Germany is undermining future growth. Philippe Legrain

Money Makes The World Go Round

Skype’s record sale, the new round of investments in social media companies and rumors about Facbook’s public offerings recall the high times of the New Economy. In the 90s, a big bubble ended the internet optimism. Could it be different this time around?

The years 1999 and 2000 saw a fair share of public offerings, takeovers and financing rounds, each involving incredible sums of money. Yet investors were yanked out of their hype when the value of several companies began declining in the summer of 2000. Having been dealt a final blow by the events of 9/11, the New Economy culminated in a global crisis. In the light of those events, it is understandable to mistrust the new boom involving internet and IT companies.

A few major differences

Yet basing scepticism on a déjà-vu alone cannot always justified, since comparing the two developments in detail shows major differences. Firstly, all the companies named above as well as others, such as Groupon, are based on tried and true business models. While there are frequent complains about the unwillingness of internet users to pay for content, these companies have achieved an annual turnover of between several hundred million Euros (Yandex, Skype) and more than one billion Euros (Facebook, Groupon).

This is a noticeable difference to the companies of the New Economy, whose earnings remained far below such figures. What is more, the important investment indicators back then were different, i.e. the speed of spending investment dollars (“burn rate”).

The most well-known case must be, which managed to “burn” $180 million in 18 months, without ever achieving any reasonable turnover. In comparison, today’s companies not only accomplish a health turnover, they are even profitable. Last year, Facebook doubled its turnover, accomplishing an operating margin of 30 per cent. That is a number even ambitious German banks can only dream about.

Another difference are the investors: Microsoft bought Skype in order to diversify their profitable yet outdated portfolio. Just the opposite took place when AOL took over Time Warner. In other cases, the big investors are companies such as Goldman Sachs or large VC funds. The floatation of Yandex or LinkedIn did not even come close to reaching the number of oversubscriptions that were common in 1999. Of course there is a danger that the current success stories cause others to enter the market – if they were to spark another euphoria, during which the dream of quick money ends up dominating, a parallel to the New Economy could indeed arise.

The dark side of euphoria

Yet it helps to remember that euphoria has characterized every investment bubble during modern history, regardless of the product that was being invested in. This began with the tulip mania, once more during the South Sea Bubble or the Railroad Crash in the German Empire. The fact that the early stages of high technologies serve as a particularly fertile ground for euphoria derives from the fact that their future potential is simply not yet foreseeable. Thought it is especially the internet and IT-industry that has matured significantly – both in terms of technology and economic viability – in comparison to ten years ago.

Investments remain a risky business, since for each Google there are, as Myspace shows, a hundred technology failures. This, however, is an intrinsic feature of the market economy: Technology advances. Who would still consider railroads a high-risk investment? It still bears certain risks – but that is a different story altogether.

Read more in this debate: Carlota Perez, Ross von Burg.


comments powered by Disqus
Most Read