Web Boom 2.0 - Is it different this time?

Time Magazine's "Person of the Year" is You, meaning the you in user generated content. Translation? YouTube. The cover story, Web Boom 2.0 says there are five reasons it is different this time.  I agree the situation is different today, but the end result will be the same. All booms eventually go bust.

In my opinion the main difference between the Dot Com Boom and the Web 2.0 Boom is who will get hurt when the bubble bursts. During the Dot Com Boom those companies took their IPOs to the NASDAQ where small individual investors were left holding the bag. Today these companies are not public. The VCs and acquiring companies will be hurt when the Web 2.0 bubble bursts.

Lets review Time Magazine's five reasons it is different this time.

1. PAIN. Most of us probably won't get hurt this time. Then again, most of us won't get rich either. The dotcom run-up was a public bubble, funded by Wall Street, and this is a private one, financed by venture capital.

I absolutely agree. Individuals won't get hurt. The smart VCs won't get hurt much either. The acquiring companies paying hundreds of millions, or billions, will get hurt, and indirectly the investors who own the stock.

2. PROFIT. Start-ups want to be profitable, fast. Too many first-generation dotcoms thought they were Amazon's Jeff Bezos (Time's 1999 Person of the Year), who, in the early days, famously used to deflect questions about profitability. (It took eight years after the website was launched to turn a profit.) 

Sorry, but I disagree. Was YouTube profitable? No way. They were burning cash, over $2M a month. Was JotSpot profitable? No. Was Writely profitable? Nope. Was MySpace profitable? Not at the time of acquisition, but it certainly is now thanks to a $900M advertising deal with Google.

3. BILL GATES. Who's he? This time it's mostly about Google. Dave Winer, argues that most successful Web 2.0 start-ups are little more than "after markets" for Google, meaning that without Google, there would be less opportunity to sell their content. These new companies thrive, he writes, by "acting as sales reps for Google ads."

I agree with Dave Winer on this. Without Google and the big guys making acquisitions there is no Web 2.0 boom.

4. FOOD. This time there's no such thing as a free lunch. "I'll know it's a bubble when I can eat for free," says my pal Om Malik. Malik's a blogger and Business 2.0 columnist who has been covering Web 2.0 since its inception. Back then, he said, he could go three months without buying dinner—San Francisco was one big movable feast, with a buffet of dotcom parties every night. Now he gets just two or three invites a week.

Hmmm... only 2 or 3 free meals a week? Sounds like a bubble to me. I do agree though that the parties today are low budget and tame compared to the Dot Com Boom era. Those were the days!

5. BURN RATE. Web 2.0 companies don't live large; they live small. Under the old model, start-ups took a ton of IPO money, then quickly burned through it by hiring too many people and supplying them with Foosball tables. Web 2.0 start-ups are monastic by comparison.

Yes, burn rates are lower. It costs a lot less money to launch a company today. There are so many free services, and technology prices have come down significantly. Also, VCs know that the "exits" will be smaller M&A transactions, not IPOs, so they are putting less money in.

So, I agree the situation is different today, but the end result will be the same. The Web 2.0 boom will go bust, but this time the VCs and M&A guys take the hit, not small time stock investors.

Josh Hallet says Time Magazine should have named "Them" as Person of Year. The question is, what about the people not taking part in creating/using any of this user-generated-content? Are they part of the 'You'? Perhaps they should have a different cover of Time that says, 'Them'.

UPDATE: Alfred Thompson makes an excellent point on his blog;

"The media likes to focus on the big guys - the stock brokers on Wall Street, the Silicon Valley Venture Capital firms, and the CxOs of large media, Internet and other companies that are involved. Frankly I'm not sure I care a whole lot if those people lose a lot in dot bust 2.0. Rather I care about the rank and file employees who will lose their jobs in the bust and what the impact will be on the development of future talent into the field. The real victims of the first bust were individual contributors and the development of future contributors to the field."

Alfred is right. There were thousands of employees left without jobs when the last bubble burst and many startups went out of business. Investors lost some capital but their lives went on. Employees lost their jobs and sometimes their houses. It took years for some of them to recover. I knew lots of people who lost their jobs AND had to pay capital gains taxes on exercised stock options that were worthless. That was a very cruel tax trap that caught a lot of people by surprise.

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Comments

[Rhea]

So, it really is all about me. I mean, us.

[Paul Fabretti]

One thing everyone should remember is that there are very few companies who can survive successfully and profitably on the internet alone - that was Web 1.0's mistake.

Web 2.0's mistake will be thinking that making communities-alone or UGC will make them money...it won't. We are dealing with some of the most fickle consumer-groups around, how can you rely on ANYTHING with that kind of customer-base?

As soon as web 2.0 became mainstream, we needed to be picking faults with it to see where it will lead us next.

What will kids do when they get sick of passing messages to each other...or am I wrong...will they EVER get sick of passing message to each other?

[Dr. Pete]

I completely agree with you on (2) and (5). Yes, it's cheaper to launch a Web 2.0 start-up, but that doesn't mean the people doing it are any smarter. Filling an empty web-page with AdSense links isn't a business model, IMO.

I'm also concerned about where the VC is going to go. At least here in Chicago, the capital is becoming more available, but the smart start-ups don't want it. They're all looking for angel investors, which makes me think that the big VC is going to push for large, high-risk ventures, creating demand for the same kind of companies that caused the first dotCom bust.

[Chris D]

@Paul,

"What will kids do when they get sick of passing messages to each other...or am I wrong...will they EVER get sick of passing message to each other?"

Kids will indeed never get sick of passing messages to each other. For FREE, that is. However once any large acquirer of a name-brand community site starts to monetize, either though "pay-per-play" or advertising, the end-users will immediately migrate to another FREE service that is being subsidized with VC money.

It'll be interesting to see what will happen to Skype (eBay) usage once they roll out their monetization plans of charging $30/year fee. While $30 is cheap and still offers a lot of value for consumers, there is a infinite gulf in consumer's (particularly young) minds between low-cost and FREE.

So, @Dr. Pete, that is where VC's big money will be ultimately put to use: not in product development (cheap to build product), but rather subsidizing FREE usage to build up a user base, to then sell to a deep pocketed acquirer. That strategy worked wonders for YouTube/Sequoia.

[PTC]

I agree with the point of 'whos gonna get hurt' but the change of responsibility placement on right shoulders, per se, reduces the chances of burst. This time, the entities whos gonna get hurt in case of burst are VCs and Big players. We can certainly expect careful moves from them (as compared to crowd following individual investors during DotCom).

A comprehensive analysis of Web 2.0 at http://www.techbiz.blog.com