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Sunday, October 08, 2006

Google, You Tube & the Next Bubble

Okay, so by now you've read the rumored news that Google, that wunderkind of Wall Street, is rumored to be sniffing around YouTube.com, considering a purchase tagged at more than one billion dollars.

That's right. One Billion Dollars. With a "B".

Why, you may ask, would anyone pay such an exorbitant amount of money for such a piece of new, unproven potential? Does YouTube have some sort of secret worth a billion bucks? Some ravishingly robust technology? Is there anything under the hood that could possibly be worth more than the cost of curing cancer?

The answer, from where I sit at least, is a resounding "no." And before you go playing back your TiVO for what the pundits passed off on your favorite financial cable channel, consider this:

You're watching the wrong replay. What you should be watching is your VHS copies of the internet bubble's previous crash, which is remarkably similar to the one we're watching this week. It wasn't all that long ago, for example, that Lucent technology was trading at $60+ per share. Amazon was way up there. And everyone's favorite blunderball, America Online, had mushroomed to such an overblown valuation that it managed to swallow Time Warner whole.

Back before the Big Pop, Qualcomm was trading near or at $1000 per share. Everyone was buying. Nobody was selling. And the meanest man at the party was Alan Greenspan, who pooped in the punchbowl when he warned Americans of the market's "irrational exuberance." Well, pal, Greenspan was right then. And I'll bet he's chortling right now, too.

What everyone seems to be missing here is that Google and YouTube are the exact same stuff of which bubble stocks are made. The only thing that keeps either of them afloat is the most dangerous thing that inflated and shorted all those previous players: Wall Street analysts who know little about technology. If they read what's really going at Google, they'd be avoiding it like the plague. But it's clear that few of them have ever gotten up close and personal with their Silicon Valley playthings.

For instance, the big under-reported story about Google is that the company is a juggernaut, over-stuffed with engineers suffering from a sever case of "feature creep." For the uninitiated, "feature creep" is the phrase applied to engineers who become so fascinated with inventing new technology that they forget about doing business. They just keep developing new technology. By its management's own admission, Google is quickly becoming crippled with feature creep: more projects are being given the green light, even though there's no real purpose for their development.

And I haven't even begun to address the flaw and holes in Google's systems that threaten to blow apart their revenue strategies. Does the phrase "click fraud" ring a bell? Well, it's only the first one ringing.

Think that's bad? Try this: YouTube has nothing going for it other than high media awareness. It's certainly not the only public video upload site. It has no claims that other brands couldn't boast. And so far, it hasn't earned a dime of profit that it's told anyone about. In fact, recent stories abound about how great it would be if only YouTube could be as profitable as it is fun.

Don't get me wrong, I love both these sites. But there's no way on God's green earth you can tell me that either Google or YouTube can sustain a market cap in the hundred millions, let alone billions. Show me a company with a billion dollar market cap and I'll show you a company that has the power to sustain revenues with lots of zeroes marching in line behind them. The last time anyone tried to pump up the value of an internet stock the way the Wall Street knuckleheads are, they were using phrases like "lifetime value of a customer" to literally increase the real value by one hundred fold.

I wouldn't trust my car to my dentist and I wouldn't let my lawyer take out my appendix, so why would anyone listen to Wall Street analysts - and we all know how ethical and impartial they are - set the value of technology stocks about which they apparently know so little?

Hey, I'm no stock broker. You want to invest in a company that would pay a billion plus for a company that hasn't even come close to turning a profit - and has no reasonable chance to do so in the near future? Fine by me. As far as I'm concerned, Murdoch was having a senior moment when he overpaid for MySpace. But Wall Street is filled with egos, so I guess now the game is on to see which moron will overpay the most.

It's call Big Business for a reason. This time, it's to see who can cause the biggest shareholder lawsuits.

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