Blodget Is Back. Now You Know It's a Bubble Again.

Seems like eons have passed since Henry Blodget was barred from the securities industry for analytical indiscretions committed during the last tech boom. Blodget pumped hot stocks he thought were dogs, S.E.C. investigators charged.

In 2003, after settling the case without admitting or denying guilt, Blodget was fined $4 million and banned from Wall Street for life.

Since then, Blodget has tried to reinvent himself as a something of a tech Svengali, with a writing gig at Slate and a widely read blog, Internet Outsider. He's also published a book, Wall Street Self-Defense.

Some say Blodget was unfairly tarnished in the millennial tech stock meltdown. Others view him as a symbol of Web 1.0 "irrational exuberance." Still others say he was busted doing what was common practice.

Portfolio.com caught up with Blodget as he revs up Silicon Alley Insider, his new New York-focused technology web site. To hear him tell it, New York City's ripe for a tech renaissance.

In an exclusive interview with Portfolio.com, the former Merrill Lynch star says Viacom and Yahoo made a "colossal error" not snapping up Facebook. He also says he's "appalled" that New York City—the media and money mecca—doesn't have more tech clout.

PORTFOLIO.COM: What is Silicon Alley?

BLODGET: New York is the center of the massive global collision of media, technology, advertising, and finance. We have everything from a vibrant start-up scene to thriving mid-sized companies to global behemoths. We also have Wall Street and the stock exchanges—the center of the money universe and huge digital businesses in their own right. We founded Silicon Alley Insider because we were appalled that New York didn't have a bigger voice in the digital business conversation. Now it does.

PORTFOLIO.COM: How is New York different than Silicon Valley?

BLODGET: Well, for one, it holds open the possibility that the people running established businesses aren't morons. Two, its digital economy is more diversified—the Valley has an awesome start-up culture but there's a reason it's so hard to get a flight into JFK. Three, we have better pizza.

PORTFOLIO.COM: Why should people take this iteration of Silicon Alley seriously, considering the last iteration—call it Silicon Alley 1.0—fizzled out?

BLODGET: If you're referring to the start-up scene, it's cyclical, like most industries. Every time there's a downturn—which there undoubtedly will be again—everyone writes autopsies crowing about how silly the boom years were. Lots of companies fold, and lots of depressed people go back to work for Time Warner, Wall Street, et al.

But such downturns actually serve an important purpose: They wash away the crap. Then, when no one's paying attention, the survivors emerge stronger and a new generation of entrepreneurs has the playing field to themselves. The same thing happens out west, by the way. Back in 2002 a friend of mine got a nice fat advance for a book called "The Rise and Fall of Silicon Valley." He was about halfway through the draft when the Valley started roaring again.

PORTFOLIO.COM: What's your view on the valuation numbers being assigned to the hottest web companies like Facebook? Is Facebook really worth $10 billion now?

BLODGET: You mean Bubble 2.0? Actually, while the numbers do seem huge, I think it's shortsighted to reflexively ridicule them. If there is one mistake people have made since the dawn of Internet time it has been to underestimate the value of the leaders and overestimate the value of everyone else.

Remember when Google went public? Snickering about the $85 I.P.O. price filled the papers for weeks. Sure, we could wake up tomorrow and discover that Facebook was a fad. But more likely, we'll marvel at what a colossal error it was for Viacom and Yahoo to pass on buying it when they had the chance.

More specifically, for Facebook to be worth $10 billion, the company has to generate about $1 billion of revenue in a few years. By this time next year, it should be halfway there. To support a $10 billion valuation you just have to believe that Facebook can quickly grow to less than 1/15th of Google's current size. I have no trouble believing that.

PORTFOLIO.COM: Was YouTube worth $1.65 billion?

BLODGET: I actually think it's too early to tell. Online video is proving hard to "monetize," and the video business will never be as profitable as Google's core text-ads (it costs a lot to host and serve video). That said, YouTube's growth has been phenomenal, and contrary to many smug predictions, it is still crushing the rest of the industry.

PORTFOLIO.COM: And it didn't exactly take a dent out of Google.

BLODGET: What people forget when they gawk at the YouTube buyout price is that it amounted to about 1% of Google's market cap. Google's own video effort was D.O.A., so they bought the leader for what, to them, was couch change. You don't have to be Nostradamus to see that video is going to grow like mad over the next few years, and Google will be at the forefront of that. I think the economics will work out, but even if they don't, I think it was a smart bet.

As for the larger tech industry, it's cyclical, too. We've had a happy few years, and eventually we'll have a tough few. But you're not going to wake up one morning and find that the Internet was a hallucination.

by Sam Gustin

^{Photograph of Henry Blodget by Imke Lass/Redux}