Main Introduction

Five years ago, the term ‘Internet’ was almost unheard of in most of the world. At this present day, at any single moment, millions of people are browsing the Internet for information, while the so-called dotcom companies execute their transactions. Indeed, in the last 5 years, an astonishingly rapid boom in the Information Technology sector was witnessed. However, the growth over the last few years unfortunately has not been sustainable. In March 2000, following the release of their annual reports that showed that the dotcom companies were losing immense amounts of money, panic hit the market and caused a series of catastrophic devaluation of the share prices. ‘Huge profits’, ‘tremendous growth’ and ‘high return rates’ were no longer used to describe these companies. Instead, people talked about ‘burn rate’ since the dotcom companies were effectively ‘burning money’. The share prices of the dotcom companies halved instead of doubled in just a few days. Some dotcom stocks listed on the NASDAQ in the United States are now worth less than 5 % of their peak value attained in around February this year. Why are the prices of these dotcom companies so volatile?  Is this an ‘economic bubble’?

To answer these questions, the stock market of the high-tech sector as a whole will be looked at in detail in the first three sections, while specific dotcom companies are analysed in the subsequent sections. This report looks at the dotcom market from primarily 3 main perspectives,

First and foremost, the dotcom stock market is analysed from the perspective of the different parties actively involved in the market, namely the Venture Capitalists, the Investment Banks and the ordinary investors. This approach aims to illustrate the interdependence and interrelationship between these parties. The ‘insiders’ and ‘outsiders’ are compared and contrasted with each other and this is mainly presented in the third section.

Secondly, the problem is approached from a historical perspective. Has anything similar ever happened in history?  Do the well-known economic bubbles in history in any way resemble what has recently happened to the dotcom market?  If so, what are the similarities and differences?  A rigorous analysis of these questions is given in the fourth section.

Thirdly, the dotcom market is investigated from a theoretical perspective. These perspectives provide insight to how a dotcom company is analysed from a professional viewpoint and this method is contrasted with the investment strategies that ordinary people commonly adopt. This theoretical perspective is mainly adopted in the analysis of the individual companies from section five to nine.

Dotcom Research Project Team (Feb 2001)