Real-life Case Study: The Fate of the Dot-Coms

Supply and Demand

The “dot-coms” are companies that sprang up to take advantage of the potential business opportunities offered by the Internet. The first of these companies to take off provided services directly relating to the Internet—companies like America Online and Netscape. Right behind them came a big group of “B2C” companies, businesses marketing products to consumers. Amazon.com is the best known of these, but there were hundreds—even thousands—more looking for a share of consumers' spending.

Unlimited Potential? Many dot-coms were started by young entrepreneurs with more vision than experience. Companies like Amazon declared that making a profit in the short term was less important than developing a large market share for the long run. Even though the companies were losing money, and often did not expect to be profitable for years, excited investors flocked to the stocks. Stock prices soared, which in turn generated more excitement, attracted more investors, and pushed stock prices even higher. Venture capitalists funded fledgling companies and pushed them quickly to market in order to take advantage of the hot stock market.

The Fall of the Dot-Coms In the middle of 2000, Internet stocks fell sharply as investors became concerned about the lack of profits. The companies could stay in business if investors were willing to put up more money or if they had profits to reinvest. Otherwise, they could quickly run out of money. Many dotcoms filed for bankruptcy protection or closed their doors entirely. Investors saw the value of their holdings plummet.

The Future of the Dot-Coms After the fall of technology stocks, many formerly enthusiastic entrepreneurs and investors began to think that dot-coms would never be a good investment. In reality, they were probably never as good as people thought at the height of the market, or as bad as people thought after the fall. Certainly the Internet will continue to expand, and its use in business will grow. Companies that are able to develop useful Web-based services may find that they grow more steadily, but more reliably, than during the boom years.

What does the cartoon suggest about investing in dot-coms?

One technology stock, Cisco Systems, reflected the decline of the value of dot-coms in 2001.
Source: Nasdaq

Applying Economic Ideas

1. Why did the initial success of dot-coms make it easier for other dot-com companies to get started?
2. What might a dot-com entrepreneur have done to avoid the “boom and bust” cycle that many technology stocks experienced?

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