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Wilhelm research paper

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  • 1. Devry UniversityDot-Com BubbleThe rise and fall of internet businessWendy Wilhelm9/29/2012
  • 2. Dot-Com Bubble 2 Table of ContentsIntroduction……………………………………………………………………….Pg 3History of the Web………………………………………………………………..Pg 3The history of the World Wide Web………………………..…………………….Pg 3What caused the bubble to burst………………………………………………….Pg 4The Aftermath of the bubble……………………………………………………...Pg 6What Companies made it through…………………………………………….…..Pg 6Could the bubble been avoided…………………………………………………...Pg 7Conclusion………………………………………………………………………...Pg 7
  • 3. Dot-Com Bubble The rise and fall of the World Wide Web which happened between1993 to 2001 when 3suddenly the overpriced giants of the industry came crashing down. When the web crashedindividual investors lost millions of dollars and the NASDAQ tumbled down. During this timewhen the World Wide Web crashed what companies, if any, made the most of this devastatingtime and what companies lost the most? What and why did this happen? Could this have beenavoided? The internet first was used in December 1969 it connected four major U.S. universities and itwas designed for research, education, and government organizations. This first type of internetprovided communications linking the United States as a second way for the military tocommunicate in the event that conventional ways of communication were destroyed. Then in1972 was when electronic mail was introduced. While in 1976 Jimmy Carter and his runningmate Walter Mondale used email to plan their campaign events. The word internet was used forthe first time in 1982 and in 1984 the network address extensions were established. Thefollowing year in 1985 American Online debuts offering email, electronic bulletin boards, newsand other information. By 1993 Marc Anderson developed Mosaic and it becomes the dominantnavigating system for the World Wide Web. At that time this system accounts for 1% of all theinternet traffic. In 1995 CompuServe, American Online, and Prodigy start providing people withdial up internet access also during 1995 Sun Microsystems releases Jave. During 1996approximately 43.2 million U.S. households have computers and 14 million of them are online(infoplease.com). E-commerce becomes the new word as internet shopping starts spreading in1999 and during this time MySpace.com is launched. Finally by 2000 is when the internetbubble bursts and the investment capital dries up, the Nasdaq stock plunges which causes theinitial public offering window to slam shut and many dotcoms to close their doors.
  • 4. Dot-Com Bubble The internet bubble was an economic bubble and it exists whenever the price of an asset that 4may be freely exchanged in a well-established market first soars then plummets over a sustainedperiod of time at rates that are decoupled from the rate of growth of the income that mightreasonably be expected to be realized from owning or holding the asset (Political Calculations).The period of time between 1993 and 2001 was labeled the internet bubble and was marked bythe founding of a group of new internet based companies know as dot-coms. This economicbubble had companies seeking to have their stock prices go up adding prefixes on their nameswith this happening it was a combination of rapidly increasing stock prices, market confidencethat the companies would make profits as well as venture capital this created an environment inwhich investors throw the traditional metrics of investing out the door like profit and loss ratiosonly thinking of the confidence in technological advancements. During this time the dot-com
  • 5. Dot-Com Bubblecompanies whose stocks were setting record growth relied on venture capital and initial public 5offerings of stock to pay their expenses while they had no true source of income. With thenovelty of those types of stocks and also it was difficult to value the dot-com companies this sentmany of the stock prices to wild heights and made the companies rich on paper and with manypeople willing to invest and the day trading caused a lot of money for this investmentopportunity. The American news media encouraged the public to invest in risky companies,despite many of the companies’ disregard for basic financial and even legal principles. (1) The technology heavy NASDAQ composite index peaked at 5,048 in March 2000, reflecting the high point of the dot-com bubble. http://www.ask.com/wiki/Dot-com_bubble During 2000 after the NASDAQ has lost more than 10% from its peak, Sean Parker stated“During the next 12 months scores of highflying internet upstarts will have used up all of theircash. If they can’t scare up any more, they may be in for a savage shakeout.”(2) Also an articlefrom Barron’s a financial magazine made an exclusive survey of the likely loser. “The articlepointed out: “American’s 371 publicly traded Internet companies have grown to the point thatthey are collectively valued at $1.3 trillion, which amounts to about 8% of the entire U.S. stock
  • 6. Dot-Com Bubblemarket.”(2) So by 2001 the majority of the dot-coms stopped trading after running out of money 6from their venture capital and many of them never made a net profit. The aftermath of many of these dot-com companies were they ran out of capital and wereacquired or liquidated their domain names were picked up by competitors or domain nameinvestors. Many companies along with their executives were accused or convicted of fraud formisusing shareholders’ money. The U.S. Securities and Exchange Commission fined the topinvestment firms for millions of dollars for misleading investors some of these firms wereCitigroup and Merrill Lynch. Some other companies that were significant to the bubble when itburst was Boo.com who spent $188 million in just six months in an attempt to create a globalonline fashion store went bankrupt in May 2000(4). WorldCom, a long-distance telephone andinternet services provider that became notorious for using fraudulent accounting practices toincrease their stock price, the company filed for bankruptcy in 2002 and former CEO BernardEbbers was convicted of fraud and conspiracy. MircoStrategy, whose shares lost more than halfof their value on March 2000, following their announcement of re-stated financials for theprevious two years. A business Week editorial said at the time, “The Company’s misfortune is awake-up call to all dot com investors. The message is it’s time at last to pay attention to thenumber.”(5) When the internet bubble burst there were many companies that did go bankrupt but therewere also some that were able to overcome the bubble. Some of these companies wereAmazon.com which was founded in 1994 by Jeff Bezos. Amazon is the largest online retailer inthe world. Ebay was another company that was able to overcome the bubble and they werefounded in 1995 by Pierre Omidyar. Also Priceline.com which was founded in 1998, Priceline isa travel related website that helps users find discounted rates on all of their travel needs.
  • 7. Dot-Com Bubble Will we repeat what happened in the internet bubble again it seems as though perhaps we did 7not learn our lesson. With the introduction of the social media some of the major players nowinclude Face book, Twitter, LinkedIn, and Groupon. These companies are showingadvertisement profits but no income so we have to remember that just because a website ispopular we need to keep our money in our pockets you need to make sure that the companyfollows solid business fundamentals. To avoid another internet bubble we need to remember thatpopularity does not equal profit, many companies are too speculative, make sure sound businessmodels are essential, also we need to remember that basic business fundamentals cannot beignored, and correlation with the stock market is key. With all of our mistakes from the internet bubble we will need to look deep into an internetcompany before we put our money into them. Things can always be avoided so that nothing isrepeated to an extent as the first time where people lost millions of dollars, they lost their jobsbecause companies had to close, and we do not need another economic meltdown.
  • 8. Dot-Com Bubble References 8International Data Corporation, the W3C Consortium, Nielsen/NetRatings, and the InternetSociety. http://www.infoplease.com/ipa/A0193167.html1. Origins of the Crash: The Great Bubble and Its Undoing,Roger Lowenstein, Penguin Books,2004, ISBN 1-59420-003-3, ISBN 978-1-59420-003-8 page 114-115.2. Burning Up, By JACK WILLOUGHBY, March 20, 2000, Barronshttp://www.ask.com/wiki/Dot-com_bubble4. Top 10 dot-com flops – CNET.com5. "Commentary: Earth to Dot-Com Accountants".http://www.investopedia.com/financial-edge/0711/5-successful-companies-that-survived-the-dotcom-bubble.aspx#axzz27yvuYFhPhttp://www.moneycrashers.com/dot-com-bubble-burst/