The Next Bubble

I know a little about Web bubbles.

From 1996 to 2002, I was the editor of Red Herring, a magazine the Wall Street Journal dubbed the “bible of the boom.” We described the startups of the first bubble, explained their innovations, and chronicled their wonderful capacity for “wealth creation”–our polite shorthand for the fortunes their investors and employees made on a speculative stock market.

While we issued stern warnings about financial euphoria, we profited from it, too. By the middle of 2000 we had some 500,000 enthusiastic readers. Every month, we published two issues of more than 600 pages, whose editorial content was written by expensively recruited journalists from Forbes and the Journal, and whose ads were bought by startups keen to announce their existence, technology vendors frantic to sell products and services, and investment banks eager to brag about the public offerings they had underwritten. It was big business, at least for publishing: in the first six months of 2000, we earned more than $100 million in circulation, advertising, and sponsorship revenues.

But when the bubble burst in March of 2000, our advertising vanished. By the end of that year, we’d reverted to publishing a single, slim issue once a month; then we fired hundreds of employees and closed our offices in London and elsewhere. By the end of 2002 we ceased to exist. Today, it’s all gone: the magazine and website now published under the same name by Alex Vieux, who bought all our assets for a little more than $100,000, has only a tenuous relationship to the bible of the boom.

Red Herring’s experiences were repeated in centers of technology everywhere. To those of us who lived through those times, the Web 2.0 ventures of 2008 seem painfully reminiscent of the Web companies of 2000. In his superb 1990 book A Short History of Financial Euphoria, the late John Kenneth Galbraith describes the common characteristics of a speculative mania:

“Some artifact or some development, seemingly new and desirable–tulips in Holland, gold in Louisiana, real estate in Florida, the superb economic designs of Ronald Reagan–captures the financial mind or perhaps, more accurately, what so passes. The price of the object of speculation goes up. … This increase and the prospect attract new buyers; the new buyers assure a further increase. …The speculation building on itself provides its own momentum. … Something, it matters little what, triggers the ultimate reversal.”

The new development in 2000 was the Web’s alchemical ability to make markets for books, software, or stocks more efficient. In 2008, it is the collaborative, social functions of Web 2.0 that excite investors. The trigger for the dot-com collapse was multibillion­-dollar sell orders for bellwether tech stocks that were processed simultaneously soon after NASDAQ reached its high of 5132.52 on March 10, 2000, leading to an unprecedented selloff. Today, the collapse of the housing market and its derivative securities might close the market for initial public offerings and so discourage further investment in Web 2.0 ventures. The Web companies of both eras, however, reveal the same structural problems: they have no clearly understood business, but float on investors’ capital and hope that getting big quickly will lead to profits.

As Bryant Urstadt explains in “Social Networking Is Not a Business”, last March Microsoft bought a 1.6 percent stake in Facebook for $240 million, giving the social-networking site a notional valuation of $15 billion. Yet according to Mark Zuckerberg, the company’s chief executive, Facebook will lose $150 million this year. Similarly, Google paid $900 million in 2006 for the right to deliver ads on MySpace, the largest of the social networks, for three years–but Google says the results have been disappointing. So far, no one has much idea what will do for Web 2.0 what keyword advertising (the source of most of Google’s 2007 revenues of $16 billion) has done for search.

I am ambivalent about bubbles. On the one had, they are tremendously destructive–of capital, but especially of human labor and creativity. When I think of how we toiled at Red Herring–how for years it seemed quite normal to work 14-hour days six or seven days a week–I wince. I still feel wounded.

On the other hand, speculative manias are an apparently inescapable feature of our entrepreneurial capitalism. “America, from its inception, was a speculation,” Aaron M. Sakolski wrote at the beginning of his 1932 classic of economics, The Great American Land Bubble. I know that the railway, automobile, and airplane industries were all built in fits of speculative excess. Most of the companies of those eras no longer exist; but the best are still around. Similarly, I remember that the best of the dot-com companies survived the crash and continue to influence our lives.

When I survey the future of the Web (which we describe in this month’s special issue), I feel confident that the best of the Web 2.0 companies will weather the inevitable correction. But I confess that I feel sorry for all the entrepreneurs, as young as I was in 2000, who must suffer their bitter lessons. Write and tell me what you think at jason.pontin@technologyreview.com.