Dot Com 2.0: Is another shakeout at hand?

Anyone else feel like 2012 is “Dot Com Boom 2.0″?  Consider Instagram’s market valuation around 500 million, with Facebook offering twice this amount today to buy Instagram.  Other companies I’m sure have been over-valued in recent months.  A lot of money is changing hands as these companies large and small buy each other up.

Add to it the explosion of all different types of social media, sharing and bookmarking platforms, and other online services that have come our way to make our lives a little easier.  There are too many of these, and there will be a shakeout.  Some are growing too large, too fast.

Back in the original Dot Com Boom (which I profited in–I owned stock in AOL, Amazon and Yahoo for awhile), the big companies grew even bigger, acquired smaller companies, and one day it all collapsed as the price adjusted itself to value.

If 2012 isn’t an echo of that, I don’t know what is.  Today there is more venture capital out there.  And developers now have cloud facilities such as Amazon Web Services where they can cheaply and easily deploy computing resources as needed.  All it takes now is someone with that killer idea.  Thing is, too many have killer ideas, with too much overlap.  Instagram has a nice little niche but let’s be practical: at it’s core, what is it?  A free photo sharing service.  How many free photo sharing services can coexist?  Nobody knows.  Multiply this by any other type of service (file sharing, journaling, blogging, bookmarking, etc.), and you’re looking at hundreds of companies, many of them overlapping.

Check out some of the other economics at work here.  The core of the economy is still not healthy.  The housing market is still in a rut due to an inventory glut of foreclosed homes.  Fuel prices are at a peak, which will drive up costs on everything (even food, clothing, etc.).  The dollar is dicey; the price of gold is far beyond what it was a few years ago.  Unemployment numbers are dropping, partly due to job growth, but also due to increasing numbers of workers falling from the unemployment compensation rolls and/or giving up job searches.  And there’s more.

With all the negative indicators, doesn’t it seem odd that there is essentially hyper-inflation in the tech sector?  A lot of money is flowing into these products and services, but many are not backed by a sound business model.  Have you paid to use most of these free services?  If not, who is?  We all love free stuff. Can this income from paying subscribers cover those of us who don’t shell out a single penny?  (This is called the “freemium” model, incidentally.)

It can’t sustain itself.

The bubble has to burst.  It did back in the original Dot Com bust, when everything was overvalued and the stock prices of these companies did not reflect what the companies were truly worth.  They were overvalued.  Their stock prices experienced hyper-inflation; heck, I profited from it myself.  Instagram may very well be worth every penny of $500 million, or it may not be–that is not the point here.  But how does a leisure-based photo sharing service (a free one yet) ever get to be worth more than the New York Times Co., which is over a century old?  See something wrong with this picture?

I would like to see this current Dot Com 2.0 trend continue, with young upstart companies finding success in niche products and services.  But with all the other indicators, I can’t see it going anywhere but down.  There is a ton of creativity out there, but there is too much, it’s growing too fast, and it’s overvalued.   And this could be the precursor to another Dot Com Shakeout.

The best, the most streamlined and the strongest will ride it out and survive. Big, lumbering dinosaurs will be too large to adapt quickly, and may very well collapse entirely, or need to reinvent or repurpose themselves to exist beyond any crash.

I don’t want to see any of this happen.  But if it does, don’t say I wasn’t skeptical back in April 2012…

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