Archives: October 2007

02/10 Internet Bubbles

A couple of articles in the business section of last Sunday's Observer brought some thoughts to mind. Simon Caulkin writes,

"In the internet boom of the late Nineties, the inflated valuation of web start-ups was the direct result of investors taking the business model - how they would make any money - on trust. Not trusting their own eyesight, they allowed the internet emperors to convince them that virtual clothes were the same as real ones."

Fair enough, there's a lot of tarring there with a single brush, but few if any dot-com startups have justified their pre-crash valuations. A few pages later, John Naughton follows up on the same theme,

"Microsoft is supposedly contemplating paying between $300m (147m) and $500m for a 5 per cent share [of Facebook]. If true, this suggests that its advisers put a value of between $6bn and $10bn on Facebook. Google is also reported to be sniffing around... The only conclusion to be drawn from this is that TechBubble 2.0 is running to schedule. TechBubble 1.0 (1995-2000) was based on crazy valuations of 'internet' companies; the current tulip mania is based on nutty valuations of web companies."

Today we learn that eBay are writing off part of their investment in Skype - they overvalued it. Skype's founders have quit the combined business, with only their vast mounds of cash to console them.

Now, I don't think that either Microsoft or Google are idiots when it comes to takeovers (yes, including YouTube); they're both motivated by the fear that in an environment that changes as fast as the Internet, there are no guarantees regarding the long-term viability of their business models. When your annual revenue is >$10 billion, investing in (or indeed buying out) the undisputed leader in a market that could threaten your business isn't necessarily stupid.

If a significant fraction of the world's Web users set Facebook as their homepage (instead of, say, MSN or Google), then you're going to lose out if Facebook land an exclusive embedded-search deal with Yahoo. For a company like Google that still makes virtually all its money from targetted advertising, the prospect of mining the databases of a social network inhabited by the educated middle classes must be a pretty attractive one. And if I was Microsoft, I'd be very interested in trying to tie social networking functionality exclusively into the Vista desktop. If you want an analogy, think of Apple's acquisition of Emagic and the subsequent release of GarageBand as a component of iLife, cementing their hold on the dilettante digital artist. Pure speculation, but the idea of integrating "web applications" into the Vista desktop isn't new - think back to the BBC iPlayer demo that Bill Gates and Ashley Highfield did last year.

Oh, and eBay? Idiots - what were they thinking? ;-)