For a revisionist history of the bubble

No need to be a grizzled veteran of financial markets to experience a strong sense of dejà vu. Breakneck stock rises, high volatility, stratospheric valuations: Is it the first phase of a new market bubble?
According to Karl Marx, “All significant historical facts occur twice: first time, as a tragedy, second time as a farce.” Is the current market run a farce, a laughable imitation of the great bull run, but which may end up in tears?

Future is not ours to see but we can learn from the past. Another philosopher George Santayana said: “Those who do not understand the history are condemned to repeat it.” Do we understand the bubble’s history?

I believe that the ‘conventional wisdom’ about the bubble is largely misguided. Here we would like to focus on two misunderstandings:
- The respective role of dot.coms and big corporations
- The fallacy of new business models
Dot-coms’ excesses constitute an enduring image of the bubble. Demented piedpipers, Internet visionaries led investors right off the cliff. Their attractive yet harebrained ideas, combined with the lack of operational experience led to a widespread capital destruction. This image is epitomised by books such “Dot.con” or “Dot.bomb.” Steve Case, AOL founder, who seduced Time Warner into a “merger from hell,” is the poster boy of Internet piedpipers.
It would be fanciful to deny dot.com follies and resources’ waste. This does not mean however that cyber-entrepreneurs were the only or even the biggest culprits. Stolid managers of big corporations, acting on considered advice of best consultants, provoked considerably more damage. They are not always keen to acknowledge it. In a recent Fortune article, a Deutsche Bank executive asserts smugly,”We decided that 28-year olds making $12 million dollars a year, wearing sunglasses, and appearing on CNBC were probably a bit too frothy for our liking.” Could it be the same Deutsche Bank, which tirelessly promoted Neue Market stocks and proudly announced in 1999 that it would spend a billion dollars on Internet platforms ?

Staying in the banking sector, the largest Internet project gone bad was not a work of inexperienced upstarts but of a prestigious Swiss private bank, Vontobel. Relying on expert advice of PriceWaterhouseCoopers, Vontobel spent over 120 million euros on the project, demonstrating, if need be, that the potential for specification creep and cost overrun is as large in Internet as it is in traditional IT.

This case was far from unique. Big companies have widely engaged into leapfrogging, each announcing Internet plans bigger than their peers.

Value destruction was certainly not limited to dot.coms. Telecommunications experienced a $2 trillion market value loss. AT&T contibuted mightily. Under the stewardship of Michael Amstrong, with impeccable Fortune 500 pedigree, it spent over $120billion on acquisitions. These were written off or resold for a fraction of value and AT&T seems to lost its plot.

In Europe, the company that embodies the bubble excess, Vivendi Universal, is often assimilated to a dot.com. Yet,the bulk of its capital destruction came from traditional media acquisitions not from Internet initiatives. Its CEO, Jean-Marie Messier, has been a bona fide member of the French establishment – adviser to the Prime Minister and Lazard partner.
In short, sins of traditional corporations should be given as much recognition as dot.com’s excesses in the analysis of the bubble.

One of the most widespread judgments about the bubble is the fallacy of new business models. According to this judgment, fancy notions of grabbing the eyeballs and innovative revenue-generation approaches do not work. Those who espoused them were condemned to chronic unprofitability. Once the froth has been blown away, businesses and markets would revert to traditional ways of measuring value and setting up prices.

There is just one problem with this judgment: it is erroneous. New business models are not only alive and well but spread beyond their original habitat to contaminate mainstream businesses. Many of the seemingly far-fetched assumptions of Internet pioneers proved justified.

Take Amazon, which bet the house on the power of technology to accelerate customer acquisition and lower transaction costs. Its mad rush to scale and volume led to financial acrobatics, which, according to many analysts, were not sustainable. Yet, today, Amazon is durably profitable.

Online advertising was another victim of premature burial. By late 2000, its supporters’ claims that it would revolutionise traditional advertising and offer the key to profitable content distribution were discredited. Companies such as Yahoo were drifting.

What a difference few years make! Online advertising is back and gaining market share on traditional channels. It will account for 14% of total ad spending by 2005, compared to 4% in 2001. Yahoo resumed strong growth. Advertising and other third-party revenues account for over three-quarters of the total.

Innovative third-party schemes such as paid-search clearly demonstrate their revenues generation capability.

The notion, which seemed controversial five years ago and hopelessly misguided two years ago, that the new economic and technological environment requires radically new valuation and pricing approaches, is now gaining broad market and business acceptance.

The true role of dot.coms and the premature burial of new business models are just two instances where ‘conventional wisdom’ about the bubble got it wrong. There are many others. It is time to take a second look at the history of the bubble.