Dot-coms

Companies that conduct business and deliver products or services primarily via the Internet and are designated by the domain address .com

Many e-commerce start-up companies took shape during the mid-1990s. When the dot-com bubble burst at the beginning of the twenty-first century, investors lost confidence as these businesses did not return anticipated profits. When dot-com stocks began to plummet, the businesses began to fail in record numbers.

The communications network known as the Internet was originally created for use by scientists and the military. That limited usage changed, however, with the launch of the Netscape Navigator browser in 1994 by Netscape Communications founder Marc Andreessen. The browser allowed consumers unprecedented access to information online via the World Wide Web. Exuberance abounded for business start-ups in the electronic commerce (e-commerce) revolution, much as great enthusiasm had accompanied the development of telegraphy, telephony, and transistors earlier in the twentieth century. The business world soon took notice of the commercial potential in this technological revolution, and by the mid-1990s, the US economy experienced significant productivity growth with the Internet. Young entrepreneurs who had graduated from some of the top business schools in the United States saw an advantage to e-commerce and rushed into the marketplace to make their fortunes. For example, Jeff Bezos quit his job on Wall Street, moved to Seattle, and founded Amazon.com (1994).

By the fall of 1998, the National Association of Securities Dealers Automated Quotation System (NASDAQ) index and the Dow Jones Industrial Average had tripled. Investors were eager to jump at the chance to enter the dot-com boom in anticipation of a global economy and the increased technical mobility made possible by the Internet, resulting in a wave of enthusiasm among shareholders who wanted to enter the cybermarketplace. This new economy experienced an infusion of venture capital; incomes soared, and stock values increased. High confidence caused an explosion of dot-com companies that attracted even more entrepreneurs to unprecedented investment and dividend opportunities. Investment totals went from $3 billion in 1990 to $60 billion in 1999. Media and business tycoons soon hailed the new economy as economic productivity growth occurred and many Americans attained a higher standard of living. The e-commerce explosion would not last, however.

The Dot-Com Bubble Bursts

The problems of inept strategies and slow reactions to their customer bases plagued the dot-coms throughout the late 1990s. The NASDAQ peaked on March 10, 2000, leading to a five-week collapse when the NASDAQ dropped 34 percent from March 10 to April 14. The immediate explanation for the decline was that the dot-coms had launched a US media blitz for the 1999 Christmas season that had ended up backfiring on them. The companies conducted their sales campaigns all at the same time, and all of the advertising hype confused consumers. Another factor in the crash was the accelerated spending on computer hardware and software that companies had done in preparation for the transition to the year 2000 (the so-called Y2K crisis). The bubble burst, recession hit, and the dot-coms went out of business.

The problem of the dot-com bubble was exacerbated by rhetoric in the mass media that promised unlimited prosperity and an end to the traditional business cycle. Indeed, the chief executive officers (CEOs) of many companies became rich on paper, but a number of companies did not develop good business plans or models. Often, the survival of these companies depended on their expanding their customer bases too rapidly. These dot-coms were launched in the hope that they would generate large sales and profitability, but public stocks were offered before the companies had produced solid business plans, and initial public offerings (IPOs) were made before the companies’ prospects for success were fully evaluated.

The major reason for the downfall of the dot-coms was the companies’ failure to exercise caution. Business journalists, Wall Street analysts, and policy makers such as Federal Reserve Board chairman Alan Greenspan lauded the new economy in the dot-com era. When the IPOs began to double and triple, investment banks followed with allocations of shares to their best customers, who sold these stocks in an increasingly speculative market. In the end, the Internet fostered overly optimistic expectations among business founders who diversified too quickly. Dot-com managers lacked the skills to produce steady earning power. Arrogant business transactions abounded as Internet companies failed to address sales ratios, inventory turns, and margin losses. Many companies took considerable liberties in how they reported revenue accounting, and some used fraudulent tactics to inflate the profits they reported. The increasing stock prices, individual stock speculation, and widely available venture capital led companies to deviate from standard business models or plans.

Impact

The rise of Internet commerce drastically transformed business management principles. The new economic age brought forth technological innovations that helped the marketplace by improving productivity and changing consumer behavior. The rapid flow of information prevented the buildup of excess inventories, so various stores had lower surpluses, but those that remained struggled to sustain themselves in the marketplace with new competition and reluctant investors.

A division was created between the “pure plays,” which were Internet- or e-commerce-driven and had to deal with cost-management and pricing issues, and the “click and mortar” companies, which retained physical stores and locations but expanded into e-retail. The “click and mortars” were able to take advantage of well-established brand names, good customer bases, and established supply chains and inventory systems. For example, Wal-Mart, the technical leader in the retail industry, went through a series of redesigns and changes in sales strategies in response to online competition, and Borders Group outsourced its e-commerce activities to Amazon.com. Barnes & Noble tried to imitate Amazon but failed to take advantage of its physical stores’ presence and its existing sales successes. Internet retailing had positive impacts on some business activities, such as the streamlining of customer service in the areas of ordering, billing, and supplying customers with products in an efficient manner.

Some economists have speculated that the dot-com frenzy of the 1990s contributed to the boom in the housing and real estate market in the United States in the early twenty-first century because that market became the last vestige for speculative trading opportunities. However, on the downside, the companies that expected to build brand names and charge profitable rates at a later time failed to deliver on this promise. The US Securities and Exchange Commission fined top investment groups such as Citigroup and Merrill Lynch for misleading investors. In 2000, more than two hundred Internet companies folded, and the technical personnel who had worked for those companies, especially computer programmers, confronted a glutted job market. Universities and colleges even began to see a drop in the numbers of new students entering technology fields.

By 2015, dot-com companies, both those that are exclusively online and those that have brick-and-mortar stores with additional online services, had become concerned about the ability for people to buy Web addresses ending in ".com." Over the years, incidents had increased in which people would purchase dot-com addresses and then design a website that fraudulently mirrors the original, legitimate site to trick customers into supplying them with private information. Therefore, some legitimate companies had begun applying for the rights to purchase domains that reflect their trademarked brand instead to allow them to better control their pages (such as ".walmart").

Bibliography

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