How the first Dotcom Bubble began
The first Dotcom bubble started out more than 15 years ago, in 1995. The period was marked by the overnight surge of countless Internet-based companies, the so-called “dotcoms”, and by the increasing market valuation of such companies.
First dotcom bubble: The beginnings
The beginning of the 90s brought an explosive growth in the personal computer industry, as well as in the Internet adoption, made available to the public in 1991. Up until that time, computers were heavy pieces of equipment with prohibitive prices for the regular user. But the launch of affordable PCs with graphical interface managed to turn computers into a market-wide product.
Here are some highlights from that time:
1983 – Apple introduces Lisa, the first personal computer with a graphical user interface, priced at $10,000 – Wow!
1984 – Apple launches Macintosh, the first mouse-driven computer with a graphic user interface, with a much more affordable price: $2,500. The first version failed to become a hit due to its high pricing, but the following releases became much more affordable, making computer sales skyrocket.
1989 - Apple launches the first Macintosh portable computer.
1990 - Price of a PC 286 with printer: $1,699.00.
1991 - World Wide Web becomes available for the public. Internet users multiply at a rate of 3500 times a year, reaching the number of 295 million users by the year 2000.
1992 - launch of Windows 3.1
1993 - price of a PC 486/33 with 250 MB HDD, 1MB memory and floppy disk: $1,260.00
1995 - launch of Windows 95
The technological advances led to an increasing interest, from both mass media and investors, in anything tech-related. Major US magazines were raving about the “information highway“, “digital era“, “interactive television“, “intelligent refrigerators” etc. and everyone wanted a piece of the action: big companies, investors, regular people, they all began putting their money into anything that had a “.com” to its name.
Internet companies exploded almost overnight, and their main goal became developing a user base, the so called “network effect“. Traditional metrics such as P&L, revenue, P/E were overlooked, with everyone bowing to the all-mighty “growth over profits” mantra. Companies began spending like crazy hundreds of millions of dollars just to get more users, without putting too much thought into how to make money. Does any of this sound familiar?
All this growth was reflected in a 500% increase in the NASDAQ index, considered an indicator of the performance of technology companies.
How the Dotcom bubble burst
No bubble grows forever. Neither did this one. Based on a business model not very different from that of a Ponzi scheme, most dotcoms were meant to fail sooner or later. If more and more companies raise more and more money to compete over the same number of users (the network effect), then it’s unlikely that all players can win the race. I know, it’s so much easier to see it coming after it has already happened. 
The bubble began to burst in March 2000, when NASDAQ index dropped 4 percentage points over a single weekend. By the beginning of 2001, the bubble reached its lowest point, causing companies and investors the loss of $5 trillion in market value (which amounts to a 70% value drop).
Dotcom companies began dropping like flies. Interested solely in their user base and lacking a viable business model, most dotcoms were unable to survive in the real world without external financing. When the money hose was pulled out, they resorted to mass layoffs in order keep costs under control. This may have bought them more time, but it didn’t solve the real issue. By 2004, almost 50% of the dotcoms were closed.
The Dotcom bubble returns
Where are we at now? Well, I see startup valuations going through the roof, I see a lot of hype around anything social (social networks, social games, social shopping, social q&a), I see a lot of interest in user traction and not so much in revenues or profits.
And the list goes on.
Are we heading into a second dotcom bubble? No one can say for sure, but the signs are there: skyrocketing valuations, increased focus on user traction, weak revenue streams. But I think there is one thing worth remembering: the first bubble grew for 5 years before bursting, but not everyone lost: a smart (or lucky) few which pulled their money out in time won. Unfortunatelly, since it’s a zero sum game, everyone else lost.
Sources:
• Timeline of Computer History
• The History of Apple
• Computer Changes In The 1990′S
• History of the Internet – the Dotcom bubble
• Dot-com bubble
Great article, I enjoyed this and was an interesting read!!!