Slashdot Mirror
Has the Second Dotcom Bubble Started?
An article at the Guardian asks whether the exceedingly high valuations of social tech companies signify the arrival of a second dotcom bubble. Quoting:
"Every week, one of the new generation of internet firms seems to attract a sky-high valuation. Zynga, the social-network games company that has tempted millions to grow virtual vegetables in its FarmVille game, has been valued at $9bn (£5.54bn). Profitless Twitter is said to be worth $10bn. Groupon, vendor of online discounts, rejected a $6bn offer from Google and is considering a flotation with a potential valuation of $15bn. Tech-watchers say this is just the start: the real boom will come when Facebook, the head boy of the new dotcom frenzy, goes public, probably next year. ... The last dotcom boom really took off after the flotation of the internet software company Netscape in 1995. Patrick says this time it's likely to be Facebook that lights the fuse. So far, private investors have been locked out of the New Thing. But JP Morgan is setting up a fund, and Goldman Sachs recently tried to get its clients' money into Facebook."
It's not often I agree with a piece in the Guardian, but on this occasion, I think they're onto something. I remember the build-up to the first dotcom bust and a lot of the signs are showing up again. The over-valued floatations of profitless companies are certainly the most obvious of these, but there's a lot more than that out there if you want to look for it. Most worrying for many slashdot readers (though not for me with my nicely non-IT-based job), I'm starting to see the same kind of rush towards IT and computer-science based courses that we saw in the 90s, as the area became seen as a good route to "get rich quick". More competition for jobs and downward pressure on wages on the way.
Actually, I think the Guardian article is, in some ways, a little under-stated. It assumes that we're about to see the start of the bubble, which will begin in earnest with a facebook floatation. I suspect that we're actually a bit further along the cycle than that - already well up on that bubble and waiting for it to burst.
Of course, things won't be absolutely the same this time as they were in the original boom. I think the first boom and bust was characterised by a lack of understanding over what the public actually wanted out of the net. Pretty much everybody who was a significant online presence in those days was a new startup of one form or another and what the bust really did was sort out the wheat from the chaff. The businesses who had hit upon a successful model - like Amazon - came through it just fine. Meanwhile, the likes of Boo.com were exposed as fundamentally unviable - the public weren't remotely interested. It's worth remembering that outside of a small number of finance types and journalists, nobody was actually even looking at the sites of most of the victims last time. I was a heavy net user at the time and I remember seeing these huge IPOs for companies that I hadn't even heard of.
This time around, I think there's a better understanding of what people are interested in. The problem this time isn't the "everything dotcom is exciting" myth that we had last time. Rather, it's the "this is popular, therefore I must be able to make it insanely profitable" myth. The huge valuations are being attached to companies that have already undergone some fairly extensive testing in the court of popular opinion. The problem, however, is that that popular isn't the same as profitable and, I think, the lessons of the last 15 years or so indicate that making them profitable (at least to a degree that justifies the IPO) will likely not prove possible.
Advertising isn't going to do it alone in most of these cases. Sure, advertising is always going to be part of the online economy, but it's been proven time and time again that it isn't a silver bullet - not least because so many people these days just block it. At some point, a lot of these businesses are going to be pushed in the direction of starting to charge for content or services that they have been offering for free. And in a world where people have been used to having these things for free - and where free alternatives will still exist - I don't think that's going to work. Particularly not for social networking enterprises like these, where a lot of their value hinges upon the fact that everybody you know uses them. Some companies may fare better (just as some did in the first bust) - those selling casual games, for example - because they're already extracting revenue from customers.
I just ask a simple question: "Is this company selling a product that people will buy?" If the answer's no, then the company's story probably isn't going to have a happy ending.
-So if they can't charge, how do they generate income? As we know, its largely advertising revenue
And that brings up problem #2 that the last bubble happened in an inflationary flood of credit and generally increasing (at least nominally) incomes. In a deflationary environment, you can't grab a slice of the pie and watch it grow, even just to stand still you have to convince your customers (advertising agencies, etc) whom have a shrinking revenue stream, that their dollars are better spent on your dotcom ads than spent on TV commercials, print ads, billboards, whatever.
Every millisecond spent on facebook is a millisecond not spent at home depot or related pursuits, not spent eating at a restaurant, not spent buying a car or driving around... Computer product importers / retailers and ISPs are pretty much the only industries that are a good fit for facebook.
You want to reach car buyers so you can sell more cars, you put a billboard on the biggest interstate in town, you advertise on TV during nascar races, and you put print ads in a car magazine. You don't advertise to peasant subsistence farmers, real or virtual farmvillers. The real ones can't afford it, and the virtual ones are more interested in clicking mice than driving cars. Facebook, etc, is too old and too wide spread to dazzle them into investing in something "new", since everyone's had an account for years.
In other words its hard to bubble off shrinking advertising revenue that would be targeted to the wrong people anyway.
"Science flies us to the moon. Religion flies us into buildings." - Victor Stenger
Wall Streets (and the market in general) function have always been to separate fools from their money. Now we have a bunch of fools who missed out on the first dot-com. They too need to be separated from their money.
TCAP-Abort
the rush of the lemmings is all done by rich, well-connected investors this time around, a select few, rather than mom and pop investors like last time around. there has been a trend away from going public in recent years, and sticking with private investors. why deal with the SEC and obsessing over stock market valuation? the stock market is becoming a thing of the past. which is part of a larger story away from the citizen investor and a return to the days of plutocrats and a class structured society, the death of the middle class
so, since dot-com crash 2.0 is all about rich assholes losing their money out of blind greed, i ready my world's tiniest violin
intellectual property law is philosophically incoherent. it is your moral duty to ignore it or sabotage it
High moral fibers? That's a dubious claim. Your thought of "really nice people" that somehow managed to keep (possibly other) greedy bastards from running the show is mischaracterized. They merely provide somewhat astute competition at the cost of your privacy, and therefore, your dignity.
Proliferating web content through subsidized advertising is much like how the TV industry let the ad sales people out of their cages, resulting in a proliferation of enormous quantities of total content blather. That evolutionary process seemed like growth, but because it panders to quantification rather than qualification of content, it made much of the web entropic.
---- Teach Peace. It's Cheaper Than War.
I'm surprised that this article didn't cover what is probably the most obvious example of a bubble stock: Netflix. While Netflix is indeed making money, they are not making (nor have the potential to make, due to various reasons) what their stock is currently valued at. But, the problem is people think "oo netflix that's the way of the future, not old fashioned cable providers" and they pump their money into it.
There are many articles about Netflix being a bubble, but here's the first one I found off of Google which summarizes a portion of the problem: bubble.
I think the difference between the last .com bubble and this one is that in the last one, companies had no way to make money, whereas in this one they are making some money, just nowhere near the crazy valuations that investors are giving them. The mindset is the same as last time, but the implementation is somewhat different.