December 14, 2005

Internet 2.0

From Bloomberg


Web 2.0 Won't Mean New Version of Internet Bubble: Matthew Lynn
Dec. 14 (Bloomberg) -- Tech-heads like nothing better than a catchphrase. In the past year, Web 2.0 has become the description for the new wave of technologies redefining the Internet. Type the phrase into Google Inc.'s search engine, and it records more than 20 million mentions.

Judging by what happened last time around, surely it can't be long before Web 2.0 is followed by Bubble 2.0? We are all familiar with the pattern: The technology emerges, the market heats up, a few people make a lot of money, and there is an investment frenzy.

Within a year, it all crashes and burns, and everyone goes home to try and repair their balance sheets.

This time, it may be different. Beneath the froth, there is a lot more substance. Unlike five years ago, the Internet has real sales and advertising revenue creating real businesses.

``It doesn't feel like a bubble to me,'' said Julie Meyer, founder and chief executive officer of the Internet investment firm Ariadne Capital in London, in a telephone interview. ``There is a new wave of technology and media companies emerging that are delivering audiences and revenues.''

There is plenty of evidence to show that within six months we'll all be wearing chinos, sitting around sipping lattes, and discussing how we've just quit our jobs to start our new Internet or podcasting venture.

The Internet is back in vogue, and lots of big companies are jumping back on the bandwagon, armed with open checkbooks.

EBay's Skype

In October, EBay Inc. completed its $2.6 billion acquisition of Luxembourg-based Skype Technologies SA, whose technology allows people to make free voice calls over the Internet.

This month, Yahoo! Inc. bought New York-based Del.icio.us Inc., an Internet service that lets people share their Web bookmarks. The business was founded in 2003 and employs nine people.

The old media companies have also started snapping up small Internet firms. In September, Rupert Murdoch's News Corp. completed a $580 million takeover of Los Angeles-based Intermix Media Inc., which operates Web sites such as the popular MySpace.com.

Earlier this month, U.K. broadcaster ITV Plc agreed to pay as much as 175 million pounds ($310 million) to acquire Friends Reunited Ltd., which operates a Web site that helps you track down old school friends. And Daily Mail & General Trust Plc, which publishes the Daily Mail newspaper, this month agreed to pay 48 million pounds for Fastcrop Plc, which operates the primelocation.com Web site, where real-estate agents can list their properties.

``If you look at a lot of these transactions, who is to say it is too much money?'' Meyer said. ``A lot of these businesses have been baking for seven or eight years.''

Three Differences

There are three main differences between the boom in Internet acquisitions this year and the bubble that developed in 1999 and 2000.

First, there are real sales out there. Take the U.K. market, which is fairly typical of developed economies. A Deloitte & Touche LLP survey this month found more than half of British consumers will do some of their Christmas shopping on line this year. In 2004, about a third used the Web to buy gifts. In the run-up to Christmas, shoppers will spend 150 million pounds a day on line. Whichever way you look at it, it is a huge and growing business.

``The big question is what percentage of all retail sales are going to end up on the Web,'' said London-based Deloitte & Touche partner Richard Lloyd-Owen in a telephone interview. ``We think it will be about 10 percent, which would be another doubling from where it is now.''

Start-Up to Consolidation

Next, there is a generation of companies set up during the first wave of Internet start-ups. They are now four or five years old and looking like well-established enterprises with solid revenue. It isn't surprising that they are now being sold. All new industries move from a start-up phase to a consolidation period. The Internet has reached the point where some of the founders are now turning the assets they have created into cash.

Lastly, the old media companies are frightened -- and with good reason. The increase in Internet advertising spending is draining money from established newspapers and broadcasters. They can see their businesses under attack and are trying to position themselves in newer, faster-growing media. ``I don't know anybody under 30 who has ever looked at a classified advertisement in a newspaper,'' Murdoch said in a recent interview with the U.K.'s Press Gazette.

When an astute strategist like Murdoch says the old media is in trouble, everyone takes notice. The figures back him. In the third quarter, Internet advertising expenditure in Britain grew 47 percent compared with a year earlier, according to the U.K.'s Advertising Association. Spending on advertising in national newspapers declined 8 percent, the London-based group said.

Interest vs Profit

That isn't to say that prices aren't rich. Daily Mail & General Trust's purchase of Fastcrop is one example. Fastcrop had a pretax profit of about 500,000 pounds in 2004. Considering that 48 million pounds could earn about 2 million pounds just by sitting in the bank, the acquisition price was a lot of money. It will have to at least quadruple that profit figure to make the deal pay. Then again, who is to say that isn't possible? It certainly won't be any harder than reversing the relentless decline in newspaper sales.

Nobody should rule out the possibility of Bubble 2.0. Capital markets are good at overshooting. Exuberance is their natural state. And yet, there is far more substance to this Internet boom than there was to the last one. It may turn into a bubble, but it has a long way to go before then.

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