How the Internet Happened

by Brian McCullough

  A lot of companies were nothing more than IPO plays. And in the worst instances, some of the bubble companies were platforms for outright fraud. Pixelon was a company that raised $35 million in venture financing, promising to develop “full-screen, TV-quality video and audio streaming technology” in an era of dial-up modems.57 It promptly turned around and blew $16 million of that on a company launch party at the MGM Grand in Las Vegas that featured performances by KISS, the Dixie Chicks, Sugar Ray, and a reunion concert by the Who. It was later revealed that Pixelon founder Michael Fenne was really a man named Paul Stanley (no relation to the guitarist from KISS) who was wanted by the State of Virginia on stock fraud charges. Pixelon never released a product before it was eventually forced into bankruptcy.

  The parties, the hype, the headlines, it was all part of the milieu. In any fad or bubble, eventually the scenesters show up. And when the pretty people arrive, that’s usually a sign that a bubble is at its height. This was especially true in the media capital of the world, New York. And if one company exemplified hype-as-a-business-plan, it was Pseudo.com. Pseudo was the brainchild of Joshua Harris, a technology early adopter who had previously founded the tech research company Jupiter Communications. Pseudo’s stated goal was quite simple: to bring television online. To this end, Pseudo invested in studios and creative talent to produce dozens of different “shows”—about 240 hours of original programming a month—that it broadcast over the web from its SoHo headquarters.58

  The shows that Pseudo produced ran the gamut of subjects, from sports to video games to music to talk shows. Pseudo combined video with online chatrooms to create programming that was self-consciously interactive. The on-air talent mixed freely with the viewers who lurked in the chatrooms and often impacted what was happening on air, in real time. Like a public access channel on hallucinogens, Pseudo claimed it was establishing an entirely new medium that would be like the second coming of television—but two-way and interactive.

  If producing television for the twenty-first century was the stated goal of Pseudo, the delivery method seemed to be a 24/7, never-ending party. Harris and Pseudo became, briefly, ground zero for the New York City art scene, and Pseudo’s regular events and parties put Pixelon’s Las Vegas bash to shame by rivaling the artiness and excess of Warhol’s Factory (“I think I’ll be bigger actually [than Andy Warhol],” Harris said).59 The Pseudo soirees featured DJs, poetry and art, but also computers and video games. “I remember that some exhibitionistic fat guy with a really tiny penis started taking a shower while dinner was going on,” said a gossip writer the New York Post dispatched to report on one Pseudo event. “The food was quite good, but I couldn’t really enjoy it because some half-naked people who seemed to think they were very important kept dancing on the table.”60 These fin de siècle bacchanals were all funded by Harris and the more than $25 million that he was able to raise from the likes of Intel and the Tribune Company, ostensibly to turn Pseudo into a broadcaster for the twenty-first century.61

  Silicon Valley was comfortable celebrating the dot-com companies with unquestioning adulation. After all, the Valley’s whole industry is predicated on churning out the new. But New York was especially susceptible to dot-com envy, and it was there that the backlash against the bubble first began to take root. Journalists and old-media types began to look jealously at these kids, with their raves and their computers and their stock options that made them (on paper at least) worth millions of dollars for—what, exactly? Or, they could look at peers like iVillage founders Nancy Evans and Candice Carpenter Olsen, both of whom had come from publishing but had crossed the divide into digital moguldom, and were now pictured smoking enormous cigars in the pages of magazines after celebrating their record-breaking IPO.

  When former Surgeon General of the United States C. Everett Koop became the eponymous public face of Drkoop.com, it must have felt like a thumb in the eye to any media celebrity who hadn’t been smart enough to jump on the dot-com bandwagon sooner. Drkoop.com was nothing more than a general-interest health portal with a celebrity figurehead. Its traffic numbers were nothing special, and of course the site didn’t make any money. Nonetheless, Drkoop.com enjoyed a nearly 100% first-day IPO pop and raised $85 million from investors despite reporting lifetime revenue totaling only $43,000.62 Following this lead, veteran news anchor Lou Dobbs shocked the media world in June of 1999 by leaving his decades-long stint at CNN to launch Space.com, a space-focused portal financed by VC firms Greylock and Venrock Associates.63 “I think most of the people here would be very insulted if somebody said the reason they are here is because of the potential of an IPO,” Dobbs said of the company he quickly staffed up to about thirty employees. “I’m not saying that’s not part of the equation, but it sure as hell isn’t the primary reason,” Dobbs was quick to add.64

  By 1999, the faces in the annual list of the “Silicon Alley 100” included the usual suspects like Kevin O’Connor and Dwight Merriman of DoubleClick and Craig Kanarick and Jeff Dachis of RazorFish, but also Sam Donaldson of ABC News, who, late in 1999, launched a fifteen-minute, thrice-weekly, web-only video news show.65 The Silicon Alley 100 was the yearly status list of the magazine Silicon Alley Reporter, launched by the New York tech gadfly Jason Calacanis to cover the New York tech scene with a slavish vigor that was intended to rival the way Vanity Fair covered Hollywood. Calacanis’s magazine came to be seen as the calling card of what appeared to be a new media establishment, with Calacanis as the new media maestro.

  At the end of 1999, in its final issue of the twentieth century, Time seemed to make the supremacy of the dot-coms official when it named Amazon’s Jeff Bezos as its Person of the Year. At age thirty-five, he was the fourth-youngest person to receive this accolade, after Charles Lindbergh, Queen Elizabeth II and Martin Luther King Jr.66 James Kelly, Time’s deputy managing editor, wrote that Bezos had been selected because “he has helped guarantee that the world of buying and selling will never be the same.”67 When he was asked if it truly was his intention that Amazon would one day to be able to sell anything, any item, Bezos responded: “Anything, with a capital A.”68

  ■

  BY OCTOBER 1999, the market cap of the 199 Internet stocks tracked by Morgan Stanley’s Mary Meeker was a whopping $450 billion, about the same size as the gross domestic product of the Netherlands. But the total annual sales of these companies came to only about $21 billion. And their annual profits? What profits? The collective losses totaled $6.2 billion.69 “People come in here all the time and say, ‘The last thing I want to be is profitable,’ ” one investment banker bragged in June of 1999. “ ‘Because then I wouldn’t get the valuation of an Internet company.’ ”70

  The continued craziness of the market, coupled with the increasing dubiousness of the companies and stocks that were going public, eventually pushed the bubble toward its end point. Over the second half of 1999, it wasn’t a question of whether or not a bubble existed, it was a question of how big a bubble it was, and when it would pop. The entire nation seemed to be engaged in a “greater-fool” standoff. You bought stock or founded a company because you knew everyone else was doing the same. Most people knew the irrational exuberance was unsustainable, but no one wanted to be the first to admit it. After all, if you could squeeze your IPO out before the window closed, or if you could hold your Yahoo stock long enough for it to double one last time, then you could pick your moment to cash out, hopefully before everyone else got the same idea. In the meantime, you kept your own counsel and shook your head quietly as the last flood of dubious companies rushed the public markets.

  Sensing this cynicism, the backlash among the New York media establishment began to creep onto Wall Street. Barron’s came out with a widely read cover story analyzing the balance sheets of especially the ecommerce companies and warned that investor patience with continued losses was probably running out. This was coupled with distressing quarterly reports from some of the weaker dot-coms that sent their stocks downward. Even the big names began
to come in for questioning. Another highly publicized Barron’s cover story was titled “Amazon.bomb” and said, “Investors are beginning to realize that this storybook stock has problems.”71 If Amazon, the standard-bearer for the dot-coms, was in trouble, what did that mean for everyone else? A Lehman Brothers analyst named Ravi Suria began writing scathing reports questioning Amazon’s very solvency as a going concern. Suria wrote that Amazon would likely run out of cash within four quarters “unless it manages to pull another financing rabbit out of its rather magical hat.” The New York Post headlined, “Analyst Finally Tells the Truth About Dot-Coms.” Around the time Jeff Bezos was feted as Time’s Man of the Year, Amazon’s stock hit its all-time high, a split-adjusted $107 a share, and then slowly began to drop in price.72 In February 2000, Wall Street was shocked when Amazon announced it had sold a $672 million convertible bond offering.73 Why did Amazon need so much cash, unless it feared it was running out?

  For the better part of two years, the dot-com mania had been fueled by the This Time It’s Different™ mass faith that Americans had in the promise of the Internet. That sort of new-economy mumbo-jumbo worked for the dot-com companies—until it didn’t. Get Big Fast and profits-someday were valid business strategies—until they weren’t. The hundreds of new companies created in the dot-com era simply pushed credulity a bit too far, for a bit too long. The flood of crap companies, especially those that came to market near the end of the bubble, could not be ignored forever. If the “good will out,” as they say, then the opposite is true as well: the bad will out eventually, if given enough time.

  One by one, the weakest of the dot-coms, those with the flimsiest business plans, or those that were the most blatant copycats of other flimsy ideas, began to underperform the market. Dot-coms ceased being sure stock market winners—at first in a trickle, and then all at once. Falling stock prices turned into stock market delistings and then became actual bankruptcies. Like any good game of musical chairs, when the music stopped, there simply weren’t enough seats for everyone. As investors suddenly began to demand that companies show a profit for the first time, the collective response from the dot-coms was “What? You can’t be serious!”

  10

  POP!

  Net­scape vs. Microsoft, AOL + Time Warner and the Nuclear Winter

  Careful readers will notice that in all this talk about the dot-com frenzy, there hasn’t been a single mention of the original dot-com company: Net­scape. That’s because even before the dot-com bubble was properly inflated to its greatest extent, Net­scape had ceased to be an important player in events as they unfolded.

  Net­scape actually tallied impressive revenue growth in its first ten quarters as a public company.1 It was, for a time, the fastest-growing software company in history, going from zero to half a billion in revenues in three years.2 But that growth papered over the internal problems that later revealed that Net­scape as a company was confused about its ultimate strategy. Net­scape had IPOed as a software company: it developed web browser software that consumers and businesses ostensibly paid to use. At the time of its IPO in 1995, fully 90% of the company’s revenues came as a result of its stand-alone Navigator web browser.3

  But then came Microsoft and Internet Explorer. So, Net­scape pivoted to service corporate customers with commerce servers and Intranet servers. By 1997, the percentage of Net­scape’s revenue generated by the stand-alone browser was below 20%.4 The only problem with that state of affairs was that selling to corporations required a traditional, corporate-style salesforce. From 15 sales­people in 1995, Net­scape’s sales army ballooned to almost 800 people by 1997, and sales and marketing costs ate up about 47% of revenue.5 From the nimble and efficient “new-style” software company that Marc Andreessen and Jim Clark had told the press Net­scape was destined to be, the company actually evolved into the very thing it had once ridiculed: a lumbering and inefficient “old-style” software and services firm.

  “I absolutely thought we were a software company—we build software and put it in boxes, and we sell it,” Marc Andreessen said in May 1998. “Oops. Wrong.” The Net­scape that had kicked off the Internet Era was now Net­scape, the many-headed hydra, groping desperately for any business model it could find. “We’ve completely changed,” Andreessen said.6

  The irony was that the very company that had announced to the world that there were riches to be found on the Internet couldn’t find a reliable way to make money on the Internet. After ten quarters of growth, Net­scape’s revenue suddenly dropped by 17% in the fourth quarter of 1997. In January of the next year, the company reported a quarterly loss of $88 million and laid off 300 of its 2,600 employees.7 After reaching an all-time high in early 1996, by 1998, when the Yahoos and eBays of the world were entering the stratosphere, Net­scape’s stock was languishing below its IPO price.8

  The question was, did Net­scape stumble, or was it pushed? In October 1998, Microsoft’s Internet Explorer passed Net­scape’s Navigator (later called Net­scape Communicator) in browser market share.9 Each new version of Internet Explorer released copied features that Navigator had pioneered, and then added features that Navigator didn’t have. Microsoft usurped the browser market by giving away its browser for free. And more than free, there were instances where Microsoft was essentially paying valuable partners—Internet service providers, computer manufacturers—to favor IE over Navigator. Net­scape, the smaller company by far, couldn’t afford to give away its browser. The whole reason that Net­scape tied itself in knots trying to reinvent its business model was that it knew it couldn’t match Microsoft’s deeper pockets when it came to competing in the stand-alone browser market.

  In a last-ditch effort to shore up market share, Net­scape released the source code to its browser on a website called Mozilla.org in January 1998. The Economist magazine said that this move was “the computer-industry equivalent of revealing the recipe for Coca-Cola.”10 This open-source browser project would later evolve into the Firefox web browser, which would, in the 2000s, eventually take the market-share crown back from Internet Explorer. But it did nothing for Net­scape at the time. By February 1998, Net­scape’s stock was down by half from its IPO, and 88% off its all-time high.11

  In a bit of asymmetrical warfare, Net­scape had, very early on, turned to the federal government in an attempt to gain some sort of relief from Microsoft’s predations. It sure as heck seemed to Net­scape like Microsoft was leveraging its operating system monopoly to kill the market for web browsers. On August 12, 1996 (the same day that Microsoft shipped Internet Explorer version 3.0), Net­scape sent a letter to the U.S. Department of Justice, claiming that Micro­soft was wielding Windows 95 like a cudgel, preventing Net­scape from doing deals with vendors and manufacturers that would allow the company to protect its place in the market. On October 20, 1997, the Department of Justice announced that it was investigating Microsoft for violation of a previous consent decree, and in May 1998 the attorneys general of twenty states joined the DOJ in filing antitrust suits against Microsoft.

  The ensuing Microsoft trial was like a bonfire-of-the-vanities-style sideshow playing out in the background during the headier months of the dot-com bubble. Running from October 1998 to November 1999, the trial provided plenty of entertainment for those in the technology industry who both feared Microsoft and were jealous of it. The trial uncovered over 2 million emails, memos and other materials from within Microsoft, Net­scape, and even other companies, such as AOL and Apple.12 The government focused largely on proving that Microsoft had strong-armed companies into shunning Net­scape, such as when AOL was induced into double-crossing Net­scape over its default browser, and when computer manufacturers were cajoled into removing Net­scape’s Navigator as a preinstalled option.

  The trial was intensely embarrassing to Microsoft executives, who, time and again, were contradicted by their own emails and previous statements. Not even Bill Gates was immune. The government played hours of a videotaped deposition from Gates, showing
him sparring with the government’s lead attorney, David Boies. Gates came off as dissembling, petulant, even petty. Like Bill Clinton’s famous testimony dispute over what “the meaning of the word ‘is’ is,” Gates argued over the characterization of basic words in his own emails. He denied remembering meetings and claimed to forget details about strategy—things that no person with a passing knowledge of the way Gates managed Microsoft could believe. Gates denied seeing Net­scape as a serious competitive threat, in direct contradiction to previous public statements.

  When the judge, Thomas Penfield Jackson, finally delivered his decision in the case, it was the verdict that Microsoft’s enemies had been hoping for for years. Judge Jackson found Microsoft guilty of violating U.S. antitrust laws. Microsoft had “maintained its monopoly power by anticompetitive means and attempted to monopolize the Web browser market.”13 The suggested remedy: Microsoft should be broken up into two separate companies: one that developed and sold operating systems, and another that developed and sold applications like web browsers.

  Of course, it never ended up that way. The case was appealed: the original verdict was rejected; and by the time the new Bush administration took office in 2001, there was little appetite for continuing what could be seen through a partisan lens as “antibusiness” litigation. Microsoft was never broken up, instead eventually agreeing to a Department of Justice settlement that required Microsoft to open its APIs and protocols, and generally play nice with competitors in the near future. Critics saw this as little more than a slap on the wrist.

  With the benefit of twenty years, it’s easy to look back on the Microsoft antitrust trial and even the whole Net­scape/Microsoft web browser war as a bit of a tempest in a teapot. After all, we now know that Microsoft was about to enter something of a “lost decade” during which its influence on the industry would wane and the company would come to be seen by many as almost an irrelevant force as technology evolved. Indeed, Microsoft’s diminished stature over the course of the 2000s would seem to validate one of the company’s key claims during the trial itself: that the technology industry is so dynamic, so competitive, that no player, no matter how dominant in one market or at one point in time, can really be thought to be monopolistic. Because, in the blink of an eye, that entire market could change thanks to the arrival of new competitors or new technologies.