History Lesson: Dot-Com Meltdown

We don’t have cable TV at home, so I don’t watch much TV. My mother-in-law occasionally tapes educational shows from PBS, and sends them up to us. In 2000, when my son was 2, she filled a whole tape with “Between the Lions” (about a family of lions that lives in a library… get it? Between the lions?). While this is supposed to be public television, every show began and end with a classic soft-sell advertisement for eToys. A banjo strumming, a maternal voice humming and “oohing” a soothing tune, and ad copy that tries to connect a show about reading to a website that sells toys. We watched those tapes over and over again, usually pausing it in the middle of the eToys theme music. Sometimes if Peter’s attention had wandered, the sound of the eToys theme music caused him to come running from the next room, crying because he didn’t want me to shut off the tape.

One day, I mentioned offhand that eToys had gone under.

My wife was shocked… the ads were such a constant presence in our house, and the content of the ads somehow suggested that eToys had been around when you were a kid, and will be there when you are a grandparent.

eToys was a dot-com.

Wikipedia offers a good overview of the dot-com phenomenon. Basically, a “dot-com” is one of the countless internet-based companies that popped up in the late 1990s and started dying in 2000. They shared pretty much the same business model.

Quick economic primer.

Mom and pop companies are owned by individuals (or families). They put their own money into their companies, they live off a share of the profits, and they put the rest back into the company.

If a company has global ambitions, then it needs to invest a huge bundle of cash. It raises the money by offering shares of stock — anyone who wants to can buy a tiny slice of the company, called a share. If the company makes money, the price of that share goes up. If the company loses money, the price of the share goes down. The stock market crash of 1929 happened because too many companies were investing paper money — that is, they were taking out loans that they intended to pay back from the profits they would make by investing the money they had borrowed. But the banks themselves had loaned out huge sums to companies that needed to take out more loans to pay them back. A catastrophic stock market crash happened when banks started forcing those companies to pay back their loans. Nobody — not even the banks — had enough money to pay their bills.

Something like that happened to the dot-coms.

In ye olde days, in order to make money, you had to make something. Yahoo! didn’t really make anything, in the traditional sense — but its stock was shooting up.

Remember the Super Bowl ads of 2000?  They were probably the most visible sign of e-mania.  Investors spent lavishly in the hopes of getting attention. They gave away free e-mail and file storage space. One company gave away thousands of dollars to people who named their kid after a website.  For the whole year 2000, some idiot changed his name to “dotcomguy,” and tried to live entirely off the Internet.  

Investors poured money into the hands of multiply-pierced, scooter-riding visionaries who spent obscene amounts of money on lavish rooftop parties. The founder of Jupiter Communications (a multimillion dollar consulting company that strokes corporate egos by encouraging the adaptation of expensive smoke-and-mirrors) acted like some kind of Hollywood celebrity, while marketers squandered money building brand awareness that outlasts the brands. 

The business model of countless dot-coms was something like this (as satirized via “South Park”):

Step 1. Give away lots of free stuff in order to win a loyal base of followers.

Step 2 ?

Step 3. Profit.

A few companies managed to figure out step 2, but with millions of dollars in venture capital (money supplied by deep-pocketed investors in return for a share of the profits), egg-headed whiz kids made flashy stuff to impress investors, and did their best to keep the investors from realizing that they (the investors) were pretty much the company’s only source of income.

Meanwhile, workers on the inside watched money fly out the door.  (“Six-figure salaries seemed pretty commonplace, and the 23-year-old green-hairs I’d bum cigarettes off of had that slightly fattened look of children who have always known they were put on earth to receive stock options and buy Lexuses.” — Matt Welch.) 

All this money floating around meant that there was a lot of good reading to be found on the Internet.  Websites like space.com hired science fiction geeks to write semi-scholarly articles on The Force and weekly reviews of Star Trek: Voyager. When space.com turned out, like so many other content sites, to be a big money-loser, all the science fiction stuff was moved off of that site; it’s now archived on starport.com. Note that no new article has been posted there since January, 2001. I found the science-fiction articles there pleasant to read, and I enjoyed them, but to me, going there was hardly even worth the annoyance at having to look at the blinking banner ads. (God bless WebWasher!) I never spent a dime at space.com, or any of its advertisers. I, like so many Internet visitors, was a freeloader.

Soon, investors got tired of watching their money being pored into over-designed and over-programmed websites (like boo.com).  The high-tech stock market bubble burst in March of 2000.  

While dot-coms that deserved death fell quickly, others lingered.

The dot-com bubble was in large part due to a bunch of callow young men with dollar signs for eyeballs, whose greed and naivete effectively created and destroyed an entire industry in the span of less than five years. — Washington Monthly, “Bubble Boy“

The dot-bomb left in its wake a lot of unemployed tech workers, lots of barely-used office equipment (including computers), and lots of empty office buildings.  While it’s hard to cry for the Silicon Valley wunderkinder who can’t make the payments on their million-dollar mansions, the effects of the dot-com debacle have rippled through society.  The “content” websites — the ones that used to hire artists and writers, on the theory that banner advertisements would generate enough cash to pay the bills — withered quickly.

I confess that I worked briefly for a dot-com, writing short articles on health and medical topics. I was rather relieved to hear the company folded shortly after I told them just how much I thought it would cost to get their content into shape. (I also wouldn’t sign a contract that didn’t contain a clause absolving myself and my students from any factual errors in the drafts we were given — these articles were describing the risks and benefits of various surgical procedures. Lives were potentially on the line, and that level of research was above and beyond the kind of work we had originally discussed.)

Salon, which in its heyday put out more original articles in a day than most magazines put out in a week, dropped to about 30 employees, from 200 at its peak (among them habitual plagiarist Ruth Shalit, who wrote the above article on brand awareness).  Salon now relies heavily on the same wire stories that you can get at dozens of other places around the net, and at one point, in order to cater to its remaining audience, tried to work the word “breasts” into its headlines as often as possible.  In June of 2001, The Industry Standard (the guys who hosted those legendary rooftop parties) reported about the demise of cult web columns Suck and Feed. A few months later, The Industry Standard itself died — like so many web companies that had been glowingly profiled in its pages. (I’m linking to archived copies of Standard articles.)

One (slightly bitter?) technology journalist laments the sleazy deals that the online magazines made with the very companies they were writing about: “They dated dotcom people, their editors were willfully blind to the worst, most insane IPO ponzi schemes. No one wanted a bad news story” (Steve Gilliard). He argues that tech magazines wouldn’t run negative reviews about any products, because the editors were worried about 1) losing ad money or 2) getting sued for libel.

Dead companies like Kozmo.com (which hired fleets of scooter-riding Gen-Xers to deliver videos and Snickers bars to lazy urban hipsters in under an hour), eToys, and WebVan (an online grocer… yes, that’s right… an online grocer) spent hundreds of millions of dollars on advertising, on high-tech automated billing and warehousing facilities, and — of course lawyers. While a few years earlier, every company tacked “.com” to the end of their name, by late 2001, companies were changing their names back to avoid the “.com” stigma.

Since the early dot-coms rarely brought in any money at all, some of them measured their success by counting “eyeballs” — that is, estimating the number of people who were looking at their web pages. I’ve read enough “I used to work at a dot-com” confessions that it’s pretty clear to me that while the employees of company A sat around waiting to figure out what to do for “Step 2,” they spent a lot of time fooling around with the free online gizmos and services offered by companies B, C, D, and E. Meanwhile, everyone at companies B, C, D, and E was doing the same thing. If one company tried to charge for a service, the others would offer it for free, just to gain “market share” and “brand loyalty”.

Would-be customers were apparently too busy using Napster to steal (er, that is… “swap”) music and getting all sorts of stuff for free (while the ride lasted) to spend their money online.

Perhaps the real revolution happened long before the dot-com era, in the infancy of the Internet, when the geeks and hackers who worked at government and university research facilities in the 60s came together after hours to “hack” (fine-tune solutions to problems, just for the joy of it).  They created a special culture, with a set of ethics all their own.  They invented word processors and e-mail and conversation simulators and space battles and interactive story-games — not for profit, but for the hell of it. 

See:

• i was a 20-something dethroned dotcom ceo that went to work the counter at mcdonald’s