Om Malik says to be afraid, Very afraid...
At the turn of the century, everything went to hell with the dot-com bust. Then the pendulum started to swing the other way; the pessimism that once reigned supreme was being replaced by wild-eyed optimism. Now Silicon Valley is in for a long-overdue reality check, one that should worry one and all. Why? Because the news coming out of advertising-focused companies is not good.
He then goes on to quote negative earnings from online companies (or the online components of companies) such as ValueClick, Time Warner, Microsoft and Google.
Here's the thing, I know a little about this. One of the advantages of being pulled out to the Valley at 18, just as the dot com boom was about to bust, is that I got to see it first hand and was young enough for it to be very vividly burned into my brain.
Given that, let me tell you one thing I remember very distinctly: Companies with valid business strategies did just fine. That is the flaw in Mr. Malik's theory.
All the companies he singles out are publicly held and making profits and all the companies they service are presumably doing the same.
Lets back track just a little. To understand the bust you have to understand VCs. VCs are short term investors who aren't really all that interested in the business model of the companies they invest in. Sounds crazy, but its true.
The VCs customer is the IPO investor so they don't need to worry about the companies viability they just need to convince other people that the company is viable.
During the Dot.com boom VCs managed to build a "sky's the limit" myth around Internet companies. It was a new business model that looked like the future of everything so it was easy enough to convince people that there was no limit because, in theory, all commerce could go online.
The bust was the result of VCs seeing a recession coming and realizing they wouldn't be able to sell that myth anymore. So they stopped pumping money into companies that they couldn't resell.
But that's the important point. Those companies died because they had no other source of income. The VCs dried up and they were orphaned with no way to pay the bills. They were an economic black hole in effect, taking in money without providing anything the consumer was willing to pay for.
Which is why they had virtually no influence on the economy as a whole.
Look at the parties involved:
The VCs: Being a VC is a rich person's game. They lost, there's no doubt about that. But when your losses come out of your disposable income it really doesn't hurt much (other than perhaps your pride)
Individual Investors: Again, these companies were all in the VC phase. No individual investors allowed. Had they been public someone would have been looking at their balance sheet and asking why there was so much red being used.
The Companies' Employees: The tech industry is always running low on competent people so all those workers just went back to slightly more mundane jobs. Do you remember seeing many highly skilled computer programmers in the unemployment line? Of course not.
The Companies' Vendors: This again boils down to "companies making money" vs "companies losing money". Any vendor with a valid business plan still had customers to fall back on. Companies such as Sun didn't fly as high anymore but they didn't die out either.
So in the end the economic impact here is pretty low because the end result is just a few badly run companies going out of business. Something that happens every day in every industry regardless of the economic conditions.
So if you are a VC or a profitless company you might want to be a little afraid. Everyone else just needs to sit tight and wait out the storm.
As far as the recession, yes, its coming. But Google is not going to die, Microsoft is not going to die, even ValueClick is not going to die. Their stock will drop, for a while. But so will everyone else's stock so it won't really matter. It will be a rough couple of years for the economic world but eventually things will rebound. Like every time before.