The dot-com era was over.
“If you had asked me two years ago, does this dot-com thing make any sense, I would have said, no, the bubble will burst,” George Shaheen, Webvan’s CEO, told the New York Times shortly before Webvan went under. “But I didn’t have any idea of the blood bath that would ensue.”52 Shaheen, whose Webvan stock options were once worth $280 million, saw the value of his paper wealth shrink to $150,000 by the time he quit the company.53
Perhaps most emblematic of this epic turn in fortune is the story of TheGlobe.com. Founded by two undergraduates at Cornell University in 1995, TheGlobe was a community site, allowing things such as personal homepages, much like GeoCities, Angelfire and Tripod did. It had decent early user growth, reaching 14 million hits a month and 30,000 subscribers by 1996.54 And, most important, it had young, baby-faced, photogenic twenty-something cofounders, Stephan Paternot and Todd Krizelman.
By 1997, the site was adding 100,000 users per month.55 This sort of growth attracted the attention of Alamo Rent A Car founder Michael Egan, who invested $20 million. Paternot and Krizelman moved the company’s operations to New York City and plunged into the hype-and-party machine that was already in full swing. By late 1998, with revenues of only $2.7 million (and losses of $11 million), TheGlobe.com seemed to be another promising dot-com, ready for its time in the spotlight.
TheGlobe enjoyed what was perhaps the quintessential IPO of the dot-com era. Going public on Friday, November 13, 1998, priced at a cautious $9 a share, Bear Stearns, the underwriters of the stock, discovered that there was suddenly a 45-million-share demand for the 3 million shares TheGlobe was selling.56 When the stock opened in the morning, the first trade took place at $87 a share. TGLO reached an intraday high of $97 before closing at $63.50. It was the largest single-day IPO pop in history—605.6%. Sixteen million shares traded hands during the day, meaning the 3 million shares of TGLO available to the public were bought and sold on average five times that day. This was, of course, the smart money selling out. “I sold my TGLO at 88—who wouldn’t?” one hedge fund manager told TheStreet.com.57 The headline in the New York Post would later read, “Geeks Make $97 Million.”58 Paternot and Krizelman were twenty-four years old.
TheGlobe had executed on the dot-com era playbook perfectly.
Except . . .
On the second day of trading, TheGlobe.com’s stock fell to $48.
Within a week, it was down to $32.
Over the course of 1999, TGLO would rise and fall with the rest of the Internet stocks, briefly bouncing to almost $80. But, quite literally, it was all downhill from there. Toward the end of 1999, the price was down, under $10.
TheGlobe was—perhaps from the beginning—a company with dubious long-term prospects. For a company that needed gobs of traffic to ever have a chance of making money, it never really competed with the big boys, only peaking at 34 in the list of the most trafficked websites in the world.59 Because of this “second-tier” status, TheGlobe never had the chance to be acquired like GeoCities and even Tripod were. In an era when an electronic greeting card company like BlueMountain could be snapped up for its 9 million unique visitors a month, TheGlobe was only averaging 2.1 million.60 Plastering banner ads at the top of every page in order to make money was never a sustainable strategy, especially when the online ad market began to crash by the end of 1999. GeoCities and Tripod were safe under their parent company umbrellas, so who would ever know if they were just as unprofitable? Meanwhile, at publicly traded TGLO, the whole world could see that, even in a good quarter, like the three months ending March 31, 2000, when TheGlobe.com saw revenues more than double, to nearly $7 million, it nonetheless recorded a net loss of $16.4 million.61 Just by being in business, doing the thing its business plan said it had intended to do, TheGlobe was losing more than $2 for every $1 it brought in.
There are plenty of people, both today and at the time, who view TheGlobe as designed merely to IPO, make its investors and bankers rich, and then—nothing more. Whether or not that was the case, for one brief, shining moment, it was the hottest stock, the most exciting company in the world.
And then, it was a laughingstock.
By the spring of 2001, TheGlobe.com was trading at 8 cents a share. Paternot and Krizelman were forced out of their own company long before then.
When TheGlobe.com was delisted from the Nasdaq on April 23, 2001, its final trading price was 16 cents.
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OF COURSE, THE DOT-COM ERA didn’t end disastrously for everyone. According to numbers subsequently published by Barron’s, between September 1999 and July 2000, insiders at dot-com companies cashed out to the tune of $43 billion, twice the rate they had sold at during 1997 and 1998.62 In the month before the Nasdaq peaked, insiders were selling twenty-three times as many shares as they bought.63 The most famous example from this era is Mark Cuban, perhaps the quintessential dot-com billionaire. Cuban had already cashed out early by selling his company, Broadcast.com, to Yahoo. But he didn’t trust the insane valuation of the Yahoo stock he had been paid in, so he set up a hedge against his Yahoo holdings, called an “options collar.” When Yahoo’s stock subsequently collapsed, his entire fortune was protected. “He probably extracted more from the initial Internet bubble than anyone else,” the hedge fund manager and author James Altucher said of Cuban.64
Compare Cuban’s story to that of Toby Lenk, founder of eToys, who saw his paper fortune of $600 million wither away because he refused to bail out on his company’s stock.65 Is there any great nobility in Lenk’s determination to go down with his ship versus Cuban’s astute decision to get out when the getting was good? Probably not. Or consider Paternot and Krizelman, who in May of 1999, when TheGlobe stock was still at $20 a share, sold 80,000 shares and 120,000 shares for roughly a combined $4 million (original investor Michael Egan sold TheGlobe shares worth more than $50 million).66 Paternot, Krizelman and Egan did nothing ethically or legally wrong. In fact, they played by the rulebook of a crazy game that was largely foisted upon them. But one does wonder about other people who had a stake in TheGlobe.com. Those hundreds of employees, say, who had been granted stock options and imagined themselves to be rich the day of TheGlobe’s IPO. Or what about the potentially tens of thousands of investors who bought shares of TheGlobe.com for $87 on IPO day? When did they sell? And at what price?
What we can say definitively is that we know who ended up holding the bag as the bubble exploded: average investors. Over the course of the year 2000, as the stock market began its meltdown, individual investors continued to pour $260 billion into U.S. equity funds. This was up from the $150 billion invested in the market in 1998 and $176 billion invested in 1999.67 Everyday Americans were the most aggressive investors in the dot-com bubble68 at the very moment the bubble was at its height—and right at the moment the smart money was getting out. According to Barron’s journalist Maggie Mahar, by 2002, 100 million individual investors had lost $5 trillion in the stock market. Bloomberg News has estimated the damage at $7.41 trillion.69 A Vanguard study showed that by the end of 2002, 70% of 401(k)s had lost at least one-fifth of their value; 45% had lost more than one-fifth.70
A lot has been made in the last several years about income inequality and how gains made in the overall economy tend increasingly to go to the top 1%, while the rest are left with scraps. At the time of this writing, there is a lot of talk about how the American public, especially the middle and working classes, have come to believe the economic structure of America is rigged against them, and everything is tilted in favor of the insider, the moneyed, the elite. An argument can be made that this was a belief that first took hold when the dot-com bubble burst, especially to a generation of investors who came to the stock market for the first time in those years. Baby boomers did what society told them: they invested in stocks; they bought and held. And for a time, they did well, seeing their nest eggs go up by five, even six, figures (or more if they were lucky). And then they watched it all evaporate. They watched the insiders
and the bankers, the lucky and the elite, walk away scot-free while they, the hardworking Americans who did what they were told, lost everything. And all of that would happen to them again less than a decade later, only this time, in the housing market.
The bursting of the dot-com bubble was the opening act of our current economic era, and the repercussions from that bubble’s aftermath are still with us today, economically, socially, and especially politically.
Middle-aged investors weren’t the only ones to lose out, of course. A whole generation of workers who had staked their careers on the transformative dream of technology were suddenly, almost en masse, unemployed. It was later estimated that between 2001 and early 2004, Silicon Valley alone lost 200,000 jobs.71 A whole generation of young people had, in the space of a decade, gone from being young upstarts who “got it,” to masters of the universe who seemed to be transforming the world, to completely redundant.
There were some engineers and secretaries at various companies who were lucky enough to cash out some stock options at the right time and probably walked away with enough money to pay off student loans, put a down payment on a house, or maybe pocket a cool million or two. But those were the early or the lucky. The vast majority, the tens or maybe hundreds of thousands who flooded into tech in the bubble era, now found themselves without even a severance package because their pre-IPO company was bankrupt.
The hangover from this comeuppance is what still haunts the tech industry today. Even now when young entrepreneurs talk glowingly about how their technology will change the world, in the back of any Internet entrepreneur’s mind is the Icarus-like cautionary tale of the dot-com bubble’s implosion, as well as a fear that someday they too will be exposed for their hubris.
Marc Andreessen would later say of the bubble and its aftermath: “A lot of big companies in 2000, 2001, 2002, breathed a massive sigh of relief, and said ‘Oh! Thank God that Internet thing didn’t work! Stick a fork in it, it’s done. Everybody knows the dot-com thing was a bubble. That was a joke. It’s over. So, now we don’t have to worry about it.’ ”72
American industry need look no further than the example of AOL Time Warner to assure themselves that it had all just been a grand delusion. A multitude of books have been written about the monumental culture clash that ensued when the AOL cowboys invaded the halls and boardrooms of Time Warner. Certainly, dysfunctional infighting and managerial malfeasance were in large part responsible for what conventional wisdom has collectively agreed was the worst merger of all time. There were charges of accounting fraud and dirty dealing directed at the AOL side, but the ultimate failure of the combination was really a result of the collapse of AOL’s advertising business. Over the course of 2000 to 2002, all those deals AOL did with dot-com companies unwound, as the dot-coms themselves went belly-up. Slowly, AOL dial-up subscriber numbers, which peaked at 26.7 million in 2002, dwindled away, as Americans shifted over to broadband connections with DSL companies or to cable ISPs like Time Warner Cable’s own Road Runner Internet service.73 As early as 2003, Time Warner dropped “AOL” from its corporate name.74 By that point, Steve Case and most of the rest of the AOL cowboys had been pushed out of the company. But also by that point, AOL Time Warner had been forced to announce two of the biggest losses in American history: $54 billion in 2002 and $45.5 billion in 2003, both write-downs of the inflated value of AOL’s market cap that was now proven to have been illusory.75 Corporate America assured itself that it had been right all along: there was little money to be made on the Internet, and the evaporation of the biggest Internet player of them all seemed proof positive.
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MANY OBSERVERS of the dot-com bubble have found it instructive to compare it to earlier bubbles like the tulip mania in seventeenth-century Holland or the South Sea Company’s collapse in eighteenth-century London. But it’s the example of the railroads in Britain in the 1840s that’s the most analagous.
Railways were cutting-edge in the 1840s. As with the dot-coms, there was a period of about three or four years when Britons experienced a mad rush to invest in business schemes surrounding this new technology. Eight hundred miles of new railways were floated for development in 1844. Two thousand eight hundred and twenty miles of new track were proposed in 1845. A further 3,350 miles were authorized in 1846. Because the British Parliament had to pass legislation approving each new railway scheme, the railway bills passed by Parliament provide an amusing analogy to the IPOs of the dot-com period. Forty-eight railway acts were passed by Parliament in 1844, and 120 in 1845. At the height of the mania, the capital required to fund these schemes came to £100 million, and by 1847, investment in the railways represented 6.7% of all national income.76
In his book Fire and Steam: A New History of the Railways in Britain, historian Christian Wolmar describes a frenzy that sounds eerily familiar:
As the supply of finance appeared almost endless, with more and more people eager to jump on the “get rich quick” bandwagon, unscrupulous fraudsters entered the fray, pushing schemes whose only aim was to deprive investors of their savings. For example, investors were being sought for schemes whose sole purpose was to pay the bills on previous projects drawn up by the same promoters. While such utterly fraudulent schemes were few, there were many more in which investors lost their money because the economics were as shaky as their prospectuses were woolly.
The inevitable bust came because, in Wolmar’s words, the bubble was ultimately based on “little more than optimism feeding on itself,” and it was pricked in part by the Bank of England raising interest rates.77 The aftermath of the bubble feels similar to the aftermath of the dot-com fiasco, albeit with a Victorian tinge:
A contemporary chronicler reckoned “no other panic was ever so fatal to the middle class. . . . There was scarcely an important town in England what [sic] beheld some wretched suicide. It reached every hearth, it saddened every heart in the metropolis. . . . Daughters delicately nurtured went out to seek their bread. Sons were recalled from academies. Households were separated; homes were desecrated by the emissaries of the law.”78
But what Wolmar’s account also points out is to what degree the bubble, and the railroads constructed because of it, ultimately created the infrastructure that would enable the high Industrial Revolution in Victorian Britain. The mileage of rail schemes authorized during the bubble years came to represent 90% of the total route mileage on Britain’s rail system. “The vast majority of the railways constructed in these years survive today as the backbone of the [UK rail] network,” Wolmar writes.79
The bubble made possible the British Empire at its economic height. People never stopped riding trains. Businesses never stopped shipping goods over them. The railways never went away, even after the investment mania did. The lesson of the dot-com bubble is similar. Of course, the dot-coms went away. Of course, AOL—for one brief shining moment, the embodiment of the Internet in American life—went away. But the Internet itself didn’t go away. And that’s why the railway example is so pertinent.
All of the money poured into technology companies in the first half decade of the Internet Era created an infrastructure and economic foundation that would allow the Internet to mature. And I mean that in a tangible, physical way. During the dot-com bubble, there was a similar, less publicized bubble in telecommunications companies. This estimated $2 trillion bubble ended in a similar bloodbath with the well-publicized bankruptcies of companies like WorldCom and Global Crossing.80 But before the bubble burst, between the years 1996 and 2001, telecom companies raised $1.6 trillion on Wall Street and floated $600 billion in bonds to crisscross the country in digital infrastructure (the banks collected more than $20 billion in fees for their troubles, far more than they had gotten from the dot-com IPOs).81 These 80.2 million miles of fiber optic cable represented fully 76% of the total base digital wiring installed in the United States up to that point in history.82 What did this mean, ultimately? Well, it meant that for the coming years, the literal infrastructure that wou
ld allow for the maturation of the Internet was in place. And because of a resulting glut of fiber (the telecoms had overextended themselves just as disastrously as the dot-coms, thus the bankruptcies) in the years after the dot-com bubble burst, there was a severe overcapacity in bandwidth for Internet usage that allowed the next wave of companies to deliver sophisticated new Internet services on the cheap. By 2004, the cost of bandwidth had fallen by more than 90%, despite Internet usage continuing to double every few years.83 As late as 2005, as much as 85% of broadband capacity in the United States was still going unused.84 That meant as soon as new “killer apps” were developed, apps like social media and streaming video, there was plenty of cheap capacity allowing them to roll out to the masses. The tracks, as it were, had already been laid.
And people didn’t suddenly stop surfing the web. Many have made the case that the dot-com era was doomed to failure simply because there were too many companies chasing what at the time were too few users. When the bubble burst in 2000, there were only around 400 million people online worldwide. Ten years later, there would be more than 2 billion (best estimates peg the current number of Internet users at 3.4 billion).85 In the year 2000, there were approximately 17 million websites. By 2010, there were an estimated 200 million (today, that number is over a billion).86 In 2000, a company like Yahoo could claim a $128 billion market cap because it was tallying 120 million unique visitors a month.87 A decade later, Yahoo would boast a global monthly audience of 600 million.88 Amazon might have flirted with insolvency after the bubble burst, but the company has seen its revenue increase every year of its existence, even in the worst years of the bubble’s aftermath. Amazon’s revenue in 2000 was $2.8 billion. Ten years later, it would be $34.2 billion.89
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