Anatomy of an Internet Bubble, and How I Almost Fell For It

September 7, 2007

Those of us who have been online awhile remember the so-called “bubble burst”. We hear about bubbles all the time in this business. People LOVE to speculate about the next bubble burst. In fact, a lot of people are looking at this whole “Web 2.0″ thing as another bubble about to burst. But, what the heck is all this? Well, let me explain it in brief, and then give you a little story about how I almost lost it all in the midst of the 90’s bubble.

What is a Bubble?

Anybody familiar with even the basics of economics knows that the economy is cyclical. It rises and it falls, over and over again. We see periods of growth, more growth, then a gradual slowdown, then a faster slowdown, then a recovery, then a gradual growth, and so it goes. It just happens. Well, the internet economy is part of the overall economy, and it has ebbs and flows just the same way.

“Bubble” refers to the sharp growth of something while it also being simultaneously weak, and could burst at any point. A real bubble is very weak, has mostly air on the inside, and can burst instantly. A technology bubble is something that grows, is mostly hot air, and can burst instantly. If you look at the normal progression of a bubble in technology, it starts with great, new technology. It proceeds to grow. Others catch on. MORE people catch on. Then the money-makers and pure marketers jump on the bandwagon in a big “me too” migration, dirty the scene with pure money making motives and no innovation. Lots of money gets thrown around in a big digital gold rush. It is all based on hype - hot air. And, it bursts when the laws of economics catch up to the fact that there is no substance there.

So, that is the usual progression. It is pure technology. Smart people making cool new things and have little business and marketing skills. Then smart businessmen get involved and start creating a buzz around this new technology. It grows to the point where we get a good balance between innovation and marketing. But, then the “make money at any cost” people get on the bandwagon, create a lot of hype, get lots of venture capital. They are better at marketing than they are at creating a decent product. It is hot air, and it goes POP!

A bubble burst.

The 90’s Bubble Burst

The famous “dot com bubble” of the 90’s is a lesson in and of itself. It is marked by a LOT of hype and spectacular failures. Online businesses were sold as the next big thing, where anybody can just put up a website and make millions. Dot-com businesses were sprouting like weeds, many without any business plan, but flooded with lots of venture capital investment. It was all hot air. And it all came tumbling down.

Like many things on the stock market, it is usually a collection of things with bad timing that cause a collapse. When you take the poor earnings reports of some of the dot-coms, the government’s ruling of Microsoft as a monopoly, the Federal Reserve increasing interest rates to try to slow the bubble down, some of the internet tycoons cashing out their stocks at the same time and various other factors, the whole thing came tumbling down. Internet businesses were disappearing overnight.

My Personal Experience

I have been working online for a long time, since 1997 to be exact. So, I came into this in the height of the dot-com bubble. PC Mechanic was my first site, and it grew like crazy. I was eventually approached by a company called Efront Media to buy the website. They offered me essentially almost $1 million in fake money for the site and I fell for it. The promise of big dollars was enticing. I fell for the internet boom. I had grandiose dreams of buying my own sailboat, a nice car, a big house. And here I was a poor college student living with my parents at the time.

ut, why do I call it “fake”? Well, it was based on a monthly income stream and stock options. The total sum WOULD have been almost $1 million, but it was all money which did not exist. The concept of a stock option was crap because the company was not public and had no idea when they would go public. So, they based a LARGE chunk of their offer on this non-existent stock. The cash part of it was a monthly payment stream, so essentially they were paying me over time while they were making money with the site. The “offer” they sent me had the $1 million figure in BOLD, with details underneath. My jaw hit the floor seeing an offer that large. How could I say no?

The company was dishonest, and I fell for it (stupidly) in the height of the dot-com bubble. Later, they had the nerve to start paying me less monthly because they said the traffic was not as good as contracted. They offered nothing in terms of news on an IPO. So, it amounted to a takeover of the site with no financial compensation. Sure, I was getting monthly checks, but gimme a break! I was making monthly income from the site before eFront!

eFront Media was a prime example of the dot-com bubble. They may have originally approached me with honest intentions. But, their “value” was all on paper. Nothing real to it. They were enticing site owners with big dollar values that were not real. When I started hounding eFront for breach of contract, the criminal CEO of that company actually told me I had to BUY the site back from them. I ended up getting a lawyer and authoring a letter to eFront telling them they were in breach. I removed the site from their servers (luckily they didn’t bar my FTP access to it). I put the site back onto my own web host. Then, I had to work eFront hard to get my domain name transferred back. While I firmly hold that the CEO was a criminal shithead, there were people there who were not and one of them made it go right for me to get my domains back. In my letter, I told them if they don’t like what I did, I would see them in court. That letter was refused by the sender.

While we were in the midst of all this, FuckedCompany.com (sorry about the name, but that is literally what it is called) was hounding eFront. And it came out that the CEO was involved in some internet chat hanky panky. His computer was hacked by somebody and his chat logs were made public. That seemed to mark the final downfall of eFront Media. The logs not only contained said hanky panky, but also private chats with others on how to deal with the pissed off publishers (like myself). It made for interesting reading, I have to say.

eFront died. It was a sinking boat, started in the dot-com gold rush, and then got involved in really questionable tactics to stay afloat as reality set in. And I almost lost it all by attaching myself to it.

Just a quick note, the eFront domain is now held by a completely different company which has no ties to any of this. So, I don’t want anybody to connect dots that aren’t there.

The Next Bubble?

A lot of tech pundits will tell you that Web 2.0 is the next bubble. And it’s funny, too, since a lot of people can’t really even place their finger on exactly what Web 2.0 is.

I DO think Web 2.0 is the next bubble, but I DON’T think that the next burst will be nearly as dramatic. Sure, there are a lot of people out there starting various social sites, slapping “beta” all over their colorful logos, hiring “evangelists” to sell everybody on the idea. And many of them could go POP. Some people will lose their shirts. But, I think internet entrepreneurs, on the whole, learned hard lessons from the 90’s bubble. Those people will not (hopefully) fall into the same hype this time around. But, some will, and they could lose out big time.

Web 2.0, while as much an undefined buzzword as it is, is also a real concept. The social nature of the web is a real phenomenon . Social networking sites, community driven content, interactive bookmarking, web applications…all these things indicate a very real trend on the internet. It marks great business opportunities and many are taking advantage of that.

But, a lot of “me too” marketers are jumping onboard, too, with weak concepts and crappy business plans (if they have one). It’s the same pattern as the first bubble burst. So, yes, we probably do have a little POP coming. Will it be as dramatic? Likely not.

Actually, for the REAL bubble burst for this economy, one should look away from the internet and more toward real estate and predatory lending practices using fake money. THAT is the real bubble, but it has little to do with WebbyOnline, so I will leave it alone…

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