Economics and Business


What was the dot-com bubble?

The dot-com bubble was a phenomenon of the late 1990s, when there was unguarded optimism for Internet-based businesses. According to the Oxford English Dictionary, a “bubble” has long been defined as “anything fragile, unsubstantial, empty, or worthless”; since the seventeenth century, the word has been applied to “delusive commercial or financial schemes.” “Dot-com” refers to a commercial Internet venture, which most often carries the “.com” suffix in its URL, or Internet address.

The dot-com bubble inflated quickly. The graphical user interface (GUI) of the World Wide Web, with point-and-click hyperlinks, was integrated into the previously academic-oriented Internet in the early 1990s, making it more user-friendly for the average person. Public use of the Internet expanded rapidly. Existing businesses realized they needed a presence on the Internet for information or marketing purposes, if not for commerce. The promise of conducting business online, where costs were (wrongly) judged to be low, spurred entrepreneurs. New businesses began popping up to take advantage of the commercial, or e-commerce possibilities, of the “net”; these were the start-ups. They often had no real-world, or bricks-and-mortar, correlation; they strived to make money by reaching consumers only over the Internet. Among the start-ups of the dot-com bubble were Amazon, eBay, eToys, WebMD, HotJobs, and Monster.

Startups were known by several characteristics: Because of investor optimism about e-commerce, startups had quick access to venture capital funds; their managers were usually young, risk-taking Gen-Xers (some of whom were unsalaried workers who signed on for the promise of big earnings through stock options); they spent lavishly on their office spaces and on employee perks; they conducted expensive advertising and marketing campaigns; and, when taken public on the stock market (in an IPO, or initial public offering), the original owners and investors were known to make huge amounts of money, at least on paper. Once the dot-coms were on the stock market (the technology-heavy NASDAQ was home to many), individual investors became enchanted with them, artificially inflating their stock prices, even when many companies had yet to earn a dime. The price-to-earnings ratio (or PE), a measure of performance used by investors, became virtually meaningless when applied to the dot-coms.

The height of the dot-com bubble was the (January) 2000 Super Bowl, when almost 20 dot-com companies paid more than $2 million each for prime advertising spots. On March 10, 2000, the NASDAQ index of leading technology peaked at 5048.62: a year earlier the index was less than half that, right around 2500; and a year later it hovered around 2000, or about 40 percent of its peak. (In spring 2005 the NASDAQ composite index was below 2000.) Some called the March 2000 burst “cataclysmic,” but other analysts and investors saw the end of the dot-com bubble as a necessary correction, or thinning, after which earnest players could get on with building Internet-based businesses that would be successful in the long run. Whatever the view, the dot-com bubble was the biggest market bubble ever seen, and many investors lost big.


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