eWEEK at 30: Web Expansion Drives Frenzied Dot-Com Boom and Bust

 
 
By Todd R. Weiss  |  Posted 2014-02-10
 
 
 

eWEEK at 30: Web Expansion Drives Frenzied Dot-Com Boom and Bust


In mid 1990s, the Internet was just beginning to take shape as a global business juggernaut. The Netscape Navigator Web browser had been launched, and it would soon be followed by Microsoft Internet Explorer, allowing anyone with a computer and modem to go online to see what there was to discover on the World Wide Web.

Quickly, entrepreneurs around the world saw that the Web would support new e-commerce ventures based on the new idea of selling goods online and shipping directly to buyers.

During this period, suddenly it seemed brilliant to sell dog food, groceries, toys and anything else online to consumers. The sky was the limit to what could be sold on the new global marketplace because the fledgling Internet was the secret sauce that seemed to promise instant profits and riches.

This period gave rise to the concept of supposedly "frictionless" retailing that would enable online marketers to sell goods of all kinds without having the massive overhead of brick-and-mortar stores staffed with battalions of shelf stockers and checkout clerks.

Venture capitalists appeared ready to throw cash at anybody with a vaguely plausible e-commerce business plan on a PowerPoint presentation. This gave rise to what came to be known as the dot-com boom, which rapidly saw hundreds of companies get massive influxes of cash from venture capitalists and investors to build Websites and the distribution infrastructure required to sell any conceivable commodity or service

The only problem, however, was that lots of investors and companies jumped into the abyss without any experience of knowing how these newly minted e-businesses would find a path to sustainable profitability.

The businesses were started without the hard-nosed business planning that typically went into the creation of entirely new business venture. But the problem was nobody really had any experience starting a sustainably profitable e-business. The founders of these ventures thought they would figure out how to do it as they went along. The main goal was to get the business started before someone else put a stake in the ground and then figure out how to make a profit later.

Although this is the period when the likes of Google, Amazon.com and Salesforce.com were founded, there were many more companies that were organized, funded by venture capitalists, issued initial public stock offerings and collapsed all within three or four years or less.

Among the big dot-com names to initially soar and later crash-land were Webvan.com, which hoped to make a fortune delivering groceries to consumers who placed their orders online; Pets.com, which started up operation in August 1998 selling pet supplies to retail consumers; and Boo.com, which was a short-lived British-based Web company that sold clothing and fashion online.

Also well-known at the time was Kozmo.com, which promised home or office deliveries of food, movies, CDs and more after users placed their orders online; Flooz.com, an online gift currency business; and Drkoop.com, a health and medical information site. All of these Web ventures have the distinction of going into business and failing on the Web from 1997 to 2001.  These are just a few examples of the dot-com companies that rose and collapsed during this period.

 

eWEEK at 30: Web Expansion Drives Frenzied Dot-Com Boom and Bust


Many of these companies caught the imagination of investors when they issued their initial public stock offerings. Flush with investor cash, these companies often spent wildly and watched their stock prices rise to amazing highs—all before they ever turned a dime in profits.

This all took place from 1997 to 2000, a period when investors were seized by "irrational exuberance," a term coined in December 1996 by Alan Greenspan, former Federal Reserve chairman. It became a catchphrase of the era to describe the mindless optimism that gripped stock market investors as they drove the stock prices of many dot-com and high-tech companies to stratospheric heights.

While his comments caused an immediate but short-lived drop in stock market values, the dot-com stock boom still had several years left to run.

Investors came to believe that e-commerce had somehow changed the laws of economics and the good times would last indefinitely. At that point, it should have been clear that the crash was coming soon.

But many investors didn't realize what was going to happen before it was too late. What goes up must come down, and the market reacted accordingly when it became clear that many of the dot-com businesses were rapidly burning through all their venture and IPO cash without a hope of turning a profit or even surviving as going concerns.

Watching that dot-com boom and its resulting crash was one of the biggest stories covered by eWEEK in the last 30 years. The dot-com crash started in late 2000 and continued through 2001 as many of the once high-flying dot-com ventures collapsed and billions of dollars in shareholder value simply evaporated.

The evidence of the crash can be found in the Nasdaq stock exchange index. Many high-tech stocks are traded on Nasdaq, as were many of the dot-com startups.

The Nasdaq Composite index hit a high of 5048 on March 10, 2000. But by April 4, 2001, the index had dropped to 1638, a loss of 71 percent of its previous value. The Nasdaq has yet to return to that previous peak, although it hit 4176 in late December 2013.

While the dot-coms obviously can't be blamed for all of that loss, the failure of a number of these companies was a factor that soured investors on the broader market and convinced them to pull their money out of stocks. The failure of so many dot-coms also hurt the broader technology industry as computer hardware, software and network equipment vendors also saw their sales slump because so many dot-com companies suddenly went out of business.

So why did this happen and could it happen again?

We asked several IT analysts for their thoughts about the dot-com rise and fall to get their perspectives on the early business climate online.

Dana Gardner, principal analyst of Interarbor Solutions, told eWEEK that it's important to remember that the dot-com bust didn't happen in a vacuum, but also came at a time when there were big changes in the telecommunications industry.

 

eWEEK at 30: Web Expansion Drives Frenzied Dot-Com Boom and Bust


"People were being highly speculative [in the stock market], knowing that the Web was going to be big, but having no idea just how big," said Gardner. "In the telecom industry, they overbuilt for network capacity at that time, but 10 or 15 years later, that capacity was fully filled. So they weren't wrong," but their timing was off.

"We've seen this time and time again," he said. "People come in, and they want to make a killing. They were gambling instead of investing. We've seen this around early mobile, around news media and content, and around social media. This is what happens when technology and Wall Street collide."

Some of those early dot-com companies could see what was coming, but they reacted in the wrong ways, said Gardner. "The idea of doing commerce on the Web was right. What was wrong was that it would be highly specialized like a boutique, rather than like a department store."

Roger L. Kay, principal analyst for Endpoint Technologies Associates, said there is "a tendency to go into frenzies" in the marketplace. "Look at Twitter [today]. Its growth is conceded to be in the future. If you're talking about hype cycles, then 2000 to 2001 represented the popping of the hype balloon. Everyone wanted in on this wonder concept, the Internet business."

Today, what we see is more of a reality of the Internet, said Kay. "We see companies fail, but not whole segments. The Amazons survive. Amazon hasn't been profitable yet, but it has taken huge revenue growth and invested it."

In the end, though, even the dot-com crash was a good lesson for everyone, he said. "We learned that there has to be a viable business there and not just a crazy idea." Some of the entrepreneurs thought that they would succeed if they started a site and it attracted a lot of people who thought it was cool, Kay said. "We learned that you can't do that" and expect success, he said.

Dan Kusnetzky, principal analyst at Kusnetzky Group, was working as an analyst for IDC during the 2000 to 2001 dot-com conflagration, and said that he remembers that "people were making decisions based on buzzwords, rather than about what the words meant."

That was a huge factor in how investment mania took over and pushed common sense to the side of the road, he said.

"Often, they didn't have clear views of the technologies, the competitors and how the technology would be used, or even who were the targeted customers," said Kusnetzky. "They just had this interesting idea for technology and went out and got funding and they built it. It was the 'build it and they will come' idea." Kusnetzky said he still sees this behavior today in the business marketplace.

One of the hallmarks of the 2000 to 2001 dot-com bust was the eagerness of many executives to give themselves and sometimes their employees large salaries, gifts and perks instead of investing money back into their newfangled companies, said Kusnetzky.

This was the start of the era when dot-com startups would spend millions of dollars for television commercials during the Super Bowl as a way to grab consumers' attention.

 

eWEEK at 30: Web Expansion Drives Frenzied Dot-Com Boom and Bust


Pets.com appeared in commercials during the 2000 Super Bowl that featured the company's trademark sock puppet mascot. Pets.com was just one of the dot-coms that bought hugely expensive Super Bowl commercial time. But it didn't help Pets.com very much. The company was out of business before the end of 2000

But this was just one example of the unbridled spending that was the hallmark of many dot-com startups in this era.

"I'd see little companies in very expensive locations that had very high costs per square foot. I'd always seen companies started by people in the past who even minded the cost of paper clips," said Kusnetzky. "I also saw a lot of people [at the time] spend a lot of money on marketing events" for their new products or services. They never bothered to connect that to how many sales they would get. It was pretty fascinating."

Rob Enderle, principal analyst of The Enderle Group, blamed the initial dot-com crash on "a feeding frenzy of investors wanting in on Internet companies started by kids who never went to business school."

Those startup leaders "thought that profit and revenue were terms only used by old, clueless people and that treating IPO funds like you would an allowance—to spend it on fun stuff as quickly as possible—was the smart thing to do," said Enderle.

"[Eventually] the investors figured out that these dot-coms were black holes that worked more like a high-speed Ponzi scheme than as a business, and then the market collapsed, leaving the last set of investors screwed."

Charles King, principal analyst with Pund-IT, told eWEEK that during the dot-com boom in the mid-1990s, the key business proposition for many was to take the Amazon idea of e-commerce and extrapolate it to address every conceivable vertical and market segment. "There was a fine line between a vendor that was enthusiastic about a particular idea and the instincts of investors who are trying to ride that to a few million more bucks."

In retrospect, King said, few people seemed to see what could happen as the dot-com bubble grew at the time. King said he "was working with some very smart people at the time," when he was at the former Zona Research. "It was exciting coming to work and people were doing cool stuff. No one that I worked with on a regular basis foresaw the size and the scope of what would happen. At the same time, I wasn't privy to every idea from everyone. It's not something that we kicked around."

Dan Maycock, an analyst with OneAccord Digital, told eWEEK that it's only a matter of time until it happens again. "Absolutely, because the tech bubble now is that companies do not have to be profitable to be worth a lot of money," said Maycock. "It kind of flies in the face of common-sense economics, but a lot of companies can get these massive buyouts because they can drive a lot of people to their sites" and generate huge valuations. "I think we're definitely liable to have another bubble for sure, but it won't be for the same reasons."

 

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