Why did the dotcom bubble burst?

It was the turn of the Millennium. The champagne was flowing, the money was pouring in, the girls were easy and the good times were most definitely had by all. It was the peak of Internet spending where billions of dollars were lavished around on a young acne ridden industry that was witnessing unparalleled growth and showed no sign of slowing. Everyone with a website was set to become instant Billionaires; the American Dream epitomised.

Then it all went microchips up. The bubble burst and billions of dollars suddenly disappeared into a tag cloud of smoke. Companies went bankrupt, houses were lost, equipment was repossessed and the license to print money so many had predicted was revoked.

The dotcom bubble had burst… but why? How could so many have gotten it so wrong?

As with any catastrophe of this scope it wasn’t caused by one single event, there were many contributing factors that built up into the collapse that was so spectacularly witnessed in such a short timeframe.

The problem began with the ‘bubble’ building to astronomical size at an alarming rate. Investors were pouring money into dotcom start-ups at a far quicker and less measured way than they would a regular business. The novelty factor of the dotcom industry played a part in this, as did the imaginings of a global marketplace. It was a new technology, and fear of being left behind led to overspend. It became impossible to accurately value the companies sprouting up, causing them to be grossly overvalued – which made for some very rich people, on paper at least.

The initial start-ups operated with a short term loss business plan, insisting that by grabbing the market share and dominating their specific sectors they could then charge what they wanted at a later date. The motto used for this was ‘get big fast’, and it was one that many dotcom businesses ran with. There was one main problem with this business model however, it was not sustainable.

As a result of the over-valuation of dotcom companies the stock market reacted accordingly, with investors realising these companies were going up in value (at least theoretically) and jumped on board in unison. The problem was of course that eventually these companies would have to start to turn a profit, and so many were being started so quickly, all with the business plan of monopolising their particular marketplace, there were going to be casualties. The business model was flawed. Once companies started to burn through their capital they began folding, and like a house of cards the demise of dotcoms triggered a panic that saw shares being sold, investors pulling out and businesses disappearing overnight.

The bubble physically burst on March 10th 2000 as rising interest rates in the USA gradually reduced spending before a massive multi-billion dollar simultaneous sell order from leading technology companies such as Dell, Cisco and IBM triggered a chain reaction of investors liquidating their shares. The initial sell orders from the leading technology companies is believed to be just a coincidental event, but the panic it caused led to a drop in the NASDAQ that has never since been recovered.

Another contributing factor to the burst of the dotcom bubble is the poor performance of online retailers in the run up to Christmas 1999, where overly inflated sales forecasts were simply not met. These poor results were made public in March 2000, the exact time of the collapse of the industry.

So who were the biggest losers? It is human nature to look back on history like this and want to know just how much money was lost, by whom and on what. Sites like Pets.com managed to raise $82.5 million in February 2000, yet didn’t make it to the end of the year before collapsing. They even had Amazon.com backing them, one of the few dotcoms to survive the crash.

Online grocer WebVan.com was another high profile casualty of the big bad burst. They traded between 1999 and 2001, rising to a peak value of $1.2 billion and occupying eight US cities. However they failed to attract enough customers to justify their rapid growth, and as such ceased trading in July 2001 making 2,000 employees redundant.

Just like other returning phenomenon such as the Yo-Yo, Take That and Transformers, some of these websites have been reborn like the proverbial phoenix from the flames.  eToys.com for example has been resurrected, which is something of a gamble considering the first time round its shares went from a high of $84 in October 1999 to a low of just 9 cents in February 2001. Ouch! eToys.com also has a certain eBay as its main competition, and as we all know eBay is the embodiment of the dotcom philosophy of get big quick and dominate the marketplace. Does anybody use any other online auction sites?

Of course, the big question on everybody’s lips is ‘could this all happen again?’ Could we see another dotcom boom only to end in the collapse of the market?

May 2007 represented the first time since the bubble burst that the NASDAQ traded at over half of its peak value. Basically it has taken more than 6 years for the market to recover to 50% of its all time high, showing a lack of bouncebackability, but don’t expect it to attain those heights again. The 5,046 point level achieved on March 10th 2000 was a false level achieved by overvaluations and unsustainable business plans, whereas today’s 2,000 + point level is realistic. The market, while never truly being stable, is certainly more grounded in economical stability than it has ever been.

Google may be buying up Internet ventures as though they were going out of fashion, but they’re not taking risks with them. They passed on MySpace for a quarter of a billion, and it’s now valued at considerably more than that by its new suitor, Yahoo!!!! Google’s $1.65 billion purchase of YouTube was to use its audience for advertising and to utilise its technology for its Adwords / Adsense programmes. Every purchase today is carefully researched and explored so that they can be profitable, the days of buying websites with no tangible revenue stream or market share for billions of dollars are gone, thus the risks of investing online are reduced.

That’s not to say we’ll never see another dotcom bubble, but the signs of overzealous investors irresponsibly throwing money at unproven ventures wouldn’t cause such a mad panic now. We have a better understanding of the Internet, and how it can be profitable. It’s still early days in its evolution, and mistakes will certainly continue to be made, but the entire industry imploding as it did in March 2000? I don’t think so.

But then, I’ve been wrong before.

Darren
SEO Programmer