What Will Pop the Current Tech Bubble?

Back when Bill Clinton was still President, a bunch of tech entrepreneurs launched online retail Websites that quickly grew to gargantuan size. While some of these Websites had genuine staying power, just as many possessed little more than buzz and some good publicists.

Buoyed by tons of venture-capital cash, those buzzy Websites paid for Super Bowl ads and launched IPOs. Throughout the latter half of the 1990s, the stock price of most major tech companies inched higher and higher, and hundreds of engineers and developers became millionaires on paper. But it couldn’t last: the fundamentals (little things like profits) simply weren’t there. By 2001, the bottom fell out of the market, and lots of tech companies tumbled to their inevitable doom.

Twelve years later, it seems as if another tech bubble is rapidly inflating. Massive tech firms such as Yahoo and Facebook are buying up apps at ultra-premium prices—never mind that most of those apps have yet to earn anything close to significant revenues. Real-estate prices around San Francisco, a longtime barometer of the tech market’s larger fortunes, have risen to ridiculous levels. Flush with cash, tech companies are building giant offices filled with cool distractions and refrigerators stocked with free food.

Unlike the Dot-Com Bubble, which was based largely on e-commerce Websites, this latest bubble is centered on apps—and therein exists some crucial differences with what came (and collapsed) before. For one thing, those e-commerce Websites inevitably went public and saw their stock prices shoot through the proverbial roof, only to collapse once investors woke up to the fact that the fundamentals simply weren’t there. But fewer app-makers are taking their companies public; instead, most are jockeying for a buyout from Yahoo, Google, Facebook, Microsoft, or the other massive players. Whether or not you believe the current stock market is wildly over-optimistic and too high for its own good, the current crop of startups isn’t driving the boarder market.

Second, the larger tech companies—Amazon, Google, and so on—have solid business models that deliver consistent revenue and profits. They sell actual products that customers can purchase with real cash. These giants create a rock-solid foundation on which the rest of the current tech industry has risen; even if all the founders of these bubbly startups decided to go back to graduate school tomorrow, leaving the industry behind, that bedrock ensures there (probably) won’t be a collapse on the scale of what hit back in 2001.

If anything, the current bubble won’t pop so much as gradually deflate. At a certain point (if it hasn’t happened already, at least in the nascent stages), some tech giant will pay too much for an app—or a series of apps—that will grievously underperform. Either that, or there’ll be a gradual realization on the part of the tech world’s moguls and venture capitalists that all this churn in the minor-acquisitions market isn’t translating into real revenue. That could lead to a gradual and largely silent decline in the number of big deals; the tech market won’t so much implode as simply cruise along at a more stately pace, at least until the Next Big Thing comes along.

Macro-economic factors could also trigger that deflation. The tech industry is not a hermetically sealed environment; if there’s a hiccup in the broader economy, it could curtail advertising spending (the lifeblood of online firms such as Google and Facebook) and kill consumer spending (necessary for pretty much everyone else). In that case, belt-tightening among the major companies will end up strangling the startup culture.

In any case, the bubble that exists within the tech industry at the moment—where everybody and their mother is seemingly an “entrepreneur” with a startup they’re hoping to sell for big bucks to a search engine or software giant—simply can’t sustain. Everything is cyclic: a lesson that we end up re-learning again and again.

 

Image: fuyu liu/Shutterstock.com

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