Web 2.0: A new dot-com bubble in the making?

The dot-com bubble burst -- numerically at least -- seven years ago this month when the NASDAQ Composite index peaked at 5,048, more than double its value just a year earlier.

What followed was a bloodbath of layoffs and consolidation caused in many cases by "dot bombs" -- companies launched with great exuberance to grab as much Internet real estate as they could without mounting a successful revenue model.

In 2007, new Internet technologies have prompted another rush by start-ups and industry stalwarts to tap the burgeoning energy associated with Web 2.0 wikis, blogs, podcasts, widgets and social networks to quickly extend their Internet real estate.

Cisco Systems Inc., for example, this year has acquired two firms that focus on social networking, while venture capital is flowing for newly established firms like Eons Inc., which is making a social network for the 50-plus crowd, and Geni Inc.,  which is building a social network for families.

But while the Web 2.0 phenomenon may have some things in common with the Internet bubble, experts note that there are also stark differences, including the low cost of entry for companies launching blog, wiki or social networking businesses, and the maturity of infrastructures like broadband that are needed to support many Web 2.0 technologies.

The main difference, however, is that this time around consumers are driving the adoption of the technologies rather than companies trying to force their Internet sites and wares onto users, according to industry observers.

Indeed, instead of parking on the Web 2.0 sidelines to wait out a possible bubble, companies should be embracing the new technologies or risk losing out to competitors, said Andrew McAfee, an associate professor at Harvard University who coined the term Enterprise 2.0. 

"What if they decide to ignore this phenomenon and their competitors don't and are able to harness this energy we see on the Web with Web 2.0," he said. "If the competitor can harness that internally and with its community of customers and suppliers … how much trouble would that first company be in? How unpleasant a scenario would that be? That is a key question for managers."

McAfee, like others interviewed for this story, doesn't expect that a rush to create Web 2.0-based systems will lead to a new dot-com bubble that will burst under the stress of failing businesses. "The first go-around was so big, and there was so large a collapse that I have trouble believing either the up or the down will be as big this time around," he said.

In addition, he said, venture capital investments in the new firms are generally far lower than those made during the late 1990s, and the companies receiving funding "typically have more than a PowerPoint" business plan, he added. "Maybe sometimes they don't have revenue … but they have a product, some customers and adoption."