Bubble 2.0?

It is now for quite some time that a few industry experts are predicting another dot com bubble. So it was very interesting to come across this optimistic piece “What Bubble?” by Harry Gold.

Harry looks at the positive growth trend of internet ad revenue and concludes that there is actually no bubble. To quote Harry, “Wow! If that doesn't say it all and validate the hot air we've been blowing all year, I don't know what does….Just look at this growth trend:.”

It’s refreshing to see such a positive outlook, but why I’m still a bit skeptical about his conclusion. Let’s reproduce the image from his article:




-- Source: Interactive Advertising Bureau, 2007 –

Harry seems to have got it right, isn’t it? There is indeed a very significant positive growth trend for past few quarters. But before we start jumping in joy, let’s take a quick look at the Ad revenue growth trend in 2000. Do you remember when exactly the first dot-com bubble burst? It was March 13, 2000 i.e. 1st quarter of 2000. What was the Ad revenue trend before that? Well, again a very significant upward trend. Although, it’s difficult to get the numbers from the graph, the slope looks much steeper in 1999 than it is now. In fact the Ad revenue spends didn’t go down till 3rd quarter of 2000. So the downward trend in the ad spent is actually an aftermath of the bubble not the cause. Harry seems to have got the causality reversed in his equation. Perhaps he would have written a similar article in 2000 saying “What Bubble?”.

Another source for Harry’s positive outlook is an eMarketer report predicting the Ad revenue for future. We, of course, need to take such predictions with a pinch of salt. One of the methods commonly used in such predictions is the use of historical data, and as I’ve mentioned above it’s difficult to predict some drastic event just by looking at the history. One wonders why these folks were not able to predict the first bubble burst.

So what is my view on this? I feel the industry is again heading towards a major shake up. The major players like Google, Yahoo would definitely make it through; but some of the new players might find it difficult to survive. The warning signs are no where more evident than the social networking space. MySpace was valued $15bn in 2006. Facebook is similarly valued at $15bn by Microsoft recently (Yeah, I know the common argument that it was not a valuation, but strategic investment. Although I’m not sure what kind of strategy it was to flush money down the drain). Again we are going back to the days where firms are valued just by page views or user base. On last count there were around 137 million social networking sites (give or take a few); all of them relying on “network externality” effect to win the space. One wonders how many of them are going to make it through.

And by the way when we are on this subject, look at Harry’s article again to see the optimistic predictions by the eMarketer about this space. “Social-networking advertising numbers, currently being revised by eMarketer, are expected to increase from $900 million in 2007 to $2.5 billion in 2011.”. So $2.5bn annual revenue to be shared between all these players; some of them are valued at $15bn.. hmmn.. interesting.

Having said all that, I hope Harry is right and I’m wrong. I was not part of the industry when the first bubble burst (If memory serves one right, I was learning to write “hello world” programs in Java). But this time I earn my bread and butter here. So nobody will be happier if Harry’s optimistic views turn out to be right.