I follow the tech news as closely as ever, it’s just that I think I am at a point where all news feels like “old news” by the time I have the free moment to write… 🙂 But I digress.
Recently, there’s been horrible turmoil in the financial markets due to the housing bubble’s collapse. It’s really beyond the scope of this blog to discuss this matter, but I believe the turmoil isn’t over for several more months. That said, I’ve wondered how it will impact the Internet 2.0 bubble that currently exists.
Unlike the previous bubble, this bubble is definitely fueled by results. As in, companies that are producing revenue are the ones that are becoming successful. But the big problem with today’s bubble – and why I refer to it as a bubble – is that the success is circular. If you cut any part of the circle, all other parts are adversely affected. It’s just like how in the housing bubble, everybody was making money because all prices were going up; success of one neighbor helped fuel the success of another.
Did you know that 37% of all online advertising dollars are spent on financial services such as mortgage loans? There are thousands of blogs, web services, and web applications out there that exist solely for advertising dollars. You might say, “That’s nice, but my company doesn’t deal with financial service ads!”
You are right. I would venture a guess that far less than 37% of web searches and web sites are financially oriented. However, if advertising dollars dropped, it chills the advertising market as a whole. If financial service advertising dollars dropped 30%, for example, we could be talking about a double digit revenue drop (11%) for companies like Google and Yahoo. But it doesn’t stop there.
Once news of a weakening economy starts to sink in, followed by news that Google and Yahoo fell far below sales projections, venture funding begins to cool. Right now, we are beginning to see the reemergence of dumb investments straight from the bubble 1.0 playbook. These types of investments will be be the first to die off as risky investing will be highlighted by the other crash. Certain breeds of “go until a fool buys us out” startups die.
All of this relies on the fact that online advertising somehow grows less effective. If online advertising were to become even more effective, a correction would not occur. So then I close the circle with the other secondary effect: consumer spending.
As consumers begin to spend less due to a cooling economy, that definitely effects Internet ads. Internet shopping is the epitome of impulse buying: shopping is as simple as two clicks and typing in your credit card number. But these types of purchases are the first to die off when consumers feel a pinch.
Some of the largest sites in the world are still only small companies when compared to equally ranked brick and mortar businesses. And believe me, their equivalently ranked real-life business counterparts have a much larger profit. And like all bubbles, because the Web 2.0 bubble is circular, any slowing in one sector drags down the rest. That is because the bubble is driven by speculation. There are probably 100 or more funded video startups out there, but most if not all are just running losses.
Everybody is speculating that these will become the next big thing, and thus dumping cash on them. Wait, isn’t that exactly the same thing as what happened with all those homes?
In a speculation driven market, a correction is inevitable. It’s exactly how the housing market got to where it is now.