Internet Illusions

by Dick Morris
Renaissance Books, 236 pp., $15.95 (paper)


Until March 28 of this year, the investment world acted as if the coming of the Internet really had changed the basic rules of finance. Early that month, the Nasdaq average, which is heavily influenced by technology and Internet stocks, had passed 5,100, double its level of six months earlier.—essentially a discount retailer, which had never made a profit and whose most recently reported yearly losses were more than $700 million—had attained a market capitalization greater than that of Boeing. The 3Com Corporation, which makes communications hardware for computers, had just spun off the subsidiary that manufactures the popular Palm Pilot handheld device. A week after its shares began trading, the new subsidiary was valued by the market at $35 billion. The parent company, 3Com, held 95 percent of Palm’s shares—but 3Com’s total market capitalization was only $24 billion.

Clearly this could not last. But day by day traders and analysts kept bidding up Internet stocks. In reality, many were operating on the “greater fool” theory—the expectation that they would be able to unload the overpriced stocks at an even more inflated value before the mania subsided. For public consumption they rationalized their decisions and the Net valuations as reflecting the “new rules” of the information economy, and the “new business models” that made companies desirable even if they had no obvious way to make money.

Then, in mid-March, the Nasdaq headed down. It had slipped from time to time in the preceding year, only to recover when investors feared they might miss the next inexplicable market high. But on March 28, the consistently bullish analyst Abby Joseph Cohen of Goldman Sachs announced in a newsletter that she considered the technology sector as a whole over-valued. In the next five weeks, the Nasdaq lost 40 percent of its value, going below 3,300. (At this writing, it is below 3,200.) Amazon’s market capitalization fell by 75 percent from its peak. By mid-summer, more than a hundred initial public offerings for Internet companies, with projected total value of more than $8 billion, were canceled or indefinitely postponed. A delightfully malicious website named made its debut. It mocked the upbeat business magazine Fast Company in its layout and tone, and it publicized the latest alarming news about which Internet companies were about to lay off employees, announce they were “looking for new revenue models,” or go out of business altogether.

The leading chronicler of the Internet economy, The Industry Standard magazine of San Francisco (for which I write a column1 ), ran a cover story late in 1999 called “Suddenly Rich,” about the way lives were transformed by unimaginable wealth. In September of this year it ran a feature called “The Day the IPO Died,” about entrepreneurs who risked it all on new Internet ideas—and went broke, because venture capitalists had become hyper-selective about Net startups.2 In the spirit of, the magazine also instituted its grimly comic “Dot-Com Layoff Tracker,” “Dot-Com Flop Tracker,” and…

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