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November 24th, 2009
12:33 PM ET

The dot-com bubble: How to lose $5 trillion

Editor's Note: This article continues our series excerpted from AC360°'s contributor David Gewirtz's upcoming book, How To Save Jobs, which will be available in December. Over the next few months, we'll be excerpting the first section of the book, which answers the question, "How did we get here?".Last time, we looked at how India has been transforming itself into a world-class competitor This time, we start to look at the Internet and how some of the early irrational exuberance has led to some of today's job market problems. To learn more about the book, follow David on Twitter @DavidGewirtz.

David Gewirtz | BIO
AC360° Contributor
Editor-in-Chief, ZATZ Publishing

While many of the tasks we perform here in the 21st century are pretty much the same as those we performed before the turn of the century, many factors have changed the flavor, pace, and experience of 21st century employment.

Chief among the factors changing the employment world has been the Internet. Of course, as we all know, the Internet existed for quite some time before we began the 21st century, but its almost overwhelming ubiquity has been a phenomenon of the last few years.

You may remember the boom (and subsequent bust) of the early World Wide Web. From about 1995 though about 2001, the excitement and irrational exuberance of the dot-com bubble seized the imaginations of financiers wanting to make billions from entrepreneurs and entrepreneurs wanting to make millions from their sweat and smarts.

This was a time before Google and YouTube, a time when Amazon was just starting up and we were all wondering if anyone would be willing to use their credit cards online. It was a time when us techies found ourselves explaining to the less computer-savvy what ".com" meant, what those "www" things were, and trying to help our family and friends understand the difference between email and the Web. Twitter and Facebook were still years in the future.

For those who were dot-com entrepreneurs (and that included me), the Internet seemed to hold virtually unlimited promise. We were all convinced that this Web thing had the potential to change business and the world - and make us all tons of cash in the process.

We were half right.

Without a doubt, the Internet has changed the world. How it changed the nature and flavor of jobs is much of what this piece is all about. But while Internet investors and entrepreneurs were measuring what they called "eyeballs" (the number of people looking at Web pages), many forgot some basic business fundamentals like value, return on investment, and that tiny little thing called profit.

And so the dot-com bubble burst.

Excite.com was sold for $6.7 billion dollars in 1999. What's left of it is now a teeny-weeny part of the Ask.com property. Lycos and AltaVista were the big search engines of the day. Little bits of both are still around, but they're certainly not big-value properties. The list of failed dreams is virtually endless.

But out of the dot-com bubble came a rebirth. A few properties became absolute game changers. These were the Google, Amazon, eBay, YouTube, Facebook, Wikipedia, and Twitters of the world. These Web sites became more than just Web sites or Internet "properties" - they became essential resources for just about everyone.

Virtually no one calls a company to order a brochure anymore. Now we all just do a search and visit the Web site. Many people now make their entire living selling on eBay or Amazon. These two companies provide virtual shopping hubs so if you happen to want an old, out-of-print, original edition copy of The Flexible Enterprise (a book I wrote back in 1996), or a fender to a 1956 Buick Roadmaster, or, for that matter, an original 1954 Fender Stratocaster owned by Hank Williams, Jr., you can find one online.

So why did the dot-com bubble burst?

Today, there's one Amazon, one company that sells virtually anything you want online. During the dot-com bubble, there were thousands of companies that wanted to be Amazon.

Today, there's one Google, one company that provides deep search access to anything you want on the Internet. During the dot-com bubble, there were thousands of companies that wanted to be search providers and portals.

Today, there's one eBay, one company that provides online auction services for millions of people worldwide. During the dot-com bubble, virtually every Web site wanted to have an auctions section.

Of course, there are still other e-commerce sites, search engines, and auction sites. They just don't really matter much to anyone. These three sites built a level of critical mass and brand awareness that proved to be a barrier of entry to their competitors.

And then, there was the rise of user-generated content. Instead of Web site operators hiring writers to do all their writing and creating all their content, so-called "Web 2.0" operators created sites as frameworks for their users to create content.

Facebook, for example, generates very little of its own content. Instead, you, me, and a few million of our "friends" create our own profiles. YouTube doesn't create its own videos. Instead, everyone uploads videos of their kittens, Metal versions of The Munsters theme song, and movies of firecrackers exploding out some kid's, well, you've seen it...admit it.

Although there were a few huge winners, the dot-com bubble burst because of unrealistic expectations and impractical business models. I was there. I remember showing an investor how I could build a nice, million dollar online magazine business. In response, he told me that he'd invest $5 million - if I promised he'd get back $5 billion within 18 months.

Many Internet entrepreneurs would promise anything they were asked, so long as they got their funding. I just couldn't do it. I couldn't bring myself to promise some banker that I could make him billions. It wasn't that I was more high-minded than the other guys. It's just that after studying what makes companies work for more than two decades, I knew these valuations weren't sustainable.

I figured that if I took their money and knowingly made false promises, somehow it'd come back and bite me. It just seemed like a bad idea.

Instead of taking outside capital, my company continued to run along nicely, fueled solely by our own sales. We always made just a bit more than we spent, and managed our costs so that we were always funding ourselves. That's why my company, ZATZ Publishing, is still around and many of those dot-com companies aren't.

Many entrepreneurs of that era would sign "term sheets" with investors, venture capitalists mostly, and start their businesses. They'd get some money to operate, but they'd always spend far more money than they made until they got so many visitors to their site that they could sell the business for billions.

Some lucky founders managed to cash out, and it was the acquiring company that bit the big one. Excite.com is a good example. Excite.com was bought for $6.7 billion dollars on January 19, 1999 by @Home Networks, a company owned by cable giants TCI, Comcast, and Cox Communications. On October 31, 2001, @Home filed for bankruptcy and over the next year, 1,350 employees lost their jobs.

But other dot-coms simply died because their investors wouldn't give them any more money to lose. Pets.com was a classic example. This company began operations in February of 1999 and closed shop in November, 2000. After buying a $1.2 million Super Bowl ad and burning through $300 million dollars in investment capital, the company closed. Once the dot-com bubble started to deflate, no one was willing to invest good money after bad in a company that lost money on every order. About 320 people lost their jobs.

According to the Los Angeles Times, when the dot-com bubble burst, it wiped out $5 trillion dollars in market value for tech companies. More than half of the Internet companies created since 1995 were gone by 2004 - and hundreds of thousands of skilled technology workers were out of jobs.

But before all these people were fired, even more needed to be hired. And that, in a bizarre twist of fate, brings us to outsourcing...

Follow David on Twitter at http://www.Twitter.com/DavidGewirtz.

Editor's Note: This article continues our series excerpting AC360 contributor David Gewirtz's upcoming book, How To Save Jobs, which will be available in December. Over the next few months, we'll be excerpting the first section of the book, which answers the question, "How did we get here?". Last time, we looked at our changing relationship with work This time, we'll begin our look at how changes China and India will be impacting our workforce for years to come. To learn more about the book, you should follow David on Twitter @DavidGewirtz.


Filed under: David Gewirtz • Technology
soundoff (3 Responses)
  1. Tim Gibson

    And does not a large part of this outsourcing include workers from other nations and not here at home.

    November 24, 2009 at 1:01 pm |

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