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Tech bubble 2.0?

The most read story in today’s Guardian business section asks if we are seeing the start of a second dotcom bubble.

There’s no doubt that some of the valuations bandied around for Facebook, Twitter et al do seem a little toppy; especially when Twitter, as far as I can see, doesn’t seem to have a viable revenue stream (and I’m a keen Tweeter). Another sure sign of a bubble is that advocates or proponents for the crazy valuations tend to say “things are different this time.”

At the risk of looking very silly in the near future (alright, even more silly), I’m with those who think this boom bears little relation to the turn of the century blow-out. That’s not to say the valuations aren’t crazy, and that a slew of investors won’t get their fingers burned. But there are differences, and they’re major ones.

In 2000-2001, we saw some of the pioneering tech companies go public in an immature market. Netscape, AOL and others of their ilk had been in business for some while, and had attracted millions of customers. AOL, certainly, was ubiquitous, and its status in 2000 (remember that irritating Connie character?) was probably commensurate with Facebook’s today. However, to my mind their buyouts at wildly inflated prices, and subsequent failure or dissolution, don’t mean that all tech companies should be tarred with the same brush.

AOL, Netscape, Boo.com and others were flawed models in a sexy new industry. If you like, they were like the Hindenburg at the start of the aerospace age. The fact that they imploded doesn’t mean all large tech companies are over-valued any more than it means that all airships are going to blow up. At the same time as the Zeppelin company in Germany was realising that filling an airborne vessel with a highly combustible gas was maybe not the best idea in the world, Boeing were well on their way to ensuring that the mass transit of air passengers was a pretty good business model.

Because the entire tech market is infinitely larger than it was 10 years ago, with hundreds of millions more people using Facebook than ever signed up to AOL, the dynamics of the marketplace are different. Yes, it’s true that for Facebook to be more valuable than Ford, for example, seems counter-intuitive, especially when the start up costs for a rival social site are not as prohibitive as they would be to start up a global car company. But unlike Netscape and AOL, there are no credible competitors to Facebook and Twitter – at least, not at the moment. When Netscape and Yahoo floated, most savvy tech types had already decamped to Google. AOL were hated and distrusted long before Connie hit our screens.

Twitter and Facebook, meanwhile, are trusted brands, not just tech companies. Users are Tweeting and Facebooking to overthrow governments, and they’re doing so in huge numbers. There comes a point in any market where scale and ubiquity have to count for something: do you really believe that Coca Cola is the best fizzy drink ever invented?

I am not defending the business models of Facebook and Twitter; I am not arguing that it will be harder for them to make money than some of their supporters suggest, nor can I argue that their valuations are necessarily realistic. But do I think they’ll be around, and successful, in five years time? I do.

Feel free to keep a copy this blog and laugh at me in 2016…

Edit: Not that this proves my argument, but…http://tinyurl.com/5sg4mj6

Categories: Uncategorized
  1. boingster
    February 24, 2011 at 11:41 am

    No competitor to Facebook?

    Diaspora being an open-source social networking project could be the giant killer. Anyone who’s developed on Facebook will appreciate something a little more supported and transparant.

    What about LinkedIn? I think we’ll see a gradual chipping away at Facebook as people find other outlets for some of what Facebook does, but better… this is what happened to MySpace.

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