What Was the Dot-Com Bubble?

Mary McMahon
Mary McMahon

The dot-com bubble was a stock market bubble that popped to near-devastating effect in 2001. It was powered by the rise of Internet sites and the tech industry in general, and many of these companies went under or learned some valuable lessons when the bubble finally burst. Many investors lost substantial sums of money, helping to trigger a mild economic recession in the early 2000s. Analysts noted that some companies did not seem to be sobered by the burst of the bubble when web 2.0 sparked a fresh round of investing and speculation around 2004.

Pets.com, an early Internet hi-flyer, was one of the biggest casualties when the dot-com bubble burst.
Pets.com, an early Internet hi-flyer, was one of the biggest casualties when the dot-com bubble burst.

Several factors combined to cause the dot-com bubble, which is usually defined as the period of investment and speculation in Internet firms that occurred between 1995 and 2001. The year 1995 marked the beginning of a major jump in growth of Internet users, who were seen by companies as potential consumers. As a result, many Internet start-ups were born in the mid to late 1990s. These companies came to be referred to as “dot-coms,” after the .com in many web addresses.

Widespread unemployment among developers and programmers occurred following the dot-com bubble burst.
Widespread unemployment among developers and programmers occurred following the dot-com bubble burst.

Many of these companies engaged in unusual and daring business practices with the hopes of dominating the market. Most engaged in a policy of growth over profit, assuming that if they built up their customer base, their profits would rise as well. A lot of companies also expended a great deal of energy in market domination, attempting to corner the bulk of customers for a particular need.

Investors responded to daring business practices with money, and lots of it. The American stock market rose dramatically during the period, with hundreds of companies being founded weekly, especially in tech hot spots like the Silicon Valley near San Francisco. Many people associate lavish lifestyles with the dot-com bubble, since companies regularly sponsored exclusive events filled with fine food and entertainers. At conferences and events focusing on the tech industry, the combined entertainment costs were sometimes counted in hundreds of thousands of dollars.

Unfortunately for many companies and investors, the growth of the tech sector proved to be illusory. Many high profile court cases targeted tech companies for unscrupulous business practices including borderline monopolies, and the stock market began to tumble down in a serious correction. A decline in business spending combined with market correction to deal a serious financial blow to many dot-coms, and tech companies began to fold, one by one.

The issues of the bubble were also compounded by outside factors, like a rise in outsourcing that led to widespread unemployment among computer developers and programmers. The market also took a major downturn in the wake of terrorist attacks in the United States in 2001, and companies that had engaged in shoddy or questionable bookkeeping were essentially caught with their pants down in a series of government investigations. The loss of consumer faith in the tech industry also depressed earnings for dot-coms.

The rise of broadband in developed nations only a few years after the collapse of the dot-com bubble has been an issue of concern to some financial analysts, who recognize a recurring pattern. The growing number of high-speed users led to a new proliferation of dot-coms, especially social networking sites, and some investors fear that the tech industry may be facing a bubble 2.0.

Bubbles are caused by increasing speculation in a certain sector of the economy.
Bubbles are caused by increasing speculation in a certain sector of the economy.
Mary McMahon
Mary McMahon

Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a wiseGEEK researcher and writer. Mary has a liberal arts degree from Goddard College and spends her free time reading, cooking, and exploring the great outdoors.

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Discussion Comments

anon991754

This article, like every other article about this subject, is either totally wrong or an outright lie. The ".com" bubble burst for one reason only: power in Northern California being turned off and on because of Enron's Power Embargo on Northern California. The .com pre IPO's were making their money from advertising dollars, when the power went off, the web servers running most of these companies did so as well and refunds of ad dollars had to be given back to those who purchased advertising. Companies began to fall one by one because of power issues, not what this article says it was.

anon205999

this is the best article I have ever read on this topic. Now I actually understand it. Thanks

anon149072

An informative and concise article. Thank you.

anon147868

Wow. I've read so many articles about the dotcom bubble where I've seen words I've never heard of before, but this article was to the point and so easy to understand.

Thank you!

anon107459

The dot-com bubble can be likened to the south sea bubble - promises of untold wealth! This is a repeated pattern, and patterns should not be repeated in an efficient market.

anon105769

It helped me to understand dot-com bubble in easy terminology.

anon85251

excellent article. really helped me to understand the "dot-com bubble". cheers.

arunil

I lost my job in February 2001 as part of the dot-com crash. It was a shame, since the company I worked for at the time was well run and not particularly lavish. The real problem was that they hired too many people too quickly, and didn't have a real plan for how to make money long-term. Nearly everyone I worked with then got out of the industry, but I managed to find work at another tech company some months later ... and was laid off again within a year.

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