John Dvorak at PCMag has written a truly crazy article called ‘Bubble 2.0 coming soon’, which contains some truly ludicrous statements that are so far wide of the mark that I’m currently finding it difficult to breathe properly.
It might be linkbait but hey, here's the link, and it is well worth a read. My contrarian response comes after the jump...
Dvorak starts off with a fantastically dumb statement: "Every single person working in the media today who experienced the dot-com bubble in 1999 to 2000 believes that we are going through the exact same process and can expect the exact same results - a bust."
What utter, utter nonsense. I do not even remotely believe this kind of bullshit, and Dvorak should know better than to make these generalist assertions about people working in the media.
Things are completely different nowadays and comparisons between 1999 and 2007 are normally pretty lame. Dvorak’s article is no exception.
Let’s start off with a definition of a ‘bubble’. This term typically applies to speculative financial markets, not specific products or technologies. But Dvorak seems confused. He suggests that we’re in a technology bubble, and that technology is ‘Web 2.0’. So for starters, we’re not comparing apples with apples.
The reasons why the dotcom bubble imploded were 90% financial, and 10% behavioural. It had very little to do with the underlying technology of the day, despite Dvorak’s claims.
Back in the day...
The real dotcom ‘bubble’ was intrinsically linked to the super-buoyant IPO markets of the day, which were driven by fatcat investment bankers and VCs who were more than willing to jump on the bandwagon. They would have done it in any other market – it was simply an opportunity to make some money.
There weren’t any precedents for the internet industry, no real research, just inflated forecasts about what markets and companies would be worth in X years. And as we know, many of these fatcat analysts were releasing research notes that did not reflect their private views (eg: ‘POS’).
Wide-eyed entrepreneurs with no internet experience would present beermat business models and receive millions in funding. Many had negligible business experience. It didn’t seem to matter too much at the time. And let’s not forget that wily banks can make money in a rising market, or a falling market. It was, in industry parlance, a real no-brainer.
Yet those companies that went public – and there were a hell of a lot of them, both in the UK and the US – soon realised that they needed to release regular updates to keep investors informed. Most of them didn’t want to shout about their lack of revenues, or the fact that they were haemorrhaging their remaining cash at rates that would worry even the most bullish of optimists.
We used to estimate the remaining lifespan of any given tech company based on its cashburn. Most would die within months, it seemed. The market, after the high watermark of March 2000, turned very bearish, very quickly. It didn’t help that investors insisted they spent their cash quickly to attract the ‘eyeballs’ that Dvorak talks about, possibly the only observation of any merit in his article. Look at the Superbowl advertisers in 2000 for proof of this madness.
The bubble imploded mainly because of the crass activities of financial bigwigs. Let’s not forget that the average investment bank earns a comfortable fee when it takes companies to market. In Morgan Stanley’s case, it bagged 7% of Lastminute.com’s IPO back in 2000 – about £8m.
It was therefore in the interests of investors and banks for the valuations of these newcomers to be high. And we know that the analysts of the day artificially inflated the valuations of such companies. Very swinish. Psychologists have released some interesting studies as to why this may have happened. Nothing to do with greed then?
Fast forward to the present
Firstly, the technology didn’t fail. As I mentioned, the dotcom bubble was a financial bubble. That’s how it will be remembered. It ain’t about the internet, or HTML, or e-commerce. All that worked just fine, and it continues to work. Don’t go catching Dvorak’s curve balls in this respect.
The financial / business reasons for a market collapse are obvious and we’ve discussed them, so what of the other 10%, the behavioural stuff? Three things have happened to change people’s behaviour online, for the better (especially if your company has adopted e-commerce). They are:
- The rise of broadband. We hear it a lot, but the fact is that high speed internet connections have increased the amount of time people spend online, and reduced the amount of pain they suffer.
- The trust factor. Back in the day people would resist any attempt by e-commerce companies to extract their credit card details. Nowadays there is a much higher degree of trust online, and internet retailers, travel agents and banks are all benefiting hugely. The travel sector in particular has become much more efficient. This increase in trust has grown over time, as people have become au fait with the internet, again, spurred on by their fast broadband connections.
- The technology has improved. At least in theory. There are still lots of examples of poor practice, with established sites like eBay are starting to look rather cluttered, but by and large lots of internet professionals have learned the basics. They know what works and what doesn’t. They’ve had the time to experiment, and to monitor the results of changes to their websites. This makes life less complicated for the average internet user.
The lack of these three factors back in 1999/2000 meant that, for example, people had to wait 50 seconds for the Boo.com homepage to load. Imagine that today! You’d wait 5 seconds at best before hitting the back button. And you certainly wouldn’t want to buy anything from such a tardy website.
Boo collapsed partly because it was actually way ahead of the market. In a more mature, broadband-enabled world, Boo may have survived, especially now that we’re seeing that consumers have an increased propensity to buy goods online. But then again, having read the book, I’m sure the founders would still manage to spend the £180m Boo raised from the likes of JP Morgan and Goldman Sachs.
Or would they? The key point here, and one that Dvorak needs to think about, is that it doesn’t take anything like that sort of money to establish a website such as the one Boo created. And there is no chance that we’ll see that sort of money being raised again, all things remaining equal. Surely?
Admittedly, there are some silly amounts of money being pumped into early-stage firms, after five years or so of near-zero investment. It remains to be seen whether these companies generate a return for their investors. There are some signs of inflation, but it is nothing like the madness of 2000. And it isn't IPO-centric, which is a marked difference.
There are still business model issues, and companies continue to work on ambitious ideas that are still too far ahead of the market, and as such too far ahead of realistic consumer demand. But we’ve had seven years of insight, education, know-how and many lessons have been learned along the way, both by the entrepreneurs and the financiers. I can’t imagine that the same mistakes will be made again. And besides, the dynamics of the market, of internet behaviour, have changed. Forever.
A final point – we live in a multichannel world. It isn’t a case of either / or, and it never was. The web vs the high street. Newspapers vs blogs. The real winners of the future will be those that have a multichannel approach to sales, marketing and communicating with people.