Eli5 the ‘dot com bubble ‘ and why it burst in the early 2000s?


EDIT: thanks for all these brilliant responses. Hits great to get the various perspectives. Upvotes are on me!

In: 13

“Dot com” referred to internet-based businesses at a time when that was new. After some early internet businesses did well in the 90s there was a rush of investors to invest money with any 20-something software engineer with a business plan (the bubble). The internet as consumer technology was new at the time, and many of the investors didn’t really understand it other than that many people were going online and there must be money in that. Although some of those businesses did well, many of them did not, and their failure was the bursting of the bubble. It was not primarily that something specific happened in the early 00s so much as it turned out (for most companies) to monetize growing web traffic.

We’re seeing a bit of the same with tech now and will likely see the same with AI in ~5 years.

I was there, but not in one of the startups. I was working in the SF Bay area at a big company called Sun Microsystems (which has been absorbed into Oracle).

Windows 95 was the OS that got a lot of people to buy a computer and get on the internet. Home computers before then were for hobbyists because it was all Command-Line. Even if you had Windows 3.0/3.1, you still had to load DOS first and then type win.exe to start it up.

The internet in the mid 90’s was very simple. Some websites figured out how to sell stuff, but if you put your credit card into the web page, it was passing the information as clear text (no security), so people were just starting to figure out how to monetize the internet.

One of the most well known sites to hit it big early on was eBay. All of a sudden investors and venture capitalists saw a new market where a small company could make it big and make tons of money. eBay didn’t need warehouses and staff to move merchandise. They just needed people who knew how to make web sites. So investors could put their money into a dozen different startups, and if one was successful, that was good enough.

Just as a side note, you’ve probably noticed that a company like Uber that has been around for awhile has never once turned a profit. It pays its bills with venture capital hoping to be in on the ground floor of a business that owns the whole rideshare market. The dot com bubble was like that but for hundreds of websites. They may have had good ideas, but they couldn’t make them profitable. You could go to pets dot com, but you couldn’t get pet supplies for less money than driving down the street to WalMart or a pet store, and you had to pay big shipping costs, which people today still roll their eyes at. So you had a lot of money propping up startup companies that couldn’t turn a profit. As soon as the VC dried up, they all went out of business.

You know how people say if only i put X amount of money in amazon back then. The problem is that there were 1000s of little amazon back then and you dont know which one will win. Basically the internet was seen as a gamechanger to everyday life (which i would agree with) and thousands companies were given tremendous capital. When the dust settled there were 3 major players left. This is nothing unusual, it happens all the time.

In the late 90s the ‘practical internet’ was born.

While the internet had existed for decades it had only really been used by enthusiasts, big corporations, the military, and academics.

The late 90s saw a boom of internet growth where it became something used in the average household. Email, online shopping, and web surfing became more and more common place.

Lots of startups during this time were trying to get in on the boom but for every Amazon or Ebay there was a dozen pets.com that either had a flawed business model or a business that just wouldn’t work.

A lot of internet businesses like Amazon are actually just the modern version of buying from a mail order catalogue and when people realized that the shipping costs didn’t make up for the convenience of buying from home companies like pets.com collapsed.

Seeing that the internet was a huge untapped marketplace investment money rolled in and a lot of web companies ballooned in size while not generating any significant revenue.

These businesses had stock prices that were way over valued and wall street speculation was rampant.

Eventually the bubble popped and many of these early internet businesses went into bankruptcy. Lots of investment cash disappeared and the stock market took a tumble.

One the prevailing theories is that the market greatly over estimated the speed at which the internet was growing. These businesses might have actually succeeded today but back then the internet didn’t have nearly as many users as now.

The other point is that Amazon succeeded in part because it was able to build on its low-shipping cost book business to put together a massive shipping infrastructure to lower the cost of shipping for every day items.

…That and because it ran at a loss for a long time to put the small book stores that it competed with out of business.

A lot of people are talking about all of the websites that failed for all kinds of various reasons, and yes, that started the dominoes falling, but the actual burst came as a result of that. Far more than just a ton of b2c (business to consumer, meaning the business sells straight to consumer) e-commerce websites and other sites that sprang up and failed, there were lots of b2b (business to business, meaning they sold software and services to businesses to help them sell to consumers) startups who had solid business models and real products that worked, which failed because many of their customers started to go away.

I myself worked for one of these. I worked for a rapidly growing startup that provided payment processing for those e-commerce sites. This was before PayPal existed, and at that time, for the most part, if a website wanted to sell something, they had to figure out how to do all of the credit card processing themselves. We were profitable, and on the path to IPO, and then all those companies started to fail, so we lost a lot of our customer base, and we failed.

There were other companies that started doing things like web hosting for those sites, other companies which provided assistance for the supply chain management, other companies for managing shipping, etc, etc. The dot com boom was a lot more than just websites selling stuff direct to consumers. It created all kinds of companies to support selling stuff direct to consumers. When those companies lost their customers, they also failed. THAT was the real bubble bursting.