Bubble and strife?

Tom Adams, managing director of digital agency Mook, recently received the sort of approach he has not had for many years. The caller wanted his company to work on a website for their business, but was offering an equity stake in the venture instead of paying a fee.

It was the sort of deal that was common back in 1999 when Mook first opened its doors, but since the dot-com bust of 2000 has become rare. Adams had no hesitation in turning down the opportunity. But was it an indication of what is happening more widely in the market? The sense that the internet has been running ahead of itself was strongly reinforced last week when Yahoo! chief executive Terry Semel warned that the growth in online advertising was weakening. Advertising has been the backbone of almost all internet companies, so the warning from one of the biggest online media players that two of the most important advertising sectors – automotive and finance – were weakening sent shockwaves through the online world.

Many observers in the industry who experienced the last Web boom and bust at first hand feel history could be repeating itself. With valuations soaring, they are seeing companies focusing on things like the number of people registered on a site, rather than profits. And while operations are not quite as hot as the heights of the late 1990s, when even the woolliest of business ideas got investors excited, some feel it could once again overheat.

“You can’t help but get a feeling of déjà vu,” says Toby Rowland, who set up health and beauty site ClickMango in the first boom. The company burnt through millions of pounds and hired actress Joanna Lumley to star in its advertising before shutting down in September 2000 after barely a year. “What characterised the bubble for me last time was the involvement of venture capital in pushing companies to improve their top line. I see exactly the same thing happening. We’ll definitely see some destruction of value.”

surge of interest If there is another bubble, this time it is mainly based around user-generated content and social-networking sites, rather than online retailers such as Boo.com that gained all the attention and money last time. When Rupert Murdoch paid $580m (£308m) for MySpace in the summer he legitimised the internet again in the eyes of many businessmen.

Viacom is among the most widely tipped to follow with a major acquisition, while BT has joined in with a user-generated podcasting service. Even brands like Dr Martens are developing social networking sites.

Alongside this surge of interest are suggestions that existing sites such as YouTube and Bebo should have multi billion-dollar price tags attached to them. Revenues, let alone profits, earned by many of these sites tend to be low as they almost invariably offer their services free to consumers. The hope is that a seemingly bottomless pit of advertising revenue will sustain them. But given the warning from Yahoo!, can they all survive? “We have reach and frequency, which is what advertisers want,” says Jeremy Verba, chief executive of Piczo, a social networking site with 10 million registered users. “Where the audience goes, the marketers follow. I think there have been a lot of lessons learnt from the 1990s. If there is a bubble it’s in the number of competing businesses, not the inherent value in the business.”

“There are far too many of these companies setting themselves up,” says Ken Olisa, a board member of Reuters and, during the first boom, the chief executive of Interregnum, a technology-focused merchant bank. “Where’s the money to be made in that model? No one will subscribe to these, and why would you? “The logic of the internet is ultimately one-to-one marketing. In that context, social networking sites have a big role to play, given the amount of information they have on their users. But there will probably only be one or two sites that succeed.”

As potential buyers try to identify the winners, a parade of Silicon Valley geeks are appearing on the covers of Business Week and Fortune in the US. The venture capitalists are also getting in on the act and the billions of dollars burning holes in their pockets could drive up valuations to unrealistic levels.

“Paying big money for relatively nascent companies is not necessarily representative of a bubble,” says Dan Wagner, chairman of Brightstation, which bought the technology behind Boo.com soon after it collapsed. “News that MySpace drove more traffic to shopping sites than MSN Search says a huge amount. It is a sustainable opportunity.”

Others also claim that the current crop of new businesses have a bright future. “I don’t think there’s a bubble in the sense of last time. It felt wild and out of control. I don’t think that’s the case now,” says Richard Duvall, who set up online bank Egg.com in 1998 and now runs Web-based lending exchange Zopa.

Behind much of the growth is the surging uptake in broadband, boosted by “free” service launches from Carphone Warehouse and BSkyB.

“I’m glad I’m not in the business anymore,” says Ajaz Ahmed, the founder of Freeserve, the internet service provider which provided many people’s first taste of the internet in the 1990s. “Freeserve had a sound business model – getting fractions of a penny for the time spent online. I’m not sure of the economics of broadband. It’s wrong to say it’s free; it’s not. It’s more of a package deal.”

Ahmed, who recently launched a company called Browzar that allows people to surf the Web in relative privacy, thinks the broadband market could be undermined by other wireless technologies, with wi-max having the potential to throw a spanner in the works.

sense of perspective And as Andy Mitchell, managing director of AdLink, points out, many of the sites attracting so much attention these days are not doing much that is new. Companies such as Geocities burned brightly for a short time in the late 1990s by offering personalised home pages, effectively doing what MySpace is doing now.

“We have this habit of thinking things are being invented. Community sites aren’t new,” he says. “I think there’ll be a correction in the market next year. Two or three years of 20-30% growth is not sustainable. But I don’t think it’s a frenzy like it was in the 1990s. There’s a more calculated approach to it these days.”

If he is right, the industry still has a chance to regain a sense of perspective. But in the years running up to the first internet bust, it wasn’t difficult to find people acknowledging that the growth was unsustainable. Despite that, the market kept on growing.

The market has yet to see too many of this second wave of internet start-ups making it onto the stock market, and leading to the Gold Rush-style pursuit of shares seen in Lastminute.com. And there has been no word of law firms or accountants, let alone digital agencies, taking equity stakes rather than fees from their clients. When that happens, things might well have gone too far. •