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The 90’s Dot-Com Bubble And Lessons To Learn From It

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If you think of the Internet as an encyclopedia, the “pages” for this encyclopedia are the websites. As of December 2019, there are a total of 1.7 Billion registered websites. However, things were a bit different in the 1980s. Despite the successful sales of personal computers, the internet wasn’t prevalent until the 1990s. When the World Wide Web project was launched in 1991, new websites started making its way to the internet. In 1993, the total number of websites was limited to 130.

However, during the period from 1993 to 1997, the number of websites went from 130 to 1 Million. For some reason, this interested a lot of investors. From 1997 to 1999, investors began making hefty investments on e-companies. These greedy and unwise decisions led them to lose trillions of dollars.

Dot-Com Bubble


A Bubble, in the context of the Stock market, takes place when market participants drive stock prices above their value in relation to some system of stock valuation. The Dot-com bubble was more or less the same. It started in 1997 and reached a peak in the year 1999 before crashing down in 2002. During these years, the number of websites jumped from 1 Million to 38 Million. Surprisingly, most of these websites were created just to get the attention of market participants. Consequently, these websites would crash with a huge overnight loss. However, some e-companies survived this crash and became stronger than ever. Note: “e-companies” are those who have an active dot-com extension and offer services through the internet. It is the same as dot-com companies.

How did it start?

It all started when Netscape and Yahoo were found in 1994. Until then, the number of websites was 130, and the internet users were just 14 Million. Essentially, only 2% of the U.S population accessed the internet during these times. In 1995, the number quickly jumped to 44 Million, and 23,500 websites. Akin to what happened in the PC revolution, people started taking an interest in the internet. For investors, this was a business opportunity. They took e-companies for granted and thought they would be the next big thing. In 1997, investors began investing in any companies that had a dot-com extension. Moreover, the 1997 taxpayer relief act encouraged more investors to join the wagon.

More investors started investing a lot of money in companies. Companies, that they didn’t have any adequate knowledge of. In addition to that, some of these companies didn’t have any product to offer. The stocks were overpriced and there was a huge difference between the perceived & actual value. Unbeknownst to them, these companies had no potential to survive the market. Surprisingly, many made investments in spite of knowing the company’s future. Even when the market participants were investing, these companies had no profit. They were living off their stock value. However, following a sudden change of events in the 2000s, many of these companies had to face a dead-end.

How did it end?

Going into 2000, the dot-com crash was inevitable. Many analysts knew it was coming and made timely decisions to walk home with a huge lump sum. However, for the rest, it would cost them a fortune. On March 10, 2000, Nasdaq hit 5048.68 points. A huge difference from what it was 2 years back. At this point, Nasdaq was valued at a whopping 6.71 trillion dollars. A lot of e-companies were making profits seldomly through the rapid increase in their stock values. But this was short-lived. After multiple reports released ahead of 2000 people realised the true worth of e-companies. Many e-companies failed to adopt a long-term business plan. Some of them didn’t even have a plan in the first place.

In 2000, the statistics of Christmas 1999 stocks were released. The records illustrated the overpriced stocks. To add to this, was the Year 2000 problem. Needless to say, Y2K played a pivotal role in the dot-com crash. It was in 2000 when people began selling their stocks frantically in a mad dash. By April 6, 2000, Nasdaq’s value slumped to 5.78 trillion. In less than 1 month, Nasdaq suffered from a 1 trillion loss.

In 2001, the market decline continued and it was fueled by the 9/11. Many accounting scandals and bankruptcies eroded investor’s confidence. Three major scandals, Enron scandal in 2001, the WorldCom scandal and the Adelphia Communications Corporation scandal in 2002 had a severe impact on the market. In 2002, stocks had lost $5 trillion in market capitalization since the peak. Consequently, Nasdaq dropped to 1114 points, 78% decrease from its peak.

The Survivors

When the bubble burst in 2000, not many companies survived. Many dot-com companies ran out of capital and went through liquidation. However, 48% of the companies somehow managed to survive this crash. The best example being Amazon or Amazon (dot) com

Amazon

Amazon is the brainchild of Jeff Bezos. Bezos forward-thinking kept him and his company from crashing down during this bubble. After going public in 1997, Amazon’s stock rose from $18 per share to $100 per share in 2000. Unlike other dot-com companies, Amazon knew what to do next. Bezos had already bought millions of square feet for housing delivery centres. Going into 2000, he had ascertained his business plan. He emphasized on customer experience and made a lot of decisions to improve the same. He introduced the 30-day return policy, which encouraged people to buy the product. Moreover, he started expanding his business. His delivery centres across the country ensured that customers will get their product early. All of this counted towards Amazon’s success. If only Bezos failed to expand unlike many dot-com companies, he wouldn’t have seen a billion-dollar fortune.

Mark Cuban & Yahoo

Mark Cuban’s Broadcast (dot) com trade is regarded as one of the wisest decisions made by anyone. Why? Because he closed in on a $5.7 billion deal with Yahoo, months before the dot-com crash. Yahoo paid $10,000 per active monthly user of Broadcast. But that doesn’t mean Yahoo was fooled. In fact, if Cuban made $5.7 billion, Yahoo actually reverted its market decline. Although this demands a full-fledged article, here’s a gist of it. Near the peak of the dot-com crash, Lycos overtook Yahoo as #1 most visited site on the internet. However, Yahoo saw this as a threat. They bought Broadcast (dot) com for a whopping $5.7 Bn. Surprisingly, after this deal, Yahoo regained their top spot. If it wasn’t for this deal, Yahoo would’ve lost $36 Billion in market cap.

Lessons from Dot-com bubble

Following the dot-com crash, many companies have taken customer experience seriously. In fact, there are companies that carry out customer analytics even before making a product. Products pertaining to the interests of the customer helped companies revert their market decline.

In addition to that, companies decreased their advertising costs. Because dot-com companies were spending a fortune in advertising. For instance, pets(dot)com, one of the worst-hit companies spent $1 Million for a Superbowl advertisement. At that time, their yearly revenue was just $3 Million. Consequently, following the dot-com burst, the company went from $300 Million to nothing. All of this in just 268 days!

After that, careful and well-planned advertising campaigns were adopted. Between these developments, digital marketing quickly rose into fame. It promised better and quantifiable results as opposed to mass marketing.

Finally, market participants started relying on statistics rather than hope. They were no longer concerned with the dot com extensions. Even though there are 1.7 Billion websites, they are not putting a lot of money on all of them. Instead, investing in those which promise a better ROI. For instance, Facebook, Google, eBay, and Amazon.

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