The Technology Bubble of 2000

Contents

1. The five years of inflation
2. The feedback loop
3. The talk of a new economy
4. The year it burst
5. The two years after
6. What the archive shows survived
7. The fiber left in the ground
8. A short glossary

Brent O’Mara entered the industry during the technology bubble and the market uncertainty after September 11, and the bubble that was deflating as he arrived is the subject of this entry. A bubble, to an economist, is a sudden rise and a sudden collapse in asset prices without much change in the information about the assets themselves. Two economists who studied the episode, quoted by The Atlantic, found that a technology heavy index doubled between 1999 and 2000 without any plausible fundamental news to support it, then lost three quarters of its value between February 2000 and February 2002, again without substantial negative news.⁸ The same account dates the beginning to August 9, 1995, when a web browser company went public and watched its shares nearly triple in hours, though it had no profits.⁸

The five years of inflation

Between 1995 and 2000 the rise of the internet was, by one participant’s reckoning, the top story in the United States, and everything that happened on the web was immediately rebroadcast through the mass channels of big media.⁷ Prices followed the attention. Marketplace later observed that the most obvious sign the boom was unsustainable was a technology heavy index rising about 500 percent in five years, and that anyone in New York on Thanksgiving Day 1999 could also have looked up at a four story sock puppet balloon advertising an online pet supply store.⁴ That company raised large sums of venture capital, spent more on advertising than it ever took in, went public in February 2000, and collapsed nine months later.⁴

The feedback loop

Steven Johnson, who cofounded an early online magazine, told Frontline in January 2002 that speculative bubbles are examples of runaway positive feedback, the kind that makes a microphone howl when it picks up its own amplifier.⁷ A share price rose, which encouraged more buying, which produced more articles about the money being made, which brought in new buyers, which lifted the price again. Ordinary markets carry a built in brake, because a rising price eventually becomes too expensive for most buyers. Here, he argued, a rising price triggered more coverage and brought in still more buyers, so the brake was lost.⁷

Figure

How the loop fed itself

1. 01
   UseSearch engines and online auctions did things that were genuinely new and useful.
2. 02
   HypeMass media rebroadcast every web story through what he called a giant loudspeaker.
3. 03
   MoneyVenture capital followed the attention, then public money followed through a run of public offerings that lasted until the middle of 2000.
4. 04
   PriceHigher prices drew more coverage and more new buyers, so the usual brake of an expensive price was lost.

The talk of a new economy

The Frontline documentary that prompted those interviews told the story of the internet bubble through venture capitalists, analysts, bankers and journalists, and its website pressed five observers on what the rhetoric of a new economy had contributed to the boom and the bust.⁶ Johnson separated two versions. One held that a broad market index was headed straight to a round number and that what went up no longer came down, and he judged it as bogus and transitory as the share prices it was built on. The other, a slower information revolution that might take fifty years to unfold, he thought valid.⁷ The New York Times made a narrower point at the end of 2000: even the most traditional brokers and investment banks had set aside the idea that a share price should reflect profits, and at the peak a money losing online ticket seller was valued above the airlines that supplied its inventory.¹

The year it burst

Time closed the books on December 29, 2000, the last trading day of the year. The technology heavy index had fallen 39 percent, the worst year in its history, while the two broad market gauges finished 6 percent and 10 percent below their 1999 closes.³ A floor specialist quoted that day said the market had overpriced everything and nobody had the courage to say so.³ Five days earlier the Times had taken stock of the dot com universe: an index of internet blue chips down more than 72 percent since March, two online retailers that had been Wall Street darlings down more than 99 percent from their highs.¹

Figure

What the year 2000 took back

fall in a technology heavy index during 2000, its worst year on record

39 percent

fall in an index of internet shares from March to December 2000

72 percent

share of its value the technology heavy index lost from February 2000 to February 2002

three quarters

The two years after

The fall did not stop at the turn of the year. By late 2000 more than five trillion dollars in wealth had been erased, and the technology heavy index kept falling until February 2002.⁸ The Times editorial of December 2000 drew a distinction that held up: the worrying decline in solidly grounded technology companies came from a slowdown in profits, while the sharper plunge in trendy internet companies with no earnings was, in a sense, comforting to anyone who believed markets were rational, because many had lacked a sensible business plan.¹ The episode sits beside the others in this cluster, from the October 1987 break to the crisis that began in housing, as a case of prices running far ahead of the facts and then running back.

What the archive shows survived

In June 2002 David Kirsch, a professor at the University of Maryland, started a digital archive of the era so that the next generation of founders could avoid the old problems or at least make new mistakes. A closing venture capital partnership donated every business plan it had received from 1999 to 2002, and by 2008 the archive held millions of documents.² Kirsch and two colleagues found that 48 percent of dot com companies founded from 1996 onward were still operating in late 2004, more than four years after the March 2000 peak, where most people guessed that about 90 percent had failed.² Many survivors had ignored the prevailing Get Big Fast model in favor of what Kirsch called micro niches.²

Figure

What the archive holds

companies whose business plans one closing venture partnership donated

1,100

email messages, memos, slides and other documents in the collection

6.4 million

people who registered to read the business plans in its first five years

87,000

The fiber left in the ground

The boom also built things. Telecommunications companies spent billions of dollars in the early 2000s laying fiber optic cable under streets such as the one in California that Marketplace visited in 2026 with an engineer who had helped lay it.⁵ When the companies went bankrupt the cable stayed. The Federal Communications Commission estimated that by 2007 about two thirds of 45 million miles of it was still dark, and years later that fiber carried search engines, social media and streaming video.⁵ Johnson had anticipated the point, borrowing a line: almost nobody made money in the gold rush, but the gold rush made California.⁷ How individual investors behaved while all this unfolded is the subject of a separate entry.

A short glossary

Bubble. A sudden rise and sudden collapse in asset prices with little change in information about the assets.⁸

Day trading. Buying and selling shares within a day, which the web opened to a large influx of new buyers.¹⁷

Public offering. The sale of a company’s shares to the public for the first time, which during the boom typically produced a large first day jump.⁷

New economy. The claim that information technology had changed the rules of growth, in a strong version that collapsed with the bubble and a weaker, slower one.⁷

Dark fiber. Installed cable carrying no traffic, as most of the boom’s fiber was in 2007.⁵

Positive feedback. A loop in which an effect reinforces its own cause, the mechanism Johnson used to explain why rising prices kept rising.⁷