Stockton and Darlington may seem an unusual place to begin exploring the potential pitfalls of the digital revolution, but as the birthplace of the railway revolution, it provides a context for some alarming parallels to be drawn.
September 1825 saw the first passenger steam train chug along the Stockton & Darlington railway line. In the period that followed, entrepreneurs flooded the market with speculative investment in new railways, all hoping to capitalise on this new technology.
By 1845, a full railway mania was underway. More than a dozen new schemes were being launched a week, attracting investors from all walks of life. Many of these investors knew little about the transport industry, but entered the fray expecting extraordinary returns, even on essentially unviable projects. The recklessness prompted a prominent judge of the time, Lord Cockburn, to comment that "the country is an asylum of railway lunatics".
Overcapacity ultimately burst the railway bubble. There were widespread bankruptcies, and an economic collapse that affected much of the country.
Fast forward 160 years to the beginnings of a new digital mania. Keen to take advantage of digitalisation, companies are entering new, uncharted areas of business. News Corp bought MySpace for [pound]300m; Microsoft is in the process of purchasing the internet advertising firm aQuantive for a spectacular [pound]3bn.
There has been unprecedented consolidation not just in the media, telecom and technology industries, but among publishers, music labels and gaming companies. In the last month alone, the US online video syndication specialist Brightcove announced content deals with Emap, IPC Media and Hachette Filipacchi UK for video clips on websites; Channel 4 and Emap announced a joint venture aimed at creating a music TV provider; and Facebook bought Parakey, a site that is yet to launch, which aims to be a web operating system that bridges online and offline content.
Digital is rapidly becoming a strategy cornerstone in the new world economy. Just last week, Dow Jones Venture One data announced that venture capital investment in information services companies, including internet companies, has reached nearly $1bn ([pound]493m) for the first time since the dot.com blowout seven years ago. Indeed, the amount of worldwide venture capital invested in internet company deals has doubled every year since 2002.
There is no denying digital revenues will be key for all companies over the coming years. The figures speak for themselves. Mobile music accounts for approximately 40 per cent of record company digital revenues. Online advertising enjoys a return on investment of 26 per cent, compared with 17 per cent for magazines. Global online advertising revenue is forecast to increase from $25bn in 2005 to $55bn by 2010. The list goes on.
The existence of a "digital bubble" has yet to be proven. However, similar warning signs to those present in the rail and dot.com bust are already identifiable: investments based on speculation rather than economics; unproven business models; overheated prices; and capital in excess of available assets.
Obviously, many deals are too recent to know if they will succeed. But we need only look as far back as the dot.com collapse to find sobering examples of disastrous online investments. US flops such as Pets.com and Webvan.com were classic cases of spending outweighing income. Fashion website Boo.com, a high-profile UK failure, suffered due to its complicated, slow website and rife mismanagement (although the domain name has found new life after relaunching as a travel site). …