Internet Bubble History Research Paper
The Internet bubble started growing in 1993 with the public access to the World Wide Web. It was actively inflated by overpriced investments from 1994 to 2000 and busted in 2001. With the increased number of the Internet users, the dotcom business focused on getting a large share of the market. They raised the awareness of customers by free of charge services and products, massive promotional and sponsorship, anticipating big profits in the future. When their real value was discovered, NASDAQ index fell, brining big losses to investors. The situation was affected by the terrorist attack in 2001 with outsourcing leading to unemployment and monopoly court cases. However, if the United States government had controlled all the processes, the consequences might have been less harmful.
The idea of creating the World Wide Web is assigned to an employee of CERN (the European Organization for Nuclear Research), Tim Berners-Lee, who wanted to provide a possibility for all people to communicate all over the globe with a universal access to information. On 6 August, 1991, the World Wide Web became available to public as a short post on alt.hypertext newsgroup. At the very beginning, it was very boring and unattractive since it provided only with texts of documents and MSDOS interfaces. The gradual updates made the technology sector attractive and useful. Thus, CompuServe and AOL added colors and changed the layout, Ted Nelson’s Xanadu project developed hyperlinks, and Douglas Engelbart proposed the mouse. Furthermore, the Uniform Resource Locator (URL) initiated the web-sites development and since 1992, it was possible to download/upload images and video and make updates in real time (Bryant, 2011). In 1993, Mosaic was the first public browser that formed a basis for Microsoft Internet Explorer. On 30 April, 1993, CERN announced that everyone could use and develop the World Wide Web with no fee. It was a crucial decision for the internet development since by the end of 1994 there were a million copies of the browser. Netscape Corporation was founded to administrate the processes and establish standards.
In the period between 1994 and 2000, the Internet experienced a considerable growth, signaling the beginning of the “technology era”. The World Wide Web grew by 2300 percent. Businesspersons started developing new business directions in such spheres as e-commerce, mobile telecommunications, websites creation, on-line gambling activities, and on-line databases that could make them reach very soon. They set up dotcom companies and set them on IPO to attract finances. Wall Street Journal and Forbes actively encouraged the public to make “promising” investments in dotcom companies, ignoring basic financial and legal principles. Investors were very optimistic in their expectations for the short-term returns with a considerable profit (“2001 dot-com bubble: Its causes, effect, and lessons learnt”, 2012). Moreover, low interest rates in 1998 and 1999 encouraged the capitals of the dot-com start-ups. The year 1995 was remarkable due to a rapid growth of the Internet users who were considered as potential consumers. By 1998, the World Wide Web comprised 750,000 commercial sites. They focused on building and extending their customers’ databases due to a strong belief that the growing number of customers would multiply their profit. They developed a business model of the “network effect” aimed at building a market share at the cost of the sustained net loss. Thus, they offered their services and end products free of charge to raise their brand awareness that would be economically beneficial in the future. The internet companies hoped that the growing stock exchange rates would raise their company’s value for sale. The speculation only increased the gap between the real and market values, making stocks inflated. Hundreds of companies entered the American stock market every week, especially in the Silicon Valley. The dot-com. companies were associated with prosperity and industry development since they sponsored thousands of dollars in public events with food and entertainment and in conferences on the Internet and technology issues.
In the period between 1995 and 2000, the index of the stock exchange NASDAQ increased immensely from 1,000 to 5,000 (Dotcome Bubble, 2013). However, NASDAQ index dropped by 78%, falling from 5046.86 to 1114.11 from 11 March, 2000, to 9 October, 2002 (Beattie, 2013). On 10 March, 2000, it reached the highest point of 5,048.62 that was twice higher that the showing for the previous year. Then, the NASDAQ index had a slight decrease that was explained by corrections of the market analysts. The actual break-down happened after the case in the Federal Court “the United States versus Microsoft”. On 4 April, 2000, the day after the Microsoft was declared a monopoly, the NASDAQ index dropped from 4,283 to 3,649. It evidenced the sensitivity of the stock exchange market. On 20 March, 2000, the financial magazine Barron’s published the Article “Burning Up” that stated the clash of the Internet companies. In 2001, the bubble was busting very rapidly and by 2002 the losses were estimated in 5 trillions U.S. dollars (“All caps in defense of liberty is no vice”, 2012).
When the dot.com bubble finally busted, the investors lost their funds. The growth of the tech sector turned out to be false. As a result, stock markets made considerable corrections in the values of the internet companies that resulted in a hard financial blow.
It happened because it was revealed that the stocks of the Internet companies were overvalued by 40 and 50% (Smith, 2013). The researchers Goldfarb, Miller, and Kirsch said that the investors were obsessed with “the Get Big Fast” idea (Goldfarb, 2006). Moreover, the situation was aggregated by some external factors that slowed down the national economy. Thus, between 1999 and 2000 the United States Federal Reserve increased interest rates six times (“Open market operations”, 2013). Outscoring led to high unemployment among American programmers and computer developers. On 11 September, 2001, the terrorist attacks killed 658 employees of Cantor-Fitzrerald that controlled one quarter of daily transitions in the treasury security market. The New York Stock Exchange did not operate for four trading seasons. Moreover, the court revealed numerous unscrupulous dotcom business practices, including monopolies.
The situation might have been different if governmental financial and legal institutions had elaborated a well-balanced, economically and legally healthy approach to the internet practices and all its participants. Consequently, the United States might have businesses with realistic stock value, stock exchanges would not deal with the inflated companies, and Microsoft might not have imposed the monopoly. In addition, a group of scientists like Brent Goldfarb, David Kirsch, and David Miller (2006) considers that the companies had to focus on a smaller share of the market for more operational efficiency.
Microsoft was the most successful in the industry since it had a considerable legal advantage that lead to a monopoly in the software industry. They offered license agreements for MS-DOS (and Windows afterwards) to computer producers with the unfair condition that Microsoft should be paid for every sold machine regardless of its operating system. Moreover, they pre-installed Office in Windows enhancing the monopoly and obtaining billions of profit. Bill Gates became the richest man in the world (Ritholtz, 2011).
The most dramatic dot-com flop is the online grocer Webvan. Within 18 months, it earned 375 million U.S. dollars in an IPO, experiencing expansion to eight cities and totally planning to operate in 26. In 2000, the value of Webvan reached 1.2 billion U.S. dollars and in 2001 the company was closed making 2,000 people unemployed. The matter is that the grocery business was never able to involve the necessary number of customers to make its spending spree justified. Another considerable dot-com flop is Pets.com that raised 82,5 million U.S. dollars in an IPO in 2000 and operated only for nine months. This is an example that massive advertising campaigns and special offers covering shipping costs do not guarantee success in the online trade. The company was never able to be an actually good business model. Firstly, the customers had to wait for their purchases for weeks and, secondly, shipment expenses were unreasonably high for the company. Kosmo.com proved to perform quick service in delivering a wide range of products ranging from CDs to food. However, it had to admit that its delivery costs were too high to make the business efficient. Even without an IPO, Kosmo.com managed to attract 280 million U.S. dollars that did not prevent it from closure. There were some other severe lessons leant by such companies as Flooz.com, eToys.com, Boo.com, MVP.com, Go.com, and GovWorks.com (German, 2013).
To sum up, the internet bubble that busted more than 20 years ago was a precedent that showed how technology developments, unhealthy micro economy, and financial speculations can ruin the national economy. Modern tendencies in business must be thoroughly analyzed with the help of efficient financial tools. Moreover, the United States government should take a strong position in regulating all processes in the economy and legal field to protect businesses and investors from speculations, cheating, and losses. Thus, the internet practices and technological development must be encouraged, but all the processes need regular supervision.