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Dot-com (also dotcom or redundantly companies were the collection of start-up companies selling products or services using or somehow related to the Internet. They proliferated in the late 1990s dot-com boom, a speculative frenzy of investment in Internet and Internet-related technical stocks and enterprises. The name derives from the fact that many of them have the ".com" DNS suffix built into their company name.



In 1994 the Internet came to the general public's attention with the public advent of the Mosaic browser and the nascent World Wide Web, and by 1996 it became obvious to most public-facing companies that a public web presence was no longer optional. Though at first people saw mainly the possibilities of free publishing and instant worldwide information, increasing familiarity with two-way communication over the "web" led to the possibility of direct web-based commerce (e-commerce) and instantaneous group communications worldwide. These concepts in turn intrigued many bright young, often underemployed people (see also generation_X), who realized that new business models would soon arise based on these possibilities, and wanted to be among the first to profit from these new models.

The sudden 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 sales, customer relationship management, and many more areas. The web was a new killer app -- it could instantaneously bring together unrelated buyers and sellers, or advertisers and clients, in seamless and low-cost ways. Visionaries around the world grabbed friends, developed new business models that would not have been possible just 3 years ago, and ran to their nearest venture capitalist.

The venture capitalists saw the fast rise in valuation of other such companies, and therefore moved faster and with less caution than usual, choosing to hedge the risk by starting many contenders and letting the market decide which would succeed. The low interest rates in 1998-1999 helped increase the startup capital amounts. Of course a proportion of the new entrepreneurs were truly talented at business administration, sales, and growth, but the majority were just people with ideas, and didn't manage the capital influx prudently. This majority formed the bulk of the "dot-com" companies.

A canonical "dot-com" company's business model relied on network effects to justify losing money to build market share, or even mind share, through giving their product away in the hope that they could eventually charge for it. (It's worth noting that and other successful survivors of the era proved this strategy sound in the long term, for a small few.) Many raised cash through public offerings on the stock exchanges, with stock often soaring to dizzying heights and making the initial controllers of the company wildly rich on paper. Dot-com companies were stereotyped as having extremely young and inexperienced managers wearing polo shirts with lavish offices including foosball, free food and soft drinks as well as Aeron chairs. Companies frequently held parties or expositions where free pens, t-shirts, stress balls, and other trinkets were given away emblazoned with the company's logo. The companies were also stereotyped as requiring extremely long work hours and high pressure.

An annual event started in 1995, the Webby Awards works to recognize the best websites on the Internet. The event was typically an extravaganza held annually in San Francisco, California, near the heart of Silicon Valley. The ceremonies mirrored the flashy dot-com lifestyle with costumed guests, modern dancers, and faux-paparazzi to make guests feel important. The event peaked in 2001 with thousands in attendance. In 2002, it was a more somber event with only several hundred guests and little of the excess of the late 1990s. In 2003, the awards were reduced to a virtual event because many of the nominees couldn't fly to San Francisco due primarily to corporate belt-tightening and fear of losing their jobs.

Soaring stocks

A stock market bubble in financial markets is a term applied to a self-perpetuating rise or boom in the share prices of stocks of a particular industry. The term may be used with certainty only in retrospect when share prices have since crashed. A bubble occurs when speculators note the fast increase in value and decide to buy in anticipation of further rises, rather than because the shares are undervalued. Typically many companies thus become grossly overvalued. When the bubble "bursts", the share prices fall dramatically, and many companies go out of business.

The late 1990s boom in technology dot-com company stocks is a good example of a bubble, which burst in late 2000 and through 2001.

The dot-com model was inherently flawed: a vast number of companies all had the same business plan of monopolising their respective sectors through network effects, and it was clear that even if the plan was sound, there could only be at most one network-effects winner in each sector, and therefore that most companies with this business plan would fail. In fact, many sectors could not support even one company powered entirely by network effects.

In spite of this, vast fortunes were made by a few company founders whose companies were bought out at an early stage in the dot-com stock market bubble. These early successes made the bubble even more buoyant.

Free spending

The dot-com boom had a jargon of its own including "dot-com millionaire", "burn rate", and IPO (initial public offering). The phrase "Get large or get lost" was received wisdom as a window of opportunity beckoned to hopeful entrepreneurs and investors.

At the height of the boom it was possible for a promising dot-com to make an initial public offering of its stock and raise a substantial amount of money even though it had never made a profit, making its principals and employees, who may have been partially paid with stock options instant dot-com millionaires. But then the matter of burn rate came into play as capital was expended in operating of a company with no profit and no viable business model.

In February 2000, stock prices for e-business and "Dot-com" companies started to fall. Many companies had very weak and optimistic business plans, failed to raise renewed funding, and had to lay off workers and close down operations.

In Europe the vast amounts of cash the mobile operators spent on 3G-licences in Germany, Italy and the United Kingdom for example led them into deep debt. The investments were blown out of proportion regardless of whether seen in the context of their current or projected future cash flow, but this fact was not publicly acknowledged until as late as 2001 and 2002. Due to the highly networked nature of the IT industry this quickly led into problems for small companies that were dependent on contracts from operators.

The downtrend first reached the highly specialized "dotcom" companies, but soon spread to computer manufacturers, telecom, and industry in general.

An example of the free spending by dot-coms is visible in comparing advertisers for the 2000 and 2001 Super Bowls. The January 2000 Super Bowl featured seventeen dot-com companies who each paid over $2 million for a 30-second spot. In January 2001, just three dot-coms bought advertising spots.

The dot-com boom had major impacts on certain urban areas such as Silicon Valley, the Research Triangle area in North Carolina, the greater Seattle area, and Austin, Texas.

Historically the dot-com boom can be seen as similar to a number of other technology inspired booms of the past including railroads in the 1840s, radio in the 1920s, transistor electronics in the 1950s, computer time-sharing in the 1960s, and home computers and biotechnology in the early 1980s.

Thinning the herd

The dot-com bubble burst, numerically, on March 10, 2000, when the technology heavy NASDAQ Composite index [1]
peaked at 5048.62, more than double its value just a year before. The event that "burst" the bubble may have been a NASDAQ composite drop attributed to Microsoft losing their high-profile anti-trust case in the US and being declared [2] a monopoly on April 3, 2000. (The guilty verdict had been anticipated for a few weeks.) By 2001, the bubble's deflation was running full speed. A majority of the dot-coms have now ceased trading, after having burnt through their venture capital, often without ever making a gross profit, thereby becoming dot-compost. A number of companies associated with the dot-com boom have been accused of or convicted of fraud. The dot-com phenomenon has been described with a number of unflattering nicknames, including dot-con and dot-bomb.

The technology-heavy NASDAQ IXIC index peaked in March 2000, reflecting the high point of the dot-com bubble.
The technology-heavy NASDAQ IXIC index peaked in March 2000, reflecting the high point of the dot-com bubble.

Some reasons given as to why the bubble burst when it did are the six interest-rate increases made by the Federal Reserve in 1999 and early 2000 finally catching up with the economy.

Another reason given was rapidly accelerated business spending in preparation for the Y2K switchover. Once New Year had passed without incident, businesses found themselves with all the equipment they needed for some time and business spending dried up. This correlates quite closely to the peak of U.S. stock markets. The Dow Jones peaked in January 2000 and the Nasdaq in March 2000 . Immediately, hiring freezes, layoffs, and consolidations followed in several industries, especially in the dot-com.

A few established dot-com companies including and eBay have survived this turmoil in good shape, and appear to have a good chance of long-term survival.

The documentary e-Dreams (2002) portrays the fate of, a unique start-up that promised one-hour delivery of just about anything you could think of.

The online magazine SatireWire [3] makes fun of the dot-com bubble. A particularly famous website, Censored page, became a focus of bad news about companies laying off large numbers of staff or closing their doors altogether.

Secondary effects

The dot-com boom produced other economic problems, based on the theory of growth of dot-coms and the need for broadband access that was assumed to follow in its wake. Many people believed that the amount of fiber optic and copper cable needed to service network traffic would increase exponentially because of the continuing explosive growth of the dot-coms. This appears to have been inspired by a famous quote made by a WorldCom executive, who claimed that network traffic would double every hundred days for the foreseeable future. Based on this continuing assumption, many of these networking companies (like the dot-coms) took on huge debts to finance massive network expansions. Their IPOs were incredibly successful, since many investors also believed that they would also soon be party to an explosion in network traffic.

Many networking companies found themselves in trouble slightly before and certainly after the bubble burst because of their debt loads and the collapse of network subscriber growth; a few were even accused of accounting scandals used to make them appear profitable when they were not. Several were also forced to declare Chapter 11 or Chapter 7 bankruptcy. When these companies went bust, a significant portion of the fiber optic infrastructure went unused and became so-called "dark fiber". Some analysts believe that there is so much "dark fiber" worldwide that only a small percentage of it will be "lit" in the decades to come. See NorthPoint Communications, WorldCom, Global Crossing, JDS Uniphase, XO Communications , Covad Communications .

List of famous dot-coms

See also

External links

  • The Nasdaq Stock Market Crash - Learn about the spectacular rise and downfall of the Nasdaq.

Last updated: 02-08-2005 00:26:10
Last updated: 02-22-2005 02:26:39