I've recently been reading the excellent Totally Wired - on the trail of the great dotcom swindle by Andrew Smith (Bloomsbury 2012).
The dotcom bubble ran (arguably) from the IPO of Netscape in 1995 to the stock market collapse of 2001/2001. Remember that 1995 was the PC iron age. In 1995, a PC computer with 8MB RAM was high-end, and would probably cost you about £1,000. Your new PC would run Windows 95 . Your older computer could theoretically run Windows 95 if it met the minimum spec of "an Intel 80386 DX CPU of any speed, 4 MB of system RAM, and 50–55 MB of hard drive space", but performance was poor with such a machine, leading to moaning about how unreasonable it was to need 8MB RAM.
Internet conections were mostly slow, unreliable and expensive (and metered). To get around you might have Netscape (launched 1993), revolutionary for the time, the direct ancestor of modern browsers. To find anything you might use Yahoo! (founded as Yahoo! in 1994) or, like me, you might have deserted to Alta Vista (1995). Google was not around until 1998. Flash appeared in 1996, Shopping on very basic websites, if you were in the US, you could buy a book from Amazon (founded 1995). Sean McManus has a nice History of the Internet page, if you want to find more time points.
The Internet Archive has some lovely captured pages from websites of that era: they had to be simple to work with slow connections and primitive browsers. Here is Microsoft's from 1996. Or IBM from 1995.
Yes, it's hard to remember how primitive things were, compared with today...
Nonethless, the Internet was clearly coming, and for a few years newly-minted companies could be rushed to the stockmarket in an Initial Public Offering (IPO) and appear to be worth crazy fortunes. Totally Wired discusses a factor that I had not considered - the IPOs usually included a big price rise during the first morning of trading, and while staff of the dotcom company were "locked in", unable to sell their shares, typically for 12 or 18 months, their bankers were able to sell that morning and turn a nice profit ontop of the fees and commissions. Hard though it may be to believe that banks would ever mis-sell anything, I suspect that Andrew Smith is right in thinking that the profitability of the IPOs for the banks really helped stoke the bubble.
STM Journals publishers were already seeing demand (there was an online edition of the Current Biology Journals when I worked there in 1993), but other publishers, such as my employer at the time, Oxford University Press (not the Journals bit), were initially cautious about the Internet. One reason was that several of them had financial hangovers from the CD-ROM bubble earlier in the '90s. The CD-ROM had been going to be the great thing in those days, but turning books into databases or multimedia experiences had proved expensive, and the mass market elusive. So my dotcom experiences were mostly of being involved in preparing data form OUP copyrights and working on licensing it to the dotcommers. Quite a profitable line of business if you insisted on a non-exclusive licence, payment on data delivery, and cashed the cheque fast before the company ran out of money.
To begin with, we met very sincere-seeming folks who (as far as I could tell) truly believed that the Internet would be a great commercial opportunity (they were of course right about that). Also they believed that there would be a huge "First-mover advantage" such that it was essential to get into the market before it became big (they were not right about that - those who waited and entered later often did well). Later, when it all tended to be seen as an abberation or a swindle, I wondered with Andrew Smith:
"Did the kids [the often youthful dotcommers] dupe the establishment by drawing them
into fake companies, or did the establishment dupe the kids by
introducing them to Mammon and charging a commission for it?"
(He seems to come to the conclusion that there was a lot of the latter).
Certianly a lot of the action became speculating in dotcom stocks, well ahead of any sniff of profitability. Writing in 1997, Jakob Nielsen said:
"The two classic errors in predicting the future of a technology shift
are to over-estimate its short-term impact and under-estimate its
long-term impact. The Web has been hyped to such an extent that people
overestimate what it can do the next year or two: most websites are not
going to turn a profit any time soon. But please don't underestimate
what will happen once we reach the goal ofeveryone, everywhere; connected.
The impact of networks grows by at least the square of the number of
connections, and the true value of the Web will be only be seen after
extensive business process reengineering."
From the periphery, there were interesting signs that things were getting out of hand. We began to get swamped with requests to meet us and developed a policy that we'd have no more meetings at which the vistor's dotcom plan would be unveiled as a surprise for us (with the flourish of a fountain pen with which to sign a non-disclosure agreement). Instead, potential partners had to write outlining their plans first, in confidence if they wished. We also indicated that we tended to like cash in return for licensing data. These steps were just a precaution against completely pointless meetings. Well, pointless to us:, I think there was value in dotcoms being able to claim to investors that "they were in negotiations with Oxford University Press", even if, as per Qui-Gon Jinn, "The negotiations will be short.". But we were rather surprised at the number of requests that went no further once we asked to know in advance roughly what the meeting was about, and that we didn't plan on giving copyrights away. Which I suspect meant that at the end the market was being flooded with people with very little idea of how to do business, but with the conception that it should be terribly easy.
When it all collapsed, the nay sayers (who had put up with a lot of "you old-business types just don't get it" from the dotcommers in their pomp) were loud in their derision. But, as an Economist article the dotcoms come of age in May 2004 notes:
"Back in 1999, at the height of the internet frenzy, Forrester, a
research company, forecast that online retail sales in America could
reach $100 billion by 2002. When the bubble burst a year later, lots of
crazy predictions went the same way as many dotcom firms. But if online
sales of cars, food and travel are added to the official figures, then
Forrester's forecast, which once looked so wild, has turned out to be
only about a year late. The growth continues."
And, interviewed in Andrew Smith's book, Fred Wilson (a venture capitalist) describes the long-term legacy of the bubble as follows:
"A friend of mine has a great line. He says 'Nothing important has
ever been built without irrational exuberance'. Meaning that you need
some of this mania to cause investors to open up their pocketbooks and
finance the building of the railroads or the automobile or aerospace
industry or whatever. And in this case, much of the capital invested was
lost, but also much of it was invested in a very high throughput
backbone for the Internet, and lots of software that works, and
databases and server structure. All that stuff has allowed what we have
today, which has changed all our lives....that's what all this
speculative mania built."
