The Books: “Dot.Con: How America Lost Its Mind and Money in the Internet Era” ( John Cassidy)

Next book in my Daily Book Excerpt:

Next book in my culture bookshelf is:

Dot.con: How America Lost Its Mind and Money in the Internet Era, by John Cassidy.

The title pretty much says it all. This is the story of the speculative bubble of the 1990s, the insanity of the Internet IPOs (anyone member Web Van? I mean … what??), the craziness of the prices these stocks sold for, the feeding frenzy on Wall Street, the “irrational exuberance”, the complicity of the media (or the gullibility – who knows what to call it – maybe it’s just plain old-fashioned greed – they jumped on the bandwagon too) and then the eventual crash. It also details the history of the Internet itself, which I found unbelievably fascinating. Like … how the hell this whole thing BEGAN. I lived through the Internet-IPO-Craziness first hand, and this book captures the unreal atmosphere perfectly.

The following excerpt describes the IPO of Priceline.com.

EXCERPT FROM Dot.con: How America Lost Its Mind and Money in the Internet Era, by John Cassidy.

Already, it is hard to fathom that just a couple of years ago many intelligent Americans believed that the marriage of computers and communications networks had ushered in permanent peace and prosperity. Depending on which Wall Street or Silicon Valley guru you listened to, the Internet was the most revolutionary development since the electric dynamo, the printing press, or the wheel. The most striking manifestation of this thinking was the extraordinary prices that people were willing to pay to invest in Internet companies. In nearly every sector of the economy, entrepreneurs, many barely out of college, were rushing to establish online firms and issue stock on the Nasdaq, which was heading upward at a vertiginous rate. Names like Marc Andreessen, Jerry Yang, and Jeff Bezos were being uttered with awe.

In March 1999, Priceline.com, an Internet company that operated a site on the World Wide Web where people could name their price for airline tickets, was preparing to do an initial public offering (IPO). In order to introduce Priceline’s executives to Wall Street analysts and fund managers, Morgan Stanley, the investment bank that was managing the IPO, rented a ballroom at the Metropolitan Club, at 1 East Sixtieth Street, a fitting location. The Metropolitan, which John Pierpont Morgan founded and Stanford White designed, is a lavish remnant of a previous gilded age. Four stories high, its white marble exterior is fronted by six Roman columns and an ornate cornice. After the guests had picked at their lunch, Richard S. Braddock, Priceline.com’s chairman and chief executive, told them that his firm had the potential to revolutionize not just the travel business, but automobile sales and financial services, too. This was a grand claim from a start-up that had been in business for less than a year and employed fewer than two hundred people, but nobody in the room queried Braddock’s presentation.

By the standards of the time, Priceline.com had impressive credentials. Jay S. Walker, the company’s founder, was a Connecticut entrepreneur who had already made one fortune by peddling magazine subscriptions in credit card bills. Braddock was a former president of Citicorp, and Priceline.com’s board of directions included Paul Allaire, a former chairman of Xerox Corporation, N.J. Nicholas Jr., a former president of Time Inc., and Marshall Loeb, a former managing editor of Fortune magazine. William Shatner, the actor who played Captain Kirk in Star Trek, had appeared in a series of popular radio ads for the firm. Morgan Stanley’s star analyst, Mary Meeker, recently dubbed “Queen of the ‘Net” by Barron’s, the weekly investment newspaper, had helped coach the Priceline.com team for their presentation, and she was sitting in the back of the room as they spoke.

The word on Wall Street was that Priceline.com would follow the path of American Online, Yahoo!, and eBay to become an “Internet blue chip.” The only question people in the investment community were asking was how much stock they would be able to lay their hands on. Underwriters reserved Internet IPOs for their most favored clients. Other investors had to wait until trading started on the open market before they could buy any stock. 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. Walker’s stake in the company was worth $4.3 billion.

Airlines like United and Continental own valuable terminals, landing slots, and well-known brand names — not to mention their planes. Priceline.com owned some software, a couple of powerful computers, and an untested brand name. Despite this disparity, few on Wall Street were surprised by Priceline.com’s IPO. Such events had become an everyday occurrence. The New York Times didn’t think the story mentioned a merit on the first page of the next day’s edition and instead relegated it to the business section. “It doesn’t matter what these companies do or how they are priced,” David Simons, an analyst at Digital Video Investments, told the paper. “Each new Internet IPO is nothing more than red meat to mad dogs.” Penny Keo, a stock analyst at Renaissance Capital, saw things differently. “We like Priceline’s business model,” she said.

This was an interesting statement. 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? To answer that question we must investigate what the nineteenth-century British historian Charles Mackay called “the madness of crowds”. Few investors, acting in isolation, would buy stock in a company like Priceline.com. To be willing to take such a risk, people needed to see others doing the same thing — and see them making money doing it. This is exactly what happened. Investors who bought stock in early Internet companies like Netscape, Yahoo!, and Amazon.com made a lot of money — at least for a while. None of these firms could boast much in the way of revenues when they went public, let alone profits, but that didn’t seem to matter. Seeing what was happening, other people started to buy Internet stocks, and other types of stocks too, not because the underlying companies were good businesses with solid earnings prospects, but simply because stock prices were going up. As history has repeatedly demonstrated, this is the point when a rising market turns into a speculative bubble.