

Dot Bomb 2.0 is coming - run4yourlives
http://davidpiccione.com/blog/dot-bomb-20-is-comming/

======
pg
This guy doesn't even have a grasp of the basic facts of the web app business.
The core of his argument is that an ad-supported business is ipso facto a fad.
So is Google a fad? Are all the ad-supported businesses of the past 100 years?

Look no further than Friendster for evidence of users' fickleness? Friendster
wasn't killed by the market; it committed suicide.

~~~
run4yourlives
I don't think I'm saying that ad-based businesses are a fad at all.

What I am saying is that ad-based businesses aren't stable enough to warrant
the valuations that we're seeing right now. The core audience - the user - is
not loyal enough to justify valuations that would take years of sustained
behavior to see any ROI.

The cause of Friendster's demise is irrelevant - it's the speed at which it
happened that proves the point. 19 million users lost in under 2 years is fast
even for web apps.

Ads are a perfectly legitimate form of revenue.

~~~
pg
> I don't think I'm saying that ad-based businesses are a fad at all.

"Consumer loyalty is directly linked to the amount the consumer invests out of
pocket."

"With social networking sites the amount spent is zero - and the loyalty
corresponds."

"Facebook and mySpace are only as valuable as the next big thing. In other
words: they are fads."

~~~
run4yourlives
Paul, you're completely ignoring my main point by focusing on this idea that
I'm suggesting ad-based models don't work. I'm not saying that.

What I'm saying is that because consumers that don't invest out of pocket are
fickle and that ad-revenue follows consumers, valuations of companies that
survive solely on ad revenue should reflect this.

Right now they do not, hence they are overvalued. When a company is
overvalued, it's not a good time to invest. The fact that there continues to
be a market is based on the fact that Facebook, or a site of equal stature
hasn't actually had to justify its value.

Once it does, the house of cards will adjust a little.

~~~
davidw
I think fickleness is more closely related to switching costs than sunk costs.
In other words, I don't pay a dime for Gmail, but it would be quite difficult
to move away from. Facebook probably doesn't have quite that much of a lock on
your data, but I guess that depends on who you are and how you use it.

~~~
mojuba
Everyone would easily switch to a better mail system that offers some kind of
a one-click migration/import from GMail, provided it is really better in some
ways. In fact, however harsh it may sound, GMail can be ruined in a matter of
months just because the majority of its user base is not loyal. Compare it
with Apple in terms of loyalty, if in doubt.

------
bilbo0s
This guy must have hit a nerve to generate so much vitriol. I think many of
the comments here hit on some good points. I think the blog post we are
discussing hits on some good points. It is possible that we are all right.

We need to be honest here and admit, however, that the vast majority of the
free to use consumer startups that we are seeing will be challenged generate
US$1 Billion in revenue a year. Or for that matter, even US$100 Million. That
is why there is little talk about taking the majority of them public, because
other than as a delivery vector for advertisements, there is scarce value in
this crop of startups. To be perfectly frank, these are less than ideal
platforms for ad delivery as well.

What can be done? We can try other models, and I'm sure many will. There are a
boatload of virtual worlds, virtual world platforms, and MMOs coming on line
this fall. ALL of them plan on using ads, microtransactions, and
subscriptions. They are in the good position of being able to use all three of
these at the same time, and all of them will. I predict though that by
December all of these companies will have their models DESTROYED by two guys
on their couch in boxer shorts developing a FREE virtual world on their
laptops while watching SportsCenter and eating ramen. There will be 1000
college students "building portfolios" around the country that will make
gigabytes of content for the new LINUX of virtual worlds. It will all be P2P
or hosted on Amazon, and it will piss many a VC off. So the only thing these
businesses will have left will be advertising.

This is the situation web 2.0 is in. People keep investing in the hope that
some little twist will be the magic one that brings in the most ad bucks.
Charging for these things is not an option, there will be free alternatives if
you wait 6 weeks. Even virtual worlds can be duplicated in 6 weeks these days!
What can we do?

It's easy to point out the holes in what is currently being done, it is much
more difficult to offer a WORKABLE solution.

~~~
pg
By hitting a nerve you presumably mean touching on some fundamental point that
makes people uncomfortable. But not everyone who generates a lot of responses
hits a nerve in that sense. Trolls pride themselves on causing huge fights
from remarks with little more content than a bot might generate.

I'm not saying this was a deliberate troll. I'm sure it wasn't. But it had
that in common with trolls.

------
mechanical_fish
The Bubble Bubble continues to expand.

The argument this time seems to be that the entire industry will crash once it
becomes clear that a large site like Facebook can't hold on to its ad revenue
for more than a few years, because the fickle users can (and supposedly will)
migrate to other sites.

I don't understand. If Facebook's users all left the site tomorrow, it would
obviously be bad for Facebook, but the rest of the industry would break out
the champagne. Users who leave Facebook don't abandon the Web and join the
Amish - they go someplace else online, and the ad revenue goes right along
with them. Friendster's collapse was a bad omen for Friendster shareholders,
but it doesn't seem to have had any terrible effect on the rest of the social
networking industry, which grew even faster once it absorbed all of
Friendster's former users.

Even if it turns out that individual sites like Facebook are fads, lasting for
a few years before burning out, there's no reason the industry can't adapt.
Clothing styles turn over just as quickly as Web fads, but fashion designers
still manage to stay in business for decades. You just have to operate at a
higher level. The Facebook or YouTube of the future could be a company with
half a dozen brands, rolling out (or buying out) a new brand every few years
to please the latest group of teenagers. Like a TV network, or Procter and
Gamble, or the Pepsi Corporation (which owns Pizza Hut and Taco Bell and a
substantial piece of your local high school cafeteria.)

The real limit to the growth of ad-based sites is the number of users and
their available attention - you can only show so many ads to someone in their
lifetime. One could argue that the industry is funding, or is about to fund,
many more ad-based companies than the ecosystem can support at the moment. But
even that would not constitute a "bubble". It's just the business cycle. These
companies aren't fantasies or fakes - they're just competitors, getting ready
to fight for a share of some very real ad dollars.

~~~
run4yourlives
I think it's dangerous to think that advertising dollars operate in a zero sum
balloon sheltered from economic realities.

>The real limit to the growth of ad-based sites is the number of users and
their available attention

Assuming the perceived value of an ad remains constant. Unfortunately, ad
budgets change, and sometimes, ad spending does indeed pick up and go join the
Amish.

~~~
mechanical_fish
Of course the advertising world is not a zero-sum game. In fact, the overall
size of the ad market has been growing like gangbusters over the last few
years.

Has it grown too much? Maybe so. It's still possible to argue - easier than
ever, really - that Web ads have become seriously overvalued and that the
whole industry will collapse when we figure out that the intrinsic value of
the average ad is _x_ and not 10 _x_ or 20 _x_. That seems like a sensible
theoretical approach, but Google took the fun out of the last round of these
arguments by experimentally disproving them to the tune of several billion
dollars, so I'm not surprised to find that theory is out of fashion and that
the modern entrepreneur prefers to be an experimentalist. Darwinian evolution
isn't fun for everyone, but sometimes it is the fastest way to explore.

And, yes, of course there are "economic realities". The number of users and
their available attention is an _upper_ limit to the growth of ad-based sites.
In a recession we will get to explore the lower limits, and the Darwinian
evolution will really kick in. But that's just the business cycle. That's not
a "bubble".

A bubble is a nonlinear event in which otherwise rational people - some of the
_smartest people you know_ \- choose to deliberately forget everything they
know about business. They're happy to pay 2x for a company that _they know_ is
only worth x because there's a sucker down the street who will pay 5x. A
bubble is where you're terribly tempted to _join_ that crowd, because they are
getting _rich_ , while you're stuck being a middle-class Cassandra with a
boring, profitable job.

What I see today is a crowd of people falling over themselves to proclaim the
next bubble. That looks like healthy skepticism to me. Maybe even a bit too
much healthy skepticism, like a public service ad that runs ten times every
hour.

However insane their valuations may appear to us, we're still at the point
where investors are debating the _actual_ value of sites like Facebook and
YouTube. It's a large, young, and unpredictable market, and even in non-bubble
times there are plenty of irrational investors, so it's not a very sober
debate. But rationality is still in the picture. Those who believe that
YouTube has a fighting chance to become the next News Corp (another worldwide
media company; $24 billion annual revenue) might well argue that buying the
company for $1b is a good deal. I think that's a nutty argument, because my
techie instincts tell me that there are several dozen Startup News readers who
could clone YouTube in less than a month, or even a week. But, you know, I
could be wrong. I was wrong about Google.

------
awt
He's right. Let's all quit and get jobs crunching numbers in the finance
industry. Better yet, lets become farmers. Everyone needs food right? That
market isn't going away any time soon.

~~~
AF
When did he ever imply that? Just because he is suggesting that the market
might see a recession or a bust doesn't mean he is saying all people should
get out of the market.

~~~
run4yourlives
In fact, as you'll see in tomorrow's post, I'm going to suggest the opposite.

------
jmzachary
This "analysis" is nothing but opinion. There is nothing data- or fact-driven
about the graph (labeled "hypothetical valuation during a general market
correction") or assertions (e.g., "Even the most optimistic however, don't
suggest that we are heading into anything but a bear market.").

If you are going to form opinions and hypotheses, please back them up with
fact-based analytical rigor before writing an article and posting it in
public. The world doesn't need more opinion masquerading as analysis.

------
parker
One important thing to remember is that company valuations in technology are
not set by any current metric (discounted cashflow, multiples of revenue), but
perceived future value. Facebook may only be taking in 8 figures in revenue
each year, but certainly has future potential on the order of billions of
dollars.

I think we are seeing another period of web standards being set (Ebay, Amazon,
etc were the standards of the previous boom). Wasn't Bezos big in the 'get big
fast' strategy? That will work, but only for a very select few.

I agree with some of his premise, in that relying solely on advertising
dollars is a huge risk to any potential revenue model, but it does not mean
that there won't be winners in that race. After some experience, I'm pretty
confidant in saying that advertising-only models are VERY hard work and
require a massive amount of network effects.

The lack of defensibility in Web 2.0 is also quite troubling to me, as it
seems like if you create something worthwhile, you may be stuck in the no-
man's land of free AND not enough page views to support the ads-only model.
Perhaps that's when we'll see a permanent change in nomenclature from 'web
products' to 'web services'?

------
sbraford
Lots of great stuff in this thread.

Elephant in the room no one's talking about: almost everyone reading news.YC
wants the market to remain as healthy (and bubbly, if you call it that) for as
long as possible.

In 1998, the voices of the naysayers were drowned out by the shouts of
irrational exuberance. Still don't agree with the article's assessment -- but
who wouldn't love to pull a Mark Cuban this go 'round?

------
dood
A good question to pose would be: assuming a significant economic downturn is
likely, how would this affect typical 'web 2.0' businesses?

The answer may well be 'badly'. A great deal of these sites presume a healthy,
wealthy economy: they hope to generate income from ads, or subscriptions, or
hope for investment and/or buyout. All of these routes will be significantly
impacted by a liquidity crunch.

Many sites with small margins, or hoping for investment, or looking for a big
sale, or counting on getting big fast may then have real problems.

I am not denying that there are many opportunities on the web, or saying that
it is necessarily a bad time to be in the internet business. I am suggesting
that anything less than a solid business may prove extremely vulnerable to a
small-medium recession.

------
tx
Well... I'd be very skeptical to listen to a guy with such a cheesy blog
title. He is _"Building leadership..."_. Often most of these folks usually
don't bother with even a basic logic in their "predictions" and
"explanations".

Quote: _Facebook and mySpace are only as valuable as the next big thing. In
other words: they are fads. Now, fads can be successful if they are managed
right, but they all share one thing in common - they will not be be around
tomorrow. If you need proof, look no further than Frendster._

I don't see much logic in that.

~~~
run4yourlives
Funny, I was actually thinking of changing my site's focus. I don't talk much
about leadership there, as you can see.

------
henning
Be suspicious of graphs that don't have units or precise labels.

~~~
run4yourlives
Ironic that you should say that, given the topic at hand. :-)

------
AF
Wow. This is an excellent, realistic article. Some of the great nuggets:

"Consumer loyalty is directly linked to the amount the consumer invests out of
pocket. Apple has a fiercely loyal base partly because they feel really stupid
spending an extra $300 on a product that isn't something special. With social
networking sites the amount spent is zero - and the loyalty corresponds.

Facebook and mySpace are only as valuable as the next big thing. In other
words: they are fads. Now, fads can be successful if they're managed right,
but they all share one thing in common - they won't be around tomorrow. If you
need proof, look no further than Frendster. In 2003 they had 20 million users.
Today, they have less than 1 million die hards. Those are fickle crowds.

So, why is this a problem? Because eventually investors - be they VC's or
acquiring organizations - want to see some growth in their investment. With a
fad-based industry, all value becomes speculative and opinion based. In order
to make money, investors need to assume that tomorrow, the perceived worth of
the product will be higher. Let's pick on Facebook a little. Facebook now
needs the next investor to believe it's worth $2 billion at least. - invest $1
billion, recoup $1 billion. Sorry if I laugh a little."

And:

"Let's put this into perspective: We have a product that has a monetary value
of zero to its users being used to build further products of negligible value
- and these products are actually being sold or invested in!"

And this has me asking the question: is it not better to charge for a product
and therefore create a loyal and mature customer base on top of actually
getting some real revenue? I mean sure, you might not have 30 billion users,
you will probably have to make something that is higher quality than something
that is free, but the results to me seem to be much more valuable.

~~~
brlewis
That first nugget ignores that some people invest a lot of time and effort
into their online identity via a social networking site. They aren't going to
switch in a heartbeat.

~~~
sabhishek
I don't know how much true is what your saying, a month back I switched to
Facebook from Orkut and I find lots of ppl doing the same. Facebook is a clear
winner thats why I joined in and if something better comes, I won't mind
switching again.

~~~
brlewis
You're making my point. Facebook started to pass Orkut three years ago, and
you didn't change until last month. It doesn't happen in a heartbeat. "Zero
loyalty" just doesn't fit the facts.

2007, fb way ahead: <http://blogs.zdnet.com/social/?p=114>

2006, fb ahead: [http://changesgood.wordpress.com/2006/09/23/myspace-is-in-
vo...](http://changesgood.wordpress.com/2006/09/23/myspace-is-in-vouge-but-
orkut-is-the-real-winner/)

2004, fb catches up:
[http://www.blogpulse.com/2004_review/2004review_socialnetwor...](http://www.blogpulse.com/2004_review/2004review_socialnetworks.html)

~~~
sabhishek
Yeah true, I agree. Call it resistance against change or little loyality, it
takes some time to shift. Friendster is still #1 in Philippines.

------
sabat
I hereby predict that the fledgling blog at davidpiccione.com, created in May
2007 by Canadian David Piccione, will be forced to fold soon due to
overvaluation and other market pressures.

We expect that the blog will cease operations before the end of the calendar
year.

~~~
run4yourlives
Dude, you're taking my opinion awfully serious. Chill.

If I'm so wrong, you have nothing to worry about. I'm not getting why simply
presenting a viewpoint needs to escalate into a personal attack.

Tell ya what, if it means so much to you, I'll write another post exactly one
year from now. If you are correct I'll point out how wrong I was for you.

~~~
sabat
Actually I'm just teasing. The "your blog will go defunct because of market
pressures" part anyway.

The rest: it's just healthy debate. As long as no one resorts to name-calling
or breaks Godwin's Law (comparing something to Hitler or the Nazis) then you
can assume we're all just stating our opinions. No hard feelings.

