John Dvorak's bubble is about to burst

John Dvorak, well known writer for PC magazine says "Bubble 2.0 Coming Soon". John says we saw this before in 1999-2000 and the exact same thing will happen again. I don't think so. There are big differences between 1999 and 2007. Marshall Kirkpatrick does a nice job of dismantling Dvorak's arguments.

The real bubble that is bursting here is Dvorak's influence. John Dvorak was a very influential writer for PC Magazine back in the PC era.He is out of step with the new web innovations, social networking, User Generated Content, widgets, and all the Internet video innovations.

First, I agree that most of the new Web 2.0 social networking startups will fail to gain traction. But that is true of all startups at all points in time...most of them fail. That is the nature of startups. They take huge risks, blaze new trails, create new wrinkles and innovations, and most often they fail. That is not a bubble.

The bubble of 2000 was an economic bubble that burst with devastating consequences. Companies with no profits and meager revenues were going public with huge valuations back in 2000. There is no economic bubble today. Individual investors are not hurt when these companies fail. Back in 2000 there were thousands of individual investors that got wiped out. Big difference.

It is much easier and cheaper to start a company today than it was 7 to 10 years ago. There are pre-built web platforms, cheap hosting infrastructure, advanced development tools, and easy ways to market and promote new companies. So yes, there are a lot of companies being started. But most of them are one or two person companies started on a shoe string with no outside funding.

Dvorak cites several areas as bubble hype zones. Social networking, Internet video, User Generated Content, mobile everything, ad leveraged search, and lastly, widgets and toolbars. Yes there are lots of experiments and beta projects in these spaces. Yes, most of them will fail. But, there are already some shining examples of success in each of these areas, and more innovations will come. The good ones will be acquired before they get very big. Others will evolve into different areas, and many will fail. That is normal...not a bubble.

When VCs start throwing tens of millions at "experiments" and the NASDAQ starts launching IPOs of companies with no profits, then I will agree we are in a bubble. For now, we are just in a healthy stage of experimentation and innovation.

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Comments

[Joseph Hunkins]

Yup, very perceptive as usual Don...

[alan p]

Don, it doesn't have to be VC's funding and NASDAQ IPO's - large companies paying very large (irrational?) amounts of money (in cash) for pre revenue companies gives exactly the same market signals.

[Don Dodge]

Alan, Good point. There have been a few acquisitions with prices that defy any reasonable valuation model. But, not so many that it feels like a bubble...at least not to me.

The thing about acquisitions is that it takes several years before you really know if the price was reasonable or not.

Some people may have thought News Corp was crazy to pay $580 million for MySpace a few years ago. MySpace is probably worth 10 times that now based on the advertising revenues they are generating.

YouTube for $1.6 Billion may turn out to be a bargain in the long run. My guess is that it will not, but it is too early to tell.

[alan p]

Don, I agree re your view on those two acquisitions. Re the "Bubble" thing I pulled some stuff together on the topic and also compared it to an old fave of mine, the Gartner "Hype Curve" (Sorry, its a long post and its on our blog broadstuff over here)

http://broadstuff.com/archives/351-Bubble-2.0-or-just-Hype-2.0.html

Net net the signals for a bubble are very strong but SocNets on their own cannot a bubble make, it needs a wider base - could just be a high intensity hype at the mo'.

[Edwin Khodabakchian]

Great post.

[Kaila Colbin]

Hey there Don,

Intriguing post as always!

This is hardly my area of expertise, but I couldn't help but put together two articles I read today: yours, which said:

'When VCs start throwing tens of millions at "experiments" and the NASDAQ starts launching IPOs of companies with no profits, then I will agree we are in a bubble.'

and the announcement about Accoona's $80.5 million IPO (http://searchengineland.com/070806-103549.php):

"In the first quarter of 2007, Accoona realized losses of $14.8 million with revenues of $37.5 million."

What's your take on Accoona?

[Don Dodge]

Kaila, Thanks for the link to Accoona. Losses of $15M in a quarter are OK for a fast growing private company on a path to profitablility. But, is it OK for a public company? I don't think so, but I guess individual investors will get a chance to decide that.

If Accoona does successfully go public that would be one piece of "bubble" evidence.

[Lloyd Budd]

Though I don't particularly like John Dvorak's politics -- I find him too pessimistic (grumpy) and polarizing -- I find your assertion "he is out of step with the new web innovations, social networking, User Generated Content, widgets, and all the Internet video innovations" ungrounded, but more important unsubstantiated by you here.

If you look at his blog, or listen or watch Cranky Geeks, you will see that he seems pretty darn in step.

Maybe, you are are meaning that he is out of step of the financial context, but that isn't what you wrote.

Your article would be a better read without that ad hominen attack.

[Kaila Colbin]

Hey there Don,

Further follow-up to our Accoona exchange: http://www.nytimes.com/2007/08/22/technology/22accoona.html

Looks like they might not be able to go public after all... and what a shady background!

Could this be a bit of pressure release, critical for the prevention of bubble expansion and future explosions?

(Thanks to Marc Andreessen for the tip.)