The Dot-Com Bubble: How the 2000 Crash Shaped the Internet

Between the mid-1990s and early 2000, investors poured money into internet companies on a scale that had not been seen before. The result was a boom that peaked in March 2000 and a crash that wiped out many businesses. Yet the internet itself survived, and several of the companies that endured became some of the largest in the world.

Why the boom started

The conditions were real. The web had gone from a research project to a mass medium in a few years. Netscape's stock market debut in August 1995 showed investors how much demand there was for anything connected to the internet. Browsers had made the web accessible, e-commerce was starting to work, and it was easy to believe that every industry would move online quickly.

Several things encouraged speculation:

• Money was readily available from venture capitalists and from new public stock offerings.
• Companies were valued on the number of visitors or the speed of growth, rather than profit.
• Many businesses spent heavily on advertising to gain customers first and hoped to make money later.
• The belief that being first would decide who won encouraged companies to expand as fast as possible.

The peak and the fall

The Nasdaq Composite, the stock index where most technology companies were listed, reached its peak above 5,000 points on 10 March 2000. It had more than quadrupled in about five years. Then the market turned. Over the following months and years, the index fell steeply, reaching its low in October 2002 at a level that was only a fraction of the peak. It took many years for the index to return to its 2000 level.

Major triggers were weakening earnings, higher interest rates, and a growing realisation that many companies had no route to profit. As funding dried up, firms ran out of cash and closed.

Examples of what happened

Company	Story
Pets.com	Online pet-supplies retailer; went public in February 2000 and liquidated by the end of that year
Webvan	Online grocery delivery that expanded quickly and went bankrupt in 2001
Amazon	Its share price dropped heavily but the company survived and grew
eBay and Google	Google was founded in 1998 and survived the period; eBay was profitable and kept growing

Not every failed company was a bad idea. Some of the services that failed, such as grocery delivery and online video, later became successful when technology, logistics and customer habits caught up.

The effect on infrastructure

The boom also led to a large build-out of data centres and fibre-optic networks. When the market collapsed, companies that had built capacity went bankrupt, and the surplus capacity was sold off cheaply. This left the industry with cheap bandwidth and space that supported the next phase of growth, including the rise of video and social media. For the hosting industry, it was a period of consolidation: many hosts closed or were acquired, and customers on the failed ones lost their sites overnight.

What survived and what changed

1. Business models. Companies learned to match spending to real revenue.
2. Online trust. People kept shopping online, and secure payment systems improved.
3. Advertising. Search-based advertising, led by Google, became the main engine of online revenue.
4. Standards and open source. Cheaper tools and open software lowered the cost of starting a company.

The people side of the crash

The human cost was large. Many thousands of employees lost their jobs as start-ups closed and larger firms cut back, and stock options that had seemed valuable became worthless. Entire areas of cities that had been associated with the boom, such as the neighbourhoods of San Francisco and New York where new media companies clustered, emptied out. Yet the skills of the people who were laid off did not disappear. Many went on to found or join the companies of the next decade, and the cost of starting a web business fell sharply because servers, bandwidth and software were so cheap. The period after the crash, sometimes called Web 2.0, gave us blogging, social networks, video sharing and online collaboration tools, all built on the lessons and the leftover infrastructure of the bubble.

How to read a boom

Looking back, the pattern is familiar from earlier technology booms such as railways in the nineteenth century: a real technology, rapid public excitement, a wave of investment, and then a correction that clears out weak businesses and leaves the infrastructure behind. The internet did change commerce, media and communication, just not on the schedule that stock prices assumed in 1999. The useful habit for anyone building an online business is to ask the plain questions: who pays, how much, and what does it cost to serve them?

The lessons for site owners

The bubble is a reminder to be cautious about promises that sound too good, and about dependency. A hosting company that sells below cost to gain customers, and then raises prices or closes, puts your site at risk. Look for a provider with a clear and stable pricing model, and keep your own backups and your domain registration in your name, so that a change of provider does not become a crisis. Zebra Hosting charges the same price at every renewal, with no introductory price that jumps later. You can see the options on the hosting page and compare them on the comparison page.