title for Dotcom Bubble profile

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section heading icon     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.

subsection heading icon     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'.

subsection heading icon     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.

subsection heading icon     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.

subsection heading icon     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.

subsection heading icon     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).

subsection heading icon     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.

subsection heading icon     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.

subsection heading icon     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.



version of January 2005
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