The dot-com bubble (also known as the dot-com boom, the dot-com crash, the Y2K crash, the Y2K bubble, the tech bubble, the Internet bubble, the dot-com collapse, and the information technology bubble) was a historic economic bubble and period of excessive speculation that occurred roughly from 1997 to 2001, a period of extreme growth in the usage and adaptation of the Internet by businesses and consumers. During this period, many Internet-based companies, commonly referred to as dot-coms, were founded, many of which failed.
During 2000-2002, the bubble burst. Some companies, such as Pets.com and Webvan, failed completely and shut down. Others, such as Cisco, whose stock declined by 86%, and Qualcomm, lost a large portion of their market capitalization but survived, and some companies, such as eBay and Amazon.com, later recovered and surpassed their stock price peaks during the bubble.
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Bubble growth
Increases in computer and Internet usage
The commercial growth of the Internet was sparked by the advent of the World Wide Web and then the release of the Mosaic web browser in 1993. In the late 1990s, the reduction of the "digital divide", advances in Internet connectivity, increases in uses for the Internet, and better education on the use of the Internet led to further increases in Internet usage. Between 1990 and 1997, the percentage of households in the United States owning computers increased from 15% to 35%. Information and communications technology progressed from a luxury to a necessity. The shift to an economy based on computerization is known as the Information Age.
Stock market bubble
As a result of the rapidly-increasing usage of the Internet, many investors were eager to invest, at any valuation, in any company that had one of the Internet-related prefixes or a ".com" suffix in its name, leading to a stock market bubble. During the bubble, the valuations of companies in the quaternary sector of the economy increased rapidly. Venture capitalists, eager to profit on this investment demand, moved to raise and invest capital faster and with less caution than usual. A combination of rapidly increasing stock prices, market confidence that the companies would turn future profits, speculation in stocks by individuals, and widely available venture capital created an environment in which many investors were willing to overlook traditional metrics, such as the price-earnings ratio, in favor of basing confidence on technological advancements. The low interest rates of 1998-99 helped increase the availability of funding. The Taxpayer Relief Act of 1997, which lowered the top marginal capital gains tax in the United States, is also cited as a factor making people willing to make more-speculative investments.
An unprecedented amount of personal investing occurred during the boom, and the press reported the phenomenon of people quitting their jobs to engage in full-time day trading. The value of the Nasdaq Composite stock market index, which includes many technology companies, rose from 1,000 in 1995 to 5,000 in the year 2000. By the end of the 1990s, the NASDAQ Composite reached a price-earnings ratio of 200, dwarfing the peak price-earnings ratio of 80 for the Japanese Nikkei 225 during the Japanese asset price bubble of 1991. In 1999, shares of Qualcomm rose in value by 2,619% and 12 other large-cap stocks each rose over 1,000%. Even though the Nasdaq stock market index rose 85.6% and the S&P 500 stock market index rose 19.5% in 1999, more stocks fell in value than rose in value, as investors sold stocks in slower growing companies to invest in Internet stocks.
At the height of the boom, it was possible for a promising dot-com company to become a public company via an initial public offering and raise a substantial amount of money even though it had never made a profit--or, in some cases, realized any material revenue whatsoever.
American news media, including respected business publications such as Forbes and The Wall Street Journal, took advantage of the public's desire to invest in the stock market; an article in the Wall Street Journal suggested that investors "re-think" the "quaint idea" of profits, and CNBC reported on the stock market with the same level of suspense as many networks provided to the broadcasting of sports events.
Academics Preston Teeter and Jorgen Sandberg have criticized Federal Reserve chairman Alan Greenspan for his role in the promotion and rise in tech stocks. Their research cites numerous examples of Greenspan putting a positive spin on historic stock valuations despite a wealth of evidence suggesting that stocks were overvalued.
Author Andrew Smith argued that the financial industry's handling of initial public offerings tended to benefit the banks and initial investors rather than the companies. This is because company staff were typically barred from selling their shares during a lock-up period of 12 to 18 months, although many were able to lock in profits by buying options or entering into forward sale agreements. However, the investment bankers and other initial investors were typically entitled to sell their shares on the first day of trading and lock in huge profits literally overnight. Smith argues that the high profitability of the IPOs to Wall Street was a significant factor in the course of events of the bubble. He wrote:
"But did the kids [the often young dotcom entrepreneurs] dupe the establishment by drawing them into fake companies, or did the establishment dupe the kids by introducing them to Mammon and charging a commission on it?"
However, executives and employees who received employee stock options became instant paper millionaires when their company made its initial public offering. Several company executives, such as Mark Cuban, made vast fortunes when their companies were bought out at an early stage in the dot-com stock market bubble; the most successful sold for cash or entered into hedging transactions on shares they received.
"Get big fast"
Most dot-com companies operated at a net loss to harness network effects to build market share or mind share as fast as possible, using the mottos "get big fast" and "get large or get lost". These companies offered their services or products for free or at a discount with the expectation that they could build enough brand awareness to charge profitable rates for their services in the future.
Advertising
Technology companies sought to expand public awareness and their customer bases via massive advertising campaigns. Many dot-coms named themselves with onomatopoeic nonsense words that they hoped would be memorable and not easily confused with a competitor. Dot-com commercials during Super Bowl XXXIV in January 2000 featured advertisements by 16 dot-com companies that each paid over $2 million for a 30-second spot. CBS-backed iWon.com gave away $1 million to a lucky contestant on an April 15, 2000 half-hour primetime special that was broadcast on CBS. By June 2000, after the bubble burst, dot com companies were forced to rethink their advertising campaigns. In January 2001, just three dot-coms bought advertising spots during Super Bowl XXXV: E-Trade, Monster.com, and Yahoo! HotJobs.
Lavish spending by dot-coms
The "growth over profits" mentality and the aura of "new economy" invincibility led some companies to engage in lavish internal spending, such as elaborate business facilities and luxury vacations for employees. Upon the launch of a new product or website, a company would organize an expensive event called a dot com party.
Bubble in telecom
Telecommunications equipment providers, convinced that the future economy would require ubiquitous broadband access, went deeply into debt to improve their networks with high-speed equipment and fiber optic cables. In the struggle to become a technology hub, many cities and states used tax money to fund technology conference centers, advanced infrastructure, and created favorable business and tax law to encourage development of the dotcom industry in their locale. Virginia's Dulles Technology Corridor along I-495 is a prime example of this activity. Large quantities of high-speed fiber links were laid, and the State and local governments gave tax exemptions to technology firms. Office vacancy increased significantly after the bubble burst, although the area still remains a major technology hub.
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Aftermath
On January 10, 2000, America Online, a favorite of dot-com investors and pioneer of dial-up Internet access, announced plans to merge with Time Warner, the world's largest media company, in the largest merger in history at that time. The announcement is generally regarded to be the peak of the dot-com bubble. The transaction was later described as "the worst in history". Within two years, boardroom disagreements drove out both of the CEOs who made the deal, and in October 2003, AOL Time Warner dropped "AOL" from its name.
On March 10, 2000, the NASDAQ Composite peaked at 5,132.52, but fell 78% in the following 30 months.
After venture capital was no longer available, the operational mentality of executives and investors completely changed. A money-losing company's lifespan was measured by its burn rate, the rate at which a non-profitable company lacking a viable business model spent its existing capital. Many dot-coms ran out of capital and were acquired or went through liquidation; the domain names were purchased by old-economy competitors, speculators or cybersquatters. Several companies and their executives were accused or convicted of fraud for misusing shareholders' money, and the U.S. Securities and Exchange Commission fined top investment firms including Citigroup and Merrill Lynch millions of dollars for misleading investors. Various supporting industries, such as advertising and shipping, scaled back their operations as demand for their services fell.
Telecoms crash
Several companies that produced network equipment were irrevocably damaged by the debt taken on to fund their expansion and went bankrupt, causing what is known as the telecoms crash. However, some communications companies that supplied equipment and outsourced manufacturing, such as Cisco and Qualcomm, were able to survive. Similarly, in Europe, mobile phone companies overspent on 3G licences, which led them deep into debt and led to the telecoms crash. The investments in infrastructure were far out of proportion to both their current and projected cash flow.
WorldCom, led by Bernard Ebbers, was the subject of accounting scandals. WorldCom's stock price fell drastically when the accounting scandal was publicized, and, in July 2002, it filed the largest corporate bankruptcy ever at the time.
September 11th attacks and stock market downturn of 2002
The September 11 attacks accelerated the stock market drop; the NYSE suspended trading for four sessions. When trading resumed, some of it was transacted in temporary new locations.
The stock market downturn of 2002 caused the loss of $5 trillion in the market value of companies from March 2000 to October 2002.
Surviving companies
Although their stock prices declined significantly, 48% of dot-com companies survived through 2004. Many companies, even those who were categorized as the "small players", were adequate enough to endure the stock market drop of 2000-2002. Retail investors who felt burned by the burst transitioned their investment portfolios to more cautious positions.
Job market and office equipment glut
Nevertheless, laid-off technology experts, such as computer programmers, found a glutted job market. University degree programs for computer-related careers saw a noticeable drop in new students. Anecdotes of unemployed programmers going back to school to become accountants or lawyers were common. Failed startups liquidated all of their equipment such as Herman Miller Aeron Chairs and computer equipment.
Legacy
On the long-term legacy of the bubble, venture capitalist Fred Wilson, who funded dot-com companies, said about the dot-com bubble:
"A friend of mine has a great line. He says 'Nothing important has ever been built without irrational exuberance'. Meaning that you need some of this mania to cause investors to open up their pocketbooks and finance the building of the railroads or the automobile or aerospace industry or whatever. And in this case, much of the capital invested was lost, but also much of it was invested in a very high throughput backbone for the Internet, and lots of software that works, and databases and server structure. All that stuff has allowed what we have today, which has changed all our lives... that's what all this speculative mania built".
As growth in the information technology sector stabilized, several companies consolidated, gained market share, and came to dominate their respective fields. A few large dot-com companies, such as Amazon.com, eBay, and Google, became industry-dominating mega-firms. The information technology industry came to more closely resemble other traditional sectors of the economy, albeit with still a faster growth rate and higher valuations than other sectors. There are now many information technology companies ranked at the top of the Fortune 500 list of the largest companies by revenues.
Source of the article : Wikipedia
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