Silicon Valley Strikes Again: Dot-Com Bubble Version 2.0?

Oct. 26, 2006 — -- With the Dow edging past 12,000, there's a lot of money floating around Wall Street these days. And, no surprise, the destination of choice for many looking to park their money is the Internet.

Many investors are looking to make a few bucks quickly by investing in companies whose stock price may suddenly jump -- the same sequence of events that led to the first dot-com bubble in the late '90s. And when Google laid down $1.65 billion for video-sharing Web site YouTube.com earlier this month, many analysts, venture capitalists and Web site owners likely experienced a slight feeling of déjà vu.

But experts have split on whether the big-bucks sales herald another another millionaire-generating movement in which an everyone has a chance at striking it rich, or just represents a bunch of rich folks making other rich folks richer.

"Right now, there's a buying frenzy for hot products for what's assumed to be the emerging audience for this kind of this stuff," explains Rob Enderle, president and principal analyst for the Enderle Group.

The deal for YouTube, a site with a huge audience -- 100 million video clips are viewed there every day -- but without a proven way to make money, was just one of several multimillion-dollar deals made over the last couple of years that suggest the dot-com bubble may be forming again.

Consider that last year social networking site MySpace sold to Rupert Murdoch's News Corp. for $580 million and that rumors are swirling around the Internet that the Australian media magnate is now attempting to acquire Digg.com, a Web site that allows users to submit and rate news and information stories.

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Forecaster and strategist Paul Saffo bluntly rejects the idea that we're in -- or about to enter -- a new bubble. Instead he contends that the recent megamillion mergers and acquisition deals for Internet properties are just part of a natural evolution.

"While [the marketplace] does have kind of a 'frothy' feel at the moment, that frothiness is well within the range of what we expect to see," says forecaster and strategist Paul Saffo.

"A lot of what you're seeing is what always happens: A bubble always precedes stability," he explains. "I think we're getting back to business as usual."

But there are other industry experts who believe it's way too soon to say whether or not there's a bubble, though the indicators exist.

"There have been some transactions in the last year and a half where some acquisitions and mergers were way off what the assumed market value was," claims Nicholas Economides, a professor of economics at New York University's Stern School of Business.

Among other deals, Google's willingness to write a check for YouTube -- the size of which Economides says was well over what many think the site is worth -- gives credence to the idea that we're seeing a resurgence of the same mentality that led to the first dot-com bubble.

As long as that money's there, he says companies like Google -- which actually made money off the stock-only deal, thanks to their stock taking off on news of the acquisition -- will keep looking for attractive properties to gobble up.

He also points out that it's the news that's not in the news that reinforces that point.

"There are a lot of other smaller deals with lots of money changing hands that may not be on the big board but are still happening," he says.

Saffo, on the other hand, says that if you look closely, you'll see that these deals are nothing like the ones we saw in the '90s.

"The public offering market is still dead as a doornail, and for it to be a bubble it has to be something anybody can get in on," he says.

Recent acquisitions have involved companies with leaders who've already proved themselves to the dot-com world. The founders of YouTube -- Chad Hurley, Jawed Karim and Steven Chen -- were also the brains behind PayPal, which eBay picked up in 2002 for a cool $1.5 billion.

During the ballooning of the dot-com bubble in the '90s, Saffo says, almost anyone in Silicon Valley with a big idea could find financial backing and had a chance at a winning lottery ticket.

This time around, he believes it's just the normal ebb and flow of business in which big fish often swallow up small fish to ensure more space to swim.