Bubble Bubble Toil & Trouble

The so called dot-com bubble popped to a near-devastating effect in March 2000 and many of the deceptive tech and Internet companies folded or at the very least learned some harsh lessons. As we saw from my last blog post most of the dot-coms didn’t actually rely on sound business plans, instead those short sighted companies only cared about undertaking IPO’s to acquire easy money. The most insidious part of the dot-com boom was the complete and utter disregard for earnings. Investors were oblivious to how their companies were being run or if they even operated with rational business models; they believed the stock price would double anyway!  Companies were encouraged to just keep increasing members/visitors and SOMEHOW money would accumulate.

When the laws of economics caught on to the fact that there was no substance behind it all the pressurized bubble suddenly popped! With regards to the markets, the supply of IT companies eventually became far greater than their demand. This dealt a serious financial blow to many dot-coms and they began to tumble down in domino like fashion causing many investors to endure grave financial losses.

Other external factors also contributed to the issues of the dot.com bubble. A rise in outsourcing at the time led to widespread unemployment among computer developers and programmers (photo!!) Also as the dot.com bubble was mainly concentrated within the US, it was dealt a severe blow in the wake of 9/11, which led to widespread government investigations. Many stories about companies who had engaged in questionable bookkeeping began to surface and the dot.coms were essentially caught with their pants down.

Looking at the whole bubble ex post, one has to acknowledge the influence the media played in the dot-com bubble. The media hype about the dotcoms disguised many of the problems and discredited many critical comments.

If one had to pin-point the pricking of the bubble, then it would have been the coinciding multi-billion sell orders for dot-com shares in March 2000. The downward spiral was primarily based on rational thinking on the experienced traders’ side because once they suspected a crisis was imminent they got out, but it was also based on herd behaviour and panic on the noise traders’ side. A study by Cooper, Dimitrov and Rau in 2001 proved that “the removal of the .com from a company’s name led, on average, to an increase in the company’s market capitalization”.

Not all IT companies perished during the bubble burst, in fact some continue to flourish today.  Most of those were e-commerce companies.  Examples include Google and Yahoo. 

My next post will discuss whether or not we are on the verge of a second dot.com bubble (a social networking friendzy).

Link to the dot.com top ten flops http://www.cnet.com/1990-11136_1-6278387-1.html