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Rory Cellan-Jones

Technology - is the party over?

  • Rory Cellan-Jones
  • 28 Sep 08, 08:52 GMT

My job for the last couple of years has been to cover technology stories for the BBC on TV, on radio and on this blog. But before that I spent many years as a business correspondent, covering stories from the late 80s housing crash through to the battle over the ownership of Marks and Spencer. In recent weeks, as the financial crisis deepens, I've been called back to my old job from time to time.

Workers in the City, LondonAnd what I've found is that the contrast between the mood music in the City and that in the web 2.0 world could not be more pronounced. In the former, the frenzied festival of lending and borrowing is over, the band has gone home, and many of the guests are being sick in the bushes.

In the technology world, however, shiny new business models are unveiled by the day, companies boast of raising millions in new capital despite still being "pre-revenue", let alone pre-profit, and you can find a new networking event every night of the week where entrepreneurs and venture capitalists circle each other in an intricate mating dance.

But perhaps, just in recent days, the music has been slowing down. Over the weekend, the tech community was circulating an e-mail from Jason Calacanis, a noted web entrepreneur and blogger, who is predicting that the collapsing US economy will kill between 50 and 80% of start-ups over the next 18 months. This unsurprising verdict - after all most start-ups do fail - nevertheless resulted in heaps of ordure being poured upon his head by those who take a more optimistic view.

But what worries me more are the echoes I'm hearing from the last dotcom boom and bust. Back in the summer of 2000, as technology shares started heading south, everyone I met in that world thought this was a very healthy phenomenon. The entrepreneurs told me that there had been far too many crazy ideas around, and that they would now find it easier to get a hearing for their eminently sensible business plans. The venture capitalists said they still had a pile of cash from investors, and as valuations were now looking more sensible they would be able to deliver better returns. And the investment analysts said that, now some of the froth had been blown off tech share prices, the market would settle down. They were all misguided of course - shares continued to plummet, dotcoms died by the dozen, and we had two or three years of nuclear winter for technology entrepreneurs and investors.

The same kind of wishful thinking has been apparent in the last few weeks, from the new media headhunter who told me that clients were still desperate to recruit the right people, to the technology start-ups who insisted that events on Wall Street or at Canary Wharf would not affect their ability to raise cash. Similarly, major technology businesses like Intel and Dell started the year telling the world that they were well placed to weather any general economic downturn.

But over the last month the stockmarket has begun to question that rosy view. Shares in Apple are down by more than 25% in September, Nokia has tumbled by a similar amount, and the FTSE Techmark index - measuring leading UK technology shares - is down more than 10% in the last four weeks.

Ah, but things are very different from 2000, according to the optimists. This time around we are talking about companies that have got a proven business model, with surging online advertising now providing a solid foundation for the web economy. That may be true for the likes of Google, but are we quite so sure that hard-pressed advertisers will provide enough dollars to fund all of those web 2.0 companies that have no other visible means of support? And wouldn't it be better if a business like, say, Facebook was going into this downturn having proved that it could generate soaring revenues as well as plenty of traffic?

It does seems unlikely that the bubble will burst in quite the same way as it did last time. After all, the hot money that went into dotcoms in the late 90s went into the housing market rather than technology this time around.

But harder times are definitely coming, and I'm a bit worried about one possible casualty of any deep downturn in the technology industry. Early in 2000, my BBC bosses briefly made me internet correspondent, just as the dotcom madness neared its peak. By the end of the year they had decided that the internet was "over" - as a story at least - and sent me back to the business beat. Let's hope that history does not repeat itself too exactly - and that my bosses aren't reading this.

UPDATE

I wrote this over the weekend, with the markets closed. Now, after another very scary day. for the world economy, it is 2130 on Monday. The FTSE and the Dow have both seen very sharp falls. But look at the NASDAQ - which measures technology stocks. Down even more sharply - over 9% on the day. Apple's shares fell by 17%. Far from bucking the gloomy trend, technology shares have performed even worse than the rest of the market.
And no, I'm not saying that innovation will stop or that good new technology firms won't still break through - in Web 2.0 and other areas. But it's hard not to think that the climate for start-ups is going to be pretty tough for a while.

Comments

  • Comment number 1.

    Rory, if you really are taking Jason Calacanis seriously, then you need to hand in your journalism gun and badge.

    He's a hack, and is generally considered one by the internet community at large. The tech community in California and Toronto know he is a rude, obnoxious joke of a failure.

    He got lucky selling Weblogs Inc. to AOL Time Warner, ran Netscape till it died a death, then founded Mahalo, which has been such a hit, hasn't it? Oh wait... No, it hasn't.

    Oh and I note that Calacanis is "entrepreneur in residence" as Sequoia Capital. You as a journalist should have made a note of this too. Especially when you look at the recent history of the company. He might be talking about his own company deciding they've made too many risky ventures into companies like LinkedIn, Meebo, Funny or Die and Amobee Systems, none of whom have a real working, successful and profitable business model.

    Sequoia make money out of risking venture capital on a company, to sell it off to Google, Yahoo, Microsoft et al at a massive profit. That model of Web 2.0 startup died at least 18 months ago, and Calacanis is rightly worried about it, for himself.

    He's just trying to infect everyone else with the panic, where it really isn't due just yet.

  • Comment number 2.

    Rory, It sounds as though you're a bit of a party animal. Maybe you should think of the neighbours, and spend a bit more time holding certain people to account.

    Btw, what about green technology? That party is just getting going, and the neighbours certainly aren't complaining.

  • Comment number 3.

    Isn't Calcanis pointing out the obvious: lack of speculative cash will mean more start ups will fail? A quote of 50-80% start up death in 15 months is hardly a crazy suggestion.

  • Comment number 4.

    I really dont see how any business or sector can say it is not effected by the current financial markets. If nothing else all businesses need to sell product in order to pay staff. In the current situation there are fewer people and companies with any cash and hence less spending.

    Many technologies have failed over the passed few years to deliver real returns on investment, which is what all companies will be looking for in the current climate add that to the fact that many high tech companies are highly geared and we will see some pain if not casulties.

  • Comment number 5.

    Jason Calacanis link has been 'removed by the author'

  • Comment number 6.

    When the money dries up, industries look for better return on investment. This does not mean cheaper technologies. As a programmer, I see opportunities in virtualisation and greater automation. Offshoring alone is not the solution because labour costs are increasing everywhere. The lack of spending on new technologies allows people to become more familiar with their existing technologies - this delivers better service. Losers are training companies and "new" technology providers.

  • Comment number 7.

    Well done, Rory. Despite peejk6's obvious hatred of Calacanis, the trends are there to see - if you want to. Having been an internet user for 16 years and in the real estate business for 36 years, there are sometimes clear similarities between the two.

    Both are badly hit by recessions (advertising always contracts markedly in bad times) and the resultant low confidence of users. Furthermore, investors and banks suddenly realise that present income is far more important than capital growth prospects and pull out their money.

    Reliance on advertising is the weak point of many dotcom models - one day the advertisers will realise that most 'Net users have ad-blocking software and don't see the ads they pay so much to have displayed !

  • Comment number 8.

    I think the difference this time is that none of the web 2.0 companies have gone public and that it takes far less money to launch a startup these days.

    Anyone who is serious will not be put off by these conditions. In fact it is an incentive to be more innovative.

  • Comment number 9.

    #6 is bang on for me.

    When times are hard there is a drive for efficiency. Computers are an obvious winner here, particularly concerning automation and business process reengineering.

    Apple and Nokia are being hammered as they are consumer-oriented, people buy their wares with discretionary income.

    Spending on Real IT (which involves code and/or tools) has a discretionary component, but a lot of IT expenditure is unavoidable, even when times are hard, as computers and networks need to stay up. A business can't make any money if its machines are down, therefore, they will spend money to keep them up. In hard times this is even more important.

    Sure there will be a shakeout and the fancier-than-thou providers will be vapourised. This will leave the playing field clear for good quality providers.

    And that's me.. ;)

  • Comment number 10.

    #7 Spoken like a true salesman !! IT is *NOT* all about selling advertising on the Web !! Web 2.0 had been a load of rubbish from day one !! It was another attempt by people with no real new "killer apps" or hardware to try and get money from the unsuspecting public.

    I don't see Google going cap-in-hand to beg for more funding and they will be the first to repudiate this Web 2.0 nonsense. Their product, the search engine, is what "sells" to the people !!

    Intel is down because they overpriced their products and people are switching to AMD.

    Dell's business model is based on the fact that most people are too thick to cobble together their own PCs. Nowadays, many kiddies can do the same for next to nothing and they do *NOT* have Dell's massive overheads of huge management bonuses !! Almost all the parts in a Dell PC are made in China and the kiddies can get the same from Maplin or other parts shops very cheaply !!

    Vista died an unnatural death because Microsoft insisted on being fascist about it. Almost all the new PCs that I know of have been "upgraded" to XP or even Linux instead of that over-bloated unnatural operating system. Microsoft is now concentrated on Windows 7 and no longer say that Vista is the best thing since sliced bread !! The life-span of Windows XP has been unofficially extend for the foreseeable future until Windows 7 is ready for the market.

    So much for the falling IT stock prices !! Have you check the prices of Acer, Asus, Seagate, etc. ?? What about Samsung and their flash memory (a major component of the "pen drives" and memory sticks) !!

    In times of dire need, snake-oil salesmen are the first to go to the wall, as has been seen in the financial world !! Just look around Wall Street and Canary Wharf !!

  • Comment number 11.

    Trust a journalist to think that the only applications for technology are finance and media. You've missed every other sector in the market. It's difficult to consider a new media art-house as technology, if that's what you mean: compare it to something like telecommunications, google search, ebay. Network businesses are more than gloss and gossip.

    As we speak new markets in technology are entering new periods in which there will be winners and losers. The way that banks apply technology to streamline their businesses can be applied elsewhere.

    There's a new party about to start and all the cool kids already know where it is.

  • Comment number 12.

    I do not have a hatred of Calacanis, I just speak what I know. I know that he got lucky with Weblogs Inc. and hasn't done anything of note since.

    Seoquia haven't invested heavily in any websites of note, and especially none that will generate any kind of profit on sale, or profit as a stand alone company. Sites like Meebo are all well and good from a consumer point of view, but they were created and designed in order to sell to companies with deeper pockets, such as Google, Microsoft, Yahoo or eBay. Investing in these companies to make a profit is a dangerous business, as these companies do not have a realistic trading and business model, and thats exactly what Calacanis has done at Seqouia. Invested badly.

    Netscape's relaunch was at best a laughable direct rip-off of Digg.com, at least when Digg came along and took influence from other sites, they changed the idea and delivery of it slightly. Netscape's relaunch was a direct rip-off of Digg's formula.

    He's gone and founded Mahalo and found out that absolutely nobody is interested in doing hard work to create profit for him.

    The guy is a chancer who got lucky once.

    Sure, things are going to get tighter, but when a one-hit wonder speculator, working for a venture capitalist company that hasn't had any major financial success since they took some profit from the sale of YouTube to Google says it, I'm likely to take it with a pinch of salt just yet.

  • Comment number 13.

    Bit of a strange article? If you want to go out every night for free rather than doing some work I guess this would be the view of the world you get.

    As others have already mentioned the uses of the internet isn't about lumbering gravy trains handing out free champagne but in developing new technologies that appeal to wide userbases. Seriously, why do you even attend these kind of events?

    Oh and Google don't believe in Web 2.0? I suppose that's why they didn't buy Youtube, didn't launch Orkut, and didn't build Chrome to have a major foucs on blogging and other web app intergration?

  • Comment number 14.

    ishkandar: I think you're wrong about a few things.

    Dell's business model is more on selling vast quantities to businesses who can't afford to sift through a list of graphics cards and then build the machines themselves. Also, don't forget that it's always been cheaper to build your own PC, just most people can't be bothered or are unaware. This is still the case.

    Microsoft's upgrade policy for Vista looks to me to have been the same as that of XP and 98 before it; the problem is that people don't like it.

  • Comment number 15.

    The great mistake of the web fraternity and many commentators alike is assuming that the internet is somehow separated from everything else - a world of its own with its own rules.

    It is not.

    It is just another form of communication where originality is as slow as everywhere else and where the picture painted rivals the truth for prime position.

    Take the so-called web 2.0: communicating and sharing between people where the viewer creates the content and the connections.

    Just as WBC and Geocities did in the early nineties.

    Just as have the letters pages of mags

    Just as kids sending notes between each other in the playground.

    Or the sharing of music (and the record companies annoyance.) We did that with the cassette in the seventies in vast quantities.

    The companies that take advantage of this split into two groups:

    1. those that use the internet as another way of doing exactly the same thing.

    2. Those that use the internet to make money out of something that doesn't actually exist - such as second life selling a bit of space on a hard disc as "Land"

    So, when it comes to world economics and how the internet is affected, it is affected just like every one else.

    The only difference is that because it is new, there are a rush of vulnerable start ups, rather than the steady flow of them in other sectors.

    But when thousands of them hit the wall - there will also be thousands of traditional businesses hitting the wall also. There was when the last bubble burst - just people didn't bother to report it.

  • Comment number 16.

    Rory

    You're a little behind the times :-)

    https://www.circleid.com/posts/internet_advertising_age_recession/

    But one of the responses I received to that was the reply from Nozomi Yumehara, who seemed to personify the ostrich-like tendancy of people to think nothing is going to affect them. Anyone who thinks this problem is only going to affect those earning more than USD25,000 needs to visit a few of the ex-homeowners who used to have sub-prime mortgages.

    Its time to take a very close look at each and every business model out there, cast aside assumptions and run a very detailed risk assessment, especially if its your money involved.

    I agree that there's still enough money in the pot for many established businesses to continue to make a profit, and for some newer businesses or startups to get their feet under the table, but that pot is a lot smaller than it used to be at the end of 2007.

  • Comment number 17.

    As others have said, "web 2.0" is basically all about user-created content. Much of web 2.0 will stay regardless of financial markets; wikipedia isn't going anywhere, unless it's replaced by something better. Once the technology is there, there's no going backwards, someone will just replace it, by copying and pasting the code. If wikipedia went bust today, someone else would have another version up within the hour. It works on the back of technology, not stock market prices.

    The problem with user-created content is that it often ends up being rubbish, as there are (more often than not) no real quality controls in place. This means that it's VERY cheap (very low overheads as you're not paying for content), but not always very good. It's very hit-and-miss, and depends entirely on your user base to make it work, but it does mean that loss of advertising revenue shouldn't effect a large number of web 2.0 sites in any way; many would just survive without income due to low costs in comparison to any other type of business, or on the back of t-shirt sales, or donations.

  • Comment number 18.

    I think there is a more fundamental shift happening.

    More and more peoplein the West, me included, now have all the kit they need (most of which is capable of doing much more than they ever use them for). They are gradually realising that they don't really need any more shiny new toys, and they actively don't want new technology or software that makes their life more difficult, eg Vista.

    To put it in market-speak, the market is approaching saturation.

    This was starting to happen even before we all began to realise that we were over-borrowed and that the boom was based on smoke, mirrors and greed.

    Now lots of people with rising living costs, higher mortgage payments and maybe negative equity will be realising they can't afford and don't need a 52" screen TV and a terrabyte PC. They will retrench spending and focus on more important things. Product churn will slow down for at least a couple of years, maybe up to 4 or 5 years.

    I therefore think we are in for a period of more cautious attitudes to and slower uptake of new kit and software, especially so-called "web 2.0" applications.

    The business model Rory is discussing is therefore already outdated. The companies to bet on may be the ones focusing on Asia and Africa not the so-called first world.

  • Comment number 19.

    Yeah, whatever.

    Now Rory, is there any chance of one of you guys doing your job as journalists and doing a proper investigation (or public lynching) of the bunch of crooks over at BT and Phorm?

    Alternatively, you could just do a snivelling, syncophantic reprint of their press release.

    Oh, hang on, you've already done that.

    Looks like it's going to be left up to the good souls over at The Register to fight the cause of the man in the street then...

  • Comment number 20.

    Following on tsunami2's comment, the belief that advertising is the "business model" is gong to be a dead end for many. If YouTube ,with all that traffic, can't make a go of it, then most companies are dreaming.

    Compound that with the reality of advertising taking one of the first hits when an economy wobbles.

    Finally, so many of the Web 2.0 businesses are nice little ideas but, really, if they were not around nobody would miss them. Many of these businesses are not essential in any way and that might be kiss of death number three.

  • Comment number 21.

    Advertising is definitely the boom area for Web 2.0 - the internet is still seen by most as a free resource - so sites that have high visitor numbers and sell advertising will continue to profit.

    The original dotcom boom and bust was more about subscription models. Now that free sites with adverts are becoming the norm, I don't think this bust will be quite so dramatic.

  • Comment number 22.

    Is the tech party over ? How long will the hangover last ? Or can we have more juice flowing please?

    Fact is, it has been one helluva party. Nearly two decades of unprecedented virtuous cycle of innovation->productisation->profit->new innovation. PCs, internet, mobile, digital audio/video in all forms and delivery means, social networks, collaborative computing, ad revenues - each helping the other grow, at the pace of formula 1. And then we begin to run out of steam - no, the speed of innovation is not affected yet, what is certainly affected is the rate of growth of that speed (acceleration).

    At such times, businesses settle down to milking the "long tail", focus on "adjacent spaces", get into "me too" markets with little shame / hesitation. So, Google will do an android, Microsoft a Zune, Nokia an XpressMusic. And then a Prahlad will deliver a lecture on core competencies. Meanwhile Samsung will benefit from commoditisation and vertical integration and Sony from branding. Apple will take a break.

    MPEG4, broadband, HD LCDs, bluray, touch screens, search engines, wikis, smart phones - the sun sets for now. It has been a long while - yes there were a few eclipses now and then, but it has been a truly long day! Goodnight.

    (For the insomniacs, https://kadlekai.blogspot.com/2008/09/mpeg4-and-tv-end-game.html )



  • Comment number 23.

    So many posts out of touch with reality ! Rory was talking about the lack of money for start-ups (a point picked up by other major media organisations - see https://www.marketwatch.com/news/story/startup-implosion-begins-silicon-valley/%29.

    Without an immediate income stream, I can't see much appetite for supporting internet start-ups from any source (even the 'angels' are hurting, it seems).

    For some time, I suspect start-ups will be largely relegated to those working from home, on unemployment benefit. Difficult to see them anymore being in expensive offices with overpaid staff and running at a loss.

 

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