When the NASDAQ stock index hit its all-time high of 5,133 on March 10, 2000 - having more than doubled in a year -- the now legendary dot-com bubble was already looking like a balloon strapped to the back of a porcupine.
A week later the NASDAQ had fallen 9 percent. ... A year later it was under 2,000. And the finger-pointing would last deep into the decade.
Since memories fade - especially memories of such an unpleasant nature - I've assembled a few items from various archives that capture the essentials of what transpired - and what was thought about what transpired -- in the aftermath of this week's high-water mark.
First the players: A few of the names live on as poster children for failure, of course: Pets.com, Kozmo.com, MVP.com and Go.com, to cite but four from this list of "Top 10 Dot-Com Flops" by CNet. And then there were the just plain too-stupid-for-words:
Flooz.com was a perfect example of a "what the heck were they thinking?" business. Pushed by Jumping Jack Flash star and perennial Hollywood Squares center square Whoopi Goldberg, Flooz was meant to be online currency that would serve as an alternative to credit cards. After buying a certain amount of Flooz, you could then use it at a number of retail partners. While the concept is similar to a merchant's gift card, at least gift cards are tangible items that are backed by the merchant and not a third party. It boggles the mind why anyone would rather use an "online currency" than an actual credit card, but that didn't stop Flooz from raising a staggering $35 million from investors and signing up retail giants such as Tower Records, Barnes & Noble, and Restoration Hardware.
If you're curious as to how anyone could figure such a turkey would fly, here's a lengthy 2008 interview with Flooz co-founder and CEO Robert Levitan.
And here's a handy Dot-Com Bubble Timeline that makes clear there were remarkable and enduring successes during this period - Amazon, eBay, Craigslist, Yahoo, Google -- even if it would be insulting to call them dot-coms and their real fortunes had so many chasing empty dreams.
While everyone remembers Pets.com and the like, even now-established (if struggling) brands played key roles in a bubble that proved impervious to market checks and balances. Here's an excerpt from a New York Times column that recounts the curious case of 3Com and Palm:
There were striking examples of apparent overpricing of stocks in 2000. For example, in March of that year, 3Com sold a fraction of its holding of Palm; it announced that by the end of the year it would disburse the rest of its holdings by giving 3Com shareholders 1.5 shares of Palm for each share of 3Com they owned.
One would expect that 3Com shares would be worth at least 1.5 times the value of Palm shares. But on the first day of trading after the announcement, Palm shares were worth $95.06 a share while 3Com shares fell to $81.81. The market was valuing the non-Palm part of 3Com's business at minus $63.
This pricing anomaly was widely reported in the financial press. The most likely explanation was that day traders and other overly optimistic investors bid up the price of Palm stock to excessive levels. These traders were presumably unaware that they could acquire Palm indirectly by buying 3Com stock.
The apparent mispricing created a low-risk arbitrage opportunity. A savvy investor could buy some 3Com shares outright, borrow some Palm shares, sell them, and repay the borrowed Palm stock in a few months when 3Com issued the Palm shares.
Indeed, many investors did exactly that. At one point, the number of Palm shares borrowed to sell short was 147 percent of the shares outstanding. (The number could exceed 100 percent since shares could be borrowed only to be lent out again.)
Eight months after the bubble burst - at a time when the scope of the failure had become clear to most all - USA TODAY published an analysis headlined: What detonated dot-bombs? It delved into a handful of "mistaken assumptions," which, in retrospect, seem difficult to imagine as conventional wisdom:
It's okay to sell products for less than what they cost you, because that will bring you lots of customers.
Internet-based companies are immune to economic cycles.
Internet companies can't spend too much on advertising.
Internet companies that carry no inventory are infinitely profitable.
Yet even then there were holdouts hiding deep in dot-com caves, witness this extraordinary claim from a principal in Pets.com:
(Spokesman John) Cummings doesn't blame the failure of Pets.com on the business model. Impatient investors did the company in, he says, because they weren't willing to invest the additional money needed to break even. "Not all companies are profitable in 14 months," he says.
Not everyone had guzzled the Kool-Aid, of course, with Warren Buffet having been a most prominent dot-com doubter. A year after that stock-market high, Buffet told BBC News:
"After a heady experience of that kind," normally sensible people drift into behavior akin to that of Cinderella at the ball. They know that overstaying the festivities ... will eventually bring on pumpkins and mice."
In other words, March 10, 2000 was the day the NASDAQ struck midnight.
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