The dot-com bubble occurred between 1997 and 2000 and was a significant speculative bubble. Stocks in the Internet and related sectors experienced rapid growth in developed countries’ stock markets during this time. The period also saw the continuous commercial expansion of the Internet with the introduction of the World Wide Web and Mosaic web browser in 1993. This expansion continued throughout the 90s, characterized by the establishment (and subsequent failure in many cases) of new internet-based companies commonly known as dot-coms. These companies could significantly increase their stock prices by simply adding an “e-” prefix or a “.com” suffix to their name, which one author called “prefix investing.”
During the dot-com bubble in the early 2000s, there was a rapid increase in stock prices and a high level of confidence in the market. This confidence was fueled by the belief that companies would be profitable in the future, individual speculation in stocks, and easily accessible venture capital. Despite overlooking traditional metrics such as P/E ratio, investors were confident in technological advancements. However, the bubble eventually burst and collapsed between 2000 and 2001.
Some companies failed completely during this time, like Pets.com, while others experienced significant losses in market capitalization but remained stable and profitable. For example, Cisco saw their stock decline by 86%. Nevertheless, some companies were able to recover and even surpass their pre-bubble peaks. Amazon.com is an example of this as their stock initially dropped from $107 to $7 per share but later exceeded $200 a decade later.
To provide perspective on the magnitude of this period, America’s 371 publicly traded Internet companies had a combined value of $1.3 trillion at that time, which accounted for approximately 8% of the entire U.S. stock market.
During the dot-com bubble, numerous startups emerged with the aim of capitalizing on abundant venture capital funding. These startups often had minimal business plans, consisting only of an idea and a catchy name. The primary objective was to quickly dominate the market and eventually go public through an IPO, yielding significant profits for the founders.
Esteemed publications like Forbes and the Wall Street Journal even encouraged investing in these high-risk companies, despite their disregard for basic financial and legal principles. According to dot-com theory, internet companies needed to rapidly expand their customer base at any cost, even if it meant incurring substantial annual losses. For example, both Google and Amazon operated without generating profits in their early years.
While Amazon focused on growing its customer base and raising awareness about its existence, Google heavily invested in improving its search engine’s machine capacity. The prevailing belief during this time was “Get large or get lost.” The boom was so intense that even a promising dot-com could go public and raise substantial funds without ever having made a profit or generating any revenue.
The lifespan of unprofitable companies without a viable business model was determined by their burn rate. Dot-coms utilized public awareness campaigns, such as television ads, print ads, and targeting professional sporting events, to grow their customer bases. They often adopted distinctive and memorable names to differentiate themselves from competitors. During Super Bowl XXXIV in January 2000, 17 dot-com companies invested over $2 million for a 30-second spot. However, this number reduced to three dot-coms in January 2001 during Super Bowl XXXV. Similarly, iWon.com aired a half-hour primetime special on CBS on April 15, 2000, where they awarded $10 million to a fortunate contestant. Numerous cities across the United States endeavored to replicate Silicon Valley by constructing network-enabled office spaces that would attract Internet entrepreneurs. Communication providers believed that broadband access would be crucial for the future economy; consequently, they incurred debt in order to upgrade their networks with high-speed equipment and fiber optic cables. Unfortunately, this excessive expansion led to the bankruptcy of companies like Nortel Networks in early 2009.
During the bubble collapse, companies such as Cisco, who didn’t have their own production facilities but still bought from other manufacturers, were able to recover quickly and succeed by selling products at low prices. In Europe, mobile operators in Germany, Italy, and the United Kingdom invested substantial amounts of money in 3G licenses, resulting in significant debts that exceeded their current and projected cash flow. However, this information only became public knowledge in 2001 and 2002. This presented challenges for small companies dependent on contracts from these operators because of the interconnected nature of the IT industry. One example is Sonera, a Finnish mobile network company at that time that faced significant expenses in Germany’s broadband auction for 3G licenses. However, it took several years for third-generation networks to be widely adopted which ultimately led Sonera to merge with Telia. Therefore, the bursting of the bubble had far-reaching consequences.
Between 1999 and early 2000, the U.S. Federal Reserve increased interest rates six times, resulting in an economic slowdown. On March 10, 2000, the NASDAQ Composite index, which mainly focused on tech companies, achieved its highest point at 5,048.62 (intra-day peak 5,132.52), experiencing a significant value increase of over double within a year. Shortly after that, there was a slight decrease due to market correction and the release of unfavorable findings in the United States v. Microsoft case declaring Microsoft as a monopoly. These findings were widely expected before their April 3 publication. The next day, on April 4th, the NASDAQ dropped from 4,283 points to 3,649 but later bounced back to reach 4,223 points. This particular day is now recognized as the most volatile trading day in NASDAQ history
Following the events, there was a period of consequences.
America Online (AOL) publicly announced its plan on January 10, 2000, to merge with Time Warner, the world’s largest media company. This merger gained notoriety as “the worst” due to subsequent events caused by disagreements among the CEOs involved, leading to their forced exit within two years. In October 2003, AOL Time Warner decided to remove “AOL” from its name. The financial consequences of this merger resulted in bankruptcy filings by multiple communication companies including WorldCom which engaged in unlawful accounting practices aimed at inflating profits. WorldCom’s actions caused a significant decline in their stock price and ultimately led to the third-largest corporate bankruptcy ever recorded in U.S. history. Other companies affected were NorthPoint Communications, Global Crossing, JDS Uniphase, XO Communications, and Covad Communications. Nortel, Cisco, and Corning also experienced substantial declines in their stock values due to relying on underdeveloped infrastructure.
Many dot-coms ran out of capital and were acquired or liquidated; the domain names were picked up by old-economy competitors or domain name investors. 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 like 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 and eBay, survived the turmoil and appear assured of long-term survival, while others such as Google have become industry-dominating The stock market crash of 2000–2002 caused the loss of $5 trillion in the market value of companies from March 2000 to October 2002.[14] The 9/11 terrorist destruction of the World Trade Center’s Twin Towers, killing almost 700 employees of Cantor-Fitzgerald, accelerated the stock market drop; the NYSE suspended trading for four sessions.
Trading resumed after the burst of the dot-com bubble, with some transactions taking place in temporary new locations. In-depth analysis reveals that 90% of the dot-com companies managed to survive until 2004, indicating that the stock market losses did not directly result in firm closures. Notably, even smaller companies were able to withstand the financial market destruction during 2000-2002. Retail investors, disappointed by the burst, shifted their investment portfolios to more cautious positions. Meanwhile, there was an excess supply of technology experts, such as computer programmers, in the job market. Consequently, university degree programs for computer-related careers experienced a decline in new students. It was common to hear anecdotes about unemployed programmers returning to school to pursue careers in accounting or law.
[edit] List of companies significant to the bubble
Boo.com, a global online fashion store, went bankrupt in May 2000 after spending $188 million in just six months[16]. Another unprofitable company, e.Digital Corporation (EDIG), previously known as Norris Communications and later renamed to e.Digital in January 1999 when its stock was valued at $0.06, experienced a rapid rise in its stock price in 1999. The stock reached an intraday high of $24.50 on January 24, 2000, after closing at $2.91 on December 31, 1999. However, it quickly dropped and has since traded between the range of $0.07 and $0.165 as of 2010[18][19].
Freeinternet.com, which had become the fifth largest ISP in the United States with 3.2 million users, filed for bankruptcy in October 2000 after canceling its IPO. In January 1999, GeoCities was acquired by Yahoo! for a whopping sum of $3.57 billion[23], but unfortunately Yahoo! closed down GeoCities on October 26th,2009 [24]. WorldCom was infamous for engaging in fraudulent accounting practices to boost their stock price as a long-distance telephone and internet-services provider before filing for bankruptcy in 2002. Bernard Ebbers,the former CEO of WorldCom ,was subsequently convicted of fraud and conspiracy.
