Gambling on Young Web Firms Again

Haven't we seen this movie before?

Cash-rich company offers more than $1 billion for a Silicon Valley Internet company with no profit started by 20-somethings backed by a blue-chip venture firm. The deal is blessed by any number of industry analysts, including Henry Blodgett, while competitors scramble to strike similar deals lest they get left in the dust.

Welcome to Internet Bubble 2.0. It began modestly last year with eBay's purchase of Skype, the Internet phone pioneer, for $2.6 billion. It gained speed with Rupert Murdoch's purchase of MySpace, a social networking site, for $580 million. And it shifted into high gear last week with Google's $1.65 billion purchase of YouTube, a video-sharing site that shows more than 100 million video clips each day. No sooner had Google's latest purchase been announced than Yahoo stepped up its campaign to snag Facebook, the networking site favored by college and high school students, whose 22-year-old founder has reportedly turned up his nose at a previous billion-dollar offer.

While the feverish hype has surely not reached the pitch of the Internet craze of the late 1990s, the similarities are striking -- in particular, the logic used to justify purchase prices on the basis of page views and synergy rather than the more traditional metrics of sales and profit. Left unspoken, but well understood, was the value to Google of making sure that YouTube traffic didn't fall to rivals such as Yahoo, Amazon and Microsoft.

"If you believe it's the future of television, it's clearly worth $1.6 billion," said Microsoft chief Steve Ballmer. "If you believe something else, you could write down maybe it's not worth much at all."

That was meant to be a put-down. But at the same time, Ballmer couldn't help but betray a hint of doubt about Microsoft's more disciplined approach. After all, it was the third time Microsoft had been outbid and outflanked in recent months, as Google snared deals with both MySpace and AOL.

For YouTube's three youthful founders, Chad Hurley, Steven Chen and Jawed Karim, the Google deal represented the second big payday of their short but brilliant careers. The initial seed money had actually come from the money they made when another start-up they were involved with, PayPal, was sold to eBay in 2002 for $1.5 billion. At the time, some thought that price was also rich. But no longer: PayPal, which allows people to make payments by e-mail, now represents more than a third of eBay's sales.

All this deal-making excitement couldn't help but fuel the recent rally on Wall Street, where the tech-heavy Nasdaq was up 2.5 percent for the week and nearly 15 percent over just the last two months.

Can you spell "irrational exuberance"?