BS/BA degree could get venture capital to start up "the next best thing". Most of those companies died out, and people are more cautious with their money. Most of the new companies and ones who survived are service related. Those can live on, and whether it's AJAX or the next big tech, it doesnt matter. If you fill a real niche and make a solid product you will survive. If you're a new company living in an AJAX web 2.0 dream thinking you're cool, and hiding behind some pretty effects but no real substance you're in for a long trip. This is true for any business.
I would look into this - is it as crazy as it was back then? I don't see many IPO's with paper millionairs appearing overnight and going bust just as fast. Nor I see many massive hiring of naive and unskilled workers with inflated salaries. I'm sure the latter is still happening but I don't see it on the scale we saw in the 90's. So if there's a bust - I don't think it'll have a big impact as it did back then. I could be wrong though.
Quick, someone mod TFA -1, Dvorak!
Shouldn't this article be linked under FUD in wikipedia?
It could happen. It may even happen. But acting like a mother and predicting every possible failure or catastrophe that can happen and when one of them does saying "Look I was right" only works on kids.
The first .com thing was called a bubble by many economists and business people from the get go and it clearly was. I remember my roommate (who was a business major) joking about how we should start a business. We'd have no business plan and no way to make money, offering something worthless. We'd lose a ton of money first quarter and just cut costs every quarter after that. Stock prices shoot up on the "growth" (less loss was huge growth for .coms) and we get out like madmen, well, minus the whole securities fraud thing.
.com bubble if there is one. If I was to pick something to be concerned about it would be the real estate market as there as a good number of ARM mortgages that are going to be resetting in rate here soon and values in most areas are not rising much if at all.
The problem was people were just throwing their money in to startups that had no fucking clue what they were doing. Many were offering something totally worthless (Cuecat), many had no plans for how they'd actually make any money since their whole business was giving shit away for free, many just pissed money away on parties and such.
Well I don't see that happening right now. Maybe it is and I've just missed it, but I do kind of keep an ear on these sort of things. If people have been unreasonably throwing money in to anything it has been housing, and at least that's a market where you are purchasing a real property with real value (though that doesn't mean you can't overpay). Sure there's still investment in online technology but that doesn't make it a bubble of any sort. There are plenty of successful online businesses. Google is a great example. While their stock is surely overvalued, there is no question that they are a profitable company and face no danger of going out of business should it drop. They are propped up by a solid positive cash flow, not a stock bubble.
I don't claim to be an economist or anything, but I really am missing the
Stock bubbles are the result of speculation. Speculation is when people buy companies with incredibly high SharePrice/EarningsPerShare (P/E) ratios. For a mature company, this number is typically around 15, meaning if earnings stay the same, and all earnings are paid as dividends, over a 15 year period, you would not lose money even if the share price went to 0. For expanding companies, P/Es can typically be as high as 40.
In the bubble, investors were buying shares with very high prices despite very little earnings. The Nasdaq currently has an average P/E 24.01, which is reasonable if some companies are mature and some are in a high-growth state.
And... since when was Dvorak a market analyst? I thought he was just a troll who posted absurd comments in order to draw readers...
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By CD-ROM, I think he means the "interactive", "multimedia" "games"/apps/"experiences" of the mid-90s, hailed by certain powers-that-be as the things that would get us to run out and buy CD-ROM drives in droves. The full screen genre preludes to Flash (in fact, a great deal were made with Shockwave) that never were useful.
I can't say whether it was a bubble or not, but I know I'm glad no one, except for perhaps some cell phone/PDA software autorun presentations, still uphold that particular art form. With this in mind, he's not all full of crap.
As for the industry going towards more or fewer bubbles, I have no idea. On one hand, the industry is stabilizing and maturing (if by "maturing" you mean "big companies can upsell other big companies on ridiculous systems no one needs") so more and more jobs are guaranteed. On the other hand, there's still technical evolution and still wrong-headed venture capital, so there will always be costly software projects that fail (and software projects *do fail*, more than half of them, regularly). On the gripping hand, there are people who know way more about this industry than I do and even they can't say which way it'll go.
The thing that made the dot-com bubble unique was that it affected damn near every corner of the industry
It was insane. Unsustainable valuations that reminded me more of tulip bulb trading. Companies with absolutely no background in tech were opening up IT consulting branches. Yes, I'm looking at you KPM&G.
If anything what we're currently experiencing is a correction from an industry that was over-sold in the wake of the dot-com collapse in 2000 and then the outsourcing insanity that followed after. That was a double whammy that dried up the pipeline of IT students in college almost overnight.
It doesn't feel like tulip bulb trading this time. This is a correction and we're still playing catch up.
That's our life, the big wheel of shit. - The Fat Man, Blue Tango Salvage
I think there is a small bubble, but for the most part it isn't a stock bubble, its a VC bubble. Right now in Silicon Valley VCs are falling all over themselves trying to fund some little crappy startup and hoping it will be the next company to flip for a billion dollar acquisition. I suspect that Yahoo is not going to be making many billion dollar startup acquisitions for the foreseeable future and Google is heading for a correction that will probably put a stop to the frenzy as well. And then, sadly, the VC is going to dry up and any web 2.0 startup that can't make money is going to close. Its the silicon valley cycle of life. The .com bubble was an extreme example, but what goes up must come down. I just hope that I can stay afloat through the next downturn.
Sig removed because it was obnoxious
Yeah, but if it were just a problem with the way the VCs were funding things, the entire stock market wouldn't have tanked, because venture capital funds are generally regarded as relatively high-risk anyway and, in any case, a company that goes off the radar before going public has little effect on the stock market. No, there's another connection here that you didn't mention.
When a venture capitalist funds a company, it will often put its own executive management into place in order to ensure that the goals of the VC are met. The question then is: what are the goals of the VC?
Well, to make money, of course. Thanks to the internet hype during the dot-com boom, internet companies were able to go public and get some crazy money for the initial stock offering. VCs typically own the bulk of said stock, and thus VCs were able to make a lot of money off of that. Initially, the companies in question generally offered something of value, but when the VCs caught on to how easily IPOs made money for them, they started to fund pretty much any internet startup, even those without any solid business plan or any real product. Their goal was to make money as quickly as possible.
They would do this by manipulating the appearance of the company to outsiders, by forcing (via the executive management they put into place) the company itself to grow rapidly regardless of need. In those days, company growth was seen as an indicator of future success, and the VCs took advantage of that. In fact, they did so at the expense of the long-term prospects of the company, since they wanted to make their money as quickly as possible. The companies would go IPO and the VCs would make a pile of money on it.
Why did the market crash, then? Because investors eventually wised up. The companies in question went public via IPO but because they often had no real product and no real business plan they were unsustainable. Even companies that had good products and a good business plan ended up failing because their long-term financial outlook was severely compromised by their unneeded growth. And their post-IPO stock performance eventually reflected that.
Stock investors eventually caught onto the scam, and stopped buying into IPOs. IPOs as a result started failing out of the gate, and VCs started losing money as a result as well. But most importantly, the whole thing destroyed the confidence of investors in the stock market. And the market naturally crashed as a result, with all the fallout that comes of such a thing (which you described nicely).
The bottom line is that VCs are, from what I can see, primarily responsible for the dot-com crash. Some of it was the result of stupidity, but most of it was the result of willful greed.
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Yes, it's hilarious how stupid some people are. They view his track record of outrageous predictions and conclude he's an idiot. Here's a clue, people: no one pays John C. Dvorak to make accurate predictions, so why would you judge his intelligence and success on that standard? It's like concluding your washing machine is a piece of junk because it can't keep your food cold. That's just being stupid. Judge how well your washing machine works by how well it washes things.
Dvorak is paid to generate controversy, outrage, and ultimately readership and page hits. And he's doing exactly what he's trying to do (and gets paid to do) very, very well. The fact that we're having this discussion is proof of just how good he is at his actual job.
"Convictions are more dangerous enemies of truth than lies."
He is completely clueless. The dot com bubble has very little to do with markets disappearing or businesses failing. The bubble was all about people that would blindly invest in internet stocks and businesses. After awhile when the overvalued internet companies started to fail, and all that stock was worthless, it caused an impact on the economy. CDROM based interactive multimedia didn't do that, they never had the investment that the dot coms did. I believe currently people are more wary of investing in unproven web businesses and you really need to have an environment where people will blindly invest in companies that think they are going to make money shipping 50 pound bags of dog food to the people. The current bubble that might hurt is the mortgage fiasco that is currently playing out right now.
You are 100% correct. What usually causes a bubble is the BS pedaled by those puffed-up MBA "stock analysts." Think of housing: analysts kept hyping financially-thin high-risk lenders b/c the returns were SO fat, even if it couldn't last.
An even more disturbing example is how we got investors to build the Internet fiber backbone for us... Think on this. Companies like Level 3, PSINet, GlbalCrossing, etc were darlings of Wall St analysts b/c they were (in the 90s) the "next big thing." Assuming (correctly) that the Net was THE FUTURE, Wall St boneheads seemed to assume that anyone building infrastructure for it would make off with billions.
What those dummies neglected to notice is that the fiber backbone had such huge capacity that it was way easy, almost inevitable, to "overbuild" in the sense that with virtually unlimited carrying capacity, the backbone owners/installers couldn't charge enough to cover their vast capital expenditures. (Remember, this was at the moment when Enron thought that they could develop a futures market in broadband---which turned out to be much like a futures market in seawater). The fiber-pullers in fact had no credible long-term business model beyond Wall St loving them. Once it became clear that there was no credible fat revenue stream for them, they went under, and the successor firms who bought those assets got them at a price that realistically reflected the revenue potential of the fiber. Long story short, as a nation the US got its fiber backbone on the cheap, thanks to gullible investors listening to the hype of the financial analysts. Thanks!
On the downside, those same analysts are apparently now convinced that 1. firing employees is always a good thing for a firm, even if it undermines the comapny's knowledge capital and skill base, and 2. any investment that can't be amortized in a year or less should be avoided, as should any firm that makes such investments. They are setting us up for long-term economic dry-rot, but hey, it keeps the rich happy, provided they can always find the "next big thing (©)," sufficiently hyped by the boys in suits.
So yeah, Web 2.0 might be a *financial* bubble, but like the tech boom of the 1990s, there's some very solid stuff there, and once the smoke clears and the greedy have either gotten cooked or rich, we'll just keep innovating, albeit for different employers if we're in the private sector. Wouldn't it be nice if our economy weren't held hostage by the analysts and their greedy clients? Maybe we could then live in economic security amidst innovation.