Encyclopedia > Dot-com
Dot-com
A canonical "dot-com" company's business model relied on network effects to justify losing money to build market share, or even "mindshare" through giving their product away in the hope that they could charge for it. Many raised cash through public offerings on the stock exchanges, with stock often soaring to dizzy heights and making the initial controllers of the company wildly rich on paper. Dot-com companies were stereotyped as having extremely young and inexperienced managers wearing polo shirts with lavish offices including foosball, free food and soda as well as Aeron chairs. Companies frequently held parties or expositions where free pens, t-shirts, stress balls, and other trinkets were given away emblazoned the company's logo. The companies were also stereotyped as requiring extremely long work hours and high pressure.
An annual event started in 1996, the Webby Awards[?] works to recognize the best websites on the Internet. The event was typically an extravagant held annually in San Francisco, California, near the heart of Silicon Valley. The ceremonies mirrored the flashy dot-com lifestyle with costumed guests, modern dancers, and faux-paparazzi to make guests feel important. The event peaked in 2001 with thousands in attendance. In 2002, it was a more somber event with only several hundred guests and little of the excess of the late 1990s. In 2003, the awards were reduced to a virtual event because many of the nominees couldn't fly to San Francisco due primarily to corporate belt-tightening. During the boom, attendees could slip away from their jobs for a short time without fear of losing their jobs.
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A stock market bubble in financial markets is a term applied to a rise or boom in the share prices of stocks of a particular industry, and applied only in retrospect when share prices have since crashed. Typically many companies thus become grossly overvalued. When the bubble "bursts", the shares become worth a small fraction of their value at the height of the boom, and many companies go out of business.
The late 1990s boom in technology dot-com company stocks is a good example of a bubble, which burst in late 2000 and through 2001.
The dot-com model was inherently flawed: a vast number of companies all had the same business plan of monopolising their respective sectors through network effects, and it was clear that even if the plan was sound, there could only be at most one network-effects winner in each sector, and therefore that most companies with this business plan would fail. In fact, many sectors could not support even one company powered entirely by network effects.
In spite of this, vast fortunes were made by a few company founders whose companies were bought out at an early stage in the dot-com stock market bubble. These early successes made the bubble even more bouyant.
The dot-com boom had a jargon of its own including "dot-com millionaire," "burnrate" and IPO (initial public offering). The phrase "Get large or get lost" was received wisdom as a window of opportunity beckoned to hopeful entrepreneurs and investors.
At the height of the boom it was possible for a promising dot-com to make an initial public offering of its stock and raise a substantial amount of money even though it had never made a profit, making its principals and employees, who may have been partially paid with stock options instant dot-com millionaires. But then the matter of burnrate came into play as capital was expended in the operation of a company which was not making a profit and had no viable business model.
An example of the free spending by dot-coms is visible in comparing advertisers for the 2000 and 2001 Super Bowls. Seventeen dot-com companies paid over $2 million for a 30-second spot during the January 2000 Super Bowl. In January 2001, just three dot-coms bought advertising spots.
The dot-com boom had major impacts on certain urban areas such as Silicon Valley, Research Triangle Park, North Carolina[?], and Austin, Texas.
Historically the dot-com boom can be seen as similar to a number of other technology inspired booms of the past including railroads in the 1840s, radio in the 1920s, transistor electronics in the 1950s, and home computers and biotechnology in the early 1980s.
The dot-com bubble burst by 2001. A majority of the dot-coms have now ceased trading, after having burnt through their venture capital, often without ever making a gross profit, thereby becoming dot-compost. A number of companies associated with the dot-com boom have been accused of or convicted of fraud. The dot-com phenomenon has been described with a number of unflattering nicknames, including dot-con and dot-bomb.
Some reasons given as to why the bubble burst when it did are the six interest-rate increases made by the Federal Reserve in 1999 and early 2000 finally catching up with the economy. Another reason given was rapidly accelerated business spending in preparation for the Y2K switchover. Once New Year's past without incident, businesses had all the equipment they'd need for some time and business spending dried up. This correlates quite closely to the peak of U.S. stock markets. The Dow Jones peaked in January 2000 and the Nasdaq in March 2000.
A few established dot-com companies including Amazon.com and eBay have survived this turmoil in good shape, and appear to have a good chance of long-term survival. The search engine Google is not typically considered a dot-com company.
The documentary e-Dreams[?] (2002) portrays the fate of Kozmo.com, a unique start-up that promised one-hour delivery.
The online magazine SatireWire[?] [1] (http://www.satirewire.com/) makes fun of the dot-com bubble.
See also: spin-off, bankruptcy, South Sea Bubble, tulipomania.
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