The dot-com bubble (also known as the dot-com boom, 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 from 1995 to 2001. During the bubble, the valuations of companies in the quaternary sector of the economy increased extremely rapidly. The value of the Nasdaq Composite, which includes many technology companies, rose from 1,000 in 1995 to 5,000 in the year 2000.
While the latter part of the dot-com bubble was a boom and bust business cycle, the Internet boom is sometimes meant to refer to the steady commercial growth of the Internet with the advent of the World Wide Web, starting with the release of the Mosaic web browser in 1993, and continuing through the 1990s.
The period was marked by the founding and, in many cases, spectacular failure of several Internet-based companies commonly referred to as dot-coms. Venture capitalists were eager to invest in any company that had one of the Internet-related prefixes or a ".com" suffix in its name. 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. By the end of the 1990s, the NASDAQ Composite reached a price-earnings ratio of 200, a truly astonishing plateau that dwarfed the peak price-earnings ratio of 80 for the Japanese Nikkei 225 a decade earlier.
The collapse of the bubble took place during 1999-2001. Some companies, such as Pets.com and Webvan, failed completely. Others, such as Cisco, whose stock declined by 86%, lost a large portion of their market capitalization but remained stable and profitable. Some, such as eBay and Amazon.com, later recovered and even surpassed their dot-com-bubble stock price peaks.
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The expansion of the internet occurred in industrialized nations due to the reduction of the "digital divide" in the late 1990s and early 2000s. Between 1990 and 1997, the percentage of households owning computers increased from 15% to 35%. Previously, the absence of connectivity infrastructure and a lack of understanding of the internet were two major obstacles that previously obstructed mass connectivity to the internet. Increased means of connectivity to the Internet and the increased functionality of the internet caused the use of information and communications technology to progress from a luxury to a necessity. The shift to an economy based on computerization is known as the Information Age.
Due to the advent of the Information Age, technology companies realized record-setting growth and experienced meteoric rises in their stock prices. Venture capitalists, eager to profit on this growth, moved to raise and invest capital faster and with less caution than usual. The low interest rates of 1998-99 helped increase the availability of funding.
A canonical "dot-com" company's business model relied on harnessing network effects by operating at a sustained net loss and building market share (or mind share). 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. The phrase "Get large or get lost" was the wisdom of the day. The motto "get big fast" reflected this strategy. Internet companies believed that their survival depended on expanding their customer bases as rapidly as possible, even if it produced large annual losses. For example, Amazon.com spent large sums on advertising to alert people to its existence and expand its customer base, and Google distributed its operating system for free and spent rapidly to create more powerful machine capacity to serve its expanding web search engine. At the height of the boom, it was possible for a promising dot-com 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. In such a situation, a company's lifespan was measured by its burn rate: that is, the rate at which a non-profitable company lacking a viable business model ran through its capital.
Public awareness through advertising campaigns were one of the ways in which dot-coms sought to expand their customer bases. These included television ads, print ads, and targeting of professional sporting events. Many dot-coms named themselves with onomatopoeic nonsense words that they hoped would be memorable and not easily confused with a competitor. Super Bowl XXXIV in January 2000 featured 16 dot-com companies that each paid over $2 million for a 30-second spot. By contrast, in January 2001, just three dot-coms bought advertising spots during Super Bowl XXXV. In a similar vein, CBS-backed iWon.com gave away $10 million to a lucky contestant on an April 15, 2000 half-hour primetime special that was broadcast on CBS.
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. Executives and employees who were paid with employee stock options instead of cash became instant millionaires when the company made its initial public offering; many invested their new wealth into yet more dot-coms.
Cities all over the United States sought to become the "next Silicon Valley" by building network-enabled office space to attract Internet entrepreneurs. Communication 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. Companies that produced network equipment including Nortel Networks were irrevocably damaged by such over-extension; Nortel declared bankruptcy in early 2009. Companies such as Cisco, which did not have any production facilities, but bought from other manufacturers, were able to leave quickly and actually do well from the situation as the bubble burst and products were sold cheaply.
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 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. Many of these buildings along I-495 became vacant office buildings after the bubble burst.
Similarly, in Europe the vast amounts of cash the mobile phone operators spent on 3G licences in Germany, Italy, and the United Kingdom, for example, led them into deep debt and led to the telecoms crash. The investments in infrastructure were far out of proportion to both their current and projected cash flow, but this was not publicly acknowledged until as late as 2001 and 2002. Due to the highly networked nature of the information technology industry, this quickly led to problems for small companies dependent on contracts from operators. One example is of mobile network company Sonera, which paid huge sums in German broadband auction then dubbed as 3G licenses. Third-generation networks however took years to catch on and Sonera ended up being bought by Telia.
In financial markets, a stock market bubble is a self-perpetuating rise or boom in the share prices of stocks of a particular industry; the term may be used with certainty only in retrospect after share prices have crashed. A bubble occurs when speculators note the fast increase in value and decide to buy in anticipation of further rises, rather than because the shares are undervalued. Typically, during a bubble, many companies thus become grossly overvalued. When the bubble "bursts", the share prices fall dramatically. The prices of many non-technology stocks increased in tandem and were also pushed up to valuations uncorrelated to fundamentals.
American news media, including respected business publications such as Forbes and the Wall Street Journal, encouraged the public to invest in risky companies, despite many of the companies' disregard for basic financial and even legal principles.
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 reselling their shares during a lock-up period of 12 to 18 months, and so they did not benefit from the common pattern of a huge short-lived share price spike on the day of the launch. In contrast, the financiers and other initial investors were typically entitled to sell immediately and profit from short-term price rises. 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?"
In spite of this, a few company founders made vast fortunes when their companies were bought out at an early stage in the dot-com stock market bubble. These early successes made the bubble even more buoyant. 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.
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.
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 transaction has been 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.
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. A few large dot-com companies, such as Amazon.com, eBay, and Google, became industry-dominating mega-firms.
Several communication companies could not weather the financial burden and were forced to file for bankruptcy protection, causing what is known as the telecoms crash. One of the more significant players, 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 2002, it filed the largest corporate bankruptcy ever at the time. Other examples of companies that filed for bankruptcy protection include NorthPoint Communications, Global Crossing, JDS Uniphase, XO Communications, and Covad Communications. Companies such as Nortel, Cisco, and Corning Inc. were at a disadvantage because they relied on infrastructure that was never developed and their stock prices dropped significantly.
More in-depth analysis shows that 48% of the dot-com companies survived through 2004. It can be concluded that even companies who were categorized as the "small players" were adequate enough to endure the destruction of the financial market during 2000-2002. Retail investors who felt burned by the burst transitioned their investment portfolios to more cautious positions.
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.
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 the technology boom receded, consolidation and growth by market leaders caused the tech industry to come to more closely resemble other traditional U.S. sectors. Ten information technology firms are now members of the Fortune 100, the 100 largest U.S. corporations by revenues: Apple, Hewlett-Packard, IBM, Microsoft, Amazon.com, Google, Intel, Cisco Systems, Ingram Micro, and Oracle.
For discussion and a list of dot-com companies outside the scope of the dot-com bubble, see dot-com company.
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