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January 24 - January 30, 2022
The venture capitalists who backed these companies were aiming for supernova IPOs, because that’s when they got paid. Any IPO meant an “exit” for venture investors.
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.
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 virtual hard drives—what we now call cloud storage.
BY OCTOBER 1999, the market cap of the 199 Internet stocks tracked by Morgan Stanley’s Mary Meeker was a whopping $450 billion, about the same size as the gross domestic product of the Netherlands. But the total annual sales of these companies came to only about $21 billion. And their annual profits? What profits? The collective losses totaled $6.2 billion.
One by one, the weakest of the dot-coms, those with the flimsiest business plans, or those that were the most blatant copycats of other flimsy ideas, began to underperform the market. 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.
In a last-ditch effort to shore up market share, Netscape released the source code to its browser on a website called Mozilla.org in January 1998. The Economist magazine said that this move was “the computer-industry equivalent of revealing the recipe for Coca-Cola.”10 This open-source browser project would later evolve into the Firefox web browser, which would, in the 2000s, eventually take the market-share crown back from Internet Explorer. But it did nothing for Netscape at the time.
Judge Jackson found Microsoft guilty of violating U.S. antitrust laws. Microsoft had “maintained its monopoly power by anticompetitive means and attempted to monopolize the Web browser market.”13 The suggested remedy: Microsoft should be broken up into two separate companies: one that developed and sold operating systems, and another that developed and sold applications like web browsers. Of course, it never ended up that way. The case was appealed: the original verdict was rejected; and by the time the new Bush administration took office in 2001, there was little appetite for continuing what
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Indeed, Microsoft’s diminished stature over the course of the 2000s would seem to validate one of the company’s key claims during the trial itself: 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.
The fact is, while Microsoft made plenty of moves during the dot-com era (MSN, Expedia, Hotmail, WebTV, just to name a few), it largely refrained from engaging in direct combat with the major dot-com players. More important, Microsoft never had the chance to absorb any of the cream of the new crop, as it had shown it was wont to do in earlier technology eras.
IF MICROSOFT’S HEGEMONY over the tech industry was broken by the end of the decade, the only meaningful casualty of this structural earthquake was Netscape. The antitrust trial was, of course, not designed to save the fortunes of Netscape; the parties involved in the trial were the U.S. government and Microsoft. Netscape was just the star witness, the primary victim. And by the end of the trial, Netscape was not even an independent party anyway. On November 24, 1998, America Online announced it was purchasing Netscape for $4.2 billion in stock.
No company took greater advantage of the bubble madness than AOL, by straight-up cannibalizing other dot-coms.
AOL skillfully played one competitor off another: Barnes & Noble paid $40 million to be the bookselling partner on AOL’s online service; Amazon paid $19 million just to be on the AOL.com portal; in the midst of fending off auction competition from Amazon, eBay ponied up $75 million for a four-year auctions exclusive.
AOL became so proficient at doing these deals, so rapacious, in fact, that it gained a reputation for aggressiveness that, until recently, only Microsoft had enjoyed. AOL’s army of deal-makers were known internally as the company’s “hunter-gatherers,” because they descended on the dot-coms like predators and made them offers they couldn’t refuse. As one anonymous dot-com executive remembered AOL’s tactics, “For weeks it was, ‘You’re great, you’re great, you’re great,’ and then one day [we had to] give them every last dollar we had in the bank and 20 percent of our company.” Another dot-commer
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AOL was worth more than Disney, Philip Morris, or even IBM; it was worth more than General Motors and Boeing combined.33 But the gorilla had a problem. It was no secret to anyone in the tech industry that the days of dial-up modems were numbered. The long-promised dream of broadband—web browsing at speeds thirty times faster than the 56,000 bits per second that was state-of-the-art for AOL’s millions of users—was just around the corner.
Unlike on the phone lines, AOL could not expect to get common carriage on cable networks. AOL’s bread and butter—being America’s ISP of choice—was careening rapidly toward extinction, and everyone inside the company knew it.
The tech-heavy Nasdaq peaked on March 10, 2000, at 5,048.62, a level it would not reach again until March 2015. From that March 2000 peak, all the way down to the trough it reached on October 9, 2002 (the bear market bottom would be 1,114.11), the Nasdaq would lose nearly 80% of its value.
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.
A whole generation of workers who had staked their careers on the transformative dream of technology were suddenly, almost en masse, unemployed. It was later estimated that between 2001 and early 2004, Silicon Valley alone lost 200,000 jobs.71 A whole generation of young people had, in the space of a decade, gone from being young upstarts who “got it,” to masters of the universe who seemed to be transforming the world, to completely redundant.
American industry need look no further than the example of AOL Time Warner to assure themselves that it had all just been a grand delusion. A multitude of books have been written about the monumental culture clash that ensued when the AOL cowboys invaded the halls and boardrooms of Time Warner. Certainly, dysfunctional infighting and managerial malfeasance were in large part responsible for what conventional wisdom has collectively agreed was the worst merger of all time. There were charges of accounting fraud and dirty dealing directed at the AOL side, but the ultimate failure of the
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by that point, AOL Time Warner had been forced to announce two of the biggest losses in American history: $54 billion in 2002 and $45.5 billion in 2003, both write-downs of the inflated value of AOL’s market cap that was now proven to have been illusory.
The lesson of the dot-com bubble is similar. Of course, the dot-coms went away. Of course, AOL—for one brief shining moment, the embodiment of the Internet in American life—went away. But the Internet itself didn’t go away. And that’s why the railway example is so pertinent. All of the money poured into technology companies in the first half decade of the Internet Era created an infrastructure and economic foundation that would allow the Internet to mature. And I mean that in a tangible, physical way.
By 2004, the cost of bandwidth had fallen by more than 90%, despite Internet usage continuing to double every few years.83 As late as 2005, as much as 85% of broadband capacity in the United States was still going unused.84 That meant as soon as new “killer apps” were developed, apps like social media and streaming video, there was plenty of cheap capacity allowing them to roll out to the masses. The tracks, as it were, had already been laid.
When the bubble burst in 2000, there were only around 400 million people online worldwide. Ten years later, there would be more than 2 billion (best estimates peg the current number of Internet users at 3.4 billion).85 In the year 2000, there were approximately 17 million websites. By 2010, there were an estimated 200 million (today, that number is over a billion).
Page was reserved, quiet, contemplative. Brin was outgoing, gregarious, loud. Page was a deep thinker, a visionary. Brin, a problem solver, an engineer’s engineer.
“You can’t understand Google,” early Google employee Marissa Mayer (and later, Yahoo CEO) has insisted, “unless you know that both Larry and Sergey were Montessori kids. It’s really ingrained in their personalities. To ask their own questions, do their own things. Do something because it makes sense, not because some authority figure told you.
For Larry and Sergey, their intellectual fearlessness overlapped in such a way that their conflicting personalities actually ended up complementing each other. When Page came to Stanford for the 1995–96 academic year, he and Brin became close.
All his career, Bill Gates repeatedly predicted that one day, some student somewhere would found a company that would challenge Microsoft for dominance of the tech industry. His prediction turned out to be right, and from a building with his name on it.
Well, what was a web link but a digital citation? If you analyzed the links, analyzed the citations, you might be able to make inferences about the relative value of a given web page, and possibly even determine which webpage was more authoritative by analyzing the back links in the same way that counting the citations told you which academic paper was the definitive one. Larry Page wanted to map out the value of the web’s connections by going backward through the link chain.
IT TURNED OUT THAT the reason search engines had never worked very well prior to PageRank was not that they were broken, but because they were missing the key innovation that Brin and Page had stumbled upon: relevancy.
PageRank wasn’t finding new things. It was merely finding things in a better way. The earlier search engines were already answering every query correctly. But it was finding the needle in the haystack and putting it at the top of the list that PageRank did better.
The obvious move was to license PageRank to one of the existing players, and indeed, this is what Page and Brin attempted to do. They met with everyone from the Yahoo founders Jerry Yang and David Filo, to another search pioneer, Infoseek’s Steve Kirsch. No one was interested.
The incumbent search players’ failure to scoop up the PageRank technology has become infamous in business lore as one of the great missed opportunities of all time. Larry Page has, on a few occasions, suggested that the search companies were simply myopic.
Starting in 1997, they had made the search engine available, first on Stanford’s internal network, and then to the general public. Through nothing but word of mouth, the service grew increasingly popular, serving more than 10,000 queries a day by late 1998.
Rather than blowing Google’s funds on lavish launch parties or marketing campaigns, they stayed grad students at heart, and instead invested all the money they had raised in continuing their project efficiently. Instead of building out their system by buying software from Microsoft, they used the free Linux operating system.
Google didn’t take pages from the established Silicon Valley playbook because, in a way, they had never bought into it. They didn’t try to Get Big Fast. Instead, Page and Brin were almost manically focused on endlessly iterating and improving upon their Big Idea, making sure it was the most comprehensive, reliable and—most important—speedy search engine in the world. Nothing Google did in its first years distracted the company from improving on its core product.
Frugality and efficiency were not just virtues, they were also philosophical and aesthetic differentiators. Google’s home page was simply the Google logo, a text field to enter a search query, a search button to execute that query and a button that said I’M FEELING LUCKY, which automatically took you to the first result returned.
Overall traffic to the Google homepage was peanuts compared to the numbers a site like Yahoo was pulling down, but in the case of Google, its users came via word of mouth alone. Not a dime was spent on marketing or promotion.
The truth was, Page and Brin did not want to take money from just any old VC. They only wanted the best: Kleiner Perkins and Sequoia Capital. The pair proposed that each firm, the blue chips of Silicon Valley venture, take a coequal stake in Google.
Today, we live in a world where consumers not only expect, but demand, infinite selection and instant gratification. Amazon had first introduced the concept of infinite selection, and now Napster was training an entire generation to require the instant gratification.
Infinite selection. Instant gratification. On any device. When it comes to digital disruption of media, it is almost never about free content or piracy, not at the core. It is always about giving people what they want, when they want it, how they want it. Napster seemed to understand this intuitively, even if its execution on this insight was bungled.
The device that would eventually be called the iPod was the result of a crash development program that took place over less than a year. Rubinstein led the iPod development team along with Tony Fadell, a gadget whiz who had previously worked at Philips Electronics. Apple did indeed bring its unique design magic to the project, under Jobs’s famously exacting tutelage. In April of 2001, the iPod team presented their prototypes to Jobs in person.
Jobs directed Apple’s engineers to create a digital rights management system called FairPlay that carefully limited the devices music files could be played on. He did this not because he liked copy protection schemes (he didn’t; he felt DRM needlessly complicated the user experience), but because he knew that was the way to get music executives to the negotiating table. In early 2002, Jobs began approaching executives at the five major record companies with a proposal to create an iTunes store. If the record companies would license him the right to sell their catalogs as digital downloads,
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Jobs was convinced that ease of use and customer choice were key to competing with the lure of the free. Making it dead simple for people to get what they wanted would make piracy seem like a hassle in comparison. Sure, people could buy albums on the iTunes store if they preferred, but at a more reasonable price that took into account the cost savings of digital distribution. Part of that was offering individual songs at 99 cents apiece. That way, it felt like an impulse to buy music, almost an afterthought. The revenue arrangement Jobs offered—the record companies would take two-thirds of
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Opening up the iPod and iTunes to Windows was the turning point that set Apple on the path to becoming the biggest, most profitable company in the world. Around the time of iTunes for Windows, Apple sold its 1 millionth iPod. That next holiday season of 2003, it would sell nearly three-quarters of a million more. A year later, in the holiday season of 2004, it sold 4.5 million.
Steve Jobs had leveraged the music industry’s crisis over piracy to destroy the business model of the album. He had done so out of selfish interests, but that doesn’t change the fact that his actions actually served the interests of consumers.
scheme cribbed directly from Amazon: instead of Earth’s biggest bookstore, Earth’s biggest video rental store.
Eliminating the late fee made for friendly headlines, but it was not what made Netflix take off.35 What mattered was that Netflix too had learned the key lesson of retailing in the Internet Era: unlimited selection, (near-) instant gratification. Whereas a typical brick-and-mortar video rental store carried 3,000 titles, Netflix carried tens of thousands.36 With Netflix, you could almost always get a movie you wanted to see.
There was no mechanism to take easy payment via credit card for the eBay hobbyist. Enter PayPal. Sellers on eBay simply asked buyers to “PayPal” them the payment for a successful auction to their email address. PayPal would withdraw the funds from one, and forward to the other. Among the eBay community, PayPal quickly generated a strong network effect: the more sellers asked to be paid via PayPal, the more buyers were incentivized to sign up for a PayPal account, and vice versa.
What Yahoo didn’t know was how important the partnership would prove to be for Google’s overall product. Remember that Google’s algorithms improved in direct relation to the number of searches it performed and the amount of data Google’s computers could hoover up. The flood of queries from Yahoo not only took Google to the next level in terms of search market share, but many Google engineers would later credit the Yahoo traffic for fine-tuning Google’s search engine into its mature state. Google was essentially improving itself on the back of its biggest partner.
GoTo served up text ads designed to look like search results, but which were paid for by advertisers who bid for position. It was an eBay-like auction model. For any given keyword, a company could pay whatever it cost to rank first for that search term. If you wanted to show up first on a search for “flowers,” you could bid, say, 10 cents a click. If someone bid 7 cents, they were listed second. Bidding a nickel might get you third place, and so on.
