Get Internet Boom essential facts below. View Videos or join the Internet Boom discussion. Add Internet Boom to your Like2do.com topic list for future reference or share this resource on social media.
The NASDAQ Composite index spiked in the late 1990s and then fell sharply as a result of the dot-com bubble.
Quarterly U.S. Venture Capital Investments 1995-2017
The dot-com bubble (also known as the dot-com boom, the tech bubble, and the Internet bubble) was a historic economic bubble and period of excessive speculation that occurred roughly from 1995 to 2000, a period of extreme growth in the usage and adaptation of the Internet.
In 1993, the release of the Mosaic web browser made access to the World Wide Web possible (prior Internet services like Usenet, Gopher, FTP, etc existed but HTTP was the new invention which triggered this growth). Internet usage 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, an economy based on information technology, and many new companies were founded.
As a result of these factors, many investors were eager to invest, at any valuation, in any dot-com company, especially if it had one of the Internet-related prefixes or a ".com" suffix in its name.Venture capital was easy to raise. Investment banks, which profited significantly from initial public offerings (IPO), fueled speculation and encouraged investment in technology. A combination of rapidly increasing stock prices in the quaternary sector of the economy 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 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% value, and 7 additional large-cap stocks each rose over 900% in value. Even though the Nasdaq Composite rose 85.6% and the S&P 500 Index 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 engage in full-time day trading were common. The news media took advantage of the public's desire to invest in the stock market; an article in The Wall Street Journal suggested that investors "re-think" the "quaint idea" of profits, and CNBC reported on the stock market with the same level of suspense as many networks provided to the broadcasting of sports events.
At the height of the boom, it was possible for a promising dot-com company to become a public company 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 options 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, sold their shares or entered into hedges to protect their gains.
The "growth over profits" mentality and the aura of "new economy" 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
Telecommunications equipment providers, convinced that the future economy would require ubiquitous broadband access, went deeply into debt to improve their networks with high-speed equipment and fiber optic cables. In many areas, such as the Dulles Technology Corridor in Virginia, governments funded technology infrastructure and created favorable business and tax law to encourage companies to expand. In Europe, mobile phone companies overspent on 3G licences, which led them deep into debt. The investments in infrastructure were far out of proportion to cash flow. These were major factors that led to the telecoms crash.
Bursting of the bubble
Historical government interest rates in the United States
Around the turn of the millennium, spending on technology was volatile as companies prepared for the Year 2000 problem, which, when the clocks changed to the year 2000, actually had minimal impact.
In February 2000, with the Year 2000 problem no longer a worry, Alan Greenspan announced plans to aggressively raise interest rates, which led to significant stock market volatility as analysts disagreed as to whether or not technology companies would be affected by higher borrowing costs.
On March 10, 2000, the NASDAQ Composite stock market index peaked at 5,048.62.
On March 13, 2000, news that Japan had once again entered a recession triggered a global sell off that disproportionately affected technology stocks.
On March 15, 2000, Yahoo! and eBay ended merger talks and the Nasdaq fell 2.6% but the S&P 500 Index rose 2.4% as investors shifted from strong performing technology stocks to poor performing established stocks.
On March 20, 2000, Barron's 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 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, although stocks rallied temporarily.
On April 3, 2000, 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. 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 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, the due date to pay taxes on gains realized in the previous year.
By June 2000, dot-com companies were forced to rethink their 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.
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.
Layoffs of programmers resulted in a general glut in the job market. University enrollment for computer-related degrees dropped noticeably. Anecdotes of unemployed programmers going back to school to become accountants or lawyers were common.
As growth in the information technology sector stabilized, companies consolidated, some, such as Amazon.com, eBay, and Google gained market share and came to dominate their respective fields. The information technology industry came to more closely resemble other sectors of the economy, albeit with still a faster growth rate and higher valuations than other sectors. There are now many information technology companies ranked at the top of the Fortune 500.
In a 2015 book, venture capitalist Fred Wilson, who funded dot-com companies and lost 90% of his net worth when the bubble burst, said about the dot-com bubble:
"A friend of mine has a great line. He says 'Nothing important has ever been built without irrational exuberance'. Meaning that you need some of this mania to cause investors to open up their pocketbooks and finance the building of the railroads or the automobile or aerospace industry or whatever. And in this case, much of the capital invested was lost, but also much of it was invested in a very high throughput backbone for the Internet, and lots of software that works, and databases and server structure. All that stuff has allowed what we have today, which has changed all our lives... that's what all this speculative mania built".
Blucora (formerly InfoSpace) - Founded by Naveen Jain, in March 2000, its stock reached a price $1,305 per share, but by 2002 the price had declined to $2 a share.
Blue Coat Systems (formerly CacheFlow) - Its stock price rose over 400% on its first day of trading in November 1999.
Boo.com - An online clothing retailer, it spent $188 million in just six months. It filed bankruptcy in May 2000.
Books-a-Million - A book retailer whose stock price soared from around $3 per share on November 25, 1998 to $38.94 on November 27, 1998 and an intra-day high of $47.00 on November 30, 1998 after it announced an updated website. Two weeks later, the share price was back down to $10. By 2000, the share price had returned to $3.
Broadband Sports - A network of sports-content websites that raised over $60 million before going bust in February 2001.
CDNow - Founded by Jason Olim and his brother, it was an online retailer of compact discs and music-related products that reached a valuation of over $1 billion in April 1998. In 2000, it was acquired by Bertelsmann Music Group for $117 million and was later shut down.
Chemdex.com - A company founded by David Perry that operated an online marketplace for businesses, it reached a market capitalization of over $7 billion despite minimal revenues.
Covad - Shares rose fivefold within months of its IPO.
Cyberian Outpost - One of the first successful online shopping websites, it reached a peak market capitalization of $1 billion. It used controversial marketing campaigns including a Super Bowl ad in which fake gerbils were shot out of a cannon. It was acquired by Fry's Electronics in 2001 for $21 million, including the assumption of $13 million in debt.
CyberRebate - Promised customers a 100% rebate after purchasing products priced at as much as 10 times the retail cost. It went bankrupt in 2001 and stopped paying rebates.
Divine - Founded by Andrew Filipowski, it was modeled after CMGI. It went public as the bubble burst and filed bankruptcy after executives were accused of looting a subsidiary.
DoubleClick - An online advertising company that soared after its IPO, it was acquired by Google in 2007.
eGain - Its stock price doubled shortly after its 1999 IPO.
eToys.com - An online toy retailer whose stock price hit a high of $84.35 per share in October 1999. In February 2001, it filed bankruptcy with $247 million in debt. It was acquired by KB Toys, which later also filed bankruptcy.
Gadzoox - A storage area network company, its shares tripled on its first day of trading giving it a market capitalization of $1.97 billion; the company was sold 4 years later for $5.3 million.
Geeknet (formerly VA Linux) - A provider of built-to-order Intelpersonal computer systems based on Linux and other open source projects, it set the record for largest first-day price gain upon its IPO on December 9, 1999; after the stock priced at $30/share, it ended the first day of trading at $239.25/share, a 698% gain, making founder Larry Augustin a billionaire on paper.
Global Crossing - A telecommunications company founded in 1997; it reached a market capitalization of $47 billion in February 2000 before filing bankruptcy in January 2002.
theGlobe.com - A social networking service that launched in April 1995 and made headlines when its November 1998 IPO resulted in the largest first day gain of any IPO to date. CEO Stephan Paternot became a visible symbol of the excesses of dot-com millionaires and is famous for saying "Got the girl. Got the money. Now I'm ready to live a disgusting, frivolous life".
MicroStrategy - After rising from $7 to as high as $333 in a year, its shares lost $140, or 62%, on March 20, 2000 following the announcement of a financial restatement for the previous two years by founder Michael J. Saylor.
Netscape - After a popular IPO, it was acquired by AOL in 1999 for $4.2 billion in stock.
NorthPoint Communications - Agreed to a significant investment by Verizon and a merger of DSL businesses in September 2000; however, Verizon backed out 2 months later after NorthPoint was forced to restate its financial statements, including a 20% reduction in revenue, after its customers failed to pay as the bubble burst. NorthPoint then filed bankruptcy. After lawsuits from both parties, Verizon and NorthPoint settled out of court.
Palm Inc. - Spun off from 3Com at the peak of the bubble, its shares plunged as the bubble burst.
Prodigy - An ISP whose stock price doubled on its first day of trading.
Pseudo.com - One of the first live streaming video websites, it produced its own content in a studio in SoHo, Manhattan and streamed up to 7 hours of live programming a day on its website.
Radvision - An online conferencing company, its stock price rose 150% on its first day of trading.
Razorfish - An internet advertising consultancy, its stock doubled on its first day of trading in April 1999.
Redback Networks - A telecommunications equipment company, its stock soared 266% in its first day of trading, giving it a market capitalization of $1.77 billion.
Ritmoteca.com - One of the first online music stores selling music on a pay-per-download basis and an early predecessor to the iTunes business model. It pioneered digital distribution deals as one of the first companies to sign agreements with major music publishers.
Startups.com - "Ultimate dot-com startup" that went out of business in 2002.
Steel Connect (formerly CMGI Inc.) - a company that invested in many internet startups; between 1995 and 1999, its stock appreciated 4,921%, but declined 99% when the bubble burst.
Transmeta - A semiconductor designer that attempted to challenge Intel, its IPO in November 2000 was the last successful technology IPO until the IPO of Google in 2004. The company shut down in 2009 after failing to execute.
uBid - An online auction site founded in 1997 as a subsidiary of PCM, Inc. that went public in December 1998 at $15 per share before its stock price soared to $186 per share, a market value of $1.5 billion.
Webvan - An online grocer that promised delivery within 30 minutes; it went bankrupt in 2001 after $396 million of venture capital funding and an IPO that raised $375 million and was folded into Amazon.com.
Aharon, David Y.; Gavious, Ilanit; Yosef, Rami (2010). "Stock market bubble effects on mergers and acquisitions". The Quarterly Review of Economics and Finance. 50 (4): 456-70. doi:10.1016/j.qref.2010.05.002.