The Dotcom bubble, also known as the ‘Internet bubble’ or the ‘Information technology bubble’ was a speculative bubble of stock prices of mainly American Internet companies during the time from 1995 until 2000 when many investors believed that a ‘new era’ was upon them. In only two years, the Internet sector grew over 1000% of its public equity and equalled nearly 6% of the market capitalization of the United States and over 20% of all public traded equity volume in the US. It had its peak on March 10, 2000 with a NASDAQ score of 5,048.62. This period was characterized by lots of establishments of companies in the Internet sector. They were called ‘Dotcom Companies’ because of the ‘.com’ in the end of an URL that comes from the word ‘commercial’.
The bubble burst during the years 2000 until 2002 when the NASDAQ lost nearly 80% of its value, many companies like Pets.com failed completely and over $7 trillion in market value were destroyed.
With this paper, the author tries to explain the rise and fall of Internet stock prices during that period. For this purpose, the general causes and characteristics of financial bubbles get described before the application to the Dotcom bubble follows. Additionally, some company examples and survivors and losers of the bubble like pets.com, Webvan or Ebay get introduced. Because the bubble mainly took place in the United States, the author will focus on American company examples and the American stock exchange.
Table of Contents
1 Introduction
2 Causes and Characteristics of Financial Bubbles
3 The Dotcom Bubble
3.1 Rise and Growth of the Bubble
3.2 Burst of the Bubble
4 Company Examples
4.1 Losers
4.2 Survivors
5 Conclusion and Outlook
Objectives and Topics
The primary objective of this seminar paper is to analyze the rise and subsequent collapse of Internet-based stock prices during the Dotcom bubble era between 1995 and 2002. By examining the underlying financial mechanics and behavioral economic factors that led to this speculative frenzy, the study aims to identify why certain business models failed while others managed to survive and thrive.
- The theoretical foundations and characteristics of speculative financial bubbles.
- The timeline and economic drivers behind the Dotcom bubble (1995–2002).
- Case studies of failed companies ("losers") like Pets.com, Webvan, Kozmo.com, and Etoys.com.
- Analysis of successful survivors such as Amazon.com, eBay, and Priceline.com.
- Lessons learned and a contemporary outlook on modern digital economy trends.
Excerpt from the Book
3 The Dotcom Bubble
Financial bubbles can be divided in three time periods: The period prior to the main bubble (‘pre-bubble’), the period where the bubble actually takes place (‘bubble’) and finally the period when the bubble bursts and the capital market turns down (‘bubble-burst’). The pre-bubble period of the Dotcom bubble went from 1995 to 1997, the actual bubble took place from 1998 until March 2000 and the bubble-burst from March 2000 until the low-point of the NASDAQ score in October 2002 (see figure 1). After that period, the stock exchanges slowly recovered.
Since 1995, more and more American start-up Internet companies issued shares and were therefore listed in the American stock exchange NASDAQ. People had enormous expectations about the Internet technology itself as it would change the whole corporate landscape and the entire way business was done. The general opinion was that Internet companies had fantastic opportunities.
The American economist Robert J. Shiller describes the general mood that was related to the uprising Internet era in the following way: “Internet technology is unusual in that it is a source of entertainment and preoccupation for us all. In this sense, it is comparable in importance to the personal computer or, before that, the television. In fact, the impression it conveys of a changed future is even more vivid than that produced when televisions or personal computers entered the home. Using the Internet gives people a sense of mastery of the world. They can electronically roam the world and accomplish tasks that would have been impossible before. They can even put up a website and become a factor in the world economy themselves in previously unimaginable ways. [...] Because of the vivid and immediate personal impression the Internet makes, people find it plausible to assume that it also has great economic importance.”
Summary of Chapters
1 Introduction: Provides an overview of the Dotcom bubble, including its definition and the dramatic market shifts that occurred between 1995 and 2002.
2 Causes and Characteristics of Financial Bubbles: Explores the economic definitions of bubbles, highlighting psychological phenomena like herd behavior and irrational exuberance.
3 The Dotcom Bubble: Documents the chronological progression from the rise of Internet startups to the market crash, emphasizing the role of venture capital and interest rate changes.
4 Company Examples: Compares business models of failed companies like Pets.com and Webvan against successful survivors like Amazon and eBay.
5 Conclusion and Outlook: Synthesizes the core lessons learned from the bubble and discusses whether current market trends echo the risks observed in the late 1990s.
Keywords
Dotcom bubble, NASDAQ, financial bubble, speculation, irrational exuberance, herd behavior, Internet companies, stock market, IPO, Pets.com, Amazon, Webvan, eBay, Priceline, business models
Frequently Asked Questions
What is the central focus of this paper?
This paper examines the rise and fall of Internet-based company stocks during the period from 1995 to 2002, commonly known as the Dotcom bubble.
What are the primary themes discussed?
Key themes include the psychological and structural drivers of financial bubbles, the evolution of investor expectations regarding Internet technology, and the analysis of business model sustainability.
What is the main research question of the work?
The paper seeks to explain the factors contributing to the bubble's rise and burst and, ultimately, asks whether the lessons from the past are being applied to prevent similar market mistakes in the future.
Which scientific methodology is applied?
The author uses a qualitative research approach, conducting a literature review on financial bubble theory and performing comparative case study analysis of various Internet companies.
What is covered in the main body of the paper?
The main body documents the timeline of the bubble, explains the mechanics of how bubbles form and burst, and provides specific company profiles categorized by their success or failure.
Which keywords best describe this study?
The study is best characterized by terms such as "Dotcom bubble," "irrational exuberance," "NASDAQ," "herd behavior," and "sustainable business models."
Why did companies like Pets.com fail?
Pets.com failed because its business model was unsustainable, relying on high-cost marketing and underpriced shipping while failing to provide a unique value proposition that justified its operational losses.
How did Amazon survive the Dotcom crash?
Amazon survived by restructuring its organization, redesigning its business model to include partnerships with other companies, and shifting its focus toward long-term profitability and product variety rather than just brand awareness.
What is the "Greater Fool Theory" mentioned in the text?
It is the idea that investors buy overvalued assets with the hope that they can sell them to a "greater fool" at an even higher price, eventually leading to a collapse when no more buyers remain.
What does the author conclude about the current state of the market?
The author notes that while there are new "digital revolutions," the question is not whether we are in a bubble, but rather how long the current growth will continue before the next inevitable market correction.
- Citar trabajo
- Christian Wollscheid (Autor), 2012, Rise and Burst of the Dotcom Bubble, Múnich, GRIN Verlag, https://www.grin.com/document/197166
