When an initial public offering revealed that the payment technology company Square was worth less than people thought this week, it intensified discussion about whether Silicon Valley is in the midst of a second technology bubble that's about to pop. And it reminded me of this funny viral video that made the rounds online in December 2007, called "Here Comes Another Bubble."
It's a good reminder that people started worrying about a second technology bubble almost immediately after the first one popped. It's also a fun time capsule of internet culture circa 2007. Back then, MySpace was still considered relevant, and blogs dominated the technology conversation more than they do today.
But the really striking thing about the video is the examples the video's creators chose to illustrate the alleged Silicon Valley bubble. They noted that Facebook was worth $15 billion, almost as much as Ford Motor Company. YouTube had recently been purchased for $1.65 billion, and Skype for $2.6 billion.
People thought there was a technology bubble in 2007, but there wasn't
Today, of course, Facebook is worth about $300 billion — 20 times more than in 2007. Microsoft bought Skype for $8.5 billion in 2011 — more than triple what eBay paid for it in 2005. YouTube is still a subsidiary of Google, so we don't know its exact value, but it's a safe bet that it's worth a lot more than $1.65 billion today.
To be fair, the other two companies mentioned in the video — an RSS feed company called Feedburner at $100 million and an advertising company called aQuantive at $6 billion — did turn out to be hugely overvalued. But it's clear that in 2007 a lot of people were hugely underestimating how valuable high-profile internet companies would become.
Obviously, it would be ridiculous to say this proves there's no technology bubble today. But it does illustrate something important about the way bubble conversations happen. Eventually, there's going to be a broad downturn in technology stocks, and whoever said there was a bubble right beforehand will look prescient. But there are also times when people say there's a bubble and then company values keep going up. And rather than treating that as a sign that there wasn't a bubble, people interpret it as a sign that the bubble has gotten even bigger.
But sometimes companies are really getting more valuable. Google and eBay got fantastic deals when they bought YouTube and Skype, respectively. Facebook was massively underpriced in 2007. People who said there was a technology bubble in 2007 were wrong. By the same token, Uber was probably undervalued last year when it raised money at a value of $17 billion (it's now valued $51 billion), even though a lot of people at the time thought the figure was ridiculously high.
At any given time, some companies are undervalued while others are overvalued
While technology companies weren't overvalued in general in 2007, it's obvious that some individual companies were. I already mentioned Feedburner and aQuantive, companies whose acquisitions look like mistakes in retrospect. MySpace is another obvious example. News Corp paid $580 million for the company in 2005, then sold it for a pathetic $35 million six years later.
This means that focusing on specific companies can be hugely misleading. Facebook's star was soaring at the same time its main competitor, MySpace, was in a tailspin. Unless you have a comprehensive view of the overall market, it's easy to mistake the decline of specific companies for weakness across the technology sector generally.
Square is a good example of this. The disappointing performance of the company's shares could be part of an industry-wide trend. But they could also reflect factors specific to Square. In particular, the payments market is getting increasingly crowded, with everyone from Apple to the Bitcoin community offering competing products. The market might be bullish on payments in general but bearish on Square in particular.
A similar point applies to Dropbox, another company whose value has been written down in recent months. They're facing pressure from companies like Google and Amazon — which are offering more and more storage for lower and lower prices — as well as a shift to smartphone-based computing models that might not leave much room for a standalone file-hosting service like Dropbox.
The thing that makes this tricky is that a lot of important technology companies, including Uber and Airbnb, don't allow their stock to be traded on public exchanges. So unlike in the 1990s, we can't look to a stock price index like Nasdaq as a real-time barometer for how the industry as a whole is doing. If there's a bubble right now, we'll only find about it gradually, as one company after another gets its value written down.