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And significantly, that's the first 15 months after AOL announced that they were essentially free -- that they'd give away their content without fees to subscribers provided their own internet access. Unfortunately -- 15 months in -- we see that AOL's content isn't particularly compelling. Every 90 days AOL's (free) service loses close to 1 million additional customers. (That breaks down to one vanishing subscriber every 9 seconds...) AOL staked their future on advertising revenues, and one of their first moves was shovelling larger ads onto their mail interface. But whatever projections they had for advertising money probably didn't anticipate a user base that would shrink by nearly 40% in a little more than 12 months.

This is instructive for several reasons. It's the flipside of their tremendous growth in the 90s. AOL benefited from a one-time historical fluke when all of humanity came online for the very first time. AOL ultimately got a "free trial" floppy disk into the hands of every American. (Literally; AOL distributed close to half a billion disks, more than one for every man, woman, and child in America.) AOL's Ted Leonsis once gloated that "We're in land grab mode right now." Ten years later, that frontier has become very, very crowded. AOL acknowledged this last year with their move to giving away their content for free, and Earthlink acknowledged it in their last quarterly report, citing "a decline in consumer access services revenue." Everyone wants high-speed internet access, and the original cast of players is now firmly locked in a competition with broadband giants like AT&T and Comcast. That battle is going to be brutal.

But look at it another way -- there's fierce competition because there's a lot of people who want to get online. And this spells bad news for tech companies propping themselves up with "traditional" off-line media. AOL's fortunes may be only one piece of Time Warner's media empire, since it also includes some of the best known magazine brands like Sports Illustrated and Time. Unfortunately, magazine circulation is down too. The reason people are signing up for internet access is because there's so many more things to do online. From Second Life and other "massively multi-player games" to full-length TV shows and even full-length movies -- consumers are spending more of their time online. Which means they're not spending their money offline.

This ultimately spells trouble for any "old school" businesses, including even some of the first pioneers of online media like Slate and Salon. But it also means trouble for what I call "the new school wannabes" -- big players who bought their way into the market. (This means anyone who's launched a YouTube competitor to try to split off a piece of the online video market, and it means anyone who's launched an online auction service to compete with eBay. ) A bursting bubble would shake out all but the strongest players.  With a billion web pages to choose from, there's no online destination that has any exclusive claim on their audience's loyalty, and that's even more true for the newer services...

There's been talk of a tightening in the market for online ad revenue, which would hit all the search engines hard. But Yahoo would probably be hit even harder, because they've had the most trouble diversifying their revenue stream. But even without a tightening of the advertising market, the technology market is probably due for a shake up, simply because the online world is always changing.

After all, on June 30 of 2006, AOL had 17.7 million subscribers, and today they have just 10.9 million....

The big question here is really which of the leaders will take a beating.  Once one of the leaders of an entire branch takes a financial nose-dive, all their related service industry companies also dive.  For example, if Microsoft were to take a real hit, then their partners would likely also suffer due to their reduced business.  Considering the diversity of the Linux marketplace, one would expect some consolidation there, with some linux service and support companies getting either eaten by larger companies, or being forced out of business by competition. 

Microsoft will continue to suffer because of Vista, but due to their incredible size, I don't forsee a huge fallout.  At worst, they could consolidate and focus on core activities, and still drive an enormous amount of revenue.  The Acer-Gateway, HP-Compaq, Dell fight will likely heat up.  One can tell who is winning by looking at the back-page ads that Dell made famous... mostly I'm seeing HP back-page IT magazine ads now, so I'd guess to see Dell suffer a bit.  Acer-Gateway may also suffer due to the ever-falling computer costs.  Most people are comfortable spending a bit more now to get a quality machine.  

The shocker may be AT&T.  They will probably start to really suffer due to those 250,000+ surreptitiously unlocked iPhones.  The iPhone is a great device, but AT&T's infamous service issues will likely continue to force customers to unlock their iPhones and switch to "anyone else".

With all tech stocks, one has to keep a close watch on new products.  All it takes is one innovative and truly unique product to catapult one company ahead and potentially drive all others out of business. For example, I would carefully watch for a huge price drop in Blu-Ray or HD-DVD players, with one or the other putting the other one down for the count.   Also, watch for a tremendous increase in one or another company's hard drive sizes, causing all other manufacturers to scramble to license their new storage patents.

Medical device vendors are tech companies, right?

GE Healthcare is one such tech company that is hurting, showing recent financial under performance. Their two key competitors, Philips Medical Systems and Siemens Medical Solutions, may be soon to follow. Here's what threatens these vendors:

1. Falling reimbursement. These vendors have become dependent on big ticket diagnostic imaging equipment - an area that has been a key contributor to raising health care costs, and consequently a target for reduced reimbursement in an effort to rein in unnecessary utilization and wring out product costs. While the impact of falling reimbursement is easiest to see in diagnostic imaging, other areas like patient monitoring are also under pressure.

2. Increasing pressures for new and better medical devices. The market is slowly being forced to consider products with better usability and patient safety. (Don't forget that US hospitals kill over 100,000 patients per year through errors and negligence; something better medical devices could improve.) Changes like better user interfaces, wireless enablement, and systems integration, can reduce provider costs through improved productivity and improve patient safety and patient outcomes. Meeting these new requirements is tough with conventional product strategies pursued by the medical device industry.

3. Proprietary end-to-end system product strategies, intended to raise switching costs and lock in installed bases, are very expensive and time consuming to develop. At the same time, medical device product life cycles are so long (5 to 10 years) that some vendors have trouble keeping experienced engineers, and each new product is a big stakes roll of the dice.

There are two kinds of "innovative" new products in health care. The innovation preferred by the big medical device vendors are increasingly expensive technologies that promise improved diagnostic or therapeutic capabilities. These types of innovations always raise the cost of health care. From a "cost of health care" standpoint, these technologies are only sometimes cost effective. The other type of innovative product is disruptive - it provides a new or existing capability at a much lower cost in a form that can be used by a much broader group of health care professions (or even by patients themselves).

The big health care vendors don't like this disruptive kind of innovation. There are a number of barriers that have limited the entry of disruptive innovations. These barriers include Group Purchasing Organizations who control what vendors can sell to their member hospitals, and receive a "fee" - okay, kickback - from vendors for each sale made; they have no incentive to lower their fees by granting market access to disruptive technologies. Other barriers include regulatory hurdles (e.g., the FDA, and others like the Joint Commission and CCHIT), and the very conservative buying preferences of health care providers.

The status quo dominance of high cost innovations are threatened by the feds. The dept of Health and Human Services has been quietly transforming US health care for years by slowly reducing reimbursement and increasing transparency. Providers have little choice in the face of shrinking revenue but to improve productivity and quality or go out of business. The push for increased transparency has increased significantly in the past few years as providers are pushed to reveal patient outcomes, quality indicators, and pricing.

Of the big three medical device vendors, GE is perhaps the most threatened as a result of their acquisition binge under Jeff Immelt. The best example of this problem is in patient monitoring. Rather than build on the excellent product base provided by their acquisition of Marquette Electronics, GE bought a plethora of other vendors (Data Critical, Datex/Ohmeda, Critikon, Danka) in an effort to buy market share and round out their product lines. Since these acquisitions, GE has been saddled with costly duplicate product support and sustaining engineering efforts. Very few of these product lines have release new products - and most of the new products are existing products that have been "reskinned." The pressure to update these aging product lines is growing; the cost to consolidate these product lines will be huge. 

Philips has done well through their acquisition of H-P/Agilent. They have avoided the corner GE's painted themselves into with patient monitoring, but are also heavily dependent on high priced diagnostic imaging modalities for much of their revenue and profit. Siemens has pushed off their lack luster (at least in the US) patient monitoring division to Draeger, and made a big strategic shift into the clinical lab market. Siemens and GE (through their acquisition of Amersham) both hope to leverage nascent diagnostic trends in molecular imaging into long term revenue growth and profits - a risky strategy.

All three vendors are vulnerable to disruptive innovations. There are a number of such innovations in development from start ups and health care vendors who do not face the "innovators dilemma" faced by GE, Philips and Siemens.

To my mind there's no question of whether there's a tech bubble. Web 2.0 cheerleader Steve Rubel has recently recanted, and VC firm Kleiner Perkins has stopped funding Web 2 companies. These days TechCrunch reads like a shortlist of transparent, Javascript-heavy scams.

You can find as many definitions of Web 2.0 as there are blogs on the internet, but to my mind it boils down to two things: peer production and UI improvements. The former has revolutionized the web and consumer experience, but has proved difficult to monetize for all but a few companies. The latter has allowed for the development of a generation of browser-based applications combining the worst of thick and thin clients, and which appeal only to light-duty users who're unlikely to pay for, say, a web-based spreadsheet. The low-hanging fruit is long gone, and now the stuff at the top of the tree is rotting.

The impending failure of a number of startups will cause VC funding to shrivel up, but shouldn't be taken as an indictment of publicly-traded tech companies, nearly all of whom have solid businesses that are likely to keep growing. Those with an ad-based business will of course suffer if there's an economic downturn, but there's no reason to doubt the viability of Google, Yahoo, Ebay, et al.

With that said, here are a few notable companies (not all of them traded) whose future is, I think, rather gloomy:

• AOL. Its recent bloodletting was a necessary step, but there's no reason to think the wound has been sealed. They're doing what's necessary by trying to reinvent themselves, but a hodgepodge of advertising acquisitions isn't lgoing to magically add up to a viable business. Right now they simply haven't got anything that anyone wants -- their remaining size is their only real asset. AOL's decline seems likely to continue.
  
  
• Facebook. Put simply, there's nowhere to go but down from the stratospheric, Google-like levels of hype currently surrounding the company. Despite the chilly reception that greeted OpenSocial, it seems likely to pose a serious threat to Facebook's current near-monopoly. They're also perched on the edge of monetizing their userbase, which, if Friendster and Myspace are any indication, is the point at which a social network inevitably stagnates and declines. Besides, absolutely no one thinks they're worth the valuation produced by the Microsoft deal. I expect them to use the next year to prove they have a business plan, then cash out before their platform stagnates.
  
  Facebook will become a viable business and there's doubtless still plenty of money to be made off of it. But the wave of its underlying value has crested. It's probably a good idea to invest in it when the opportunity becomes available — but I wouldn't hang on for too long.
  
  Relatedly, any business that's concerned itself primarily with building Facebook Apps is a very bad bet indeed. FB's almost certainly going to be using Microsoft's classic embrace & extend strategy. Third parties will be made redundant and muscled out as soon as they generate a profitable idea.
  
  
• Akamai. The coming release of Flash 9's superior video codec will further the online video boom, providing Akamai with plenty of business in the short term. But its longer -term outlook is less rosy: the content distribution network space is growing crowded, and initiatives like Miro, Joost and BitTorrent, Inc. are working to bring P2P content delivery to commercial enterprise. That technology seems likely to find its way into set-top boxes over the next few years, substantially reducing the need for centralized CDNs. The murky net neutrality issue also poses a threat: in the absence of regulation, large network operators will be well-positioned to cannibalize Akamai's business. And countervailing the windfall of Flash 9, a tech downturn would be a problem for them, too, as video startups' speculative nature and relatively high cost means that a lot of VC money has been finding its way into Akamai's coffers. When the VCs close their checkbooks, Akamai will notice.
  
  
• Microsoft. Redmond houses a huge, lumbering beast, and it takes a while for it to notice that it's been injured. But Vista's failure to impress, Apple's Mac marketshare renaissance, and the increasing proliferation of cheap, Linspire-style open source PCs all add up to looming trouble for Microsoft. Will institutions obediently upgrade to Vista the way MS expects them to? It's hard to see why they ought to. And although I'm not bullish on web-based office apps like Zoho, they still provide an alternative to the increasingly bloated Office Suite. MS continues to show strength in enterprise marketing and a downright surprising amount of technical competence in their server software, but their online strategy lacks coherency, and Vista's failure may mean that their days of consumer OS dominance are drawing to a close.
  
  
• Technorati. A small fry, but one near and dear to my heart — and one that's profoundly doomed. I know some of their engineers, who are friendly, smart and thoroughly competent. But the company shows no signs of life. It did a great job providing a useful function, outlasted its competitors, but ultimately couldn't sell what it had built. Now it provides less useful, mostly-broken functions and can't sell those, either. Google Blogsearch killed these guys — they just don't know they're dead yet.

As noted in the question the markets are turbulent and prices appear in some cases out of whack with business realities.  However I'd suggest that this "second bubble" will have a softer landing than the first as the technology sector has matured and most investors are correctly demanding profits behind the company.  That said, technology always calls for more caution than most other sectors. 

Online advertising continues to spur innovation and fuel earnings growth.   However the revenue winners tend to be confined to the larger companies who can command dramatically greater ad rates and Google who has monetized their publishing partnerships via "Adsense", a version of their "Adwords" pay per click advertising model.   Creating a viable new website or online environment is not capital intensive but gaining "traction" is very problematic.  It remains very speculative to invest in companies that have no proven track record and/or small revenues.    Small tech company failures will continue to far exceed the successes, and the turbulence and unpredictability make it virtually impossible to pick winners using any conventional business criteria.  

Microsoft is big and steady, but under attack:  Facebook partnership is threatened by Google's Open Social.  MS Office Suite and Vista, cash cows for Microsoft, are under a huge strain from free online applications, Firefox, Linux, and a diminishing Enterprise software focus.   Potential market volatility makes buying Microsoft problematic but a good PE indicates selling is not appropriate at this time.  Large players like Microsoft, Yahoo, and Google could soon make critical technological breakthroughs (e.g. a conscious computer) which as Bill Gates notes could be worth "ten microsofts".    However this prospect appears unlikely for at least a decade.

NWS News Corp:   Fox Interactive's aquisition of Myspace places News corp at the top of the online "page view" heap.  Recent partnership of Myspace and Google in "Open Social" bodes very well for Myspace.   Although social network advertising is not as lucrative as more targeted venues, the huge page views and user base are likely to keep Fox as a key online revenue leader for some time.    Fox also aggressively manages a very effective online branding and advertising sales effort.    Look for them to benefit handsomely from increased online advertising revenues and online to offline brand leveraging.

Yahoo has potential: (disclaimer - I own 600 shares YHOO).  Yahoo could benefit handsomely from their strong "second place" in search, prominent efforts in "Web 2.0" development, and their huge network reach as soon as they manage to copy or better imitate Google's pay per click advertising monetization routines.  For Yahoo, much hinges on how well Yahoo can monetize their huge traffic and search user base.   Users show little sign of turning away from Google search and this search traffic is the potentially lucrative ad revenue source, as are the publisher networks that target ads to other websites.   Yahoo is currently innovating strongly in this area but it remains to be seen how favorably that will impact their bottom line.  

Facebook in trouble:  Not traded but could see IPO in 1-2 years.   Microsoft's recent 240MM investment should NOT be seen as a value proxy.   Recent "Open Social" efforts by Google may have very seriously damaged Facebook's long term potential, which rested squarely on their early adoption of a "partially open" architecture for developers.   Open Social has blown this advantage completely out of the water by making it very easy to create social networks at any website.   

IACI:  With a good current PE,  IAC's recent decision to spin off components appears to me to be a very good way to add substantial value to IAC and indicates now may be a great time to buy this stock.  IAC stands to gain from the continued growth in internet advertising run through large networks. 

Mobile Phone and PDA Sector is explosive as Google's Open Handset Alliance will shake things up quickly:

The following Open Handset Alliance Google partners, especially the smaller low cap companies due to their greater exposures to the benefits of the alliance, are poised to do well as they develop new hardware, advertising, and partnerships under Google's innovative umbrella:

Click here for list of companies in the Open Handset Alliance

The big handset alliance losers are Apple and Palm:

Apple iPhone sales are likely to decline immediately as users wait for similar and superior devices using the Google open protocols.    Unlike the MP3 market where Apple's early innovations, continued leadership, and marketing-driven "coolness" factors all played to their advantage they will face big challenges in gaining new subscribers. Predict that iPhone market will show a Mac-like descent rather than an iPOD-like ascent.   Apple stock, now close to historical highs, likely to fall at least 10% and probably more like 30%, consistent with Apple's very long history of large up and down price swings.  

Palm loses because Treo and the new centro sales are likely to decline under pressure from superior new models from other companies.

Google:   The effect of the sweeping changes in technology and "Web 2.0" on Google's stock price is very hard to predict as it appears investors have already incorporated significant and ongoing large profits into the Google stock equation.   I believe Google is a great company but overvalued vis a vis other players in the space like Yahoo.  Google online competitors should eventually rise more with the online advertising tide because their stocks currently reflect failed attempts to match Google's brilliant online advertising abilities.   As advertising distribution and pricing become more standardized and commodified, Yahoo, Microsoft, IAC and even many smaller players stand to gain disproportionately to Google in terms of revenues, profits, and stock price.