Serious Money: Regular readers of technology pages will be familiar with Web 2.0. The next generation of the internet has arrived and with it has come one of Bill Gates's famous memos, the one he writes once a decade when he spots a clear and present danger to Microsoft's hegemony.
The last time he penned a similar missive was back in 1995 when he somewhat belatedly woke up to the threat posed by Web 1.0 in general and Netscape in particular. What Microsoft did next is the stuff of legend and Netscape is now but a sad footnote in the history of the internet.
For investors, Gates's 1995 memo was the ultimate "buy" note. Not just for Microsoft shares of course, but for anything even vaguely associated with technology. Indeed, it may be pure coincidence, but in some ways we can say that the then Microsoft chief executive officer launched the great stock market bubble of the late 20th century. He wasn't responsible for it but he certainly marked its arrival.
We might be forgiven for thinking that his most recent memo could mark another investment opportunity. But of what kind? A re-run of the technology bubble? History rarely repeats itself so early, but there may well be echoes of irrational exuberance already present in one or two asset prices - with more to come. There may well be real investment opportunities.
As it happens, a surprising example of how history can be repeated has been seen this year with the market's response to the mergers and acquisitions (M&A) boom. Investors know that the vast majority of M&A deals fail to deliver any shareholder value at all, particularly, of course, to the owners of the firm doing the buying. Armed with that knowledge, we might have thought that the share prices of the many firms trying to buy other businesses would have fallen.
Not a bit of it - both sides of the deal have been rewarded this year, suggesting that markets have failed to understand the lessons of history. Until recently that is.
Telefónica's recent bid for O2 has subsequently seen woeful share price performance from the Spanish telco giant. Perhaps history does just rhyme rather than repeat itself. Maybe investors are now moving to a more discriminating frame of mind. In which case, it would be quite wrong to argue that the coming of Web 2.0 means that we should just buy technology stocks willy-nilly. But it does mean that we should buy some technology companies. The question is, of course, which ones?
Web 2.0 is very different to the threats posed to Microsoft by Netscape. The latter produced a small range of products and was best known for just one of them, its web browser.
Microsoft produced its own web browser, Internet Explorer, and in its inimitable fashion, saw off the threat posed by the competing software supplier. Web 2.0 is not like this at all. It represents a fundamentally disruptive threat to Microsoft's business model.
Bill Gates makes software that he sells to PC users for use on their own computers. Web 2.0, in just one aspect of its multifaceted existence, inverts this model and allows users to run software, remotely via the internet, for nothing. Google is the obvious example of this: a sophisticated - and very proprietary - search software available to use by anyone for free. We don't download the search software to our PC, we simply run the software that sits on Google's computers. Google makes its money from advertising revenues. Web 2.0 has hundreds of examples of bits of software that can be run in this fashion. Larry Ellison of Oracle must be laughing.
This is, sort of, how he has long imagined what distributed computing would look like. Web 2.0 - anyone interested in a description of something that is still rather vaguely defined should look at www.oreillynet. com/lpt/a/6228 - represents one thing above all else: business disruption. If someone offers spreadsheets, word processors and operating systems for free, it is hard for Microsoft to compete. Indeed, it is hard for anyone to make money out of all of this.
So far, we have the high-profile examples of Google and eBay as striking investment opportunities. But only venture capitalists and the original owners of the businesses have made any money from Skype or Flickr.
Serious Money has long been attracted to Microsoft's shares. Now I'm not so sure. I think Gates is right to be worried and Steve Ballmer is right to have identified Google as a very serious threat. But dealing with Netscape was a piece of cake compared to the problems they now face. Crushing competitors with the same business model is relatively straightforward, if a touch Darwinian. Coping with someone who gives away products that compete directly with your main revenue generators is a tad disruptive. What internet telephony is to incumbent telcos, so Web 2.0 is, perhaps, to the established software vendors.
Hence, Microsoft is now a much less compelling story that before. But if we sell our Microsoft shares, what do we buy? Google's stratospheric rise means that only the very adventurous should buy it here.
This is now one for the punter, but I still like it a lot. In another echo of the bubble, it might be time to look at companies at the bottom of the food chain like Cisco or Alcatel.
The key problem with disruptive technological change is that it is much easier to spot the losers than it is to identify the winners.
Venture capitalists can hedge their bets by making diversified bets. We don't have the luxury of investment opportunities in start-ups, so our job is even harder than usual.
Right now, Serious Money is sticking with its punt on Google. There aren't any compelling valuation numbers - the only relevant statistic is the growth rate. But the story is everything.
Chris Johns is an investment strategist with Collins Stewart. All opinions are personal.
