Online Economics - 2006 Annual Report

There was much talk in late 2005 of another economic bubble like the one that devastated the online industry at the turn of this century. But most signs point to much healthier, stable economic conditions in 2006 and beyond.

As John Battelle and Chris Anderson have written, there are several key reasons not to expect a repeat of 2000. First, as suggested earlier, broadband penetration has increased rapidly since the online world began to emerge from the ruins of 2001 and 2002. And broadband access is the engine for much of the industry’s growth.

Second, the technological infrastructure to run online sites is much cheaper now, which helps keep down operating costs. That is particularly true for servers that are needed to host both existing and new sites. Moreover, less expensive hardware means less of a risk in launching a new site and thus encourages more entrepreneurship.

Finally, there is considerably less venture capital circulating in Silicon Valley. According to Chris Anderson, venture capitalists are now investing “less than a fifth” of their 2000 level.72 Less venture capital has meant many fewer public offerings. Rather, hot new companies are being woven into more secure, corporate media structures like the News Corporation or the New York Times Company.