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Last Updated: Tuesday, 10 October 2006, 09:43 GMT 10:43 UK
Has the dotcom boom returned?
ANALYSIS
By Steve Schifferes
Economics reporter, BBC News

CEO of eBay, Meg Whitman with Niklas Zennstrom, CEO and co-founder of Skype
EBay paid $2.6bn for internet telephone firm Skype

The purchase of YouTube by Google for $1.65bn (883m) is just the latest in a series of high-profile, high-value deals among internet firms.

But does it mean that we are entering another dotcom boom era, like the one in the late 1990s that ended in a stock-market collapse?

Certainly, the current set of numbers is impressive.

Last year Rupert Murdoch's News Corporation bought MySpace, the online community site popular with teenagers, for $580m.

Internet auction firm eBay bought Skype, the leading provider of voice-over-internet telephone services, for $2.6bn.

And Yahoo is rumoured to be in talks to buy Facebook, which allows university students to keep in touch with their friends, for $1bn.

Dotcom boom

At first glance, this seems to be a repeat of the dotcom boom of the late 1990s, when $2bn per week was flowing into the venture capital firms of Silicon Valley.

Myspace logo
Myspace has 14m users per month

The mad dash to profit from the internet led to many internet firms rolling in cash before they had made any sales, or indeed had any customers.

The stock market valuations of internet firms climbed rapidly, fuelling the boom, starting with the first flotation, of Netscape, in 1995.

Five years later, in 2000, the boom peaked - and investors finally realised that dotcom companies were not necessarily a licence to print money.

The resulting collapse set back investment in hi-tech firms for several years.

Among the casualties of the era were companies such as pets.com and boo.com, an online clothing company.

Viewers first

However, there are a number of differences between the first internet boom and the current one, not least the fact that the companies that survived - such as eBay, Yahoo, and Amazon - tended to dominate their market niche.

The main change is that the companies being acquired today are real businesses, with lots of customers or viewers.

YouTube has 100 million video downloads a day, and 73 million viewers a month, and by acquiring it Google has increased the amount of video streams it controls by a factor of 10.

MySpace has 14 million viewers a month - mainly young people, a group that the traditional media is finding hard to reach.

And Skype has 53 million users, with its technology widely perceived as a threat to traditional telecoms companies.

Many of the acquisitions are about acquiring online communities, the fastest-growing section of internet use.

Money-making model

The second key difference with the late 1990s is that companies now have a model of how to make money from the internet - and that model is based on advertising.

Google, the leading internet search engine, has become the most valuable property on the internet because it is able to sell advertising around its searches.

Google currently sells about $10bn worth of advertising a year, and makes a profit of $2.4bn, if the pattern of its first quarter figures are maintained.

Google's deal with YouTube is based on the idea that it will make money for all the site's content by sharing advertising revenues - either with commercial video-makers, such as music companies, or the amateurs who put their home movies up online.

Rupert Murdoch
News Corp's Rupert Murdoch has seen the value of internet sites

Yahoo and News Corporation also hope that by acquiring popular sites that appeal to young people they will be able to sell content and advertising to an audience they are finding it harder to reach.

Another motive for the latest wave of tie-ups is synergy.

EBay, for example, hopes that more people will use its service to buy and sell online if they can make free telephone calls to facilitate the deals.

Stock market role

Finally, the role of the stock market is very different in the current boom.

Vitally, the new boom is not being led by IPOs on the stock market, when new companies float their shares to gain capital.

Rather, all the acquisitions are being made by existing internet or media companies that have substantial revenues and cash reserves - Google, for example, is sitting on a cash pile of $9.8bn.

This suggests that they are making investments for the long-term, and that the level of funding will not be affected by the sudden swings in stock market fashion.

That is not to say that there are no risks in the current situation.

Companies may have overpaid to acquire customers, and given the fast-changing nature of the internet, some of the sites may lose their attractiveness to viewers.

And internet ad revenues, which have enjoyed an extraordinary growth in the last few years, may tail off - particularly if the economy slows down.

But in the main, these are the ordinary risks of doing business.

And it may be another sign that, with this boom, the internet has finally come of age.


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