Dot-com crash losers become winners again

February 14, 2010

David Olive

PETER BAXTER/SHUTTERSTOCK

A decade ago next month, the so-called dot-com mania crested, soon followed by a widespread collapse across the entire high-tech sector. When the panic selling was over, some $8 trillion (U.S.) in stock-market value had been wiped out. Hundreds of tech start-ups disappeared.

Many of the biggest firms in the vanguard of the Internet revolution never recovered. These include telecom equipment makers Nortel Networks, Lucent Technologies and Global Crossing, and telecom provider WorldCom, the world's second-largest telecom company when it collapsed in an epic accounting scandal in 2002. And Sun Microsystems, which bragged of having put "the dot in dot-com," was merged out of existence last month with its bargain-priced acquisition by Oracle.

At the height of the Internet-driven investor euphoria, stratospheric market valuations were based not on profits, which were non-existent (indeed, so were revenues in many cases) but on new "metrics" like spiralling growth in Internet page views. "The ability to monetize shareholder ignorance has probably never been exceeded," Warren Buffett warned at the time.

After the dot-com bust and even more devastating "tech wreck" – a 38 per cent collapse in the Dow Jones industrial average by 2002, the worst stock-market drop since the Crash of 1929 – the tech sector understandably became an investor no-go zone.

Yet, discriminating tech investors who kept the faith have profited mightily from five undeniable winners of the Internet revolution:

• Cisco Systems Inc., the San Jose, Calif., firm whose best-in-class routers are the Internet's "traffic cops." Shares have doubled from a post-crash nadir of $12 in 2001.
• Google Inc., the top search engine, whose stock has quintupled since going public in 2004.
• Amazon.com Inc., the dominant online retailer, whose stock is up 1,530 per cent from its post-crash low of $7.20.
• Apple Inc., given up for dead in the 1990s when its market share in computer operating systems slipped to about 3 per cent, its stock is up 2,873 per cent since 2003 on the strength of the iPod and iPhone.
• Research In Motion Ltd. RIM), the Waterloo-based BlackBerry inventor whose stock cratered in 2000, losing 94 per cent of its peak 2000 value, only to surge 2,982 per cent since bottoming out in 2002.

These firms not only survived, but thrived.

What do they have in common?

Business smarts

• RIM's co-founders, Jim Balsillie and Mike Lazaridis, kept their eye on the business, not RIM's heady stock price, during the tech mania, to the point of requiring any employee caught mentioning the stock price to buy doughnuts for the entire staff. RIM focused on building the most secure email network, making itself indispensable to its base of corporate and government users.
• Cisco became the most M&A-savvy tech firm in history, growing rapidly from successful acquisitions in a field notorious for failed takeovers.
• Nortel, by contrast, wrote off most of the $34 billion worth of takeovers it made between 1997 and 2000.
• Amazon, like Cisco and RIM, accumulated an immense war chest of spare cash, raised in the stock market at the height of the euphoria, and carefully husbanded its cash "burn" as it grew an enterprise that consistently lost money until it refined its unproven business model to the point where last year, in the midst of a consumer recession with few equals in modern history, it turned a profit of $900 million.

Evangelical leadership

• Apple's Steve Jobs effortlessly evolved from a high priest of personal computing to a cocky champion of music and communications gadgetry.
• Cisco's John Chambers made the rounds of Fortune 500 CEOs, warning of the perils awaiting anyone foolish enough not to embrace the Internet in everything from marketing to inventory control to internal communications networks.
• RIM's Balsillie, the business half of the co-CEO-ship he shares with techie Lazaridis, got in the face of financiers, industrialists, politicians, surgeons and others for whom secure, instant communication with colleagues was, by his description, essential and possible only with a BlackBerry.

Game-changing

• Jobs, only 54, has been a prime mover in revolutionizing personal computing, animated motion pictures, the music industry and mobile communications.
• Founder and CEO Jeff Bezos has proved with Amazon that almost anything can be sold online, turning his electronic bookstore into an Internet general store, and changing consumer behaviour not only by persuading Amazon's 88 million customers to buy apparel and giftware sight unseen, but to research prosaic purchases like cleaning agents the way they do cars and houses.
• Google eclipsed an incumbent, subscriber-based America Online by making search free, deriving its prodigious revenues from advertising.

Market knowledge

An obvious requirement, one would think. Yet once-dominant firms as varied as Eastman Kodak Co., Gap Inc. and Starbucks Corp. – to say nothing of the Detroit Three – have managed to let themselves decline in customer relevance.

• Both Cisco and RIM sell to corporate customers, RIM having expanded into the consumer market only in recent years. That makes these firms acutely sensitive to the requirements of telcos such as Verizon Communications and Bell Canada, which use or distribute their products and demand the highest standards of reliability.
• Amazon exploits the global "town square" nature of the Internet to create at least 50 new community applications each year, from discussion boards and chat rooms to the world's largest inventory of consumer-written reviews – making itself not only an exceptionally customer-friendly vendor but a favoured online hangout for Sarah Vaughan and John Irving fans.

Buffett was right, of course. All movements go too far, and the undeniable promise of the Internet turned into an unsustainable gold rush.

Neither was it enough to be an evangelist for the Internet and one's role in it, or Scott McNeely's Sun Microsystems would have emerged a winner rather than a casualty of the online revolution. As in previous industrial upheavals, business fundamentals – adequate funding, relentless new product development, unflagging attention to shifts in customer demands – ultimately won out.

Sun's last CEO, Jonathan Schwartz, summed it up in a farewell haiku that alluded to the path-breaking company's failure in the last decade to keep ahead of changes in computing demands:

"Financial crisis
Stalled too many customers
CEO no more."