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Is Bad News Good for the Net?

By Curtis Lang on Apr 2, 2000

This article appeared originally in OnMoney.com, a division of Ameritrade.

Requiem for the Bubble

The Networked Nineties are just about over.

The dot-com bubble has burst. The Nasdaq bear refuses to go into hibernation for the winter. “Geek chic” suddenly looks as tired and dated as those Priceline PCLN ads with William Shatner that looked so cool only a few months ago, when Priceline’s stock was soaring.

For the first time it appears that Internet use is declining. A new PricewaterhouseCoopers study shows that over the past year, time spent on the Internet by the average user has dropped from 5.3 hours per week to 4.2 hours. Despite the Napster buzz, the Internet’s mystique is wearing thin, and cool new Internet applications no longer drive increased usage among the general public.

The news media have turned savagely negative about all things Netcentric.

In New York, where I live, The New York Observer has published a steady stream of articles ridiculing both the entrepreneurs and the venture capitalists who took public such failed Net darlings as IVillage, CBS Marketwatch, Amazon.com and many others. The Observer points out that these insiders profited massively at the expense of those gullible individual investors who bought high soon after the IPO, only to lose billions when these stocks came crashing down to earth.

Nor is ill will toward Utopian Internet visionaries limited to the alternative media.

Forbes magazine recently called top Priceline.com chief strategist Heidi Miller an “Internet loser”, and the new issue of Fortune features a lengthy investigative piece on the convoluted finances of Priceline and Jay Walker’s affiliated companies that begins, “You may think you've heard all the crazy-quilt news there could possibly be about Priceline.com: weakness in its core business of selling airline tickets; the demise of its grocery- and gasoline-selling licensee, Priceline WebHouse; Delta Air Lines' urge to bail out of its Priceline stock; enough customer complaints to get Priceline pilloried on television's 48 Hours.” Forbes then goes on to suggest that celebrity Priceline investors John Malone, Paul Allen and Saudi Arabia’s Prince Alawaleed may very well be Internet losers as well.

Perhaps most ominously for tech fans, and tech investors, the news media are no longer willing to play the role of uncritical cheerleaders for every flaky technology booster promoting the latest Net “revolution” to come down the pike.

In response to Internet guru Nicholas Negroponte’s recent claims that children of the future “are not going to know what nationalism is” and to Michael Dertouzos’ claim that digital communications will usher in an era of global “computer-aided peace,” the Economist magazine says, “The mistake people make is to assume that wars are caused simply by the failure of different people to understand one another adequately. Indeed, even if that were true, the Internet can also be used to advocate conflict. Hate speech and intolerance flourish in its murkier corners where governments find it hard to intervene.”

The Economist also disputes the notion that the Internet will reduce energy consumption and foster equality.

Lotus Development Corporation’s founder Mitch Kapor told the third Internet and Society Conference at Harvard University this summer, “There’s almost a sort of backlash right now, sort of an enormous hangover and a retreat from… giddy euphoria.”

Kapor recalled with some degree of chagrin that she had made a number of speeches a decade ago. “I said the Internet was going to make everything better. As we know, that didn’t exactly happen.”

Pattie Maes, an associate professor at the MIT Media Lab, told reporters at The Boston Globe earlier this year that she once believed that the Internet would level the playing field so small businesses could compete against the giants, empower individuals at the expense of large institutions and serve as the “collective mind” of people around the world.

“I can’t exactly say that all these visions have become reality,” Maes admitted. “Maybe they are becoming delusions.”

It’s useful to recall the media buzz that surrounded long-forgotten and unlamented Net fads of the ‘90s, such as: First Virtual’s Virtual PIN numbers, Cybercash, virtual communities, pay-per-download content, Larry Ellison’s Internet appliance, and e-tailers who would empower consumers at the expense of giant marketers.

The fate of today’s tech fads du jour -- from broadband Internet, to webcasting, to wireless Web surfing, to distance learning, to interactive television (which already went through one boom-and-bust cycle in the early ‘90s) -- remains to be seen, but so far these novelties remain little more than vaporware, without substantial market penetration.

Beleaguered tech investors can only hope that the backlash against the Net, and technology in general, signals a return to realistic business models and valuations in the tech sector, which are the essential prerequisites for the next bull market.

Now, for the first time in the post-Netscape era, all Internet ventures and innovations will be judged against a set of criteria that bear some relationship to reality.  

        Will this new innovation enable users to do something they want to do more easily and cheaply than they could otherwise?

        Will users be willing to pay for this service?

        Does this new innovation contribute to the well being of society as a whole?

        What are the politics of this new innovation?

        Who gains and who loses power as a result of this new technology?

        Is the new technology user-friendly?

This is a very good thing for the Internet, for tech investors, and for all IT consumers. In fact, the Internet backlash could provide the critical thinking that must be the foundation for successful Net enterprises in the Roaring Zeros.

 That’s the good bad news. But there is bad bad news as well.

All this bad news and its good side effects may not be enough to save the tech sector if the venture capital community has failed to learn its lesson. The key lesson the VC need to learn is that oversupply of new companies in hot tech sectors threatens the viability of all technology companies. Whether in e-tailing, webcasting, virtual communities, B2B exchanges, or electronic commerce application integrators, too many competitors sour the market for all participants.