The Old New Thing

Dot.Con: The Greatest Story Ever Sold

By John Cassidy. HarperCollins, 320 pages, $25.95

About two years ago, a journalist I know interviewed the five founders of a new dot-com for an article in a prominent business magazine. Despite not having any income from this business, or any customers, or even any system for getting customers, the founders were so certain of their inevitable success that they all dropped out of Stanford to launch their company -- something that then seemed like a reasonable thing to do. The five cheery young men had spent about a week writing up the business plan. For this exhaustive labor, venture-capital firms gave them $50 million. The new entrepreneurs had spent almost as much time, they bragged, deciding on the outfits they were going to wear when having their first major media interview. The five of them entered the conference room in identical red T-shirts, my friend told me, swinging yo-yos of precisely the same shade.

Needless to say, their company vanished without a trace.

Hard though it may be to recall, not too long ago the nation -- or at least its chattering class -- was entranced by the exuberant antics of the dot-coms, those technophiliac start-up firms that promised to Change Everything. After the deadly emergence of al-Qaeda into the national consciousness, though, the whirligig of the market for IPOs -- initial public offerings of company stock -- suddenly seemed less compelling. In consequence, Dot.Con, a history of the Internet bubble by New Yorker economics writer John Cassidy, chronicles a vanished era. It is not often that one can use this characterization for a phenomenon that is less than five years old.

The outlines of Cassidy's story should be familiar to anyone who did not spend the last presidential administration in a coma. As Dot.Con dutifully recounts, the Internet was originally intended for scientific and military purposes. But ordinary people drifted in, attracted by e-mail, virtual communities, online porn, and the sheer coolness of networking technology. As the audience on the Net grew, it attracted commercial interest. One of the early birds was Netscape, whose Navigator browser made it easier for nonspecialists to use the World Wide Web. So thrilled were Netscape's customers by the possibilities of the Web that when the company went public its share price almost tripled in a single day. Its founders, who retained much of the stock, became very rich, very fast. Lots of other people copied them. Many of these IPOs were wildly successful, too.

A kind of conventional wisdom built up. The Internet, many people thought, would overturn so many established ways of doing things that it would inevitably create vast new fortunes -- fortunes that would be obtained by the young, the nimble, and the technologically clued-in. To avoid obsolescence and to cash in on the IPO mania, established businesspeople jumped into the Net, both as entrepreneurs and as purchasers of stock. A classic speculative bubble ensued. In the euphoria of the time, sober people made absurd financial decisions -- giving $50 million to a bunch of dropouts with red yo-yos, for instance. Pessimistic analysts correctly argued that the whole business was doomed to implode, but the collapse took so long to occur that many of the pessimists were out of their jobs by the time it happened. When the dot-coms fell -- some disappeared and many lost almost all of their value -- it was the optimists' turn to look stupid.

As the title suggests, Dot.Con embodies a new kind of conventional wisdom: Anyone who got excited about dot-coms was a dupe. Cassidy adopts an archly Olympian tone, clipping together newspaper and magazine accounts of short-lived companies and rolling his eyes at the "hysterical" tone of the press coverage. Bemoaning the affronts suffered by "the already depleted ranks of reason and common sense," he scoffs at journalists, business analysts, and politicians who "helped create a populist investing culture in which adulation of the stock market was the norm." In the height of financial euphoria, he intones, "all prior reasoning, sentiment, and knowledge count for naught. Only the twisted logic of the market matters." The Internet boom, he believes, should be compared to such calamitous episodes as Holland's tulip mania in the seventeenth century, the South Sea bubble in eighteenth-century Britain, and the pre-1929 exuberance of Wall Street.

Cassidy's book has almost no firsthand reportage of the boom -- indeed, he seems not to have ventured from Manhattan to Silicon Valley, the center of the Internet frenzy that is the subject of his book. This is a shame, because the Bay Area in the clutch of dot-com mania was a subject worthy of Tom Wolfe or Norman Mailer or Ian Frazier. (Po Bronson's collection of essays The Nudist on the Late Shift captures the atmosphere better than anything else I've read.) In the headiness of the time, coffee shops in Woodside, California, had whole tables full of paper millionaires, each with a cell phone socketed into an ear.

Nearby, in Portola Valley, a young stock-option zillionaire once invited me to his home. He had invested fabulous sums turning a 1950s ranchette into a temple to electronics. Though he had lived there for a year, the house had almost no furniture -- not a single bookcase -- and he had not yet unpacked his belongings. "Do you know how much money I'd lose if I took time to do stuff like that?" he explained, tugging at his backward baseball cap. "Every book I read is, like, a million dollars." The gaudy human carnival of Silicon Valley in full boom is almost entirely absent from Dot.Con.

Actually, Cassidy wouldn't have had to go as far afield as California to see the show. In Cambridge, Massachusetts, I once saw an open-source guru in a grubby T-shirt -- an emissary from the West Coast -- lecture Boston's stodgiest suits on his homegrown notions about evolutionary biology. To my amazement, the bankers and lawyers ate up every word, so desperate were they to be in on the newest twist of the dot-com revolution. And who could blame them? For a while, it was as if a vast hand had lifted the East Coast and, as money and influence slid from Washington, D.C., and New York City down to Palo Alto and Redmond, all the establishment could do was watch helplessly.

More important, Cassidy seems unaware that his own book provides evidence that the Internet mania, though surely worthy of lampoon, was neither a true disaster nor completely irrational. What was unusual about the dot-com era was not that many new businesses sprang up but that they went public. As is well known, most new businesses don't succeed. A common piece of business folklore is that three-quarters of all start-ups fail within two years. If you apply this standard, the dot-coms fared surprisingly well. Cassidy includes a valuable "dot.con data bank" tracking the stock price of every publicly traded Internet company between its IPO and last August 31. Of the 244 companies on his chart that had initial public offerings at least two years before the end of August, 77 no longer survive as independent companies -- a failure rate of just one in three.

To be sure, the comparison is unfair; companies with IPOs aren't typical new businesses. Thanks to Wall Street, the dot-coms were better capitalized than most new companies and so could hang on longer. Moreover, many that are still around are barely alive. Nonetheless, the dot-com collapse was less widespread than Dot.Con makes out. Referring to the wildly successful, Netscape-like IPO of the South Sea Company that led to a speculative mania in 1720, Cassidy argues that "the parallels between the South Sea bubble and the Internet bubble are striking." But in 1720, as Cassidy notes, 194 "bubble" companies were founded, "of which four survived" -- a failure rate of about 98 percent. By that metric, the dot-coms look pretty good.

Although many of the investors in the Internet boom -- especially the day traders --were misguided, dot-com mania was not, as Dot.Con concludes, "primarily a story of greed and gullibility on the part of the American public." Cassidy's title here is something of a misnomer, because most of the dot-coms and many of their investors were sincere, if confused. (How do you pronounce Dot.Con, anyway? "Dot-dot-con"?) Many believed -- correctly, in my view -- that networking technology was going to make a difference to the business world, providing new opportunities and increasing productivity. Unfortunately, investors couldn't buy stock in the technology itself; they were able only to buy stock in individual companies. As proxies for the Internet, the dot-coms were as close as people could come to investing in the global network that they believed would create huge future value. Naturally, many people bought their stock and that of older companies that promised to jump into the Net.

Despite the scoffing conventional wisdom embodied in Dot.Con, this strategy was fairly successful. As the book notes, in January 1995 -- half a year before the Netscape IPO, which launched the Internet craze -- the Dow Jones Industrial Average was about 3,800. In January 2002, deep in recession, it was a little under 10,000. In other words, the Dow more than doubled in seven years -- not bad for a story of greed and gullibility. Cassidy approvingly quotes Barton Biggs of Morgan Stanley, who argued in 1996 that the stock market was approaching the conditions that led to the disastrous collapse of 1929. But compare the fate of investors who heeded his advice and bailed out of the market then and investors who ignored it and put their money into an index fund (a mutual fund that tracks the general fortunes of the market, rather than individual companies). Even considering today's recession, the latter would have done much better than the former: They would have approximately doubled their initial stake. The market may go down much further or remain flat, but it is premature, to say the least, to speak of the dot-com mania in the same breath as the stock-market boom that preceded the Great Depression.

Don't get me wrong -- the dot-com frenzy was chockablock with stupid and meretricious behavior. All evidence to date, however, suggests that it was a sideshow. Its collapse wiped out the investments of some gullible people, to whom sympathy should be extended. A few businesspeople took advantage of the hullabaloo to launch fraudulent schemes, and they should be punished. Yet the shallowness (to date) of the recession inaugurated by the Internet collapse suggests that the U.S. economy was simply too large and complex to be thrown for a loop by a noisy techno-cabal in Silicon Valley. Americans thus may be right in relegating the experience to the harmless status of a vanished craze, like watching Dallas or wearing yellow power ties. Still, I look forward to reading someday a more amused, less moralistic account of the time than Dot.Con.