As someone who works in high technology, I am routinely aghast at the blithering business practices that I have encountered in the “Internet Economy”. The conflation of information based technology stocks with that of the equipment and chip producing companies has dealt an unnecessarily greivous blow to many important Silicon Valley concerns in the recent market downturn.
The exorbitant venture capital burn-rates, overcompensation for services and extravagant acommodations that these “Internet Moguls” awarded themselves and their workers were too often a case of flat-out fiscal irresponsibility. Brick and mortar companies, in or out of the high technology sector could never skate on such nebulous business plans and profit structures. I find it particularly outrageous that companies that have turned a solid profit for decades should have to take a hit in their earnings due to the poor business practices of some enterprise greenhorns.
I am obliged to think “Bubble Economy” every time this topic comes to mind. The “goldrush” of the Internet bred an almost entirely artificial market for skills and services that will not find such a level of stable demand for many years. Having attended several asset auctions of Internet companies, all I have seen is a bunch of outdated work stations, some cubicle furniture and a customer list. If you take apart a semiconductor equipment manufacturer there are untold thousands of dollars worth of test equipment and components to recoup value with. The overconcentration on intangible things, such as intellectual property represents an order of magnitude greater level of risk taking.
I am well aware of how semiconductor equipment companies are reliant as well upon intellectual property. But there is a more healthy balance of capital assets and intangibles. I do believe that the Internet is one of the most profound paradigm shifts since the industrial revolution. I also firmly believe that the Internet may well represent one of the most powerful tools ever invented including the computer itself (however hard they may be to separate). There are wonderful and equally ominous fruits to be borne by this electronic Pandora’s box.
I hope that this thread will examine the impacts of what I perceive as the Internet “Bubble Economy” and how it will and, perhaps, shouldn’t have affected the recent economic climate. I know that there are many IT professionals at these boards and would like to know their viewpoints on this pertinent and controversial issue.
We had an IPO crash in '87, Black Monday. Didn’t have anything to do with tech stocks, just that IPO fever had swept the market and the herd had headed for a cliff.
It caught me in particular, because I was VP of Software at a company that sold daily IPO database updates and analysis to Wall Street underwriters. When IPO’s tanked, so did the demand for comparison data.
The trouble with all market economies is that in theory they account for everything, but in practice all the action is at the fringes, the hottest, newest, unproven stocks, where you can’t actually account for anything.
The Internet bubble was looking forward to something real, I’m convinced. My first experiment with Amazon went like this: there was a book my brother had that I wanted but that I could never find anywhere. I’d been looking for years. I went to Amazon, put in the title, and they had it, in stock! I ordered it, and it arrived the very next day, even though I hadn’t specified any sort of special delivery.
I was utterly amazed.
Also: I’m skinny and about 5’10", and I find getting pants that have the right waist and inseam at the store to be almost impossible. Online, you just specify your measurements and a couple of days later, the UPS guy shows up with clothes that usually fit.
But of course at the beginning of great changes like this you’re going to have lots of froth. Goes with the territory. The trick is making sure that after the inevitable bubble bursts, you don’t let the entire economy get sucked into the vacuum that gets created.
As for the effect specifically on IT, well, at my company we’ve already hired at least one person that I know of from a busted dot-com. More will be coming, I’m sure. I’m also sure that the next couple of years will see some rough times for employment among IT pros.
IT people tend to think the world revolves around them, and that the whole world is converting over to the information economy. But the output even of Microsoft is dwarfed by GM, Exxon/Mobil, Ford, General Electric, and some other extremely large Old Economy companies. A little perspective is in order.
It’s really simple. The Internet was this hot, revolutionary new medium, and everyone wanted a piece of it. You could make a fortune if you got in “on the ground floor”, IIRC. The investors got so caught up in the hype that they kept pouring money in even though a vast majority of those startups were losing tons of money. (According to This Modern World, Priceline.com was selling below cost and Amazon.com never once made a profit, although this may be chaning.) Kind of like three-card monte; they were so blinded by the prospect of easy money that they never even realized they were being ripped off. Eventually, everyone wised up, the gravy train ran dry, and the dotcoms bankrupted in droves.
It’s unfortunate, but, as Pantom mentioned, too many of these companies thought they could spit in the face of simple economics. I’m not shedding any tears over their fate.
Aside: The strange thing about the whole dotcom revolution (which I think Ted Rall mentioned once) was that everyone involved seemed to lose out. The internet companies were busted. Dotcom employees suddenly found themselves destitute (no kidding; many of them were paid in stock, now worthless). The investors lost everything they put in. The traditional industries’ profits took a hit from the competition. Where the hell did all the money go?
I think that the new economy bubble was spurred on by the millions and millions of dollars that became available thru 401(k)s and IRA investments. This makes me wonder if the proposed $1.6 to 2.6 trillion tax cut will also flood the stock/investment market resulting in another new economy bubble of overinflated investment hopes. Seems to me that it might be better to target tax cuts, no matter what size, to those with heavy credit card debts, no prepaid college plans for the kids or modest/nonexistent retirement assets to augment social security.
The old economy and new economy blend: The January issue of the Atlantic Monthly’s article "The New! Old Economy: how computers reinvented America’s rest-belt industries and ended the age of limits is a real eye-opener.
While many folks have seen the internet dotcom companies as the “end all and be all”, the old economy has been increasing productivity potential via computers. A major link is the ability to share this type of information via the internet.
Why hasn’t changing demographics [ie: more working mothers with less time to shop] been a big positive to internet shopping? Because: “I gotta get out of the house”, instant gratification, and the need to touch/feel products before you buy. Can online shopping come up with a deal to change these barriers? That I don’t know.
It’s a typical example of economic stupidity and flooding the available market.
Someone made money on a dotcom, so 500 others greedily decided to do the same, and they flooded the market, forgetting that the Internet has limitations. Like, I watch these advertisements on TV and they show Internet businesses giving you TV quality video, gobs of information easily at your finger tip, and superfast uploads, downloads and Internet connections.
Well, I’ve never obtained TV quality videos, never managed to get a smooth flow webcam picture, had to struggle through various difficulties with site searches, web searches, and even ‘askjeeves’ sucks for Internet searching. I’ve had to load up my limited drive space with several media players because it seems every other website uses a different one, and found ordering things off of the net a bit of a pain, especially when the pictures of the items are too small and when enlarged, are grainy.
It had all the earmarks of your classic bubble – a “new” investment opportunity that supposedly will make all the investors rich. What used to be land or tulips is now dot.coms.
There were certainly questions about Internet stocks. As I’ve pointed out here before, if you’re selling a tangible item on the Internet, you’re essentially a mail order business. No one was rushing to buy up L.L. Bean. And indeed, even a successful Internet company was unlikely to be the type of massive success that engendered the boom.
The smarter investors knew this. They also knew that they could make money until the bubble burst. So they got in, and got out as soon as things began to falter (which, of course, made the fall that much quicker).
The rest of the investors jumped in simply because they saw the stock prices rising and figured they’d get rich quick (a pretty typical reaction).
Who made money? The people who knew enough to get out when the bubble showed signs of bursting (and were able to resist the urge to buy on weakness). The employees of the dot.coms (it may not look like it now that they’re out of a job, but while the ride lasted, it was quite lucrative. The smart ones should have put the money into savings or blue chips so they had something when the bubble burst). And, actually, a lot of people never actually made any real money even at the height of the boom, simply because they never cashed in the stock, expecting it to continue to grow.
