Com Industry Crash Term Paper

Pages: 40 (11033 words)  ·  Bibliography Sources: 1+  ·  Level: College Senior  ·  Topic: Education - Computers  ·  Buy This Paper

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[. . .] On October 1st 1969 a researcher at UCLA attempted to send a message across the network to a researcher at Stanford. The network abruptly crashed. Needless to say, they got it up in running over the following months and gave birth to the Internet.

Through a combination of improvements in hardware, networking and software the use of the fledgling Internet grew until it was used by scientists and researchers worldwide. It was a bit cumbersome to navigate and instructions for navigating it could be cryptic at times.

On Saturday, January 23, 1993 a message appeared on several Internet bulletin boards:

"By the power vested in me by nobody in particular, alpha/beta version of 0.5 of NCSA's Motif-based information systems and World Wide Web browser, X Mosaic, is hereby release

Cheers,

Marc" (Cassidy 2002 p. 51)

Marc Andreessen, a 21-year-old computer-science major from the University of Illinois in Urbana-Champaign had released what was to later to become the Netscape World Wide Web browser. Andressen was working part-time at the National Center for Supercomputing Applications as a programmer. His little browser made it much easier to navigate through the Internet. By the summer of 1993, hundreds of thousands of people were using Mosaic, the precursor to the Netscape browser.

Many people credit the start of the dot-com boom to the success of one company, Netscape. In August of 1995, a generation of investors had been inspired enough to invest in Internet technology based on the market success of Netscape's initial public offering. (CNN/MoneyLine 2000) Many have described the Internet as being as transformative as the railroad, the automobile or the electrification of the nation.

Marc Andreessen was a $6.50 an hour intern with the government when he created the first user friendly Internet "browser." His new idea would allow people to more easily access and view content on the fledging Internet.

Andreessen graduated and moved to California where he went to work for a small software company. A few months he received an unsolicited email from Jim Clark, the founder of Silicon Graphics, a computer company, inviting him to join Clark in a new company he was putting together, Netscape.

Netscape was put on the NASDAQ market August 9, 1995 and went from an opening price of $28.00 to has high as $74.00 by that afternoon. That kind of appreciation in an IPO was unheard of. The New York Times wrote the following day that Netscape had the single must successful opening day of any stock on Wall Street. Marc Andreessen and his fellow browser developers at Netscape were worth over $70 million dollars each. Jim Clark, the initial money behind the venture was worth now worth over $660 million dollars on that same day. Many credit the phenomenal success of Netscapes' initial public offering for igniting the Internet dot com boom.

Following the success of the Netscape browser was the web search engine Yahoo, which enabled people surfing the web to enter a word or phrase and have the search engine search its extensive database of web links to pull up the most likely hits. Two Stanford students, David Filo and Jerry Yang, started yahoo. They were capitalizing on the popularity of their web site called "Jerry's Guide to the World Wide Web"

The two had incorporated their company in 1994 with a plan to garner revenue by selling advertisements on their Yahoo search engine website. It may sound a tad unsound to expect to make money off of a website that people can access for free by charging companies to advertise on the site, but it should be remembered that in late 1999 Yahoo joined the S&P 500 and was trading on NASDAQ at $228 a share. (Wang 1999)

In the summer of 1995 Jeff Bezos quit his Wall Street job to found a new company created to sell books on the Internet. He decided to call his new company Amazon.com. It was the first time a company used the dot-com in its name. He located the company in Seattle, Washington for several reasons but most importantly because it was not too far from a major book distributor in Oregon, Ingram Book Group.

Amzon.com launched on July 16, 1995. In its first week Amazon.com received about $12,000 worth of orders. The initial public offering of Amazon.com stock the in 1997 gave Bezos a net worth of $180 million. This fueled yet more excitement in an already expanding market.

While the focus of this paper is on the reasons behind the dot-com meltdown there are still many companies that started in the heyday of the dot-com boom that are doing business today. Companies like eBay, who combines a winning idea for allowing people to sell almost anything to almost anybody over the Internet, with sound financial and management practices. Etrade was the first online stock trading company, using the power of the Internet to give people easier access to investing in stocks, options, and mutual funds via the Internet.

The creation of NASDAQ allowed a market for small-capitalized companies to have their stocks publicly traded. The exchange was a magnet for small technology companies seeking to raise capital by going public. Often times these small companies would never be able to qualified on the New York Stock Exchange. NASDAQ helped fuel the dot-com boom in this way.

Like the Tulip investment in Holland in the 1600s, the dot-com was fed in part by speculative investors looking for the next big score. The "New Economy" helped fuel the national economy and was part of the reason for the largest peacetime economic expansion in U.S. history. Like all speculative bubbles, the dot-com bubble burst but it created many millionaires along the way and has changed the world forever.

Price to Earnings Ratios

Currently NASDAQ composite market is worth just 27% of its historic highs.

Over valued stocks were one of the leading causes of the eventual retraction and collapse of the dot-com boom. As investors woke up to the realities of stock prices based on speculative gambling they began to sell off their holdings in these companies. The massive sell offs drove the NASDQ composite from its June 2000 highs of over 5000 to its current composite of around 1370 as of March 28.

Years before the dot-com crash investment professionals noted that many Internet stocks had P/E ratios in the 30s. Most of the companies behind these highflying stocks had negative or nil earnings. (BusinessWeek 1996) PE ratios are important because a firm's stock price is often determined by multiplying the EPS (earnings per share) times the P/E ratio. Market determined P/E ratios include not only earnings and sales growth but also the risk and volatility of the company's performance, the debt-equity structure and other factors. Irrational exuberance, as Alan Greenspan, Chairman of the Federal Reserve, famously remark, drove stock prices far beyond their fundamental underpinnings would justify.

An excellent example illuminating Greenspan's prescient remark can be seen the performance of Broadcast.com. This company billed itself as the leading aggregator and broadcaster of streaming media programming on the Web. Broadcast.com held its initial public offering on NASDAQ exchange in July of 1999. In September of that year, its stock price fell from the mid-60s to the low-30s. It then skyrocketed to 100 at the end of the year. On January 8, 1999, a Friday, it rose from 132 to 197, a jump of 50%. Fearful NASDAQ officials stopped trading and tried to get an explanation from the company, which could offer none. On the following Monday, after the company announced a two-for-one stock split, its price climbed to 278, a 40% gain. Broadcast.com was little more than a name. It was a company in search of a business. Its web site was limited, almost amateurish. It produced nothing itself (it relied on "content providers" in Internet lingo). It simply plays ("streams" to use the jargon again) low-quality audio and video generated by other companies (radio stations, CSPAN, etc.). Even with a high-speed modem, the pictures were choppy, hardly a surprise given the still limited technology of Internet video at the time. (Cassidy 2002)

What happened to this overvalued, over funded and non-profitable company? On April 1st of that year, (somewhat appropriate), Yahoo, the Internet search engine company, agreed to pay $6.1 billion dollars to acquire Broadcast.com. This was in spite of the fact that the company had reported losses of $16.4 million on sales of $22.3 million. Yahoo did not actually pay cash for the company but instead exchanged its own over valued stock.

The sudden distaste for Internet stocks resulted in massive sell offs, delisting of multiple companies from NASDAQ and reluctance to buy any stock remotely associated with the Internet or computer technology. The fall out affected otherwise fundamentally sound companies and companies that had only tangential ties to the computer world.

An Unsustainable Model

The Internet business model seemed to… [END OF PREVIEW]

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Com Industry Crash.  (2003, March 30).  Retrieved February 24, 2019, from https://www.essaytown.com/subjects/paper/com-industry-crash/572742

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