The ones that are still around do. But an awful lot of the startup tech companies that crashed and burned did so precisely because they didn’t have products.
And Google had their search engine for a good long time, and made it quite a success, before they started on their ads. Nor are the ads the only thing they sell: They also sell customized search solutions to businesses. It’s not nearly as visible to the average Joe, but that was their first income source, and I’m not sure it isn’t still their primary one.
[QUOTE=Google 2010 Annual Report]
Advertising revenues made up 97% of our revenues in 2008 and 2009, and 96% of our revenues in 2010.
[/QUOTE]
Not pertinent to the thread, but just a general FYI. They may be pushing for other revenue streams, but for now it’s almost entirely AdWords.
I think you’re unjustly assuming that tech is bubble prone to begin with. Two bubbles does not make a particularly convincing trend to me. Maybe if we had 10 years of rational investing between before the irrationality finally returned specifically to tech, you’d have a point, but we didn’t.
In fact, when the tech bubble of the late 90s crashed causing a relatively shallow and short recession (9/11 didn’t help), the Fed kept interest rates extremely low to prop up the economy and eventually all that free cash created a really massive global housing bubble. When that bubble popped it caused a much greater problem than the late 90s tech bubble, even just in terms of value lost in real estate - to say nothing of almost destroying our global financial system.
So in short, I don`t see how you can gloss over the much larger bubble that occurred in the middle when they seem highly related. That is, the tech bubble bursting & low interest rates left tons of money needing to be invested somewhere and it wound up in part creating the real estate bubble.
So is it really bubble-prone or is it just a coincidence?
pets.com had a product. It was a crappy product, that would never sell, but it was a product. Of course lots of start-ups got the plugs pulled before they had a product finished, but I think pretty much everyone who went public had some sort of product. Now, if by product you mean something people pay money for, then you may be right.
]quote]
And Google had their search engine for a good long time, and made it quite a success, before they started on their ads. Nor are the ads the only thing they sell: They also sell customized search solutions to businesses. It’s not nearly as visible to the average Joe, but that was their first income source, and I’m not sure it isn’t still their primary one.
[/QUOTE]
I’d have to look it up, but i strongly doubt it. They are a behemoth in the advertising market. Now, they did start as you say, but so did the browser companies, but they were smart enough to expand into an area where they really made money, unlike the browser companies. If Netscape had gotten a few pennies for every pop-up you see, think how much they would have made.
There have been other tech bubbles - for instance the minicomputer bubble, where everyone and his brother were making minis. There was the Atari bubble, and an early PC bubble. Those were characterized by too many people getting into the market, and then the market collapsing into just a few top players. Since consumers had nothing to do with these, for the most part, they didn’t get excited by these stocks and so they were pretty well contained in the tech industry.
But I definitely agree with the rest of your post - the cure for that bubble was worse than the disease.
The low level of capitalization required compared to the possible returns makes internet investment a gold mine for venture capitalists. So there’s a lot of speculation.
A lot of these companies start out with trivial amounts of seed capital in exchange for relatively large stakes in the company. At those prices, investors can afford to invest in a lot of failures so long as they hit one big success.
In addition, internet time is fast compared to the brick and mortar world. It’s not uncommon for an investment in a factory or a company with physical distribution to not see a return for years or even decades. This makes the cost of capital very high. But that new promising facebook competitor? Hell, that’ll either win or fail within a couple of years, so the cost of money is lower.
All of these things increase the velocity of money in the internet economy, which draws in investment capital. Sometimes you get too much capital chasing too few good ideas, and you wind up with a bubble.
I believe it is bubble prone for many of the reasons others have stated low barriers to entry, low startup capital, potential huge rewards, difficult to understand well enough to valuate.
I also agree with pretty much your entire post and would go so far as to say that tech bubbles are perhaps a symptom of a much greater trend in financial speculation. And I believe this trend has has likely gone on since at least the 80s as our economy has shiften from a manufacturing economy to a services one.