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Dot Com Bubble Burst

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INTRODUCTION
The dot-com industry began in the early 1990s as a collection of startup companies using the Internet as their primary means to conduct business. These companies typically used the “.com” suffix in their company names, such as Amazon.com, and proliferated in the late 90’s with the massive investments in Internet-related stocks and enterprises. But with the failure and consolidation of many of these companies their numbers have since dwindled. The catastrophic collapse of the dot-coms that shook the U.S. economy started in May 2000. More than 210 dotcom companies failed in 2000 and a total of 762 dot-coms closed for the period January 2000 to December 2001. Since many of these dot-coms began to lay off their staff, the unemployment rate also increased from 3.9% to 6% by 2002. The dot-com bubble burst because the boom was based on the false premise that new technology would eliminate the need for brick-and-mortar stores as this new business model would supplant the old one, thereby converting the “Old Economy,” which is based on the production of physical goods into a “New Economy,” which is based on heavy use of information and communication technology. Although a great deal can be learned from examining the dot-com successes, it is equally important to study reasons for the failures. Examining the mistakes made by the dot-coms can provide insight into the evolution of e-commerce as a means of conducting business and furthermore help to form the basis on which new strategies can be developed for the future e-commerce environment.
BACKGROUND
In the 1990s, the commercialization of the Internet started a revolution in the way business is conducted. In particular, the growth of the World Wide Web has offered a unique opportunity for many companies to increase efficiency forge better customer relationships, and expand their markets through “global visibility”. These advantages have led many companies to move their primary operations to the Web. According to CNN and BBC reports, an estimated 20 million Web-based companies came into existence. With the flourishing of these companies, the economy faced a new challenge: business transaction over the Internet, or e-commerce. In the early stages of e-commerce, however, the terms Web-based company, Internet based company, and dot-com company were all used interchangeably to refer to the same sort of online retailer. As traditional and new companies continued to establish themselves as online retailers, mass media often exaggerated the enthusiasm with such one-liners as “Be Digital or Be Toast!”, “Get Web or Be Dead!”, and “Dot- Com or Be Gone”. At the same time, as the number of Internet users increased exponentially, and online shopping became a popular consumer activity. According to Giga Information Group (2000), it was once estimated that U.S. online retail sales would increase from $26 billion in 1999 to $152 billion in 2002 and $233 billion in 2004. Another prediction suggested that consumers would spend $200 billion on the Internet in 2005. Investors also showed their enthusiasm for Web-based companies. In 1999, venture investments in Internet-related businesses exploded, increasing to nearly $20 billion from $3.4 billion in 1998. This was due to the fact that many investors considered technological innovation to be the promising “future value” of a company. Subramani and Walden (2003) confirmed that the public announcement of a company’s e-commerce initiative would enhance the market value of that company and thus create value for the company’s stockholders. In fact, rather than measuring business performance in traditional ways, many investors demonstrated little concern about gains and losses in profit margins. One recurring comment was that “as long as an ecommerce business ‘makes sense’ (it does not need to ‘make cents’), it may still be backed by numerous investors”. With the massive investments, the U.S. economy experienced the dot-com boom or dot-com bubble in the late 1990s. The height of the boom was characterized by an enormous increase in stock prices, especially in the prices of Internet-related stocks. Starting in January 1997, the dot-com industry stimulated NASDAQ and thus surpassed expectations with record high after record high. In the period of just one year (1997-1998), America Online’s stock rose by 593%, and Yahoo!’s by 584%. Amazing growth occurred in Amazon.com, with a 970% increase. The NASDAQ also showed inflation. Within only six months (September 1999 to March 2000) it showed an 83% increase.
However, in early 2000 the stock market witnessed a bubble ready to burst. This burst led to the rapid decline in the value of Internet-related stocks. In the weeks and days that followed the burst, the stock market bounced up and down randomly. For instance, on March 10, 2000 NASDAQ closed above 5,000, but dropped three days later by almost 500 points. On March 22, NASDAQ jumped to 4, 864.75 with a 3% increase and was back to almost 5,000 points at the end of week. However, the overall cycle of NASDAQ during March 10 to April 14 showed a 34.2% decline. More importantly, though, the stock prices for all the 20 leading Internet stocks fell. For instance, Amazon.com dropped by 29.9%, eBay by 27.9%, Yahoo! by 34.8%, and TheStreet.com by 54.3%. The first factor contributing to the dot-com collapse was the frenzied buying of Internet-related stocks without serious consideration of whether the companies were actually fiscally sound with strong management plans. This impulsive buying sent the main U.S. market indices (especially the tech-heavy NASDAQ) soaring from a low 1541.80 in late 1998 to a high of 5000 in early 2000. With this inflation in NASDAQ and in the Dow, many believed that the dot-coms constituted a prime investment opportunity and that technology itself was a good business plan. This idea led to significant growth of the Internet-related sector of the stock market through the overvaluing of stock prices.
The second factor was that investment firms involved in launching IPOs undervalued the initial stock offering, depriving the startups of vital capital resources. For example, Priceline.com went public on March 31, 1999 and initially had an IPO of $16, with an initial public offering of 10 million shares. However, Priceline.com opened the first day of trading at $81.00 with a high of $95.94 and achieved market value of $9.8 billion, the highest first-day ever achieved by an Internet company (Business Magazines & Media Inc., 1999). If the firm had priced the IPO at $30.00, it could have made $300 million instead of $160 million (which it made at the initial IPO). One reason for such undervaluation was the lack of know-how in deciding the true value of dot-coms with complicated situations.
Given that Priceline.com had profit and revenues of only $35 million, and there was no justification for predicting the potential market value: “One person who took part in the Prieline.com pricing meeting likened the process of valuing Internet companies to throwing darts”. This scenario was repeated throughout the dot-com industry as billions of dollars were lost in IPOs by the undervaluation of these stocks. Although the stock market’s bounce resulted in many dot-com meltdowns, there are a number of other reasons why many dot-com companies have been unsuccessful at making a profit. One of these reasons is that most dot-com companies did not have a sound business strategy that provided a clear plan.
DOT-COM FAILURES
In some cases, failure was due to financial problems. Most of the so-called B2C (Business to Consumer) companies had spent far too much money marketing themselves to consumers, but had not yet turned a profit. Many dotcoms failed because they spent too much when the company was founded and then simply ran out of money. For instance, Boo.com, founded in 1999, targeted women under 30 who are interested in trendy clothing. The site promised that it would be “working diligently over the next few weeks to position Boo as the ultimate global fashion portal—to deliver all the great things you loved about Boo.” But that portal never reached its target audience. Boo.com’s attempt to reach a global community of online “fashion-conscious consumers” made them the first victim in the NASDAQ crash. On May 17, 2000, five months after its Web site launched, Boo.com shut down and filed for bankruptcy. Boo.com’s failure was generally credited to its expensive marketing budgets, high technology costs and ambitious Web site. When Boo’s Web site launched in November 1999, it was slow because it was graphic heavy as well as inaccessible to some Apple users. However, one crucial factor leading to Boo’s bankruptcy was its failure to make a profit. Boo.com spent $185 million in 18 months to create brand value, but total sales were only $1.1 million in the three months, between February and April 2000 (Cassidy, 2002). In the “old” economy, stock performance correlates with earnings—the more money a company makes, the higher its stock price should increase. But in the “new” economy of the dot-com bubble, investors assumed that market share comes first and profits follow. Boo.com relied heavily on venture capital but revenue did not follow, its failure was inevitable.
LIST OF COMPANIES SIGNIFICANT TO BUBBLE * Books-a-Million - Saw its stock price soar by over 1000% in one week simply by announcing an updated website on November 25, 1998. The company's share price rose from around $3 previously to an all-time closing high of $38.94 on November 27 and an intra-day high of $47.00 on November 30, before quickly pulling back to around $10 two weeks later. By 2000, the share price had returned to $3. * Broadcast.com – Acquired by Yahoo! for $5.9 billion in stock, making Mark Cuban a multi-billionaire. The site is now defunct and redirects to Yahoo!'s home page. * e.Digital Corporation (EDIG) – Long-term, unprofitable OTCBB-traded company founded in 1988 previously named Norris Communications. Changed its name to e.Digital in January 1999 when stock was at $0.06 level. The stock rose rapidly in 1999 and went from closing price of $2.91 on December 31, 1999, to intraday high of $24.50 on January 24, 2000. It quickly retraced and has traded between $0.07 and $0.165 in 2010. As of 2013, the stock continues to trade low, ranging between $0.12 and $0.19 a share * Freeinternet.com – Filed for bankruptcy in October 2000, soon after canceling its initial public offering. At the time Freeinternet.com was the fifth-largest ISP in the United States, with 3.2 million users. Famous for its mascot Baby Bob, the company lost $19 million in 1999 on revenues of less than $1 millionGeoCities – Purchased by Yahoo! for $3.57 billion in January 1999.[32] Yahoo! closed GeoCities on October 26, 2009. * theGlobe.com – Social networking service, that went live in April 1995 and made headlines by going public on November 1998 and posting the largest first day gain of any IPO in history up to that date. The CEO became in 1999 a visible symbol of the excesses of dot-com millionaires * InfoSpace – In March 2000 this stock reached a price $1,305 per share, but by April 2001 the price had crashed down to $22 a share. * Kozmo.com – offered one-hour local delivery of a number of retail items, from March 1998 to April 2001 * Lastminute.com – IPO in the UK coincided with the bursting of the bubble * Lycos – Purchased by Spanish telecommunications provider Telefónica for $12.5 billion in 2000 to expand its Terra Networks online platform. It was sold in 2004 to Seoul,South Korea-based Daum Communications Corporation for $95.4 million in cash, less than 2% of Terra's initial multi-billion dollar investment.[37] * MicroStrategy – Shares lost more than half their value on March 20, 2000, following their announcement of re-stated financials for the previous two years. A BusinessWeekeditorial said at the time, "The company's misfortune is a wake-up call to all dot-com investors. The message: It's time, at last, to pay attention to the numbers". * Pets.com – Former dot-com enterprise that sold pet supplies to retail customers before entering bankruptcy in 2000 * Pixelon – Internet streaming video company that hosted a $16 million launch party in 1999 hosting celebrities such as The Who and the Dixie Chicks. Failed less than a year later when it became apparent that its technologies were fraudulent or misrepresented * Think Tools AG – One of the most extreme symptoms of the bubble in Europe: market valuation of CHF 2.5 billion in March 2000, no prospects of having a substantial product (investor deception), followed by a collapse * Tiscali – Important Italian telecommunications company whose share price grew from €46 (IPO in November 1999) to €1,197 in four months. They fell to €40 afterwards in less than two months and have continued plummeting to well under 0.2 euros * VA Linux - A provider of built-to-order Intel systems based on Linux and other open source projects. They set the record for largest first-day IPO price gain; after the price was set at $30/share, it ended the first day of trading at $239.25/share, a 698% gain (9 December 1999). After that, its stock declined consistently. After several business transitions it became Geeknet. It provides the backdrop of the documentary Revolution OS. * Webvan, Online grocer that operated on a "credit and delivery" system; the original company went bankrupt in 2001. It was later resurrected by Amazon.com
WorldCom, a long-distance telephone and internet-services provider that became notorious for using fraudulent accounting practices to increase their stock price. The company filed for bankruptcy in 2002 and former CEO Bernard Ebbers was convicted of fraud and conspiracy.…...

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