Liam Dann on business

Business editor of the New Zealand Herald, Liam Dann, discusses New Zealand and international financial matters

Liam Dann: Facebook deal points to bubble trouble

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The web is a pain, says Noel Gallagher, but he and just about everyone else is having to deal with it. Photo / APN
The web is a pain, says Noel Gallagher, but he and just about everyone else is having to deal with it. Photo / APN

"The internet is a pain in the arse," laconic British rock star Noel Gallagher told a press conference this week.

"I was expecting a bit more ... it's really just a lot of people on there moaning and complaining."

Sadly that's often true.

But for better or worse the internet has only just begun to transform our world.

The migration of the media from print to web page, or from disc to download, with all the associated angst and discussion, are both small steps compared with the social change the internet will soon unleash.

Look at retailing.

What will we put in our high streets when the clothes retailers go the way of the book and music shops? What will our workplaces look like when we are all connected in real time by video links?

The impact of the web on the traditional business model and the speed with which it is having that impact never fail to amaze.

Facebook's US$1 billion ($1.2 billion) purchase of mobile photosharing application Instagram is the latest example.

Intuitively a company with a paper value of US$100 billion buying a company with no revenue and 13 staff for US$1 billion screams South Sea Bubble, Dutch Tulipmania or dot.com crash. That's even after reading the hip, techie blogs that emerged so quickly to tell us why this is not a bubble deal.

Many of those bloggers have confused scepticism about the deal for scepticism about the internet itself.

The internet is not a bubble that can pop. And yes, businesses need to keep up. Most small and medium-sized companies in New Zealand don't even have a website.

However, Facebook is a listed company with a stock price that can very definitely be inflated to the point of explosion.

Given the effect that would have on US markets, it's the last thing the world needs. Facebook's move is not without internal logic. Its management understands the need to evolve rapidly. Facebook must offer more than just its original webpage interface or it won't last long enough to justify its valuation.

Instagram is worth US$1 billion because that was what someone was prepared to pay for it. But few other than Facebook could have paid that much. It can afford to lose a billion. It can't afford to lose the race to dominate the photosharing space on the internet.

The speed of evolution on the web is where the risk lies.

Several US writers have pointed out that Facebook has given two-year-old Instagram a greater value than the venerable New York Times.

Even taking into account the structural challenges facing newspapers, the New York Times brand faces no threat from a bunch of journalism students who think they can report the news better.

Instagram and any number of web-based applications, including Facebook, do.

The ability to throw a billion at Instagram shows Facebook is in a space where money has a different value than it does for other companies. That is always a very risky space to be.

Another hint of a tech bubble emerged with news that the capitalisation of Apple topped US$600 billion. It is only the second company to reach that valuation.

The last was Microsoft, which topped it for a short time in 2000 - the height of a tech bubble.

The over-valuation of both Facebook and Apple could become a very real problem if either starts to run out of steam on the growth front. Neither has yet delivered profits or dividends to justify their enormous valuations. The focus for both has been pouring money back into the business. Investors are very tolerant of this while the stock prices rise.

A short, sharp revaluation of either might be a timely reminder that the market needs to maintain some sort of correlation between value and real world profit.

The other story this week that highlighted the growing power of the internet was that of Christchurch band The Make Believe.

They are a couple of teenage boys with guitars and decent voices, the kind this country has been churning out for years. They sat in their living room recently and filmed themselves covering a song by One Direction.

One Direction (for those who really don't keep up) are the latest boy band sensation touring the world and being mobbed by 13-year-old girls.

The website for an influential US talent show host liked it enough to post a link to the YouTube clip.

Now the guys have clocked up 600,000 hits on YouTube and have picked up some kind of management contract in the US.

This is the brave new world of web marketing in action. It is wonderful to see how plugged in young people are and how entrepreneurial. Good luck to them.

These smart kids are growing up with a sense of the internet's potential instilled from an early age. For an older generation who grew up on vinyl records and video cassette machines it is going to be increasingly important to tackle the web head on or be left in the dust.

It is scary after what has already been 15 years or so of dramatic change to consider that this may just be the beginning of something. It is also exciting. This is a revolution without bloodshed and with enormous capacity to enhance our lives.

The only way we can hope to control it is by engaging with it and you don't need a billion dollars to do so. That is the lesson for business.

Follow Liam Dann on Twitter twitter.com/liamdann

- NZ Herald

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