How to know when Web 2.0 is going to blow

Dave Winer has an interesting post on how you'll know when the Web 2.0 bubble has burst. His main sign will be when Google shares tank. The argument is that Google has created a huge aftermarket so Web 2.0 players can live off of advertising.

I don't buy it. Why? The only way this aftermarket would disappear is for Google to go away, which I don't think is going to happen anytime soon. While Barron's (subscription required) over the weekend noted that Google is overvalued it's not wildly so. After all this isn't Pets.com we're talking about. Also remember Barron's said Google was overvalued at $360 (lesson: these bubbles always last longer than logic dictates). Meanwhile on a forward price-to-earnings ratio Google shares are cheaper than Yahoo's. Forward P/E ratios assume that current earnings projections are correct, but Google hasn't disappointed yet.

So a 50 percent "crash" in Google shares to $240 would leave the company with a market cap of $73 billion or so. That's still more than double Yahoo's market cap, which despite its recent troubles is far from going extinct. Bottom line: Google would need an economic collapse for its Web 2.0 ecosystem to go kaput. And if there is such a collapse Web 2.0 will be the last thing on our minds.

All that said Winer does raise an interesting question so here are a few more mileposts to indicate that the Web 2.0 bubble is going to blow.

--Fawning media coverage. We've already seen some of this. BusinessWeek's cover of Digg's Kevin Rose marks the top. Meanwhile, folks babbling in the New York Times about how they are jealous because they are merely rich compared to super-rich sounds a bit 1999-ish.

--Private equity dries up. There is a ridiculous amount of dollars sloshing around in private equity, not to mention venture capital. Web 2.0 players aren't going public, but they are getting buyouts. Of course, the real goal is to sell out to Yahoo or Google, but I'd argue those guys are only interested because they don't want Rupert Murdoch to get lucky again like he did with MySpace. Private equity means higher prices for Web 2.0 companies.

--The MySpace indicator. Watch MySpace's traffic tallies closely. News Corp. has generated a return on its MySpace purchase just by signing a $900 million exclusive ad deal with Google, but I'm convinced two things will happen:

News Corp. will screw up MySpace.

Or the audience gets bored and moves on to new things.

Either outcome would put a dent in the Web 2.0 mystique and make people question why they are overpaying for these upstarts.

The bright side: No one's 401(k) is going to be wiped out if Web 2.0 implodes. That fact alone may mean all this bubble chatter is overblown. When your grandmother can define Web 2.0--which would be quite a feat considering techies can't--you'll know any bubble is about to blow.