So good was this idea, and so mind-blowingly obvious was it to Bhatia, that when Smith first called on his cell phone to suggest the concept, Bhatia told him, “Call me back on a secure line when you get to your house! We don’t want anyone to overhear!”31 Bhatia wrote up a business plan for the idea, but refused to make copies for fear someone else would beat them to the punch. When Bhatia made the rounds at venture capital firms, he pitched a dummy startup concept instead of the web-based email idea. If the VCs in question rejected the dummy startup for what Bhatia considered to be the right reasons, only then would he share with them his real idea: a simple, seemingly obvious concept that would be called Hotmail.
Hotmail.com launched on the web on July 4, 1996. In little more than a year and a half, Hotmail would claim 25 million users.32 At the time, this meant that Hotmail was actually the fastest-growing web thing in history. Such phenomenal growth was the result of a clever marketing tactic. Every time a user sent an email using Hotmail’s free web mail accounts, a small link was appended at the bottom that read: “Hotmail: Free, trusted and rich email service. Get it now.” So, every time an email was sent, the sender was promoting Hotmail’s service. The very act of using Hotmail helped spread the word about Hotmail. This kind of practice is now called viral marketing, the technique of promotion by rabid user word of mouth. Today, this is the very foundation of modern marketing strategy; in Hotmail’s era it was very much new and revolutionary.
Almost everyone on the web thought Hotmail was a brilliant idea as well. Yahoo came calling, and almost every other player in technology was interested in getting a piece of Hotmail and its viral growth. But all lost out to Microsoft, who, on New Year’s Eve 1997, purchased Hotmail for $400 million in stock. Not bad for two years of work, and an idea that even its founders thought was so obvious that anyone could have done it.
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HOTMAIL’S TIMING WAS impeccable. By late 1997, and especially through the whole of 1998, there was a big new watchword among Internet players: portal. The major search sites—Lycos, Infoseek, and especially the two most popular search destinations, Excite and Yahoo—were regularly among the most trafficked destinations on the web. And by 1997, having a lot of web traffic meant you could generate quite a lot of revenue. Yahoo, in particular, hit a seemingly insane metric: 1 billion pageviews a month.33 And of course those pageviews translated into “impressions” for advertisers and their banner ads.
The need to produce more impressions began to change the calculus at the search sites. Yahoo, for example, had once been happy to send surfers out to their intended destinations on the web. But now all those advertising dollars were making Jerry Yang and company think twice. Money would only keep rolling in if Yahoo kept web browsers returning again, and again, and again. Suddenly, sending users off to the larger Internet wasn’t as attractive as keeping them reloading Yahoo’s own pages throughout the day in order to generate new ad impressions. As Yang told a television interviewer, Yahoo was facing a dilemma. “You’re a search engine—once they’ve done the searching, why do they need you?”34 Yahoo needed to find a way to keep users on its pages. To use a watchword that was ubiquitous at the time, Yahoo needed to get more “sticky.”
To that end, Yahoo and the other search sites began to try anything that might encourage users to return habitually. First, the search sites copied the model of newspapers: they added things like horoscopes, weather reports and stock quotes. Then they realized that features like classified ads were cheap to put up and could quickly generate listing fees with practically zero investment. And if they offered, say, airline listings, the search portals discovered they could collect lucrative promotional fees as, obviously, Expedia and Travelocity would engage in a bidding war to get on their pages.
The search sites began to accumulate a utility belt of services to keep users hooked on their offerings. Things like free, web-based email, calendars, and address books, proved to be the most sticky tools of all. Once web users locked into a given portal and began to rely on one particular site for their personal email, for their scheduling, for the most intimate details of their lives, portals locked these users to repeat visits. A portal was now where you returned to again and again throughout the day, not just to search, but to manage your life.
Providing these personal services had an added benefit. Users had to “register,” i.e., identify themselves. Users who registered on a portal proved to be more lucrative than the randoms who came by just to perform a search. Registered users of what became known as My Yahoo generated, on average, 238 pageviews per person, versus 58 pages for an unregistered Yahoo browser, and 3.82 hours per month on the site, versus 0.76 hours per month for someone who just came to search.35 And, registration allowed the portals to charge more to advertisers. Once you identified yourself to your portal of choice in order to claim your “excite.com” email address, the site now knew your name, your general geographic location, your age, your sex, and tons of individual preferences. Sure, the portals claimed that all of this was in the interest of providing useful info like local weather conditions, personalized headlines and stock quotes. But the reality, of course, was that they now had the holy grail of marketing: demographic data to target ads against. This served to turbo-boost the advertising revenues the search sites were already generating.
Today—however uneasily—it seems we’ve accepted the notion that “free” web services make their money by whoring out our personal information to marketers and advertisers. But this practice really began in earnest with the portals, which claimed they were only interested in delivering us, say, personalized sports scores for our favorite teams. All the major search sites quickly pivoted to this new portal and personalize strategy, and to say it was lucrative would be an understatement. Excite saw its revenues jump 709% in 1997 alone.36 The four biggest search sites, Yahoo, Excite, Lycos and Infoseek, all saw their share prices increase an average of 390% over the course of 1998.37
All of these various players, as they feverishly pieced together features to compete in what were called the “portal wars,” went a long way to creating the competitive froth that would set the stage for the dot-com bubble. Before dot-com IPOs were an everyday occurrence, the portals, with their ballooning stock prices, were able to fork over big money (at least on paper) to construct their arsenal of user features. Yahoo had wanted Hotmail first, but since Microsoft had won that battle, it made do with the purchase of a Hotmail competitor, RocketMail, for a comparatively cheap $94 million. RocketMail was quickly rebranded as Yahoo Mail.38 Joe Beninato, the founder of an online calendar startup called When.com, took a meeting with Yahoo, hoping to get a distribution partnership. Before he could even make his pitch, the discussion turned to Yahoo purchasing When.com. This struck Beninato as a bit nutty since When.com had not even launched to the public yet. “We didn’t really have anything,” Beninato recalled. “We were a couple of months old.”39 Yahoo didn’t end up buying When.com, but AOL eventually did. For $225 million.
The portals wanted to be all things to all people, and so they ventured into any adjacent areas that might prove lucrative. That inevitably led to experiments with ecommerce, as the portals looked jealously at the revenue that growth sites like Amazon.com were enjoying. In addition to the dozens of promotional partnerships Yahoo signed with select retailers, the company began offering its own version of an online mall, dubbed Yahoo Shopping. In order to make it easier for small merchants to set up shop in its mall, Yahoo purchased a company called Viaweb from a young British programmer named Paul Graham. By the holiday season of 1998, more than 3,000 different storefronts had opened shop, with Yahoo raking in monthly fees and a percentage of every sale.40
“We began with simple searching,” Yang told Time, beginning to sound a bit like a studio mogul, “and that’s still a big hit—our Seinfeld if you will—but we’ve also tried to develop a must-see-TV lineup: Yahoo Finance, Yahoo Chat, Yahoo Mail. We think of ourselves as a media network these days.”41 A Wall Street
analyst told Businessweek, “You have to look at it [Yahoo] as the new media company of the 21st century.”42
*Weekly magazine publishers traditionally published only fifty or even forty-eight issues a year, allowing for “off weeks” around the holidays and during the traditionally news-slow summer months.
8
BLOWING BUBBLES
The Dot-com Era
For people of a certain age (my grandparents, for example), the Great Depression was not just a historical event. It was an economic and social apocalypse that, simply by having occurred once, could, ipso facto, recur at any time. It played on their minds like a psychic bogeyman. Anytime things “got too good,” that could only mean a crash was around the corner. In many ways, the dot-com bubble and its subsequent bursting are a similar bogeyman, at least to Silicon Valley. Any time a new technology leads to the proliferation of startups, any time venture capital investments increase year over year, any time company valuations pass stratospheric levels and high-profile IPOs hit the market, people inside and outside of tech fall all over themselves to declare that a new bubble is here, and everyone should head for the hills. But the fact is, the dot-com bubble was a truly singular event, brought on by a unique mixture of causes, and we are unlikely to see its kind again in our lifetimes.
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FRIDAY, AUGUST 13, 1982, might not sound like an important day in history, but in the annals of finance, it is one of the more momentous. That afternoon, the Dow Jones Industrial Average closed at 788.05, up 11.13 points, or 1.4% from the previous day’s close of 776.92. The Dow would never again close as low as 776. By the end of 1982, it would cross 1,000, and in a few years, Friday the 13th of August 1982 would come be recognized as the beginning of the greatest bull market in American history. By the time the dot-com bubble burst in March 2000, the Dow and the S&P 500 Index would have risen tenfold, and the technology-heavy Nasdaq index nearly thirtyfold.1
There were some quite notable hiccups along the way, but from 1982 until the turn of the century, the market closed up, year-on-year, almost every single year. Even after the Black Monday crash in 1987, when the Dow lost 22% in a single day, investors who held on through the crash had more money on December 31, 1987, than they had on January 1, 1987. An entire generation of investors came of age believing that markets only moved in one direction: upward. If history tells us anything, it’s that when people come to believe only good news can ever happen, a speculative financial bubble is probably inevitable. The dot-com era was really the culmination—the euphoric end-stage—of this protracted bull market.
It was all that much more impactful because it happened to the baby boomers, the megageneration. Between 1946 and 1964, 76 million Americans were born, and by the 1990s, this cohort was entering its forties, the time that most people begin saving for retirement. If the baby boomers were now interested in investing, that meant America was now interested in investing. The sheer weight of their numbers, backed by the accumulated wealth from their prime earning years, meant that there was suddenly a mountain of money looking for a place to go.
Boomers were managing their own retirement savings in much larger numbers than the generation before them, who relied on pensions rather than 401(k)s. And they hadn’t grown up with the fear of the stock market crashing and causing an economic crisis. The economist John Kenneth Galbraith described just this sort of generational turnover in investing philosophy in his book A Short History of Financial Euphoria. “For practical purposes,” Galbraith wrote, “the financial memory should be assumed to last, at a maximum, no more than 20 years. This is normally the time it takes for the recollection of one disaster to be erased and for some variant on previous dementia to come forward to capture the financial mind. It is also the time generally required for a new generation to enter the scene, impressed, as had been its predecessors, with its own innovative genius.”2
The dot-com bubble is called the dot-com bubble because of the hundreds of new technology stocks that debuted in the late 1990s, but the fact is, the party had been going for quite a while already. From the 1987 Black Monday crash to the inauguration of President Bill Clinton, the stock market had nearly doubled. In 1995, the S&P 500 Index returned 37.20% in a single year. When the dot-com companies announced their arrival with Netscape’s spectacular IPO in August of 1995, Wall Street was already in an ebullient mood. “The dot-com stocks were the froth in the cappuccino,” former Barron’s financial journalist Maggie Mahar says.3
Even though companies like Yahoo, Amazon, eBay and others were formed largely in the two years between 1994 and 1996 (and generally went public in the two years after that), it wasn’t until 1998 that the stock prices of dot-com companies began to demand attention. It took a while for dot-com stocks to stand out because, again, at the time, seemingly all of Wall Street was doing well. Everything was already inflated. A traditional old-economy stock like General Electric was trading at forty times earnings.4 During the time period from Netscape’s IPO in August of 1995 to the beginning of 1999, shares of traditional blue-chip companies like, say, Procter & Gamble, doubled. Not a bad return in only forty months. So, at first, Internet stocks didn’t seem all that exceptional.
But if you weren’t content with merely doubling your money on a solid, staid stock like Procter & Gamble, then, by 1998, you might start to look enviously at the returns tech stocks were ringing up. Everything changed over the course of 1998. If you bought $1,000 worth of Yahoo and Amazon each at the time of their IPOs, over the course of 1998—merely twelve more calendar months—you would ring in the new year of 1999 to discover that your original $1,000 investment in Amazon was now worth $31,000 and your $1,000 worth of Yahoo stock had ballooned to $46,000. Turning a $2,000 investment into $77,000 is phenomenal on any time scale, but to do so in less than thirty months is unheard of. And the funny thing was, getting this sort of return wasn’t exactly rocket science. In the twelve months of 1998, Yahoo stock returned 584%, AOL 593% and Amazon 970%.5 These were three of the best-known, most talked-about stocks of the mid-nineties, widely heralded as the vanguard of the new economy that the Internet was supposedly bringing into existence. They were hardly needles in the haystack.
In the last two years of the nineties, seemingly any random Internet stock pick began to feel like a sure-thing lottery ticket, and that is why we remember this period as the dot-com bubble. Internet stocks proved to be particularly susceptible to speculation for a couple of reasons. Dot-com companies were young. They were going public sometimes only months after their creation. When they showed any sign of growth, their stock prices took off because it seemed to validate the notion that there was only more growth ahead. And it was that limitless promise that led to the second unique feature of Internet stocks: the profits didn’t seem to matter. Valuations weren’t tied to things like, you know, income. They were tied to potential fortunes to be made, somewhere in the future. New metrics like counting “eyeballs” and “mind share” were used to show companies were growing, even if that growth couldn’t be measured in dollars and cents. Heck, sometimes a dot-com stock would increase in value even after it announced losses! Investors might take that as a sign the company was “wisely” plowing its money into strategies for growing at all cost.
Americans believed all this, because all the so-called experts were telling them it was true. This Time It’s Different™ was a rallying cry of the time period. Magazines like Wired were promoting a glittering future where technology would soon be a panacea for all of mankind’s ills. Books like Ray Kurzweil’s The Age of Spiritual Machines promised that technology might help us transcend death itself. Bestsellers like The Long Boom and Dow 36,000 made the argument that technological advances were enabling a structural shift that would kick the global economy into a new, higher gear, almost unfathomable to contemporary minds.
These arguments—that technology was changing the game and that investment markets overall were being transformed—fused until they were almost one and the same, a self-reinfo
rcing battle cry. All of this whipping up of idealistic hysteria found a willing accomplice in the financial press. On television especially, the gyrations and permutations of the boom were given literal play-by-play treatment by the channel that made its reputation during the late nineties. Early in the decade, CNBC had been an unprofitable, poorly watched channel on deep cable, the dorky, boring relation to CNN. But in late 1993, Roger Ailes took over the channel and transformed it. Taking his cue from the way that ESPN covered sports, especially with its SportsCenter franchise, Ailes began populating CNBC with winning personalities who covered the stock market the way a sports anchor might cover a bowl game. All through the day, a parade of talking heads from Wall Street came on to analyze fluctuations in the market. Today, we’re used to cable news being a daylong parade of talking heads debating topics in Brady Bunch–style boxes. But before Ailes took this format to Fox News and it became standard operating procedure on cable news everywhere, the free-for-all gabfest format found its first success on CNBC.
By the turn of the century, CNBC had become the background noise for a particular American moment, the default channel of the bubble era. It was “an authentic cultural phenomenon,” as Fast Company magazine described it, “broadcast to nursing homes, yuppie gyms, dorm rooms, hotel lobbies, pilot ready rooms, and restaurants” so that Americans could get a quick update on their favorite stock or the hot new IPO that was hitting the market. People at the time felt that CNBC was the most visible aspect of an overall democratization of investing that was taking place. “Why can’t Joe Smith who works at a deli have the same information as Joe Smith who works at an investment bank?” said CNBC’s Maria Bartiromo when asked to define her role to everyday investors. “That’s why it’s a bull market. It’s not a professional’s game anymore.”6 Years later, Maggie Mahar would concur. “It was in the last five years of the 90s that you saw the individual investor really take over,” says Mahar. “They were really leading the market. They were doing a lot of the buying.”7 Indeed, the numbers bear this out. In a 2002 study, 40% of investors with financial assets of $25,000 to $99,000 reported making their first-ever stock purchase after January 1996. They were doing a lot of the buying because of the new online trading platforms that had proliferated, like E*TRADE, Ameritrade, Firstrade, Schwab, and more. By late 1999, the number of online brokerage firms was nearing 150, and normal Americans were making half-a-million online trades every day.8 By 1999, nearly 40% of retail security trades were being done online.9
How the Internet Happened Page 15