Of late, I had been reading a lot of news articles that frequently kept referring to the dot com bubble. It’s a term thrown around so often that I kind of got used to it for a while, till I realized that I didn’t really know what it meant. This sudden realization made me go down a Googling spiral for a whole day, devouring articles that dated back to 1999 (yes!). What better way to make use of this new found information than to pin it down in a blog post? So today’s post is a one-stop solution for anyone looking for a somewhat detailed but concise understanding of the dot com bubble of the late 90s.
The dot com bubble revolved around the emergence of the internet and how it would shape business and lifestyle in the years to come.
What causes any bubble?
Now, it’s important to note why a bubble is formed in the first place. There have been many bubbles in history. And all of them were brought about by speculative activity surrounding the development of new technologies. The Great Depression of 1930s was influenced by the introduction of radio, automobiles and aviation. Similar economic crisis can be attributed to the introduction of canals and railways in the Canal Mania of 1790s and the Railway Mania of 1840s respectively. Similarly, the internet caused a speculative frenzy eventually leading to a downfall.
The initial years: 1990s
This was the era where a new way of carrying out business would set in: e-commerce. This was an age that was define by the world wide web and two major players – Amazon and eBay. These two companies were revolutionary when they first began in the 1990’s. They shook big businesses at their core. The focus shifted from CEOs in their glass-tinted buildings to the consumer on the street. Amazon, founded by Jeff Bezos, started off mainly as giant online bookstore. eBay, founded by Pierre Omidyar was an auctioning site for day-to-day items. Seeking leverage from the quickly growing internet, these companies started raking in substantial revenues in their initial days itself. Amazon, for example, had sales up to $20,000/week within the first 2 months. But what was leading to this kind of massive growth?
Reasons for the internet boom
This was governed by two major laws:
Moore’s law: It’s an observation that over the course of history, the speed and power of IC chips doubles every two years. This exponential growth would be phenomenal in making PCs and computing machines more accessible to people.
Pic courtesy : Wikipedia
MetCalfe’s law: Also known as the Moor’s Law of Connectivity, this law states that when a new node is added to a network, it doesn’t just increase the network’s value by +1, but it is in fact a remarkably rapid growth. The following figure makes it clear.
Pic courtesy: Wikipedia
So this meant that as the number of users increases, the usefulness of the network increases, which makes it more compelling for new users to join in.
Events leading up to the bubble
Investors in Wall Street started taking note of this unusual exponential growth in this thing called the internet. Further more, companies like Netscape and Yahoo! went in for IPOs that were hugely successful. Netscape, for example had its share price go from $28/share to $75/share on the first day itself.
Since it’s inception in 1994, Amazon has baffled investors and business theorists with it’s unconventional business model. The company pushed for massive growth with seemingly no profit at all. The idea was simple – “Get large or get lost”. Even with absolutely no profit (in fact it had reported a loss of $3 million for the quarter preceding the IPO), it went in for an IPO in 1997, which was hugely successful. This CNET News article (Amazon.com IPO skyrockets) dated May 15, 1997 has some information on the market scene at the time. eBay too, which was considered a company having no value-based product to offer, had a great IPO run in 1998. During this time, Amazon stock value had literally doubled in a span of a few weeks.
Growth of the Bubble
Tech IPOs were taking the Wall Street by storm, and investors started getting greedy and irrational by investing massive amounts of money on companies, which barely had a product nor a business plan. There were more and more people headed to Silicon Valley to start ventures of their own and to claim their share of the gold mine. Any and every company with a ‘dot com’ as suffix or an ‘e’ or an ‘i’ as prefixes would gain investor attraction. Money was rampantly being thrown around without much heed to the core fundamentals of the company but was riding purely based on speculation. There was also an increasingly growing clan of small time stock traders who barely understood the companies, whose stocks they were trading in. Companies, on the other hand, consumed themselves through false promotions and failed business models. Also, the “Get Big Fast” bug seemed to bite all the new companies that would start business in the Valley. The emphasis was no more on profits, but just rapid growth and abnormal publicity for non-existent products.
March 10, 2000 saw the ultimate peak and pop of the doomed bubble. After this day, the road just went downhill.
Pic courtesy: Wikipedia
Companies like “boo.com” and “pets.com” which were widely popular due to their publicity couldn’t deliver on their promised growth rate and business starting coming to a braking halt. There was an overall loss of $5 trillion dollars in the market value of companies from 2000-2002.
Here is an article which talks about the greatest failures of the dot com bubble.
Failed IPOs of the Dot-Com Bubble
While most of the small fish died when the bubble burst, big companies like Amazon, eBay and Google survived the crash. How did Amazon survive despite not raking in any profit? Well, that would be another full-fledged answer altogether.
Fast forward to 2016, although speculations of a second tech bubble are doing the rounds, only time will tell whether investors have learnt a lesson from the 1990s, or if another technology innovation is going to drive the stock market to pop.