Dot-com bubble
The Dot-com bubble refers to a significant economic phenomenon that occurred in the late 1990s and early 2000s, characterized by the rapid rise and subsequent fall of internet-based companies' stock prices. Initially fueled by investor optimism about the potential of the internet, companies received substantial venture capital, leading to extravagant spending on marketing and infrastructure. Many investors overlooked traditional profit assessments in favor of soaring stock valuations, which became unsustainable. The bubble peaked in March 2000 when the NASDAQ Composite index surpassed 5,000, but a shift in economic conditions, including rising interest rates, triggered a sharp decline in stock prices. By 2001, numerous companies faced bankruptcy, and the market lost over $5 trillion in value, contributing to a recession. Despite the turmoil, some successful companies emerged from this period, such as Amazon and Google, which laid the groundwork for future technological advancements. The event underscored the volatile nature of speculative investing and the importance of sustainable business practices.
Dot-com bubble
A boom in the stock value of Internet-based companies during the late 1990s and early 2000s
Internet-based companies reached their peak stock market value in the early 2000s. In what has been dubbed the dot-com bubble, the stock prices of Internet companies soared during this time as investors forecasted the vast potential of the World Wide Web. They were encouraged by the confidence many placed in the flourishing Internet industry. As a result of such confidence, many were careless with their analyses and ignored the usual assessments involved in stock market investing. When many of the dot-com companies failed to thrive, investors lost millions of dollars.
Investors placed their confidence in the booming dot-com business during the late 1990s. Spurred by low interest rates and rising stock prices, investors provided a glut of venture capital to countless Internet companies. Companies used the capital to fund massive public awareness campaigns, and many paid millions of dollars for advertisements during Super Bowl XXXIV in January of 2000. The money was also spent on lavish corporate offices and to pay bonuses to employees. This uncontrolled spending would quickly bring the companies to ruin. Many investors failed to consider a company’s potential to make a profit and solely relied on the high value of stock prices.
After several years of fast-rising stock prices, web-based companies foundered. On March 10, 2000, the NASDAQ Composite index topped 5,000. The Federal Reserve’s increase in interest rates spurred the eventual deflation of the dot-com bubble. Within three months, stock prices were on the downturn. During this period, the market value of Internet companies fell by 50 percent. These companies were spending their venture capital faster than expected. One European venture, Boo.com, spent more than $188 million developing a global online megamall. Unable to recover its expenditures, Boo.com was liquidated. Such companies were dependent on the interests of the stock market, which failed to keep up. As these companies began to run out of funds, stock prices continued to plummet. Many venture capitalists panicked and sold their stakes before the businesses had time to recover. Such actions worried other investors and contributed to further losses.
Early 2000s Recession
By 2001, stock prices had fallen so low that many companies were filing for bankruptcy. Stock market favorites like Pets.com, eToys, and Priceline had seen their stock prices drop more than 99 percent. Some entrepreneurs profited before the burst, however, by selling their companies for massive profits. Most companies were not so fortunate. Celebrated start-ups like Webvan.com accumulated hundreds of millions of dollars in initial public offerings. Webvan.com was at one time worth $1.2 billion. Despite intense promotion—including branding on the seat cup holders at the San Francisco Giants’ ballpark—the company was never able to attract enough customers to match its expenses and shut down in July of 2001.
The dot-com bubble burst also contributed to a recession early in the decade. From 2000 to 2002, the market value of NASDAQ companies lost more than $5 trillion in paper wealth. The September 11, 2001, terrorist attacks helped contribute to the ever-falling stock prices. The crash lasted more than three years.
A New Dot-com Bubble?
The NASDAQ eventually made a slight recovery and by 2006 had rebounded to $3.6 trillion. Venture capitalists became much more cautious as well. During the first quarter of 2006, investments totaled one fifth of the amount invested in the first quarter of the 2000 bubble.
Dot-coms saw an upsurge in stock prices in 2009. Companies such as Netflix and Amazon saw their market value climb to an all-time high in late 2009. Even companies such as Priceline began to recover, with stock prices increasing 140 percent and selling for nearly $180, a significant increase from the 2000 low of $6 per share. Even though many considered the possibility of another dot-com bubble, most experts agreed that the surge in stock prices was significantly different from the increases seen in the early 2000s. That these companies also survived the steep economic downturn of the late 2000s also helped to increase investors’ confidence.
Impact
Despite the many drawbacks and losses seen in the aftermath of the dot-com bubble, many positive developments emerged as a result of the excessive investments made by venture capitalists. Companies such as Google and Amazon would not have succeeded without the capital they received during this bubble period. The event produced some of the most beneficial technology the world had seen and the Internet became the most predominant resource for connecting people and products around the world.
Bibliography
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La Monica, Paul R. “Internet Bubble 2.0? Not So Fast.” CNN Money. Cable News Network, 26 Oct. 2009. Web. 21 Dec. 2012.
Langdana, Farrokh. “Federal Reserve Policy from the Dot-com Bubble to the ‘Subprime Mess’: A Story of Two Ups and Two Downs.” Rutgers Business Law Journal 6.1(2009): 56–65. PDF. Rutgers University. Web. 21 Dec. 2012.
Willoughby, Jack. “Up in Smoke.” Leonard N. Stern School of Business. New York University Stern, n.d. Web. 21 Dec. 2012.