Five years later, dot-com boom to bust

Five years later, with an unrealistic high-tech dream destroyed and U.S. business returned to a more sensible way of working, a still decimated Nasdaq has no hopes of reclaiming that lofty ground anytime soon. After companies folded, jobs disappeared and shareholder capital evaporated, there’s little celebration of this anniversary.

“Everybody got one hell of an education after the Nasdaq hit its high and the bubble burst,” said Lincoln Anderson, chief investment officer at LPL Financial Services. “It turned out that you really did need a sustainable business model that didn’t rely on untenable assumptions. It seems so basic now, but back then, who knew?”

While the Nasdaq Stock Market lists only about a quarter of the publicly traded companies in the United States, it took on disproportionate importance in the late 1990s. Some of the biggest initial public offerings in history – many of which ended up discarded, bought or dismantled – were done on the Nasdaq. Dot-coms with huge ambitions and no profits took investors’ capital freely, despite a lack of revenues, let alone actual profits – then ultimately folded and left shareholders stuck with the bill.

With those kinds of false business models rightly discredited, the stocks listed on the Nasdaq today are leaner and far more viable. But by the same token, the wild spate of innovation and job growth that fuelled the boom disappeared along with investors’ money. The Nasdaq, which fell all the way down to 1114.11 on Oct. 9, 2002, before turning higher, ended trading Wednesday at 2061.29, a drop of 59.2% from its all-time high.

Proof of the changed atmosphere rests with two other major market measures – the Dow Jones industrial average is carefully treading back toward 11000, down just 7.8% from its own peak of 11722.98, reached Jan. 14, 2000, and the Standard & Poor’s 500 index is 21% off its all-time high of 1527.46, reached March 24, 2000.

The lagging Nasdaq isn’t the only sign that the dot-com era is gone. Compare the March 2005 issue of Fast Company magazine, one of the earliest New Economy business magazines, with an issue from October 2000. The 2005 issue has 96 pages. The 2000 issue weighed in at 406.

The time of expensive offices with $800 Aeron chairs and skyscraper views – for start-ups without profits even – has also passed. Big spenders are frowned upon. Look at Amazon.com Inc. – employees, including founder Jeff Bezos, worked at desks made of doors and two-by-fours. Companies that were careful with their money survived. Others did not.

It’s telling that the most valuable asset of Pets.com, the online pet supply store that folded in November 2000, was the attitude-laden sock puppet from its popular TV commercials. When last seen, the puppet was hawking a no-name credit company that bought the rights to it for just over $20,000.

It wasn’t that the ideas were wrong. Some companies simply failed to execute a sound business plan. Others piled into a crowded arena and failed to set themselves apart from the crowd. And still others were simply overly ambitious, failing to account for the fact that the Internet boom would ultimately have to settle down.

“The vision was there, but the people involved in the whole dot-com bubble based so much of their businesses on assumptions that couldn’t last,” said Joseph Battipaglia, chief investment officer at Ryan Beck & Co. “There was a chance that those assumptions – that the Internet would continue to grow and businesses would continue to spend on technology at those high levels – could have gone on a while. But they didn’t.”

It turned out that the rules of the New Economy were the same as the Old Economy – companies need to have more money coming in than going out.

Corporate America learned its lesson. Sky-high promises have been replaced with ultra-conservatism when it comes to predicting profits – which has led to many companies deliberately lowering their profit expectations in order to then beat those expectations when earnings time rolls around.