Defrag Blog

Because I’m a sucker

by Eric Norlin on Aug.02, 2007, under defrag "theory", general

My oh my, turn on the blogosphere this morning and what do I find? A serious brouhaha brewing and boiling because Dvorak went and wrote the tiresome, “Bubble 2.0″ (”we’re in one and it’ll end badly”). Go read all of the techmeme links if you want the full skinny — including folks like Fred Wilson correctly pointing out that you can’t be near the popping of a bubble if everyone’s walking around talking about it.

Now, with my prior caveats firmly in place, I wanted to offer up some contextual thoughts because, as mentioned in the title of this post, I’m a sucker:

1. Long live the echo chamber!
I have yet to see one piece that mentions “bubble 2.0″ in a larger economic context. Scoble’s talking about how John’s got the wrong bubble. Marshall’s slappin’ John down. Lots of folks are piling on. And not one comment has been made about the housing market, sub-prime (and prime) loan problems, 75 dollar oil, a fed that claims to be still leaning toward tightening, private equity bubbles — nothing! Apparently, lesson #1 of “Bubble 2.0″ is that the entire twitter-facebook-youtube-google driven mess lives in complete isolation. ;-)

2. So, how about some context?
Ahem. By any objective measure, the economy has been doing quite well the past few years. In that time, a bubble did form — in the housing market. And that bubble is now bursting. Bad. Notice, though, that *that* bubble doesn’t seem to be dragging down the entire economy. In fact, it is probably serving as a nice drag on what would be normal inflationary trends. Further, that drag may lead to the Fed *easing* rates sooner than would be their normal inclination.

Lesson: for the past several years, the economy was growing. The economy has actually been slowing, and in a context larger than silicon valley, is on the verge of touching zero growth (especially in places like Florida). This is all healthy — and will ultimately provide the foundation for when “bubble 2.0″ does occur. That is to say that as the economy picks up steam again (2008), it will serve as a real booster to the already fine technology industry.

(I’ve left oil, etc out of the above point for simplicity’s sake.)

3. Bubble? How do we know?
Economies are cyclical. Industries (no matter how innovative) live within economies. “Bubbles” are natural parts of cyclical economic movements. Are we in a bubble? Good question. Most economists will tell you that we’re most certainly in the strongest global economic growth cycle in the last 40 or 50 years. That larger mega-trend, when combined with the about-to-recover U.S. economy, provides the larger economic backdrop for the whole “web 2.0″ movement.

The last “bubble” occurred around public equity markets, as they provided the liquidity and transparency needed to really drive a mass bubble. I remember knowing it was bad when *everyone* I met was becoming a stock broker and/or day trader. People were quitting their jobs to “live off of trading.” That was the backdrop for the last bubble.

Will we see something similar this time around? I’d bet so. And I’d also bet that we’ll be hearing the “this time its different” refrain again.

Will this bubble be bigger than the last one (as Dvorak alleges)? Well, if the global economic expansion (and the big wave of baby boomer retirement spending) is any indication — yes.

4. Are we close to busting
Let me go out on a limb here (that’s sarcasm), not even *close*. Judging by the cycles, the articles, the worry, I’d guess that we won’t see an actual “bubble” pop until some time that’s 24-48 months from now. And, as Phil as said many times, you can’t plan more than three years out (for anything). In other words, we’re not there; we’re two years from needing to worry about it; everyone go back to work.

5. What is important
Really good innovative ideas *occur* during bubbles and come to material reality in the aftermath of the bubble (the bust). That’s why the whole “defrag” topic is a 10 year cycle. We’re at the very beginning of really cool ideas, and we won’t see the fruition of it all for another 8-10 *years*. What’s important in a bubble? Finding the rare nuggets of real innovation and nurturing them through the tough times.

Enough brouhaha…

16 comments for this entry:
  1. Marshall Kirkpatrick

    Smart post, much appreciated. I’m afraid I’ve got to admit, I don’t feel qualified to comment on the economy in general. I only know about the internet and a few other parts of the world with little connection to big picture economic forcasts. None the less, I think the internet is here to stay and do feel qualified to write at length about that. Perhaps that’s total bubble talk but so far I’m not convinced of it. This post does come close though!
    best,
    Marshall

  2. More on That Bubble 2.0 Topic : Venture Chronicles

    [...] Eric writes an interesting post about the Dvorak "we’re in a bubble and it’s gonna pop" dustup. [...]

  3. I, Platform » Blog Archive » Blogger A-Listers and the *Blogger* Bubble 2.0

    [...] Here’s the best post to read: Eric Norlin weighs in on the so-called Bubble 2.0: “And not one comment has been made about the housing market, sub-prime (and prime) loan problems, 75 dollar oil, a fed that claims to be still leaning toward tightening, private equity bubbles — nothing! Apparently, lesson #1 of “Bubble 2.0″ is that the entire twitter-facebook-youtube-google driven mess lives in complete isolation.” [...]

  4. dave mcclure

    wow. finally some thoughtful analysis (aside from Marshall’s informed ripping of dvorak). nice work.

    i didn’t bother writing about housing market / other stuff, altho to be honest i’ve been scared about that one for a looooooong time. sold my condo in SF in 2003, and been renting in silicon valley ever since. (altho i did buy a much less expensive home in western MD that my mom lives in).

    i’ve often wondered whether the potential / eventual housing market bubble pop (or soft landing?) could have carry-over impact to the tech market. my guess is that it might hurt individual workers in silicon valley, and possibly impact consumer spending at large, but that it won’t have major long-term impact on large tech companies whose revenues come from consumer advertising & e-commerce (it will have impact, but it won’t crush them… at best it might slow their growth).

    given as i’ve said on my dvorak is an idiot post that it’s the M&A activity of these companies which fuels investors & startups these days, then i’d say that even a housing market bubble burst won’t disrupt the ‘Web 2.0′ movement all that much. large tech companies will still buy small tech startups, which means investors will invest and startups will startup.

    still, very insightful piece & i love the cross-market industry perspective. nice job :)

    - dave mcclure
    http://500hats.typepad.com/

  5. Eric Norlin

    tks dave. glad to have you reading ;-)

  6. Paul

    “None the less, I think the internet is here to stay …”

    Bubbles bursting != Internet disappearing
    Bubbles bursting != underlying technology disappearing

    It does mean lots of stupid “We’re Web2.0 too!” wannabes disappear, thankfully. I think that’s the point here, not whether there’s a technology trend here or not. In true Usenet style shooting the messenger is way easier than rational discussion. Which is probably the biggest challenge to UGC in the first place. Try having a debate about the “cult of the amateur” - and watch yourself getting shot down, by, well, a bunch of amateurs…

  7. Dave Hodson

    one thing to think about regarding housing and its’ impact - access to capital still drives Silicon Valley. As the exposure to housing defaults increase, credit tightens. If we see some large margin calls (like here — http://www.smartmoney.com/onedaywonder/index.cfm?story=20070730&afl=yahoo) we might see access to capital decline. This would have a direct impact on startups.

  8. Webomatica

    Agreed. Tons more people have homes than investments in Web 2.0. I would actually be more worried that the housing bust starts impacting the economy at large and taking Web 2.0 down with it, than Web 2.0 popping its own bubble.

  9. Dvorak on Bubble 2.0| Zoli’s Blog

    [...] Silicon Alley Insider, CrunchGear, A VC, CostPerNews, MYBLOG by Ouriel, JD on EP, Marshall Kirkpatrick, Master of 500 Hats, Business Week, Ajaxian, rexduffdixon.com, Don Dodge (gotta love this:” The real bubble that is bursting here is Dvorak’s influence“), Venture Chronicles, Scobleizer, the Constant Observer, Socialtext, Defrag, Industry Girl [...]

  10. Real Weather Comes To Virtual Football

    [...] But perhaps the most convincing is Erin Norlin, at the Defrag Conference blog: I have yet to see one piece that mentions “bubble 2.0″ in a larger economic context. Scoble’s talking about how John’s got the wrong bubble. Marshall’s slappin’ John down. Lots of folks are piling on. And not one comment has been made about the housing market, sub-prime (and prime) loan problems, 75 dollar oil, a fed that claims to be still leaning toward tightening, private equity bubbles — nothing! Apparently, lesson #1 of “Bubble 2.0″ is that the entire twitter-facebook-youtube-google driven mess lives in complete isolation. [...]

  11. dave mcclure

    @Dave/Webomatica -

    hmmm… i don’t think so. access to capital for VCs has not been a problem… in fact, quite the opposite — even in the downturn years, there was ton of capital INflow into VCs. however, the problem was the VCs weren’t spending / investing much of it between 2001 and 2004, since THEY COULDN’T SEE ANY EXITS. as soon as they started to see some light at the end of the tunnel — the Google IPO, several other smaller M&A deals — they went back to investing.

    given that most of VC firms capital comes from pension fund & private institutional investments, those entities asset allocations are set WAY ahead of when funds get distributed. and for most of them, private equity (= VC + other stuff) allocations are probably set somewhere around 2-6% of overall assets.

    so while again i’m sure there’s impact, i kind of doubt that VC funds are based on credit markets or housing markets.

    INFLOWS to VCs are based on asset allocation for large pensions & institutions, and in general they don’t fluctuate very rapidly at all… much like stock vs bond asset allocations probably don’t fluctuate much from avg allocations.

    OUTFLOWS from VCs are based on perceived market liquidity & exist 2-5 years hence… thus if VCs see stuff getting bought and/or IPO, they’ll keep investing. should the M&A market shut down, then they would likely stop. but i don’t see M&A activity slowing down anytime soon.

    - dave

  12. links for 2007-08-04 — EXCELER8ion | People ARE The Social Media

    [...] Defrag blog » Because I’m a sucker Really good innovative ideas *occur* during bubbles and come to material reality in the aftermath of the bubble (the bust). That’s why the whole “defrag” topic is a 10 year cycle. We’re at the very beginning of really cool ideas, and we won’t se (tags: Dvorak bubble2.0 bubble-2.0 innovation) [...]

  13. Dave Kearns

    Here’s what your overlooking, though, Eric - at least bubble 1.0 had a business plan even if it was only selling 50 lb bags of dog food. Bubble 2.0 - and most of web 2.0 - has none. Oh, there is an exit strategy as you’ve noted (the winners from bubble 1.0 will buy up the newbies). But there’s still no way to actual show profit from the web 2.0 properties. Mostly the mantra seems to be “we lose a $1 for every new member - but we’ll make it up in the volume.”

    But the bursting of bubble 2.0 will seem like a tiny burp when the Google bubble bursts…

  14. Dave Kearns » Bursting the bubbleheads

    [...] Poor John Dvorak. He’s only been writing about, and accurately foretelling, the story of computing for over 20 years. But he recently had the temerity to suggest that another internet bubble is about to burst. He cites the proliferation of so-called “social networking” sites, video-sharing sites and alludes to the eventual crash of Google’s ad-supported search philosophy. He is, of course, instantly attacked - especially by those too young to have suffered through “bubble 1.0″ (less than 10 years ago). One of the more thoughtful disputations was mounted by my friend Eric Norlin (”Because I’m a Sucker“) but even he overlooks the primary reason for the upcoming burst while alluding to it as a benefit: “The last ‘bubble’ occurred around public equity markets, as they provided the liquidity and transparency needed to really drive a mass bubble.” This next bubble will be driven in the same way, but via the Merger & Acquisition market. Google, for example, whose stock is already so vastly overinflated that it alone could fuel a bubble burst, continues to buy up new ventures whose sole business plan is “let’s do something catchy then sell out to Google, or Yahoo, or whoever bids highest.” None of them, from MySpace to Flickr have the remotest concept of a path to profitability - but that doesn’t stop the portal players from throwing money down their drains. In just a couple of years Dvorak will have been proven prescient once again. [...]

  15. Defrag blog » Liquidity concerns and the tech industry

    [...] A few days ago, I addressed the “bubble 2.0″ talk. One of the comments that came up in response to my post was that the tech industry could get hurt as the mortgage woes and the credit crunch spread to consumer spending and bank lending (respectively). [...]

  16. In Anchor » Dvorak Dupes ‘Em Again

    [...] But perhaps the most convincing is Erin Norlin, at the Defrag Conference blog: I have yet to see one piece that mentions “bubble 2.0″ in a larger economic context. Scoble’s talking about how John’s got the wrong bubble. Marshall’s slappin’ John down. Lots of folks are piling on. And not one comment has been made about the housing market, sub-prime (and prime) loan problems, 75 dollar oil, a fed that claims to be still leaning toward tightening, private equity bubbles — nothing! Apparently, lesson #1 of “Bubble 2.0″ is that the entire twitter-facebook-youtube-google driven mess lives in complete isolation. [...]

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