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Dotcom Bubble: Causes: Rapid Technological Advancement

The dot-com bubble was fueled by speculative investments in internet companies during rapid technological advancement and increased availability of capital in the 1990s. Many companies spent heavily on advertising with no profits, seeking future revenue from brand awareness. When the bubble burst, there was widespread bankruptcy, job losses, and mergers as struggling companies were acquired. The bursting damaged the investment bond market and delayed some technologies.

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Harsh Shah
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152 views

Dotcom Bubble: Causes: Rapid Technological Advancement

The dot-com bubble was fueled by speculative investments in internet companies during rapid technological advancement and increased availability of capital in the 1990s. Many companies spent heavily on advertising with no profits, seeking future revenue from brand awareness. When the bubble burst, there was widespread bankruptcy, job losses, and mergers as struggling companies were acquired. The bursting damaged the investment bond market and delayed some technologies.

Uploaded by

Harsh Shah
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Dotcom Bubble

Speculative investments behind the infinite potential of the rapidly growing


internet ventures.

Causes:

Rapid technological advancement


In 1993, the release of the Mosaic web browser made access to the World
Wide Web easier. Internet usage increased as a result of the reduction of the
"digital divide" and advances in connectivity, uses of the Internet, and
computer education. In the range of 7 years between 1990 to 1997, the
percentage of households in the United States owning computers increased
from 15% to 35%.

Increased availability of capital


As there was an immense and rapid growth in Information Technology,
interest rates for the same were brought down and thus the capital availability
for the IT companies increased. Venture capital was easy to raise too. (venture
capitalist Fred Wilson, who funded dot-com companies and lost 90% of his
net worth when the bubble burst, said about the dot-com bubble)

Investors investing mentality and speculation


Again due to the growth of IT, many investors were eager to invest, at any
valuation, in any dot-com company, especially if it had one of the Internet-
related prefixes or a ".com" suffix in its name.
'Nothing important has ever been built without irrational exuberance'
from the 2015 book of venture capitalist Fred Wilson

Companies spending pattern


Most dot-com companies incurred net operating losses as they spent heavily
on advertising and promotions to harness network effects to build market
share or mind share as fast as possible. These companies offered their services
or products for free or at a discount with the expectation that they could build
enough brand awareness to charge profitable rates for their services in the
future. The company pushed for massive growth with seemingly no profit at
all. The idea was simple - "Get large or get lost"

Reference: https://en.wikipedia.org/wiki/Dot-com_bubble

Effects:

Bankruptcy
The effects of the bubble bursting were that several companies went bankrupt.
An example is WorldCom who admitted to billions of dollars of accounting
errors (Tran, M., 2002), and as a consequence the stock price fell so
drastically they had to file for bankruptcy.

Acquisitions and mergers


Many other struggling companies became acquired or merged with other
companies. Aharon et al. (2010) found that there was an increase in mergers
and acquisitions during the dot-com bubble. Interestingly, they also found
that the pricing of mergers and acquisitions did not change.

Changing names
Many companies changed their names to remove any association as a dotcom
company.  Cooper et al. (2005) mention how during the bear market of the
early 2000s “investors react positively to name changes for firms that remove
dot.com from their name”.

Investment Bond Market


The investment bond market was badly hit by the bursting of the dot com
bubble in the early noughties and has been in perpetual decline ever since – in
2002

Other effects:

 Many people lost their jobs, affecting their lives and careers at
that point. Not all of them were highly-paid coders. It is inevitable
that some talented people were lost from the scene due to their need
to get stable jobs and survive.
 Many investors lost their money. It might not have been "real"
money for the rich early investors, but for retail investors after IPO it
was definitely real.
 It is highly likely that many technologies were delayed for
years or lost completely due to the churn of the bubble bursting.
However, it is very hard to quantify or even know about these lost
possibilities.

References:

https://writepass.com/journal/2012/10/2001-dot-com-bubble-its-causes-
effect-and-lessons-learnt/

https://www.quora.com/What-were-the-positive-and-negative-impacts-of-
the-bursting-of-the-dot-com-bubble-on-the-world

How companies took a hit?

360networks 
A fiber optic company that had a market capitalization of over $13
billion but filed bankruptcy a few months later.

Pets.com
Few companies epitomized the dot-com bubble more than Pets.com,
which sold pet products. It had an iconic glove puppet mascot, a Super Bowl
ad and a balloon in the Macy’s parade. However, as sales boomed following its
aggressive advertising campaign, it struggled with issues such as distribution.
When the bubble burst and funding was pulled, Pets.com was dead in the
water and around $300 million of capital investment was lost.

Gov.Works
Kaleil Isaza Tuzman (pictured right) was one of the better known but
least successful '90s dot-commers. He left Goldman Sachs to start up
Gov.Works, which had the great idea of allowing people in the U.S. to pay
parking tickets and get other government services online. He was so confident
that he allowed a film crew to follow his attempts. Sadly it blew $60 million in
venture capital and never made any actual money.

Broadcast.com (founded by Mark Cuban) and Geocities (founded by


David Bohnett)
Yahoo paid the eye-watering sum of $5.7 billion for Broadcast.com
and $3.57 billion for Geocities. Both these companies did not fare well for
Yahoo

Boo.com
Swedish entrepreneurs Ernst Malmsten (pictured) and Kajsa Leander
wanted to take high-end fashion and put it on the internet. The result
was Boo.Com, which set out to conquer the world but fell flat on its face. It
launched in 1999 and burned through $135 million in venture capital in just
18 months, before being placed into receivership in May 2000. It was one of
the biggest and fastest busts in history.

eXcite
In 1995 a group of Stanford University students launched a search
engine called eXcite. In 1999 @Home bought eXcite for $7 billion, after a
bidding war with Yahoo. However, by 2001 it was filing for bankruptcy.

Reference: https://www.msn.com/en-us/money/companies/9-early-dot-
com-businesses-that-went-from-boom-to-bust/ss-AAsZonu

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