With the hype leading up to the Facebook IPO there is the beginning of a lot of discussion around a new Dotcom boom and bust. Just like we had back in the late nineties. Though I can see the similarities I don’t think this is going to be like the last tech boom. I believe we have come along way since the bubble and I view this upcoming tech bubble with a lot of optimism and I think with good measure. But Wall Street, like any other media outlet love,s a good story and history always provides us a window into the future. But in the end there are a lot of reasons for my optimism around this new tech boom. But before we move forward Let’s consult history and what it taught us.
In the tech boom and bust there were a lot of things that went wrong, but maybe most notably was a loss of common sense. A lot of discussion was around new business models and throwing away the old all due to the internet. Though this was most certainly true it did not mean we replaced balance sheets, income statements and cash flow. Second, as exciting as the internet was, the infrastructure was simply not in place to support some of the grand ideas. Yes we were laying down fiber that would cir cum navigate the globe many times over, but most people were still connecting via a 28.8 modem with ungodly slow connection speeds. The initial Application Service Provider (ASP) model was a precursor to Software as a Service (Saas) or what we refer to as the cloud today. Your Facebook experience would have been very different and don’t even think if adding photos. Another thing that was interesting was many companies you could not figure out what they did, it was like Wang computers all over again. The classic was the Razorfish founders being interviewed on 60 minutes, nit being able to answer the question, “What is it you do?” It was like asking Bob Dole, “Why do you want to be President”. Just think Mark Cuban made billions all because he wanted to stream Indiana Hoosier basketball over the internet. The sucker there was Yahoo, who bought a pile of nothing.
I am optimistic this time around. Exactly for the two reasons I outlined above. Today we have a viable and always improving infrastructure for the internet. Not just via lanline support but wireless connectivity has improved in leaps and bounds beyond what we could have anticipated. We can thank the iPhone for making the wireless internet an enjoyable experience. We can now view so many applications and services wherever whenever we want. Services like Netflix, which will destroy the need for a DVD player in time. New services are springing up all the time to further improve and enhance our online experience. Though a lot of videos I stream through YouTube still need to be viewed in the Flash player within the browser, more and more video contents is being done in HD and allowing me to view full screen. Within the next five years that will simply be the norm.
More importantly many of the IPO’s filed of late have business models and real revenues. It’s not a promise of a better future, because the future is now. The idea that old business models are, well old is not exactly true. A solid income statement and strong balance sheet still matter. In the case of Facebook they are starting to capitalize on their status as a “place to hang out” on the net. The filing with the SEC already shows a company that makes $3.7 billion a year. In a recent coffee I had, someone had met with the Microsoft Advertising team in New York. the word in the street was that companies looking to spend online ad dollars wanted to deal with Facebook. Back in the dot-com days you did not hear stories like that and certainly did not see revenue like that in the SEC filing. It was always just a promise of a brighter future. With Facebook the word one the street is they are set to grow and grow fast. When you consider how much time people spend on Facebook versus Google or Bing there is more than just hope. Advertisers want to spend with Facebook. Facebook just needs to execute.
Many of the companies pre-Facebook have been impressive LinkedIn, Pandora, Zynga, and Zillow. Are they Facebook? No but with such a huge captive audience who is. They are, however, companies with existing business revenues and opportunities to build on what they have. This then just becomes a question of vision and execution. It is by no means guaranteed. Some I am not sure they are thinking big enough and attracting the audiences they have. Pandora, as much as I love, needs to think of themselves as digital entertainment and not just music. But the opportunities are there as we have come a long way since the original dotcom boom days, where we had grand idea just not the infrastructure or platform to execute those ideas. We have those now.
There will be challenges along the way and as I have said before when America gets excited it starts to see riches, and a bubble will be born. Our gold rush mentality makes it so. We will over value companies and do so until basic economics takes us back to earth. There will be those who time the market and capitalize on its excesses. We call them Mark Cuban,the numbers of what happened in that transaction for a pile of nothing are staggering. Mr. Cuban’s company Broadcast.com, generated $13.9 million in revenues in 1999. It was sold in 1999 to Yahoo for $5.9 billion. I don’t think this time around well see those type of valuations as business fundamentals will rule during this go around. But the opportunities to cash in for a great profit will be there again. Hopefully most will have learned this time around when to cash in. Only god knows how many paper millionaires we had the first go around. I met many of them and saw their egos rise and then fall back to earth. The thud was rather distinct.
Good Night and Good Luck
Hans Henrik Hoffmann February, 7 2012
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