The Dotcom Bubble: Review Of The Darkest Days For The Technology World
In the 1990s, legal entities and individuals invested in Internet companies with the aim of making astronomical profits, leading to the dot-com bubble.
In the 1990s, the Internet was spreading and it became a reason for many companies to switch to the Internet business model. They added the prefix “e” or the suffix “dotcom” to their brand name to show their activity on the Internet. That’s why they were called dot-com companies.
Since 1994, dot-com companies have grown faster and attracted public and media attention, and many individuals and legal entities have decided to invest in these companies, which has led to a large number of new investors entering the market and creating Various companies without a proper business model.
These exciting days continued until March 10, 2000, when the Nasdaq stock market index reached 5,132 units, and on that day the market closed at 5,048 units, but for various reasons the downward trend began the next day and continued until October 9, 2002, when the Nasdaq stock market index reached 1,114 units.
Financial bubbles can be divided into three periods: the period before the main bubble, the period of the main bubble, and finally the period after the main bubble. In the case of the dot-com bubble, the pre-bubble period lasted from 1994 to 1998, the main bubble period from 1998 to March 2000, and the post-bubble period from March 2000 to October 2002, after which the market slowly recovered and it took 15 years for the Nasdaq to recoup the remaining losses and return to its March 2000 peak.
1. The Beginning Of Exciting Days For Dot-Com Companies
In January 1993, the NCSA Mosaic graphical browser was released and attracted a lot of attention. Microsoft has licensed this browser and developed its own browser based on it, which was launched in 1995 under the name Microsoft Internet Explorer. With this action, Microsoft made the first move in the browser war.
At that time, companies such as Amazon and Microsoft were active in the market. Microsoft was conquering the market with products such as Windows and Internet Explorer, and Amazon was also developing rapidly; other companies also decided to seize the opportunity and start their activities on the Internet.
Technology was developing rapidly, and the number of dot-com companies was increasing day by day. Therefore, investment banks and venture capitalists decided to seize the opportunity and benefit from the huge profits of this market and started investing in dot-com companies. For example, Webvan.com received a capital of $393 million from companies such as Goldman Sachs, Benchmark and Yahoo.
Various people have warned about this emotional trend, for example, Alan Greenspan, the chair of the Federal Reserve Bank of the United States of America, announced in 1996 that the current market conditions are unstable and will lead to a collapse of the market in the future, but no one paid attention to this warning and more and more companies were created. For example, one of these companies was Pets.com, founded in 1998, which was in the business of selling pet supplies online, and even Amazon bought some of its shares. They started to advertise and attract investors, even though they were not able to make good profits.
2. What Were The Causes Of The Dotcom Bubble?
2.1 Overvaluation
As dot-com stocks continued to rise, many investors came to believe that the U.S. economy had fundamentally changed and that several factors that traditionally played a role in valuing a company’s stock, such as assets, liabilities, earnings, profit margins, market share, etc., no longer had a direct bearing on the valuation of dotcom companies. Accordingly, they invested even in indebted companies that had no real prospect of making a profit. This overconfidence of investors led to an increase in the share price of dot-com companies, and the price of individual shares moved away from their actual value. However, many investors did not pay attention to this problem and, with undue enthusiasm, bought shares in companies whose prices were unrealistic and above their intrinsic value.
2.2 Abundance of Financial Resources
The flow of money from investors to these companies in the dot-com era was one of the reasons for the creation of the economic bubble, as many of them in this frenzy were only out to attract capital and failed to generate significant returns and value, so their easy access to capital magnified the bubble.
2.3 Media Frenzy
News from media companies encouraged investment by conveying overly optimistic expectations about startups. Publications such as The Wall Street Journal, Forbes, Bloomberg, and many other investment analysis publications stimulated demand through their media outlets and helped to grow the bubble. Alan Greenspan’s December 1996 speech on “irrational exuberance” also boosted this trend.
Investment Epidemic In Technology
In May 1997, Amazon went public and Microsoft bought Hotmail for $400 million. Technology had become a part of people’s lives, and dot-com companies were attracting people’s attention with extensive advertising.
Many people invested in these companies without paying attention to fundamental issues after seeing the huge profits, astronomical growth and increasing traffic of these companies to grow faster and get rich. Also, many analysts did not pay attention to the fundamental aspects of these companies and focused on the growth of website traffic.
One of the most interesting moments of these years was the broadcast of 21 commercials(before the start of the game and between the two halves) by various dot-com companies in the Super Bowl (the final game of the American Football Professional League in the United States of America) in 2000. This caused quite a stir.
Time Warner’s purchase of AOL for $164 billion was one of the other events that created fear and excitement. AOL was an Internet giant and owned a number of major news sites and Web services, and Time Warner wanted to take advantage of AOL’s capabilities on the Internet.
In those years, the stock prices of dot-com companies were far from their intrinsic value, and on March 10, 2000, market enthusiasm peaked and the Nasdaq market index doubled from the previous year, but the next day this economic bubble burst and the stock values of companies fell dramatically.
How Did The Darkness Of The Bubble Dominate The Market?
The market and investors had realized that many of these companies had very low revenues and did not see a bright future ahead, and this pessimism spread throughout the market, and it increased with the creation of various challenges.
The first blow was the fear of the change from 1999 to 2000 that was spreading in society at the time. Investors believed that if the number was changed from “99” to “00,” the entire structure of the Internet would collapse and these companies would be driven to ruin.
The Federal Reserve also put pressure on the market by deciding to raise interest rates, and in addition, Microsoft was convicted in court and labeled a “monopolist,” which caused further problems.
Of course, other companies also had problems that triggered pessimism. For example, pets.com failed to make significant financial profits, even though it spent a lot of money on advertising, which caused anxiety among its investors.
The number of users was increasing day by day, and many companies did not have the capability and the right infrastructure to respond to these users, which caused negative feelings among users and investors. Amazon was one of the companies that was able to improve infrastructure with proper capital management and successfully came out of the crisis. In addition, many companies wasted the financial resources they easily get, instead of investing in infrastructure and advancing the company’s goals, they spent the financial resources on other things, such as fun and…
In addition to all these problems, the recession of the Japanese market in 2002, which was an important player in technology, and the attacks of September 11, 2001, can be counted among the factors that caused the acceleration of this decline.
Many of these companies had interesting goals and initially wanted to bring about great changes, but halfway through they were caught by various temptations and gradually moved away from their goal.
These interesting ideas didn’t die when these companies disappeared, many of these ideas were carried on years later by other people with better strategies. For example, Amazon could implement the idea of Webvan.com with the Amazon Fresh service, and Uber could implement the idea of Kozmo.com with the Uber Rush service.
Domination Of The Darkness In The Market
After the negative news, investors felt more at risk and gradually realized that the shares they had bought were not worth the price they had paid for them, which led to a massive sale of shares and the beginning of the crisis. Companies such as Pets.com and Webvan.com, which initially had a lot of publicity, declared bankruptcy in 2000 and 2001, and this news caused a great shock in the market.
The $164 billion deal between Time Warner and AOL was known to be a bad deal and had disappointing effects on Time Warner. Google was one of the companies founded in 1998. They waited until the market calmed down and then went public on August 19, 2004. Other companies such as eBay, Amazon and Microsoft were also among those that managed to survive this crisis.
Many companies were destroyed in this crisis, but many companies have also come out of it successfully and have continued on their path by making better decisions and developing stronger and more stable strategies.
Many people believe that the current market conditions are similar to those of that time, and in their opinion, the increase in the number of startups is a sign of a new bubble and a bleak future like in those years. Of course, it should be remembered that the Internet was a new platform at the time, businesses were not yet stable and even the big technology companies were not powerful as they are today, and technology had not yet found its place in life.
When a critical situation occurs, a number of startups and even relatively large companies may be destroyed due to their mistakes, and the technology world will face challenges, but the presence of superpowers such as Amazon, Apple, Google, Meta, and Microsoft, etc., may be a factor that restores stability to the market, and also a factor that does not make investors doubt the entire structure.
It should be known that stock prices rise and fall with news, but the most important thing is to have a right and stable strategy for a meaningful and specific goal, so that companies can successfully come out of crises with their right principles.
