I was contacted recently by a journalist from Spanish daily El Mundo who wanted to know what I remember about the dot.com boom of the late 1990s, a period I spent between Spain and California.
Are we living through a similar bubble? There has been a lot of talk recently about another boom and bust, but there is no simple answer. The fact that some companies with no income are being valued in the billions of dollars doesn’t necessarily mean we’re in a bubble, as long as these companies at some point in the not too distant future begin to make money, or create synergies with other outfits.
Instagram had no business model or interest in developing one, but that doesn’t mean that in the hands of Facebook might be worth one billion (even though the final price tag was smaller, some $715 million… some years I don’t make that amount myself! :-) It may not have had a business model, but a year on from the Facebook acquisition, it is creating advertising campaigns for companies all over the world, as well as exploring new, non-invasive communication channels with users.
In the late 1990s, there was tremendous pressure for traded companies to prove that they were doing something, anything, on the internet. If you didn’t have an internet investment plan you didn’t have a ticket to the future, and your share price fell accordingly. Companies are still under a lot of pressure: the reason that so many of the big acquisitions recently have priced companies up in the stratosphere is because buyers want to frighten off other would-be purchasers.
But the pressures of the 1990s affected the entire market, today it’s only four or five companies, all competitors, that are affected, not the economy overall. Just because Facebook pays $19 billion for a company like WhatsApp or hires a crackpot like Jan Koum to sit on the board doesn’t mean the market has gone haywire… it means other things: that Mark Zuckerberg is imprudent, that he sees things in the company that the rest of us don’t, or that he doesn’t want anybody else to buy WhatsApp. In the same way, buying Oculus VR might seem insane when the company still has little more than a prototype and a tiny number of customers, but it could be interesting if it allows to sign up a team that could end up defining the future of virtual reality.
hIt’s possible that the tecnnology environment is overheating. But these kinds of things tend to happen when there is uncertainty about the future, and when things happen that could redefine it, when there are alternatives at stake that can be valued (how do you put a price on leading a segment that has still not been exploited?), or when there are few players and they are awash with cash. Outfits like Google or Apple have more cash than God, and can do what they want with it: this is not about extravagance, but about what they are worth and what they can do in an industry that has no comparison in history.
Is Apple’s $159 billion in cash a bubble, or is it clinking clanking money? Is Google’s $60 billion a year money making machine a bubble, or is it made up of greenbacks paid by thousands of companies all over the world to put their advertisements in front of potential buyers?
There is a big difference between the bubble of the late 1990s and what some observers suggest is inflating before our eyes today. In the 1990s, the idea was to put a price on expectations. Today, there are more than expectations: there are users, there is consumption, there is turnover, and there are greenbacks that many different types of clients are prepared to hand over in return for products and services.
Is there a risk that the situation will become unsustainable, that valuations will suddenly fall, and that what was once gold won’t be worth the paper that its new share price is printed on? Overall, I would say that isn’t going to happen. Could it happen to this or that company, or even to a group of them operating in the same field? Definitely. But uncertainty or risk don’t necessarily point to a bubble. They imply that there is a market, and that the market moves quickly and less predictably than the markets of a few years ago.
(En español, aquí)