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Is Web 2.0 a bubble?

I was recently asked to comment on whether Web 2.0 is a ‘bubble’ – here’s what I think.

Both web 2.0 and the dot.com surge are/were driven by a common human bias: this is to over-state the implications of major societal/business/regulatory changes in the short term and to under-state them in the longer term. The dot.com era companies were, in many cases, prescient. The problem was that they did not quite factor in how long the changes would require to generate cash flows in the near term.

If you look at the statistics, a lot of the predictions made for the dot.com era have by now come true. The Web is destabilizing industries ranging from media to retail to telephony. More and more people all over the world are buying via e-commerce. I believe something like 30% of retail transactions have some e-commerce aspect to them (whether it is searching or getting information as well as actually ordering on line). Efficient markets for everything from the stuff in your closet (eBay) to obscure sound tracks (ITunes and other sites) and even your mate (think match.com) have been facilitated by the Web. It just took 13 years, not 3, for the changes anticipated to become a reality.The other big myth is that first-mover advantage will go to the biggest and earliest entrant. We found it wasn?t true in the Dot.com era (think Value America or WebVan), and I predict it won?t be true in the social networking/YouTube/Myspace era either. The extent to which a model is sticky is vastly over-estimated in my opinion. If all my friends are on Myspace and I go there because of that, what happens when they all move to another place? What?s to prevent them? More importantly, what happens when a site like myspace is
…so yesterday, my kid sister is on that…
and the hunt begins for a newer cooler place to be?

A lot of the flurry over web 2.0 is simply the realization of the power of the Internet and the maturing of some business models (eg, advertising based models) that were NOT foreseen during the dot.com era. Indeed, remember when everyone was so hot on eyeballs but nobody knew why? My poster child on this one is the $780 million Excite@home paid for Blue Mountain Arts, a free greeting card site that had 54 million unique subscribers, but no revenue model. Well, we?ve now found the revenue model and it is advertising. Excite had to sell the site for a humiliating $25 million a short time later to American Greetings. Today, it?s Provide Commerce selling roses to go with the cards that is racking it in, affiliated with the Blue Mountain site.

So what you are seeing now is a resurgence of investment and interest because the Internet-based revenue model (like the TV and radio models that came before it) promise to redirect the billions companies spend on advertising to where users are actually spending time.

Will it have some bubble like features? Absolutely. This unfortunately seems to be how we learn as a society about new business models in a major way. Bubbles have accompanied just about every major technological transition in our economy. Are there some differences between the dot.com era and now? Yes.

Some differences:

There is more emphasis today on having a revenue model and something to actually sell

More and more young companies are building up to be bought out, rather than to go IPO. This means that they are targeting a useful innovation for another company (like Google) rather than trying to lure investors into a big-bang IPO.

There is a bit more maturity about the whole Web phenomenon and investors are looking more for the fundamentals.

Many smaller businesses can now be started for a song, so the downside is lower if they fail.

Are there some dangerous similarities we should be alert to? You betcha

Waaaaay too much money sloshing around looking for a home. When $50 billion companies are in play by hedge funds and private equity investment firms, you know that some big investors, desperate for higher returns, are going to start getting a little careless about their investment standards just to get/keep the deals flowing. That behavior feeds a bubble in almost all cases.

This has the effect, counter-intuitively, on making normal M&A too expensive for normal companies. What that does is begin to put a premium on organic innovation (growth from within through corporate venturing) as well as smaller acquisitions to create new capabilities for established companies.

While all of this works as long as the party continues, once we start to see some of those debt-ridden large companies stall in the market or there is more regulation of these investment vehicles or interest rates come up, or risk appetites sharply drop, it?s like a game of musical chairs ? the last investor standing will be dealing with a sharp loss of value.

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