The Two Phases of Internet Investments

The 1990s saw what now has come to be called the dot-com boom. In less than 10 years, however, the dot-com boom experienced an unexpected failure, the dot-com bust. While it is difficult to see where exactly the cause of the dot-com bust resided, it is possible retrospectively to analyze the state of the market which will allow us to comprehend the reasons for a dramatic turn predicted in the market with regard to the investments in SNSs.

Early Predictions and Investments

A typical dot-com company in the early 90s functioned on a business model that relied heavily on the principle of network effects. These companies operated with the belief that when a new market, containing strong network effects comes into being, firms should concentrate more on growing their market share (or even mind share) rather than on becoming profitable. This was thought to be rational because market share would determine which firm could set technical and marketing standards and thus determine the basis of future competition. The dot-coms, thus, began providing products and services free, in the hope that they later would be able to charge for it.

One observes a similar emergence of free social networking software (SNSs) companies in the second phase of internet investments. The SNSs, however, are quicker to act than the dot-com companies and provide some exclusive paid services alongside the free services. Whether these paid services yeild the expected results remains to be seen in a more detailed analysis in the K-Praxis report.

Monopolizing Sectors

In the frenzy of the network effects principle, the dot-com firms neglected one major condition which has resurfaced in the second phase of high internet investments. These companies initially suffered losses in order to create a market base which they hoped monopolize. This, however, was not possible since (despite intellectual propoerty rights), several small and medium sized dot-com companies surfaced providing similar services. Some of the early dot-coms; Amazon, Yahoo, Netscape etc still continue to survive and flourish. The aim of securing a market share by increasing the client base has proved effective in these cases.

SNSs are attempting to revise this error by adding newer services and providing specialized services which gives them a monopolistic role, however small, in the market. For example, one SNS specializes in pet networking. The K-praxis report intends to provide a more nuanced analysis of the specialized services which inform investment opportunities.

Speculation, Policy Changes and the Media Bubble

Even as the owners of SNSs began doubting the sustainability of their companies in the mid 90s, the excessive optimistic spurge in the market based on early successes of certain dot-com companies and media predictions, led them to float stocks which did not exist. Several companies were sued for fraud in the next three years. The policy changes made by Alan Greenspan, the then chairman of the Federal Reserve Bank, including the drastic cuts in interest rates, are said to be the beginning of the dot-com downfall.

Investments based on speculation have reduced considerably in relation to SNSs. Detailed social networking analyses are available through social networking analysts to avoid events like the media bubble.

A Reality Check

The advent of the dot-com companies, falling in line with the exuberance of the Internet, made large claims of delivering all products and services with a click of the mouse. While this decade has shown that the claims themselves may not have been impossible to fulfill, there is a need to see how appealing these claims are to the members of the economy. It is not unlikely (despite Amazon being the 'largest bookstore on earth'), that book lovers still prefer to stroll over to their favorite local bookstore. Business and stock trading continue to be based on 'experiential knowledge' that includes a personal interaction to judge the trustworthiness and reliability of the client/broker etc. Dating and forming new friends comes to be based on a checklist of criteria, rather than the thrill of serendipitous meetings.

SNSs are showing interest in solving this reality-paradox of Internet based service. Are the SNSs interested in creating a new automated utopia or are they trying to simulate the real world? While the automated utopia takes away from the unexpected charm of the real world, does the existence of a fully functioning real world render the need to simulate it redundant?