The dot -com bubble ( Dot-com bubble ) is an economic bubble that existed from about 1995 to 2001 . The climax occurred on March 10, 2000, when the NASDAQ index reached 5132.52 points (daily peak) during trading and fell more than one and a half times at closing.
The bubble was formed as a result of the take-off of shares of Internet companies (mainly American), as well as the emergence of a large number of new Internet companies and the reorientation of old companies to Internet business at the end of the 20th century . Shares of companies offering to use the Internet to generate income fabulously soared in value. Such high prices were justified by numerous commentators and economists who claimed that the “ new economy ” had come, in fact, these new business models turned out to be ineffective, and the funds spent mainly on advertising and large loans led to a wave of bankruptcies and a strong drop in the index NASDAQ, as well as the collapse in prices for server computers [1] [2] .
While the last part of this period was an alternation of sharp ups and downs, the Internet boom is usually attributed to the stable commercial growth of Internet companies associated with the advent of the World Wide Web era, which began with the first release of the Mosaic web browser in 1993 and continued throughout the 90s .
Content
Underlying Reasons
If we discard the superficial and obvious reasons mentioned above (comments on the “new economy”, investing investor funds in advertising and marketing instead of developing a business), we can identify the true cause of the collapse. It consists in the fact that the efforts of both not-so-pure businessmen and enthusiastic apologists for the new economy in the minds of investors and dotcom creators have replaced concepts: doing business via the Internet is only a tool for carrying out a business process, but not an independent business process able to generate income from invested capital. Nevertheless, using this tool it is possible to repeatedly increase the effectiveness of a “traditional” business or to realize a new business idea (impossible or ineffective without the Internet).
The first case is illustrated by the activities of various online stores (for example, Amazon.com ). Trade in goods through catalogs (or through telemarkets ) with postal delivery was a rather large and profitable segment of the business even before the advent of the Internet. The use of direct sales via the Internet with automation of ordering and payment processes, updating catalogs, and logistics has made it possible to increase both the speed of capital turnover and the reach of the audience.
An illustration of the second case could be an eBay online auction. Without the use of the Internet to private individuals, as well as small and medium-sized businesses, it is impossible and inappropriate to organize auctions for the sale of their goods or products (except for extremely expensive or exclusive goods) due to expenses incomparable with revenue, and in some cases due to the inability to attract at a buyers auction due to territorial remoteness.
As an example, which applies to both the first and second cases, we can use the Internet for stock trading. Prior to the widespread use of the Internet, the decision to conduct exchange operations was made “on the spot” by brokers or analysts of the respective companies, based on either customer’s instructions given in advance (specific to the price and type of securities or general regarding the purchase / sale strategy), or direct telephone consultations with by customer. The natural limitation of the available time for information exchange and the inability to simultaneously contact all customers led to a shift in the "center of gravity" in decision-making towards professional market participants.
The ability to remotely view securities quotes, as well as remotely instruct exchange agents to complete transactions, has led to the emergence of a new approach to traditional business: in this case, the client is engaged in market analysis, chooses a strategy and actually carries out operations, leaving professional participants only documentary questions transactions and financial and accounting reporting. This approach, on the one hand, increased the efficiency of traditional exchange trading (from the point of view of customers), on the other hand, it is impossible without the existence of the Internet. At the same time, the old principle of exchange trading (when a professional market participant decides) was and remains effective and attractive, for example, for use by investment or pension funds, which do not have a corresponding unit in their composition and transfer asset management to a third party.
Event
The dotcom bubble burst on March 10, 2000 , when the NASDAQ Composite index of high-tech companies collapsed. Before that, he reached his maximum at 5048.62 (with a daily peak at 5132.52), thereby doubling the indicators a year ago. Most dotcom companies burst along with the American stock exchange. As a result of these events, hundreds of Internet companies went bankrupt, were liquidated or sold. Several company executives were convicted of fraud and embezzlement of shareholder money. Most of the business models of the new Internet-oriented companies were ineffective, and their funds were mainly spent on marketing campaigns and advertising on television and in the press.
After these events, for several years, the word " dotcom " began to be used as a designation of some immature, ill-conceived or ineffective business concept.
The term dotcom for such companies comes from the commercial top-level domain - .com (literally - English dot com "dot com").
Consequences
The collapse of the dotcoms was the loss of confidence in the securities of high-tech firms related to the provision of services via the Internet. This was caused on the one hand by a significant reappraisal of the so-called. post-industrial technologies, which in practice did not live up to the expectations attributed to them, on the other hand, there were uncontrolled speculations on these expectations, which greatly increased the negative effect of the drop in confidence. In fact, a whole service sector ceased to exist, the demand and value of which turned out to be bloated. This was accompanied by the ruin of thousands of firms and companies of various levels, mostly newly formed.
Some companies in the communications sector were also unable to bear the financial burden and were forced to file for bankruptcy. One of the largest players, WorldCom , has been convicted of annual illegal banking operations to increase profits. [2] WorldCom's market value crashed when this information became available to the general public, causing the third largest bankruptcy in US history. Other examples include NorthPoint Communications , Global Crossing , JDS Uniphase , XO Communications, and Covad Communications . Companies like Nortel , Cisco, and Corning were at a disadvantage as they relied on infrastructure that had never been created, which caused a significant drop in Corning's equity.
Many dotcoms ran out of funds and were bought or liquidated; domain names were purchased at residual prices by competitors or investors. Some companies and their boards were accused of fraud for the misuse of investor funds, and the U.S. Securities and Exchange Commission fined the largest investment companies (e.g. Citigroup and Merrill Lynch ) for misleading investors. Many related industries, such as advertising and logistics, have reduced their activities due to falling demand for services. Many large dotcom companies, such as Amazon.com or eBay , have survived and seem capable of long-term survival; others, such as Google , have become industry leaders.
The collapse of the stock exchange in 2000-2002 caused a $ 5 trillion drop in market value for companies between March 2000 and October 2002. The 9/11 attack , which destroyed the twin towers of the World Trade Center and claimed the lives of more than 700 Cantor-Fitzgerald employees, the end result slowed down the decline in the trading rate on the stock exchange due to the introduction of mechanisms for direct control over the processes of speculation in securities related to "anti-terrorist" activities.
It is believed that only 50% of dotcom companies survived by 2004 [3] , while it is not indicated in what form they “survived” and due to what type of activity. The allegations that the loss of assets on the stock exchange is not directly related to the closure of firms are false because they turn everything upside down. For some time, these companies flourished only through speculative operations with securities, not even representing a small share of services and not getting the corresponding profit that was expected from them by investors. The incompetence in economic matters of the investors themselves was caused by the intensive processing of public opinion, which convinced the emergence of a new “after” industrial era, which supposedly abolished any requirements for the availability of real production resources for economic activity. Thus, the information superstructure was passed off as the entire economic mechanism.
Many temporarily laid-off technology experts, such as programmers, are faced with a saturated labor market. In the United States, international outsourcing and the increased number of skilled foreign workers (participating in the US visa program H-1B) the day before aggravated the situation. University programs for training specialists in the computer field have faced a decrease in the number of new students. Jokes about programmers returning to study as an accountant or lawyer were popular.
One of the reasons for the dot-com crash is an incorrect assessment of the assets and prospects of Internet companies, as a result of which overvalued estimates of the value of companies were provided to investors. Such analytical activities of investment houses attracted the attention of financial regulators. Laws were passed on the division of commissions ( Commission sharing agreement , client comission arrangements ), according to which the guaranteed part of the brokerage fees received by investment houses goes to payments to analysts. As a result, investors have the opportunity to receive independent analytics , which provides a comprehensive view of the investment attractiveness of Internet companies and makes it possible to avoid the inflation of new economic bubbles in the future.
See also
- Dotcom