Web 2.0 Internet Bubbles: Form Without Substance

(MoneyWatch)  Earlier today, my colleague Michael Hickins discussed concerns about a new tech bubble involving Web 2.0. His take was that those who see the expanding iridescent form simply don't "understand the value proposition of Web 2.0," and that a person who raises such doubts "confuses enthusiasm engendered by the potential of the likes of Facebook and Twitter with the 'irrational exuberance' over the likes of Pets.com." I'll disagree. The question is not a simple good versus bad argument, and many in the new round of "enthusiasm" have shown a disturbing number of traits in common with the 2001 dot bomb fiasco.

Michael quotes venture capitalist and Internet connoisseur Fred Wilson in listing such companies as Amazon, eBay, Craigslist, Baidu, Lastminute, Vente-Privee, Tencent, and Sohu as some of "asily a dozen and probably two dozen worldwide Internet businesses that investors should own today and for the long haul."

Now, that may be true, but let's take this apart a bit. Amazon, eBay, and Craigslist? Founded in 1994, 1995, and 1999, respectively. Baidu? Founded in 2000. Lastminute? Founded in 1998. Vente-Privee? 2001. Tencent? 1998. Sohu? 1996. See a pattern? These are not "Web 2.0" companies, but ones that actually survived the turn-of-the-century meltdown. In other words, they had legs and kept using them. That's because these aren't "Internet" companies. They are companies that had a real business that could benefit from the Internet.

Michael referred to the doubters personified by "legendary fun manager James Altucher" as simply not understanding the "value proposition of Web 2.0." And I'd agree -- because there is no value proposition. The value comes from how technologies are used, and these companies are examples of how some businesses did smartly use what was possible.

My colleague may speak with respect of a company like Cisco (founded in 1984, for heaven's sake) as a solid example of corporate value. What Altucher said in his Wall Street Journal opinion piece was that he advises clients against investing in the Internet, and he's right for doing so. Smart investors, and smart managers, look at businesses, not technologies. As he points out, and I've repeatedly written on BNET Technology, even Google has been unable to make a comparatively strong revenue stream out of anything but ads, and the company bought the AdSense system when it acquired Applied Semantics back in 2001. Without that acquisition, where would the company be today?

Stock price may be nice, but it doesn't pay the salaries, grow revenue, or establish profits. And if a company doesn't know how to do that, what it does know how to do may not make that much difference. And as far as Twitter goes, let me know when it's figured out how to make <em>any</em> revenue, let alone profit.

Image via stock.xchng user LesKZN, site standard license.