1. Internet mania
According to Ian Peter’s “History of the Internet” its origin reaches early 1960s, when some of visionary people discerned great potential value in sharing information via the computer. In 1965 Lawrence Roberts of MIT connected a Massachusetts computer with a California computer over dial-up telephone lines and in 1966 he started to develop his plan for ARPANET – the predecessor of the Internet. The plan was implemented in 1969 under a conducted by Advanced Research Projects Agency (ARPA).[1]
What is worth mentioning, from the very beginning the Internet would work even if some of the most important connections were destroyed, for example by nuclear attack. Namely, if the most direct route was not available, routers were able to direct traffic around the network via alternate routes. The early Internet was used by computer experts, engineers, scientists, and librarians. However, there was nothing friendly about it. There were no personal computers in those days. People who applied them, had to learn how to use a very complex system.
According to Ian Peter, during the two next decades the Internet developed steadily, but without attracting broader attention. In 1972 the telnet protocol, enabling logging on to a remote computer and sending e-mails was adapted. The ftp protocol, enabling file transfers between Internet sites, was published in 1973 and in 1974 appeared Ethernet, a protocol for local networks. The next milestones were the development of TCP/IP protocol and Network Control Protocol (NCP), finally adopted in 1983 and established in 1986 by the National Science Foundation NSFNet, a cross country 56 Kbps backbone for the Internet. More and more people found ways to communicate with colleagues around the world and to share files and resources, although there were many obstacles to it. In 1989 a significant fact took place, when scientists from CERN proposed a new protocol (which became the World Wide Web in 1991) for information distribution.[2]
With the personal computers increasingly popular, people started to realize that the Internet offers some potential. Between April 1992 and July 1993 most of the major US magazines published some features on the new mean of communication, which was dubbed the "Information Superhighway". However, investors were reluctant in entrusting their savings to companies, which launched their enterprises with the intention to change commerce and communication. Bearing in mind the fact that computers were still a novelty and a lot of people could not imagine benefits ensuing from using them, it was not strange. But with the computers more and more fast and efficient, awareness of new possibilities which the Interned carried, rose. In effect, the first companies that entered the stock market were not too expensive and this made them possible to gain. As indexes was gaining steadily, investors who ventured to buy shares reaped profits from it. Gradually more and more people decided to invest their money in the new medium and demand for the Internet companies rose. 1995 marked the beginning of a major jump in growth of Internet users, who were seen by companies as potential consumers. As a result, new Internet start-ups were launched.
A prominent financial adviser Fred Wilson wrote about the phenomena:
When there were not very many Internet companies, the supply of Internet companies to the market was small and the appetite for them was large. Therefore, if you were in the business of creating Internet companies in 1996-98, you had a market that provided massive demand for that.[3]
The main purpose of the Internet firms were to raise the capital, develop a successful web business and finally to sell the company to the public. Some of them were: a bookstore Amazon.com, an auctioneer Ebay.com, a media company Yahoo.com, a search engine Lycos.com and Hotmail.com, which offered email accounts. But whereas they businesses were based on realistic assumptions, many others launched firms with very weak business plans, sometimes with nothing more than an idea and a catchy name. Among them were : Boo.com, Freeinternet.com, theGlobe.com, GovWorks.com, pets.com, lastminute.com. They tried to place themselves in multifarious aspects of consumers’ demand but had one characteristic in common – unusual, sometimes peculiar, ideas. The examples were Think Tools Company, that entered into the stock market without having a substantial product and DigiScents – that promised to transmit smells over the Internet. [4] Sometimes motives to make a company public were mundane and fraudulent from the very beginning. An example of it revealed David S. Carr’s:
Arguably, it all began with Netscape in 1995. The IPO was extremely successful as the stock price rose from $28 to $71 on the first day, and ultimately cleared the way for hundreds more net companies to do IPO’s far earlier than ever before. A firm with $3 million in losses was suddenly worth $2 billion. Jim Clark, Netscape’s co-founder had been advised strongly against going public, but went ahead anyway because he had to make payment on a mega-yacht he was having built. If he missed the payment, the builder would give his slot to someone else, and he wouldn’t get his yacht for years. From such motives, among others, grew one of history’s great stock manias and a new model for venture funding.[5]
According to Hossein Bidgoli’s:
The advent of the World Wide Web brought with it a rush of businesses hoping to be first to achieve market share online. During this frenzy of the mid-1990s, venture capitalists were willing to invest in almost any type of online organization. The belief seemed to be that just about any idea could bring a fortune online. Nothing appeared to be too extreme.[6]
No one was interested in companies’ profitability. Most companies engaged in a policy of growth over profit, assuming that if they built up their customer base, their profits would rise as well. During the dot-com bubble of the 1990s, many questioned the value of traditional accounting information for investment decision making purposes. Stocks were trading at record multiples of earnings. In fact many companies with no earnings at all, experienced significant increases in their stock prices during the latter half of the 1990s. However, many of Wall Street’s most respected analysts, including those independent of investment banking firms, were recommending Internet stocks to the firm’s institutional and individual clients as being fairly valued. Some maintained that earnings no longer mattered and that other metrics such as number of clicks or page views were more appropriate in the current business environment. Discussions about new business models became more and more common. It was claimed that the old laws of economics did not apply anymore and that new laws had taken their place and as a result of it the term the New Economy was coined. Enthusiasts of the New Economy proposed a new method for determining the value of the intangible assets that were at the heart of the new economy. Baruch Lev wrote:
One of the major problems with today’s accounting systems is, that they are still based on transactions, such as sales. In the current, knowledge-based economy much of the value creation or destruction precedes, sometimes by years, the occurrence of transactions. The successful development of a drug creates considerable value, but actual transactions, such as sales, may take years to materialize. Until then, the accounting system does not register any value created in contrast to the investments made into R&D, which are fully expensed. This difference, between how the accounting system is handling value created and is handling investments into value creation, is the major reason for the growing disconnect between market values and financial information.[7]
As equity valuations rested on uncertain future forecasts, there were no prices which the stock market would not accept. With outlandish and unsupportable claims being made by companies, the technology NASDAQ Composite index, which grouped the Internet companies, was rising steadily. Whereas in 1990 hovered between 400 and 480, in August 1996 stood at 1,114 and on March 10, 2000, closed at its all-time high of 5,048.62. The index within 10 years gained about 900%, that amounted to an average yearly return 90%.[8]
Historical prices of Nasdaq, 1979- 2011[9]
People running the Internet businesses were considered as symbols of the new reality. As if symbolically one of them, Amazon.com founder Jeff Bezos, in 1999 was named by Time magazine's Man of the Year. Time managing editor Walter Isaacson explained the magazine's choice as follows: "Bezos is a person who not only changed the way we do things but helped pave the way for the future.”[10]
The story of the young entrepreneur whose vision of a giant Internet bookstore helped pioneer the global online shopping revolution, was cited by everyone. Bezos launched Amazon.com in July 1995 in an initial investment of US$300,000 in a garage of a two-bedroom home in Seattle. As the number of customers rose, the company diversified, selling DVDs, CDs, MP3 downloads, computer software, video games, electronics, apparel, furniture, food, and toys. In 1999 the company had over 13 million customers and was the leading online retailers with $8 billion worth of sales. One share Amazon.com, that went public in May 1997 at $1,8 on April 1999 was worth $101,5 – despite the fact that within these years the company did not earn even a cent.[11]
Historical Price Chart of Amazon (AMZN) 1997 - 2001[12]
However, with public markets glutted with new companies, investors were becoming increasingly reluctant to sink more money into new enterprises. On February 12, 2000,
Securities and Exchange Commission Chairman Arthur Levitt warned investors against being overly bullish: "Any way you look at it, many of today's valuations seem to defy traditional explanation.”[13] In 1999 and early 2000 the Federal Reserve increased the interest
rates 6 times and the economy began to slow. On top of all that, in March 2000 Internet retailers revealed annual and quarterly reports (including the 1999 Christmas season) and they performances were extremely poor.[14]
Securities and Exchange Commission Chairman Arthur Levitt warned investors against being overly bullish: "Any way you look at it, many of today's valuations seem to defy traditional explanation.”[13] In 1999 and early 2000 the Federal Reserve increased the interest
rates 6 times and the economy began to slow. On top of all that, in March 2000 Internet retailers revealed annual and quarterly reports (including the 1999 Christmas season) and they performances were extremely poor.[14]
Several days later the dot-com bubble started to deflate. Technology NASDAQ Composite index between March 10, 2000, and April 4, 2000 fell from the peak at 5,048.62 to 3,649.[15] In the meantime, on March 20th, 2000, after the NASDAQ had lost more than 10 percent from its to, financial magazine Barron's shocked investors with the story "Burning Up". Jack Willoughby wrote:
During the next 12 months, scores of highflying Internet upstarts will have used up all their cash. If they can't scare up any more, they may be in for a savage shakeout. An exclusive survey of the likely losers.(…) 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.[16]
Now people started to realize the truth about the Internet companies. Simultaneously some of those companies that could not weather the financial burden filed for bankruptcy. Several executives were convicted of fraud for abusing shareholders' money. The U.S. Securities and Exchange Commission fined investment moguls Citigroup and Merrill Lynch millions of dollars for misleading investors. [17] Selling on the stock market precipitated and lasted until October 09, 2002, when NASDAQ Composite reached the daily bottom at 1114.11.[18]
The 10 best-performing tech stocks of 1999 and their lost within the next 14 months[19]
Company 1999 % gain 12/31/99 to 3/5/01 % change
Qualcomm 2,619 -64
BroadVision 1,494 -88
Metricom 1,416 -95
VeriSign 1,191 -75
ARM Holdings 1,171 -65
DoubleClick 1,037 -89
Emulex 1,025 -51
InfoSpace 1,023 -93
Exodus 1,006 -67
The Internet bubble finally burst. Market quality deteriorated significantly - between 1999-2002 1,098 firms were delisted from NASDAQ composite.[20] Three companies alone - America Online (presently AOL Time Warner), Yahoo and Amazon.com erased $300 billion in market capitalization since the March 2000 market top. Overall, the crash caused the loss of $5 trillion in the market value, contributing to the 2001-2002 recession. [21]
[1] http://www.nethistory.info/History%20of%20the%20Internet/index.html
[2] http://www.walthowe.com/navnet/history.html
[3] http://www.great-quotes.com/quote/1231678
[4] http://mytimemattersblog.com/failure-and-success-of-dot-com-companies/
[5] http://www.docstoc.com/search/stock-bubble
[6] http://books.google.pl/books?id=ghrlmdSu0I0C&pg=PA136&lpg=PA136&dq
[7] http://www.juergendaum.com/news/03_06_2002.htm
[8] http://finance.yahoo.com/echarts?s=^IXIC+Interactive#symbol=^IXIC;range=my
[9] http://stockcharts.com/freecharts/gallery.html?$COMPQ
[10] http://www.marketwatch.com/story/executive-briefing-can-it-enhance-creative-thinking
[11] http://finance.yahoo.com/echarts?s=AMZN#chart2:symbol=amzn;range=
[12]moneycentral.msn.com/investor/charts/chartdl.aspx?PT=11&compsyms=&D4=1&DD=1&D5=0&DCS=2&MA0=0&MA1=0&CP=1&C5=4&C5D=1&C6=1997&C7=1&C7D=1&C8=2002&C9=&CF=0&D7=&D6=&showchartbt=Redraw+chart&symbol=amzn&nocookie=1&SZ=0
[13] http://www.sec.gov/news/speech/spch345.htm
[14] http://www.tryfinance.com/1/t9.html#where
[15]http://finance.yahoo.com/echarts?s=^IXIC+Interactive#chart3:symbol=^ixic;range=19890205,20010402;indicator=volume;charttype=line;crosshair=on;ohlcvalues=0;logscale=on;source=undefined
[16] ibidem
[17] http://en.wikipedia.org/wiki/Dot-com_bubble
[18] http://www.nasdaq.com/aspx/historical_quotes.aspx?symbol=IXIC&selected=IXIC
[19] http://news.cnet.com/2009-1017-253125-2.html&tag=txt#ixzz1K5ISRBoj
[20] http://econpapers.repec.org/paper/eclohidic/2008-6.htm
[21] http://www.huffingtonpost.com/social/Amalek/federal-pay-freeze-obama_n_789141_68985002.html
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