The argument this time seems to be that the entire industry will crash once it becomes clear that a large site like Facebook can't hold on to its ad revenue for more than a few years, because the fickle users can (and supposedly will) migrate to other sites.
I don't understand. If Facebook's users all left the site tomorrow, it would obviously be bad for Facebook, but the rest of the industry would break out the champagne. Users who leave Facebook don't abandon the Web and join the Amish - they go someplace else online, and the ad revenue goes right along with them. Friendster's collapse was a bad omen for Friendster shareholders, but it doesn't seem to have had any terrible effect on the rest of the social networking industry, which grew even faster once it absorbed all of Friendster's former users.
Even if it turns out that individual sites like Facebook are fads, lasting for a few years before burning out, there's no reason the industry can't adapt. Clothing styles turn over just as quickly as Web fads, but fashion designers still manage to stay in business for decades. You just have to operate at a higher level. The Facebook or YouTube of the future could be a company with half a dozen brands, rolling out (or buying out) a new brand every few years to please the latest group of teenagers. Like a TV network, or Procter and Gamble, or the Pepsi Corporation (which owns Pizza Hut and Taco Bell and a substantial piece of your local high school cafeteria.)
The real limit to the growth of ad-based sites is the number of users and their available attention - you can only show so many ads to someone in their lifetime. One could argue that the industry is funding, or is about to fund, many more ad-based companies than the ecosystem can support at the moment. But even that would not constitute a "bubble". It's just the business cycle. These companies aren't fantasies or fakes - they're just competitors, getting ready to fight for a share of some very real ad dollars.
I think it's dangerous to think that advertising dollars operate in a zero sum balloon sheltered from economic realities.
>The real limit to the growth of ad-based sites is the number of users and their available attention
Assuming the perceived value of an ad remains constant. Unfortunately, ad budgets change, and sometimes, ad spending does indeed pick up and go join the Amish.
Of course the advertising world is not a zero-sum game. In fact, the overall size of the ad market has been growing like gangbusters over the last few years.
Has it grown too much? Maybe so. It's still possible to argue - easier than ever, really - that Web ads have become seriously overvalued and that the whole industry will collapse when we figure out that the intrinsic value of the average ad is x and not 10x or 20x. That seems like a sensible theoretical approach, but Google took the fun out of the last round of these arguments by experimentally disproving them to the tune of several billion dollars, so I'm not surprised to find that theory is out of fashion and that the modern entrepreneur prefers to be an experimentalist. Darwinian evolution isn't fun for everyone, but sometimes it is the fastest way to explore.
And, yes, of course there are "economic realities". The number of users and their available attention is an upper limit to the growth of ad-based sites. In a recession we will get to explore the lower limits, and the Darwinian evolution will really kick in. But that's just the business cycle. That's not a "bubble".
A bubble is a nonlinear event in which otherwise rational people - some of the smartest people you know - choose to deliberately forget everything they know about business. They're happy to pay 2x for a company that they know is only worth x because there's a sucker down the street who will pay 5x. A bubble is where you're terribly tempted to join that crowd, because they are getting rich, while you're stuck being a middle-class Cassandra with a boring, profitable job.
What I see today is a crowd of people falling over themselves to proclaim the next bubble. That looks like healthy skepticism to me. Maybe even a bit too much healthy skepticism, like a public service ad that runs ten times every hour.
However insane their valuations may appear to us, we're still at the point where investors are debating the actual value of sites like Facebook and YouTube. It's a large, young, and unpredictable market, and even in non-bubble times there are plenty of irrational investors, so it's not a very sober debate. But rationality is still in the picture. Those who believe that YouTube has a fighting chance to become the next News Corp (another worldwide media company; $24 billion annual revenue) might well argue that buying the company for $1b is a good deal. I think that's a nutty argument, because my techie instincts tell me that there are several dozen Startup News readers who could clone YouTube in less than a month, or even a week. But, you know, I could be wrong. I was wrong about Google.
The argument this time seems to be that the entire industry will crash once it becomes clear that a large site like Facebook can't hold on to its ad revenue for more than a few years, because the fickle users can (and supposedly will) migrate to other sites.
I don't understand. If Facebook's users all left the site tomorrow, it would obviously be bad for Facebook, but the rest of the industry would break out the champagne. Users who leave Facebook don't abandon the Web and join the Amish - they go someplace else online, and the ad revenue goes right along with them. Friendster's collapse was a bad omen for Friendster shareholders, but it doesn't seem to have had any terrible effect on the rest of the social networking industry, which grew even faster once it absorbed all of Friendster's former users.
Even if it turns out that individual sites like Facebook are fads, lasting for a few years before burning out, there's no reason the industry can't adapt. Clothing styles turn over just as quickly as Web fads, but fashion designers still manage to stay in business for decades. You just have to operate at a higher level. The Facebook or YouTube of the future could be a company with half a dozen brands, rolling out (or buying out) a new brand every few years to please the latest group of teenagers. Like a TV network, or Procter and Gamble, or the Pepsi Corporation (which owns Pizza Hut and Taco Bell and a substantial piece of your local high school cafeteria.)
The real limit to the growth of ad-based sites is the number of users and their available attention - you can only show so many ads to someone in their lifetime. One could argue that the industry is funding, or is about to fund, many more ad-based companies than the ecosystem can support at the moment. But even that would not constitute a "bubble". It's just the business cycle. These companies aren't fantasies or fakes - they're just competitors, getting ready to fight for a share of some very real ad dollars.