Dot-com bubble

A dot-com company, or simply a dot-com (alternatively rendered dot.com, dot com, dotcom or .com), is a company that conducts most of its business on the Internet, usually through a website on the World Wide Web that uses the popular top-level domain (TLD) ".com". As of 2021, .com is by far the most used top-level domain, with almost half of all registrations.

The suffix .com in a URL usually (but not always) refers to a commercial or for-profit entity, as opposed to a non-commercial entity or non-profit organization, which usually use .org. The name for the domain came from the word commercial, as that is the main intended use. Since the .com companies are web-based, often their products or services are delivered via web-based mechanisms, even when physical products are involved. On the other hand, some .com companies do not offer any physical products.

The .com top-level domain (TLD) was one of the first seven created when the Internet was first implemented in 1985; the others were .mil, .gov, .edu, .net, .int, and .org. The United States Department of Defense originally controlled the domain, but control was later transferred to the National Science Foundation as it was mainly used for non-defense-related purposes.

Historically, the dot-com boom can be seen as similar to a number of other technology-inspired booms of the past, including railroads in the 1840s, automobiles in the 1900s, radio in the 1920s, television in the 1940s, transistor electronics in the 1950s, computer time-sharing in the 1960s, and home computers and biotechnology in the 1980s.

With the creation of the World Wide Web in 1991, many companies began creating websites to sell their products. The 1993 release of Mosaic and subsequent web browsers during the following years gave computer users access to the World Wide Web, popularizing the use of the Internet. In 1994, the first secure online credit card transaction was made using the NetMarket platform. By 1995, over 40 million people were using the Internet. That same year, companies including Amazon.com and eBay were launched, paving the way for future e-commerce companies. At the time of Amazon's IPO in 1997, they were recording a 900% increase in revenue over the previous year. By 1998, with a valuation of over $14 billion, they were still not making a profit. The same phenomenon occurred with many other internet companies—venture capitalists were eager to invest, even when the companies in question were not profitable. In late 1999, the Nasdaq index reached a price-to-earnings ratio of over 200, more than double that of the Japanese asset price bubble at the beginning of the 1990s.

Internet use increased as a result of the reduction of the "digital divide" and advances in connectivity, uses of the Internet, and computer education. Between 1990 and 1997, the percentage of households in the United States owning computers increased from 15% to 35% as computer ownership progressed from a luxury to a necessity. This marked the shift to the Information Age, an economy based on information technology, and many new startups were founded as a result of that growth.

At the same time, a decline in interest rates increased the availability of capital. The Taxpayer Relief Act of 1997, which lowered the top marginal capital gains tax in the United States, also made people more willing to make more speculative investments. Alan Greenspan, then-Chair of the Federal Reserve, allegedly fueled investments in the stock market by putting a positive spin on stock valuations. The Telecommunications Act of 1996 was expected to result in many new technologies from which many people wanted to profit.

As a result of these factors, many investors were eager to invest, at any valuation, in any dot-com company, especially if it had one of the Internet-related prefixes or a ".com" suffix in its name. Venture capital was easy to raise. Investment banks, which profited significantly from initial public offerings (IPO) (almost all of them were on Nasdaq), fueled speculation and encouraged investment in technology. A combination of rapidly increasing stock prices in the quaternary sector of the economy and confidence that the companies would turn future profits created an environment in which many investors were willing to overlook traditional metrics, such as the price–earnings ratio, and base confidence on technological advancements, leading to a stock market bubble. Between 1995 and 2000, the Nasdaq Composite stock market index rose 400%. It reached a price–earnings ratio of 200, dwarfing the peak price–earnings ratio of 80 for the Japanese Nikkei 225 during the Japanese asset price bubble of 1991. In 1999, shares of Qualcomm rose in value by 2,619%, 12 other large-cap stocks each rose over 1,000% in value, and seven additional large-cap stocks each rose over 900% in value. Even though the Nasdaq Composite rose 85.6% and the S&P 500 rose 19.5% in 1999, more stocks fell in value than rose in value as investors sold stocks in slower growing companies to invest in Internet stocks.

An unprecedented amount of personal investing occurred during the boom and stories of people quitting their jobs to trade on the financial market were common. The news media took advantage of the public's desire to invest in the stock market; an article in The Wall Street Journal suggested that investors "re-think" the "quaint idea" of profits, and CNBC reported on the stock market with the same level of suspense as many networks provided to the broadcasting of sports events.

At the height of the boom, it was possible for a promising dot-com company to become a public company via an IPO and raise a substantial amount of money even if it had never made a profit—or, in some cases, realized any material revenue or even made a finished product. People who received employee stock options became instant paper millionaires when their companies executed IPOs; however, most employees were barred from selling shares immediately due to lock-up periods. …

Nearing the turn of the 2000s, spending on technology was volatile as companies prepared for the Year 2000 problem. There were concerns that computer systems would have trouble changing their clock and calendar systems from 1999 to 2000 which might trigger wider social or economic problems, but there was virtually no impact or disruption due to adequate preparation. Spending on marketing also reached new heights for the sector: Two dot-com companies purchased ad spots for Super Bowl XXXIII, and 17 dot-com companies bought ad spots the following year for Super Bowl XXXIV.

On January 10, 2000, America Online, led by Steve Case and Ted Leonsis, announced a merger with Time Warner, led by Gerald M. Levin. The merger was the largest to date and was questioned by many analysts. Then, on January 30, 2000, 12 ads of the 61 ads for Super Bowl XXXIV were purchased by dot-coms (sources state ranges from 12 up to 19 companies depending on the definition of dot-com company). At that time, the cost for a 30-second commercial was between $1.9 million and $2.2 million.

Meanwhile, Alan Greenspan, then Chair of the Federal Reserve, raised interest rates several times; these actions were believed by many to have caused the bursting of the dot-com bubble. According to Paul Krugman, however, "he didn't raise interest rates to curb the market's enthusiasm; he didn't even seek to impose margin requirements on stock market investors. Instead, [it is alleged] he waited until the bubble burst, as it did in 2000, then tried to clean up the mess afterward". Finance author and commentator E. Ray Canterbery agreed with Krugman's criticism.

On Friday March 10, 2000, the NASDAQ Composite stock market index peaked at 5,048.62. However, on March 13, 2000, news that Japan had once again entered a recession triggered a global sell off that disproportionately affected technology stocks. Soon after, Yahoo! and eBay ended merger talks and the Nasdaq fell 2.6%, but the S&P 500 rose 2.4% as investors shifted from strong performing technology stocks to poor performing established stocks.

On March 20, 2000, Barron's featured a cover article titled "Burning Up; Warning: Internet companies are running out of cash—fast", which predicted the imminent bankruptcy of many Internet companies. This led many people to rethink their investments. …