Marcus Cake

This article is intended as an update to the previous articles Another bubble in technology through to 2010 and Update: Another bubble in technology through to 2010 .

The .NET boom

A number of articles have been written suggesting that the boom may have already begun. We can see high valuations, stock recommendations, new ways to value companies to justify high valuations on conventional metrics. However, this time we have underlying demographic drivers that provide greater substance.

A few comments from the article “The boom is back:Net companies are on fire again. Here’s the smart way to invest without getting burned” (19th April 2006) have been extracted for your convenience. It is a long article and I recommend that youtake the time to read the original.

“But brace yourself–it’s time to say hello to the new Net boom. And believe it or not, it’s a boom you’ll very likely want to invest in–even if you think (as we do) that Google (Research) at $400 a share is too scary to consider. The Internet, as you well know, didn’t vanish along with all those dubious dot-coms. While shell-shocked investors were licking their wounds (or trying to make back all their money by flipping condos), folks in the Internet industry kept right on dreaming up new ways to use the revolutionary technology that created the fuss in the first place.”

“Those speedy connections have supercharged the online experience, and people are doing exactly what you’d expect: spending vast amounts of time with their eyes glued to computer screens. More important, companies have finally figured out the long-sought key to “monetizing” those eyeballs, mainly by selling advertising, but also by charging for music and video downloads, not to mention for the access itself.”

“The not-so-surprising result is that the Internet industry isn’t just back, it’s better than it was before.”

“In Boom 1.0, any company with buzz and a business plan rushed to go public long before it had any profits. Now standards for IPOs are higher. And with tough reporting requirements imposed by the Sarbanes-Oxley corporate-governance law, fewer companies are even attempting to go public.”

“Another crucial difference for investors: Today’s Net stocks are far more reasonably priced than the highfliers of the dot-com era. For instance, at $400, Google trades for about 33 times Wall Street’s estimates of 2007 earnings of $12 per share. That’s rich but hardly stratospheric. Compare that with shares of Internet Capital Group, which at their peak in 2000 traded for well over 400 times the company’s 2001 sales.”

This article suggests that the boom has started. The article was a very interesting read. My mind was very quick to question the motives of the author. This is, perhaps, a byproduct of the previous technology boom. If the primary purpose of the article is to highlight an emerging trend, then it is an invaluable read. If the purpose of the article is to justify current stock valuations, then the analysis is a fraud.

Real drivers

If there is a boom emerging, it is likely to based based around more rigorous financial analysis. There may be “inventive” valuation techniques, but they will have more substance than the previous boom. There will be real drivers for the coming boom. Some of these are highlighted in “The rise of online social networks” . The other drivers of this boom will be emerging signs of consumers will to pay for online subscriptions, classifieds and other content.

Online subscription and classified revenue is growing

Consumers are willing to pay for internet content. Over the last few years, there has been a view that internet users expected everything to be free. We are beginning to see consumers that change. The article Paid Content Growth: Sky’s the limit, ECommerce times, 20th April 2006 offered an insight into this change.

“Last year saw spending on paid Web content in the U.S. alone top $2 billion for the first time ever, a 15 percent increase over 2004. Many are predicting a long horizon of continued growth as the way people use the Internet to get news, information and entertainment continues to evolve.”

“All signs point to very strong and steady growth for paid online content,” said Horan. “In each of the last five years, we’ve seen record revenues and record numbers of consumers paying for content. With only 12 percent of the total Web population purchasing online content, enormous opportunity for growth continues to exist.”

“The establishment of micropayments is seen as a key development in the online payment world. Even though the OPA says subscriptions remain the dominant online content pricing model, it said revenue from single payments jumped 61 percent last year and now make up more than 20 percent of all online paid content.”

“Such small payments have long been seen as a stumbling block in propagating more paid content use by consumers. That people have begun to get comfortable using credit or debit cards, PayPal or other online payment services to buy music downloads or play a round of an online video game bodes well for the future, especially as more content is available through mobile handsets, said In-Stat analyst Neil Strother.”

How will .COM be different from .NET

With high broadband penetration to empower consumers, open software to empower entrepreneurs, we may be on the verge of the .NET technology boom. The .NET technology boom is likely to be different from the .COM boom. Investment capital is likely to be allocated more efficiently and less investment capital will achieve quality outcomes. I will be devoting some more thought to this and will post another article.