Facebook’s flotation will inspire another internet gold rush

Facebook's flotation has caused a massive stir amongst investors. But haven't we seen this all before? Matthew Lynn examines whether we are on the threshold of another dotcom boom.

A wonder company connecting the whole world. A billionaire still in his 20s. A massive successful stockmarket flotation that creates a boom in technology stocks. We're talking about Facebook, of course. Well, actually, we're not. The firm is Netscape, the business that created the first widely available and easy-to-use web browser.

No one remembers Netscape anymore, but back in 1995 it was big news. The browser, created by its then 24-year-old founder, was the first piece of software that turned the internet into something we could all use, rather than just a plaything for a few geeks happy tapping in pages of code every time they sent an email.

It didn't have an obvious business model the browser was given away free but that didn't stop investors piling into the shares. The stock soared, and everyone made a lot of money.

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Netscape was finally crushed by Microsoft, which gave away its own browser with every Windows computer sold. Its legacy, though, was huge. Its flotation sparked the dotcom boom. For the next five years, every ambitious entrepreneur had their own site and investment bankers working on their initial public offering (IPO). It was one of the most epic stockmarket booms of all time.

The interesting question about the Facebook IPO is whether it will be another Netscape or another Google. When the search giant listed in 2004, it marked the stockmarket debut of a huge new company, and it went on to massive success. But it wasn't the start of a wider tech boom. It was a one-off. Netscape however, initiated a tech boom.

So which will it be? Twelve years after the last dotcom boom collapsed, a third wave of internet expansion is getting going. Here's why.

First, there are a huge number of satellite firms turning into big successes.The internet giants are spawning dozens of smaller firms that feed them content or services. As Facebook soars in value, for example, so does Zynga. In its IPO prospectus, Facebook revealed that 12% of its revenues come from the firm that creates hugely popular online games such as FarmVille.

At Apple, the Finnish software developer Rovio has made a fortune from its Angry Birds game, and may float this year or next. On eBay, thousands of small traders have created an alternative economy selling everything from spare parts to cars. Many of them will turn into major businesses over the next few years.

Every online giant is spawning a host of smaller firms. Each one is often very profitable in itself and many of them will stage their own IPOs in the next few years. The result? A steady stream of new firms will come to the market.

Next, old industries are starting to crumble in the face of the online onslaught. We can see the evidence all around us. Newspapers have been losing sales for years, but now they are starting to close down. So far it's mostly local newspapers, but national publications can't be far behind. Shops are closing on the high street, unable to afford the cost of rent, heating and staff when people can buy the same products online for less, and without the parking hassle.

Banks are starting to lose market share to the new breed of internet-only lenders, and may not be able to keep thousands of high-street branches open forever. Credit card firms are losing out to new players, such as Wonga, which, while no one likes them much, have come up with innovative ways of assessing credit worthiness in a market that's been brain dead for years. Book publishers are being taken apart by the Kindle. Estate agents face challenges from internet rivals. The fund management industry's high charges are being challenged by low-cost exchange-traded funds.

A dynamic process is underway. Take retailing, for example. As high-street shops come under more pressure, the more marginal ones (or those loaded up with debt by private equity) will close. Shopping centres start to be boarded up, and become less attractive to visit, so more people buy things online, making it harder for the remaining stores to stay afloat. As online retailer volumes rise, they can get better prices from suppliers, allowing them to cut prices further and encouraging more people to shop online.

Much the same happens in other industries. As online lenders such as Zopa grow, the banks suffer, their rates get worse, so more people lend and borrow online. As bookshops close, more people will buy Kindles. A tipping point is now being reached where many industries will become mostly digital, with digital sales on the side. It happened to the music industry some years ago and many others will now follow. As old businesses close, more space opens up for online entrepreneurs allowing them to increase their profits hugely.

Many of them will float, and if they are doing well the shares will soar in value. Investors always like a big theme. Twelve years on from the dotcom crash, they are ready for another internet gold rush and the Facebook IPO will be its trigger, just as Netscape was 17 years ago. The only real difference is that Facebook isn't likely to be crushed by Microsoft.

Matthew Lynn

Matthew Lynn is a columnist for Bloomberg, and writes weekly commentary syndicated in papers such as the Daily Telegraph, Die Welt, the Sydney Morning Herald, the South China Morning Post and the Miami Herald. He is also an associate editor of Spectator Business, and a regular contributor to The Spectator. Before that, he worked for the business section of the Sunday Times for ten years. 

He has written books on finance and financial topics, including Bust: Greece, The Euro and The Sovereign Debt Crisis and The Long Depression: The Slump of 2008 to 2031. Matthew is also the author of the Death Force series of military thrillers and the founder of Lume Books, an independent publisher.