Déjà Vu? How Today's Tech World Compares To The Dot-Com Bubble Of Y2K
If you're even a casual fan of "The Simpsons," you will likely have been at the receiving end of a history lesson delivered through one of the iconic show's more popular episodes, one that was filled with humorous jabs at the instability of the tech world around the turn of the century and the dot-com bust that ensued as a result.
"I am furious (yellow)," perhaps more commonly known as "the Angry Dad episode," was filled with scenes that, sadly, had all the makings of a true-to-life story at the time of its airing.
There was the creation of a prodigious product (the Angry Dad comic) that gained popularity locally; the acquisition of that product by an Internet company from the young founder in exchange for stock in the former; the discussions of a sound business model that were casually dismissed; the quick rise in notoriety on the web (i.e. "no. 1 non-porn site on the internet") and an equally rapid decline into bankruptcy.
The episode, which debuted in 2002, indulged in satire, of course, but for satire's standards was an accurate reflection of the time. It came only a few years after investors had gone dot-com crazy, pumping money into the hands of trendy startups that, despite having the knack to draw publicity, lacked any semblance of a solid business plan.
Companies ran on a motto of "get big quick." Draw attention, attract a following and worry about the fundamentals later. It's a mindset that ultimately led to the crumbling of an industry, which saw only the (really, really) strong survive, like eBay, Yahoo! and Amazon.
Now, over a decade later, there is a growing amount of people whose reactions to recent news imply that it might not be long 'til another tech bubble allows "Simpsons" creator Matt Groening to make a similar episode.
In the wake of Twitter's IPO and subsequent debut on the New York Stock Exchange at $24.9 billion, for example, there are generally two ways in which the social network's move to go public has been received. One has observers praising the 140-characters-or-less platform as a notable success of the new world and a company worthy of all the admiration that the tech industry has to offer. The other prompts a raising of eyebrows, along with a few questions.
How, for instance, is a company that generates $500 million annually worth 50 times that amount? The discourse surrounding the value of Snapchat has similarly drawn skepticism. Is popularity among youngsters and a high volume of users alone really worth billions of dollars? But there's one question that, despite being independent of any one company, stands out as the most ominous of all.
Haven't we been here before?
"I just worry a little bit that we are edging back to the 'eyeball-and-click' thing we had just before the year 2000," UBS director Art Cashin told CNBC. "It's not quite frothy yet, but it won't take that much stirring to get there."
Context clues alone might indicate that what Cashin warns against is something to worry about, but a true understanding of the terms he uses (which some may be forgiven for not recognizing) put his words into true perspective. A state of "froth" describes an economic climate in which the demand of a particular type of product drives the value to unrealistic and unsustainable levels.
Froth also dictates that investors value companies by standards that do not correlate with the usual fundamentals by which enterprises are traditionally judged (i.e. revenue, profit, projections for growth). So when Twitter reaches a $25 billion valuation, despite its state of "profit-less-ness" and the fact that the company has operated at a substantial loss for the past three years, it's clear to see why one might think it wont take much for the tech world to "get there."
And what exactly is "there"?
"There," the point to which people expect the world to be going, happens to be a point at which we've already been. A time when Pets.com, which began operating in 1998, served as the perfect case study of what went wrong in the tech world of its day, with a trademark sock puppet so infamous it could serve as the mascot for the dot-com bust.
The site had the profile of big time company, with appearances on "Good Morning America," the Macy's Thanksgiving parade and the Super Bowl, but lacked the fundamentals of a second grader's lemonade stand -- the company went bust just nine months after it went public.
"There" is when we began valuing companies on account of their abstract qualities regardless of whether or not they have concrete results.
But while the valuations of companies like Pinterest, Tumblr and Snapchat, along with Twitter's IPO and that of other companies to follow, might provide a sense of déjà vu for some observers, others believe that these things are nothing to worry about, they're just signs of the times says Bloomberg Businessweek reporter Larry Popelka.
"While some may argue this is another bubble like the dot.com bust at the turn of this century, it is actually part of a longer-term trend that is valuing innovation at increasingly higher rates due to the impact it has had on many businesses," Popelka wrote on Monday.
Investors are not overestimating companies, Popelka says, they value the innovate ones over the traditional. Such is the reason Apple, which has lost some of its "change the world" aura, has seen its value drop tens of billions of dollars during the past few years despite increasing revenue. What the market craves is revolutionary products, Popelka argues, and for the companies who offer that, a premium is added to their valuations.
In presenting Apple as an example of the standards that drive the tech market today, Popelka does make a good point, but he also sheds light on a parallel that validates the opinions of those who draw comparisons between the age of the dot-com bust and today.
On the one hand, the companies that are drawing quizzical looks today are the one that are revolutionizing their spaces. Twitter is a unique social network that keeps users logged in (instead of checking in, like Facebook), Snapchat is the one notable social media platform that evades privacy issues and Pinterest is a one of a kind, unique tool that essentially prompts customers into advertising their favorite brands (instead of the brands themselves).
But, on the other hand, if innovation really is the commodity that drives the value of the industry today then therein lies a damning comparison. The idea of "innovation" is exactly that, an idea and, thus, an intangible. That puts it in the class of the ability to "get big quick" the intangible quality that investors favored over traditional indicators around the turn of the century.
Whether or not innovation is a standard that serves as a better indicator of longevity remains to be seen, but while everyone waits for the result, one thing can be said for certain. If there's one reason to compare the two eras in question, the dot-com bust of Y2K and web 2.0, it's that they both devalued concrete results, like profit and revenue, in favor of abstract qualities, like obsession and innovation.