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."
The problems that monetizing free services like Facebook are largely as follows.
-The value of the product to users is determined by the number of your friends that use it. It's value to consumers massively diminishes if large swathes of your friends dont use it. Its the same reason I don't use MSN messenger anymore. That's actually a really great product, but I don't know anyone else who uses it, and that pushes its value to 0. What this effectively means is that Facebook cannot charge users for content. As soon as they do that, some people will leave, which pushes down the value for money that users who want to stay get. So they leave too. No future there.
-So if they can't charge, how do they generate income? As we know, its largely advertising revenue. That's true of Google, and Facebook, and any aspiring free products out there. The success of that model is difficult to predict. On the one hand, the amount of information about users that these companies can get is astronomical. It is certainly of use to advertisers, and they are probably willing to pay huge sums so that they can integrate that data into their systems for personalized adverts. On the other hand, I've yet to see personalized advertising systems which is accurate enough to be of value. I've never clicked any Google or Facebook ads because they have never hit anything that I would want. Until that gets addressed, there's not a huge future in that either.
Is it just my observation, or is eldavojohn an idiot?
During last dotcom boom companies had no usable plan to get income. However, Facebook is advertisers dream with its extremely targeted advertising system, Zynga has a huge amount of casual players and both advertising and direct payment system and groupon receives good money from the stores. They all have business plan. They might have to work on them a little bit as they're still so new companies, but they definitely have one that work.
That's why it's not a second dotcom bubble - it's just that the masses have started using internet a lot more than before and web itself has changed.
I hope this happens for two reasons. One, after everything that's happened in the last 15 years, investors seem primed to look for bubbles wherever they can find them. It's been looking like Treasuries might be the next Big Thing; if that happened, it would accelerate the destruction of the dollar. I'd much rather speculators charge after some stock than my country's currency.
Second, my career really started at the beginning of the last bubble. Maybe a second one bring in some new blood to the industry, especially my step-son (who'll be graduating college in two years and is gonna need a job).
God invented whiskey so the Irish would not rule the world.
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.
http://youtu.be/I6IQ_FOCE6I
Apple is worth how many times their yearly profit? Thirty-something? Meaning if I buy a share I will statistically start making a profit when I'm 75. For Facebook it will probably be 156. Don't get me wrong, Facebook will in time become a huge money-machine. But the first investers will be one-cell brained "Facebook is big: must buy" kind of people. The more I learn to know bankers, the more I despise them. We are warming up for the next round of "let's kill people savings for fun".
10 ?"Hello World" life was simple then
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
why should we take the opinion of someone who utters such a sentence ?
Read radical news here
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
Maybe there is a bubble and it's just elsewhere.
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.
I doubt this.
Selling your primary resource (the social graph) to outsiders is creating your own competitors: once I have your data, why do I need to pay you more?
Facebook isn't selling their data. They're selling placement of your data (ads, mostly) on their social platform. The facebook customers (the users aren't customers, they're marketing dangled in front of the real customers) thus get to keep paying Facebook for "use" of the social network.
Please define valuable.
You realise that they are knocking houses down because the supply of them is such that they are worth less than the loans which were taken out to build them.
Let me say that again, to emphasise the insanity. They are knocking houses down.
Despite all the poverty and homelessness, despite the trailer parks. Because for capitalism to function, supply must never meet demand. It is only by destroying perfectly good housing that the supply can be reduced, the remaining stock can be made more valuable and people can go back to their wage slavery in order to pay the mortgage.
Deleted
Selling your primary resource (the social graph) to outsiders is creating your own competitors: once I have your data, why do I need to pay you more?
Live feed. Extreme example: Egypt would have paid a lot for a live private facebook feed. Who could possibly know, maybe they did?
Not so extreme example: Local cops pick up a punk, need to find out his current accomplices, not his buddies from half a year ago.
"Science flies us to the moon. Religion flies us into buildings." - Victor Stenger
Groupon seems to me like one of those ideas we'll look back in retrospect and think, "Why was it worth that much? It was so obvious!"
The idea of landing a big number of first-time customers sounds great until the customers start coming in. From the experiences of business owners I know, Grouponers were, simply put, cheap (not condemning cheap people here, as the times demand it for many.) If the groupon is "get $50 for $25," you better damn be sure most customers will spend the $50 and not a penny more. And if it's a restaurant, they'll tip on the $25.
I expect that those customers will not be back; they will move on to the next goupon.They're not looking for a new place to eat; they're looking for a deal.
And for consumers, the deals are already being watered down by the typical (one month free at the gym, or free karate classes for a week) that you see everywhere.
As for the businesses themselves,I wonder how many more of these kind of situations we'll see - a restaurant using a Groupon-like company hoping to land quick cash in desperation.
Also, from my conversations with people who own businesses, Groupon's sales approach is very aggressive. They put dollar signs in the business owner's eyes. But eventually, they'll get found out. Right now, people don't want to miss out on this since all the cool kids are doing it.
Of course there are businesses who've had great results with Groupon. I just think it's lunacy to think they're worth $15B.
What would be interesting is to see if some investment can be directed toward funding open source. It's more than fair, a huge amount of these operations depend on open source. I favor setting up threshold pledge funds -- http://en.wikipedia.org/wiki/Threshold_pledge_system
Build your own energy sources from scratch. http://otherpower.com/
Facebook 09 estimated revenue is indeed $800 million...yet Goldman Sach's offer could place the total value near $50bn. That's laughable compared to Groupon, who saw profits around $350 million, yet were only offered $6bn. If Facebook really is worth $50bn (it's not) then Groupon was right to reject the offer. Hell, that $800 million is only revenue. I'm sure it's probably not by very much, but their income is going to be less.
The smart investor won't dump money into a company so overpriced as Facebook when you look at the money they can get. Besides, how long will it be until Facebook is unseated? 5, 10, 15 years?
During the last bubble, 3 digit, and even 4 digit, P/Es were not all that unusual. Most of those companies listed in the parent post, have P/Es around 20. If this is a bubble, it's certainly nothing like the last bubble.
Is Goldman Sachs involved?
Yes.
Watch this Heartland Institute video
On the other hand, I've yet to see personalized advertising systems which is accurate enough to be of value. I've never clicked any Google or Facebook ads because they have never hit anything that I would want. Until that gets addressed, there's not a huge future in that either.
Hi. This is purely anecdote, so it will be natural if you take this with a grain of salt. In the last couple of months I've been seeing an improvement in the type of advertisements I see (read get) with Facebook. I've not stated in Facebook any interests in training for embedded systems and FPGA stuff and crap (rather, I've done it in other forums, blogs and in StackOverflow.) And yet, I've been getting advertisement for equipment and training that is right up my alley, things that sometimes I never find even with the most extensive of googling efforts. Similarly with other activities I like (crossfit, MMA, etc.) Whatever FB is doing wrt to personalized advertisements, at least on the narrow fields of interest that touch a chord me, they must be doing something right.
Obviously, YMMV, but I just find it curious.
My coworker and I had this convo a few weeks back. Of course, we've witnessed the demise of centrally-planned economies in the last 100 years, as they're unable to determine the optimal setup of manufacture and distribution of goods and services, resulting in shortages or overproduction. However, does the proliferation of information technology change this?
In many industries, the only remaining competitive advantage is to optimize process through the use of IT, as opposed to making a product better or cheaper (a toaster will be $X +/- a few dollars no matter which big box store you go to). Walmart competes with Target not by having lower prices, but by streamlining shipping and ordering to minimize wastage - to use computers to determine the optimum number of Fram oil filters that need to be on the shelf at store #2 in Boise, for example. In fact, one could say that something like Walmart could very well represent a microcosm of the economy of a country whose economy is centrally-planned, using massive servers to calculate the exact amount of demand for any product at any given time.
There are a huge number of yeast infections in this county. Probably because we're downriver from the bread factory.
And that is why, everywhere that Walmart opens a store, there are no more local stores. There are only Walmart, Target, Home Depot, Lowes, and Best Buy...oh wait, no there isn't. There are lots of little shops that supply needs/wants that Walmart and the other big box stores don't. Those little stores represent the things that would fall through the cracks with central planning.
The truth is that all men having power ought to be mistrusted. James Madison