Friday, July 01, 2011

ECONOMY - Tech Bubble Version-2

"Are Social Media Services the Next Tech Bubble?" PBS Newshour Transcript 6/30/2011 (includes video)

Excerpts

RAY SUAREZ (Newshour): The numbers are astounding. Companies and individual investors are paying billions of dollars for the next generation of tech enterprises, and, often, the valuations dwarf the revenues.

Microsoft bought Skype for $8.5 billion earlier this year. Skype's revenues are less than a billion dollars annually. When LinkedIn went public, it was initially valued at $9 billion -- its current profit, just $12 million a year. There's talk of Facebook selling for more than $75 billion next year.

Along with the excitement, there are cautionary tales, too. MySpace, the social networking site, sold yesterday for just $35 million, after it was expected to fetch $100 million at auction. Six years ago, News Corp. bought it for $580 million.
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Are we watching the inflation of tech bubble two?

JOSH BERNOFF, Forrester Research: Well, I certainly think that there's no rational way to understand these valuations.

I want to be clear here. Social is extremely exciting. There's a lot of business perspective, a lot of optimism that goes along with it. But I think these valuations are based on where people think the next buyer will come from, and not on where the actual revenues of these companies are going.

RAY SUAREZ: Jessi Hempel, is it a little different this time, in that some of the companies we are talking about actually do have revenue streams and do make money?

JESSI HEMPEL, "Fortune": That's exactly right.

I agree with Josh. I think that it's impossible to explain exactly what's going on here with the exuberance, but this is not the first bubble. And I think, when you say bubble, people immediately think Web 1.0. They think Pets.com and Boo.com.

This is not that. These are real businesses. So...

RAY SUAREZ: But, still, aren't these -- when you compare revenues, for instance, to estimated earnings in the future, those numbers are -- well, they don't line up in the way they do in conventional businesses. How do you explain that?

JESSI HEMPEL: Well, they certainly don't line up in the way they do in conventional businesses.

I think one thing you're seeing is the product of an IPO market that really hasn't existed in last few years. So you see a lot of pent-up demand for these high-growth tech companies. And there haven't been a lot of companies to invest in.

So, yes, you see high valuations, perhaps valuations that seem relatively optimistic for the actual revenues these companies are displaying now. But I think that if you peel that back, what you see at these companies are often very strong, very nascent businesses with something Web 1.0 didn't have, which is massive numbers of users.

I mean, everybody is on the Web today. And you see the start of real revenues and real profits, which is something that you didn't see first time around. And I also think that you see the Web coming off of our computer screens and entering our world in a different way.

I mean, you look around in today's world, most people have a computer in the palm of their hand in the form of a smartphone. And you're starting to see commerce develop from that palm of your hand, and you're starting to see new advertising models that go beyond the banner ad to make real money.

And I think that people are pretty excited about those building blocks and optimistic that these companies, while they perhaps are nascent now, really do have the fundamentals that are going to make them explosively -- explosively profitable.

RAY SUAREZ: Josh, when you see some of these gaudy numbers talked about, $75 billion for Facebook, when a company isn't publicly traded, how do they come up with a figure like that? How do we know?

JOSH BERNOFF: Well, it's just like any other market. It's a question of supply and demand, the supply of shares that are available and the demand of investors that want them.

What's changed here is that it used to be, before a company went public, that only sort of experts, people like venture capitalists, could decide on where they thought the company was going. Now you can go and buy shares that may have been made available by some Facebook employee in places like SecondMarket and SharesPost even before the company is public.

And, as a result of that, investors who don't have a whole lot of information that they would have about a public company are saying, you know, I have to get in on this. I don't care what the price is. And that's really what drives some of these valuations.

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