...it's not dark yet, but it's gettin' there...

June 06, 2005

Dot Com Bubble

Over at The Sheila Variations, there's a very interesting excerpt from the book Dot.Con: How America Lost Its Mind and Money in the Internet Era, by John Cassidy. Here's an excerpt from the excerpt:

On the morning of March 30, 10 million shares of Priceline.com opened on the Nasdaq National Market under the symbol PCLN. They were issued at $16 each, but the price immediately jumped to $85. At the close of trading, the stock stood at $68; it had risen 425 percent on the day. Priceline.com was valued at almost $10 billion -- more than United Airlines, Continental Airlines, and Northwest Airlines combined.

. . .

Priceline.com started operating on April 5, 1998. By the end of the year it had sold slightly more than $35 million worth of airline tickets, which cost it $36.5 million. That sentence bears rereading. Here was a firm looking for investors that was selling goods for less than it had paid for them -- and as a result had made a trading loss of more than a million dollars. This loss did not include any of the money Priceline.com had spent developing its Web site and marketing itself to consumers. When these expenditures were accounted for, it had lost more than $54 million. Even that figure wasn't what accountaints consider the bottom line. In order to persuade the airlines to supply it with tickets., Priceline.com had given them stock options worth almost $60 million. Putting all these costs together, the company had lost more than $114 million in 1998.

How could a start-up retailer that was losing three dollars for every dollar it earned come to be valued, on its first day as a public company, at more than United Airlines, Continental Airlines, and Northwest Airlines put together?

Crazy stuff. Here's a graph of Priceline's wild fortunes.

Posted by annika, Jun. 6, 2005 |
Rubric: On The Blogosphere


I remember those days well. Seemed like everyone threw caution (and their money) to the wind.

Posted by: Mark on Jun. 6, 2005

It ranks up their with the Tulip bubble 1593 as one on the great follies of mankind. At one point, a single tulip bulb was selling for more than the cost of a mansion.

The end of the dot.com bubble started when an analyst in the Fall of 2000 stated that 200 dot.coms would run out of cash within a year and fail. He was somewhat wrong as 206 companies failed in 2001.

Posted by: Jake on Jun. 6, 2005

Thanks for the link, Annika! :)

Posted by: red on Jun. 6, 2005

Annika -
Why do unproven (in professional competition) draft picks in major team sports get paid big bucks? Same reason - potential.

Actually, the IPO seemed fairly well priced at $16 in hindsight - the stock now makes accounting profits and I don't think that 114M loss was accurate (given the way the author notes the 60M option as a direct 60M loss). Of course, the business model didn't pan out to support the post-IPO market price..but then again, I bought Microsoft in summer 1987 after an already large price gain and saw its net income fall for two consecutive qtrs (but the stock price did okay - fell 25% on that Oct 1987 day) because "the model" made long-term sense even given the price. The difference, a decade plus later, is more people and more money chasing promising results drives the price up faster, ahead of the company delivering, or showing greater promise to deliver.

Remember, in the same draft, both Peyton Manning and Ryan Leaf got a 11M + signing bonuses!

Posted by: Col Steve on Jun. 6, 2005

This sounds like piling on, but the airline business is not exactly a money maker either. There are plenty of 3rd world countries that can't even feed their people that run national airlines at a loss. In this country, until one major carrier goes bust, don't look for a lot of profit from the others either.

Posted by: Mark on Jun. 6, 2005

The Fed mucked with the economy by lowering interest rates back in the 90's to help create an expansion of credit in order to fuel an economic boom. What this did was to create an environment of easy money where business which didn't look profitable before now became attractive (at the marginal level) and drew resources away from firms that were very likely better suited to have them. One may say "well if the market worked like it was supposed to that money would've gone to the right people" and you would be right, but with the aforementioned expansion of credit provided by the Fed, lenders have easier terms so to speak (witness the boom of Venture Capitalists, the number of failed startups -- hmm, where did this extra money come from to invest in BuildYourOwnCar.com and advertise on the Superbowl for it?)

Credit expansion does not create real wealth so the boom that resulted in the 90's lacked a solid base. Again witness stock prices as an indicator, as the anectdote with Priceline shows. There was too much cash on the market. Eventually interest rates will rise to reflect the scarcity of real resources. What we have been seeing lately is deflation marked with contrasting incredibly low interest rates, but this is still failing (somewhat) to stimulate the economy. What the gov't needs to do is let the bad capital wash away, figuratively speaking, so that a solid base can re-establish itself. Also regulate in an intelligent manner (i.e. do more like Sen. McCain's words and less like Eliot Spitzer's actions).

Posted by: Scof on Jun. 6, 2005

Pretty good Scof.

Posted by: Casca on Jun. 6, 2005

good comments, all. And glad to see you back Col. Steve.

Posted by: annika on Jun. 6, 2005

The credit boom really did not come from lowering interest rates. Whether a bank borrows at 2.00% or 2.01%, it still loans the money out at interest rates which today routinely exceed 30%. (And it makes fully 25% of its money from fees and penalties.)

The dot-con days were a bubble, just like the tulips, and they created the same problem: a massive amount of "cash" in people's hands which really has no basis in fact. A massive amount of lending which will produce loans that can never be repaid. And today, a massive effort on the part of banks to cover-up the true extent of those loans. Loans that should never have been made. Loans that were made using Federally insured money.

Posted by: Mike on Aug. 2, 2005