Umair Haque / Bubblegeneration

Sunday, August 20, 2006

Research Note: The Great 2.0 Shakeout and Why It (Really) Matters

"...Debate now centers around whether this is a harbinger of things to come. Robert Scoble thinks so. So does Dharmesh Shah. And of course, they're right. The market has no need for so many startups doing similar things."

Ah, hysteria on a Sunday evening. Let me try and clarify the economics of the shakeout.

1) When revolutionary things happen, lots of startups jump into the market. Entry explodes.

2) There is always a shakeout, because not all of these new players can make it. Just like not every rock band gets to be the Rolling Stones (ha ha), or just like not every baby grows up to be Dick Cheney (ha ha ha). That's the nature of competition.

Even if a 2.0 startup revolutionized every industry under the sun, many would still be left to go under.

3) This doesn't mean the revolutionary thing doesn't go on to be revolutionary. Let me quote you a few examples: cars, railroads, telegraphy, wireless, etc...

4) Yes, there will be a 2.0 shakeout. If only because there about 12 billion 2.0 startups in the universe.

5) The only people that will really suffer (deservedly so) are most VCs. And even that's only for a few months - then they can go back to golfing most of the time and failing to invest in all the plays that earn enormous returns. At least they're consistent.

5.5) This is not a bubble (=inflow of capital dependent on irrational expectations, or the like). This is a Long Boom. There's a big difference: Long Booms are characterized by an ongoing and fairly ruthless winnowing of winners from losers. They are marked, in other words, by the opposite of what happens in bubbles: relative market efficiency. Think railways in the 1800s, and then consider that P&G getting 2.0 and making real money from doing so is vastly more Long Boom than bubble.

To the 2.0 crowd, because no correction has happened for a year or two, it looks like a bubble. Of course, they're ignoring the massive, persistent, and thoroughly rational transfer of value from traditional media/IT/entertainment to new media.

6) Don't focus on the hysteria - focus on the cool (I'd tell you where it is, but I'd have to charge you).

-- umair // 5:43 PM // 6 comments

Comments:

awesome - could not agree more. Terrible use of the wrd bubble which is reallt the only bubble - the actual use of the term!

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Howard Lindzon // 2:27 PM

The terminology used is arbritary and irrelevant. The fact is that there are a lot of companies with no business model (again) that exist solely to be bought out by Google, Yahoo, or others. There is a lot of capital flowing into companies that won't be taken back out. There will be a lot of companies that fail. Period. In the long run, it will probably be a good thing, but there will also be a lot of cool tehnology that never sees the light.

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Anonymous // 4:14 PM

anon - predicting that startups will fail is like predicting the sun will rise - you're right but no-one's impressed.

and you're totally missing the point - web adoption has now reached a level of momentum such that any website with an audience has a potentially viable business - business models online are more obvious than they've ever been - and that the cost of getting there is now next to nothing - Web 2.0 is a low-risk, high leverage opportunity and an entrepreneur would be crazy to ignore it

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David G // 4:42 PM

Thought you would find this piece by O'Reilly (on Apple) interesting

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alberot // 8:44 PM

Howard,

That's pretty funny :)

Anon,

There is no arbitrary terminology here, perhaps you need to read a bit more econ/finance to understand what bubbles really are and aren't (or just read David's comment).

Alberot,

Thx for the link, it was an interesting article.

Thx for the comments guys.

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umair // 4:15 PM

2.0 is dead.

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Anonymous // 11:20 PM