2000: Dot-bomb


Issue: "Year in Review 2000," Dec. 30, 2000

First came the crash of e-commerce speculation, complete with layoffs, stock crashes, and capital losses. The mascot of this decline was Sock Puppet, the creation of Pets.com, a startup that advertised during the Super Bowl in January and closed down in November.

Call it dot-bomb, dot-bust, or any favorite analog cliché: The gold rush was over. Startup after startup was founded through the 1990s on venture capital, inexperienced management, and visions of grandeur. Too many companies sprang out of nowhere and many fell flat. Instead of carefully managing capital, executives poured money into so-called customer acquisition and pushed themselves toward disaster.

Besides the temptation to Get Big Fast, too many managers saw an initial public offering into the stock market as a destination instead of a mile-marker. Instead of trying to build long-term excellence, they tried to dress up risky business models for investment banks and investors so they could get rich quick.

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Part of the problem was that speculators bought e-commerce stocks without understanding that dot-coms were more similar to the retailing sector than to technology. Amazon.com, for example, resembles

Wal-Mart and Sears Roebuck far more than Microsoft and Intel. When the Internet bubble popped in April, this confusion caused a backlash against all technology-related equities, with a grinding, painful decline wasting away most of 2000.

The word dot-com went from implying growth and prosperity to connoting foolishness and greed. Yet e-commerce isn't dead. It just started. Some of the names born in the late '90s will be around for years. Other future greats haven't even started yet.

The other fault line was that the world of personal computers started to shift. Sales dropped and many wondered whether PCs will continue to be the centerpiece of high-tech. This didn't receive nearly as much attention as the failed dot-com, but it is probably more important.

To understand the situation, consider that in the late 1990s consumers purchased computers en masse just to get online. They brought the box home, fired up AOL, Earthlink, or AT&T WorldNet, and entered cyberspace. Box and component makers like Dell, Compaq, and even Apple Computer loved every minute of it. At the same time, PCs became more stable and functional. A typical low-cost model could surf like crazy and run all the software the typical user needed; this was great for users but became a timebomb for the industry.

Since the 1980s the computer industry has relied on obsolescence as a sales tool. The computer purchased today is supposed to become hopelessly out of date in two to four years. By the year 2000, the hardware had crept ahead of the software. A typical word processor, Web browser, and e-mail program work fine as they are and don't necessarily need upgrades. Processor speeds are less important today as more people care about their Internet connection. No wonder Intel's Pentium 4 chip and Microsoft's Windows Me operating system don't generate as much interest as their predecessors.

What gets people psyched up today? MP3, wireless phones, handheld computers. These tiny, pocket gadgets are all moving ahead, giving people power without requiring a laptop or desktop PC. Instead of moving into a virtual world on a desktop monitor, users are putting bits of cyberspace in their purses, pockets, and car stereos. Soon the Internet will be like electricity, plentiful and ubiquitous.

A whole new world (what tech theorist George Gilder refers to as the telecosm) is growing up around us. Like the Internet itself, the "telecosm" promises to change everything from politics to pizza delivery. Growing this infrastructure takes years. Today's wireless technology is like 1980s computers: cool compared to the past but nothing like the future.

In the short term, technological progress beyond mere PCs doesn't yet have the attention of the federal government. Microsoft still faces a court-ordered breakup over alleged predatory acts from the 1990s. Meanwhile, Bill Gates and other executives are trying to change their own business model in ways that may make old issues irrelevant.

On April 3, just as tech stocks were teetering toward a downhill slide, U.S. District Court Judge Thomas Penfield Jackson ruled that Microsoft misused its monopoly power over the Windows operating system to manipulate other companies and smash the competing Netscape browser. Mr. Gates immediately protested the decision and his company quickly appealed. "The high-technology industry that Microsoft has helped create has unleashed a wave of competition and innovation that has led to new, more powerful products for consumers, at lower prices than ever before," he said.

During the trial and ensuing controversy, Microsoft's defenders argued that the company was in an innovate-or-die situation. Its opponents mocked the charge, saying the company was a marketing machine that mass-produced mediocrity. Today, the world's bellwether software company is in a fight for its life, trying to expand into all sorts of areas including handheld computing video games and high-end Internet products. How well these ventures progress-and the jury is out on all of them-will test the company's greatness.


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