IBS

AP

TIME to dust off the dotcom party hats again? Investors drove up shares in VMware, a Silicon Valley software-maker, by 76% on its first day of trading on Tuesday August 14th. Diane Greene (in our picture, being shown around the New York Stock Exchange), the boss of VMware, was suitably pleased on the day of the launch. The excitement sparked recollections of the much-hyped technology initial public offerings (IPOs) of the first internet boom. But the chances that this foreshadows Bubble 2.0, let alone Bust 2.0, are slim—at least when it comes to stockmarket listings of internet firms.

To be sure, technology firms are back in favour with investors, almost worryingly so. This mood even extends to internet start-ups. Some have been scooped up for large sums of money by bigger companies. The most notable example is YouTube, a video-sharing service, snapped up by Google in November last year. The internet giant used $1.65 billion-worth of its own shares to secure the deal.

Venture capitalists are again pouring money into the sector, particularly into next-generation internet start-ups that boast the label Web 2.0. In the second quarter of 2007 American venture-capital firms invested nearly $1 billion in information-services companies—an increase of more than 50% compared with the second quarter of last year.

Yet VMware is a prime example of what has changed. It was able to go public despite the shaky financial markets because it actually has a real business. The firm dominates the market for virtualisation programs, which separate software from hardware. This means, for instance, that one server computer can do the job of many, allowing data centres to be run much more efficiently and so stretching IT budgets further. In the first half of 2007 VMware’s revenues and net income doubled, reaching $556m and over $70m respectively.

Except for the likes of Facebook, a hugely popular social-networking site, most Web 2.0 start-ups can only dream of making such substantial sums—and will never go public. In fact, Silicon Valley feels a bit like it did in 1999 these days: many new firms are developing me-too sites that merely copy other ideas and do not have a sustainable business model. Their one hope is that there will be enough advertising dollars to go around for them to make some money eventually.

There is another reason why many new internet start-ups will never make it to the trading floor but must rest their hopes on getting bought by a bigger firm. There is just not enough capital involved. Compared with 1999, developing a new web service is cheap; it sometimes cost only $100,000 compared with a few million back then. Thanks to low-cost hardware, free open-source software, powerful programming tools and new marketing techniques the sums of money involved are not as eye-watering as in the other dotcom boom. Some venture capitalists are already wondering whether making the small investments that these firms need are really worth bothering with.

This is also why, compared to the first internet bust, the economic impact will not be big if venture capitalists really lose interest in internet start-ups. And since the costs of building Web 2.0 services are still coming down, people will keep coming up with new ones—even if they do not make a lot of money and appeal only to a smallish audience. Perhaps, as some predict, this bubble really does have a “long tail”. But even beyond the jargoneers of Web 2.0 there are many who believe it may indeed offer something for everyone and it will never burst.