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Dot.con

Dot.con

John Cassidy
2002
T2 372 pages · about 6h 12m to read Open Librarygoodreads

The bubble that made and unmade Yahoo's valuation.

Summary

Cassidy, a New Yorker writer with an economics background, wrote a history of the internet stock bubble published shortly after it burst.

The narrative covers the sequence: the Netscape offering in August 1995 that established that a company with minimal revenue could be valued in the billions; the rush of offerings that followed; the role of investment banks in allocating hot issues, in spinning shares to executives who might direct future business, and in publishing research written to win underwriting mandates; the emergence of analysts as promotional figures, particularly Henry Blodget and Mary Meeker; the day trading phenomenon; the abandonment of earnings-based valuation in favour of eyeballs, page views and revenue multiples; the peak in March 2000 and the collapse.

Cassidy's analytical position is that the bubble was not a failure of individual rationality but a predictable outcome of the incentives in place. Underwriters were paid for volume, analysts were paid from banking revenue, venture investors needed exits, and fund managers who avoided technology stocks underperformed and lost their jobs, so nearly everyone with influence had reason to keep participating. He connects this to the economic literature on bubbles, discussing rational bubble models, the limits of arbitrage that prevent short sellers from correcting prices, and Kindleberger and Minsky on credit-driven manias.

The book was written immediately after the events, so the corporate fraud cases that followed at Enron, WorldCom and elsewhere and the resulting regulatory response are outside it. Its treatment of individual companies is necessarily brief given the number covered. Cassidy is stronger on the incentive analysis than on the technology itself, and readers wanting to understand which internet business models actually worked will not find it here.

Key takeaways 7

  1. The Netscape offering established that a company with minimal revenue could carry a multi-billion dollar valuation, which set the pattern for the following five years.
  2. Analyst research was written to win underwriting business, and the compensation structure made this the expected outcome rather than an abuse.
  3. Underwriters allocated shares in hot offerings to executives whose companies might supply future banking fees.
  4. Fund managers who avoided technology stocks underperformed and lost assets, which forced participation regardless of individual judgement.
  5. Short sellers could not correct prices because borrowing costs and margin risk made betting against a rising bubble unsurvivable.
  6. Valuation metrics based on audience rather than cash flow were adopted precisely because cash flow metrics gave unacceptable answers.
  7. Bubbles proceed through incentives that make participation rational for each individual while the aggregate outcome is destructive.

Who should read it

Investors who want the incentive analysis of how a bubble is sustained by rational individual behaviour, written close enough to the events to capture what participants believed.

Similar books 6

Chosen by shared topics, the entries that hold them, and the people who recommended both.

Anthony B. Perkins, Michael C. Perkins · 1999

Written before the crash, naming Yahoo among the overvalued.

Robert H. Reid · 1997

Contemporary profiles including Yahoo's founding by Yang and Filo.

Recommended by: Keith Rabois

Maggie Mahar · 2003

The US bull market from August 1982 to its 1999 peak, and what changed in it.

Recommended by: Warren Buffett

Robert J. Shiller · 2000

How psychology, not fundamentals, drove the stock and housing booms of 2000 and 2005.

Nicholas Carlson · 2015

Marissa Mayer's arrival at Yahoo in 2012 and her struggle to turn it around.

John Battelle · 2005

The search industry from early engines to Google, and how paid search was invented.

Recommended by: Gary Vaynerchuk, Keith Rabois

Where it sits in the reference 2

Companies
Financial panics

Topics

Financial HistoryTechnology and ComputingTech strategy and platform economics