Last Updated on February 17, 2021 by Sean B
The advent and subsequent widespread use of the internet shaped the destiny of the world in a number of ways. One of the most famous or infamous, if you think that way, events associated with the internet is the Dot.com Bubble, particularly when the Dot Com bubble burst. The entire bubble event sent people from rags to riches and back to rags within a decade.
A Little Context of the Story
The internet was first conceived of as a network between the Military, Universities, and Laboratories in the late 1950s. This network didn’t come to fruition until January 1967 when the ARPANET was launched and at that time it was still only thought of as a way of communication for defense entities or research institutions. It was not until the early 1990s that the potential of the technology for the general public was realized and the Internet was adopted for widespread use.
It was the release of Mosaic and other web browsers that brought the internet to the masses and increased the number of computer-owning Americans from 15 to 15 percent by the end of the decade.
Another thing was taking place at the same time, and that was a steady decline in the interest rates and the resulting influx of capital into the stock market. As a result, people started to capitalize on the internet, and a number of companies emerged.
Investors, particularly venture capitalists, saw this as an opportunity, and astronomical investments were made in the dot com companies, the name adopted from the suffix “.com” used by the internet websites.
The Beginning of the End: The Dot Com Bubble Bursts
The tech companies were not founded by seasoned CEOs and Investors. The people running these companies were technical geniuses but were not very well with finances. The result was over expenditures. The nascent companies fueled by a volatile investor group could only survive so long. The decline of dot com started with the arrival of the new millennium. Here is what happened.
Timeline of the Worst Economic Crisis for the Tech World
To get the idea of the scope of the Dot-Com Bubble by the end of the millennia can be put into perspective by this one simple example:
- All the ad spots for the XXXIII Super Bowl on 31st of January 1999 were booked by just two Dot-Com companies!
That was like the heart rate of a patient going into a cardiac arrest going sky-high just before death. From that moment on, it was all downhill for the Dot-Com Party. And now, here is the sequence of events that followed.
- As the year 2000 neared, a paranoia spread across the investors that the computer systems will crash due to the change of the date. It was believed that the computers will register the year 2000 as 1900 and the whole system will fail catastrophically. It held people back from investing in tech companies, and the people who had already invested cashed out. However, that was just paranoia, a baseless fear, and nothing of that kind actually took place.
- January the 10th, 2000, marked the merger of America Online with Time Warner. It was the largest merger till that time, and its transparency was questionable.
- From all ads of Super Bowl XXXIII being purchased by two dot-coms in 1999, just 20 percent were under the use of the Dot-Com companies and this time 19 companies pooled in for that. However, it was still substantial, keeping in mind that a 30-second ad in the game cost upwards of $2million at that time.
- In the second month of the new millennia, with the 2000 problem out of the way, then chair of the Federal Reserve of The United States, Alan Greenspan announced his plans for aggressively increasing interest rates resulting in extreme volatility in the stock market. People grew cautious of investing in tech companies, fearing that they might not be able to keep up with the increased borrowing rates.
- March the 10th, 2000, marked the peak of NASDAQ at 5,048.62 points.
- In an unfortunate turn of events, the news of Japan going into yet another recession on March 13th sparked a global sell-off, and it had a devastating effect on technology stocks all over the world.
- Yahoo and eBay settled their merger on March 15th, and the result was NASDAQ falling 2.6%. Investors pulled out of the Dot-Coms and invested in established corporations, as a result, the S&P 500 index went up 2.4%. Even though the Dot-Com stocks were performing better, investors wanted to be safe and went with the established yet poor-performing stocks.
- A Barron’s article from March 2000 claimed: “Burning Up; Warning: Internet companies are running out of cash—fast”. The result was widespread anarchy in the investment world, making people further paranoid of investing in the Dot-Com companies. An example of that was the drop in the share price of MicroStrategy by $140 or 62% in one day. The same company had shown a staggering 4700% growth in the previous year.
- The very next day, the Federal Reserve announced an increase in interest rates. This, combined with the prevalent circumstances, led to an inverted yield curve, but the stocks somehow managed to rally for some time.
- The next blow came in the form of the verdict against Microsoft Corporation on April the 3rd where they were found guilty of monopolization and violating the Sherman Antitrust Act. This verdict cost Microsoft a whopping 15% of its market cap, with the NASDAQ losing 8% of its value.
- NASDAQ was not going to recover any time soon, and by April the 14th, it had seen 25% decreases in its value within a couple of weeks. Things had yet to get worse for the Dot-Comers.
- By the first June of the Millennia, the Dot-Co folk were forced to rethink their advertising policy and business running methods.
- The going out of the business of Pets.com, an Amazon-backed company, marked a decline in the market cap of the Dot-Com companies by as much as 75%. It translated to a loss of $1.75 trillion, a blow large enough to disrupt the economy of the nation as a whole.
- By the year 2002, the total loss of NASDAQ amounted to $5 trillion since its peak value in terms of market cap, and that combined with the downturn of the stock market in 2002 marked the event we know and the bursting of the Dot-Com bubble.
The story of the Dot-Com bubble’s rise and fall tells us one thing that misinformation on the part of media and illogical paranoia among the investors can lead to serious financial losses by both nascent and established companies. The stock market operates with a very delicate balance, and any slightest disruption can lead to the most serious consequences.