Bubble and Squeak

"Dot.con: The Greatest Story Ever Sold" by John Cassidy (HarperCollins, 384 pages, $20), translated from English by Baruch Gefen, Yedioth Ahronoth Publishers, Sifrei Hemed, 318 pages, NIS 88.

"Dot.con: The Greatest Story Ever Sold" by John Cassidy (HarperCollins, 384 pages, $20), translated from English by Baruch Gefen, Yedioth Ahronoth Publishers, Sifrei Hemed, 318 pages, NIS 88

The bursting of the dot.com bubble, and the bubble of Internet and high-tech companies, continues to leave a lasting impression even three years after it happened. The hundreds of thousands of unemployed people throughout the world and the billions of dollars that went down the drain are just part of the evidence of the intensity of the market boom, whose source can be traced to the early 1990s.

John Cassidy's book is one of many that have been written on this subject in the past two years, and in it he describes the development of the bubble, the organizations responsible for it and the resonating explosion when it burst. Anyone who worked in the high-tech industry in the boom years or followed it in the media is familiar with many of the stories that Cassidy tells, but even so, there are a few interesting analyses in the book, some of which are significant and sometimes even innovative.

Cassidy explains that all the speculative bubbles have four stages. In the first, something new changes the expectations of people regarding the future and some of those with inside knowledge who try to profit from the new situation do so very successfully. This attracts attention. The second stage is that of prosperity, when skepticism is replaced by the lust for money. People are attracted to the new thing on the market, causing regular citizens to feel they are not "with it," or are even stupid for not taking part in the festivity. The third stage is when the prosperity becomes euphoria and the basic rules become superfluous. Prices lose all connection with reality and the investors, who know that such a state of affairs cannot last forever, try to make a profit before the bubble bursts. It is therefore no wonder that con artists flourish during such periods. The fourth stage is when the bubble bursts: Prices plummet, companies go bankrupt and the economy goes into a recession.

Happy days

That is what happened to the dot.com bubble, too. In the years 1995-2000 thousands of startup companies were founded, eventually earning the moniker "dot.coms," thanks to the ".com" that was added to the end of their names and which ensured them success in raising funds for quite some time. The establishment of these companies was possible thanks to the success of a few companies that sprang up before them, including Netscape, which developed the first Web browser, the Amazon online bookstore or Yahoo, the most popular Website ever. These companies, which issued stocks on the Nasdaq exchange in the mid-1990s, excited many investors, who sent vast sums of money into the pockets of shareholders who were wise enough to sell at the right time.

The success of these companies, and others like them, hastened the second stage in the formation of the bubble. Thousands of entrepreneurs declared that they were "the next Yahoo," and the investors, who wanted a piece of the action, invested their money. The basic assumption was that the Internet was about to change the fundamental laws of economics: that revenues, not to mention profits, are no longer important. What is important is to be first, to grab a spot, to create a brand. The money would come later, somehow.

In retrospect, it is possible to characterize the happy days of the bubble years as quite amazing. Hundreds of companies, most of them superfluous, were established with great hoopla and their entrepreneurs declared that they would change the world. The investors poured tens of millions of dollars into each and every one of them and pressured them, against all economic logic, to burn the money as fast as possible, claiming that it was "cheap money" and that more could easily be raised. They were not wrong. At that time it was enough to make a presentation based on a few slides, offer data on the "size of the market" and claim that "it is enough for us to take 10 percent of that market, and we will be millionaires," in order to raise millions of dollars from venture capital funds and private investors.

Cassidy claims that the dot.com bubble held up thanks to the active assistance of a few bodies: newspapers, magazines, television programs, banks, analysts, "experts" and even the governor of the central bank of America. Particularly fascinating are the stories about the investigative media, the analysts who dissected the market and the entrepreneurs, each of whom inflated the bubble in his own way and for his own reasons.

One excellent example of this is the Amazon legend. The media quickly fell in love with the story of Jeff Bazos, the CEO and inventor of Amazon. On May 15, 1995 The Wall Street Journal published an article describing how Bezos had resigned his position on Wall Street, and how he conceived the business model for Amazon.com on his laptop computer while his wife drove him to the other side of the United States. Other articles also focused on how he discovered the World Wide Web on his coast-to-coast journey, and on the fact that Amazon began to operate from the garage near Bezos' house.

The truth, however, was that Bezos wrote his research on Internet businesses on his boss' orders and did not motor coast to coast with his wife, but rather flew from New York to Texas and only there transferred to a car. He also rented a house with a garage just so that he could later say that Amazon.com was born in a garage.

Amazon.com's prospectus, in which it presented its business to potential investors for the purchase of shares in its initial stock offering, contained forecasts for the company, including statements that the company "believes it will suffer heavy operating losses" and that "restrictions on entering the book market are very low and existing and future competitors can set up new sites at relatively low cost." Anyone who took an interest and read the information could understand that the company's chances for profits were quite slim. But no one was interested in these facts.

TV influence

Television programs also played their role. Take, for example, the CNBC channel, set up by the NBC network in order to stop the nosedive in its ratings. CNBC was devoted to covering the capital markets. Cassidy contends that CNBC did not create the prosperity in the shares, but did help increase it, operating as a mechanism for spreading the investments plague.

The network's journalists did not "push" shares, but they helped create a culture of populistic investments, in which admiration of the stock market became commonplace. CNBC never told the public that unlike other media organizations, it allowed its journalists to trade in the shares of the companies they covered during their work as journalists, on the condition that they held the shares for a few months. Objectivity? What a laugh. All the way to the bank.

The analysts, too - the researchers who were supposed to advise investors about investments, inflated the bubble. Most of them worked for investment banks that made their living from stock issues. "The Great Wall of China" that was supposed to divide the research division from the stock issues division slowly crumbled, and the right hand (the analysts) began to advise the left hand (the issues division) regarding the shares of the companies it was about to issue.

Throughout the book Cassidy presents many examples of companies that reported revenues of several hundred thousand dollars a year, but whose shares, after being issued on the stock exchange, were traded at prices reflecting company values in the hundreds of millions, and sometimes even more. These companies hit rock bottom a few months after March, 2002, when the big collapse of the American stock market began. In one fell swoop the collapse wiped out hundreds of billions of dollars from company values, emptied the pockets of the speculators, led to the bankruptcy of hundreds of companies and entrepreneurs, shook up the American economy and threw it and the whole Western world into a long recession.

Experienced economists claim that a financial bubble like that of the 1990s will not return in our lifetimes. On the one hand, this is a good thing. Hardly a single company founded in those euphoric days has managed to change the face of the world or made its owners wealthy. The fact is that most of them have disappeared altogether, among other reasons because they sprang up on the basis of false economic assumptions that have no place in the real world. On the other hand, it's a pity, because during those euphoric days, money was poured out like water, and with it, business logic. It was, however, also a golden period for technological creativity. Strange ideas, sometimes overblown and sometimes ingenious, rose to the surface because there was an infrastructure to absorb them. Now that infrastructure has disappeared and conservatism has taken over again. It might be more stable and economically sound, but it is also a bit less interesting.