Tech Bubble 2.0: This Time is Different

Posted by Ahmad Barirani in Blog

May
25

Remember the crazy pre-dotcom crash days? Investors where financing businesses that had little more than a business plan to show for. As a result, many of these investments translated into financial loss. Combined with unscrupulous accounting practices by some large firms, we witnessed what we today call the tech bubble.

But no need for worries as those days are over. Markets have learned their lesson and they are much more selective. Today, only the top revenue generating companies are subject to IPOs. Think of Linkedin, Zynga, Groupon and, recently, the all-mighty Facebook. No more IDontHaveABusinessModel.coms.

Well, let’s take a look at these huge IPOs. Groupon is a total disaster. After seven months of trading on the market, the company is worth half its IPO valuation. It would take a lot of “forecast-beating quarters” before prices go back to initial levels. And with a dubious business model and an economy plagued with demand-side issues, it does not seem to be a probable scenario. Although too soon to speak in the case of Facebook, the company has lost 30% of its value in a week. And this goes without saying about trading irregularities and selective dissemination of information. Zynga has also lost a quarter of its value after 6 months of trading. LinkedIn is the only “happy” story, with a ~5% gain after 12 months of its IPO. Lets not forget that these companies are trading at crazy P/E ratios. If stock prices do not grow fast in a fast paced industry, it could translate into a lot of money thrown out the windows…or into someone else’s pocket…

The thing that all these companies have in common is tons of data. Facebook has personal information about 1B people and is supposed to use it to make money through advertizing. If stock markets can be viewed as a place where resources are allocated to promising business opportunities, then Facebook’s value has to be more or less equal to the gains in marketing efficiency associated with the interaction and targeting possibilities not offered through traditional promotion channels. Yet, advertisers seem to have doubts about the platform’s potential as we have seen through GM’s recent pullout. Could it be that markets have overestimated the potential of unlocking value from terabytes of data?

In my view, there is a way to make money out of data, but that requires technical knowledge about this kind of thing. Google’s AdWords platform is so far a success story in terms of targeted advertising. But the fact that one company is able to translate data into sales doesn’t mean that all companies that have access to data can do likewise. Facebook might have to do a lot more investments in R&D before it can be skilled enough in this area. The big question is: how long would it take, and how low will it go before then.

Of course, Facebook can always charge fees to its users. Dating website match.com makes around $350M with less than 2M paying subscribers while there are free alternatives like plentyoffish.com available. Why can’t Facebook do so? In fact, if there is any free website on this planet that can charge fees without loosing most of its clientele, it is well Facebook. After all, whatever Facebook charges to its customers will always be marginal compared to the time wasted on Facebook!