Is the Web Boom Over?

andreas.com FAQ: Dotcom Crash

Palo Alto, November, 2000. I’ve been working with computers since about 1985. For the first four years, I had a company (we produced software and hardware) and since then, I’ve been doing technical publication, web sites, and localization in Silicon Valley. I’ve worked at over twenty-five Silicon Valley startups and companies, mostly in engineering. I’ve been the chair of the tech writer trade group for Silicon Valley since the mid-90s. Throughout the summer of 2000, I discussed the end of the web boom with recruiters, VCs, journalists, managers, CEOs, workers, contractors, and so on. Here’s my conclusions. — andreas)

The Cycles of Evolution

The computer industry, like any industry, has several kinds of cycles. There’s a small cycle, and it’s seasonal: lots of sales for the Christmas holidays (people give presents and everyone is playing indoors) and low sales in the summer (everyone is playing outdoors.)

There’s also another kind of cycle. It seems to take about four to five years. It’s the evolutionary development of technology. We all know from evolution that amoeba were followed by trilobites, which were followed by dinosaurs, which were followed by mammals. Each of these didn’t turn into the next one; each one was followed by something totally different.

The same thing happens with computers: we move from one stage to the next in use of computers. A new evolutionary stage for computing is invented, and for a year or so, there is innovation and development, as the possibilities are explored. Eventually, the edges are reached. No more new products. The fittest companies manage to grow large, while other companies disappear. Towards the end, consolidation sets in: a few large companies completely own the market. The field falls into petrification: the same devices are sold to the same customers forever. A new evolutionary stage is invented somewhere else, and many of the developers leave for that new field.

The Age of Dinosaurs

The 50s to the mid-70s was the Age of Dinosaurs: the mainframes from IBM and DEC. The stage of evolution was computers-as-corporate-machines. A machine, as large as a room, was tended by specialists in white laboratory coats. Each large corporation had one computer. For decades, this was a good market, with multi-million dollar upgrades. But IBM and DEC became fat and lazy.

In 1982, IBM crashed and lost billions in value. Tens of thousands of people were fired. IBM never again became an important company. DEC was later bought by a small company.

Along with the laws of evolution, another law is that dinosaurs do not notice the little mammals in the undergrowth. Desktop computers were developed by Steve Wozniak and other hackers in their bedrooms. Bill Gates and a few other college dropouts developed MS-DOS. IBM and the other big companies completely missed out on the next evolutionary wave.

The Age of Mammals

In 1972, the dinosaurs were replaced by warm and fuzzy mammals: the Personal Computers. The new stage of evolution was “a stand-alone computer on the desk, used by an individual.” Throughout the 70s and 80s, the computer consumer market was based on the idea of one person, one computer, alone. This included many species of mammals: DOS, Amiga, Atari, Apple, and so on, but they were all mammals: personal, isolated computers.

This offered many new possibilities and new companies were created, which meant lots of jobs. But eventually, people began to feel that “everything had been invented.” People felt there was no more room for expansion or innovation. Companies stopped investing resources and people. A few companies (WordPerfect, Adobe, Corel, Novell, and so on) owned the DOS market.

That led to a slowdown by the end of the 80s and a two-year recession in 1991. Thousands of managers and engineers were fired. California lost population very fast. There was a six-month waiting period for U-Haul trailers for those leaving California. People with real skills and years of experience found it extremely hard to keep a job or get a new job in computers. Those with little skills or experience had no chance at all.

In 1993, Microsoft released Windows 3.0 and this opened a new market, with lots of new possibilities and opportunities. Take a successful but old DOS program, convert it to Windows, and sell the upgrade! New companies were created, people were hired, and so on. This peaked in late 1995, when Microsoft released Windows 95 with the largest media event ever for a software package: the Rolling Stones, the Empire State Building in Microsoft colors, months of press coverage, and general global hysteria.

The Age of the Web

Remember how IBM didn’t notice the little PCs? A few weeks before the glory of the Windows 95 release, a little company named Netscape did their IPO and earned two billion dollars in one day. Jim Clark’s $12 million dollar investment turned into a $800 million profit. That kicked off the shark feeding frenzy of all time as VCs (venture capitalists) began to pump billions of dollars per month into anything that had a web site. Here was the next new stage of computer evolution: the networking of personal computers. All of those tens of millions of computers were quickly brought online and connected to each other with the web, modems, and browsers. Information flowed from one computer to hundreds of computers, and onwards to tens of thousands of computers, across a vast web of computers.

Five years later, April 2000, once again every possible web idea had been explored and tested. VCs had seen hundreds of business ideas every day. Millions of commercial sites were created. There were some 30 million web sites. Over 1.5 billion web pages were written in five years. For every viable business idea, there were dozens of identical competitors (pets.com, petsmart.com, petfood.com, petstuff.com, petopia.com, and so on.)

VCs thought they could simply pour money into the web: all they needed was ten million dollars to buy a business plan, a logo, a Superbowl ad, a TV actor spokesman, a cute handpuppet, a nationwide brand, and several million users. But all of the Stanford and Harvard MBA business yadda-yadda-yadda was… just blah-blah-blah. Some projects burnt up hundreds of millions of dollars and never made any money at all. Webvan burnt nearly a billion dollars and died.

In April 2000, Wall Street analysts and CMGI’s VC newsletter (CMGI is the largest VC firm) wrote that the web boom was over. Throughout Summer 2000, NASDAQ went into a long decline. By the end of the year, it was 40% lower than the start of the year. $2.5 trillion dollars in market cap value has evaporated.

VC funding for pre-IPO startup dotcoms (such as content, B2B, B2C, and ecommerce) collapsed from Q2/2000 to Q3/2000. This is documented in November 2000 by PriceWaterhouseCooper’s quarterly VC report, MoneyTree at http://www.pwcmoneytree.com.

Here are the death statistics:
Sector Q2/2000 Q3/2000 %Services $3.08b $2.23b -28%Content $1.01b $0.70b -30%B2B $1.59b $0.99b -38%B2C $1.36b $0.80b -41%

(November 2000. PriceWaterhouseCooper’s Moneytree, Q2 and Q3 2000. Numbers in billions.)

All of these sectors had seen years of continuous increased funding. But now, they have been abandoned, falling by more than a third. The B2B sector (business-to-business) fell 38%. The B2C (business to consumer) sector fell the most: 41% drop in funding.

Because dotcoms had no profits, low revenues, high burn rates (the speed at which they use up their VC funding, often at several million dollars per month,) and because they are funded entirely by VCs and because VCs are pulling out of the dotcom market, most of the dotcoms will go bankrupt very fast, very soon, very hard.

Many dotcoms are hanging on for one last Christmas, hoping that they’ll make enough money with holiday shopping to either last another year or get more funding. Analysts expect that 50-75% of dotcoms will close.

Yes, Virginia, the sky has fallen.

This is bad news for San Francisco and New York. Both of these cities invested hundreds of millions of dollars to attract web companies: city-funded fiber optic rings, loose zoning laws for dotcoms, etc. The massive influx of money caused quite a bit of turmoil in their cities: people moved out, new people moved in, housing costs tripled or quadrupled, old neighborhoods were wrecked, and so on. Just as a killer asteroid caused mass extinction, a 75% bankruptcy rate will hit SF and NYC very hard.

VCs were dumping up to four billion dollars per month into pre-IPO startups. All of that money slowly made its way down the food chain, from big companies to smaller companies to people.

23-year olds with fresh Harvard or Stanford MBAs moved in to buy houses in million dollar bidding wars, borrowed with the expectation of future stock options, and they are paying $10,000 monthly mortgages. With those huge monthly expenses (yes, their personal burn rates,) they will wipe out their savings in weeks and declare bankruptcy soon after. Game over.

This will devastate the secondary economy: businesses that support the dotcoms, such as web design boutiques, ad agencies, magazines that carry the advertising, law firms, accountants, photographers, graphics designers, and so on.

This also includes personal services, such as restaurants, book stores, flower shops, cafes, waiters, hairdressers, nannies, personal chefs, BMW and SUV dealerships, massage services, exotic dancers, drug dealers, and so on. No more tips, no more fun, no more jobs.

There’s also the tertiary economy: the companies that supply services to the secondary economy: food preparation services, delivery services, cleaning services, and so on. They too will suffer unemployment. It’s not just the dotcom kids who will suffer. Mexicans, Black youths, and other low-skill workers will all lose jobs in those secondary and tertiary services.

On the bright side, lawyers are preparing themselves for the business of bankruptcy and foreclosures on houses and Porsches. You may soon be able to get a house with Italian marble toilets and gold faucets for a fraction of the cost. Some may think that housing will return to low prices and commuting will be easy. Yes, house prices will drop, but so will jobs, salaries, and stock options.

The Next Wave?

Like evolution, each wave reaches higher upon the shore. Each new cycle of computers builds on the experience of the previous market and becomes larger. Thousands of engineers and managers were thrown out of Apple when it collapsed, but with their skills and connections, they went on to create the infrastructure for the next evolutionary stage.

Just as Macs and Windows and IBM mainframes are still around, the web won’t disappear. The commerce sites for small companies will survive because they have low monthly expenses and they are modestly profitable. The big sites may survive because they can burn stock to pay their bills. Friendly brontosaurus will turn into velociraptors: they will began to charge fees. No more free services at the big web sites. But the mid-sized sites (those with fewer than perhaps ten million users) will be wiped out, because with only a few million users, they can’t make enough on banner ads to support the very expensive engineers and technical infrastructure.

You can’t just pull the covers over your head and hope that tomorrow, the web will come back. It’s over. DOS never came back. It’s really over. No more web boom. The hard core (the really bright engineers, the top managers, and the VCs) have all already moved out of the market.

What’s next? The next technology cycle? The next stage of evolution? Another thing I’ve learned in 15 years is that no one can predict the next thing. It always comes totally out of someplace you never expected. The dinosaurs did not notice the small mammals in the underbrush. Bill Gates had no idea of the web in April 94.

And no one in the web industry noticed the new small critters, the Palm Pilots. After the crash is over, I’m guessing that wireless PDAs (Palm and Handspring with wireless email capability) will be the next big wave. There’s all sorts of clever, new ideas (check out Vindigo and Handspring’s modules.) The excitement and turbulent innovation, similar to the early days of DOS, the early days of Windows, the early days of Netscape, is going on there.

Desktop computers could be used only by workers who sat at a desk. But most people do not sit at a desk: doctors, nurses, lawyers, salespeople, clerks, moms, kids, teachers, and so on. We are finally moving away from the “computer-on-your-desk” metaphor and towards pocket devices that offer information anywhere. Instead of $1,500 computers, there are $120 PDAs. Entirely new possibilities open up, onto a much larger market.

But this is all just my guess. You’ll know when it finally arrives, with the Rolling Stones and the supermodels and the bright lights.

PDAs will not be the end of computing. In four or five years, by 2005, clever people will have invented everything possible within the parameters of wireless handheld devices and people will began to wonder about the next next thing.

There’s a ten-year old kid among us, playing on her Gameboy, and in five years or so, she will invent that next thing. PDAs will join the museum of DOS, Apple, Windows, and the web. What will she invent? Wireless devices embedded in our heads so we’ll have telepathy? Or something truly useful, such as speech enabling for cats? Nobody knows. Nobody can predict the next stage of computer evolution.

What to Do?

So… if you’re working in the dotcom world (how can you tell? you can’t explain the business concept to your mom without her laughing,) you may consider jumping onto a different boat in a rising tide.

How can you tell if your company is steaming straight at the iceberg? Look over the side and see if captain and his officers are getting into the life boats. The CEO, the VPs, engineering directors, and so on, especially the technical people. The VP of Sales or QA doesn’t matter, but if the CTO, CFO, or the hardcore engineers leave, then quietly take a life jacket. Ignore the PR and HR people who say that the company is doing fine. They are just playing dance band music.

It’s not the end. You don’t need to join a militia in Montana and learn how to skin rabbits. The computer industry has grown so large that it is no longer one industry. While the dotcom industry is headed for mass extinction, there are other industries. There are many sectors: biotech, semiconductors, infrastructure, software, medical devices, and so on. You can read about these sectors at Red Herring or MoneyTree and start looking not just for your next job, but your next industry.