Bubble collapses are, like, so 2001

December 7, 2005 7:02 AM

Signs of a Bubble? In a world where it makes sense for ebay to pay around $4 billion for (mostly free) internet phone service Skype, it's hard to not think that the old days of wild overvaluation are here again. Then again not everyone agrees.
posted by clevershark (25 comments total)

I read an interesting article about that by Joel Spolsky who basically claimed the reason ebay bought them was because ebay was totally incapable of writing their own software (look what happened when they tried to come up with their own paypal competitor)

If eBay could really let all of their buyers and sellers talk to each other for perpetuity, might actually be worth $4 billion in 20 years, if eBay keeps growing the way it is. On the other hand, if they knew anything about software they could have written their own code for far less money. But they can't.
posted by delmoi at 7:08 AM on December 7, 2005

This is going to sound like a dumb question, but: When eBay buys Skype, where does the money go?

If the payout is primarily in eBay shares, then the cost isn't really as high as it looks, right? And the value of the shares, to some extent, is kept in-house as long as the Skype principles remain good eBay corporate citizens. Right? So overall, these massive buyout numbers, while still kind of obscene, aren't quite as obscene as they seem.

Or am I missing something? (Finance gives me a headache.)
posted by lodurr at 7:13 AM on December 7, 2005

... as for the DarwinianWeb link, I have a nit: I really get irritated by the way people use the term "singularity." Yes, it's a singularity in the sense that you can't go back beyond it and do it over. But so was getting up this morning. So is going to get more coffee, which I'm about to do right now....
posted by lodurr at 7:15 AM on December 7, 2005

If the payout is primarily in eBay shares, then the cost isn't really as high as it looks, right? And the value of the shares, to some extent, is kept in-house as long as the Skype principles remain good eBay corporate citizens. Right? So overall,

Well, if eBay used newly printed shares to buy Skype, then they won't have to ever 'pay' anybody real money – regardless of whether or not the Skype principles (remember, there are going to be some who don't work for the company, VCs and such who are not going to be employed by eBay.) Decide to sell their shares.

If they do sell their shares, they'll take money from people who want to be invested in eBay. So all of original Skype investors have something that is worth real money, and something that eBay could have sold on the market for real money.

However, printing more shares dilutes the value of all shares, just as printing more money dilutes the value of money overall.
posted by delmoi at 7:20 AM on December 7, 2005

But the real (effective, practical) cost is still less than the $4B figure that everyone throws around, right? Is there anybody who reports estimates of the real cost? Anywhere that this kind of thing is discussed?
posted by lodurr at 7:27 AM on December 7, 2005

lodurr: ".I really get irritated by the way people use the term "singularity." Yes, it's a singularity in the sense that you can't go back beyond it and do it over. But so was getting up this morning."

When there's a term for something, it doesn't always need to make perfect, logical sense. Why is a sweater called a sweater, since other things also make me sweat? Stanislaw Ulam coined "Technological singularity", and it stuck.
posted by Plutor at 7:43 AM on December 7, 2005

Yes, but it's even a bad usage by analogy with that. It was just a bubble. Calling it "singular" is a way of excusing people for their stupidity, I think.
posted by lodurr at 7:51 AM on December 7, 2005

All I can say about this is that since Skype has moved to ebay the support service sucks. They changed passwords on bunch of people's accounts and many didn't have their e-mail anymore. I am one and have been waiting for almost a week for help.. It certainly feels like this bubble is going to suck too.

My advice: anticipate growth. Hire people help with that growth.. don't overwork current employees.
posted by thedoctorpants at 8:33 AM on December 7, 2005

Well, on one hand there's no Y2K spending and the IPO market is nowhere near '99 (or '95 even) levels, but on the other the startup infrastructure is now there and is much cheaper than before (more coders on- and off-shore, tons of free software, tons of services geared towards small businesses, more people online).

I think we're living in interesting times... in my mind the technology people are split into two groups: the "never again" people that are being extra-careful and are doing due diligence twice on every step to avoid the mistakes of the late '90s and the "please God one more bubble" people that are aiming to cash out before this bubble (real or imaginary) bursts. It's an interesting dynamic, because the bubble of '99 is still so fresh in everybody's mind...
posted by costas at 8:53 AM on December 7, 2005

The smartest people in the last bubble weren't the people who sold at the very top, in early 2000. Those were merely the lucky people. The smartest people were those who sold in the summer of 1999, who decided they didn't need to be greedy, and those who sold in the summer of 2000, who decided to get out while the getting was still somewhat good. This applies both to investors selling their interests and to workers getting out of the dot com space and back into more stable industries.
posted by MattD at 9:10 AM on December 7, 2005

Yeh, those 'stable industries' took a hit, too. I left what I thought was a bubble-contingent job in a custom-coding shop to join an actual company with really valuable products. (Spend $1.3M to implement and then save that much money in your first year of using the software? Sounds good to me! Can't say that for Oracle or PeopleSoft.) But for largely bubble-related reasons (albeit exacerbated by 9/11), that company's investors lost their nerve by Summer/Fall of 01, and they too were history.

One thing that irritated me about the bubble was the way that the big failures of irrational ventures had a general impact on rational ventures, as well. The thinking was like a drug, and as you allude, MattD, the high continued long after the burst of the bubble was clear. Hell, some people (like Kevin Kelly) still don't seem to think it actually did burst.

I'm not as bitter about it as I might seem. I think some gambles are/were worth taking. Google is obvious. Yahoo has paid off, contrary to some conventional wisdoms. Social networking -- it will definitely be hugely important, just no one really knows exactly how yet. But Skype -- it's only worth the money if there's a reason you can't do what they do without them. E.g., patents. I haven't heard that.
posted by lodurr at 9:21 AM on December 7, 2005

The 'Signs of a Bubble' article lists "The rules are different now" as the number one sign of a bubble. I wold tend to agree. But as someone who's been working in software startups (6 in eight years!) since 1996, I definitely do not hear that phrase hardly at all now, certainly much, much less than in 1999 or so.

My conclusion is that right now we're recovering from the effects of the first blowup, and people are beginning to take a little more risk again, but it's nowhere near how it was was before.
posted by tippiedog at 9:46 AM on December 7, 2005

Mergers are almost never good for stockholders. Among companies who carefully buy other companies with cash on hand, the return on investment almost exactly matches straight investment in the stock market. However, shareholders usually lose out bigtime then their company sells its own stock to buy another company. The only people who benifit from mergers are the executives, who get to run a bigger company & get paid more.

As a side note, I saw an interesting article in the Journal of Memetics (online) which tried to explain the above principle as "the merger meme benifits itself"; thus suggesting taht the executives might not be trying to rob their stockholder. But, I feel its safer to just imagine any CEO directing any merger to be a theif, maybe its time to sell.
posted by jeffburdges at 10:27 AM on December 7, 2005

Mergers are almost never good for stockholders.

But does that mean that they're bad for the company? One could argue (and this is what I was proposing above) that as you spend to bring more into the company, if you're also bringing in the entities that you gave the money to, you really haven't "lost" as much money on the transaction as you might otherwise suppose. Again, this is a thought -- I've love it if someone had a pointer to an article on this topic.

(Speaking of links, would you have one to that article?)

Another thought, perhaps relevant: The real question is not whether the stockholders actually benefit, but whether they think they will. (See, I don't disagree with your last sentence at all, really. I think the vast majority of American corporate management is ethically and intellectually bankrupt.)
posted by lodurr at 11:03 AM on December 7, 2005

Nevermind the parenthetic: Mergers and Takeovers: A Memetic Approach:

This paper constructively diagnoses problems within the current merger & acquisition (M&A) theories and provides an alternative theory of corporate behaviour. We contend that humans are the hosts for a replicating entity known as `memes'. Since finance based motivational studies on M&A activities have not established that this activity `adds value' to the acquiring firm, it is our thesis that certain managers gain power through mergers and acquisitions. Thus, M&A from the point of view of the acquiring firm can be seen as driving the evolution of ideas, shaping the flow of technology, information, and tastes rather than as `value adding'. In simple terms, managers (the meme holders) use mergers and acquisitions to enhance their power, and in gaining this power managers unconsciously provide an improved medium through which their memetic `stories' may be replicated.

The paper first introduces popular theories surrounding M&As, the motivation for M&A is developed further in an examination of the need for managerial power, we then discuss how this power struggle relates to the `battlefield' of corporate asset allocation allowing `stories' to be told and replicated, and finally we ask questions and develop hypotheses that provide direction for future research.

posted by lodurr at 11:10 AM on December 7, 2005

Yes, the bibliography to that paper is a reasonable place to find the actual work showing that current mergers & acquisitions do not add value.

Yes, companies are very good at making the stockholders think they will benifit, but this is presumably some analog of "exploitation by a parasite" (the merger meme). Anyway, I prefer to just think of the executive as a crook in the first place, but the memetic idea is quite cool too. Ideally, the memetic approach would help you work out a counter measure "epidemiologically", but I've not seen such a thing.
posted by jeffburdges at 11:32 AM on December 7, 2005

What about the housing bubble? Isn't that estimated to dwarf the size of the .com bubble?
posted by PenDevil at 12:36 PM on December 7, 2005

What about the housing bubble? Isn't that estimated to dwarf the size of the .com bubble?

The rules are different now.
posted by QuietDesperation at 12:51 PM on December 7, 2005

I find all this bubble business rather silly. After the first bubble the herd got scared of internet tech. Google showed them there was gold in them thar hills after all, and now we get the same gold rush all over again.

There clearly are some great business/innovation opportunities in the web, but then there always was. A great idea, a solid business model and a bunch of happy customers will generate a profit regardless of what the pundits say, and what NASDAQ does (e.g. Craigslist, Amazon).

The irony is that the excitement is over the exact same concepts (long tail, networking, advertising) as last time round, only with a marginally different name (web 2.0) and a lot of muttering about tags, ajax and betas.

The difference is that this time we have to pretend it really isn't a bubble, and write blogs. Oh well, just make sure you sell before everyone notices the click fraud and bullshit. I'm off to make a social networking site.

Incidentally, keep an eye on the page count of wired, as it appears to have a fair correlation with NASDAQ, and this month its a fatty.

Also read this short, informative guide to great booms and busts of history, then try to tell me this is any different with a straight face.
posted by MetaMonkey at 1:19 PM on December 7, 2005

... this time we have to pretend it really isn't a bubble....

And that's different from last time....how? (Just askin'.)

Re. the page count of Wired: Interesting observation. One time in 1999 or so, the guy I was living with at the time told me he'd read oen of my Wireds, and he was surprised to discover that it wasn't a computer magazine. "It's just a lifestyle magazine," he said, genuinely surprised.

"Of course," I said, "what did you think it was?"

Wired is a financial lifestyle magazine. It's all about consumption. That's why Conde Nast bought the damn thing. Oh, its readers think it's about ideas or some shit like that, but it's not: It's about consumption and product and being a first-adopter. That's what it was always about: First adoption. First adoption is all about consumption, after all. So it's quite reasonable to expect that their page count (which is really a measure of their advertising revenues) would track to the prosperity of consumer technology manufacturers.
posted by lodurr at 2:07 PM on December 7, 2005

Incidentally, keep an eye on the page count of wired, as it appears to have a fair correlation with NASDAQ, and this month its a fatty.

Even if that was true in the past, as soon as they became self-conscious of that fact it would no longer cease to be true.
posted by vacapinta at 3:07 PM on December 7, 2005

In an industry that has so much potential, and is really just in its infancy, of course it's tempting for people to turn things into a bubble.

Look at myspace.com. Within basically a year, with no real technological achievements, they became one of the biggest websites in the world. That can happen again and again and again, and obviously that is going to make some people crazy.

You can't expect people to be able to tell which are the losers and which are the hits, because that kind of thing is almost impossible to predict.

So, I think the nature of the medium in its current infancy is always going to stoke irrational belief that company X is going to perform thusly. But what's not irrational is that of companies x, y, z, alpha, beta, on and on and on, one or two is going to go to the moon.
posted by cell divide at 3:11 PM on December 7, 2005

...this time we have to pretend it really isn't a bubble.
... And that's different from last time....how?

I was referring to the boy-who-cried-wolf aspect, though not particularly well. I should have added emphasis maybe:

The difference is that this time we have to pretend it really, really, isn't a bubble.

I was trying to point out that a new bubble so soon after the crash makes it so much more conspicuous - last time the web was something genuinely new and exciting. The hypers and fanboys are having to really go overtime on the bullshit and doublethink to pull this one off.

The actual revenue generated by the web, I would guess, corresponds to a fairly smooth exponential curve. The IPOs, stock prices and marketing are just bad noise around a simple and evident trend.
posted by MetaMonkey at 3:12 PM on December 7, 2005

...keep an eye on the page count of wired...

Even if that was true in the past, as soon as they became self-conscious of that fact it would no longer cease to be true.

I would suggest otherwise - bubbles are sustained in many ways by the knowledge that a bubble is underway. What is good for Wired is good for the bubble, and vice-versa.

There is a feedback loop effect:

As the bubble becomes evident, tech advertising increases and Wired readership increases. This feeds the visability and viability of the bubble, which increases advertising budgets and readership, which feeds the bubble, which... (repeat until crash).

I'm sure a nifty formula could be worked out, but I ain't the type to do it.
posted by MetaMonkey at 3:23 PM on December 7, 2005

vacapinta: Even if that was true in the past, as soon as they became self-conscious of that fact it would no longer cease to be true.

The page-count of Wired is in more or less direct relation to their advertising revenues. I used to count the ads, and calculate the proportion of hte mag that was content versus ads. I tracked the page count over time, and saw it start to fall drastically right when the bubble was starting to burst. There was a temporary increase in the proportion fo content to ads, but it was corrected quickly -- presumably, as soon as they cleared their pipeline of content... Point being, observer effects would have very little bearing.
posted by lodurr at 3:40 PM on December 7, 2005