But from another perspective, it’s worth wondering how much the flowering of the dot-com era was enabled by the fact that the most dominant, rapacious player in the industry was distracted while the new era was taking shape. The fact is, while Microsoft made plenty of moves during the dot-com era (MSN, Expedia, Hotmail, WebTV, just to name a few), it largely refrained from engaging in direct combat with the major dot-com players. More important, Microsoft never had the chance to absorb any of the cream of the new crop, as it had shown it was wont to do in earlier technology eras. Microsoft never attempted to acquire Amazon, say, though it certainly had the money to do so early on. And, crucially, once the dot-com bubble burst, Microsoft was in no position to swoop in and gobble up the wounded survivors because it feared angering the government again.
In short, it’s easy to see, especially based on recollections that have come out from ex-Microsofties, that the antitrust trial hobbled Microsoft strategically, and maybe even creatively. “It had a big impact, and even a decade later it was still having an impact,” Mary Jo Foley says of the antitrust trial. A journalist who followed Microsoft through the 1990s and 2000s, Foley argues that after the trial, no matter what product or feature it looked to develop, Microsoft had to think about legal issues first.14 And so, one must consider to what degree Microsoft was distracted by the trial, allowing it to miss, say, the development of paid search as a dynamic new market, or the rise of social networks as an entirely new paradigm.
This is not to suggest that Microsoft was unsuccessful in the 1990s. On December 30, 1999, Microsoft reached its peak market cap of $618.9 billion.15 This was due in large part to the fact that the 1990s was the decade that truly saw computing go mainstream. In 1990, there were around 9.5 million PCs sold in the United States. By the year 2000, that number had increased to 46 million annually.16 Considering that around 90% of those machines were running Microsoft Windows and Office, no one was crying for Microsoft. In that same year, 2000, PC penetration in U.S. households passed 50% for the first time.17 The web revolution helped normalize computing and Microsoft rode this wave as much as any dot-com. But the end result of the trial was that, going forward, Microsoft was merely another passenger; it was no longer steering the wave’s direction.
■
IF MICROSOFT’S HEGEMONY over the tech industry was broken by the end of the decade, the only meaningful casualty of this structural earthquake was Netscape. The antitrust trial was, of course, not designed to save the fortunes of Netscape; the parties involved in the trial were the U.S. government and Microsoft. Netscape was just the star witness, the primary victim. And by the end of the trial, Netscape was not even an independent party anyway. On November 24, 1998, America Online announced it was purchasing Netscape for $4.2 billion in stock.
It was painful for many involved with Netscape that the pioneering web company couldn’t overcome Microsoft’s might. But the fact that Netscape ended up swallowed by AOL, the “training wheels for the Internet,” seemed especially ignominious. “I mean, OK . . . Microsoft? A worthy opponent!” says original Netscape engineer Aleks Totic. “Did they fight fair? No, they did not. But . . . it’s understandable. Now, being in a market where Netscape got sold to AOL? That was just depressing.”18 Most of the original Netscape team left the company rather than join AOL. Marc Andreessen briefly stayed on as AOL’s chief technology officer, but he also left within a year, to form a new startup with fellow Netscape refugee Ben Horowitz. For his part, Netscape’s other cofounder, Jim Clark, was already ensconced in his third billion-dollar startup, Healtheon (later, WebMD), which enjoyed one of those 292% first-day pops when it IPOed in February of 1999.
The Netscape folk might have looked down their noses at AOL (AOL never got much respect from true techies in Silicon Valley), but by 1998, their jaundiced view was not shared by Wall Street. AOL was how around 40% of U.S. users got online.19 It was the most popular ISP in America—all the more so after it acquired its oldest rival, CompuServe, in September of 1997.20 By the end of 1999, AOL would surpass 20 million subscribers.21 At any given moment, especially in the evenings, as many as 1.1 million Americans were logged in to AOL.22 And what so impressed Wall Street was that AOL was not only one of the few profitable Internet companies—by the height of the dot-com era, it had become a really profitable company. At the end of its fiscal year 1999, AOL could boast cash flow of $866 million dollars on revenue of $4.8 billion.23 Fortune put Steve Case on its cover under the headline “Surprise! AOL Wins.”24 As the 1990s came to a close and Microsoft was distracted by its trial, it seemed to many in the industry that if there was any company that might be the heir to Microsoft’s throne, it was AOL.
AOL had those 20 million Americans paying $21.95 a month to log in—a nice, steady stream of reliable revenue—but also had learned a new trick: advertising. By 1999, the company was generating $1 billion a year just in ecommerce and revenue deals—more than ESPN and ESPN2 combined.25 Analysts were predicting that by 2003 AOL would generate more ad revenues than ABC or CBS.
No company took greater advantage of the bubble madness than AOL, by straight-up cannibalizing other dot-coms. You might remember that the Drkoop.com IPO raised $85 million for the health-information website. A month after its stock market debut, Drkoop turned around and basically spent all that money by agreeing to pay AOL $89 million over four years to provide health content to AOL users.26 And that wasn’t even the biggest deal AOL struck in those days. A long-distance phone provider named Tel-Save ponied up $100 million.27 AOL skillfully played one competitor off another: Barnes & Noble paid $40 million to be the bookselling partner on AOL’s online service; Amazon paid $19 million just to be on the AOL.com portal; in the midst of fending off auction competition from Amazon, eBay ponied up $75 million for a four-year auctions exclusive. And Wall Street rewarded such tie-ups. Tel-Save’s shares leapt from $13 to $19 after announcing its deal; Drkoop.com’s deal announcement caused its stock to surge 56%.28
Locking down guaranteed traffic from AOL became a box that dot-coms had to check in order to begin the Get Big Fast sweepstakes. And as AOL realized the position of power it had over the dot-coms, the deal-making only got more aggressive. In 1998, the dot-com startup N2K tried to land a $6 million agreement for the privilege of being AOL’s premier music retailer when, in the midst of negotiations, its executives let slip that they were in a hurry to close the deal ahead of N2K’s forthcoming IPO. AOL promptly jacked the price of the deal up to $18 million, which represented more than ten times N2K’s annual revenue.29 N2K didn’t even flinch. It paid the $18 million rather than risk a busted IPO.
AOL became so proficient at doing these deals, so rapacious, in fact, that it gained a reputation for aggressiveness that, until recently, only Microsoft had enjoyed. AOL’s army of deal-makers were known internally as the company’s “hunter-gatherers,” because they descended on the dot-coms like predators and made them offers they couldn’t refuse. As one anonymous dot-com executive remembered AOL’s tactics, “For weeks it was, ‘You’re great, you’re great, you’re great,’ and then one day [we had to] give them every last dollar we had in the bank and 20 percent of our company.” Another dot-commer said AOL demanded 30% of her company, “and then for good measure they tell us, ‘These are our terms. You have 24 hours to respond, and if you don’t, screw you, we’ll go to your competitor.’ ”30
In essence, AOL leveraged its “platform” of eyeballs and dial-up customers in the same way that Microsoft had leveraged its operating system. And burnishing this reputation as the 800-pound gorilla of the dot-com market was very lucrative for the company. In the era of skyrocketing valuations, no other Internet company soared as high as AOL did. Over the course of the 1990s, AOL’s stock appreciated 80,000%.31 By 1999, its market cap would reach $149.8 billion, and that same year AOL became the first Internet company added to the S&P 500 index, taking the place of the century-old Woolworth Corporation.32 AOL was worth more than Disney, Philip Morris, or even I
BM; it was worth more than General Motors and Boeing combined.33
But the gorilla had a problem.
It was no secret to anyone in the tech industry that the days of dial-up modems were numbered. The long-promised dream of broadband—web browsing at speeds thirty times faster than the 56,000 bits per second that was state-of-the-art for AOL’s millions of users—was just around the corner. And the biggest issue for AOL was the inconvenient reality that cable companies were in the best position to deliver this new era of connectivity. AOL had achieved ubiquity by piggybacking on the government-regulated copper wires of the staid, century-old telephone network. Unlike on the phone lines, AOL could not expect to get common carriage on cable networks. AOL’s bread and butter—being America’s ISP of choice—was careening rapidly toward extinction, and everyone inside the company knew it. By doing deals with almost every player in the space, the gorilla had access to everyone’s financials, and could see (even before the press caught on) that many dot-coms were close to running out of money.
So, as the dot-com party lurched to its climax, AOL, more than anyone else, knew it was time to find a seat before the music stopped. Fortunately, AOL had one very big ace in the hole: its soaring stock. It could use its gargantuan market cap to buy another company—any company, but preferably one with valuable long-term assets—in order to make up for the inevitable shortfall that would come when dial-up users jumped to broadband. As early as December 1998, internal AOL emails show that Steve Case and his lieutenants began kicking around the idea of purchasing a safe lily pad to land their company on. AOL came very close to acquiring eBay, but Case was wary of doubling down on the Internet space. A merger with AT&T was floated as a way for AOL to claim direct ownership of distribution pipes, but Ma Bell declined. After approaching Disney and getting rebuffed by its CEO, Michael Eisner, AOL turned its focus to arguably the biggest media company in the world: Time Warner. A deal with Time Warner would allow AOL to marry its new media savvy to the toniest of old-media content. Aside from its numerous, tangible and lucrative assets (magazines, TV channels, movie studios and more) Time Warner had one key piece of the puzzle that AOL craved: the second-largest cable network in the country.
Time Warner, of course, was the one big media company that had taken the Internet seriously from the very beginning—and it had hundreds of millions of dollars in losses to show for it. Its CEO, Jerry Levin, was the man who had bankrolled the expensive, doomed Full Service Network and Pathfinder experiments. In spite of these high-profile failures, Levin remained a true believer in technology’s ability to transform the distribution of content.
Especially given the way it all turned out, many have painted the AOL/Time Warner merger as a smash-and-grab job: savvy Internet punks swooping in and taking advantage of clueless old-media types. In some sense, it’s hard not to see the merger as a cynical ploy for AOL to cash in on its market cap before its business model collapsed. But, from another angle, Steve Case probably made the most rational move on behalf of his shareholders. “We all knew we were living on borrowed time and had to buy something of substance by using that huge currency,” one AOL executive said later.34 “We didn’t use the term bubble,” said another exec. “But we did talk about a coming ‘nuclear winter.’ ”35
And from the perspective of Time Warner? As the great tech journalist Kara Swisher said, if Time Warner got conned, “it was clear it was a con that the victim was very much in on.”36 By 1999, when Internet stocks were worth more than gold, and when new phenomena like Napster were driving home the lesson that web technologies could be existentially threatening to old media companies and their distribution models (more on Napster in a later chapter), how could it have felt like anything other than a coup for Time Warner to team up with the ostensible king of the web? By marrying AOL, Time Warner would insulate itself against the Internet’s disruption.
At the time it was announced to the world, the merger of $164 billion AOL and $83 billion Time Warner seemed like nothing less than the triumph of the New Economy. “This is a historic moment in which new media has truly come of age,” Steve Case told the stunned financial press. “We are going to be the global company of the Internet age.”37 Case vowed that one day AOL Time Warner would have $100 billion in revenue and a $1 trillion market cap. And for the moment, there was no reason to disbelieve him. For all the talk of the deal being a “merger of equals,” AOL shareholders would control 56% of the company and Time Warner shareholders, 44%.38 The reality was, AOL had bought Time Warner. An Internet upstart had taken over a decades-old media giant with five times its revenue.39
The entire business world was shocked by the deal. “Let’s be clear,” Silicon Valley venture capitalist Roger McNamee said. “This is the single most transformational event I’ve seen in my career.”40 Music industry executive Danny Goldberg said the merger “validates the Internet and vindicates the value of content.”41 The definitive book on the merger, There Must Be a Pony in Here Somewhere, was written by Kara Swisher some years after the deal was consummated. In it, she claims that, at the time, the merger seemed like a home run to her and nearly everyone else: “In one major move, the two companies had seemingly addressed their weaknesses and intensified their strengths. I won’t deny I really believed that, as did many others—many of whom now pretend they never did.”42
The AOL/Time Warner merger was announced on January 10, 2000. On April 3, 2000, Judge Jackson’s final ruling suggesting the breakup of Microsoft was announced. At the time, these two events felt epochal—clarion signals ushering in a new era in the technology and even media industries.
Instead, from the perspective of hindsight, they look more like historical footnotes, bracketing the weeks when the dot-com bubble finally burst.
■
FOUR DAYS AFTER the AOL/Time Warner merger announcement, on January 14, 2000, the Dow Jones Industrial Average peaked at 11,722.98, a level it would not return to for more than six years. The tech-heavy Nasdaq peaked on March 10, 2000, at 5,048.62, a level it would not reach again until March 2015. From that March 2000 peak, all the way down to the trough it reached on October 9, 2002 (the bear market bottom would be 1,114.11), the Nasdaq would lose nearly 80% of its value.
Was there any one thing that pricked the dot-com bubble? Of course not. There were a myriad of factors that all accumulated to bring about the end of irrational exuberance. For one thing, the Fed had finally begun to raise interest rates: three times in 1999 and then twice more in early 2000, the most sustained round of fiscal tightening over the whole of the late 1990s. And just as suddenly, the language from the Fed had shifted to an open attempt to rein in equity prices. Added to this was the fact that the Internet cheerleaders were changing their tune as well. One by one, Wall Street analysts began advising their clients to lighten up on Internet stocks, saying that the technology sector was “no longer undervalued.”43 But more than anything else, it was the weak constitution of all those “iffy” dot-coms that had hit the market toward the tail end of 1999 that tipped the scales. These were companies without a realistic chance to make money over the long term. Many, perhaps most, had merely been cynical plays to go public and then hope more money could be raised later to keep them afloat.
The crash had myriad victims, but a few can stand for the many. Webvan burned through more than $1 billion before declaring bankruptcy in July 2001.44 Pets.com had the ignominious distinction of liquidating a mere 268 days after its February 2000 IPO.45 It closed its first day of trading at $11, the same price at which it had gone public—no first-day pop. The next week of trading saw it down at $7.50.46 eToys went out of business after ringing up $274 million of debt. Once valued at $10 billion, its liquidators couldn’t even line up bidders for the $80 million warehouse system it had built.47
By April, just one month after peaking, the Nasdaq had lost 34.2% of its value.48 Over the next year and a half, the number of companies that saw the value of their stock drop by 80% or more was in the hundreds. By August of 2001, e
Trade was down 84% from its all-time high. SportsLine was down 99% (trading at 91 cents). And for most, no recovery ever came, even for the biggest names. Priceline had cratered 94%. Yahoo was down 97%, from an all-time high of $432 per share to $11.86 on August 31, 2001, its market cap down to $6.7 billion from $93 billion. That $1,000 put into Amazon’s IPO, which had climbed in value to more than $61,000 at the bubble’s height, was worth about $3,400 at the end of September 2001, when Amazon was trading under $6.
There are various ways to measure the amount of wealth that was annihilated when the bubble burst. As early as November 2000, CNNFN.com pegged the losses at $1.7 trillion.49 But of course, that would only count public companies. The amount of money lost to dot-coms that went bankrupt before IPOing or getting acquired would push the calculation of losses higher still. Beyond the public companies, it’s estimated that 7,000 to 10,000 new online enterprises were launched in the late 1990s, and by mid-2003, around 4,800 of those had either been sold or gone under.50 Many trillions of dollars in wealth vanished almost overnight. Obviously that amount of money leaving the playing field had to have some effect on the economy overall. The U.S. government would date the start of the subsequent dot-com recession as beginning in March 2001. By the time of the economic shock from the terrorist attacks of September 11, 2001, there was no longer any doubt. That tragic month of September, for the first time in twenty-six years, not a single IPO came to market.51
How the Internet Happened Page 19