For starters, I am not convinced we are in a bubble, but…  

A lot of smart and connected people have started to ask
a) if we are seeing another web bubble, and if so,
b) who would suffer the most in the event of a burst.

We’ve already written about how we are not in a bubble.  With Nasdaq at 2,500, cumulative VC activity being a shadow of 2000-levels and deep-pocketed marketers shifting their advertising dollars online, the likelihood of us being in a bubble is slim.

Of course, because history repeats itself, many are trying to get ahead of the curve and make predictions.  That’s fair and a good thing.

In our previous article on the matter, we stated that we’re not in a bubble per se, we’re just seeing bubble pockets form in some areas like a) video file sharing sites and b) social networking.  Yet, both of these areas are growing.  The only problem is that many of the companies coming out of these categories are in fact applications or features, and not stand alone companies.  This is something that FIM’s CEO Ross Levinsohn discussed in a recent interview.

But, for argument’s sake, let’s assume we are in a bubble, and said bubble would burst.  Those who stand to lose most are VCs.  It is VCs who have finance a dizzying array of startups that will probably not represent successful exits.  Some will, but the bulk will not.  The economics don’t support it.  Say there are 15 Del.icio.us clones, even if 3 go on to be acquired for a profit, the other 12 will eventually lose out to the leaders.  Will they?

Probably not.  Even the laggards who have some technology of value of have built up an audience will find a suitor who can find something to do with them.  Reddit was a clear #2 to Digg and Condenet just bought them, but they were not financed by a deep pocketed VC, so an exit at a low valuation might be possible.  For our thoughts on what Reddit might have fetched, click here.

In Paul Kedrosky’s post that got us thinking, he lists Google, News Corp., Adobe and Yahoo! as main losers in such a scenario, but in fact, when you think about it, all that a bubble would do is ensure that leaders remain firmly entrenched in their slot:

- Google would remain the top search engine for good, it currently boasts nearly 50% market share.  Who else could gain traction when #2 Yahoo! is a distant second with 30% market share; #3 MSN is at 10%, #4 Ask is at 5%, #5 AOL is at 4%.  Go ahead, I know you want to, add it up.  That’s right, the top 5 players hold onto 99% of the market.  Then why did we launch MetaMojo.com - the domain specific vertical search engine?  Read on here.  But the fact is, if tomorrow a bust took place, it would be hard for other startup companies like Turn or Powerset to hurt Google in the long term.  After all, these companies have just secured initial VC financing and really putting a dent in Google’s business will require additional funding - there is no guarantee that VCs would maintain their risk appetite in a post-burst environment.

And in terms of Google’s revenue, we’ve covered it here.  It might take a small hit, but long term, Google will be generating more not less revenue.  That does not mean it’s market cap will also rise though, since P/E and P/S multiples might slide for Google.  Though we think that unless MSFT shakes things up and the overall web space does not cool off, Google has a shot of overtaking MSFT in market cap.  Of course, MSFT looks to have its Mojo back.  I sold my MSFT shares last month after a nice run-up.

- News Corp./Fox Interactive Media/MySpace would definitely be a major winner.  Today VCs are rushing to fund the next MySpace (despite the fact that it’s so fashionable to say that they are not).  MySpace would crystalize its place as the largest social network space without the risk of up-and-comers aiming for its place at the top of the mountain.  After all, users would continue to visit the site, it’s not like an 16 year old MySpace subscriber would care if Web 2.0 fizzled.

In fact, an even bigger beneficiary would be Myspace’s parent Fox Interactive Media.  Their $580M purchase for Intermix (Myspace’s parent) is already a bargain considering YouTube’s sale price and the fact that MySpace has grown 300% since the deal.

MySpace will actually help FOX save money on advertising offline and online on other sites.  Not just on MySpace, even IGN who it bought last year as well for $650M.  This not only makes sense from a marketing sense, but also from an accounting perspective. 

- The third on the list is Yahoo!  On this, au contraire.  Sure, Yahoo! bought Web 2.0 pioneers Flickr and Del.icio.us, but these are now features within Yahoo!’s network.  Yahoo! never counted on these for revenues.  Quite the opposite, Yahoo! acquired these companies to improve user experiences online and retain users.  By doing so, it will be able to continue being the largest Web property out there (note: I own shares in Yahoo!).  If a bubble bursts, the market would rush to them (a flight to quality of sorts) because the overhang of Yahoo! not having been as aggressive as others in acquiring Web 2.0 companies will dissipate.

- Last on the Mr. Kedrosky’s list is Adobe.  I owned Adobe’s shares until its recent rise and sold it to cash in on some profits, but I’d say that while YouTube and the rise of flash video has helped Adobe’s Macromedia become ubiquitous, the truth is that Web 2.0 hurts and not helps Adobe.

Let’s see why: blogging software and everything that embodies Web 2.0 is a negative for Adobe in the sense that less people buy their products.  A couple of years ago, I would create a site using Macromedia Dreamweaver; today I can get a site going on Wordpress or other blogging platforms.  I can edit videos on free video editing programs today.  Of course, all of this comes from the Macromedia acquisition (which all factors being equal was great for Adobe).  But as more and more free services come online, there is less of a need to use Adobe: images can be uploaded on image hosting sites, etc.

The list goes on.  Of course, with or without a bubble, and with or without it bursting, Adobe will do just fine (and for the record, if the stock dips to $30-35, I am probably buying some), but I would say that the explosion of free website building, image cropping, document creating and video uploading services means Adobe is less of a must have on one’s Christmas shopping list.

Oh, while we’re at it, there are a lot of ways to download pirated version thanks to file sharing networks like Bittorrent, Limewire etc…

Point of the story is, the major losers are all of the me-too clones - and the VCs who backed them - out there who will be squeezed if a bubble bursts…

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