Web 2.0: Things Haven't Changed Much Since the Last Dotcom Boom

Josh Quittner is wrong in his Time magazine paean to all thing Web 2.0. Far from being different from the prior dot-com boom, this boom is achingly similar, with the main difference being that it is cheaper this time to get yourself in just as deep -- and this time there is no IPO market to bail you out.

Sure, while Quittner's right that no-one can name any Web 2.0 IPOs, that's not the same as they don't know anything about the liquidity providers/sources. They can name the main buyer -- Google (GOOG) -- and they can name its largest acquisition -- YouTube. And that is a reminder why this is so perilous: Web 2.0 is an even more concentrated boom, one that centers on only a few names on the liquidity provider side, rather than the wide-open affair we saw back in 1999.

Liquidity aside, Josh then goes on to repeat a favorite myth about Web 2.0, the one that says profits are key. Bullshit. Josh tries to make the point, but then he backpedals to eyeballs [shades of Web 1.0], and then makes up a factoid about how "sugar daddies" will only buy profitable Web 2.0 companies. Really? Okay, name one. Microsoft's (MSFT) Not Jot, YouTube, Yahoo's (YHOO) Flickr, etc. etc. None of these high-profile buys were profitable when purchased.

So, is this bubble different, as Quittner suggests? Only if by different you mean "riskier". Because the main difference between Web 2.0 and Web 1.0 is that we have higher risks with lower payoffs. It is the concentration of risk, the narrowness of the exits, the low cost of market entry, and the ephemeral nature of consumer markets that makes this a more perilous time.

Sorry Josh. Like most times when someone says "this time it's different" about capital markets, the only thing truly different is the person saying it.

[Disclosure: I like Josh, and even briefly wrote a column for the Quittner-helmed Business 2.0.]

Comments

[kdewalt:]

Paul,

There may well be a Web 2.0 bubble but there IS a significant difference. I'm not sure I understand how it can be "cheaper this time to get yourself in just as deep" - particularly what you mean but "just as deep" - but the main difference is that it is much, much, much cheaper to build and operate a company online.

In 1999 I built a web company that took multi-million dollar institutional funding; without it there was no way to build the product quickly, and we characterized all that was good and bad with web innovation back then. This past summer I built a site that rivaled it in functionality for a total cost of $0. I did it with open source software in my own spare time. What took 8 FTEs and 6 months in 1999 takes .25 FTE 6 months today.

Moreover, we had to shut down the business in 1999 because there was no more institutional funding to operate it. Today a similar service could be kept running by the sweat of one entrepreneur using the available online infrastructure to host it and the social online community to market it.

The net effect of this difference is that you will not see spectacular flameouts, massive wealth evaporation, and huge layoffs if there is a pullback. Most, of course, will not be bought by Google/Microsoft/fox/y... People will just hunker-down and keep innovating with whatever resources they can garner. Many of these sites will continue as going-concerns run by a handful of people running a small operation, returning a modest value to their owners and investors.

Given the scarcity of risk-based assets and the huge available levels of liquidity in the world the temptation to spread money among many of these type of companies is understandable.

2006 Dec 18 12:52 PM