Is Tech Bubble 2.0 in the Works?

Jeff Macke

The late 90's was a magical time in the United States. The Cold War "Peace Dividend" was burning a hole in our pocket, owning a home was still the American dream, and for the most part, citizens were fond of our deeply-flawed but undeniably smart and likable President Clinton. The country had what was called a "budget surplus" and the Internet bubble made all things seemingly possible.

I can't emphasize the last point hard enough. Everything seemed possible in the age of the bubble. Forget the worn-out derision of the completely awesome sock puppet as a symbol of the era. Pet food delivery? Pffft. There was a fully-funded company called that promised to deliver you almost anything legal in an hour. Seriously. A person could get a sandwich, a soda, and a DVD delivered directly to their desk in less than 60-minutes without even making the new kid run out and fetch it. And Kozmo was actually thought by some to be a good investment.

So don't tell me about Internet Bubble 2.0. We've got to live in the here and now and figure out a way to make money with the hand we're being dealt. To help Breakout viewers better understand the forces driving the latest round of technology start-ups, I welcomed Mark Mahaney, a top notch analyst with Citigroup, and fellow greybeard who's been covering dotcoms since 1998.

Mahaney sees three or four major drivers of growth for the next wave of the Internet. Social media is obvious. But getting less attention is anything related to mobility. This is the nuts-and-bolts backbone stuff where the real engineers and inventors are putting together the networks and devices that are going to bring a truly mobile online world to you. 4G and wi-fi are for children; mobility is about clouds, credit card-sized tablets and phones, and your basic Buck Rogers stuff being patented, squatted on, and packaged. Google's (GOOG) acquisition of Motorola Mobility (MMI) is in this broad category. Mahaney regards mobility as bigger than broadband was in the early aughts; which is to say HUGE.

But mobility is the steak. The sizzle is all about Social Media. If the current era in any way resembles the late 1990s, it's in social media. Networking of a human sort enabling cheap reservations, a faux life, and a chance to catch up with people you intentionally lost track of after elementary school is where the real lunatic start-ups lurk. Is there anything more to these companies than an overrated movie and a slew of terrible IPOs in the pipeline?

Mahaney says yes. His basic argument is that the companies of today have benefited from the lessons of the last bubble. Social media start-ups are competing earlier and more viciously with one another, leading to a Darwinian process of culling the herd before outside investors get hurt. The relatively low cost of starting a social media company means those rising to the top have already destroyed would-be competitors, making them relatively battle-tested and more investment worthy. As an obvious example, Facebook didn't become the rage it is today before it destroyed Friendster, Myspace and the Winklevoss twins' psyche.

The low costs of social media concerns also means there's less of a gold-rush mentality in the race to the IPO. A well-run social media company isn't based on the idea of losing money on every transaction but making it up in volume; it's about making money on all free-standing transactions and building a customer base of rabid users.

Facebook doesn't much need to go public. The company prints cash, can offer early investors liquidity through firms like (itself a start-up, of course), and has more than enough deep pocket VCs to fund operations long before needing to tap the public market.

According to Mahaney, the bottom-line is a higher level of companies coming to the public markets after much more thorough vetting. It's less manic fun than the real Internet bubble and it's not quite ready for primetime just yet, but this round of start-up fever is off to a much more rational start. Forget LinkedIn (LNKD) and Groupon; those looking for guys like me and Mahaney to start talking about bubbles are going to have to wait until at least the likely IPO of Facebook in 2012 before we even begin throwing around the b-word.

If you need me before then I'll be forlornly listening to my Barenaked Ladies CD and wistfully recalling my short position.

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