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Actors
This page considers the
interaction of analysts, brokers, government agencies, the
media, investors and other participants in the 1990s boom.
It covers -
Particular actors are discussed in more detail in the
Information Economy guide on
this site.
introduction
It is traditional to
characterise relationships in a bubble as those of the
confidence man and his victims. The entrepreneur or broker
spruiks investments to stupid (or merely greedy) investors
until there is a crisis of confidence and everything ends in
tears, with vultures (accountants, lawyers, officials,
journalists, other investors) picking over the
remains.
In practice is is more effective to consider
the dot-com and telco bubbles as the result of interaction
between analysts, brokers and financiers, a range of
government agencies (including regulators), the media and
investors. In other words the bubbles were integral parts of
the economy and involved the 'usual suspects', rather than
being unprecedented aberrations with a new cast of
actors.
A similar interaction will presumably energise
future 'irrational exuberance'.
the
analysts
The bubbles were driven by
assessments of innate value, projections of market growth (eg
uptake of broadband,
wireless
and B2C
electronic commerce) and forecasts that the price of
telco/dot-com stocks would rise as revenue grew and
impediments to market increased.
Assessments of current
value are contentious. Predicting future value is more of a
dark art, reflecting the unavailability of information (or
uncertainty about its interpretation) and analyst self
interest. Reshaping of financial services in Australia, the US
and elsewhere during the 1980s and 1990s (eg convergence of
wholesale and retail banking, substantial deregulation and
emphasis on market analysis as a revenue centre in major
financial institutions) was reflected in upbeat analysis by
- accounting firms (which increasingly extended beyond
traditional audit activity to embrace the provision of
management consulting and even legal services)
- experts associated with major broking houses
- consultancies such as Gartner or Jupiter that claimed
to offer insights into markets through special access to
information, analytical tools or the experience of key
staff.
In essence, consumers do not pay analysts to hear that
the crystal-ball
is murky or that it is advisable to stay out of the market
when a boom appears to be underway. The major corporate
analysts - and individuals such as Henry Blodgett - thus had
an incentive to look on the bright side and, in some
instances, to gain media/client attention by badging
unexceptional insights with funky prose about imminent
developments or sky-high projections.
Metrics
specialists - in some cases more appropriately considered as
metrics factories - were under similar pressure, responding
with oracular statements by gurus ("the death of the web", the
rise of "the x-internet"), frequent media releases and
research that on close examination was often strikingly thin.
In 2002 major Wall Street houses such as Morgan Stanley
agreed to a US$1.4 billion settlement over charges that their
analysts published misleading stock research.
Two
starting points in considering valuation are Aswath Damodaran's The Dark Side of
Valuation (New York: Wiley 2001) and his 2000 paper
The Dark Side of Valuation: Firms with no Earnings, no
History and no Comparables: Can Amazon.com be valued? (PDF).
We
have provided a more detailed examination
of the ICT analyst business elsewhere on this
site.
the
media
Old
and new journals, newspapers and broadcast programs
understandably embraced the idea of an exciting 'new economy'
centred on the internet, one that
- would defy traditional notions about
profitability
- featured iconoclastic gurus and unwashed young
entrepreneurs who'd suddenly become billionaires courtesy of
"the web thing"
- involved the death of 'old business' (eg the 'old
media' 'dinosaurs')
- promised a cornucopia of goodies for young and
old
As Richard Barbrook perceptively commented, in the
digital millennium we'd all be rich and hip (although
apparently the geeks would be richer and hipper).
The
bubbles lifted the fortunes of self-consciously new economy
journals such as Industry Standard, Fast
Company, Business 2.0, Forbes ASAP
(under George Gilder),
Wired and Red Herring. It is perhaps
unsurprising that several expired soon after the
crash.
Although we are wary about the condescension of
posterity, the lack of intellectual rigour - and indeed
disregard for fact - in much of the writing is quite striking.
In essence, much of the literature functioned as cheerleading
- lots of noise, colour, movement, adulation of heroes,
expressions of contempt for those unfortunates (naysayers,
regulators, the 'offline' and 'old industry') who weren't
surfing the digital zeitgeist.
The bubble was also
inflated by 'dried trees encased in cardboard', ie traditional
book publishing. Arguably more money was made writing about
electronic publishing (and the death of print) than was made
by electronic publishers. The dot-com book became a genre,
extending from triumphalist tomes such as Dyson's Release
2.0, Gilder's
Telecosm and Rheingold's Homesteading the
Electronic Frontier to profiles such as Proddow's
Heroes.com and Kait & Weiss's Digital
Hustlers: Living Large & Falling Hard in Silicon Alley
to corporate vade mecums embracing The One Minute
Internet Manager, Siegel's Futurize Your
Enterprise and Evans & Wurster's Blown To Bits,
often from our favourite fiction publisher Harvard
Business School Press.
Others, echoing Fukuyama's
proclamation of the end of history, forecast a perpetual boom.
Works such as Glassman & Hassett's 1999 Dow 36,000:
The New Strategy for Profiting from the Coming Rise in the
Stock Market looked less prescient in 2000, in contrast
to The Internet Bubble by Perkins &
Perkins.
financiers and
brokers
In introducing this profile we
suggested that bubbles reflect the availability of cheap
capital and the expectation that investment in a particular
sector or enterprise will result in capital growth that's
greater than that of the overall economy.
The 1990s
bubbles occurred in part because of the availability of
venture capital, acceptance of IPOs and the willingness of
service providers such as brokers to get enterprises to market
and thereafter promote the shares. In retrospect it is clear
that some major institutions behaved less than admirably,
spruiking particular shares to mum-&-dad investors while
offloading their own holdings or accepting inducements for
executives that are ethically/legally problematical.
Others appear to a jaundiced observer to have been
simply incompetent: despite the best advice that money could
supposedly buy 16 of the 17 largest US brokers for example
were recommending purchase of Enron shares in September 2001,
after that firm had announced an alarming loss of US$600
million.
One
perspective is provided by Take On The Street (New
York: Pantheon 2002) by former SEC chair Arthur Levitt and in
The Roaring Nineties: A New History of the World's Most
Prosperous Decade (New York: Norton 2003) by überbanker
Joseph Stiglitz, who laments that
what happened in the Roaring Nineties was that a set
of longstanding checks and balances - a balance between Wall
Street, Main Street (or High Street, as it is called in the
United Kingdom), and labor; between Old Industry and New
Technology, government and the market - was upset, in some
essential ways, by the new ascendancy of Finance ... The new
mantra was what is good for Goldman Sachs, or Wall Street,
is good for America and the world.
Another is Infectious Greed: How Deceit and Risk
Corrupted the Financial Markets (New York: Times Books
2003) by Frank Partnoy.
Others are provided in
Trading with the Enemy: Seduction & Betrayal on Jim
Cramer's Wall Street (New York: HarperBusiness 2002) by
Nicholas Maier, How Companies Lie: why Enron is just the
tip of the iceberg (New York: Crown 2002) by A Larry
Elliott, Buy, lie, and sell: high how investors lost out
on Enron and the Internet bubble (London: FT Prentice
Hall 2002) by D Quinn Mills, Corporate irresponsibility:
Americas newest export (New Haven: Yale Uni Press 2001)
by L.E Mitchell and the fashionably retardaire Fat cats
and running dogs: the Enron stage of capitalism (London:
Zed 2002) by Vijay Prashad.
Reference to works about
preceding scandals such as Levine & Co: Wall Street's
Insider Trading Scandal (New York: Holt 1987) by Douglas
Frantz, Inside Out: An Insider's Account of Wall
Street (New York: Putnam 1991) by Dennis Levine, A
License to Steal: The Untold Story of Michael Milken and the
Conspiracy to Bilk the Nation (New York: Simon &
Schuster 1992) by Benjamin Stein suggest that the problem may
be inept regulation and human nature rather than the terminal
stage of capital, something diagnosed every 20 years since the
1860s.
the
regulators
In some sense we are all
Thatcher's children, affected by the deregulatory zeitgeist of
the 1980s and 1990s. Part of the excess of speculative
investment in dot-coms and telcos is attributable to reliance
on self-regulation by financial markets. It is also
attributable to the weakness of government regulators in the
US, Germany, Australia and elsewhere.
In retrospect
agencies such as Australia's ASIC took too positive a view of
those they supposed to regulate. In some cases, such as
insurance sector regulation by the Australian Prudential
Regulation Authority (APRA) the lack of will appears to have
been compounded by lack of expertise and resources, resulting
in the HIH, OneTel, Froggy.com and Enron
debacles.
Blame must be shared with private sector
financial service providers, in particular global groups such
as as Arthur Andersen that had expanded from audit activity to
embrace management consulting and even legal advice. In the US
the 'big five' - PricewaterhouseCoopers (US$2.2 billion
turnover in 2000), KMPG (US$1.3bn), Deloitte Touche Tohmatsu
(US$1.2bn), Ernst&Young (US$1bn) and Arthur Andersen
(US$0.9bn) - were belatedly found wanting by the SEC and other
agencies. As noted on the preceding page, Andersen appears to
have made more money from providing management advice to Enron
than underpinning corporate compliance through rigorous
independent audit services.
Insights are provided by
Inside Arthur Andersen: Shifting Values, Unexpected
Consequences (New York: Prentice Hall 2003) by Susan
Squires, Cynthia Smith, William Yeack & Lorna McDougall,
Paul Barry's Rich Kids (Sydney: Bantam 2002), Maggie
Mahar's Bull! A History of the Boom, 1982-1999 (New
York: HarperBusiness 2004) and Jean Gadrey's New Economy,
New Myth (London: Routledge 2003).
other government
agencies
Government regulatory action was
sometimes contested by other government agencies. One of the
products of notions of 'internet exceptionalism' and 'policy
by media release' was the establishment of 'new economy'
agencies such as Australia's National Office for the
Information Economy.
The effectiveness of such agencies
in facilitating uptake of the net by business and the wider
community or driving the development of coherent
whole-of-government policies is uncertain. Most appear to have
succumbed to hubris, serving as cheerleaders and distinguished
by publishing of glossy reports rather than much of substance,
offering legitimacy to media noise about the unendable boom.
Comparison of the 'digital' cheerleaders with other
government new technology facilitators (such as those in the
biotechnology sector concerned with policy-making and funding)
is instructive. We'll be exploring the performance of the
digital agencies and biotech agencies in a forthcoming
paper.
Other parts of government, such as agencies
responsible for auction of radiofrequency spectrum to mobile
phone companies, were also fundamental actors in the
bubbles.
investors
Ultimate responsibility for
the dot-com and telco bubbles rests with investors, the people
who put their own money into the market (whether directly or
through mechanisms such as mutual funds) and who - as voters -
have some control over government regulators such as ASIC.
As in past bubbles some investors funded expansion
because it seemed like a good idea at the time, because they'd
been wowed by noise from the media and their financial
advisers or because they'd been lulled by cheering from
government. The number of people burned when the bubble
collapsed is unknown.
winners and losers?
In discussing the
digital economy we've suggested that it will be some time
before substantial productivity growth across most industries
is clear. Economists cited earlier in this profile have argued
that the overall impact of the dot-com and telco crashes may
have been overstated. However, it is clear that significant
wealth was destroyed in Australia and elsewhere in the
collapse of dot-com and telecommunication share
prices.
As with past booms and busts, the identity of
some winners is clear. These include lawyers (setting up and,
alas, reorganising businesses), accountants, financiers and
brokers. They also include service providers such as
publicists, advertising agencies and the media, prospectus
printers, caterers (accounts of promotional expenditure by
Boo.com and its peers are suggestive) and vendors of Aeron
chairs or expensive bibelots.
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