
It's not 1999 - clarkm
http://stratechery.com/2015/1999/
======
toby
Do people remember 1999? 24% of people in the developed world and 5% worldwide
had internet access. No one had mobile broadband (remember WAP?), and wired
broadband was just starting. Virtually none of the public .com companies made
a profit.

However, the NASDAQ was basically where it is now. Many people I knew were
getting multiple job offers with incentives like a Boxster S or a 4-day
workweek thrown in.

We may or may not be in a bubble now, but the excessiveness of that time
really felt like a different level to me.

~~~
nostrademons
Yeah, I remember thinking in 1999 that the Internet was going to be huge, but
it wasn't going to be huge _yet_ , and there would be a helluva reckoning for
dot-com investors when the inflated expectations didn't pan out.

With this bubble, I'm bearish not because I don't think that the general
investment thesis of tech disrupting existing markets is wrong, but because I
don't think _these particular companies_ will be the ones left standing when
the dust settles. Basically, I'm betting that technological progress will be
_more_ dramatic than we expect, and that these are early market leaders that
will then fade away into obscurity as future technology changes the
assumptions they're built upon. Uber and Lyft, for example, are dead as soon
as self-driving cars become viable. DropBox is vulnerable to the end of the
file; in recent devices, the filesystem is quite hidden and peoples' workflows
just don't involve creating files, they involve inputting information in some
specialized cloud service provider. AirBnB may end up being eaten by itself:
as it becomes more viable economically, you'll see more purpose-built
construction being built to be listed straight on AirBnB, and at some point it
becomes worth it to ignore the consumer sellers entirely and just act as a
broker between commercial property owners and travelers.

~~~
jaredsohn
>Uber and Lyft, for example, are dead as soon as self-driving cars become
viable.

Wouldn't they just replace drivers with self-driving cars but maintain the
rest of their infrastructure? It has already been announced that Uber is
working to develop automatic cars.
[http://money.cnn.com/2015/02/03/technology/innovationnation/...](http://money.cnn.com/2015/02/03/technology/innovationnation/uber-
self-driving-cars/)

~~~
nostrademons
It changes the value chain in ways that destroy their competitive position.
Short term, it's pretty likely that they'll adapt. Long term, they're dead.

A good example is the IBM PC. When it came out, everyone was saying "Of
course, IBM will now dominate the new personal computer market, because they
have the sales & marketing apparatus to reach into every business that will
want to buy one. Nobody ever got fired for buying IBM, after all, and now that
they own the technology to make a personal computer, their offering is clearly
superior."

But that's not what happened. Instead, they _did_ dominate the PC market - for
approximately 5 years. But the PC had reduced prices so that it was now
targeting a market that was cost-sensitive, and it had created a secondary
market of applications that let it reach into many areas that had previously
required custom software direct from the manufacturer. IBM did not own the
critical matchmaking components of this, the instruction set, operating
system, and BIOS. Intel and Microsoft did, and then Compaq reverse-engineered
the BIOS. As a result, clones flooded in, IBM's sales & marketing prowess
counted for nothing, and they found their market commoditized.

Uber's critical value proposition is serving as a market-maker in a two-sided
market. That's the part that's really difficult for a startup to clone. You
can make the Uber ride-sharing software trivially, and many people have [1].
But even if you do, riders won't use your service because you don't have the
same number of drivers available that Uber does, and drivers won't join
because they won't make as much in fares.

When self-driving cars come out, that two-sided marketplace becomes a one-
sided marketplace. We've yet to see how Google will market the technology, but
the most strategically advantageous approach for them is to contract out
manufacture of the cars, own the hardware, put their own software on it (and
not license it out), and then sell a service to riders, undercutting Ubers'
prices. Under this model, Uber's competitive advantage counts for nothing -
their supply chain costs more than the competition, in a price-sensitive one-
sided market.

Google could then use a number of different tactics to lock Uber out. The most
likely one is regulatory; in the interest of public safety, they could argue
that all self-driving cars need to pass a very stringent safety test,
consisting of real-world driving for X00,000 miles. Google's got a 10-year
head start on Uber for developing this software, and once a critical mass of
cars on the road are Google self-drivers, they have accurate position
information on everybody else, a key factor in making this safer.

[1] [http://www.businessinsider.com/homeless-coders-trees-for-
car...](http://www.businessinsider.com/homeless-coders-trees-for-cars-
app-2013-12)

------
timr
_" For one, if everything goes sour, the folks taking a hit can very much
afford it."_

Really. Where do people think this private capital is coming from? I guess the
investment banks and fund managers who are dumping hundreds of millions into
late-stage companies are doing that _exclusively_ with the investments of
wealthy people?

The fact that people aren't investing in Uber via E-Trade accounts doesn't
mean that it won't hurt regular folks when the bubble pops. When this all goes
south, we're going to find out that grandma's pension was tied up in it, just
like last time. It's just a bit better hidden in 2015.

~~~
michaelochurch
If there are major losers in this game, it'll be young people who moved to the
Bay Area, threw 90 hours per week into an overfunded startup for a 0.05%
slice, got "fired for performance" by a company trying to dodge the press of
an honest layoff, realized that they learned no useful skills munching on
Scrum tickets and fixing someone else's ball of shitty deadline code, and lost
their prime savings years due to Bay Area rent and job instability.

If the bubble pops in a way that reduces their earning potential permanently,
it's a catastrophe. More likely, it's a blip. Valuations are inflated but
salaries aren't. This period, in the VC-funded Valley, will be remembered
bitterly but I think the damage will be minimal.

Still, I find it jarring that no one wants to speak for the _real_ risk-
takers: the engineers actually building the products, who (unlike investors)
don't get to diversify and are the first to get hit when things go bad, but
get such a small percentage of the upside.

~~~
Kalium
A lot of Silicon Valley culture and counter-culture alike are built on having
no empathy for engineers. The investors see them as useful workers, and the
counter-culturalists see them as inhuman invaders. Nobody gives a flip, and
when confronted the universal response is a dismissive "Oh, they'll be fine".

~~~
michaelochurch
First Estate: investors and well-connected serial founders who can raise money
on a drop and get injected at VP levels in tech giants on a phone call. They
dominate SV culture.

Second Estate: true technologists. Programmers and designers and makers.

Third Estate: everyday people. Often pissed off (justifiably) about the
arrogance of the Valley's tech barons. Tend to protest Google buses, making it
hard for _Second_ Estaters to get to work (while being slightly amusing to
First Estate assholes). They're the "counter-culture" you describe, along with
the regular people who are getting annoyed by tech's arrogance. A few of them
are the anti-vax NIMBY assholes who are even more execrable than the tech
barons, but most of them are just normal people.

Silicon Valley is dominated by the First Estate. The Second Estate is misled
to think it's in charge by workplaces with ball pits, but has no real power or
hope of advancement or financial upside except in extreme long-tail cases. So
much of the narrative has been II vs. III. That's because the First Estate
doesn't want the Second and Third Estate to get together and realize that they
don't need the First.

See, the Second Estate has weak organizational and social skills, and has been
systematically infantilized ("Agile"/Scrum) to keep it that way. We could
learn a lot from Third Estaters (who are often just as smart as we are) in
politics, government, law, labor activism, etc. But we've been told by the VC
elite to reject such people as parasitic future-averse peons, and _they 've_
been told that we're a bunch of socially inept, prematurely affluent assholes.
This artificial II/III cleavage works to their benefit, and it hurts us, by
making us dependent on the First Estate for funding and approval.

~~~
Kalium
I've been studying and listening to what you describe as the Third Estate. I'm
honestly not convinced they have good lessons to teach about politics, law, or
labor activism. They have excellent lessons to teach about how those things
worked decades ago, but have failed to update. Their decline in power and
affluence is in part a result of applying old models to poorly matched modern
scenarios.

Some of the ideas are useful, though. But not the ones where you add pain the
lives of people and expect it to engender sympathy towards you.

The First Estate has more value and utility than your typical Marxist eat-the-
rich analysis would suggest. Further, the Second and Third don't have as much
in common as a naive analysis might suggest.

------
notahacker
The article makes an interesting point about whether the later IPOs are
leaving private capital bearing the risk rather than retail investors. It's
basically correct about the beauty of SaaS, except for the obvious counter
that high-margin businesses are a magnet for competition in the long run.

But it starts off with it's very worst argument, the ultimate '99 argument
even: analysts suggesting Instagram's value increased 35-fold since
acquisition based on the assumption that if it "fully monetized" it could
contribute $2bn revenue (ie. at zero costs and zero discount rate you're still
looking at a 17 year time horizon to get $35bn from Instagram, which is about
three lifetimes for youth-oriented media properties) It suggests that's quite
reasonable with reference to the stock price of yet-to-turn-a-profit Twitter.

It doesn't get any better when it suggests the "unicorns" are different
because they're competing with non-tech-enabled businesses. That could have
been a slide from the WebVan pitch deck. Plus it's very, very wrong in the
case of AirBnB: Sabre et al sewed up a large chunk of the profitable end of
the distribution market by solving the technical problems of filling hotel
rooms, and locking themselves into the infrastructure, before the _internet_.
AirBnB has a flair for consumer marketing, but does that really make it worth
more?

The argument that the '99 companies failed because the mass of consumers
didn't exist and the infrastructure wasn't ready is true, but for any self-
respecting bear that's an indication of exactly why it could be worse than 99
when investors get cynical about companies peaking at hundreds of millions of
users whilst still being unable to squeeze a respectable profit to justify
their valuation.

------
discodave
The distinction made at the end of the article between a "valuation bubble"
and a "risk bubble" seems entirely false to me.

 _" much of the media has adopted Gurley as the apostle of the “here we go
it’s 1999 all over again” mantra, but that was a valuation bubble. Companies
simply weren’t worth what they were priced at. Gurley is arguing that the
private market with its limited information and oversight is producing
something very different: investors putting too much money in companies
without enough information or enough potential upside to justify the risk."_

To me "investors putting too much money in companies without enough
information or enough potential upside to justify the risk" == valuation
bubble.

~~~
rqebmm
Agreed. At the end of the day investors are doing the following formula:

(Projected Revenue * %Risk of Ruin) = Valuation

If you overestimate the projected revenues, or underestimate the risk , you're
still arriving at the wrong valuation, and if investors are doing this
systematically, we get a bubble.

------
johngalt
If it isn't a bubble now, what criteria would make it a bubble?

The opening paragraph creates an infallible criteria. It's true that many
people thought instagram wasn't worth $1billion. Does that mean $35 billion is
less indicative of a bubble, or more? Simply saying 'hah! Bubble predictions
were wrong in 2012 because valuations are still rising, so they must be wrong
now too.' This sort of thinking would never predict a bubble.

~~~
spiritplumber
A lot of people who post on my facebook wall seem to think that it's the
beginning of the Singularity.

[https://www.youtube.com/watch?v=IFe9wiDfb0E](https://www.youtube.com/watch?v=IFe9wiDfb0E)
I hope they're wrong if it looks like this.

~~~
eli_gottlieb
Have you explained what poor suckers they are?

~~~
spiritplumber
No, why would I?

------
angersock
The only frustrating part to be is that, since apparently the IPO rate is
rubbish, my hopes as an early engineer of getting fuck-you money are now worse
than they were in '99.

So, all of us doing the hard and annoying work of building the companies are
getting screwed.

------
dkrich
_The fact that Instagram is now valued at $35 billion suggests the 2012
doomsayers were just a bit off._

Is that really a fact? Clicking through to that article and reading it (which
I don't recommend) shows that that valuation is based on the whims of a group
of analysts at Citigroup.

From the article:

 _“While Instagram is still early in monetizing its audience and data assets
and its financial contribution to FB is minimal today, we believe that it is
quickly gaining monetization traction and would contribute more than $2bn in
high margin revenue at current user and engagement levels if fully monetized,”
they wrote._

It's a bit ironic that the initial premise of the article is that commentators
on the Apple/Microsoft battle of the 80's had their facts wrong.

------
jonstokes
I don't know whether we're in a repeat of 1999 or not, but I know that this
article is not very convincing.

"In short — and I’m not the first to say this — it’s less that valuations are
unnaturally high than it is the fact that there is a completely new capital
market — the growth market."

No, you're not the first to say this. Down through the ages it is usually
phrased as follows: "this time is different."

I'm not yet convinced that we're in a bubble, but a few more articles like
this and I will be.

(And as others have pointed out, the attempt to draw a distinction between a
"risk bubble" and a "valuation" bubble is hand-waving nonsense.)

~~~
Zelphyr
> a few more articles like this and I will be

Can you elaborate on why? "If it bleeds it leads" and the potential of another
bursting bubble is making the media wet themselves. And when the media starts
getting orgasmic about something its only natural that bloggers are want to
follow.

But them constantly writing about a bubble doesn't make it true any more than
them constantly writing about Ebola wiping out civilization (at least that was
the implication).

------
natrius
Bubbles are macroeconomic phenomena. If you're discussing the likelihood of a
bubble without addressing the unique macroeconomic situation the world is
in—widespread quantitative easing to deal with a deleveraging crisis—you're
probably missing something.

~~~
smoorman1024
Yes. I would say watch what happens when the Fed definitively decides to raise
rates. If there is no pullback in the big social companies then I'll be
converted to the "This time is different" camp

------
carsongross
No, it's not.

The Swiss just auctioned 10 year debt at a negative yield.

So, no, it's not 1999.

~~~
a8da6b0c91d
Oh, man, does anyone else remember getting 5% interest on savings accounts?
What a golden age.

~~~
VLM
This is insightful when you look at something like Facebook's financials. So
$200B valuation on $12B of gross revenue but profit varies around zero and
last quarter was 1/2B aka almost exactly 1% annualized rate of return. Better
than my local credit union savings account, but riskier. Probably a reasonable
valuation.

Governments will collapse if interest rates ever return to normal, so they
probably won't. But its interesting to see how cheap capital or "value" is
when interest rates approach zero. If interest rates were 20% like 1980 and
you needed 25% to get investors to even sniff, that would drop facebooks
valuation from $200B to about $4B to maintain that 25% return. That's quite a
haircut.

Low interest rates result in a margin-like whip when revenues drop. Say
revenue dropped a billion at FB. That would drop profit by half and if
interest rates remain constant, risk constant etc, that would collapse the
price by half. And thats a less than 10% decline in revenue. Ouch. So one
effect of low interest rates is making valuation/price very sensitive to small
revenue changes. This will make things exciting.

------
otakucode
I'm no economist, but it seems to me that we're just experiencing society
slowly learning how to deal with this new 'software' thing. Before the
introduction of computers into the workplace, things were fundamentally
different. Productivity inched up incrementally year after year, and we dealt
with that very well. We understood it, and we structured things to function
smoothly with it. Between 1950 and 1980, average worker productivity grew by
76% and the average compensation of the lower 90% of the economy rose by 75%.

Then computers showed up. Instead of worker productivity inching up slowly, it
started multiplying. Your secretary didn't go from being able to answer 25
letters a day to 27, she went from being able to answer 25 letters a day to
150. No one knew how to deal with this. Keeping worker compensation in line
with the value being created would require annual raises to get much larger.
Companies would need fewer workers every year to reach the same levels of
productivity. Entirely new products and services became possible all at the
same time. Companies needed thinkers, not laborers. So many things changed so
fast. And societies and economies don't really 'do' fast. 1980 was yesterday
as far as social change is concerned. Analysts are still looking at companies
and industries through lenses shaped by the Industrial Revolution - and most
companies are operating in the same old ways too.

We haven't adapted to the computer age yet, and it will probably be a long
time before we do. Until then, 'Are we crashing or soaring?' is probably going
to be a constant topic of debate.

------
mbesto
The only benefit that comes from bubble-talk articles is that publishers get
eyeballs.

------
klenwell
I'm generally with the naysayers and the skeptics, but this point makes sense
to me:

 _This though, is why concern one — the lack of access for retail investors —
is arguably a firewall against this truly being a bubble._

This seemed to me one of the key necessary factors to the dotcom bubble and
the housing bubble after it: online brokers allowed people who previously
didn't have a lot of experience to buy stocks and even daytrade. (Count me
in!)

Similarly, ARMs and the various other exotic mortgage tools opened up the
housing market to lots of people who traditionally wouldn't have had access.
(Thankfully learned my lesson with the NASDAQ bubble.)

~~~
maxxxxx
A lot of the money comes from sources like pension funds. A collapse won't
hurt retail investors directly but their pensions will hurt.

If Uber at $20 billion is such a great deal, why don't Larry Ellison, Bill
Gates or Warren Buffet buy it outright?

~~~
adamlett
Nobody said it was 'a great deal'. It could be that it is simply priced right.
In which case a savy investor might be able to find investments elsewhere. And
don't forget that just because the three you mentioned didn't jump at the
investement (maybe because only one of them is actually a professional
investor), it doesn't mean that nobody else did. Obviously somebody did.

------
dataker
While there's enough arguments and data to claim we're not in a tech bubble,
the amount of doubt/negativism/uncertainty is a strong display of market
sentiment and I'd mainly use it as a leverage.

------
niche
Yes! Of course, those who blew the bubble 16 years ago learned their lesson
and built a basket this time. A few items may fall out of the basket as the
supermarket gets busy, which makes me think Uber will fall on the wrong side
of legislation (and AirBnb will not) based purely on Peter Thiel's name
comment in that recent interview. That being said, my gut tells me the
opposite. Ideally, they both thrive!

------
nosuchthing
The whole "debt / insurance derivatives" issue was never fixed from 2008.

Whether businesses making use of emerging technologies and the internet are
worth one million vs twenty billion seems to pale in comparison in the realm
of economic balance and bubbles.

Visual chart for reference:
[http://xkcd.com/980/huge/](http://xkcd.com/980/huge/)

