The day the bubble burst

April 2000, and Bloomberg TV's Brian Sullivan watches as the Nasdaq index plunges. From its peak, the index fell by 83 per cent. Photo / Bloomberg

The gong that signalled the end of the business day on the Amsterdam stock exchange sounded particularly ominous when it rang out on Friday, March 17, a decade ago.

It closed the first day's trading in shares of World Online. While previous dotcom IPOs had rocketed skywards, shares in the pan-European internet service provider halted a mere €0.20 above their offer price. The firm was still valued at an eye-watering €12 billion, but in web terms the performance was a disaster.

The internet bubble, which had created a slew of paper millionaires and a fair clutch of real ones, was beginning to burst. The so-called "new economy" was turning out to be nothing of the sort: it was just boom and bust on steroids.

After the weekend, World Online shares crashed to earth. In London, investors started bailing out of Lastminute.com - an online travel agency - which had managed to get on to the stockmarket just days before. And as jitters about over-valued technology stocks turned into panic, markets across the world went into reverse.

It quickly became a rout that pushed scores of businesses to the wall and ushered in a technology recession that lingered at least until the arrival of Google on the American stockmarket in the summer of 2004.

And an estimated trillion dollars of investors' money went down the drain as the contagion spread to the communications infrastructure sector. They had argued that in a gold rush the real winners were the ones who sold the shovels and pickaxes - in the internet's case, the actual equipment of the web - but they quickly discovered that in a recession, everyone loses.

Companies that had poured hundreds of millions into building huge fibre-optic cable networks and data-hosting centres suddenly found their mantra of "build it and they will come" sounded hollow. They had built, but the dotcom clients suddenly were not coming.

Companies such as KPNQwest, Pangea and CityReach International collapsed while others such as Energis, Telecity and Cable & Wireless were forced into massive restructurings.

But out of the mess emerged a new way of doing business. The internet did have a profound effect on both society and commerce, just not as quickly as the "digerati" from the dotcom boom had hoped.

Some of the technology trends that everyone now takes for granted were born in the boom, from instant unmetered internet access, web TV and "cloud computing" to social networking and the mobile web. They may have been born in the boom but only in the past few years have they come of age.

There was already unrest in the air when World Online floated. The week had started with the publication of the annual statement to investors in Berkshire Hathaway by its investing guru boss, Warren Buffett.

Having refused to invest in tech stocks because he did not understand them, he was forced to apologise for the fund's poor performance in the previous year, but warned: "If anyone starts explaining to you what is going on in the truly manic portions of this enchanted market, you might remember still another line of song: 'Fools give you reasons, wise men never try."'

As his message was sinking in, Freeserve, Britain's biggest internet service provider, started offering unmetered internet access for the first time, after being forced to react to moves by cable group NTL and Alta Vista the previous week.

The move ripped a hole in its business model - it had made money from call charges - but chief executive John Pluthero said it would mean more people would spend more time online and Freeserve would make money from content, e-commerce and advertising - a battle the ISPs are still waging.

Even back then, analysts were unconvinced, starting to doubt the crazy revenue projections built into their financial models.

Then on that Tuesday, Lastminute.com made its stockmarket debut, crystallising a £150 million paper fortune for its founders, Brent Hoberman and Martha Lane Fox, the young couple who had become pin-ups of the British dotcom boom.

The shares rocketed from 380p to 555p within minutes of the opening but the nearly 200,000 retail punters who had registered to take part in the float were left disappointed, given just 35 shares each.

At their height on that first day, Lastminute.com's shares valued the business at £800 million. That's £800 million for a company that in the previous three months had made revenues - not even profits - of just £409,000, the naysayers pointed out.

But the dotcom boom was all about the creation of a new paradigm for business. Companies could not be valued on multiples of revenues or profits, the dotcom crowd argued. As Julie Meyer, founder of internet networking event First Tuesday, said on the day of Lastminute's ascension: "As for value, it is like beauty - all in the eye of the beholder."

And it was a brave person who denied the power of putting a small "e" in front of any business model, be it e-venturing or e-commerce. There had been a lot of "moonshots" - companies whose shares soared on their debut. In the United States, for instance, between 1975 and 1998 only 39 IPOs doubled in value on their first day.

In 1999, 117 achieved it. By the middle of March 2000, 43 had already doubled in value on their first day. There were mammoth gains to be made and the effective takeover of Time Warner by upstart AOL at the start of 2000 really had seemed to signal an unstoppable revolution.

A few days before World Online went public, there was talk that Yahoo was about to merge with eBay, having been in talks with Rupert Murdoch's News Corp, in order to compete with the AOL/Time Warner behemoth. Such talk helped the Dow Jones Industrial Average race up 500 points - its biggest one-day gain - fuelling concerns on Capitol Hill about the "casino mentality" gripping US markets.

On the other side of the Atlantic, traders were becoming nervy. Buoyed by the positive share price reactions which had greeted dotcom investment announcements from the likes of Sky, Pearson and Reuters, magazine group Emap announced plans to invest £250 million in new e-ventures, only to see its share price drop 12 per cent. Investor sentiment was turning against "dotcommery".

When traders returned to their desks after that weekend, the selling gained pace and after three days in the public markets World Online's shares had lost 20 per cent of their value. By the end of the following week, Lastminute.com shares were down a similar amount.

"The greed evident in the flotation might actually increase the chances that the company disappears up its own portal," the Guardian commentator Edmond Warner said at the time, summing up a mood. In Germany, shares in Lycos Europe dipped under their issue price within moments of the company going public.

In the US, the Nasdaq index of high-tech stocks still had some life in it and touched a high of 4816.35 points on March 24 as internet technology firm Cisco surpassed Microsoft as America's most valuable corporation with a valuation of US$579 billion.

But the rot had set in. Within a few weeks, company after company was pulling its flotation - starting with video-on-demand player Yes Television, which pulled its £600 million IPO - and the following months one after another high-profile corporate collapsed as funding dried up.

Even Joanna Lumley's endorsement could not help health and beauty site Clickmango, for instance, while the demise of fashion retailer Boo.com, amid tales of executive jets and champagne excesses, quickly became the stuff of legend.

Also headed into the deadpool were so-called business-to-consumer - or B2C - firms with such webby names as Letsbuyit.com and UrbanFetch.

Business-to-business - B2B - firms, e-finance boutiques and so-called dotcom incubators were wound up or sold on the cheap. Once tipped for a £700 million flotation, online retailer Jungle.com, for instance, was snapped up by Great Universal Stores for £33 million; the technology behind online information group Scoot, which once had a stockmarket valuation of more than £2 billion, was picked up by BT for just £5 million. By the end of 2000, World Online itself had been taken over by rival Tiscali.

Investors suffered massive losses. Having hit its peak in early March, the FTSE Techmark index, launched with great fanfare just the previous November by then-chancellor Gordon Brown, went on to lose 90 per cent over the next three years. The Nasdaq dropped 83 per cent over the next 2 years.

The pendulum had swung wildly from "everyone's going to be a millionaire by Christmas" to the "internet is dead", remembers web entrepreneur Jamie Riddell, one of the British pioneers of internet advertising who launched his own agency, Cheeze, in late 1999. "We had gone from one extreme: people throwing hundreds of thousands of pounds at companies with business plans that did not add up, to people saying, 'No, the internet is not going to work."'

Part of the reason the post-dotcom collapse was so prolonged was that while the boom provided fertile ground for new ideas, the technology of the web lagged behind.

The internet connections being offered by the likes of Freeserve, for instance, were 56kB-per-second dial-up. The average home connection today is more than 80 times faster.

Back in 2000, getting a broadband connection, which ran at a fraction of the speed available today, cost upwards of £50 a month and only a few tens of thousands of people had one.

Most home connections struggled with the overly complex sites created by many B2C companies, such as Boo.com, while the chances of consumers being able to watch internet TV, as proposed by some companies during the boom, were slim indeed.

It was another two years before BT started properly rolling out broadband services and only in the past few years has it become ubiquitous.

Back in 2000, data-hosting companies talked of corporate clients storing information on the web, or switching to an application service provider model, under which many of the programs used by employees would be run on the internet. Few companies, however, were confident enough about their web connections to plot such a move.

But now, companies like Google are challenging the might of Microsoft by providing corporate clients with everything from document management to calendars and email through a browser, and "cloud computing" is now a hot topic.

The dotcom boom also saw the sale of licences to operate the next generation of 3G mobile phone services.

Mobile phone operators had already tried unsuccessfully to get consumers to try a pared-down version of the internet - using technology called Wap - but it took years for 3G services to take off. It was not until the arrival of the 3G iPhone in 2008, which spawned a host of copycat touchscreen devices, that 3G services came of age.

"It was a very tough time after the boom, because we did not have the audience online that we do now, we did not have the technology," Riddell remembers.

"We had the ideas, but the boom was built on foundations of sand that were washed away."

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