Rise of the First Web

What does the dot-com bubble, and its bursting, tell us about predicting revolution, other than “it’s dangerous?”

Irrational Exuberance

What were the predictions surrounding Web 1.0 and why were they so widely accepted?

The promise of Internet technology…

The end of the 1980s saw the development of the World Wide Web. The development of the first Web client and browser, by Tim Berners-Lee of CERN, the European Particle Physics Laboratory, followed in 1990. Although concepts of hyper-linked information had been conceptualized as early as 1945 by Vannevar Bush in his article “As We May Think,” practical application and use of the technologies didn’t come to fruition until 1995 when Mark Andreesson launched the Mosaic browser, and the WC3 consortium was established.

The period from 1995 – 2001 is typically referred to as the Dotcom Bubble era. This period of time is marked by intensive speculation from the venture capital community, the marketplace, and the general investing population on internet technology start-up companies that promised to change the way people communicated, consumers consumed and the business world worked. The enthusiasm that took over much of the business and financial world at that time was bolstered by several necessary infrastructure factors:

  • The widespread use of personal computers, equipped with voice-grade telephone line modems and/or Ethernet capabilities
  • Extensive development of local area networks (LANs) connected to information servers in organizations.
  • Widespread use of TCP/IP and Ethernet standards to create an inter-operable system composed of elements form many different companies.
  • Continued and rapid decline in the prices of transmission, routing and end-user equipment
  • Favorable regulatory treatment in both domestic and international forums for value-added or enhanced services (Internet-based services), allowing them to utilize the established infrastructure without being bound by the rules developed for an earlier technology.
  • Passage of the Telecommunications Act of 1996, relaxed regulatory boundaries and moved in favor of competition and market driven pricing.[1]

It is the arrival of World Wide Web standardization that paved the way for the acceptance of the technology and facilitated its growth as a method of information retrieval with enormous potential. New companies such as Mark Andreesson’s Netscape exemplified the dotcom start-up story that became the standard tale of rags-to-riches-to-rags that defined dozens of start-up dotcom companies and venture capitalist firms over the dotcom era.

Netscape and its Web browser of the same name were quickly accepted as the standard for Web browsing and the company experienced a meteoric rise. In August of 1995, not even a year after its inception, the company issued an initial public offering (IPO) that valued the company at $2.2 billion dollars despite revenues of less than $10 million dollars. This became the typical tale of the dotcom company for the next half decade. Eager venture capital investors began looking for the next great Internet-based idea, and as a result they were funding almost any Internet-idea regardless of profitability or generally accepted rules of business planning. “A canonical “dot-com” company’s business model relied on harnessing network effects by operating at a sustained net loss to build market share (or mind share). These companies expected that they could build enough brand awareness to charge profitable rates for their services later. The motto “get big fast” reflected this strategy.”[2]

The following is a list from CNET of the top ten worst DotCom Start-up Failures:

Webvan (1999-2001): A core lesson from the dot-com boom is that even if you have a good idea, it’s best not to grow too fast too soon. But online grocer Webvan was the poster child for doing just that, making the celebrated company our number one dot-com flop. In a mere 18 months, it raised $375 million in an IPO, expanded from the San Francisco Bay Area to eight U.S. cities, and built a gigantic infrastructure from the ground up (including a $1 billion order for a group of high-tech warehouses). Webvan came to be worth $1.2 billion (or $30 per share at its peak), and it touted a 26-city expansion plan. But considering that the grocery business had razor-thin margins to begin with, it was never able to attract enough customers to justify its spending spree. The company closed in July 2001, putting 2,000 out of work and leaving San Francisco’s new ballpark with a Webvan cup holder at every seat.

Pets.com (1998-2000): Another important dot-com lesson was that advertising, no matter how clever, cannot save you. Take online pet-supply store Pets.com. Its talking sock puppet mascot became so popular that it appeared in a multimillion-dollar Super Bowl commercial and as a balloon in the Macy’s Thanksgiving Day Parade. But as cute–or possibly annoying–as the sock puppet was, Pets.com was never able to give pet owners a compelling reason to buy supplies online. After they ordered kitty litter, a customer had to wait a few days to actually get it. And let’s face it, when you need kitty litter, you need kitty litter. Moreover, because the company had to undercharge for shipping costs to attract customers, it actually lost money on most of the items it sold. Amazon.com-backed Pets.com raised $82.5 million in an IPO in February 2000 before collapsing nine months later.

Kozmo.com (1998-2001): The shining example of a good idea gone bad, online store and delivery service Kozmo.com made it on our list of the top 10 tech we miss. For urbanites, Kozmo.com was cool and convenient. You could order a wide variety of products, from movies to snack food, and get them delivered to your door for free within an hour. It was the perfect antidote to a rainy night, but Kozmo learned too late that its primary attraction of free delivery was also its undoing. After expanding to seven cities, it was clear that it cost too much to deliver a DVD and a pack of gum. Kozmo eventually initiated a $10 minimum charge, but that didn’t stop it from closing in March 2001 and laying off 1,100 employees. Though it never had an IPO (one was planned), Kozmo raised about $280 million and even secured a $150 million promotion deal with Starbucks.
Flooz.com (1998-2001): For every good dot-com idea, there are a handful of really terrible ideas. 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. Flooz went bankrupt in August 2001 along with its competitor Beenz.com.

eToys.com (1997-2001): eToys is now back in business, yet its original incarnation is another classic boom-to-bust story. The company raised $166 million in a May 1999 IPO, but in the course of 16 months, its stock went from a high of $84 per share in October 1999 to a low of just 9 cents per share in February 2001. Much like Pets.com, eToys spent millions on advertising, marketing, and technology and battled a host of competitors. And like many of its failed brethren, all that spending outweighed the company’s income, and investors quickly jumped ship. eToys closed in March 2001, but after being owned for a period by KayBee Toys, it’s now back for a second run.

Boo.com (1998-2000): Though Boo.com is another flop that has been given new life by Fashionmall.com, its original incarnation proved that dot-com flops were not restricted to U.S. shores. Founded in the United Kingdom as an online fashion store, Boo.com was beset with problems and mismanagement from the start. Its complicated Web site, which relied heavily on JavaScript and Flash, was very slow to load at a time when dial-up Internet usage was the norm. Boo spent wads of cash to market itself as a global company but then had to deal with different languages, pricing, and tax structures in all the countries it served. The company also mysteriously decided to pay postage on returns, but even more importantly, sales never reached expectations. Boo.com eventually burned through $160 million before liquidation in May 2000.

MVP.com (1999-2000): Like Planet Hollywood and Flooz.com, MVP.com proved that celebrity endorsements are worth nothing in the long run. Backed by sports greats John Elway, Michael Jordan, and Wayne Gretzky and $65 million, MVP sold sporting goods online. Founded in 1999, the company grew to more than 150 employees, but a high-profile partnership came to be a liability. A few months after its launch, MVP.com entered into an $85 million, four-year agreement with CBS in which the network would provide advertising in exchange for an equity stake in the e-tailer. Yet barely a year later, CBS and its online affiliate SportsLine.com killed the agreement because MVP.com failed to pay the network an agreed-upon $10 million per year. The game was over for MVP.com soon afterward, and SportsLine took over the domain.

Go.com (1998-2001): The Walt Disney Company felt the sting of the dot-com bust with its portal Go.com. Started in 1998, Go.com was a combination of Disney’s online properties and Infoseek, in which the Mouse had previously acquired a controlling interest. Though it was meant to be a “destination site” much like Yahoo, Go.com had its own little quirks, such as content restrictions against adult material. Disney was never able to make Go.com popular enough to validate the millions spent on promotion. In January 2001, Go.com was shut down, and Disney took a write-off of $790 million. Go.com still exists, but it carries only feeds from other Disney Web properties.

Kibu.com (1999-2000): Unlike the other flops listed here, Kibu.com, an online community for teenage girls, didn’t wait till the very end to wave the white flag. In fact, at the time of its October 2000 closing, the company had not run out of the $22 million it raised. And on a more bizarre note, the end came only 46 days after a flashy San Francisco launch party. Though Kibu had started to attract traffic from its target demographic (incidentally one of the fastest-growing segments of Web users), company officials said they decided to shut down because “Kibu’s timing in financial markets could not have been worse.” Kibu was backed by several Silicon Valley bigwigs, and they sent a strong message about the financial prospects of other dot-coms by bailing on Kibu so soon.

GovWorks.com (1999-2000): Last but certainly not least, the story of GovWorks.com was good enough to become the documentary Startup.com, which chronicles its brief life. Envisioned as a Web site for citizens to do business with municipal government, GovWorks was started by two childhood friends in 1999. One was the flashy salesman, while the other had the technical know-how. At first, the future seemed bright as they suddenly found themselves worth millions of dollars each and rubbing elbows with the politically powerful. But you can guess what happened– everything that could go wrong soon did. Personalities and egos clashed during long work hours, one partner was ousted, technology was stolen, and they never got the software to work as it should have. A competitor eventually took over GovWorks in 2000.

So what drove the DotCom boom? What was the blood in the water that brought in the sharks and elicited the financial feeding frenzy?

It wasn’t a single source of blood that attracted the money-hungry investors and venture capitalists; it was a combination of things. The timing was right, the environment was right and an unknown and promising technology was in the jaws of the carnivores regardless of its taste.

We can look to the S-curve of both personal computers and the Internet for the timing of the feeding frenzy. The first consumer-based home personal computers were released in the late 1970’s with Apple’s Apple II, which was released in the spring of 1977. Throughout the following decade computers began to move into the home at an accelerating pace. By 1996 it was estimated that 40% of all households would have a personal computer in them. The Internet came to the home a little later, but once it arrived, it moved in at an even faster pace.[3]

The S-curve illustrates how new technologies evolved slowly at first, but then as barriers to entry, such as price, availability, and support, are reduced, the growth rate of evolution quickly increased. When a new technology moves into the mainstream marketplace and becomes accessible to the average person, the adoption of these technologies occurs at a rapid pace. It is the speed of adoption by the average individual that drives the market speculator to take notice and nudge the venture capitalist to open his wallet and fund what he feels is the next great idea. With a computer in every house, and low-coat access to communication technology, how could they not succeed?

The Dotcom’s were promising a new world driven by technology: a world where people didn’t step into a grocery store, they had all their goods and sundries delivered to their door. A world built on complex e-commerce applications, Flash driven animation and secure transaction processing. But they couldn’t deliver it — at least, not in the 1990s. Not all Dotcom’s failed because they had no profit strategy in their business plans, although this did happen to several. Many were built on solid business plans, with profit strategies, but they were counting on technologies that had not matured. The average consumer wasn’t willing to sit through an opening Flash animation that took 15 minutes to download over a slow modem. Most users were underwhelmed by the experience that had been promised to them.

Broadband connectivity, the delivery of information signals over multiple frequency channels or bins, was not readily available to the average consumer as it is today. Connectivity to the Internet and web sites was facilitated over the existing phone lines and modems. The speed of most modems and telephone lines maxed out at 600 bits per second. Today, most homes are equipped with high speed Internet access; cable modems support roughly speeds of 30 Mbps (mega bits per second) where DSL (digital subscriber line) services reach the 10 Mbps speed.

In addition to the poor performance of communication technologies and web-based application design beyond the available information conduits, user behaviors were unknown, and in many cases misjudged. The assumption that traditional business models, such as selling shoes or clothes, would translate successfully to the online world was also misjudged. The excitement and frenzy around the quickly evolving technologies, endless sources of venture capital funding and astronomical growth in paper wealth of inexperienced CEO’s blurred vision of the visionaries. Concepts such as profitability, customer satisfaction, usability, competition, return-on-investment, sales, and business planning were pushed aside, for the promise of fast cars, expensive offices and stock options.

The Web 1.0 promises were eventually realized as the communication technologies matured, but the burst of the dotcom bubble left a vast crater in the marketplace strewn with the collateral damage of bankrupt companies, lost fortunes and empty high-priced offices. Today the promises of Web 1.0 have been surpassed and the technology sector is looking toward what has been termed Web 2.0. The fundamental infrastructures of broadband access, wireless LANs, fiber optic networks and mobile devices have set the stage for the social networking and communication that defines Web 2.0. The Internet is not simply a means of providing information to a mass of users sitting at a desktop station, as was speculated by early Internet pundits. Today the Internet is defined as much by the user as by the supplier. The user has taken on a new role as contributor, producer and consumer.

[edit] Radio Web 1.0

History is doomed to repeat itself, and history shows that whenever a new media form is created, it is quickly capitalized on by industry, effectively killing its authenticity and democratic potential. cf. Bob McChesney, Schiller, etc.

The relationship between popular media and industry is a rocky one. Whenever a new type of media has become popular, industry has stepped in and used that medium to make money. Profits have come both through outright ownership of the new medium and placing advertising within said medium.

This pattern has recreated itself time and time again. Newspapers make a small portion of their revenue through subscriptions; most of it comes from advertising. The prevalence of newspaper ads is so overwhelming that the space remaining for journalism, the purpose of the paper, is now referred to as the “newshole.” It’s not uncommon for a score of pages to pass before readers get to a magazine’s table of contents. Radio stations advertise having fewer commercials than competitors to entice listeners. The commercial breaks are even driving people to pay for radio from satellite services. TiVo was created to both allow people to watch TV on their own schedule and to skip the commercials in recorded shows.

That’s just the advertising quotient. The massive media conglomerates also have a history of simply buying productive media outlets and folding them into their corporate structure. Clearchannel Communications, Time Warner, News Corp., Vivendi SA, are just some of the largest corporations that employ this tactic.

Then came the Internet. For a long time nobody was sure how to make money online. The first attempts produced IPO’s that (temporarily) made certain people a lot of money, then busted.

But that was the old Internet. Does Web 2.0 have a better chance against both history and industry?

Popular opinion states that the new web is a different beast since the dot-com bubble burst. Gone are the days where a Web site simply sold you a product. Now, sites offer users the tools to create their own content and communities. Despite this change, industry’s former ways are using their old tricks to creep into Web 2.0.

Take the examples of Myspace and Facebook. Both are Top 50 websites (6 and 21, respectively) visited.[4] Both have a similar goal: be an “online community that lets you meet your friends’ friends.”[5] But industry has reacted to each differently. Realizing the potential of Myspace, Rupert Murdoch’s News Corp. paid $580 million for Myspace in 2005.[6] Not wanting to be bought (it’s rumored to have turned down offers of at least $750 million[7]

Everyone has a right to make money; that’s one of the tenets of capitalism. But at what point does the struggle for wealth corrupt the goal of the application?

Both Myspace and Facebook are free to their members; they are completely supported by advertising revenues. Nothing, however, is completely free. Facebook has no qualms about selling their user’s profiles to advertisers for highly targeted marketing campaigns [need citation]. Myspace leverages its place as one of the most visited websites to charge exorbitant fees for ads [need citation]. The question becomes do people mind having their profiles used for corporate gain? Or is this a case where ignorance is bliss (users only notice that they aren’t being charged and don’t explore the matter beyond that)? Could this be construed as betrayal because the website is profiting off the personal profiles and hard work of its users?

This is a new area for both industry and users. It’s an ongoing situation between maximizing potential profits and user freedom.

[edit] References

  1. Brock, Gerald W. The Second Information Revolution., Cambridge, Mass.,Harvard University Press, 2003
  2. Cassidy, John, Dot.Con The Greatest Story Ever Sold., New York, NY., Harper Collins, 2002
  3. Dent, Harry S. The Roaring 2000’s: Building The Wealth and Lifestyle You Desire in Greatest Boom in History., New York, NY., Simon & Schuster, 1998.
  4. Meattle, J. (10/30/2007). Top-50 Websites – Ranked by Unique Visitors; Digg.com, Facebook, Flickr sky rocketing. Retrieved January, 28, 2008, from http://blog.compete.com/2007/10/30/top-50-websites-domains-digg-youtube-flickr-facebook/.
  5. Myspace.com. Myspace.com-About Us. Retrieved January, 28, 2008, from http://www.myspace.com/index.cfm?fuseaction=misc.aboutus.
  6. Butcher, A., Everett, T., Nolte, R. & Brewer, B. (7/18/2005). News Corporation to Acquire Intermix Media, Inc. Retrieved January, 28, 2008, from http://www.newscorp.com/news/news_251.html.
  7. Rosenbush, S. (3/28/2006). Facebook’s on the Block. Businessweek. Retrieved January, 28, 2008, from http://www.businessweek.com/technology/content/mar2006/tc20060327_215976.htm?chan=technology_technology+index+page_internet.</ref, Facebook has turned its user profiles into cash by selling ads (called pages in Facebook-ese) and allowing members to join them as a group.<ref>Rosmarin, R. (11/29/07). Facebook Woos Advertisers. Forbes Online. Retrieved January, 28, 2008, from http://www.forbes.com/businesstech/2007/11/29/facebook-advertising-widgets-technology-internet-cx_rr_1129facebook.html?feed=rss_business_businesstech.</li></ol></ref&gt;

Additional Resources

CNET of the top ten worst DotCom Start-up Failures: [1]

This essay is from a book being produced as a collaborative exercise and assignment from the class Communications, Media and Society in the Interactive Communications Masters program at Quinnipiac University.