THE DOTCOM BUBBLE

INTRODUCTION


The dot-com bubble is also known as the dot-com boom, was a stock market bubble which is caused by excessive speculation of Internet-related companies between 1995 and 2000, a period of massive growth in the use and adoption of the Internet. The speculative investments in dot-coms drove up equity markets. The technology-centric NASDAQ Composite Index rose from less than 1,000 in 1995 to a peak of 5,000 in March, 2000.


The reason we can say that, as people were shifting from traditional investment to internet investment or online trading, many investors ignored traditional investment metrics, such as the ratio of a company's current share price compared to its per-share earnings (P/E ratio), and many other factors also investor started ignored. Instead, they subscribed to a business model that favored building brand awareness and market share quickly, even if that required offering services or products for discount prices or for free. Advances in technology infrastructure and a growing understanding of the Internet-enabled people in developed countries to easily get online. These factors, combined with the seemingly overnight fortunes made by some of the startup founders whose companies went public, fueled the exuberance.


The dot-com bubble started collapsing in 1999 and 2000 many companies were suffering huge losses and many were declared bankruptcy at the end of year. By the end of 2001 the dot-com bubble bust and many big companies sees a huge loss in their market share capitalization and many dotcom stocks had gone burst. The trillions of dollars in market value lost during the crash of the stock market in between 2000 and 2002. And couple financial damages inflicted such as 9/11 which add more damage to the economy of US and stock market.


The new economy has defined as the internet boom takes in the economy, among the estimated 48% of the dot-com companies that survived through 2004 are current Internet giants Amazon, eBay, Priceline and Google.


FORMATION


1. Innovation in the 90s

The 90s were a period of rapid technological advancement. The creation of the Mosaic in 1993, the world’s first internet browser, allowed individuals to access the World Wide Web from their personal computers. Soon after, personal computers slowly transitioned from being a luxury product to essential in many homes across the United States. With this new mass adoption of internet usage, entrepreneurs began to see the untapped potential within this industry. This marked the shift to the Information Age, an economy based on information technology, and many new companies, such as Amazon, Yahoo, and GeoCities were founded, among thousands of others.


2. Favorable Economic Conditions for Tech

Around the same period, interest rates in the United States were at their lowest point since the 1970s and the capital gains tax rates were lowered significantly. Because of this, investors now had more capital which allowed them to make more speculative investments in Dot-com companies. Low-interest rates made borrowing less expensive for entrepreneurs who needed loans to start their new “internet ventures”. This resulted in a large number of new internet-companies being formed. The success of Netscape’s IPO also inspired this new wave of entrepreneurs and investors to take their companies public, and investors rushed to fund them.


BURSTING OF THE BUBBLE


1. Overvaluation of dotcom companies


Most tech and internet companies that held IPOs during the dot-com era were highly overvalued due to increasing demand and a lack of solid valuation models. High multipliers were used on tech company valuations, resulting in unrealistic values that were too optimistic.


Analysts did not focus on the fundamental analysis of these businesses, and revenue generation capability was overlooked, as the focus was on website traffic metrics without value addition. Research carried out revealed an overvaluation of more than 40% of dot-com companies through the study of their P/E ratios.


2. The Abundance of venture capital


Money pouring into the funding of tech and internet company start-ups by venture capitalists and other investors was one of the major causes of the dot-com bubble. Also, cheap funds obtainable through very low- interest rates made capital easily accessible. It coupled with fewer barriers to acquiring funding for internet companies led to massive investment in the sector, which expanded the bubble even further.


3. Media frenzy


Media companies encouraged people to invest in risky tech stocks by peddling overly optimistic expectations on future returns and the “get big fast” mantra. Business publications – such as The Wall Street Journal, Forbes, Bloomberg, and many investment analysis publications – spurred demand through their media outlets adding fuel to a burning fire and further inflating the bubble. Alan Greenspan’s speech on “irrational exuberance” in December 1996 also set off the momentum on technological growth and buoyancy.


4. Spending tendencies


Most dot-com companies incurred net operating losses as they spent heavily on advertising and promotions 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.


The "growth over profits" mentality and the aura of "new economy" invincibility led some companies to engage in lavish spending on 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.

AFTERMATH OF THE BUBBLE


After venture capital was no longer available, the operational mentality of executives and investors completely changed. A dot-com company's lifespan was measured by its burn rate, the rate at which it spent its existing capital. Many dot-com companies ran out of capital and went through liquidation. Supporting industries, such as advertising and shipping, scaled back their operations as demand for services fell. However, many companies were able to endure the crash; 48% of dot-com companies survived through 2004, albeit at lower valuations. After suffering losses, retail investors transitioned their investment portfolios to more cautious positions. Popular Internet forums that focused on high-tech stocks.


Layoffs of programmers resulted in a general glut in the job market. University enrollment for computer-related degrees dropped noticeably. Anecdotes of unemployed programmers going back to school to become accountants or lawyers were common. As growth in the technology sector stabilized, companies consolidated; some, such as Amazon.com, eBay, and Google gained market share and came to dominate their respective fields. The most valuable public companies are now generally in the technology sector.


If bubbles popping were extinction-level events, then companies like Apple, Google, and Amazon were the crocodiles of the tech ecosystem. The Big Pop allowed them to become apex predators in their respective fields, for several reasons. Real estate became much cheaper, hardware became easier to obtain, the market was flushed with recently-unemployed, talented software engineers, and the extinction of their competitors allowed them to rapidly gain market share. Today, they are some of the most valuable, and most recognizable brands in the world. Their respective portfolios overlap somewhat and often they compete for market share, as well as talent. In later years, companies like Facebook and Netflix

would join their ranks. Within their respective workplaces, each of these tech giants demands extremely high performance from their employees and have a habit of acquiring any potential competition.


Although nearly untouchable today, back then these companies were not immune to the fallout. In the face of diminishing confidence, Amazon’s share price fell from $107 to just $7. Google waited out the DotCom bubble and only launched its IPO in 2004. The innovation that followed the malaise of the early 2000s were led by these apex companies. They invested heavily in new startups and even built the infrastructure (cloud computing) that allowed smaller companies to iterate much faster for much less upfront infrastructure investment.


The DotCom bubble fostered an era of entrepreneurship that has not been in the US since before the Great Depression. It provided a petri dish to test out the validity and marketability of a wide range of Internet services. Many of the services were way ahead of their time — like online food delivery and online clothing stores. Unfortunately for these services, the consumer base, technology, and infrastructure simply were not ready.


Today, investors look at tech IPOs with increased scrutiny — the consensus is that one simply does not take a tech company public before it reaches profitability. WeWork, Uber, Lyft — all these companies went public before having showing profitability. They were whipped in the public square — figuratively, of course — with their share prices falling on the day of their respective IPOs.

Effects of DOT-COM Bubble burst on the companies


A Dot-com company is a for-profit company that do most of its business through the internet and usually uses .com as top-level domain. Due to the crash caused by the dot com bubble many dot com companies failed and even got shut down. Let us look at the companies that got affected due to the DOT com bubble burst:


Yahoo!:

Under the leadership of Timothy Koogle, Jerry Yang, and David Filo Yahoo! acquired several companies for billions of dollars in stock, but because of the losses caused by the bubble burst it had to shut them down a few years later.


Pixelon:

It was a Streaming video company that hosted a $16 million dot com party in October 1999 in Las Vegas with celebrities including Chely Wright, LeAnn Rimes, Faith Hill, Dixie Chicks, Sugar Ray, Natalie Cole, KISS, Tony Bennett, The Brian Setzer Orchestra, and a reunion of The Who. The company failed less than a year later when it became apparent that its technologies were fraudulent or misrepresented. Its founder had been a convicted felon who changed his name.


NorthPoint Communications:

This company saw a reduction in revenue by 20%, as after the bubble burst its customers failed to pay due to which it backed out of the investment by Verizon and a merger of DSL businesses in September 2000. NorthPoint then filed for bankruptcy. After lawsuits from both parties, Verizon and NorthPoint settled out of court.


MarchFirst:

formed on March 1,2000 this web development company came into existence when the dot com bubble was at its peak and it filed for bankruptcy and liquidation just over a year after it was formed.


MicroStrategy:

After rising from $7 to as high as $333 in a year, its shares lost $140, or 62%, on March 20, 2000, following the announcement of a financial restatement for the previous two years by founder Michael J. Saylor.


CDNow:

It was an online retailer of compact discs and music-related products which was founded by Jason Olim and his brother. The company reached a valuation of over $1 billion in April 1998. It was acquired by Bertelsmann Music Group for $117 million in 2000 and was later shut down due to the bubble burst.


Books-A-Million:

It was a book retailer and saw a sudden rise in its share price as its stock price soared from around $3 per share on November 25, 1998 to $38.94 on November 27, 1998 and an intra-day high of $47.00 on November 30, 1998 after it announced an updated website. Just after two weeks, the share price was back down to $10 and the share price had returned to $3 by the end of 2000.


Blucora (then InfoSpace):

This company was founded by Naveen Jain, and it had a market cap of $31 billion at its peak. It became the largest Internet business in the American Northwest. In March 2000, its stock reached a price $1,305 per share, but because of the crash caused by the dot com bubble burst the price had declined to $2 a share by the year 2002.


Terra Networks:

It was a web portal and Internet access provider in the US, Spain and Ibero-America. After its November 1999 IPO, its shares skyrocketed from an initial price of €11 to €158 in just three months. The price then sunk under €3 in a matter of weeks. The company was acquired by Telefónica in February 2005.

Apart from these there were a lot of companies that lost most of their market capitalization due to the bursting of the dotcom bubble and later filed for bankruptcy or were acquired by other companies.

RECOVERY


On March 10, 2000, the Nasdaq Composite Index hit an intraday high of 5132.52. By October 2002, the index had fallen 78.4%—to 1108.49.

This was only half the agony. The other half was the index's anemic recovery from that low. It took until November 2014 for the index to battle back to its March 2000 level, even after taking dividends into account. If you adjust for inflation, the

index didn’t recover until August 2017, more than 17 years later.


After the dot-com crash many companies like Apple, Google, and Amazon became the crocodiles of the tech ecosystem. The Big Pop allowed them to become apex predators in their respective fields, for several reasons.


Real estate became much cheaper, hardware became easier to obtain, the market was flushed with recently-unemployed, talented software engineers, and the extinction of their competitors allowed them to rapidly gain market share. Most of the prominent companies like Microsoft, Oracle, etc. have gone past their dot com era peak while some like intel is still in treading waters.


In later years, companies like Facebook and Netflix would join their ranks. The dot com bubble provided a petri dish to test out the validity and marketability of a wide range of Internet services. Many of the services were way ahead of their time

like online food delivery and online clothing stores.


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