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MYHRVOLD: I wrote an article in Slate about the economics of the Web, where I pointed out that there were no economic models regarding the content creation on the Web. At this point. The blunt way to put that is the word that usually follows manic is depressive. The phase of enormous uncritical not well-thought out enthusiasm for the Net which we've seen in Wall Street and many other ways in the last 12 months is going to give way to a period of time where people are very negative, at least about some aspects of it. Some of the corrections that we're going to see the market make are going to be too far the other way. In the same sense that they were crazy high six months ago they're going to be crazy low six months from now. Roughly speaking.

So, that's one effect. The second effect is that even setting aside the market being overly negative, it's just basically true that many of these things don't have a lot of basis in reality. They never did. Or they did at one time and now events have changed. If you look at television as an example: TV ultimately developed both a strong subscription version, which is cable, and a strong advertising version which is ordinary broadcast television. It's a great example of a new medium that developed both, but it developed both over a period of about 30 years. It took a while for the major advertisers to shift their advertising budgets from print and billboards and those cute little Burma Shave signs that they used to have in the 30's. Those people had a hard time shifting to television. Similarly the advertisers of the world spend billions and billions of dollars, but they're not going to shift those billions, which is a central part of their business, until they understand the medium more, until there's more people there and until the techniques of Web advertising are understood better.

All those things take time. It doesn't happen overnight. A lot of the problem with the Web comes from mis-extrapolating. There are some curves that are rising enormously fast. Like take the number of people who get on the Internet. That curve is going like a rocket. That's because it's easy for people to get on the Net. A hundred million people have personal computers, of one variety or another, and they're not on the Web yet. Getting on the Web means getting a modem, which for most of those people are already built into their computer; getting some free software, and signing up to a service where someone may give you up to a year free to get on the service. The barrier to getting on the Net is very low, and the pressure's very high, because you hear about it constantly. And all your friends are on it. Pretty soon everyone who's even half awake is going to be on the Web, in some form or another. Maybe just for email, maybe just for limited exploration; but they'll be there. That curve grows very very fast.

On the other hand, the curve for getting advertisers to support content sites is based on a fundamentally different dynamic. It's about people having success with Web advertising. It's about ad agencies understanding how to do it. Unfortunately the center of gravity of the advertising world has been broadcast, which is a quite different medium, quite different set of techniques. Getting the people in the board rooms of America and the rest of the world to decide to shift billions away from something that they're very comfortable with over to the Net takes time. A much longer period of time than it takes millions of people to say "Oh, what the hell, I'll answer that free offer and get on the Net." But if you take those curves extrapolated from one phenomenon and move them over to another, you make the wrong decision.

To keep it in perspective the early days of the personal computer industry were just as tumultuous. Just the stakes were smaller, and nobody gave a damn.

At The West Coast computer fair, there was a point where you could have gone and Steve Jobs and Mike Markkula would have run your credit card and sold you an Apple I. Many of the companies of that era tanked. There was a company called Gavalan that made the first portables. Some companies were spectacularly successful, and then fell right off, like Osborne Computer.

That example is being played out today on the Net. The Net is way more central to society, so it's been hyped far more than early PCs were. Because it threatens potential entertainment, content and communications, the stakes are enormously higher. Instead of companies going through five million dollars of venture capital funding, and tanking, as they did in the early 80's, today they get an instant IPO valuation of five hundred million dollars, and then tank. So they have a hundred to one difference to scale.

BROCKMAN: To Bill's credit, he told me that Microsoft, among a few other large companies, was prepared to lose a lot of money for at least three years. It would then be interested to see who was left standing. Isn't it interesting that companies can call themselves successful when they've never had a profitable quarter? What does it say about culture, economics, when some of the leading companies in the field have never shown a profit.

MYHRVOLD: Not only have they not shown a profit, some of them don't even have any cash flow (speaking broadly, not just the companies you mentioned). The one counter-example I can give you is Craig McCaw, who became a billionaire without ever turning a profit. There was only one year when McCaw Cellular was profitable and it was because of an asset sale, it wasn't because of operations. Now the flip side is that they did have cash flow. The reason they weren't making a profit is they were continually building up their network, which clearly was a good decision.

However, we are living in the realm of expectations so much that ultimately it becomes difficult to fulfill those expectations. It's a perfectly reasonable statement regarding some set of Internet companies to say "this company may be enormously important in five years." However that quickly becomes, "if it's going to be important in five years, then it's going to be a real rising star in two years." That means I have to buy the stock now, and that winds up getting the company fully valued, such that some companies over the course of last year, have had values that are in excess of anything you could imagine for their business outlook in five years under reasonable expectations. To a degree that was crazy; to a degree that was actually fairly sane. Mostly it was crazy. The problems start to happen when you get people's expectations up too high. Once they start getting disappointed, then they wind up crashing things unrealistically low. We're likely to see a variety of cycles of Internet popularity. I don't mean national popularity of the Net, but in terms of punditry, in terms of the business, we're going to see a cyclical phenomenon where people get way too excited, and then way too depressed. This is sad, because it's going to hurt some very legitimate companies and some very legitimate ideas.