Stock markets slipped across the world today, probably fuelled by a drop in China’s Stock Exchange. The Nasdaq (the NY technology SE) has slipped just as all the others have, raising the possible question of a Web 2.0 bubble burst, brought about by other economic factors. Since the question ‘is this a bubble?’ is asked (or answered) by someone just about everyday in the tech blogosphere, I thought this would be a good opportunity to take a look at what might happen from here, using some common-sense economics.
In order to work out if we will see a bubble, we need to take a guess at what this stock slip means for the rest of the economy; this is either a correction of stock prices which were becoming slightly over-optimistic, or it is a more sinister economic downturn.
In the first case, there will be little or no impact on Web 2.0, because private equity is over-funded at the moment anyway, and they want to spend that money. If other areas of the economy, such as advertising and consumer spending, are doing well, then there is no reason why web companies shouldn’t continue to succeed. Therefore venture capital will continue to be available, and companies will continue to succeed.
However, in the other option, there could be a significant impact. Crucially, if the advertising market is hit (which can be one of the first cuts companies make if they are short of cash) then monetisation for much of the Web 2.0 sector becomes much harder. Companies will also have less cash to make acquisitions. Therefore, in a situation when it is difficult for Web 2.0 companies to succeed, the good venture exits (such as that seen with YouTube and Skype) will not happen because a) the companies won’t be making any money, and will have little prospect of making money, and b) no-one will be able to afford them anyway. In this situation, we could see a ‘bubble burst’, although it will be far less dramatic than that seen in 2000.
We’ll have to watch over the coming weeks to see what happens; I’m fairly hopeful that this is just a recognition by the markets that they were getting a little too excited. Given that the economy is inevitably cyclical, it seems much healthier to have mini booms and mini busts with sustained net growth than enormously successful booms and devastating busts.
Google Finance is the best place to get stock prices for the US stock exchanges. Unfortunately they don’t display the FTSE (the UK index), so you have to use Yahoo Finance for that.
