It’s become something of a truism that running a web business these days doesn’t require much capital. Computing is cheap, storage is cheap, bandwidth is cheap – and, to boot, you can get your content for free (unless you’re Jason Calacanis).
Like most truisms, this one’s pretty true. But it’s not entirely true. There are exceptions – web businesses that require a whole of capital – and the exceptions are interesting because they mark the stress points in the entrepreneurial economy, the places where you can most clearly see the current balance of fear and greed. Back in the dot-com days, the big stress point was fiber-optic cable. Huge amounts of money were dumped into the ground, as companies built high-speed networks designed to handle an expected tidal wave of demand. But the surf didn’t come in – at least not quickly enough – and all that cash stayed in the ground. The overhang of overcapacity sank a lot of companies, ultimately leading to the repricing, at pennies to the dollar, of that capacity, which in turn is fueling, in part, the current resurgence of investment in web businesses. All’s well that ends well – unless it was your money that got buried.
Today, video may be emerging as the new stress point – the new fiber. Running a big on-line video business is anything but inexpensive. Storage and bandwidth may be relatively cheap, but if you consume enough of them, as video businesses do, they start to get very expensive. Yet we’re now seeing all sorts of companies make those investments, from deep-pocketed big guys like Google and Microsoft and Apple to not-quite-so-deep-pocketed big guys like Amazon to startups like YouTube, Grouper, Motionbox and their brethren. What’s not known is how much profit is going to be pumped out of this business, in its various forms, in the short to medium term. What is known is that there’s a heck of a lot of redundant capacity being built up, and unless you believe that all the companies rushing into this market are going to be successful in it, you have to assume that there’s going to end up being more capacity than demand and, hence, a painful accounting for some of the investors. How painful? We don’t know. Maybe it’ll be a toothache, maybe it’ll be a leg run over by a lawnmower. Faith-based investing is always risky, though, and it gets really risky when the business is a capital-intensive one.