The World Wide Web Bubble - Research Paper Example

? The World Wide Web bubble of the of the Table of Contents Introduction: The World Wide Web bubble 3 Growth of the bubble period 3 Soaring Stocks 4 Free Spending in this era 4 The bubble burst situation 5 Synopsis 6 Several Drawbacks in Decision Making 6 Conclusion 7 References 9 Introduction: The World Wide Web bubble The dot com bubble also known as information technology bubble or world wide web bubble is considered as one of the most speculative bubbles in between the time period of 1997 to 2000 (where the highest point was on March 10, 2000 because of NASDAQ’s peak value at 5408.60) when the stock markets in most of the industrialized nations witnessed their equity value rising rapidly because of the growth or expansion in the internet sector and other related fields (University of Texas Inequality Project, 2004; Business and Finance Digest, n. d.). While the next part was boom & bust cycle, the internet boom is sometimes also used for referring to steady commercial growth, which took place in the Internet sector with the advent of the World Wide Web by the release of Mosaic web browser for the first time in the year 1993. The steady growth in the internet sector continued throughout the 1990’s. This period has been remarkable by the founding of new Internet based companies also known as the ‘dot-coms’. These companies increased their stock prices rapidly by adding an ‘e’ prefix or ‘.com’ in the end, which is also known as the ‘prefix investing’ (Techdirt, 2003). A mix of the speedily increasing stock prices and the market confidence that the companies would be turning into future profits along with the broadly accessible venture capital resulted in the creation of such an environment where many investors were agreeable to overlook the traditional metrics like the price earnings ratio in support of their confidence in the technological advancements. The fall down of the bubble occurred within the year 2000 to 2001. Various companies like Pets.com, declined completely. Other companies had a loss of a huge portion of market capitalization, but were able to sustain and achieve profit e.g., Cisco, whose stock prices declined by almost 86%. Some companies recovered afterwards and surpassed the dot-com bubble peaks, such as Amazon.com. Its stock price went down from 107 dollars to 7 dollars per share, but it exceeded 200 dollars after a decade. Growth of the bubble period The venture capitalists found record setting growth in the internet sector as the dot com companies were experiencing meteoric rise in the stock prices and as a result, moving faster with reduced caution than usual. These companies chose to mitigate the risk by the start up of many contenders and left it up to the market to decide that which would turn out to be successful. The low rate of interest within the period of 1998-99 has helped in increasing the total startup capital amount. Some of these dot com companies had their business model built in such manner which relied mostly on harnessing their network effects by means of conducting operations at sustainable net loss for the purpose of building the market share. These companies provided their services or their end products to the customers without charging any money for them. They did this with expectation of building enough brand awareness that would help them to charge profitable rates to these customers in future. Soaring Stocks In the financial market, the stock market bubble means a self perpetuating increase or downfall in the share prices of the stocks of any industry. The bubble occurs in the financial market when the speculators find that there is rapid increase in the stock value and they plan to buy the stock with the perception that it would rise in future as well rather than because of the fact that these shares are undervalued. Because of this fact many companies were becoming overvalued (grossly). It is due to this reason that when bubble bursts and the share prices come down drastically, many companies cannot survive and are forced to get out of the business. Free Spending in this era According to the dot-com theory, the survival of any internet company depended on the expansion of its customer’s base in a rapid manner, even if the process resulted in huge losses for the companies. The companies like Amazon.com and Google have not seen profit in first few years of their operations. Amazon was spending huge amount on building and expanding its customer base in order to make the people feel their existence. On the other hand, Google was spending huge amount of money on the creation of powerful machine capacity for serving the expanding search engines. When the boom was at its peak, it was possible for any of the dot-com companies to make initial public offerings of the stock and thereby raise money in spite of the fact that it has never earned profit and also revenue (in some cases). Several campaigns like the public awareness campaigns helped these dot-com companies in expanding the customer bases. These campaigns included various print ads, television ads, promotional activities targeting various professional sporting events. Super Bowl XXXIV has featured 17 dot-com companies where each has paid over $2 million for only 30 second spot. Contrasting this with the present situation, in the year January 2001 only three dot-com companies have bought the advertising spots during the Super Bowl XXXV. The mentality of ‘growth over profits’ in the ear of new economy has resulted in the companies spending huge amount in their internal spending, which included expansion and elaboration of the business facilities and preparing various luxury vacations for the employees. Those employees and executives who were usually paid by means of stock options rather than cash became millionaires instantly because of the initial public offerings made by the companies and the investment on the stocks of the dot com companies increased more rapidly. Cities all throughout the United States were busy in creating network enabled work space for attracting the internet entrepreneurs. The communication providers felt that in future the dot companies would require unique broadband access and based on this thinking they went into high debt for improving their network by means of fiber-optic cables and various high-speed equipments. Several companies like Nortel were damaged because of this over extension of network and failed to recover from this situation. Nortel filed for bankruptcy in the year 2009. Other companies like Cisco, which had no production facilities and used to buy from other manufacturers, did well and survived in this situation by selling their products at cheap rate. In the competition of becoming technology hub, many states and cities started using their tax money for funding the technology conference centers in order to enable advanced infrastructure. This helped in the creation of favorable tax and business laws, encouraging the development of the dot-com industry in their locality. Thus, this era was full of technological developments performed by all the nations in order to enhance the operation of dot-com companies in their market. The bubble burst situation Over the year 1999 and early 2000, United States Federal Reserves increased the interest rate by almost six times (Board of Governors of the Federal Reserve System, 2013). This resulted in the gradual slow down of the economy. The dot-com bubble burst took place on March 10th 2000, when NASDAQ composite has peaked at 5048.62, almost double the value it had a year ago (Trading Charts, 2013). The actual reversal took place on the disclosure of the conclusion of the United States Vs Microsoft Case in the federal court (Justice Government, 1999a). The conclusion of the law declared Microsoft as a monopoly on April 3 (Justice Government, 1999b). This resulted in the decline of the value of NASDAQ index on the next day. On 20th March 2000 NASDAQ lost its value by 10 percent from the peak value. There were 371 publicly traded American companies, which collectively valued $1.3 million, almost 8 percent of the entire stock market of United States. In the year 2001, the bubble deflated at high speed and most of the dot-com companies ceased their business as they were running out of cash (Barrons, 2013). These dot-com companies were also called dot-bombs by the investors (The Economist, 2013). The companies which were badly affected by the dot-com bubble are: 1) Boo.com has spent almost $ 188 million in six months, in order to develop a worldwide online fashion store. Because of this dot-com bubble, the company went into bankruptcy state in May 2000 (Flat World Business, 2013). 2) Startups.com, which ultimately went out of businesses in the year 2002. 3) EDIG: It is a long term unprofitable company founded in the year 1988. The company was previously named as Norris Communication. The company had to incur huge losses in this dot-com bubble period. 4) Freeinternet.com: This Company filed for bankruptcy in the year 2000, just after the cancellation of its Initial Public Offering. It ranked as the fifth largest USP with almost 3.2 million users. In the year 1999 it lost $ 19 million followed by the filing of bankruptcy in the year 2000. 5) Hotmail: The founder of the company Sabeer Bhatia had to face tough situations and finally he sold the company to Microsoft at $ 400 million. At that pint of time hotmail had approximately 9 million users. 6) Kozmo.Com: There were other companies as well, which got affected badly because of the dot-com bubble or World Wide Web bubble. Synopsis The internet was developed by the United States military; who have vastly underestimated that exactly how much people would be eager to be online. From the commercial perspective, the internet was catching on and creating and expanding its operations with almost 18 million users. The rise in this usage involved international market. The speculators could hardly control the excitement of the internet users in the ‘new economy’ period. With the latest technologies in this era, the customers wanted even big ideas than only business plan. Networking, information technology, customer driven navigation, increased usage of internet, tailoring web experience were some of the main reasons, which resulted in the increase of thirst for the investors as well as the media. The Initial Public offerings of the dot-com companies emerged with high frequency. The investors started grabbing all the new issues without considering any business plan to investigate that how long will the companies take for making profit. It is because of these reasons that the problem aroused. The bubble started with the companies who incurred huge losses within several months of the initial public offerings. In 1999 there were almost 457 Initial Public Offerings made, among which majority were issued by the dot-com companies. Among these 457 issues 117 offerings doubled their prices on the very first day of trading. This scenario was totally different in the year 2001, when the number of IPO’s came down to 76 and none of the offerings have doubled their value on the first day of trading. The dot-com boom and bust took place within a short period of time. Several Drawbacks in Decision Making The dot-com companies made their initial public offerings on the assumption that it would rise in future. They did not make any business plan while making such offerings. Moreover, the investors were investing heavily on all the issuance of IPO’s without making any proper business strategy for such investments (PBS, 2013; Time Magazine, 2013). It is due to this reason that when NASDAQ index fell down, a large number of companies had to file for bankruptcies. The investors were also affected badly and suffered huge losses. The dot-com companies should have made effective business strategies related to their Initial Public Offerings in order to confront the worst situations. Moreover, the investors should have planned for appropriate business plans while making their investment decisions, instead of investing on all the Initial Public Offerings made by the dot-com companies. These steps would have helped in confronting the situations like downfall in the NASDAQ index. It would have helped the dot-com companies from getting into worst condition of filing bankruptcies. Conclusion The World Wide Web bubble or information technology bubble was one of the speculative bubbles, which took place within the time period of 1997 to 2000. It started with the growth of the bubble period, when these dot-com companies were following the strategy of mitigating the risk factor, by the start up large number of contenders and left it up to the operating market to take the decision that which one would be successful. The reduced interest rate within the time period of 1998-99 contributed to the increase of the net startup capital amount. The dot-com companies provided services to their customers and did not charge any amount for providing these services. This strategy was followed with the expectation that it would help in developing such brand awareness, which would enable charging higher rates in the future. In this era the nonprofit seeking companies made huge spending. The companies like Amazon.com and Google did not achieve any profit in the starting few years of their operations. Amazon has spent huge amount for the purpose of building as well as expanding its customer base to increase the awareness among the people related to their existence. ‘Google’ has spent huge amount for creating powerful machine capacity which would be able to serve the expanding search engines. When the boom went at its peak, it became easy for any dot-com company to make its initial public offerings of the stock. This era involved high competition of becoming technology hub where a large number of states and cities in United States were using their tax money for funding the technology conference centers. This in turn helped in the development of favorable tax and business laws encouraging the introduction of the dot-com industry in their locality. Thus, this era was full of technological developments performed by all the nations in order to enhance the operation of dot-com companies in their market. Soon after the huge spending, the bubble burst situation was knocking at the door. The bubble burst situation started with the increase of the interest tax rate (six times) by the United States Federal Reserves. This slowed down the economy. The dot-com bubble burst was initiated on March 10th 2000 when the NASDAQ composite index had peaked at 5048.62 almost double the value it had a year ago. The main issue started with the disclosure of the outcome of the United States Vs Microsoft Case in the federal court where it was concluded that Microsoft is monopoly. In the year 2001, the bubble deflated and majority of the dot-com companies had to stop their business operations because of the shortage of cash required to carry out the business. There were some loopholes in the business strategies of the dot-com companies as well as the investors, which deepened the drastic situation. The dot-com companies were making their initial public offerings based on the assumption that the value would rise in future. They lacked effective business plan while making Initial Public Offerings. The investors were investing heavily on each and every issuance of IPO’s without planning for any proper business strategy in making such investments. It is due to this reason that the decline in NASDAQ index resulted in filing of bankruptcies for a large number of companies. The dot-com companies should have made effective business strategies related to their Initial Public Offerings for avoiding these worst situations. The investors should have also planned for appropriate business plans while making their investment decisions instead of investing on all the Initial Public Offerings made by the dot-com companies. If these steps would have been taken by the companies and the investors, then it would have helped them in confronting the tough situations due to downfall in the NASDAQ index. It would have helped these dot-com companies from getting into the worst condition of filing bankruptcies. 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