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The new tech bubble

John Naughton

YOU MAY have noticed that there's a new technology boom under way. Let us call it TechBubble 2.0. It revolves around two axes.

One is Google, which currently dominates everything it touches. It has also caused investors to lose what remains of their marbles. On January 31, for example, the company announced fourth-quarter profits that had nearly tripled ($1.03 billion profit on a 67 per cent jump in revenues to $3.2 billion) This indicates a year-on-year growth rate of 70 per cent. And yet the main consequence of the announcement was a two per cent drop in the share price to $494, which suggests that investors had expected even better results. If this isn't bubble thinking then I don't know what is.

The second axis is user-generated content and social networking. This is the world of blogging, Flickr, YouTube, MySpace and Facebook. It's causing palpitations in multi-media conglomerates as their executives wonder What It All Means. Should they buy into the phenomenon at the inflated prices that these services currently command?

Colossally inflated valuations are an infallible indicator of a bubble. In the late 1990s, dotcom start-ups with 50 employees and zero profits were briefly valued at more than the market cap of Fortune 500 companies. In 2005, Rupert Murdoch paid $649 million for MySpace and eBay paid $2.6 billion for Skype, a VoIP [internet telephony] company. Last year, Google forked out $1.65 billion for YouTube. Such valuations provide terrific incentives for ambitious geeks because the new web services require less upfront investment than the original dotcoms. What is YouTube, after all, other than some smart software for converting every uploaded video clip into a Flash movie, plus server capacity and bandwidth? Skype adds 150,000 subscribers a day and buys almost no hardware because it uses its subscribers' computers to do the heavy lifting.

A recent Google filing to the Securities and Exchange Commission reveals how rich the TechBubble 2.0 pickings can be. YouTube co-founder Chad Hurley received Google shares worth $345 million. His partner Steven Chen received $326 million. Jawed Karim, the third YouTube founder (who left to study) got $64 million for his pains. And Sequoia Capital, the main investor in YouTube, came away with just over $500 million. Not bad for 15 months' work.

Will the YouTubes and MySpaces of this world endure? Who knows? In the meantime, the best advice for ambitious geeks is to take the money and run. —

© Guardian Newspapers Limited 2006

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