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Ecommerce Crash 2000
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Intro In this report we will discuss the E-commerce bubble burst and its subsequent crash in March 2000. We will examine what happened during this time and what caused the bubble to burst. In order to understand these events, it is important to firstly comprehend what Dot-com is and its purpose. Dot-com can be defined as a company whose main market is on-line trading. An example is Amazon who doesn’t operate off-line. We will use case studies such as Pet-com and companies such as Amazon to illustrate this. We will discuss in our opinions, the long-term effects of the 2000 crash and how it has affected investor’s confidence. In 1997 online trading was beginning to become widely recognised and by 1999 E-commerce was worth £2bn in the UK. More and more people started to have access to the Internet. It is important to know what happened to E-commerce in March 2000. Before the crash, the share prices of Dot-com stocks were priced too high and although investors knew about this, they kept on investing in them as they thought it was a good investment and had great potential. The price of the shares kept on rising and rising until March 2000 when its price started to plummet. Therefore employees were made redundant, some Internet shops were closed down and others went into liquidation after investing heavily. The main cause of this was that on-line firms had far too many overheads relative to sales revenue generated but they kept on expanding and expanding, subsequently debts started to build up which they could not afford to pay up. An example is Amazon, an established on-line business, which started off just selling books then expanded to videos, CDs and continued to expand to other markets. Amazon had spent many years struggling to meet their overheads; which are not directly applied to the product. Other companies saw this as a good opportunity. Therefore they followed suit, without working their way up, and went straight into the market to compete with established firms. The cost involved in setting up this method of trading was neglected and firm’s overheads were far too high compared to the revenue they were generating. On-line firms such as Pet-com who spent on $3m for each TV commercial which was pointless and a waste of money as people could not remember the URLs. This section will look at what happened after the Stock market crash of March 2000 and how it generally affected investors confidence. Post March 2000 the Us NASDAQ has suffered in a period of instability, an investor in the Financial Times (FT) said, ' Volatility has become bewildering.'(April 14 2000). In periods of volatility, where stock prices are falling, it is widely regarded that Government Bonds (specifically US or UK) are seen to be less risky than shares and therefore investors will switch their funds from shares to bonds. If the bond prices are increasing then there is greater demand for the bond and less confidence needed than more risky assets, such as shares, that can bring a higher return. The table and graph below show the price changes of a 10 year US Government Bond. Date Prices (US $) 25/02/1999 95 29/32 22/02/2000 100 11/16 24/02/2000 101 1/32 27/02/2001 100 11/16 26/02/2002 99 29/32 The graph clearly illustrates that the price of a bond is highest on the 24/02/00, just before the crash, when investors were already worried about what may happen "would the bubble burst?" Between the 22nd Feb 2000 and the 24th Feb 2000 there is a 0.5% increase in the price of a bond indicating that there was a growing concern about the market and this is a sign that investors were already loosing confidence. In our opinion, investors are not as confident in the market after March 2000 as they were in Feb 1999; the bond prices can be used as a rough guide. Long-term effects on the market are very hard to judge, this is because new information is constantly being fed to the market. Major geopolitical events such as September 11th, war in Afghanistan and the war in Iraq will have a much bigger effect on investor confidence in 2001, 2002 and 2003 respectively than the crash in Marsh 2000. We believe that the effect of the Crash in March 2000 will affect specific sector risk and high technology stock; in particular, those with many links with the Internet will be viewed as riskier investments.
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