![US VC funding](https://upload.wikimedia.org/wikipedia/commons/5/50/US_VC_funding.png)
The dot-com bubble (dot-com boom, tech bubble,
or the Internet bubble) was a
stock market bubble in the late 1990s, a period of massive growth in the use and adoption of the
Internet
The Internet (or internet) is the global system of interconnected computer networks that uses the Internet protocol suite (TCP/IP) to communicate between networks and devices. It is a '' network of networks'' that consists of private, pub ...
.
[
Between 1995 and its peak in March 2000, the ]Nasdaq Composite
The Nasdaq Composite ( ticker symbol ^IXIC) is a stock market index that includes almost all stocks listed on the Nasdaq stock exchange. Along with the Dow Jones Industrial Average and S&P 500, it is one of the three most-followed stock market ind ...
stock market index rose 400%, only to fall 78% from its peak by October 2002, giving up all its gains during the bubble. During the dot-com crash, many online shopping
Online shopping is a form of electronic commerce which allows consumers to directly buy goods or services from a seller over the Internet using a web browser or a mobile app. Consumers find a product of interest by visiting the website of the ...
companies, such as Pets.com, Webvan
Webvan was a dot-com company and grocery business that filed for bankruptcy in 2001 after 3 years of operation. It was headquartered in Foster City, California, United States. It delivered products to customers' homes within a 30-minute window o ...
, and Boo.com, as well as several communication companies, such as Worldcom
MCI, Inc. (subsequently Worldcom and MCI WorldCom) was a telecommunications company. For a time, it was the second largest long-distance telephone company in the United States, after AT&T. Worldcom grew largely by acquiring other telecommunic ...
, NorthPoint Communications, and Global Crossing
Global Crossing was a telecommunications company that provided computer networking services and operated a tier 1 carrier. It maintained a large backbone network and offered peering, virtual private networks, leased lines, audio and video con ...
, failed and shut down. Some companies that survived, such as Amazon
Amazon most often refers to:
* Amazons, a tribe of female warriors in Greek mythology
* Amazon rainforest, a rainforest covering most of the Amazon basin
* Amazon River, in South America
* Amazon (company), an American multinational technolog ...
, lost large portions of their market capitalization, with Cisco Systems
Cisco Systems, Inc., commonly known as Cisco, is an American-based multinational digital communications technology conglomerate corporation headquartered in San Jose, California. Cisco develops, manufactures, and sells networking hardware, ...
alone losing 80% of its stock value.
Background
Historically, the dot-com boom can be seen as similar to a number of other technology-inspired booms of the past including railroads
Rail transport (also known as train transport) is a means of transport that transfers passengers and goods on wheeled vehicles running on rails, which are incorporated in tracks. In contrast to road transport, where the vehicles run on a prep ...
in the 1840s, automobiles in the early 20th century, radio
Radio is the technology of signaling and communicating using radio waves. Radio waves are electromagnetic waves of frequency between 30 hertz (Hz) and 300 gigahertz (GHz). They are generated by an electronic device called a transmi ...
in the 1920s, television
Television, sometimes shortened to TV, is a telecommunication medium for transmitting moving images and sound. The term can refer to a television set, or the medium of television transmission. Television is a mass medium for advertisin ...
in the 1940s, transistor
upright=1.4, gate (G), body (B), source (S) and drain (D) terminals. The gate is separated from the body by an insulating layer (pink).
A transistor is a semiconductor device used to Electronic amplifier, amplify or electronic switch, switch ...
electronics in the 1950s, computer time-sharing in the 1960s, and home computers and biotechnology
Biotechnology is the integration of natural sciences and engineering sciences in order to achieve the application of organisms, cells, parts thereof and molecular analogues for products and services. The term ''biotechnology'' was first used ...
in the 1980s.
Overview
Low interest rates in 1998–99 facilitated an increase in start-up companies. Although a number of these new entrepreneurs had realistic plans and administrative ability, most of them lacked these characteristics but were able to sell their ideas to investors because of the novelty of the dot-com concept.
In 2000, the dot-com bubble burst, and many dot-com startups went out of business after burning through their venture capital
Venture capital (often abbreviated as VC) is a form of private equity financing that is provided by venture capital firms or funds to start-up company, startups, early-stage, and emerging companies that have been deemed to have high growth poten ...
and failing to become profitable
In economics, profit is the difference between the revenue that an economic entity has received from its outputs and the total cost of its inputs. It is equal to total revenue minus total cost, including both explicit and implicit costs.
It i ...
. Many others, however, did survive and thrive in the early 21st century. Many companies which began as online retailers blossomed and became highly profitable. More conventional retailers found online merchandising to be a profitable additional source of revenue. While some online entertainment and news outlets failed when their seed capital ran out, others persisted and eventually became economically self-sufficient. Traditional media outlets (newspaper publishers, broadcasters and cablecasters in particular) also found the Web to be a useful and profitable additional channel for content distribution, and an additional means to generate advertising revenue. The sites that survived and eventually prospered after the bubble burst had two things in common: a sound business plan, and a niche in the marketplace that was, if not unique, particularly well-defined and well-served.
In the aftermath of the dot-com bubble, telecommunications companies had a great deal of overcapacity as many Internet business clients went bust. That, plus ongoing investment in local cell infrastructure kept connectivity charges low, and helped to make high-speed Internet connectivity more affordable. During this time, a handful of companies found success developing business models that helped make the World Wide Web a more compelling experience. These include airline booking sites, Google
Google LLC () is an American Multinational corporation, multinational technology company focusing on Search Engine, search engine technology, online advertising, cloud computing, software, computer software, quantum computing, e-commerce, ar ...
's search engine and its profitable approach to keyword-based advertising, as well as eBay
eBay Inc. ( ) is an American multinational e-commerce company based in San Jose, California, that facilitates consumer-to-consumer and business-to-consumer sales through its website. eBay was founded by Pierre Omidyar in 1995 and became ...
's auction site and Amazon.com
Amazon.com, Inc. ( ) is an American multinational technology company focusing on e-commerce, cloud computing, online advertising, digital streaming, and artificial intelligence. It has been referred to as "one of the most influential econo ...
's online department store. The low price of reaching millions worldwide, and the possibility of selling to or hearing from those people at the same moment when they were reached, promised to overturn established business dogma in advertising, mail-order
Mail order is the buying of goods or services by mail delivery. The buyer places an order for the desired products with the merchant through some remote methods such as:
* Sending an order form in the mail
* Placing a telephone call
* Placing ...
sales, customer relationship management
Customer relationship management (CRM) is a process in which a business or other organization administers its interactions with customers, typically using data analysis to study big data, large amounts of information.
CRM systems data collectio ...
, and many more areas. The web was a new killer app
In marketing terminology, a killer application (commonly shortened to killer app) is any computer program or software that is so necessary or desirable that it proves the core value of some larger technology, such as computer hardware, a video game ...
—it could bring together unrelated buyers and sellers in seamless and low-cost ways. Entrepreneurs around the world developed new business models, and ran to their nearest venture capitalist
Venture capital (often abbreviated as VC) is a form of private equity financing that is provided by venture capital firms or funds to startups, early-stage, and emerging companies that have been deemed to have high growth potential or which ha ...
. While some of the new entrepreneurs had experience in business and economics, the majority were simply people with ideas, and did not manage the capital influx prudently. Additionally, many dot-com business plans were predicated on the assumption that by using the Internet, they would bypass the distribution channels of existing businesses and therefore not have to compete with them; when the established businesses with strong existing brands developed their own Internet presence, these hopes were shattered, and the newcomers were left attempting to break into markets dominated by larger, more established businesses. Many did not have the ability to do so.
The dot-com bubble burst in March 2000, with the technology heavy NASDAQ Composite
The Nasdaq Composite ( ticker symbol ^IXIC) is a stock market index that includes almost all stocks listed on the Nasdaq stock exchange. Along with the Dow Jones Industrial Average and S&P 500, it is one of the three most-followed stock market ind ...
index peaking at 5,048.62 on March 10 (5,132.52 intraday), more than double its value just a year before. By 2001, the bubble's deflation was running full speed. A majority of the dot-coms had ceased trading, after having burnt through their venture capital
Venture capital (often abbreviated as VC) is a form of private equity financing that is provided by venture capital firms or funds to start-up company, startups, early-stage, and emerging companies that have been deemed to have high growth poten ...
and IPO capital, often without ever making a profit. But despite this, the Internet continues to grow, driven by commerce, ever greater amounts of online information, knowledge, social networking and access by mobile devices.
Prelude to the bubble
The 1993 release of Mosaic
A mosaic is a pattern or image made of small regular or irregular pieces of colored stone, glass or ceramic, held in place by plaster/mortar, and covering a surface. Mosaics are often used as floor and wall decoration, and were particularly pop ...
and subsequent web browser
A web browser is application software for accessing websites. When a user requests a web page from a particular website, the browser retrieves its files from a web server and then displays the page on the user's screen. Browsers are used o ...
s during the following years gave computer users access to the World Wide Web
The World Wide Web (WWW), commonly known as the Web, is an information system enabling documents and other web resources to be accessed over the Internet.
Documents and downloadable media are made available to the network through web ...
, popularizing use of the Internet. Internet use increased as a result of the reduction of the " digital divide" and advances in connectivity, uses of the Internet, and computer education. Between 1990 and 1997, the percentage of households in the United States owning computers increased from 15% to 35% as computer ownership progressed from a luxury to a necessity. This marked the shift to the Information Age
The Information Age (also known as the Computer Age, Digital Age, Silicon Age, or New Media Age) is a historical period that began in the mid-20th century. It is characterized by a rapid shift from traditional industries, as established during ...
, an economy based on information technology
Information technology (IT) is the use of computers to create, process, store, retrieve, and exchange all kinds of Data (computing), data . and information. IT forms part of information and communications technology (ICT). An information te ...
, and many new companies were founded.
At the same time, a decline in interest rates increased the availability of capital. The Taxpayer Relief Act of 1997, which lowered the top marginal capital gains tax in the United States
In the United States of America, individuals and corporations pay U.S. federal income tax on the net total of all their capital gains. The tax rate depends on both the investor's tax bracket and the amount of time the investment was held. Sho ...
, also made people more willing to make more speculative investments. Alan Greenspan
Alan Greenspan (born March 6, 1926) is an American economist who served as the 13th chairman of the Federal Reserve from 1987 to 2006. He works as a private adviser and provides consulting for firms through his company, Greenspan Associates LLC. ...
, then-Chair of the Federal Reserve
The chair of the Board of Governors of the Federal Reserve System is the head of the Federal Reserve, and is the active executive officer of the Board of Governors of the Federal Reserve System. The chair shall preside at the meetings of the Boa ...
, allegedly fueled investments in the stock market by putting a positive spin on stock valuations.[ The ]Telecommunications Act of 1996
The Telecommunications Act of 1996 is a United States federal law enacted by the 104th United States Congress on January 3, 1996, and signed into law on February 8, 1996, by President Bill Clinton. It primarily amended Chapter 5 of Title 47 of ...
was expected to result in many new technologies from which many people wanted to profit.
The bubble
As a result of these factors, many investors were eager to invest, at any valuation, in any dot-com company
A dot-com company, or simply a dot-com (alternatively rendered dot.com, dot com, dotcom or .com), is a company that does most of its business on the Internet, usually through a website on the World Wide Web that uses the popular top-level domain ". ...
, especially if it had one of the Internet-related prefixes Internet-related prefixes such as '' e-'', '' i-'', ''cyber-'', ''info-'', ''techno-'' and ''net-'' are added to a wide range of existing words to describe new, Internet- or computer-related flavors of existing concepts, often electronic products ...
or a ".com
The domain name .com is a top-level domain (TLD) in the Domain Name System (DNS) of the Internet. Added at the beginning of 1985, its name is derived from the word ''commercial'', indicating its original intended purpose for domains registere ...
" suffix in its name. Venture capital
Venture capital (often abbreviated as VC) is a form of private equity financing that is provided by venture capital firms or funds to start-up company, startups, early-stage, and emerging companies that have been deemed to have high growth poten ...
was easy to raise. Investment bank
Investment is the dedication of money to purchase of an asset to attain an increase in value over a period of time. Investment requires a sacrifice of some present asset, such as time, money, or effort.
In finance, the purpose of investing i ...
s, which profited significantly from initial public offering
An initial public offering (IPO) or stock launch is a public offering in which shares of a company are sold to institutional investors and usually also to retail (individual) investors. An IPO is typically underwritten by one or more investme ...
s (IPO), fueled speculation and encouraged investment in technology. A combination of rapidly increasing stock prices in the quaternary sector of the economy
The quaternary sector of the economy is based upon the economic activity that is associated with either the intellectual or knowledge-based economy. This consists of information technology; media; research and development; information-based ser ...
and confidence that the companies would turn future profits created an environment in which many investors were willing to overlook traditional metrics, such as the price–earnings ratio, and base confidence on technological advancements, leading to a stock market bubble. Between 1995 and 2000, the Nasdaq Composite stock market index rose 400%. It reached a price–earnings ratio of 200, dwarfing the peak price–earnings ratio of 80 for the Japanese Nikkei 225
The Nikkei 225, or , more commonly called the ''Nikkei'' or the ''Nikkei index'' (), is a stock market index for the Tokyo Stock Exchange (TSE). It has been calculated daily by the '' Nihon Keizai Shimbun'' (''The Nikkei'') newspaper since 1950 ...
during the Japanese asset price bubble of 1991.[ In 1999, shares of Qualcomm rose in value by 2,619%, 12 other large-cap stocks each rose over 1,000% in value, and seven additional large-cap stocks each rose over 900% in value. Even though the Nasdaq Composite rose 85.6% and the ]S&P 500
The Standard and Poor's 500, or simply the S&P 500, is a stock market index tracking the stock performance of 500 large companies listed on stock exchanges in the United States. It is one of the most commonly followed equity indices. As of ...
rose 19.5% in 1999, more stocks fell in value than rose in value as investors sold stocks in slower growing companies to invest in Internet stocks.
An unprecedented amount of personal investing occurred during the boom and stories of people quitting their jobs to trade on the financial market were common. The news media
The news media or news industry are forms of mass media that focus on delivering news to the general public or a target public. These include news agencies, print media (newspapers, news magazines), broadcast news (radio and television), and ...
took advantage of the public's desire to invest in the stock market; an article in ''The Wall Street Journal
''The Wall Street Journal'' is an American business-focused, international daily newspaper based in New York City, with international editions also available in Chinese and Japanese. The ''Journal'', along with its Asian editions, is published ...
'' suggested that investors "re-think" the "quaint idea" of profits, and CNBC
CNBC (formerly Consumer News and Business Channel) is an American basic cable business news channel. It provides business news programming on weekdays from 5:00 a.m. to 7:00 p.m., Eastern Time, while broadcasting talk sho ...
reported on the stock market with the same level of suspense as many networks provided to the broadcasting of sports events
The broadcasting of sports events (also known as a sportscast) is the live coverage of sports as a television program, on radio, and other broadcasting media. It usually involves one or more sports commentators describing events as they happen. ...
.[
At the height of the boom, it was possible for a promising dot-com company to become a ]public company
A public company is a company whose ownership is organized via shares of stock which are intended to be freely traded on a stock exchange or in over-the-counter markets. A public (publicly traded) company can be listed on a stock exchange ( ...
via an IPO and raise a substantial amount of money even if it had never made a profit—or, in some cases, realized any material revenue. People who received employee stock option
Employee stock options (ESO) is a label that refers to compensation contracts between an employer and an employee that carries some characteristics of financial options.
Employee stock options are commonly viewed as an internal agreement prov ...
s became instant paper millionaires when their companies executed IPOs; however, most employees were barred from selling shares immediately due to lock-up periods. The most successful entrepreneurs, such as Mark Cuban
Mark Cuban (born July 31, 1958) is an American billionaire entrepreneur, television personality, and media proprietor whose net worth is an estimated $4.8 billion, according to ''Forbes'', and ranked No. 177 on the 2020 ''Forbes'' 400 list ...
, sold their shares or entered into hedges to protect their gains. Sir John Templeton
Sir John Marks Templeton (29 November 1912 – 8 July 2008) was an American-born British investor, banker, fund manager, and philanthropist. In 1954, he entered the mutual fund market and created the Templeton Growth Fund, which averaged gro ...
successfully shorted many dot-com stocks at the peak of the bubble during what he called "temporary insanity" and a "once-in-a-lifetime opportunity". He shorting stocks just before the expiration of lockup periods ending 6 months after initial public offerings, correctly anticipating many dot-com company executives would sell shares as soon as possible, and that large-scale selling would force down share prices.
Spending tendencies of dot-com companies
Most dot-com companies incurred net operating loss Under U.S. Federal income tax law, a net operating loss (NOL) occurs when certain tax-deductible expenses exceed taxable revenues for a taxable year. If a taxpayer is taxed during profitable periods without receiving any tax relief (e.g., a refund ...
es as they spent heavily on advertising and promotions to harness network effect
In economics, a network effect (also called network externality or demand-side economies of scale) is the phenomenon by which the value or utility a user derives from a good or service depends on the number of users of compatible products. Net ...
s to build market share or mind share
Mind share relates to the development of consumer awareness or popularity, and is one of the main objectives of advertising and promotion. When people think of examples of a product type or category, they usually think of a limited number of bran ...
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
The New Economy refers to the ongoing development of the American economic system. It evolved from the notions of the classical economy via the transition from a manufacturing-based economy to a service-based economy, and has been driven by ...
" 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.
Bubble in telecom
Partially a result of greed and excessive optimism, especially about the growth of data traffic fueled by the rise of the Internet, in the five years after the American Telecommunications Act of 1996
The Telecommunications Act of 1996 is a United States federal law enacted by the 104th United States Congress on January 3, 1996, and signed into law on February 8, 1996, by President Bill Clinton. It primarily amended Chapter 5 of Title 47 of ...
went into effect, telecommunications equipment
Telecommunications equipment (also telecoms equipment or communications equipment) are hardware which are used for the purposes of telecommunications. Since the 1990s the boundary between telecoms equipment and IT hardware has become blurred as a ...
companies invested more than $500 billion, mostly financed with debt, into laying fiber optic cable, adding new switches, and building wireless networks. In many areas, such as the Dulles Technology Corridor
The Dulles Technology Corridor is a business cluster containing many defense and technology companies, located in Northern Virginia near Washington Dulles International Airport. The area was called "The Silicon Valley of the East" by '' Atlantic' ...
in Virginia, governments funded technology infrastructure and created favorable business and tax law to encourage companies to expand. The growth in capacity vastly outstripped the growth in demand. Spectrum auction
A spectrum auction is a process whereby a government uses an auction system to sell the rights to transmit signals over specific bands of the electromagnetic spectrum and to assign scarce spectrum resources. Depending on the specific auction form ...
s for 3G in the United Kingdom in April 2000, led by Chancellor of the Exchequer Gordon Brown
James Gordon Brown (born 20 February 1951) is a British former politician who served as Prime Minister of the United Kingdom and Leader of the Labour Party from 2007 to 2010. He previously served as Chancellor of the Exchequer in Tony B ...
, raised £22.5 billion. In Germany, in August 2000, the auctions raised £30 billion. A 3G spectrum auction
A spectrum auction is a process whereby a government uses an auction system to sell the rights to transmit signals over specific bands of the electromagnetic spectrum and to assign scarce spectrum resources. Depending on the specific auction form ...
in the United States in 1999 had to be re-run when the winners defaulted on their bids of $4 billion. The re-auction netted 10% of the original sales prices. When financing became hard to find as the bubble burst, the high debt ratio
Debt Ratio is a financial ratio that indicates the percentage of a company's assets that are provided via debt. It is the ratio of total debt ( short-term and long-term liabilities) and total assets (the sum of current assets, fixed assets, and oth ...
s of these companies led to bankruptcy. Bond investors recovered just over 20% of their investments. However, several telecom executives sold stock before the crash including Philip Anschutz, who reaped $1.9 billion, Joseph Nacchio
Joseph P. Nacchio (born June 22, 1949 in Brooklyn, New York) is an American executive who was chairman of the board and chief executive officer of Qwest Communications International from 1997 to 2002. Nacchio was convicted of insider trading durin ...
, who reaped $248 million, and Gary Winnick
Gary Winnick is an American financier best known for founding and being Chairman of Global Crossing between 1997 and 2002, when it declared bankruptcy.
As of 2015, he was Chairman and Chief Executive Officer of Winnick & Company, a Los Ang ...
, who sold $748 million worth of shares.
Bursting of the bubble
Nearing the turn of the millennium, spending on technology was volatile as companies prepared for the Year 2000 problem
The year 2000 problem, also known as the Y2K problem, Y2K scare, millennium bug, Y2K bug, Y2K glitch, Y2K error, or simply Y2K refers to potential computer errors related to the formatting and storage of calendar data for dates in and after ...
. There were concerns that computer systems would have trouble changing their clock and calendar systems from 1999 to 2000 which might trigger wider social or economic problems, but there was virtually no impact or disruption due to adequate preparation. Spending on marketing also reached new heights for the sector: Two dot-com companies purchased ad spots for Super Bowl XXXIII
Super Bowl XXXIII was an American football game played between the American Football Conference (AFC) champion Denver Broncos (who were also defending their Super Bowl XXXII championship) and the National Football Conference (NFC) champion Atlan ...
, and 17 dot-com companies bought ad spots the following year for Super Bowl XXXIV
Super Bowl XXXIV was an American football game played at the Georgia Dome in Atlanta on January 30, 2000, to determine the National Football League (NFL) champion for the 1999 season. The National Football Conference (NFC) champion St. Louis ...
.
On January 10, 2000, America Online, led by Steve Case and Ted Leonsis
Theodore John Leonsis (born January 8, 1957) is an American businessman, investor, filmmaker, author, philanthropist, and former politician. He is a former senior executive with America Online (AOL), and the founder, chairman, and CEO of Monument ...
, announced a merger with Time Warner
Warner Media, LLC ( traded as WarnerMedia) was an American multinational mass media and entertainment conglomerate. It was headquartered at the 30 Hudson Yards complex in New York City, United States.
It was originally established in 1972 by ...
, led by Gerald M. Levin. The merger was the largest to date and was questioned by many analysts. Then, on January 30, 2000, 12 ads of the 61 ads for Super Bowl XXXIV
Super Bowl XXXIV was an American football game played at the Georgia Dome in Atlanta on January 30, 2000, to determine the National Football League (NFL) champion for the 1999 season. The National Football Conference (NFC) champion St. Louis ...
were purchased by dot-coms (sources state ranges from 12 up to 19 companies depending on the definition of ''dot-com company''). At that time, the cost for a 30-second commercial was between $1.9 million and $2.2 million.
Meanwhile, Alan Greenspan
Alan Greenspan (born March 6, 1926) is an American economist who served as the 13th chairman of the Federal Reserve from 1987 to 2006. He works as a private adviser and provides consulting for firms through his company, Greenspan Associates LLC. ...
, then Chair of the Federal Reserve
The chair of the Board of Governors of the Federal Reserve System is the head of the Federal Reserve, and is the active executive officer of the Board of Governors of the Federal Reserve System. The chair shall preside at the meetings of the Boa ...
, raised interest rates several times; these actions were believed by many to have caused the bursting of the dot-com bubble. According to Paul Krugman
Paul Robin Krugman ( ; born February 28, 1953) is an American economist, who is Distinguished Professor of Economics at the Graduate Center of the City University of New York, and a columnist for ''The New York Times''. In 2008, Krugman was ...
, however, "he didn't raise interest rates to curb the market's enthusiasm; he didn't even seek to impose margin requirements on stock market investors. Instead, t is allegedhe waited until the bubble burst, as it did in 2000, then tried to clean up the mess afterward". Finance author and commentator E. Ray Canterbery agreed with Krugman's criticism.
On Friday March 10, 2000, the NASDAQ Composite stock market index peaked at 5,048.62. However, on March 13, 2000, news that Japan had once again entered a recession
In economics, a recession is a business cycle contraction when there is a general decline in economic activity. Recessions generally occur when there is a widespread drop in spending (an adverse demand shock). This may be triggered by various ...
triggered a global sell off that disproportionately affected technology stocks. Soon after, Yahoo!
Yahoo! (, styled yahoo''!'' in its logo) is an American web services provider. It is headquartered in Sunnyvale, California and operated by the namesake company Yahoo Inc., which is 90% owned by investment funds managed by Apollo Global Manage ...
and eBay
eBay Inc. ( ) is an American multinational e-commerce company based in San Jose, California, that facilitates consumer-to-consumer and business-to-consumer sales through its website. eBay was founded by Pierre Omidyar in 1995 and became ...
ended merger talks and the Nasdaq fell 2.6%, but the S&P 500
The Standard and Poor's 500, or simply the S&P 500, is a stock market index tracking the stock performance of 500 large companies listed on stock exchanges in the United States. It is one of the most commonly followed equity indices. As of ...
rose 2.4% as investors shifted from strong performing technology stocks to poor performing established stocks.
On March 20, 2000, ''Barron's Barron's or Barrons may refer to:
*Barron's Educational Series, a publisher of books, as well as college entrance exam preparation classes and materials, now an imprint of Kaplan Test Prep
** B.E.S. Publishing, the former owner of Barron's
* ''Barr ...
'' featured a cover article titled "Burning Up; Warning: Internet companies are running out of cash—fast", which predicted the imminent bankruptcy of many Internet companies. This led many people to rethink their investments. That same day, MicroStrategy
MicroStrategy Incorporated is an American company that provides business intelligence (BI), mobile software, and cloud-based services. Founded in 1989 by Michael J. Saylor, Sanju Bansal, and Thomas Spahr, the firm develops software to analyze ...
announced a revenue restatement due to aggressive accounting practices. Its stock price, which had risen from $7 per share to as high as $333 per share in a year, fell $140 per share, or 62%, in a day. The next day, the Federal Reserve raised interest rates, leading to an inverted yield curve
In finance, an inverted yield curve happens when a yield curve graph of typically government bonds inverts in the opposite direction and the shorter term US Treasury bonds are offering a higher yield than the long-term Treasury bonds. Long ...
, although stocks rallied temporarily.
Tangentially to all of speculation, Judge Thomas Penfield Jackson issued his conclusions of law in the case of ''United States v. Microsoft Corp.'' (2001) and ruled that Microsoft was guilty of monopolization and tying in violation of the Sherman Antitrust Act
The Sherman Antitrust Act of 1890 (, ) is a United States antitrust law which prescribes the rule of free competition among those engaged in commerce. It was passed by Congress and is named for Senator John Sherman, its principal author.
...
. This led to a one-day 15% decline in the value of shares in Microsoft and a 350-point, or 8%, drop in the value of the Nasdaq. Many people saw the legal actions as bad for technology in general. That same day, Bloomberg News
Bloomberg News (originally Bloomberg Business News) is an international news agency headquartered in New York City and a division of Bloomberg L.P. Content produced by Bloomberg News is disseminated through Bloomberg Terminals, Bloomberg Tele ...
published a widely read article that stated: "It's time, at last, to pay attention to the numbers".
On Friday, April 14, 2000, the Nasdaq Composite index fell 9%, ending a week in which it fell 25%. Investors were forced to sell stocks ahead of Tax Day
In the United States, Tax Day is the day on which individual income tax returns are due to be submitted to the federal government. Since 1955, Tax Day has typically fallen on or just after April 15. Tax Day was first introduced in 1913, when t ...
, the due date to pay taxes on gains realized in the previous year. By June 2000, dot-com companies were forced to reevaluate their spending on advertising campaigns. On November 9, 2000, Pets.com, a much-hyped company that had backing from Amazon.com, went out of business only nine months after completing its IPO. By that time, most Internet stocks had declined in value by 75% from their highs, wiping out $1.755 trillion in value. In January 2001, just three dot-com companies bought advertising spots during Super Bowl XXXV
Super Bowl XXXV was an American football game between the American Football Conference (AFC) champion Baltimore Ravens and the National Football Conference (NFC) champion New York Giants to decide the National Football League (NFL) champion for ...
. Without question September 11 attacks
The September 11 attacks, commonly known as 9/11, were four coordinated suicide terrorist attacks carried out by al-Qaeda against the United States on Tuesday, September 11, 2001. That morning, nineteen terrorists hijacked four commer ...
later accelerated the stock-market drop. Investor confidence was further eroded by several accounting scandal
Accounting, also known as accountancy, is the measurement, processing, and communication of financial and non financial information about economic entities such as businesses and corporations. Accounting, which has been called the "languag ...
s and the resulting bankruptcies, including the Enron scandal in October 2001, the WorldCom scandal
The WorldCom scandal was a major accounting scandal that came into light in the summer of 2002 at WorldCom, the USA's second-largest long-distance telephone company at the time. From 1999 to 2002, senior executives at WorldCom led by founder and CE ...
in June 2002, and the Adelphia Communications Corporation
Adelphia Communications Corporation was an American cable television company with headquarters in Coudersport, Pennsylvania. It was founded in 1952 by brothers Gus and John Rigas after the pair purchased a cable television franchise for US$300. C ...
scandal in July 2002.
By the end of the stock market downturn of 2002
In 2001, stock prices took a sharp downturn (some say "stock market crash" or " the Internet bubble bursting") in stock markets across the United States, Canada, Asia, and Europe. After recovering from lows reached following the September 11 ...
, stocks had lost $5 trillion in market capitalization since the peak. At its trough on October 9, 2002, the NASDAQ-100 had dropped to 1,114, down 78% from its peak.
Aftermath
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.[
Several companies and their executives, including ]Bernard Ebbers
Bernard John Ebbers (August 27, 1941 – February 2, 2020) was a Canadian businessman, the co-founder and CEO of WorldCom and a convicted fraudster. Under his management, WorldCom grew rapidly but collapsed in 2002 amid revelations of accounting ...
, Jeffrey Skilling
Jeffrey Keith Skilling (born November 25, 1953) is an American businessman who is best known as the CEO of Enron Corporation during the Enron scandal. In 2006, he was convicted of federal felony charges relating to Enron's collapse and eventual ...
, and Kenneth Lay
Kenneth Lee Lay (April 15, 1942 – July 5, 2006) was an American businessman who was the founder, chief executive officer and chairman of Enron. He was heavily involved in the eponymous accounting scandal that unraveled in 2001 into the large ...
, were accused or convicted of fraud for misusing shareholders' money, and the U.S. Securities and Exchange Commission
The U.S. Securities and Exchange Commission (SEC) is an independent agency of the United States federal government, created in the aftermath of the Wall Street Crash of 1929. The primary purpose of the SEC is to enforce the law against market ...
levied large fines against investment firms including Citigroup and Merrill Lynch for misleading investors.
After suffering losses, retail investors transitioned their investment portfolios to more cautious positions. Popular Internet forum
An Internet forum, or message board, is an online discussion site where people can hold conversations in the form of posted messages. They differ from chat rooms in that messages are often longer than one line of text, and are at least temporar ...
s that focused on high tech
High technology (high tech), also known as advanced technology (advanced tech) or exotechnology, is technology that is at the cutting edge: the highest form of technology available. It can be defined as either the most complex or the newest te ...
stocks, such as Silicon Investor, Yahoo! Finance
Yahoo! Finance is a media property that is part of the Yahoo! network. It provides financial news, data and commentary including stock quotes, press releases, financial reports, and original content. It also offers some online tools for perso ...
, and The Motley Fool
The Motley Fool is a private financial and investing advice company based in Alexandria, Virginia. It was founded in July 1993 by co-chairmen and brothers David Gardner and Tom Gardner, and Erik Rydholm, who has since left the company. The compa ...
declined in use significantly.
Job market and office equipment glut
Layoffs of programmers resulted in a general glut
In macroeconomics, a general glut is an excess of supply in relation to demand, specifically, when there is more production in all fields of production in comparison with what resources are available to consume (purchase) said production.
This exh ...
in the job market. University enrollment for computer-related degrees dropped noticeably. Aeron chair
The Aeron chair is an office chair sold by Herman Miller, first released in 1994. In 2010, it was called "America's best-selling chair". It is featured in the Museum of Modern Art's permanent collection. It was designed by Don Chadwick and Bill ...
s, which retailed for $1,100 each, were liquidated en masse.
Legacy
As growth in the technology sector stabilized, companies consolidated; some, such as Amazon.com
Amazon.com, Inc. ( ) is an American multinational technology company focusing on e-commerce, cloud computing, online advertising, digital streaming, and artificial intelligence. It has been referred to as "one of the most influential econo ...
, eBay
eBay Inc. ( ) is an American multinational e-commerce company based in San Jose, California, that facilitates consumer-to-consumer and business-to-consumer sales through its website. eBay was founded by Pierre Omidyar in 1995 and became ...
, and Google
Google LLC () is an American Multinational corporation, multinational technology company focusing on Search Engine, search engine technology, online advertising, cloud computing, software, computer software, quantum computing, e-commerce, ar ...
gained market share and came to dominate their respective fields. The most valuable public companies are now generally in the technology sector.
In a 2015 book, venture capitalist Fred Wilson, who funded many dot-com companies and lost 90% of his net worth when the bubble burst, said about the dot-com bubble:
References
Further reading
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{{DEFAULTSORT:Dot-Com Bubble
1990s economic history
1990s fads and trends
2000s economic history
Stock market crashes
Economic bubbles