This post by leadership expert David Piccione makes a shoddy argument that we're headed for another "technology crash," an opinion he admits will be unpopular given all the "hoopla" surrounding Web 2.0.
This argument, although not new, is wrong.
Essentially, Piccione argues that outside market forces augur an impending bear market, and that this bear market will somehow be magnified through the technology sector in general and, more specifically, through businesses based on the principles of Web 2.0. By his account, the central reason for this "magnification" is that, by and large, these companies are overvalued by the VCs and private investors who have staked them.
First things first: I would readily agree that outside market forces (primarily tightening credit markets, a weak housing sector, and high energy prices) have hurt the growth of the US economy and these forces may together trigger a smaller correction in the major stock markets. That's a given. But what is not apparent to me is how and why Web 2.0 companies will be subject to a much more pronounced "crash" than the rest of the economy. In addition, saying these companies don't have value is just plain silly based on how many people (millions) use their products.
Here's a couple snippets to shed some light on Piccione's argument:
"Given the conditions outside of Web 2.0, what kind of security do we have within that will shelter us from a market correction? The truth is, our industry is speculative right now — as it was in 1999. Look at the leaders — Facebook, mySpace, Digg, YouTube. Being ad-based, each of these companies generate no income from those actually consuming the product."
What Mr. Piccione seems to be telling us here is that if a company generates revenue through ads, it is somehow less secure than if they directly sold a product or service. But that's only true if you have developed a lousy product. The companies that lost out with an ad-revenue model during the dot com bubble failed because their product was lousy, and advertisers finally sobered up to that fact and pulled their ad dollars.
Mr. Piccione, and others, need to work up a new definition of what "consuming a product" means today. It no longer requires a monetary transaction in the traditional sense of the word. People "consume" future software company will run as a cross between a media company and a software company. You offer software and related products for free, thus attracting eyeballs, and you charge people for access to those eyeballs. From there, further hybrid models can emerge, like charging for spiced up editions (Google Apps has been doing this with its premier edition, charging $50 a user per year).
In a new and open economy, companies that produce the best software will be ones that offer their services for free (or near free), find a way to subsidize it by other means (say, ads), then offer advanced functionalities on top of them that will drop additional revenue to the bottom line. Again, this is only a precarious business model if you have a lousy product or poor management or both.
A lot of Web 2.0 companies are ahead of the traditional companies when it comes to this (yes, a hackneyed example, but Google comes to mind). In addition, this model ensures that their software will be the best around (because it if isn't, you have millions upon millions of users who will tell them so).
The only bubble that will burst in the technology industry right now are companies that fail (or refuse) to see this trend and who fail to listen to the power of consumers.
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