The Dotcom Crash: 10 Years Later

Ten years ago more than 30 percent was wiped off the value of companies in the IT sector. CyberShack looks at the cause of the Dotcom bust, as well as the winners and losers in the Australian IT sector.

Ten years ago this month more than 30 percent was wiped off the value of companies in the IT sector as stocks crashed and burned all over the globe. CyberShack looks at the cause of the Dotcom bust, as well as the winners and losers in the Australian IT sector during that hectic month of April 2000.

A decade ago, the hopes and dreams of millions of technorati were left in tatters as the balloon that gave the rise to tech stocks, burst. After nearly five years of stellar growth, the unsustainable promises of internet-based businesses suddenly hit terra firma with an almighty thump and it took some time for those involved to get over the aftermath, with some not recovering at all.

More than one trillion dollars of investors’ money went down the drain as this train wreck spread to the communications infrastructure sector from Melbourne to Moscow and from London to Lagos. The brave new world of ecommerce had just discovered there really were limits—even in cyberspace.

The carnage was as geographically widespread as it was financially vicious since the economic fundamentals of the dot-com bubble were really a bad joke, most of these publically listed internet companies were not only unprofitable; some in fact had no intention of ever making a profit; undermining not just market fundamentals, but capitalism as a whole.

Others were analysed that their profit making IPOs were going sky high while the business model showed no realistic way of ever turning a profit or even staying in the black. In fact, a handful of these companies were later shown that it would take literally hundreds of years before investors would see any profits at all.

But we should not forget that many real and successful companies were also spawned during this time – Google, Seek and Amazon being among some of the more well-known notables.

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However when the day of reckoning arrived on Monday, April 17, 2000, the overall value of the IT sector fell by a whopping 30 per cent, washing away 10 times as many companies as were left standing once it was all over.

Ironically, some of the same tech trends that everyone now takes for granted were born in this mega boom, from web TV, VoIP and cloud computing to social networking and even wireless technologies were all spawned from the dotcom bubble.

But some of the main actors pushing these revolutionary technologies a decade ago shared a rather different fate altogether.

One Australian company that bore the brunt of the crash was Davnet, a provider of high-speed cabling for corporate Internet services. Based in Melbourne, the company was going to be as they say the seller of the ‘shovels in the gold rush’.

Moreover, like many in the dotcom craze, Davnet went from being worth some 4 cents per share at its float to over four dollars for that same share on the eve of the crash. At one stage, the company boasted a $AUD7 billion capitalisation and had offices at the Rialto Tower, Melbourne’s ritziest business address, with company co-founder Stephen Moignard riding in the fast lane.

The Ferrari-driving entrepreneur who was the poster boy of not only fast-speed broadband, but who also positioned himself as a Telstra slayer, these days can be found far from his former corporate haunts, living in a caravan on his Coonawarra vineyard in South Australia, trying to reinvent himself as a boutique winemaker.

“I’ve been put through the ringer”, he says over the phone, adding that he doesn’t like doing media interviews as every time he appears in the press, “I get a visit from the tax authorities”.

That said, Moignard points out that “Davnet was a great company”, one that he claims, “a lot of people made money out of”.

As for his own fate, after being hounded for the past 10 years by the authorities looking for so-called ‘lost money’, he says of the dotcom experience, “They have squeezed everything out of me—there is nothing left”.

Mind you, Moignard seems to have kept some of his sense of humour, as his Terra Rossa Wine Club released two new vintages recently—rather aptly named ‘Tax Collector’ and ‘Deputy Commissioner’.

Sadly, for Moignard, his personal experience of the dotcom boom and bust was overwhelmingly negative, however, his experience is in stark contrast to others who came out of the dotcom bubble intact.

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LookSmart co-founder Evan Thornley cashed out just before things went into free fall. After entering Victorian politics on the Labor side in 2006, Thornley became a founding member of online activist group GetUp! and now heads an electric-car venture called Better Place Australia. A few years ago, he was rumoured to be worth a cool $585m.

And politics also is the common theme for one of the co-founders of Ozemail, Malcolm Turnbull. The Internet entrepreneur not only made most of his fortune from the Net, his vision was quite succinct as he wisely sold his half of Ozemail in 1999 for the tidy sum of $57 million.

Getting elected as the Member for the blue-ribbon Liberal seat of Wentworth in 2005, Turnbull went on to become the Liberal opposition leader, holding that position until December of last year.

Unlike many of the class of 2001, Turnbull has managed to become even more famous after the dotcom crash, although for a number of non-tech related reasons. In the 2009 annual BRW list of the richest Australians, Turnbull was put at number 182 of 200, with an estimated net worth of $178 million.

Another pre dotcom crash whizz kid is Daniel Petre, a former Microsoft CEO hired by Kerry Packer to run Ecorp as an arm of Publishing & Broadcasting Limited.

As usual, the Packers took the business in-house and Petre went on to establish his own foundation, giving $600,000 each year to the Petre Foundation, which has built up $12 million in funds. Recently he has been involved in the GoodStart consortium, which bought a chain of the recently failed ABC Learning childcare centres.

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So who were main casualties of the dotcom crash in 2000? Well the list reads like a Who’s Who of Silicon Valley.

The victims include:
Webvan.com
Pets.com
Kozmo.com
Flooz.com
eToys.com
Boo.com
MVP.com
Go.com
Kibu.com
GovWorks.com.

As for the survivors, well, talk about brand names:
Google
Amazon
MSN
Seek
eBay
Yahoo!
Hotmail
AOL
MapQuest
Lastminute

Next: Why It Happened

So Why Did The Bubble Really Burst?

Like most disasters, there was not one defining point where one could say this was the reason we had the dotcom crash.

And although many economists called the tech crash of 2000 as the crash we had to have, or putting it into the words of former US federal reserve head Alan Greenspan, a ‘necessary correction’, the fact is that the dotcom crash was the culmination of the blindness of the market to its own shortcomings.

The problem began with the novelty factor of the dotcom industry playing in the global marketplace. It was a new technology, a brave new world and the fear of being left behind led to overspending on a colossal scale by those that should have known better.

As it became impossible to accurately value the internet start ups they became grossly overvalued. It was conveniently forgotten that these same start-ups operated with a short term loss business plan, insisting that by grabbing the market share and dominating their specific sectors they could then, as UK IT blogger Darren Jamieson has said, “… charge what they wanted at a later date”—a sort of eat now, pay later business model.

The end result of all this over-valuation of dotcom companies was that the stock market reacted accordingly. Once these same IT start ups began to burn through their capital at warp speed they quickly began folding one by one like a house of cards, triggering a mass global panic that saw shares being frantically sold, investors pulling out and businesses disappearing – many overnight and into thin air.

Whether or not this same scenario could happen again is a question best left open for historians. Over the centuries, many societies have had their own version of the dotcom crash—whether it was the Dutch Tulip craze of the 16th century to US railway stocks in the late 1800s, the lure of a fast buck from commodities seems like a Groundhog Day for generations of investors.

Renowned Yale University economist Robert Shiller once described the dotcom boom and bust cycle as “irrational exuberance”, however it was interesting to watch the same tech stocks rally and keep the faith during last years’ Global Financial Crisis—one where for the first time in modern history, clicks really were worth more than bricks. Perhaps the dotcom crash has a few more lessons to teach.

By Branko Miletic



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