Monday, 3 February 2014

Dotcom bubble; round 2?

There has been dark talk of late?

Let’s see what happened with the first (1996 to 2000).  I was in its midst, rode it like many early internet participants in Asia, courted by financiers.  I entered the industry in 1991 operating internet service providers in Singapore, Malaysia and around the region.  ISPs are the first to emerge in the internet era.

In Asia the internet pre-1995 was laughed off.  With hindsight this was a sign of impending disaster with the public taking to internet stocks only a few years later even as they thought little of it.  Largely unknown, it was only from 1994 onwards when the press got excited did the public start taking notice.  The founding of Yahoo (1994) in particular struck a chord.  The explosive Nasdaq listing of Netscape in 1995 then created the buzz that made it headline news.

At that stage, internet penetration was low, perhaps 1%.  But it was all over the news.  Then as other listings followed; Yahoo (1996), Amazon (1997), eBay (1998) with PE ratios climbing stratospherically, public fervour was fuelled and speculators entered funding anything that had .com behind it.  I must say it felt like the years preceding 1997 just before the Asian financial crisis, a euphoric period of optimism, of riches with stock prices that only went up amid heightened excitement.  Then in 1998 I remember thinking that the IT industry was little affected even after the massive crash that so badly mauled most Asian countries.  In fact it was a small blip, the party continued.

But just about all internet companies were losing money with a business model that screamed “don’t be silly now, high grow (website hits and users) is it, profits in time would come”.  It was all about being the first to climb a mountain and the next and the next.  With even traditional companies changing their names to include ‘.com’ and seeing their share price rise, you know something is amiss but it was difficult to see the woods for the trees in the madness.  Same atmosphere today?  This amidst unknown new business models that hope shrouded.  To be sure, this is still the model today but prove is required before funding came in and only in stages.  Previously financiers simply jumped in pumping adrenalin into the hatchlings.

In Asia there were few internet stocks so the play was on internet startups, internet personalities (brand name for a startup!) and I know of a job search company with a newly setup website that got bought for being a .com!.  The idea is to list them before long.  They hardly paid attention to the business plan.  Anyone with even the slightest experience in the internet industry was fair game.  In fact, one financier told me that it’s not important for a startup to make a profit because hope was what drives the speculators!  Such a tone is not felt at least not in Asia this time round.

It’s been 14 years after the crash.  So what’s the diff?

Fundamentally, the most telling is that internet penetration is now high which at 1% during the bubble era wasn’t really viable for online businesses and eCommerce.  The internet as a business cycle has also now entered mainstream.  And internet business models, once an unknown have now been proven to be viable.  Monetisation that began during the has proven successful for the better run companies (this possibly is one factor for the run up of new internet companies this time round).

5 differences:

1.     Then the wider industry was excited; now it is only within the internet and financial industry and even then, orders of magnitude less.  Tellingly, there was a perceptible buzz in the public then too, now hardly.
2.     The anticipation today is mostly around new online services from social media, cloud to the sharing economy.  Then even traditional firms were rushing to re-invent themselves, not improving business with the new tools but a tangent towards aping high profile internet firms, perhaps in a hope that the high valuation would rub off on them.   These firms now need to re-invent themselves but most are not doing so, Starbucks is an exception.
3.     Now the push or effort for financing a venture is on the entrepreneurs, then there was also an equal and opposite pull by financiers that we now know to a large extent fuelled the mania.  This time hardly.
4.     Most internet firms are in better financial shape now, making real revenue.
5.     Facebook shares tanked for a year or so, something that would not have happened during the run up.

If we think in cycles we would know that in the first stage, infrastructure build must come first to increase internet penetration.  At 1% how many buyers online can there be?  The suppliers (digging tools) make the profits as the online gold rush was often compared to the Californian gold rush during those heady days.  It was a warning from the then insiders of the industry including this author but no one listened.

Being one of the pioneers in Asia, I was asked soon after the crash if that was the end of the internet.  Many imminent industries, history says, start with a financial crash during phase 1.0 of their development.  We saw it in the car industry, railways, electricity that in fact alludes to an industry in the making.  It shows in fact that it was going to be the next big thing!  Whilst most internet ventures failed, it was not due to a fundamentally flawed model but of timing.  Those were simply formative years, internet 1.0.

As they say in Asia, if you see housewives and retirees talking excitedly and crowding the trading lounges of their brokers, you know it’s bubbly.  There is no similar hype today, only slightly frothy perhaps.

So I think not.