The eternal ghost of the dotcom bubble

11/07/2011 -by:Silvina Moschini , CEO & Founder, Intuic | The Social Media Agency

The catastrophe on the web that has been forecast by some analysts since the dotcom crash at the beginning of 2000 does not seem to be near.

By the end of the 90s, it seemed that any project ending in “dotcom” was very promising. Online companies emerged in every corner of the planet, although, of course, the focus was on Silicon Valley, where venture capitalists made most of their investments. But all of a sudden, the illusions started to evaporate. By mid 2001, the NASDAQ price had fallen 25% compared to the year before, and it was evident that companies in the first dotcom wave did not have solid business plans that would guarantee profitability in the medium term. 

Today, many ask themselves if the social network wave is not repeating this first Internet bubble. While platforms such as FacebookTwitter, and LinkedIn do not stop growing in user numbers and appreciation, there are those who believe that they will not be able to sustain their businesses over the longer term. It must be asked, however, whether these companies are comparable to those from the first Internet wave. Or are they actually companies with solid bases, with robust business plans that will respond to investors’ demands? 

And the web keeps growing

When we consider the web universe in 2000 and 2001, we see catastrophe. Despite this, we must highlight that the online economy never stops advancing. It is true that many projects failed; some angel investors saw millions of dollars evaporate before their eyes, but the reality is that companies based on solid projections could and did survive. Perhaps the most obvious example is Amazon. Its creator, Jeff Bezos, never complained when he admitted that they foresaw losing money during the first 4 or 5 years. Today, the company has become a giant that sells everything from candies to iPads worldwide. Today, nobody would be able to criticize the viability of the project created by Bezos.

Although a bubble burst in 2000, the truth is that the online economy never stopped growing. And it has exceeded many of the expectations that some analysts projected before the debacle. In 1999, Forrester Research forecast that, by the year 2003, B2B e-commerce, that is, transactions between companies, would reach US $1300 million. However, despite the dotcom catastrophe, when the year 2003 arrived, the amount reached US $2400 million. 

Even in the most difficult moments, the online market has continued to demonstrate a pattern of growth that has scarcely paused. During 2000, online sales grew 81.3%, reaching US $29,000 million. The following year, when everybody expected the expansion to stop, e-commerce continued to increase and exceeded US $40,000 million in sales.

Understanding the market

It is necessary to understand that technology moves with innovation. Innovation means risk, and risk means that some of the projects that are promoted can end in failure. Nothing demonstrates this idea better than the analogy of Marc Andreessen, funder of Netscape, one of the pioneer web companies: “The financing of the technology industry is based on a baseball model. For every ten times you bat, you have seven failures, two base hits, and—if you are lucky—a homerun. The base hits and home runs pay for the failures. If you think that there is a bubble, based on the number of startups that get financing and fail, you will end up thinking that the industry is in a permanent bubble, which can be fun but is not really useful.”

Running the risk of financing companies before they reach their profitability point, betting on future revenues, is part of this market’s nature. Of course, this does not mean that what happened in 2000 hasn’t taught us lessons. Back then, it seemed that the fact of being online was enough to make any project a profitable one and that not much planning was needed. We all have learned today that, as in any other enterprise, a solid business plan is needed that allows maintaining the initiative through time. 

Projects come and go; the Internet remains.

Until some years ago, MySpace was the queen of the online networks. Even if it’s true that in terms of usability and utility this platform was very far from what can be achieved with tools such as Facebook, Twitter, or LinkedIn, the truth is that it was the first social network to reach an authentic penetration to a significant degree. Today, MySpace survives in agony, Twitter does not stop growing, and Facebook is used by nearly one of ten persons on the planet.

Does this mean that the MySpace bubble has burst? No, it simply means that the network that dominated the online social world until 2008 has been surpassed by other platforms that gained more audience based on better functionality and reaching a wider user base. What happened was simple: the market evolved and new actors appeared; they introduced new innovative factors that changed the way in which the audience is distributed.

Thinking that the social network market constitutes a bubble, that is to say, forecasting that the online social networks will all disappear, as some analysts have been saying since 2007, is nonsense that can only be supported by a very limited understanding of the online sector. The web 1.0 bubble burst, basically, because ventures were investing millions in businesses that were just ideas, that didn’t have a minimum audience. Comparing those early projects with a platform such as Facebook, with 700 million users, one of the most visited websites in the world, capable of developing an advertising tool with an extremely efficient segmentation capacity, is close to disrespect. 

Even if Facebook, Twitter, and LinkedIn left their heights and entered a declining phase, this would be far from indicating a bubble. If that were to happen, it surely would be because another online social platform was emerging that could articulate a better proposal. The social network world is here to stay; there is no doubt about it. Millions of users choose it every day to communicate with their loved ones, to stay informed, to speak their minds, to entertain. Forecasting a regression for this phenomenon is as absurd as supposing that one day humans will return to four-footed locomotion because they are tired of walking upright.