JIM LEHRER: Now, the bad news today -- and most every day recently -- about the once high-flying world of high-tech: Today the tech- heavy NASDAQ Index closed down another 129 points, closing at 1923 -- a drop of 3124 points from its all-time high of 5048 just one year ago. That's an enormous 61 percent decline, and the lowest its been in two years.The questions: Why was it so all high-flying in the first place, and why did it drop so low, so fast? Our business correspondent, Paul Solman of WGBH-Boston, begins with some answers about one part of the slide, the failing dot-coms.
CRAIG THOMAS: Oh, baby. Come on, go up.
PAUL SOLMAN: In 1999, the NASDAQ climbing as we spoke, we showed you the day traders putting their money on the Internet.
CRAIG THOMAS: This stock just came down about three points. I'm trying to find a bottom on it, so I can buy some.
PAUL SOLMAN: What is the company?
CRAIG THOMAS: NTRO I don't know. Some IPO that came out yesterday.
PAUL SOLMAN: Craig Thomas was trading for a living in midtown Manhattan.
DAY TRADER: Yeah!
JUDITH FLYNN: Up 15 5/8.
PAUL SOLMAN: In Cambridge, Massachusetts, Judith Flynn, a grad student, was playing with her pension.
JUDITH FLYNN: Last June, I had $100,000. I said if I had $200,000 by this June, that would be great. And so a couple of weeks ago, my portfolio was worth $215,000. Now I don't want to be 200 ($200,000) by June; it would be great if it could be three ($300,000).
PAUL SOLMAN: The prophecies seemed self-fulfilling. The more investors bought, the higher stocks soared. Demand for Internet shares was growing faster than supply, even though by last March, at least one new company a day was selling stock to the public. Judith Flynn's friend and host of this gathering, economist Terry Burnham:
TERRY BURNHAM: What was the one you were talking about today? Redback networks?
JUDITH FLYNN: Redback networks.
TERRY BURNHAM: Up 25 percent today, one day.
PAUL SOLMAN: In short, just a year ago, from coast to shining coast, and in California especially, all signs pointed to a new economy, as new businesses, in spirited competition...
TRADER: Buy another 5 7/8.
PAUL SOLMAN: ...Attracted new investors in a dizzying upward spiral. Even one of my own best friends, Jeffrey Klein, had an Internet startup, and he was the former editor of anti-business "Mother Jones" magazine.
JEFFREY KLEIN: There, there we go.
PAUL SOLMAN: We included this footage because I won at air hockey.
JEFFREY KLEIN: Your ego is so pathetic.
PAUL SOLMAN: But Klein was prevailing in the marketplace, a rather more significant achievement. His firm, Xamplify, was luring top talent with a cutting-edge idea typical of the times: Help companies appeal to their different kinds of customers by customizing their Internet Web sites.
JEFFREY KLEIN: Basically, 98 percent of people don't do on sites what the sites want them to do, and we have a solution for that.
PAUL SOLMAN: Dot-coms like Klein's weren't making profits yet, but the future was so bright, even the blind wore shades. And since future prospects drive stock prices, the market kept rising, which in turn enticed more entrepreneurs to join the whirlwind.
MAN: We're poised to become the next Yahoo!
WOMAN: We are the one-stop shopping resource on the Internet...
MAN: We are basing our business on an instant messaging product.
PAUL SOLMAN: These folks were in Boston, honing their pitches for an upcoming investor-fest.
MAN: We are in the process of building a nationwide information network to help people make choices about where they go out to eat.
PAUL SOLMAN: Adam Caper's Internet startup was a Web site featuring Boston restaurant reviews and menus. He hoped to take the idea national. But as the mentor at this practice session, entrepreneur Bill Warner, tersely noted similar sites already existed.
BILL WARNER: I want to be blunt here.
BILL WARNER: All right, I think your idea is seriously flawed, all right? And unless you can get really specific, what you've got is a generic thing.
PAUL SOLMAN: In fact, dot-com duplication was a commonplace, everyone hoping that their company would win the race because someone's had to. That meant, of course, a lot of losers. No wonder, then, that when prospects began to dim, skepticism came in a hurry. This Barron's article appeared the very day we interviewed two outspoken skeptics, former Internet workers who ran the anti-industry Web site netslaves.com.
STEVE BALDWIN: Is there an objective need for seven sites that are targeted at women, all right? Or seven sites targeted at men? How many pet sites are there?
PAUL SOLMAN: In fact, there were more than a hundred at the time.
BILL LESSARD: There's going to be a lot of consolidation taking place. There's going to be a few players, and this is going to be a regular industry just like any old other industry.
PAUL SOLMAN: With such skepticism came selling.
TRADER: Five hundred on the day; we're representing a large-scale seller.
PAUL SOLMAN: Stock prices sank even more quickly than they'd risen. The real Y2K crisis was upon us: The dot-com nosedive, a crash of 1929-like proportions. By March, Redbak had climbed to $360 a share. It then split, but has lost more than 80 percent of its value since. That's nothing compared to NTRO, which went public at $20 a share, peaked in March at $120, and was selling, last we looked, at $6. Internet public offerings slowed, then froze completely in mid-November. Of last year's 136 new issues, about 100 now trade below their initial offering price. And many poster children of the Internet revolution, after their moment in the sun, have returned unto dust, which was in fact the theme of e-trade's Super Bowl ad this year. Meanwhile, almost 60,000 Internet workers have been laid off in the past year, including everyone at bostondine.com.
ADAM CAPER: Well, I’m an ash from a financial perspective, I mean, for my investors, certainly.
PAUL SOLMAN: Adam Caper was among the players we revisited to analyze the bust. What does his case teach us about the dot-gone phenomenon? Well, maybe his restaurant Web site really wasn't original enough, given the competition: Hundreds of sites, if you count every one that rated Boston restaurants. But as important, says Caper: Business models like his, featuring slow and steady growth, couldn't stand the heat of a sizzling money market.
ADAM CAPER: A lot of what drove a lot of what we saw in the dot-com market during the years '97 to early 2000 was this idea that an investor or venture capitalist could get in, plunk down several millions or several tens of millions of dollars, and get it out to a very hungry public market very quickly. And so what was happening was companies were being force-fed, and as a result, they weren't growing organically.
PAUL SOLMAN: Jeffrey Klein is still in business, and now getting three times as many job applicants as before the crash. At last year's taping, he was wooing potential employees. Today, with all the layoffs, he's practically shooing them away.
JEFFREY KLEIN: There's a larger supply of people to draw from, and there's actually a little less desperation in the hiring process. You don't have to grab the person the day of the interview.
PAUL SOLMAN: Now Xamplify has a core competency: The ability to classify customers by discovering their learning styles via a short questionnaire. But the company has had to morph several times as venture capitalists have kept changing their tune.
JEFFREY KLEIN: They've gone through several business models. This is a great advertising medium, for example. Nobody likes ads. Why would they bother clicking on an ad? The whole point to go on the Internet is not to be interrupted in your activities. And nobody sat down and said "ads will not work on the Internet."
PAUL SOLMAN: But that was where people were going to make money, by selling ads on their Web sites.
JEFFREY KLEIN: Doesn't work. Won't work. Another one is "we're going to make money selling information on the Web." Well, because it's such a fantastic place for transacting information, you can get it for free.
PAUL SOLMAN: Nor does it now seem that consumers will buy big-ticket items like furniture on the Web.
JEFFREY KLEIN: Fundamentally you're just going to use it as an information gathering device. Then you're going to go into the car showroom or the furniture showroom.
PAUL SOLMAN: Klein sees that now. But a year ago, he was working with a major car company, and pitching his psychological profiling accordingly. Like his fellow entrepreneurs, he was dependent on those with the money to fund him: The VC's, or venture capitalists.
JEFFREY KLEIN: Most of the VC's, I think, are momentum players, and they make a lot of money by following the deal flow. But the rarest thing of all is the independent mind that's willing to say "no, this won't work;" "yes, this will work." There's remarkably little independent intelligence, which is why the market swings so wildly, I think.
PAUL SOLMAN: Of course, it wasn't just the pros who caused the gyrations.
JUDITH FLYNN: Oh, I want to be rich. Oh, I want to be rich.
PAUL SOLMAN: The pipe dreams of amateurs were also a factor.
JUDITH FLYNN: I want to take the "QE II" to England, and then travel all through Europe. I want to drink the best wine, I want to go to the best restaurants. I want to be able to go to spas and get facials and massages.
PAUL SOLMAN: Instead, Judith Flynn and Terry Burnham took a bath in the stock market.
TERRY BURNHAM: The day that you interviewed us, the next day was the absolute top on the NASDAQ. And from that close until this interview, I’ve lost 60 percent of my wealth.
PAUL SOLMAN: Sixty percent of your entire net worth?
TERRY BURNHAM: Yes. Yeah, gone.
PAUL SOLMAN: Judith Flynn is also down, from $208,000 to $90,000, which prompted the predictable TV question to the two of them.
PAUL SOLMAN: And how does that make you feel?
PAUL SOLMAN: In return, however, we got a very unpredictable response.
TERRY BURNHAM: It feels fine. (Laughs ) It really does.
JUDITH FLYNN: Actually, in a lot of ways I’m happier now, because back then... I remember even when you were interviewing us, I couldn't wait for it to be over so I could go check what the market closed at. I don't really think about it anymore.
PAUL SOLMAN: But you had this thing about how you wanted to go to Europe. You wanted to do all these things, you wanted to be tremendously wealthy, you wanted to...
JUDITH FLYNN: I still want all those things, but I'm thinking... But they're probably going to take a little bit longer to be able to do them, or have them. And that's good. You've got to have goals in life.
PAUL SOLMAN: Now, these guys may be luckier and more philosophical than most, but curiously, everyone we spoke with said the crash may turn out to be a blessing in disguise. Jeffrey Klein said it's taught him the Internet is merely another way for businesses to reach customers. He was 3,000 miles from home recently, talking to a consulting firm about selling his expertise at profiling customers to companies without any necessary connection to the Internet at all. Of course, Xamplify still might not make it, which caused me to ask:
PAUL SOLMAN: Are you better off even if your company doesn't work?
JEFFREY KLEIN: Oh, a hundred times better off. It's been a living education in a challenging environment.
PAUL SOLMAN: A living education, says Adam Caper, with specific learning.
ADAM CAPER: I know how to write a business plan. I know how to look for people who can help me run it. I know how to speak to investors.
PAUL SOLMAN: But Caper goes further. He thinks the new economy, despite the crash, has produced a larger economy-wide benefit.
ADAM CAPER: Let's just say, for example, that you have a phenomenon of people getting up an hour earlier. What you've seen is that we have had a period of tremendous growth and innovation, creation of wealth, raising of standards of living, increasing of educational opportunities, all of which can be sort of symbolized by that hour earlier that everybody got out of bed and worked harder.
PAUL SOLMAN: But to economist Terry Burnham, such positive thinking is positive malarkey. In a debacle like the dot-coms, he says, as in any unsuccessful investment splurge, real resources are squandered.
TERRY BURNHAM: You have thousands of qualified human years that have been thrown in the garbage. Their output is zero. It's negative. They've destroyed value during the time that they've been working on these companies, many of them.
PAUL SOLMAN: But they're now equipped to do something terrific the next time around.
TERRY BURNHAM: Yeah, so... But maybe their other job that they would have had would have been great, too. They could have been doing a job that produced something useful.
PAUL SOLMAN: Instead, to Burnham, they have helped produce $3 trillion in losses on the NASDAQ alone, giving new resonance to the sales blurb for a game we found the other day, Dot-Com Monopoly, which "launches you into the topsy-turvy world of e-commerce." We snapped it up for $10.99 at a going-out-of-business sale on one of the hottest dot-coms of the salad days, E-Toys. Its shares hit $86 in October, 1999. If you'd invested, you'd have lost every last cent, which suggests this one last thought: That the legacy of the new economy's dot-com days and NASDAQ nights may turn out to be the morning after.