The Tycoon Report

Why the "Dotconomy" is Still Buzzing!

Off roughly 10% over the last 2 months, it becomes difficult to see the silver lining on this cloud – but believe me when I tell you that there certainly is one! It just takes a little more than surface scratching to really unlock the value in technology today.

Back in the late 90’s, you didn’t need any experience in the tech sector to tell you which technology companies would do well – Their stocks ALL did well! You could’ve literally thrown darts at a board with stock symbols on them all day and been right more times than you were wrong.

But times have definitely changed, and that’s no longer the case. We need to be a little more diligent in our research and focus on some of the larger trends taking shape around us.

We also need to tune out some of the negative news that is being thrown at us all day long – We need to look past the broad-based declines in the Nasdaq and see for ourselves if some of these tech companies are here to stay – or will they just fade away?

Obviously the Nasdaq has its bad apples – some companies are clearly overvalued. But the technology sector overall is still humming right along – albeit at slower growth rates than what many folks have become accustomed to … but this is common for every industry that’s maturing.

For example, now that most American homes have a computer, it might be difficult for somebody to see where Microsoft’s (Nasdaq: MSFT), Dell’s (Nasdaq: DELL) or Intel’s (Nasdaq: INTC) real growth is going to be coming from.

Or take some of the Internet companies as examples – companies like Yahoo! (Nasdaq: YHOO) have come crashing down from their explosive market capitalizations of the late 90’s. Many would argue that some of these outfits are still overvalued – I happen to strongly disagree, but that’s not why I’m writing on this topic today.

I’m writing this because I think it’s crucial we begin to examine to larger trends that will shape this industry – and I don’t mean shape this industry over the next 4 Quarters – I mean the trends that will shape this industry over the next 4 years. This is especially true of the Internet, or “dot com” space.

Once again the techies in the valley are partying like it’s 1999.

VC’s are doling out cash again, and publicly traded tech outfits are scooping up start-ups like they’re going out of style.

“So what’s going on?”

That’s a question I’m sure you’re asking right now. Well, let me tell you.

The web is changing again, my friend. For better or for worse (I think it’s obviously for the better) we’re entering a new chapter in how we interact with this explosive medium, the World Wide Web. And guess what … it has a cool new name … drum roll please …

Web 2.0!!!

Nobody is 100% clear on where, how or why this name was given to the loose collection of web sites and technologies that are causing all the hub-bub in VC circles these days. But the name has stuck and the sites that are being categorized as “Web 2.0 sites” are all the rage!

For instance, check the technology section of The Wall Street Journal from Tuesday. You’ll see an article about a site called YouTube.com. If you haven’t already used it, you will very soon.

Essentially YouTube.com allows people to upload home videos (or not) to their site and then share it with all of their friends for free. Then other users come to the site and view these clips at no charge.

Because the site uses open-source technology (technology that doesn’t require the site’s owners to pay money for its use) it can afford to give away many of its features for free.

With offices above a pizza shop in California, the site was originally viewed as a hobbyist or casual user site. But now the company has struck a tremendous deal with NBC to distribute video “teasers” of NBC’s fall line-up across YouTube.

This is the first major deal the company has struck, and it promises more are to come. The company is also working on rolling out its own advertisement system similar to Google’s in the coming months.

I know when I first started hearing the buzz about “Web 2.0,” I scoffed at the idea that web sites based on ad dollars were springing up again.

I thought, “Don’t these guys ever learn!?”

But I have to admit, there’s something fundamentally different about what’s happening online now.

For starters, it costs considerably less money to get an internet venture off the ground than it used to. I remember when I owned my web development firm, if a company wanted to build a site from scratch, including a system to manage content (e.g. allowing a user to post a video onto the site), and configure all the software on the servers, then I could charge upwards of $150,000 - $200,000.

Nowadays somebody could get it done for under $5,000!

See for yourself. Check out some of the sites that are connecting software developers from India and Russia with business owners here in the states … sites like RentACoder.com.

Essentially you post a project, several developers reply with a bid, you choose the one you like and deposit money into an escrow account which isn’t released until you’re satisfied with the project.

I’ve used the site several times over the last 2 years for personal projects or for clients I still consult for from time to time.

$200,000 six years ago - $5,000 today!

That’s a HUGE difference!

Operating costs are cheaper, too.

Bandwidth, storage, hardware – prices have been falling for years, and we’re at the point where I can have my own server (a server is basically a computer that’s always connected to the internet) up and running for as little as $100 per month. Back in 1999 I’d be paying closer to a few thousand!

One of the other factors that's making this version of e-business a bit different is the “Google Factor”. When Google allowed any site to host advertisements from its ad program, AdSense, it essentially gave away the keys to the kingdom.

For too long large advertising networks held sway over the ad dollars that were pouring into the internet … now Google has let everyone get in on the game.

I can have a site set up tomorrow and immediately start generating revenue every time somebody comes to my site and clicks on a Google ad. Depending on how much traffic I had, this could pay for my hosting and server costs fairly easily.

What this all means is we have companies that are no longer raising millions of dollars in VC capital and then trying to spend it all as fast as they can. These companies are starting up on the cheap, are profitable almost right out of the gate, and are attracting attention from some of the largest tech and media outfits on the planet.

For instance, three of the most popular Web 2.0 sites were acquired by Yahoo! over the last 18 months:

Flickr.com – a photo sharing site

Upcoming.org – an event promotion site

Del.icio.us – A social network that allows users to share their favorite sites.

It’s said that Del.icio.us and Flickr were acquired for roughly $30 million each (not clear on upcoming.org) – but for a company the size of Yahoo!, $60 million is a drop in the bucket, especially if they can leverage the type of traffic these sites are getting in a meaningful way.

Plenty of the other web behemoths have the same idea – Google recently acquired Writely, a maker of an online version of Microsoft Word. This site uses a special technology that makes using a web page just like running a piece of software on your own computer.

The biggest acquisition of them all was when Rupert Murdoch’s News Corp. purchased social networking site, MySpace.com for $600 million last year. Now that transaction really put the web back on the map!

There are some very exciting things going on in the world of Web 2.0. It will be interesting to see how things play out over the next few years – we might have a few “Googles” on our hands if companies like YouTube.com play their cards right.

In any case, if you were wondering where the growth would be coming from in the tech sector in the near future – mark my words my friend, this is it!