I went to the Web 2.0 "Expo" last week, and I think it's now entirely safe to say that there's a bubble forming in the tech industry. I mean, it's possible that I need 100 different media/tagging/sharing/messaging platforms that keep my friends updated on my latest music purchases/restaurant meals/bowel movements, but I suspect that some of these things might be just fads. My suspicions were heightened by this NY Times fluff piece about Twitter. As the piece itself notes, there's plenty of Twitter criticism ("twiticism?") out there, so I won't pile on, but the mere fact that the Gray Lady would solemnly define "tweets" is a surefire indicator of financial apocalypse.
The hoopla about the Dow passing 13,000 revived my sense memory of the last run-up, and it's starting to seem like SF restaurants are just that little bit busier. But I'm not here to whine about what appears to be an inevitable cycle here in the bay area. Instead, I'm wondering: if it's clear that there's a bubble forming, what's the best way to capitalize on it?
Google is capitalizing. Consider their current $150 Billion valuation. Now I respect Google, and I think you can argue that Google deserves to be one of the most valuable companies on the planet, but a 69% profit increase? Now? A lot of the money they earned last quarter came from the investment community in the form of the aforementioned doofy internet company buying Google adwords, in hopes of attracting users, in hopes of hitting one million subscribers, in hopes of — wait a second — being bought by Google.
Now I don't think you can blame Google for overspending on its acquisitions. They recognize that all revenue is not created equal: one dollar paid by, say, a car company, is just not the same as one dollar paid by a celebrity-snuff-films-for-your-cellphone company. My guess is that Google is worth more right now than it will ever be in the future, so why not smoke 'em if you got 'em? The technology biz is like that, and although there are powerful network effects in play, the landscape continues to evolve towards lower barriers to entry and truly level playing fields at increasingly high volumes. Sure, I suppose it's possible that we'll all be using Google Office some day, but it seems more likely that Google will end up as just another big media conglomerate like Viacom, which is only worth $30B, by the way.
Reminds me of last time. When all the business-to-consumer plays started tanking, the money flowed to the B2B crap, which was really just a network of well-funded startups exchanging $$$ in hopes of seeming like viable IPO candidates. Still, those IPOs made a lot of money for the folks who were in the right places at the right time. This time, there's a lot of money yet to be made in acquisition by Google or its followers, but I think it may be too late to start a company that really is just a feature, with the cynical intent of selling it ASAP to the highest bidder. One thing that I think we'll see with this bubble is that it will form and pop much faster than the last one. The very technologies at the core of Web 2.0 will fuel better information and communication, making the fads blossom and then die in months instead of years. My prediction: the air will come out of the tech sector by the middle of 2008.
So if it's too late to start a feature — er, company, then what's an opportunistic software entrepreneur to do? Well, consulting certainly makes some sense in the short term. As the money flows from clueless VCs to startups which have a marketing idea and no technology, the value of the service of implementing said ideas is going to go up. Add to that the ticking clock of the race to hit the market first, and I think it'll be a good time to be a contractor in the bay area for the next year or so. At least I'm certainly hoping so.
But what about the long term? What can we learn from the last internet bubble/crash/recovery cycle? The first thing: the current trend won't last. I may be off in my dates, but I'm sure that the long term value of a company which essentially provides a feature for MySpace is zero. The second thing: tools have relatively little long term value. Look at the enabling technologies of Web 1.0: the browser and Java. Those things have been totally commoditized, and now swept up in the wave of open source. I've written about this trend before, but in this context I think it's safe to say that Sun's failure to capitalize on Java is not solely a result of their bungling. In fact, it's at least partially attributable to the fact that these core developer targeted technologies are too valuable not to be free. So the core technologies this time around, like the flash player and the lighter weight frameworks and tools for Java, are probably not going to be big money makers in the long term. Sure they'll be valuable, but valuable like water; not valuable like diamonds.
Where does that leave us? Well for one thing, when choosing allies, or just stocks, look at companies that have real technology. Especially (and this sounds silly) good tech infrastructure. The Google search/AdWords nexus is the exemplar of this, and it's worth pointing out that its current dominance stems from the fact that it thrived during the down cycle experienced by the rest of the valley. But YouTube is a good counter example. Sure there are users and content blah blah blah, but they don't even have technology comparable to what Napster had last time, and that company is only worth a paltry $183 mil. Amazon is another good example of a tech company with solid infrastructure. They've been kicking ass lately with S3 and EC2, and they seem to have mastered the old school page-based HTML experience. They've understood all along that they are a tech company, not a merchandising company, so they seem like they'll continue to thrive, and maybe even start to compete with the likes of IBM.
There is real innovation happening right now, of course. The drivers this time around appear to be XML and better browser standardization, which lead directly to a new level of integration and user experience. So probably your best bet is to just build good technology that makes you happy, especially stuff that's really smart that would be hard to imitate. I have personally found that my more calculated moves to try to just grab the brass ring have not only failed to materialize financially, but have been untenable personally.
Another thing that's worth pointing out here is that the focus of the Web 1.0 phenomenon and the technical revolution that it augured was understood and analyzed in terms of consumers and end-users. But the application of Web 1.0 technologies to business really happened during the period between the Web 1.0 bust and now. I think that businesses are just starting to pick up on some of the Web 2.0 technologies and integrate them. Places like IBM always make this sound painfully dorky, but it's true that while XML and web services are useful for "twittervision", they're actually valuable in integrating a company's CRM database with its accounting system. So a sensible play might be to work on an application of Web 2.0 technology to enterprise. Now everyone hates enterprise sales, and the dream of starting a website that virally attracts a million end-users is much more attractive, but I'd rather sit at the table with the big spenders than play the nickel slots hoping to hit it big.
Still, there are a lot of problems with making solutions for enterprise. I leaned this the hard way at Laszlo. The sales process is slow and expensive. The integration is always painful, and the customers demand heavily customized solutions. The answer seems to be in targeted, low-cost solutions that can be adopted by portions of an enterprise without a million sign-offs from corporate IT and a budget line item. Basecamp is a good example of this, but it's a bit of an outlier because it doesn't really integrate with anything. Anyway, this is something to work on. I have some ideas here, but you know what they say: better to show than tell.