Web 2.0 Sparks New Bubble Debate
Legendary fund manager James Altucher and verbose venture capitalist Fred Wilson are debating the merits of investing in Web 2.0 properties. While the this debate could seem nothing bigger than a pissing match outside the Tavern on the Green, the stakes are much higher when you consider that not only the ongoing value of the investment vehicles in question, but ultimately their long-term viability as technology partners to other businesses, hang in the balance.
Altucher took the offensive, writing that he would rather "run for the hills" than invest in Internet companies, in a column published by the Wall Street Journal. Why, pray tell? "Ask the best. Nobody can figure out a business model," he wrote.
Speak of the devil, many consider Wilson among the best when it comes to investing in Internet properties (although we'll have to wait awhile before the wisdom of his investment in Twitter can be judged). Wilson has a ready answer for Altucher:
And what about Amazon, eBay, and Craigslist? And international businesses like Baidu, Lastminute, Vente-Privee, Tencent, and Sohu? There are easily a dozen and probably two dozen worldwide Internet businesses that investors should own today and for the long haul.Ouch, man! The nerve of that guy to trot out facts when prejudice is much the easier route. I doubt Wilson will ever be invited to write for any property owned by Web 2.0-hating fish-wrapper Rupert Murdoch. Like his patron, Altucher simply doesn't understand the value proposition of Web 2.0 (and confuses enthusiasm engendered by the potential of the likes of Facebook and Twitter with the "irrational exuberance" over the likes of Pets.com. He also casts aspersions on Google's business model, as if a market cap of $135.89 billion were some kind of fluke, harrumphing that:
The days of infinite margins, 1,000% productivity gains, and growth of market throughout the universe are long over.I couldn't wait for Wilson to knock Altucher's hat off his head, but my heart sank when I read Wilson's rebuttal and saw that it included phrases like "transformative technologies" and "game changer." I worried that he had devolved into extoling the Internet's "cool" factor, rather than its potential to generate returns for investors (which, after all, is what both he and Altucher are both looking for):
the Internet is one of those transformative technologies that changes everything. We see it like the industrial revolution or the invention of the printing press. It is a huge game changer.Wilson admits that the full money-making potential of some of these businesses is still some time off, but fortunately, finally, gets to the nut of the biscuit:
network effects, data leverage, and scale are huge economic advantages online and if you look for businesses that have them, you can and will make a lot of money as the Internet revolution changes business, society, and the world around us. I think you have no other choice other than keeping your money under your mattress.Given Altucher's penchant for utilities and other protected monopolies, maybe a mattress isn't such a bad alternative. And some of these Web 2.0 ventures will sure fail -- that's why they call it a risk premium -- but some of them will be phenomenal success stories. Note that Cisco, once the poster child for the previous Internet bubble (with a market cap reaching $500 billion), has become one of the bedrocks of the stock market (replacing General Motors as one of the Dow 30 components). I'm hardly one to give investment advice -- my 401(k) is in the same dumpster as most everyone else's -- but in terms of pure business value, give me Amazon over Kmart any day of the week, and give me a side Facebook, hold the AOL please.
[Image source: Nicole Lee via Flickr]