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The emergence and development of the Internet has led to unreasonably high expectations in the business sector. Many businessmen saw a lot of opportunities that the Internet brings with it and began to invest incredible money. The stock prices of IT companies skyrocketed, the leaders of such organizations themselves bathed in money and spent huge amounts of money to attract more and more new investors. Nobody thought about development as such.
The world economy does not tolerate financial bubbles. The problem is that it is extremely difficult to distinguish a bubble from an economic growth. Outwardly, everything looks great, money is pouring in, everyone is happy, the most optimistic forecasts are being expressed. And if it's a bubble, it will eventually burst. And it usually crashes right away. In this article, we will talk about one of the most famous bubbles - the dot-com crisis.
What is dotcom
Dotcom is a term that was and is still used today in relation to companies whose business model is entirely based on working on the Internet. It comes from the English dot-com ("dot com") - the top-level domain.com, on which sites are usually registered commercial organizations. After the collapse of the dot-coms, the term took on a negative connotation that now denotes an ill-conceived, inefficient, and immature business model.
The dot-com climax and collapse occurred on March 10, 2000. On this moment The Internet business is experiencing its second boom and no one knows if this is a bubble or a new era.
How it was
In the late 1990s, Internet stocks skyrocketed. The very word “Internet” magically drove up stock prices. Analysts advised investors to invest even more money in high-tech companies.
On March 10, 2000, the NASDAQ Composite index of high-tech companies crashed. In just a year, the index fell from 5132 points to 1100, that is, almost five times. The vast majority of dot-com companies collapsed along with the US stock exchange. Some dot-com executives have been convicted of embezzlement of shareholder money and fraud.
Dot-com money was invested mainly in advertising and marketing campaigns, few people developed the business model itself. As a result of the collapse of the dot-com bubble, most companies were liquidated or sold.
Now (Facebook, Vkontake, Twitter) are on the rise, and analysts are looking for a new danger there. The audience of such sites is simply huge, which attracts investors from all over the world. It is assumed that if this is indeed a bubble and it bursts, then in terms of its destructive power, it can be ten times more destructive.
Reasons for the collapse of dot-coms
- Inability to objectively assess the price of shares. When placing shares of Internet companies on the stock exchange, analysts had a logical question: how to evaluate them? These companies didn't own anything at the time - they had a couple of computers, a well-known domain name, and a few employees. How much to value a share of a company, the value of which is and exists, is only in the heads of managers who may or may not be able to bring their ideas to life. A simple decision was made: to rate dot-coms by the number of audience and the time the average user spends on this site.
- Lack of a sane business model. Dot-coms were usually run by programmers and IT geniuses who did not understand anything either in business, or in art, or in monetization.
- Excessive spending on advertising. The owners of the companies understood everything correctly - not a single investor understands what is in the head of the founders of such companies, so businessmen had to just take their word for it. And the more money was invested in advertising companies, the more funds were attracted from investors. Simply put, the advertising campaign was not arranged for potential consumers of goods and services, but solely to attract more and more new funds.
- Substitution of concepts. Doing business with the help of the Internet is only a tool for the implementation of a business process, but not an independent business process.
- Misunderstanding the Internet. The creation of the Internet was predicted by many science fiction writers, but no one understood what to expect from it. The transfer of business to the Internet carried huge risks, if only because it had its own rules, which at that time no one knew. People tried to set their own rules, but they did not work, the Internet existed according to its own laws.
- Dishonesty and artificial price gouging. Many unscrupulous scammers have recognized opportunities to defraud customers and investors. In any new area, the risk of being deceived increases several times.
- Underdevelopment of the Internet. The Internet itself at that time was quite raw and incomprehensible to many participants. Effective monetization of traffic in the 90s has not yet been learned.
Consequences
A wave of layoffs followed. Not only were many specialists thrown out into the street, but even at that time international outsourcing began to develop in the United States.
Trust in the IT sector has been lost. Uncontrolled speculation on expectations has greatly increased the decline in confidence in them.
Thousands of companies around the world (mainly in the USA) were declared bankrupt and liquidated. Litigation began.
However, three companies have survived in this state and are currently thriving - Amazon, eBay and Google.
Will startups and social media cause disaster?
Since 2004, Internet projects have begun to gain momentum again. At the moment, the market has made a strong breakthrough and is a fairly serious force. However, many investors have wised up and are investing in the later stages of startup development. They want to make sure that their creators have a business strategy and are already confidently implementing it. Although many startups fail, investors take these risks because it only takes one company to break through to cover all costs and make good money from it.
Social networks in general have become powerful organizations and have been flourishing for the past few years. They came up with an ingenious solution - the social network should be free, and you can make money in almost invisible ways. An ordinary person can make money on a social network and provide for himself quite well. So at least monetization works. The only question is how it will change over time and where it will lead.
A lot has changed in 15 years. If a bubble exists, it is a completely different bubble.
Ten years ago, on March 10, 2000, the collapse of the IT sector began, which has gone down in history as the "dot-com crisis". On this day, the NASDAQ US market index, which specializes in high-tech stocks, reached its all-time high of 5132.52 points, doubling a year ago, with a rise of 1000 points in just two months. After that, a sharp decline began. In just five days, the index returned to the value of 4580 points and the decline continued. A year later, the values of this index fluctuated around the mark of 1500, and by the end of 2002 they generally approached the bottom - 1100. Now this mark fluctuates at the level of about 2500 points.
The "IT bubble" began to form in the late 90s as a result of the rise in the shares of Internet companies. The desire to grab a piece of the investment pie pushed businessmen to form more and more new Internet companies and reorient old companies to Internet business. The word "internet" magically inflated stock prices, the capitalization of network giants like ! or AOL, beat all records - for example, the market value of the subsequently bankrupt Nortel Networks exceeded $ 180 billion at that time. Analysts were confident that the NASDAQ would “break through” the bar of 6,000 points, and actively advised investing in growing high-tech companies.
“If you are an astute trader, then your portfolio should include high-tech stocks that symbolize the new economy,” argued the beginning of an article released by analysts at Prudential Securities investment fund a couple of days before the crash began.
In fact, these new business models proved to be ineffective, with large loans spent mainly on advertising and attracting new investors. This led to a landslide drop in the NASDAQ index, as well as prices for server computers. Most IT companies went bankrupt, were liquidated or sold. As of the end of November 2001, share prices Sun Microsystems, BEA Systems are down more than 62%, 70%, and 78%, respectively, from their pre-crash levels. Several company executives have been convicted of fraud and embezzlement of shareholder money.
However, Tim Leister of the University of Virginia and Brent Goldfarb of the University of Maryland, in their study of the dot-com boom, counted the number of companies that successfully survived the crisis and concluded that there were fewer casualties than is commonly believed. “People usually imagine that the 2001 crisis killed 90% of dot-coms, but in fact, out of a random sample of companies that received venture capital investments in 1999, about half remained in business five years later,” the scientists say.
Ten years later, analysts believe that
The “dot-com crisis” has become “one of the rehearsals” for the global financial crisis.
“The nature of all crises is basically the same - the overvaluation of a certain asset,” says Denis, head of the analytical department at Grandis Capital Investment Company. But if the dot-com crisis brought down only the high-tech sector and almost did not touch the fundamental foundations of the world economy, then the mortgage crisis affected one of the pillars of the modern economy - financial system which made it worldwide.
It is impossible to rule out the recurrence of such “bubbles” in the future, concludes a senior analyst at IF Olma.
“Conclusions were not drawn, as history shows, and there are no guarantees that they will not be repeated,”
Barabanov agrees. And no restrictions will help here, the analyst believes.
It is still difficult to guess where the next bubble will burst. Perhaps it will again be dot-coms. Analysts are looking for danger in social networks such as Facebook, MySpace, Twitter, Vkontakte. Due to their huge audience, they are very attractive to investors, for example, according to the analytical website comScore, in October 2009, the audience of Facebook exceeded 430 million users worldwide, MySpace - 120 million, and Twitter - more than 50 million. dot-coms, the owners do not yet understand how to make money on social networks. So far, large Internet projects are operating at a loss. So, according to comScore, the cost of maintaining the work of YouTube in 2009 amounted to $ 740 million, and this is twice as much as the portal managed to earn during this period. Hope is pinned on rising advertising revenues. So, if in 2007, according to the estimates of the analytical company eMarketer, advertising market social networks reached $1.225 billion, according to forecasts, by 2011 the volume of this market should grow to $3.8 billion.
IN modern conditions the new "dot-com crisis" will be more dangerous than the previous one. "Deep specialization modern business leads to dependence on multiple suppliers and consumers. Problems with one of the companies in this chain can destroy the entire business,” says Aleksey Steputenkov, development director of the Hosting Community group of companies.
At the turn of the 1990s and 2000s, due to speculation and unjustified optimism, investors lost about $5 trillion. The stock exchange was brought down by the rise of unprofitable Internet startups. Could something like this happen today?
In 2001, there was one of the largest stock market collapses recent history— the NASDAQ technology index collapsed. Along with the fall of the index burst. went bankrupt great amount internet startups. Even those companies whose business was established, suffered huge losses.
Why is this story interesting and why, after almost 20 years, analysts find similarities in our time with that crisis?
First steps on the Internet
In the first half of the nineties, a period of active development of the Internet began. More and more users began to have personal computers, and companies began to massively switch their activities to working on the Internet. If the company did not have its own website, it seemed undignified.
At the same time, the first projects were born, the activities of which were fully focused on the online segment. For example, the eBay online auction, the Amazon online bookstore, and the Yahoo! (now Verizon).
People were in euphoria with anticipation of the opportunities that a world united in the near future would give them. a single network communications. Investors were one of those people. Internet startups appeared daily. At the same time, the industry remained young and most people did not have a clear understanding of how to manage such a business. Giant money was invested in startups, and the valuation of companies that did not exist yesterday was inflated.
The companies themselves tried to collect investments as quickly and as much as possible. But this was done only in order to invest in marketing, increase brand awareness, raise funds again and redirect them to advertising. The slogan of that time was the expression: grow fast or disappear.
By 1999, 39% of venture capital was pouring into Internet companies, according to Investopedia.
The NASDAQ technology platform has become the main exchange for such companies. The NASDAQ index grew at an unprecedented pace: from 1000 points in 1996, the indicator indicator rose to 5048 by March 2000.
Back in 1996, Fed Chairman Alan Grispan warned the market, calling the boom "irrational optimism."
The peculiar climax of the unrestrained marketing expenses became January 2000. At once, 14 dot-com startups ordered expensive advertising during the Super Bowl, one of the most important sporting events of the year in the United States. And in March, the NASDAQ index began to collapse.
What preceded the disaster
Before the market crash, there were several events that contributed to it.
To begin with, Japan - at that time the second economy in the world - went into. This prompted a massive sale of shares in technology companies, which, according to experts of the time, could be the first to suffer from a worsening economic climate.
Some technology companies, such as Dell, realizing that the market is at its peak and at the same time has no prospects for further growth, began to sell their own shares. Investors who noticed this also began to get rid of papers.
The volume of investment capital decreased by the end of the nineties: in the nineties, the Fed maintained a low interest rate, which contributed to the appearance of extra money for investors, but in 2000 the key rate was raised.
And one of the main reasons: investors began to realize that the companies in which they invested money never learned how to make a profit. Moreover, such companies are unlikely to ever be able to do this, as they are not able to develop a sustainable business model. On the other hand, some entrepreneurs of that time did not even try to strengthen the business of their projects after the IPO and simply burned money.
Here good example is the story of TheGlobe.com dotcom founder Stefan Paternoth. After his company's fabulous IPO in 1998, Paternot, having fun in a nightclub, told reporters: “I have a girlfriend. I have money. Now I'm ready to live a disgusting, frivolous life." The 2000 crash destroyed TheGlobe.com.
But even without such spending, new companies set themselves unrealizable goals. A study by HSBC Bank showed that the cosmic valuation of Internet companies of that time could only be adequate if these startups grew revenue by 80% annually within five years.
What happened after the bubble
When the bubble burst, until recently the former promising projects were left without a livelihood. Money has evaporated from the sector, even those firms whose business was built not only on the number of clicks and high-profile advertising suffered huge losses. For example, shares of telecommunications company Cisco fell by 86%, shares of Amazon collapsed by 93%.
By October, the NASDAQ was down more than 70% from where it was in March. The directors of some dot-coms were accused of fraud and defrauding investors. Banks Citi Group and Merrill Lynch had to pay fines to defrauded investors.
According to some estimates, investment funds lost about $5 trillion in the market crash.
Is the world in a bubble again? Or is it still not?
A few years after the collapse of 2000, the NASDAQ rose above 7 thousand points. The growth in the number of companies has accelerated. If in 2008 there were 15 such, then in 2013 - 51, in 2018 - at least 150. According to the National Bureau economic research In the United States, on average, startups with a valuation of more than $1 billion are overvalued by about 50%.
The listing of Uber and Lyft reminded many of the days of dot-coms - these two companies also went to IPO with big plans and even greater losses. Despite this, banks valued them in the tens of billions.
According to John Colley, a professor at the University of Warwick Business School, investors are once again believing in the myth. This time around, players are convinced that since there are success stories like Google, Amazon, and Facebook, most tech startups will eventually find a profitable niche over time. Such investors are ready to invest money, not demanding income in a year or two, but counting on it in the long term.
In a 2018 review for CNBC, analyst Kate Wright of Villanova University School of Business wrote that an investor should think twice before investing in a unicorn IPO. “We are officially in a bubble that is bigger than it was in 2000,” Wright said.
However, as IPO expert and University of Florida professor Jay Ritter points out, there are significant differences. Many of today's unprofitable companies could become profitable if they cut staff and eliminated research costs.
The same Lyft without such expenses would show net profit at the end of 2018. The problem is, without that kind of research and marketing, Lyft could say goodbye to the idea of advancing self-driving car technology and lofty ambitions.
In addition, the Internet market itself has changed, banker and investor Carol Roth pointed out. Today's technology companies have a much more developed infrastructure and a consumer prepared for a new product. According to Roth, even companies that went bankrupt in the early 2000s could do well if they entered the market today: "In a sense, they were victims of the times in which they found themselves."
George Verbitsky recently posted a curious plaque commemorating the collapse of the 2000 dot-com bubble
Yes, you need to know such things, remember them, and understand that all this can easily happen again.
But the conclusions from this table can be very different. Depending on the depth of the nuances that you are able to discern.
In my opinion, to draw a conclusion from this table only about the riskiness of buy & hold is too primitive.
About the benefits of diversification - already better. The drawdowns of broad index holders were much lower.
About the benefits of a balanced portfolio - even better. Holders of portfolios balanced by asset class could get away with a slight fright or even make money (for example, if the portfolio contained a share in precious metals).
On the desirability of taking into account at least simple indicators fundamental analysis- better. Such changes were to be expected. And many expected them.
But in any case, as a reminder, the plate is useful. Those who do not know history and do not learn from it are at risk of repeating it again.
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In economics and finance, there is such a term as a "bubble".
Literally, this is “pumping up” liquidity of some asset or an entire industry, as a result of which the shares of companies show significant growth, not backed by the real state of affairs.
There have been many such bubbles in human history. Suffice it to recall the tulip boom in the 17th century. At that time, flowers of this variety were considered a sign of luxury.
Therefore, the Dutch willingly gave money for the bulbs. Thus began the so-called "tulip fever". It's not hard to guess how it all ended.
There have been several such booms in modern history. Among them, a special place is occupied by the so-called "dot-com bubble", which grew until 2000, after which it burst. This was accompanied by a sharp drop in the NASDAQ index, which first reached its peak values, and then collapsed in just one day by one and a half times.
This is a generic term for companies associated with the Internet..
The term came to Russian from English. "dot" is translated as "dot", and "com" is a domain zone that was originally created for commercial organizations (from "commercial").
Accordingly, dot-com called the organizations of the company that were represented on the Internet.
With the advent of the global web, it became clear that it could be used not only for communication and knowledge, but also for commerce. Naturally, numerous investors could not help but pay attention to this.
At the same time, the capitalization of companies connected with the Internet grew. For example, the Yahoo search engine, popular at the time, was already worth $114 billion by the end of 1999.
Given these figures, other investors have also taken notice of the World Wide Web.
The number of Internet companies grew and even those with a completely different business model tried to reorient themselves and be represented on the network.
All this led to an increase in the shares of companies. And investors, in turn, seeing this situation, invested more and more.
Moreover, many seriously believed that the IT market would only grow.
However, not only the general hype led to an increase in the capitalization of this market. The fact is that in the economies of the United States and Western Europe during that period there was instability.
This provoked an increase in discount rates. IT stocks were viewed by investors primarily as a safe investment in a market that continues to grow no matter what.
Some giants were in danger of separation. Sales volume fell.
There is an opinion that this crisis destroyed the IT market and most of the companies on it. However, this is not true. In fact, about half of all firms survived, which is a pretty good indicator.
Causes of the dot-com bubble
One of the main reasons that contributed to the emergence of the bubble was that technology was too overpriced.
The fact is that the Internet is not a business itself, but only a tool for doing it. But many apologists did not think so.
They were echoed by dishonest businessmen who understood everything, but wanted to profit from new investments in the industry.
However, it is the use of the Internet that increases the possibility of doing some types of business, in particular, international ones. retail chains, exchanges or online auctions. For example, today it is difficult to imagine the work of Amazon without the global web.
This is not to say that it would be impossible. The fact is that such companies existed even before the advent of the Internet. The order could be made, for example, according to catalogs. However, it was a lengthy process. The Internet has significantly accelerated the process of placing an order.
Moreover, it allowed literally everyone to have access to a platform where you can buy everything from books to software, working tools and much more.
It is enough to go to the site of the same Amazon, which is known on all continents.
Thanks to the Internet, investors have the opportunity to make transactions without leaving home. Previously, this required either a personal presence or a phone call. Today, an investor can use a platform connected to any exchange and make transactions there.
However, despite all this, at the beginning of 2000 it became clear to many experts that this market was highly overvalued. And one of the deepest reasons lay precisely in the fact that people were trying to sell a tool for business, passing it off as ready business model.
Among other reasons that could bring down the market, note:
What happened next
The collapse of the dot-com market led to the bankruptcy of many companies in this industry. Some firms were convicted of forging reports, as well as conducting illegal banking operations in order to increase profits.
This applies to WorldCom, one of the biggest players in the industry. As soon as this information became known to the public, the price of the company plummeted and led to bankruptcy.
Other companies simply ran out of money and were forced to close or sell. Other firms have been accused of misusing contributors' funds (probably referring to wasting money on advertising instead of innovation).
The accusations affected not only companies in this area, but also investment funds like Citigroup or Merrill Lynch.
They were charged with misleading investors.
The fall of the dot-com market affected not only IT companies, but also related areas that offered their services to such firms.
Another problem was the employment of many specialists who were literally on the street with the closure of companies.
During the dot-com boom, the demand for programmers is steadily rising. But after the bubble burst, many were left without work. At that time, in the United States, programmers were actively retraining for other professions.
But by 2004, the second dot-com boom had begun.. The companies that survived the events of 2000 recovered and re-engaged in the struggle for the Internet. Moreover, many companies have realized that the US market is already small for them and it is “cramped” here. They started working in other markets too. Thus, with the collapse of dot-coms, the IT sector can be said to have cleared itself of dishonest businessmen and network business in 2004 he began his second life, which continues to this day.
