May 6th, 2007
Buy Microsoft, buy Yahoo!
Two things happen in metaphysical economies — markets in which everything is based on faith & there is no concrete economic reality:
- Hyped media companies (Broadcast.com, Napster, AOL, YouTube, Facebook, MySpace etc etc) get radically over valued.
- Media companies valued on traditional economic criteria (Time-Warner, Yahoo & Microsoft) get radically undervalued.
That's exactly what is happening in the Web 2.0 bubble — a classic example of a metaphysical economy. The evidence of overvalued, overhyped Web 2.0 companies is everywhere — from the surreal YouTube acquisition to the ludicruous idea that Facebook is worth north of $1 billion. In five years time, 99% of all these social network, virtual reality and user-generated-content businesses will have disappeared. At this week's On Hollywood, for example, start-up after start-up presented identically orthodox ideas about how to create value from the democratized Internet. This poverty of innovation amongst Web 2.0 entrepreneurs is stunning. It will require another cycle, what some people are now calling Web 3.0, to successfully implement the business potential of Web 2.0 technology. Given the cyclical nature of things, don't expect to see this till around 2015.
And, on the other hand, in the Web 2.0 metaphysical economy, traditional media companies are being radically devalued. Take, for example, the rumors of a Microsoft acquisition of Yahoo. These companies — imagine them as a couple of dowdy old ladies at a young swingers club — are being pushed together by a financial community that is Web 2.0 and Google fixated. All roads, in this new advertising centric Web economy, supposedly lead to the Googleplex in Mountain View. To be fair to Google, of course, the company itself is not part of this metaphysical economy. Yet, as Dave Winer has convincingly argued, the Web 2.0 is "nothing more than an after market for Google." So no Web 2.0 boom, no after market froth for Google. And like the collapse of AOL's advertising revenue after the of the Web 1.0 economy, Google's advertising revenue will suffer immensurably when the 2.0 economy collapses.
So how should we value Yahoo and Microsoft? By their numbers. What is forgotten, in all the hype over Google, is that Yahoo and Microsoft still are two of the most popular sites on the Internet. According to Nielsen/NetRatings for March 2007, Yahoo! had 108 million and Microsoft 135 million unique users. The challenge, of course, is to innovatively translate these users into revenue. But, as Yahoo's Jeff Weiner said at last month's Web 2.0 Conference, it's never wise to count Microsoft out. The same is true of Yahoo. In contrast with the majority of Web 2.0 entrepreneurs, both Microsoft and Yahoo have innovation in the blood. So whether or not they merge or strategically align, my counter intuitive advice is to buy Microsoft and buy Yahoo.
Andrew Keen is author of Cult of the Amateur. See his full profile and disclosure of his industry affiliations.
