How the Internet Happened: From Netscape to the iPhone

by Brian McCullough

“They kept saying, ‘They don’t own anything,’ ” said Del Vecchio. “ ‘They don’t have any buildings, they don’t have any trucks.’ ” So, both companies passed.

As Yang told a television interviewer, Yahoo was facing a dilemma. “You’re a search engine—once they’ve done the searching, why do they need you?”34 Yahoo needed to find a way to keep users on its pages. To use a watchword that was ubiquitous at the time, Yahoo needed to get more “sticky.”

The search sites began to accumulate a utility belt of services to keep users hooked on their offerings. Things like free, web-based email, calendars, and address books, proved to be the most sticky tools of all. Once web users locked into a given portal and began to rely on one particular site for their personal email, for their scheduling, for the most intimate details of their lives, portals locked these users to repeat visits. A portal was now where you returned to again and again throughout the day, not just to search, but to manage your life.

Once you identified yourself to your portal of choice in order to claim your “excite.com” email address, the site now knew your name, your general geographic location, your age, your sex, and tons of individual preferences. Sure, the portals claimed that all of this was in the interest of providing useful info like local weather conditions, personalized headlines and stock quotes. But the reality, of course, was that they now had the holy grail of marketing: demographic data to target ads against. This served to turbo-boost the advertising revenues the search sites were already generating.

“We began with simple searching,” Yang told Time, beginning to sound a bit like a studio mogul, “and that’s still a big hit—our Seinfeld if you will—but we’ve also tried to develop a must-see-TV lineup: Yahoo Finance, Yahoo Chat, Yahoo Mail. We think of ourselves as a media network these days.”

Any time a new technology leads to the proliferation of startups, any time venture capital investments increase year over year, any time company valuations pass stratospheric levels and high-profile IPOs hit the market, people inside and outside of tech fall all over themselves to declare that a new bubble is here, and everyone should head for the hills. But the fact is, the dot-com bubble was a truly singular event, brought on by a unique mixture of causes, and we are unlikely to see its kind again in our lifetimes.

Friday the 13th of August 1982 would come be recognized as the beginning of the greatest bull market in American history. By the time the dot-com bubble burst in March 2000, the Dow and the S&P 500 Index would have risen tenfold, and the technology-heavy Nasdaq index nearly thirtyfold.1

There were some quite notable hiccups along the way, but from 1982 until the turn of the century, the market closed up, year-on-year, almost every single year. Even after the Black Monday crash in 1987, when the Dow lost 22% in a single day, investors who held on through the crash had more money on December 31, 1987, than they had on January 1, 1987.

entire generation of investors came of age believing that markets only moved in one direction: upward. If history tells us anything, it’s that when people come to believe only good news can ever happen, a speculative financial ...

culmination—the euphoric end-stage—of this protra...

It was all that much more impactful because it happened to the baby boomers, the megageneration. Between 1946 and 1964, 76 million Americans were born, and by the 1990s, this cohort was entering its forties...

in his book A Short History of Financial Euphoria. “For practical purposes,” Galbraith wrote, “the financial memory should be assumed to last, at a maximum, no more than 20 years. This is normally the time it takes for the recollection of one disaster to be erased and for some variant on previous dementia to come forward to capture the financial mind. It is also the time generally required for a new generation to enter the scene, impressed, as had been its predecessors, with its own innovative genius.”

“The dot-com stocks were the froth in the cappuccino,” former Barron’s financial journalist Maggie Mahar says.

But if you weren’t content with merely doubling your money on a solid, staid stock like Procter & Gamble, then, by 1998, you might start to look enviously at the returns tech stocks were ringing up. Everything changed over the course of 1998. If you bought $1,000 worth of Yahoo and Amazon each at the time of their IPOs, over the course of 1998—merely twelve more calendar months—you would ring in the new year of 1999 to discover that your original $1,000 investment in Amazon was now worth $31,000 and your $1,000 worth of Yahoo stock had ballooned to $46,000.

In the twelve months of 1998, Yahoo stock returned 584%, AOL 593% and Amazon 970%.

In the last two years of the nineties, seemingly any random Internet stock pick began to feel like a sure-thing lottery ticket, and that is why we remember this period as the dot-com bubble. Internet stocks proved to be particularly susceptible to speculation for a couple of reasons. Dot-com companies were young. They were going public sometimes only months after their creation. When they showed any sign of growth, their stock prices took off because it seemed to validate the notion that there was only more growth ahead.

They were tied to potential fortunes to be made, somewhere in the future. New metrics like counting “eyeballs” and “mind share” were used to show companies were growing, even if that growth couldn’t be measured in dollars and cents. Heck, sometimes a dot-com stock would increase in value even after it announced losses! Investors might take that as a sign the company was “wisely” plowing its money into strategies for growing at all cost.

Magazines like Wired were promoting a glittering future where technology would soon be a panacea for all of mankind’s ills. Books like Ray Kurzweil’s The Age of Spiritual Machines promised that technology might help us transcend death itself. Bestsellers like The Long Boom and Dow 36,000 made the argument that technological advances were enabling a structural shift that would kick the global economy into a new, higher gear, almost unfathomable to contemporary minds.

For everyone involved, it was far more helpful to your career if you joined the hosanna chorus talking up the prospects of the soaring market. Fund managers who did not fill their holdings with technology stocks saw their returns trail those of their peers and even the market indexes. “You either participate in this mania, or you go out of business,” Roger McNamee, one of the most famous technology investors of the era, told Fortune in June of 1999. “It’s a matter of self-preservation.”

After all, everything was getting connected! The world was shrinking! Computers were everywhere! Surely that meant that things were functioning better, more efficiently, more profitably. The only problem was, none of this seemed to show up in any of the official numbers. Economic output is easy to measure when you can count widgets coming off an assembly line. But when your “economic revolution” is built around thoughts and ideas, and the speedy new ways you’re connecting them all together, how do you quantify the value of those innovations?

In the nearly two years after the “irrational exuberance” speech, the Federal Reserve raised interest rates only once, and, in fact, cut rates several times in response to the various mid-nineties “crises” few now remember, like the so-called Asian Flu of July 1997.20 So, from late 1996 until late 1998—just the time when the dot-com bubble was inflating—the Fed was, to borrow from Wall Street lingo, extremely “accommodating” to the stock market.

IN THE WORDS of James Grant, editor of Grant’s Interest Rate Observer, writing in 1996, “The stock market is not the kind of game in which one party loses what another party wins. It is the kind of game in which, over certain periods of time, nearly everyone may win, or nearly everyone may lose.”22 By the late ’90s, everyone involved in the stock market seemed to be winning. And the coming of the dot-com stocks only seemed to extend this winning streak.

All told, approximately 50,000 companies would be founded between 1996 and 2000 aiming to commercialize the Internet, backed by more than $256 billion in venture capital.

if the dot-com bubble is remembered mainly for the initial public offerings of stock that made all the headlines, it’s important to remember that the actual dot-com mania, as measured by high-profile Internet IPOs coming to market, happened in a relatively brief window of time. In 1995, 7 stocks IPOed that could be termed “Internet companies.” In 1996, there were 27. In 1997, the first of the real “dot-coms” came to market, totaling 19. In 1998, there were 29. But in 1999, there were 249 Internet IPOs. And those were just the

Internet companies that debuted on the stock market. There were untold others that got...

Priceline was founded by Jay Walker, a forty-two-year-old entrepreneur with a clever solution to a real problem: every day, 500,000 airline seats were going unsold.1 Priceline would offer these vacant seats to online customers who could name the price they were willing to pay to fill them. Consumers would (theoretically, at least) get cheaper flights; airlines would be able to sell excess inventory; inefficiencies would be ironed out of the market; and Priceline would take a cut

SO MANY OF THE COMPANIES that would embody what we think of when we remember the dot-coms shared some or all of Priceline’s traits: a business plan that promised to “change the world”; a Get Big Fast strategy to reach ubiquity and

corner a particular market; a tendency to sell products at a loss in order to gain that market share; a willingness to spend lavishly on branding and advertising to raise awareness; and, above all, a sky-high stock market valuation that was divorced from any sort of profitability or rationality.

A startup named Furniture.com raised $75 million only to learn a lesson that Ikea had known about for years: you can’t exactly send a couch via UPS. “There were many cases when we would get an order for a $200 end table and then spend $300 to ship it,” a former Furniture.com engineer would admit. “We never could figure it out.”19

Borders knew that for every $100 in grocery store sales, $12 was eaten up by the cost of simply running the grocery store. In a famously low-margin business (for every $100 in sales, the typical grocery store sees only $2 or less in profit), eliminating a big cost center like that could be transformative. “Intuitively, I knew I’d have a great financial model if I could eliminate store costs,” Borders told Businessweek.21 And that was the promise of ecommerce, right?

It became imperative to keep the pipeline of new companies—and therefore, new IPOs—coming. Fortunately enough, the bubble era engendered a sort of fever for entrepreneurship that probably hadn’t existed in this country since before the Great Depression (the Roaring Twenties, the age of the tinkerer-developers of the automobile, the telephone, the radio, the airplane).

The supply of entrepreneurs was more than met by eager venture capitalists who were all but begging the new companies to take their money. In 1998 alone, 139 new venture funds were created, with more than $17.3 billion in new capital to invest with, an increase of 47.5% over the previous year.41 “It was absurdly easy,” a young Harvard Business School graduate said of the fundraising process during the dot-com era. “You would walk into offices in New York and people would immediately offer money to you if they thought you looked smart. We didn’t have any data on the market; we didn’t have a product demo; we didn’t have anything. We had a business plan, but that was it.”42

Venture capitalists know that they have to kiss a lot of frogs before they find a prince, but the dot-com era was a uniquely good time for VCs, because the willingness to take companies public under any circumstances—profitability be damned—meant that VCs weren’t punished for being indiscriminately promiscuous. Even the ugliest frogs could be winners. The average yearly return for venture funds that focused on early-stage startups was 25% by 1998, and plenty of the top-tier funds were earning well in excess of 100% or 200% yearly on invested capital.43 VC is a game of blockbusters; one home-run investment like an eBay, returning 100,000%, can make up for a lot of losers. And even then, what did it matter if you backed a loser when you could take it public and cash out one way or another in less than nine months?

Mercata.com raised $89 million to create a group-buying marketplace where thousands of people would buy items in bulk in order to get better pricing. One day after its IPO was canceled, the company declared bankruptcy.56

If Mercata sounds like an eerily similar idea to later social-buying companies like Groupon, that’s not exactly unusual. Plenty of dot-com startups were founded around concepts that were quite possibly good ideas but were just a bit too early for the time.

eCircles.com pioneered online photo albums, and Myspace.com and Desktop.com rented what were essentially virt...

cloud storage. After going bankrupt, the Myspace.com domain would later be put to use by another s...

‘The last thing I want to be is profitable,’ ” one investment banker bragged in June of 1999. “ ‘Because then I wouldn’t get the valuation of an Internet company.’ ”70

Over the second half of 1999, it wasn’t a question of whether or not a bubble existed, it was a question of how big a bubble it was, and when it would pop.

entire nation seemed to be engaged in a “greater-fool” standoff. You bought stock or founded a company because you knew everyone else was doing the same. Most people knew the irrational exuberance was unsustainable, but no one wanted to be the first to admit it. After all, if you could squeeze your IPO out before the window closed, or if you could hold your Yahoo stock long enough for it to double one last time, then you could pick your moment to cash out, hopefully before everyone else got the same idea. In the meantime, you kept your own counsel and shook your head quietly as the last flood of dubious companies rushed the public markets.

For the better part of two years, the dot-com mania had been fueled by the This Time It’s Different™ mass faith that Americans had in the promise of the Internet. That sort of new-economy mumbo-jumbo worked for the dot-com companies—until it didn’t. Get Big Fast and profits-someday were valid business strategies—until they weren’t. The hundreds of new companies created in the dot-com era simply pushed credulity a bit too far, for a bit too long. The flood of crap companies, especially those that came to market near the end of the bubble,

Dot-coms ceased being sure stock market winners—at first in a trickle, and then all at once. Falling stock prices turned into stock market delistings and then became actual bankruptcies. Like any good game of musical chairs, when the music stopped, there simply weren’t enough seats for everyone. As investors suddenly began to demand that companies show a profit for the first time, the collective response from the dot-coms was “What? You can’t be serious!”

that the technology industry is so dynamic, so competitive, that no player, no matter how dominant in one market or at one point in time, can really be thought to be monopolistic. Because, in the blink of an eye, that entire market could change thanks to the arrival of new competitors or new technologies.

“This is a historic moment in which new media has truly come of age,” Steve Case told the stunned financial press. “We are going to be the global company of the Internet age.”37 Case vowed that one day AOL Time Warner would have $100 billion in revenue and a $1 trillion market cap. And for the moment, there was no reason to disbelieve him.

AOL had bought Time Warner. An Internet upstart had taken over a decades-old media giant with five times its revenue.39

The definitive book on the merger, There Must Be a Pony in Here Somewhere, was written by Kara Swisher some years after the deal was consummated. In it, she claims that, at the time, the merger seemed like a home run to her and nearly everyone else: “In one major move, the two companies had seemingly addressed their weaknesses and intensified their strengths. I won’t deny I really believed that, as did many others—many of whom now pretend they never did.”

Was there any one thing that pricked the dot-com bubble? Of course not. There were a myriad of factors that all accumulated to bring about the end of irrational exuberance.

the Fed had finally begun to raise interest rates: three times in 1999 and then twice more in early 2000, the most sustained round of fiscal tightening over the whole of the late 1990s. And just as suddenly, the language from the Fed had shifted to an open attempt to rein in equity prices. Added to this was the fact that the Internet cheerleaders were changing their tune as well. One by one, Wall Street analysts began advising their clients to lighten up on Internet stocks, saying that the technology sector was “no longer undervalued.”

The crash had myriad victims, but a few can stand for the many. Webvan burned through more than $1 billion before declaring bankruptcy in July 2001.44 Pets.com had the ignominious distinction of liquidating a mere 268 days after its February 2000 IPO.45 It closed its first day of trading at $11, the same price at which it had gone public—no first-day pop. The next week of trading saw it down at $7.50.46 eToys went out of business after ringing up $274 million of debt. Once valued at $10 billion, its liquidators couldn’t even line up bidders for the $80 million warehouse system it had built.47

By April, just one month after peaking, the Nasdaq had lost 34.2% of its value.48 Over the next year and a half, the number of companies that saw the value of their stock drop by 80% or more was in the hundreds. By August of 2001, eTrade was down 84% from its all-time high. SportsLine was down 99% (trading at 91 cents). And for most, no recovery ever came, even for the biggest names. Priceline had cratered 94%. Yahoo was down 97%, from an all-time high of $432 per share to $11.86 on August 31, 2001, its market cap down to $6.7 billion from $93 billion. That $1,000 put into Amazon’s IPO, which had climbed in value to more than $61,000 at the bubble’s height, was worth about $3,400 at the end of September 2001, when Amazon was trading under $6.