Big mouth: Bubbleicious

If you hang around for long enough, history repeats: the Conservatives return to wreck the few bits of the country they missed last time; the bands you grew up with do comeback tours; the films you saw at the local fleapit get rebooted and re-released; and dotcom bubbles come back.

No? Groupon is apparently worth $5billion. Groupon?

There are only three possible explanations. One, Groupon has discovered the secrets of cold fusion and perpetual motion. Two, the tech sector has gone insane. Or three, investors are operating on the ‘Greater Fool’ theory.

My money’s on number three, because we’ve been here before. In 2000, nobody really believed that websites promising five-minute delivery of dog food and space shuttles were viable businesses. But that wasn’t the point. Sure, you were a fool for investing in it, but provided you could find a Greater Fool and persuade them to buy all your shares
in dogfoodspaceshuttle.com, you’d make money – for a while, at least. The last bubble burst because the world ran out of Greater Fools.

We now have a new supply. It’s not just Groupon. Social gaming firm Zynga’s latest funding round valued it at $3billion. Twitter was valued at $5billion and Facebook at up to $50billion. Admittedly, these are American rather than real billions and the valuations are for private investors rather than publicly traded shares – for now, at least – but we’re still looking at sites that don’t generate enormous sums of money being valued at enormous sums of money.

It can’t last

Facebook will probably survive when things go pop, albeit at a massively reduced valuation, but other sites look very shaky. Groupon’s business is easily copied – it’s already spawned a host of imitators – and if Google and Facebook decide to compete properly with it rather than buy it, it’s toast. The same applies to location- based check-in sites: both Google and Facebook are finally putting some effort into their own check-in systems, Latitude and Places.

Facebook gaming depends entirely on Facebook’s goodwill, which is a little bit like riding around on the back of a crocodile while covered in bacon and telling yourself that the crocodile is vegetarian.

Bubbles are bad news. They distort the market, with VC-funded sites driving genuine businesses – who don’t have a magic money fountain to rely on – out of markets. Look at Amazon’s destruction of bookshops: it could afford to undercut everybody because investors let it lose money.

Worse, they harm ordinary people. The money being invested is other people’s, usually from pension funds. When the dotcom bubble went, the financiers survived; ordinary people took the hit. When the credit crunch kicked in, the financiers survived; the rest of the planet took the hit. We’re not at the popping stage – that could be a couple of years away – but all bubbles burst. We already know how this one ends.

This article originally appeared in issue 216 of .net magazine - the world's best-selling magazine for web designers and developers.