Irrational Exuberance 2.0

Although I was invited to speak, I decided not to go to this week's Web 2.0 Expo. There wasn't enough value in my justifying a cross-country trip to California to attend or participate. Most of the vendors/speakers I can engage with online. In addition, there are other conferences I already have on my calendar, like Gnomedex, where I get to mingle with the digerati in the "meatspace."

Still, this morning when I woke up and began to slurp the buzz it occurred to me that I saw this movie before. Stories like this one about San Francisco 2.0 conjure memories of rooftop parties hosted by the Industry Standard. And Web 2.0 Expo feels eerily like Internet World circa 1999. We know how that movie ended, of course. I believe the same will happen to this conference within a year or two.

Now, Web 2.0 is different from the 1.0 era in many ways. This revolution is being driven bottom up by users as opposed to top-down from corporations. However, the exuberance is just about as strong today as it was in 1999. And too much hype is never a good thing. It makes big companies make big irrational investment decisions.

The economics are different today too. Dot-coms aren't exactly swooning on Nasdaq. Still, there is a venture bubble. Too many startups are getting gobs of funding (e.g. Podshow) and they won't be able to substantiate this real revenue quickly enough to appease the VCs.

The reason is simple supply and demand. While the cost of running an Internet company is a fraction of what it once was, there's a lot of competition for attention, ad dollars and enterprise revenue. The landscape is flatter. It's easier to, yes, have your lunch eaten.

Consider the enterprise space, for example. Lots of Web 2.0 startups are aiming their sails to these open waters. Some of them are run by very smart people. However, a recent study of CIOs by Forrester found that they only want to buy from big name vendors. Startups in this space should try to get a couple of customers and then sell out to the largest bidder.

Once the economy tightens - and it will, the Web 2.0 economy will cave and there will be a healthy shakeout. People will not get hurt like last time, but some will have to go back to regular jobs. I don't expect Michael Arrington to close TechCrunch and go back to being a lawyer. His costs are relatively low. But like everyone he will be forced to adapt.

So enjoy the exuberance. Bet on it, but carefully. I am just as enthusiastic as you are that we are living in a new age of communications. I bet my career on it. However, I always keep an eye on the big picture and remember the almighty business cycle. For example, Greenspan said today that global growth will help cushion the US Economy. What does that mean for your company? Think about that.

Much of the old will not be replaced by the new. For example, I don't subscribe to the fact that advertising or traditional PR/media relations is dying. It is changing, however, and Darwinism will force the marketing industry to adapt. There are lots of shades of grey.

So my advice is be prepared. Quickly adapt to technology-driven change, figure out how to capitalize on it and most importantly measure it, all while remaining a little bit paranoid. Do this and you will be fine. Just don't fall down into the irrational hole of 2.0 hype.

Comments

[Rubel Watcher]

Wow, this is refreshing to read, coming from you Steve.

[Tom O'Leary]

Of course there is hype surrounding web 2.0, and your post provides a valid critique. But there is hype in every industry and the exuberance would be similar at any industry conference from year to year. Just put a 2.0 at the end of PR, Advertising, Tourism, etc. There's always something hot on the horizon regardless of the industry. The fashion industry is but one example of a market which thrives on continuous hype of new product lines.

Like sharks, we must keep moving forward or we'll die. Sure, many of the hyped 2.0 products and services won't survive, but the spirit of innovation driving them will eventually result in some that last.

Alas, I won't be there this year either. But we can watch live via Scoble's UStream feed! Technology is cool.

All the best

Tom

[Daniel R]

Steve,

It's great to see you changing from what seemed to be "Never saw a start-up he didnt like" feeling on this blog something more sobering and refreshing.

Seeing the whole Boom-Bust cycle before, I am 100% with you. My bigger question is what exactly prompted this change in your tone? Did it start with your posting on Second Life and advertising?

How do you now feel about Twitter? ;)

[Steve Rubel]

Daniel, you haven't been reading me long enough. I skew optimistically, but I always take a harder look. So, I definitely feel like we are in a changed era but I am getting smarter by always putting things through the great filter that is economics. Being in NYC and 3000 miles from the epicenter of hype helps too.

[Mindful Entrepreneur]

Great insights, Steve!

Your comments always get me thinking on many levels, and I think you've hit the nail on the head regarding "Web 2.0 hype."

-Jason

[David Binkowski]

Welcome back, Steve. It's good to see your rational side again. :)

[Michael Markman]

When I watch ScobleShow interviews with Web 2.0 startups, there's always a hovering sense that I'm watching a slo-mo version of American Idol. Robert never cuts to the snarky judges (actually he never cuts), but I know they're out there, just off camera. One of these days, we're going to have the "Results Show."

[Amanda Chapel]

Fantastic. Good for you. Good for all of us.

Thanks Steve!

Sincerely,

- Amanda Chapel

[Adrian Ho]

Great post, couldn't agree more. Too many people will once again get caught up in the hype (although those Industry Standard parties were fun.)

You should have signed up for a virtual presentation - my company is presenting at the Expo in Web 2.0 style. www.yugma.com/stage2

[Jeremy Pepper]

This makes no sense, coming from you. Compare this post to what you just wrote last week on Twitter (PC Mag, C/Net, newspapers), and it reads as if you are hedging your bets.

Of course the bubble will burst - cheerleaders like yourself, and while you can deny your cheerleading above, it's pretty evident on this blog and Twitter, are more than a problem because there is no real skeptical look - but that's just the natural ebb and flow of business. Shit, I wrote about the bubble being back and inevitably bursting when Riya had a launch party. I wrote that it was a bad precedent, and I still stand by that statement. You remember Riya - you were all hype for that as well.

And, well, you were asked to speak on a panel at Web 2.0 Expo - let's not make it sound like you were asked to keynote, or anything.

[Ged Carroll]

Hi Steve,

Good interesting read, I think that you are right that we will see a lot of failures. In fact, Silicon Valley was built on the bones of failures and will continue to be. I also agree that there will be a market correction, but I don't think that it will be on the same kind of scale as the dot com bubble:

Sarbanes Oxley means that the IPO is no longer a realistic out for many businesses that it was. However the LSE AIM market may offer the option to European businesses and there already was a mini-burst in the online gambling sector

Funding: most businesses don't need a lot of it. LAMP (Linux, Apache, MySQL, PHP), development tools like Ruby and Amazon's mean that a start-up can be funded by scraping around with a couple of credit cards and from the family. This also means a lower barrier to entry for competitors and a lower resale value. Hence VC money required is an order of magnitude less

Fast-failure approach: take Bing as an example. This was a five-man start-up. After they did an alpha test of their product that was luke-warm and some additional research, they shut up shope and returned the capital to their investors. Contrast that with web 1.0 where bad companies were merged to make them more of the sum of their parts and VCs not having to write their investment value off

The competitive advantage in many sites is not in the code but more in the art of community management. As media companies have proven, building a social media site is not hard, building a vibrant community is the challenge.

Hotter areas: green and healthcare are both more capital intensive sectors with the promise of a big pay-day for VCs (so they don't have to refund the money including their management fee to their investors)

[LonelyBloggers]

We just put up LonelyBloggers.com for sale today, not because it failed, but as Steve mentioned -- Build it and sell it...

To compare 'right now' to the late 90's is wrong - It's fundamentally different. We put in a block of money to develop a web property and sell it. We'll do it again six months from now.

[Daniel R]

Steve,

I appreciate you taking the time to following-up with me. I've been reading your blog for well over a year, and as others mentioned here - I've always felt a sense of optimism bordering naivete on many of your blog posting.

But I guess we havnt been reading your blog close enough, as your "2006 Trends to Watch Part V: Crash 2.0" posting shows a different side.

Perhaps, I'm confusing your enthusiasm to share news about the latest finds and trends with your overall longterm outlook? Being excited about a product or service and assessing its longterm viability can be separate mindsets.

What will be interesting is what changes and what will remain the same. For example, social networks is huge at the moment, but hey Fox owns MySpace - no shifting of corporate paradigms there.

And what that, I'm gotta finish off some reports so I can go to the Web 2.0 Expo Party at the House of Shields. Who is coming? I'm reachable at http://twitter.com/danielriveong or mail@emergence-media.com

- Daniel

[Chris Duffy]

Steve,

Great Post. I'm interested in your take on Google and all the hyper-frenetic activity with them as of late.

[Jeremy David]

I've never really understood the company that establishes itself with the hopes of being bought out by a monolith. It makes me sad, really.

What ever happened to the mom-and-pop era where businesses were established to provide a services? Yes, at the end of the day those moms and pops would bring home a paycheque... but there was still the notion of providing value and service, and I value small businesses for that reason.

Do I think the Web 2.0 "bubble" is going to pop? Yes, it is. All the companies that have been established simply with the hopes of being bought out will fall. The rest - those with true intentions and sincere values - will success. Let's see if I'm right.

[Mehul Patel]

nice post, enjoyed reading it....it's pretty clear Web 2.0 or 3.0 firms with focus on meaningful services, grt +ve Cashflows and ready to adapt will do well, rest will have to more or less pack up!

[Valorie Luther]

Very well written! I felt this same way having attended one of the Techcrunch events....many will have to adjust when the pace slows!

I too believe that PR is not on the outs...it is only changing. I personally feel the change is exciting.

Nice job...great to hear your thoughts!

[Mike Abundo]

In a country dominated by neo-Luddites, irrational exuberance is the least of our worries. Around here, we geeks have to fight for the future.