The dot-com bubble was a historic speculative bubble covering roughly 1997 – 2000 (with a peak on March 10, 2000 during which stock markets in industrialized nations saw their equity value rise rapidly from growth in the Internet sector and related fields. While the latter part was a boom and bust 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, as exemplified by the first 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 a group of new Internet-based companies commonly referred to as dot-coms. Companies were seeing their stock prices shoot up if they simply added an “e-” prefix to their name and/or a “.com” to the end, which one author called “prefix investing”.
A combination of rapidly increasing stock prices, market confidence that the companies would turn future profits, individual speculation in stocks, and widely available venture capital created an environment in which many investors were willing to overlook traditional metrics such as P/E ratio in favor of confidence in technological advancements. The collapse of the bubble took place during 2000-2001. Some companies, such as Pets.com, failed completely. Others lost a large portion of their market capitalization but remained stable and profitable, e.g., Cisco, whose stock declined by 86%. Some later recovered and surpassed their dot-com-bubble peaks, e.g., Amazon.com, whose stock went from 107 to 7 dollars per share, but a decade later exceeded 200. “America’s 371 publicly traded Internet companies have grown to the point that they are collectively valued at $1.3 trillion, which amounts to about 8% of the entire U.S. stock market.”
. Many such startups were formed to take advantage of the surplus of venture capital funding. Many were launched with very thin business plans, sometimes with nothing more than an idea and a catchy name. The stated goal was often to “get big fast”, i.e. to capture a majority share of whatever market was being entered. The exit strategy usually included an IPO and a large payoff for the founders. 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. According to dot-com theory, an Internet company’s survival depended on expanding its customer base as rapidly as possible, even if it produced large annual losses. For instance, Google and Amazon did not see any profit in their first years. Amazon was spending on expanding customer base and alerting people to its existence and Google was busy spending on creating more powerful machine capacity to serve its expanding search engine. The phrase “Get large or get lost” was the wisdom of the day. At the height of the boom, it was possible for a promising dot-com to make an initial public offering (IPO) of its stock and raise a substantial amount of money even though it had never made a profit — or, in some cases, earned any 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 served as the metric. Public awareness 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 17 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, iWon.com gave away $10 million to a lucky contestant on an April 15, 2000 half-hour primetime special that was broadcast on CBS. 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 broadband access, went deeply into debt to improve their networks with high-speed equipment and fiber optic cables. Companies that produced network equipment like Nortel Networks were damaged by such over-extension; Nortel declared bankruptcy in early 2009.
Companies like 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. Similarly, in Europe the vast amounts of cash the mobile operators spent on 3G licences in Germany, Italy, and the United Kingdom, for example, led them into deep debt. The investments 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 IT industry, this quickly led to problems for small companies dependent on contracts from operators. One example is of a then Finnish mobile network company Sonera, which paid huge sums in German broadband auction for 3G licenses. 3rd generation networks however took years to be widely used and Sonera ended up as a part of Telia. The bubble bursts
Over 1999 and early 2000, the U.S. Federal Reserve increased interest rates six times, and the economy began to lose speed. The dot-com bubble burst, numerically, on Friday, March 10, 2000, when the technology heavy NASDAQ Composite index, peaked at 5,048.62 (intra-day peak 5,132.52), more than double its value just a year before.] The NASDAQ fell slightly after that, but this was attributed to correction by most market analysts adverse findings of fact in the United States v. Microsoft case which was being heard in federal court. The findings, which declared Microsoft a monopoly, were widely expected in the weeks before their release on April 3. The following day, April 4, the NASDAQ fell from 4,283 points to 3,649 and rebounded back to 4,223, forming an intraday chart that looked like a stretched V. At the time, this represented the most volatile day in the history of the NASDAQ.
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 second-largest M&A transaction worldwide. 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. Several communication companies could not weather the financial burden and were forced to file for bankruptcy. One of the more significant players, WorldCom, was found practicing illegal accounting practices to exaggerate its profits on a yearly basis. WorldCom’s stock price fell drastically when this information went public, and it eventually filed the third-largest corporate bankruptcy in U.S. history. Other examples include NorthPoint Communications, Global Crossing, JDS Uniphase, XO Communications, and Covad CommunicationsCompanies such as Nortel, Cisco and Corning were at a disadvantage because they relied on infrastructure that was never developed which caused the stock to drop significantly.
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. 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.
When trading resumed, some of it was transacted in temporary new locations. More in-depth analysis shows that 90% of the dot-coms companies survived through 2004. With this, it is safe to assume that the assets lost from the Stock Market do not directly link to the closing of firms. More importantly, however, 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. Additionally, 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. List of companies significant to the bubble
Boo.com, spent $188 million in just six months in an attempt to create a global online fashion store. Went bankrupt in May 2000. e.Digital Corporation (EDIG): Long term unprofitable OTCBB traded company founded in 1988 previously named Norris Communications. Changed its name to e.Digital in January 1999 when stock was at $0.06 level. The stock rose rapidly in 1999 and went from closing price of $2.91 on December 31, 1999 to intraday high of $24.50 on January 24, 2000. It quickly retraced and has traded between $0.07 and $0.165 in 2010 . As of 2013, the stock continues to trade low, ranging between $0.12 and $0.19 a share. Freeinternet.com – Filed for bankruptcy in October 2000, soon after canceling its IPO. At the time Freeinternet.com was the fifth largest ISP in the United States, with 3.2 million users. GeoCities, purchased by Yahoo! for $3.57 billion in January 1999. Yahoo! closed GeoCities on October 26, 2009. WorldCom, a long-distance telephone and internet-services provider that became notorious for using fraudulent accounting practices to increase their stock price. The company filed for bankruptcy in 2002 and former CEO Bernard Ebbers was convicted of fraud and conspiracy.