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November 28, 2007
 
Results Software

New Tech Bubble?


The dot com boom and crash of the 90s seems long ago, but are we going through a new wave of irrational exuberance?  News Corp. buys MySpace for $580 million, and it looks like a steal.  Google shells out $1.65 billion for YouTube.  Microsoft’s investment in Facebook implies a value of $15 billion.  Does any of this make sense, or should we expect another rude awakening?  We made a beeline to Sanjaya Krishna, a partner in KPMG’s Tyson’s office, who contributed to a recent KPMG white paper titled “The Digital Bubble:  Balancing Operational Challenges with Growth.”  

On October 1st, Sanjaya became a principal in KPMG’s Information, Communications, and Entertainment section (that’s the “ICE” section, if you want to sound cool).  As KPMG’s US Digital Services leader, he advises companies involved in digital content—like the music you download from iTunes, the games you can play on your cell phone, or the hip tech news you receive by email.  (Oooh, that’s us!)  That chart behind Sanjaya explains how his clients can actually make money from the stuff.  Hopefully Sanjaya won’t notice that we smuggled it out of his office for use at Bisnow.

KPMG’s “Digital Bubble” study, published in June of this year, claims that “the frenetic activity now under way is reminiscent of the dot.com experience and the economic bubble it produced.”  The paper notes common warning signs of an economic bubble—among them are a “land grab” mentality (Microsoft and Facebook, anyone?); overheated valuations; anticipation of extraordinary returns on investments; unproven business models; and a focus on measurements other than the bottom line.  Still, Sanjaya says he’s far from predicting any kind of imminent economic collapse.

Before he advised content producers and distributors, Sanjaya was one himself.  He lived in Seattle in the 90s and played drums for an alternative rock band called Miracle Baby.  His all-time favorite group, Led Zeppelin, was one of the last holdouts in the digital era—they just recently licensed their library of hits for electronic distribution.

The point of KPMG’s study, Sanjaya says, is not to predict doom but rather to get companies focused on the feasibility and profitability of the deals they’re making, instead of just rushing to get in bed with whoever is hot at the moment.  It may be exciting to sell your music to mobile phone users, for instance, but Sanjaya notes that the operational aspects of deals (e.g., how is this actually going to work?) get tricky in the digital era, when inventory is infinite, data exchange standards are sorely lacking, piracy is rampant and sales are entirely self-reported.  (KPMG does “contract compliance” work related to the distribution of digital content, assessing the accuracy of self-reported sales that content-owners are getting from content distributors.)

Sanjaya displays some non-digital content in his office: a turtle sculpture by emerging artist Anjali, his six-year old daughter.  Sanjaya grew up in the area, too; he attended Sidwell Friends from grades 1-12.

According to Sanjaya, advertising-supported models for content distribution are on the rise.  It’s a result, in part, of an online culture that grew up with Napster and became accustomed to free content.  (Although iTunes isn’t going away any time soon, Sanjaya notes that free—illegal—downloads still outnumber legitimate ones by 25 to 1.)  Also, the younger generation has a tolerance for advertising, and is willing to listen to a message or two in order to get a game, music, or Gmail for free.  The ability to target ads with extreme specificity makes the digital world an attractive one for advertisers as well as evidenced by the money that is flowing to companies in this space.  Hey, just ask those people on the right hand side of the page!  

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