Just about the only thing that I've been able to hold as a truth about Internet companies is that they are always changing. Perhaps we are too early in the Internet age to tell if companies can hold onto a significant section of the market for an extended period of time -- my best guess for now would be Google (GOOG) -- but if the past 10 - 20 years have told us anything, it's to not view any Internet company as having an infinite life.
Although people won't admit to it now, many viewed MySpace as the new era of social networking. Newscorp (NWS) purchased the company for $580 million in 2005, where it has since taking a huge beating from the behemoth Facebook (they recently expressed interest in unloading the company). Just a decade ago, America Online (AOL) was thought to be the beginning of a new media empire. Just recently, Time Warner (TWC) spun off the company in one of the most embarrassing buyout efforts ever, losing billions.
Although you can never see it coming, the vast majority of internet companies end up failing. The tough thing to see is that they don't fail because their business model is poor. They fail because it's an industry where there are no barriers to entry, where another company can easily setup shop, improve your product marginally, and steal all of your market share (see Facebook's success). In the case of MySpace, the problem wasn't with peoples bullish reasonings (that social networking will be a huge future market, which is it), but with their competitive landscape.
Too many times, investors look at a company and say, "Wow, their industry is going to explode,"' and forget to look at everything else. The most important part to tech investing is knowing that it is usually not the first company that succeeds. In fact, it's usually not the first dozen or so companies.
For instance, Henry Ford wasn't the person who invented the automobile. Thousands before had opened up shop in the automobile space, and hundreds were still in business when Henry Ford came on the scene. Would it be prudent for me to buy Adams-Farwell Automobile Co. (now defunct) in 1900 simply because the automobile market was set to explode dramatically? Hardly.
Yet this is how most Internet investors view the market. They see a huge need along with a company that is filling it and can't possibly see why they shouldn't invest.
Recently there's been talks of a Groupon IPO, Twitter IPO, and a Facebook IPO. Are we slowly repeating the Internet bubble 1.0? Or is this fear overblown?
I don't know what's going to happen in the near term, but I will tell you this: most internet company's will eventually be replaced. I'm in no way arguing that the conditions are the same today as they were in the late 90's, however, I think most investors need to get a change of perspective when looking at internet companies.
Someday, Groupon, Twitter, Facebook, and even Google will be replaced if they don't constantly reinvent themselves [See MySpace, Yahoo (YHOO), AOL]. In hindsight, everyone can point out to past internet busts flaws and say how today's companies are improved, smarter, or just plain different. Just remember that hardly anyone could have imagined what the internet landscape could be today just a few years ago.
How will it look in 2015?
I have no idea. And most importantly, neither does anyone else.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.