Documentary: Download - The True Story of the Internet (part 3)(Bubble)
Download: The True Story of the Internet is about a revolution — the technological, cultural, commercial and social revolution that has radically changed our lives. And for the first time on television, we hear how it happened from the men and women who made it possible.
From the founders of eBay, Yahoo, Amazon, Netscape, Google and many others, we hear amazing stories of how, in ten short years, the Internet took over our lives. These extraordinary men and women tell us how they went from being geeky, computer obsessed nerds to being 21st-century visionaries in the time it takes most people to get their first promotion. And, how they made untold billions along the way.
The style of the story-telling is up close and personal. With first-hand testimony from the people that matter, we tell a story that has all the excitement of a thriller — full of battles and back-stabbing, moments of genius and moments of sheer hilarity. You will never surf the net in the same way again.
Download is hosted by technology journalist John Heileman. He’s an edgy, combative, hi-energy New Yorker who never takes anything at face value. He’s also a personal friend of most of Silicon Valley’s most important characters and he revels in the craziness of it all. After all, this is a story in which 20-year-olds become overnight billionaires, create, destroy and re-create more wealth in ten years than the human race has ever seen, and still struggle to get a date.
From the founders of eBay, Yahoo, Amazon, Netscape, Google and many others, we hear amazing stories of how, in ten short years, the Internet took over our lives. These extraordinary men and women tell us how they went from being geeky, computer obsessed nerds to being 21st-century visionaries in the time it takes most people to get their first promotion. And, how they made untold billions along the way.
The style of the story-telling is up close and personal. With first-hand testimony from the people that matter, we tell a story that has all the excitement of a thriller — full of battles and back-stabbing, moments of genius and moments of sheer hilarity. You will never surf the net in the same way again.
Download is hosted by technology journalist John Heileman. He’s an edgy, combative, hi-energy New Yorker who never takes anything at face value. He’s also a personal friend of most of Silicon Valley’s most important characters and he revels in the craziness of it all. After all, this is a story in which 20-year-olds become overnight billionaires, create, destroy and re-create more wealth in ten years than the human race has ever seen, and still struggle to get a date.
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TechTranscript
00:00Us 21st century humans have come up with an awful lot of entertaining ways of filling
00:09up the few free moments in our over-scheduled lives.
00:13We sing and dance, we surf and ski, we cavort and canoodle, and watch TV.
00:17But what diversion do we love most of all?
00:21Man oh man, we love to spend.
00:24Now some folks say our obsession with shopping reflects a certain decadence, a certain self-indulgence
00:30But I say every time we whip out a piece of plastic and slap it down to buy some fresh
00:34bling bling, we're taking part in a noble tradition, the evolution of capitalism.
00:43But now a new phase of capitalism is upon us, the age of e-commerce.
00:48An age that's changed the way the business works, the way we buy and sell.
00:52An age ushered in by a transformative technology, the World Wide Web, and by two of its seminal
00:58companies, Amazon.com and eBay.
01:03It's easy to forget just how revolutionary these companies were when they first burst
01:07upon the scene back in the 1990s, how they shook big business to its very core.
01:12Ever since the industrial revolution, corporations have always been based on the power of high-flying
01:17executives sitting in their gilded offices way up there, with the consumer almost as
01:21an afterthought.
01:22But now Amazon and eBay were creating a whole new model of commerce, one based on taking
01:27the internet and harnessing the power of the great mass of individuals down here at
01:31street level.
01:34My name is John Heilemann, and as a journalist, I've covered the e-commerce revolution from
01:38the start, hanging around with the guys and gals who made it happen.
01:44The story I'm here to tell you is about the high-tech innovations that underpinned that
01:48revolution and about the enormous economic upheaval that it unleashed.
01:54It's a story of a boom, a bubble, a bust, and a resurrection.
01:59And it's a story that helps explain why, despite what we may think, even the worst financial
02:04meltdowns are incredibly, amazingly, and unexpectedly a good thing for all of us.
02:12It's almost a cliche, but if you're searching for the next big thing in high-tech, the best
02:24place to look is a garage.
02:27Ah, yes, the almighty garage. The place where, according to high-tech lore, the greatest
02:33startups were incubated. Hewlett-Packard, Apple, the list goes on and on.
02:39The garage we're interested in today was the birthplace of Amazon.com. It was in suburban
02:44Seattle and belonged to a guy named Jeff Bezos. Bezos started out on Wall Street in the early
02:491990s. He was highly analytical, a spreadsheet junkie. And when the web came along, he started
02:54thinking in a systematic way about its unique properties and what kinds of stuff it would
02:59be ideal for selling. He made list after list, and always at the top was books.
03:06There are millions of books active and in print around the world, and you could build
03:09something online that just couldn't exist any other way. There's no way to have a physical
03:15bookstore with millions of titles.
03:17Bezos launched Amazon in the summer of 1995. Around the same time, down in Silicon Valley,
03:23another young guy, Pierre Omidyar, was thinking hard about the web, too. Today, Omidyar is
03:28a multi-billionaire, but back then he was just another idealistic software programmer,
03:33but one who had an interesting idea, the idea that would become eBay.
03:38In the beginning, Pierre Omidyar and Jeff Bezos shared one thing in common. They thought
03:42of the web as a place to do business and not just goof around. But apart from that, Pierre
03:47was from Venus and Jeff was from Mars. They couldn't have been more different. Where Jeff
03:51was about the business plan, the market research, the methodical analysis, Pierre, well, he
03:56didn't have a business plan. He hadn't done any market research. He was just a humble
03:59software coder who thought that the idea of making an online auction site sounded pretty
04:04cool. It was an idea that he could take care of all by himself, tapping away at his home
04:08computer.
04:09I thought that you could maybe use the web and use the power of this technology to bring
04:17people in one place to create a marketplace, a market mechanism that was actually truly
04:22efficient, where regular people could compete on a level playing field with the big players.
04:28And so that's really, that's what I set out to do with eBay.
04:30Omidyar believed that an auction site on the web would be fairer and more accessible than
04:38any existing market. So he decided to make it happen all by himself over one long holiday
04:45weekend in September 1995.
04:49So I sat down over Labor Day weekend in my sort of home office there, and I started writing
04:53code. And it was really simple. You could create an item, you could list an item, you
04:58could get a list of all the items that had been created, and then you could bid on an
05:02item. It was just those three things, and I was ready to go.
05:07As the first visitors started trickling into Omidyar's site, the pickings they found there
05:11were mighty slim. A bunch of computer-related stuff, plus an extremely random assortment
05:16of items. Autographed celebrity underwear, a toy fire engine, a superhero lunchbox. I
05:22mean, my God, does this look like the makings of startup glory and transformational business
05:26potential, or a pile of useless secondhand junk? If you're thinking the latter, well,
05:31that's one more reason why you're not a billionaire, and Pierre Omidyar is.
05:36Some measure of success came to Amazon and eBay almost immediately. Within months of
05:41launching his site, Omidyar was earning thousands of dollars in fees. And in the first 30 days
05:46after Amazon went live, with its first employees sitting at desks made out of doors and sawhorses
05:51they'd assembled themselves, the site shipped books to 45 different countries and all 50
05:56U.S. states.
05:57Our business plan that we had written called for very slow growth, and in fact, we had
06:02to kind of rip that business plan up and replan everything, because the early customers were
06:09really taking on to the service very quickly. We thought it would take a long time for people
06:14to kind of change their mindset and decide to do online shopping.
06:20The early success of Amazon and eBay didn't go unnoticed on Wall Street, where certain
06:24analysts were startled to discover just how fast the web was spreading. One of the most
06:28prominent was Henry Blodgett, who would become one of the poster boys of the boom, and later,
06:34one of the scapegoats for the bust.
06:37Suddenly the company started putting up incredible numbers, quarter after quarter, and the traffic
06:42growth was so far beyond what anyone had ever mentioned to me. It was literally astounding
06:48to look at it and say, how could it be growing this quickly?
06:54How quickly? Well, consider this. After the invention of radio, it took 38 years before
07:0050 million people were using it. With TV, it took 13 years. But once the Internet was
07:05opened up to the general public, it took just four years before it had 50 million users.
07:13This was explosive growth, for sure. But what was driving it? Well, to answer that, we need
07:18to get a little bit geeky. We have to understand the collision of two technologies and the
07:23pair of laws that made them unique in the history of mankind.
07:27The first technology was the silicon chip, governed by what's called Moore's Law. Coined
07:33by Intel co-founder Gordon Moore more than 40 years ago, Moore's Law states that the
07:37speed and power of integrated circuits, from microprocessors to memory chips, doubles every
07:4318 months. Now, your first reaction to that might be, so what?
07:48The point of doubling is that if you look over time at how many steps of doubling it
07:53takes to get a preposterously large number, you don't need that many steps. So, for example,
07:59to go from one to a million, you only need 20 steps. And so, in very few steps, you get
08:06tremendous growth.
08:07This logic-defying doubling stems from engineers' ability to make transistors smaller and smaller.
08:13And it's why computers have gone from giant machines that fill up entire rooms to super-powerful
08:18laptops in what amounts to the blink of an eye.
08:21Any number of innovations that have gone into making transistors smaller, they range from
08:27how you etch the transistors onto the surface of silicon to what materials we actually make
08:33the transistors out of.
08:36What Moore understood when he came up with his law was something about engineers, that
08:40the first thing they do with each generation of denser chips is use them to make, wouldn't
08:45you know it, even denser chips. The process, in other words, is autocatalytic, meaning
08:50self-accelerating.
08:53Once he made that declaration, it was almost a rule to live by for microprocessor designers.
08:59They felt obligated to sort of deliver on whatever technology improvements were needed
09:05to make transistors small enough to provide the doubling.
09:10But Moore's law is only half of the story behind the technological miracle of the web.
09:15The other half is a rule known as Metcalfe's law, coined by Robert Metcalfe, inventor of
09:20Ethernet. Metcalfe's law says that every new node, meaning something like your computer,
09:25that's added to the network doesn't just increase the network's value by plus one, the curve
09:29is much, much steeper than that. It's the Moore's law of connectivity, and this is how
09:34it works.
09:36If we have two users, then that's one connection between them. They can each talk to each other.
09:41So let's add another user. If we have three users, then that gets you three possible connections.
09:48If we go to adding another user, that gets you six connections. So we're seeing some
09:52growth here. Let's jump up a little bit more. If you go to ten users, there are actually
09:5945 possible connections between pairs of users. So notice that the growth is quite steep,
10:04in fact. And in fact, if you go to 100 users, by that point, it turns out that there are
10:10almost 5,000 possible pairs of users who could choose to communicate with one another. And
10:15so what this really means for the growth of the Internet is that the Internet gathers
10:21momentum as it goes, which is to say, as the number of users increases, the usefulness
10:26of the network increases, and it becomes even more compelling over time for new users
10:30to join the network.
10:32By the middle of the 1990s, Moore's law and Metcalf's law were working hand-in-hand, fueling
10:37an upward spiral. Faster, cheaper, more powerful PCs were increasingly connected together,
10:43making the network exponentially more useful and exponentially more popular.
10:48Though the folks on Wall Street didn't have a clue about how all this technology worked,
10:52they could see that this Internet thing was really taking off, turning into a bona fide
10:57mass medium, which meant that there was a killing to be made. And when ignorance meets
11:02rampant enthusiasm and unbridled greed, well, you know what that means. It means that a
11:07fantastic financial bubble is just around the corner.
11:17History tells us that every great wave of transformative innovation is accompanied by
11:21a financial mania. The most famous example is the railway frenzy that gripped America
11:28and Britain in the mid-1800s. Around the same time, there was a riot of speculation around
11:33the telegraph. Fifty years earlier, there had been one around canals. Fifty years later,
11:39Ford's Model T ushered in an automobile bubble. In every instance, the pattern was the same.
11:44A breakthrough technology creates scads of risky startups. Investors get excited and
11:49rush in to buy a piece of the future, and then it all ends in tears. Bankruptcies, foreclosures,
11:55stock market immolations. Does that sound familiar to you?
12:01Of course it does, for it describes exactly what happened in the 1990s with the Internet.
12:06The cycle began in 1995, when Netscape launched its improbable and wildly successful initial
12:12public offering on the stock market. A year later came the IPOs of search engine companies
12:17such as Yahoo and Excite. And a year after that, it was time for Jeff Bezos to take the
12:21next step in pushing the web boom in the direction of bubblehood.
12:28The Amazon IPO took place in May 1997. The company was just two years old, had precious
12:33few revenues and no profits. But Bezos was already calling Amazon Earth's biggest bookstore
12:39and hyping its potential to the sky. People were poo-pooing it as, wait a minute,
12:44it's just a bookstore. It's not profitable. It's going to run out of money and go out of business.
12:49And then you had a lot of other people saying, no, it's Dell. It's this tremendous new model
12:52and they're going to grow so quickly. And so right from the get-go, it was tremendously controversial.
12:58Any time that Jeff had the opportunity, he'd lower prices so that there would be more growth.
13:04Quite unlike many other business executives who hold their prices to make more in profit.
13:09Now, truth be told, Bezos wasn't actually saying that profits didn't matter or that
13:14Amazon could go on losing money indefinitely. He was saying that in the formative gold rush
13:19land grab moment in the development of the web, profits could and should be sacrificed
13:24temporarily in favor of rapid growth. The strategy Bezos boiled down to three simple
13:29words, get big fast.
13:34Get big fast was really important for us. It was our critical strategy. And the reason
13:39is we knew that we could offer customers a better experience if we had a certain amount
13:46of scale.
13:47Absolutely essential to getting big fast for Amazon was convincing customers to trust it
13:52with some of the most valuable personal information, their credit card numbers. And to understand
13:57how Amazon did that, we need to delve in to the age old science of encryption.
14:04Powerful methods of scrambling messages mathematically had been developed long ago and employed most
14:09famously during World War II. But it was clear that something much more sophisticated
14:13was needed for the new digital age. The old method needed an upgrade because there was
14:18a fatal flaw.
14:20To explain this flaw, let's use a low-tech analogy using padlocks instead of mathematical
14:25encryption. First, imagine two people and one wants to send a confidential message to
14:30the other, just like a customer wanting to send her credit card to Amazon. Person one,
14:35the sender, puts her message in a box, locks it, and sends it off. But here's the snag.
14:41The sender of the message now also has to somehow let the recipient know the locks combination,
14:47the code to unlock the padlock. This step is fraught with problems. This is when thieves
14:52could surreptitiously observe the code, steal it, and open up the box. Of course, if our
14:57sender and receiver already know each other, they could arrange to meet in secret before
15:01the message is sent and share the code.
15:04Unfortunately, of course, this mechanism is not of that much use in the context of online
15:10commerce. And the reason is, in online commerce, you want to enable confidential communication
15:16between pairs of parties who have no... It's simply untenable for Amazon to have gone into
15:22a private room with every possible future customer of Amazon. So we needed a different
15:28plan.
15:29That plan came from a trio of California-based mathematicians named Whitfield Diffie, Martin
15:34Hellman, and Ralph Merkel, who developed something called public key cryptography. Their scheme
15:40turned how encryption had been done for centuries on its head. Let's use our low-tech analogy
15:45again to explain the essential idea, which is brilliant, but kind of subtle. The sender
15:51puts a message in a box like before. But this time, instead of locking it with her own padlock,
15:57she asks the person who will receive the message to buy a padlock and send it to her. When
16:03the sender gets the padlock, she uses it to lock the box and then sends it. Now if someone
16:09intercepts the box, they can't open it. In fact, even the sender can't open the box once
16:14it's locked. The only person who can open it is the intended recipient, the only person
16:19who has the code. Thus, presto, you have something close to perfect security. It took several
16:27years and some very clever math to create internet-friendly digital versions of the
16:31padlocks and boxes used in our analogy. But work it does, and public key cryptography
16:37is the linchpin of secure e-commerce.
16:41The public key is used for encrypting, that is, rendering secret, the data that the sender
16:48wishes to send confidentially to the receiver. There's also what's known as the private key,
16:56which is the combination used by the receiver in order to take the encrypted data, decrypt
17:03them, and produce the original message that's readable.
17:06With consumers flocking to Amazon on the basis of their confidence in secure, convenient
17:10e-commerce, Bezos had persuaded Wall Street to back his money-losing, get-big-fast strategy.
17:17But the internet boom that Amazon was part of still seemed tenuous. It progressed in
17:21bits and starts. The street still wasn't sure that the web wasn't just a fad, and companies
17:26like eBay did nothing to dispel that uncertainty, with its buyers and sellers trading in obscure
17:31collectibles that had been gathering dust in garages and attics around the country.
17:35I didn't know when I created eBay that there were all these collectors out there. I mean,
17:40I didn't even know. I'm not a business person. I didn't do the research to begin with.
17:44Initially, when eBay came out, you have a lot of investment managers who would call
17:48up and they'd say, well, come on, it's just a tag sale. It's gross, and who wants to pay
17:52for these things that you can't see?
17:54We were telling the story about people being basically good, people doing business with
17:57one another, and it was funny telling the story in New York City. You know, I mean,
18:01people were like, really?
18:03In the spring of 1998, Pierre and his investors realized they needed an A-list business person
18:08at the helm if they were going to get Wall Street to take eBay seriously. They found
18:12one in the person of Meg Whitman, a Harvard MBA who'd been a marketer at Walt Disney and
18:17a top executive at the toy company Hasbro.
18:22So we were really trying to define the company in terms of collectibles, because 98 percent
18:26of the items on the site were, in fact, collectibles. In fact, 8 percent of the items on the site
18:31were actually Beanie Babies. Not a fact we widely shared.
18:37eBay was scheduled to launch its public offering in September 1998, at a moment when the world
18:42economy was jittery because of that summer's Russian financial crisis.
18:47Did anyone want to buy shares in a company derisively referred to as Fleabay?
18:52I was slightly pessimistic. I thought, well, you know, nothing's ever really worked out
18:56for me before, and this will be just another one of these situations.
19:00But not only did the IPO window open up for eBay, the company sailed right through it
19:05with an offering that was a success beyond anyone's expectations.
19:10eBay's stock soared that first day. By the end of it, the company was now valued at more
19:14than $2 billion.
19:17The issue was priced at $18 a share, and I think actually went public at $50 a share.
19:22My partner at the time was taking photographs of the television screen on CNBC every time
19:27the ticker would go by, because he just thought, well, my life has changed now forever. It's
19:31fantastic.
19:32Meanwhile, Wall Street was casting its eyes back at Amazon and liking what it was seeing.
19:38Leading the charge was Henry Blodgett, who toward the end of that year declared that
19:42despite still posting huge losses, Amazon shares would double within a year.
19:48I remember sitting on a flight back from Houston to New York with my spreadsheet in the back
19:53row and saying, OK, let's run the numbers again and what actually is a reasonable case
19:59scenario for this stock over the next year. And I came out with a $300 to $500 range and
20:04picked the middle one. And I was actually shocked at the reaction.
20:10Blodgett's prediction caused a media sensation, and that sensation sparked a buying frenzy
20:14on Wall Street. The result was that Amazon's stock price did indeed double, not in the
20:19course of a year, however, but in the space of just a few short weeks.
20:24That was probably the start of the actual manic bubble.
20:29The fits and starts of the internet bubble were now officially over, and the era of genuine
20:33and uncontrolled madness had begun. Suddenly millions of Americans and investors around
20:38the world were stampeding to their brokers, snapping up shares in any company with a dot
20:42com attached to its name, fueling the wildest speculative frenzy since the doula mania in
20:47Amsterdam in the 17th century.
20:54The Amazon and eBay IPOs made Jeff Bezos and Pierre Omidyar richer than Croesus, on paper
21:00at least. But they also had an even larger effect. The IPOs made them famous. As their
21:06stories spread, they inspired legions of imitators, business school students from across
21:11the country, who suddenly started packing up their cars and heading for Silicon Valley.
21:15When I moved out to San Francisco at the start of 1998, the migration had barely begun. But
21:24by the end of that year, after eBay's IPO and the dawning awareness that the gyrations
21:29of the world economy weren't going to throttle the boom, a new gold rush was in full effect.
21:34You could practically see the hordes of dot com prospectors streaming across the Bay Bridge,
21:38armed with laptops and half-baked business plans, rather than picks and shovels.
21:45And really, who could blame them? Judging by eBay and Amazon, it all seemed so easy.
21:51Sure Bezos and Omidyar were smart and ambitious and monomaniacal, but so were countless MBAs
21:56from Harvard and Yale and Wharton. And it seemed as if all the old business strictures
22:00had melted into thin air. Experience? Who needed it? Profits? Please. It was a brave
22:07new world, a brand new economy, one where gravity and the rules of physics no longer
22:12seemed to hold sway. Among all the forces propelling the dot com
22:18boom, none was more profound than the democratization of the stock market, taking the power away
22:23from Wall Street professionals, giving all of us the ability to buy and sell stocks from
22:28the comfort of our own homes. To a certain kind of person, this activity became a kind
22:33of obsession. They were called day traders, and they started making the stock market look
22:37like a low-rent casino. The day traders were buying stocks in the
22:43morning and selling them in the afternoon. And where did these day trading jokers get
22:50the information on which they based their ever so shrewd maneuvers? Well, they spent
22:54a lot of time absorbing gossip in internet stock chat rooms. But even more important,
22:59they spent every waking hour watching CNBC. It was like a national sport and an obsession
23:05in a way. And people who had never dreamed of buying stock before were now just wading
23:12right into it. With the media and the markets now exhibiting
23:17an insatiable hunger for any company associated with e-commerce, it seemed that every software
23:22coder in the country was angling to quench that appetite. One such programmer was Philip
23:27Kaplan, who would later start a website that chronicled the foibles of the dot-com bubble.
23:35I would go out and do a pitch, and literally walk out of the pitch with a $40,000 check,
23:41with a $100,000 check. There's just so much money being thrown around this thing. I was
23:46like, I can just put up a net and just catch, you know, just a little bit.
23:51The money flowed most freely in Silicon Valley, of course, where a culture of wretched self-promotional
23:55excess began to take hold. An online ticketing service based in San Francisco celebrated
24:01changing its name with a party for 3,000 people in an airplane hangar.
24:06People were just spending crazy amounts of money. I remember I wrote about a company
24:09that spent $10 million on their launch party. They had the Who perform, and they had all
24:13these, all these, they raised $12 million and spent $10 million on the party.
24:19Maybe the most lunatic expenditure of all were the TV ad campaigns. During the Super
24:23Bowl in 2000, more than a dozen internet startups spent an average of $2.2 million in 30-second
24:29spots, blowing $40 million in stockholder cash and not-so-hard-won venture capital.
24:38Tom Wolfe famously christened the 1980s the Me Decade. But by 1999, it was clear that
24:44the 90s had become the E Decade. Virtually every day, it seemed, at least one new e-commerce
24:50venture was brought into the world.
24:53The kids running these new companies were all fervent disciples of the get-big-fast
24:57creed being preached by Amazon and eBay. But when embraced by lesser minds, these theories
25:02led to an ungodly amount of sheer stupidity and to a bunch of Me Too knockoff companies
25:08with incredibly silly names.
25:09There was Pets.com. There was Petsmart. There was Petstopia. There were iPrint and iBeam,
25:14iMany, iGo, and iVillage. Then there were the E's, ePrees, eGreetings, eMerge, eFunds,
25:19eLoan, eCollege, and, of course, epiphany. There was FireDog and FirePond, Razorfish,
25:26and LoudEye.
25:32Few of these companies had any plausible reason for existing, let alone a basic grasp of strategy
25:39or economics.
25:40It was a very charged, very energetic, nearly frantic time when it was easy to lose your
25:51bearings and some of your judgment.
25:54Now you might wonder why the Valley's genius venture capitalists were funding all these
25:59derivative, dopey, and entirely hopeless outfits. Were they crazy? Greedy? Well, maybe a little
26:05bit of both.
26:06What they were really doing, though, was hedging their bets. They knew full well that most
26:10of the e-commerce dot-coms were doomed from birth, but they thought that one in every
26:14category might survive or even thrive, and they were willing to risk a couple million
26:19bucks so they wouldn't mess out on the big score.
26:23We were playing, you know, with fire, but you kind of had to or you couldn't be in the
26:29game.
26:30But what about the professional money managers on Wall Street? Didn't they realize that we
26:34were in the midst of a lunatic, speculative bubble?
26:37Most people were thinking, OK, no, they're not all going to survive, but we don't know
26:41exactly who is and how long it's going to take.
26:43And in the meantime, the punishment we are taking for not owning the sector, for sitting
26:48here and saying, someday it's going to crash, is a lot of us are getting fired.
26:53Blodgett knew that a lot of e-commerce companies were fundamentally unsound, but his argument
26:58was that this wasn't necessarily a good reason not to buy their stocks.
27:03The trouble for him was that on occasion, he put his unvarnished views of these outfits
27:09into private e-mails, and that would later come back to haunt him when the bubble popped.
27:16You know, remember the Henry Blodgett e-mail where he wrote this thing, he said, you know,
27:20this piece of company, but we have to recommend it?
27:23You know, he was an analyst inside an investment bank.
27:25He knew the company was garbage, and yet he was recommending it because that was how they
27:29made their money.
27:30You know, he actually got in trouble, but in a way, in a sense, he was actually one
27:33of the few honest people in the whole process.
27:37The Internet boom had now officially turned into a speculative bubble.
27:40But it wasn't the only financial mania happening at the time.
27:43A second one, closely related, was in telecommunications.
27:48Dozens of companies were racing to stick thousands of miles of fiber-optic cable into the ground
27:53to accommodate the swelling demand for bandwidth that made the Internet go.
27:57To understand why this is important, it's time again for a little bit of tech talk.
28:02Like most Internet technology, fiber optics relies on the extraordinary properties of
28:06ordinary materials.
28:08The silicon chip ultimately starts as sand, and fiber-optic cable is made from either
28:13glass or plastic.
28:15Fiber is essentially a strand of glass as thin as a human hair, which carries beams
28:19of light.
28:20Light travels in straight lines, but fiber bends and twists for thousands of miles, so
28:25you would expect the light to shoot out at the first bend.
28:28Well, to stop this from happening, fiber is coated with a kind of mirrored surface, which
28:33keeps the light inside.
28:35But how exactly do rays of light enable the transmission of text and pictures and videos
28:40and emails, and all the rest?
28:43It uses an idea of great simplicity that dates back to the days when ships at sea had to
28:47find a way to communicate.
28:49They would flash lights at one another using Morse code.
28:53A combination of long flashes and short flashes would then be decoded into letters of the
28:58alphabet.
29:01That's pretty much how fiber uses light to carry information.
29:04The light isn't a continuous stream, it's a stream of pulses representing the ones and
29:09zeros that comprise computer code.
29:12But while a Morse code operator might be at best able to send one or two flashes a second,
29:18fiber optic cables can carry some 10 billion pulses of digital information every second.
29:24Now, the question you might ask is, how did the Internet cope with this massive explosion
29:29in users and data?
29:30Why didn't it just grind to a halt?
29:33The answer lies in an extremely clever, though simple, idea that all of us are familiar with,
29:38but in a different context.
29:40It turns out that data is directed around the Internet in much the same way that road
29:44signs direct car drivers around the road network.
29:47Here's how it works.
29:49Let's say that you start out in New York and you want to drive to Boston.
29:53So when you're far away from Boston, what you see on road signs is Boston, keep right.
30:00On the big roads, you just know about big destinations.
30:03On the smaller roads, you learn about progressively smaller destinations.
30:07Okay, so now how do we make all of this fit onto the Internet?
30:11It turns out, if I'm in San Francisco or New York, and I want to get to Harvard on the
30:16Internet, I don't need to know which computer at Harvard I want to go to, because when I'm
30:20that far away, the only thing I care about is that I'm making progress toward that
30:24one gateway that goes to all of Harvard.
30:27Useful?
30:28Totally.
30:29But the problem was, the firms that were laying all this fiber got way ahead of themselves.
30:33There was too much building, too much spending, too many companies doing the same thing as
30:37each other, with no thought for costs or consequences.
30:401999 was a wild year, almost impossible to fathom now.
30:45From the start of the boom in 1995, there had never been more than 30 Internet companies
30:49to go public in any given year.
30:51In 1999, the total number of Internet IPOs was 250.
30:57But eBay and Amazon stood head and shoulders above the rest of the dot-com crowd.
31:02eBay's market value on the NASDAQ was now $21 billion, and it was even profitable.
31:07It was very unreal from a stock market point of view, and that worried me a lot, because
31:12you have to remember, I was in my early 40s, I'd been around business for 20 years,
31:16and I knew that this wasn't quite right.
31:19So it was really more the headiness of those times, where, you know, would the market cap
31:24get way ahead of what the company could actually deliver?
31:27There was no basis in fundamentals, and I was worried about that.
31:30And while Bezos' company couldn't say the same, it was racking up sales of 1.6 billion
31:36It was racking up sales of $1.6 billion a year, and its own market cap was a staggering $37 billion.
31:44Jeff was always saying to us, actually, do not keep your eye on the stock price,
31:47which I think was very intelligent of him.
31:49You know, do your job here the best you can, do everything you can for the company.
31:53I never said to myself, gee, you know, I'm the $10 million book reviewer,
31:57because there was clearly such a disconnect between the job you were doing
32:01and the rewards you were getting, that, you know, there was something,
32:06a continued, you know, sort of nimbus of unreality floating around the whole thing.
32:17Now as the turn of the millennium drew near, Jeff Bezos was given an accolade
32:21that in the past had been accorded to the likes of Mahatma Gandhi, Martin Luther King, and Adolf Hitler.
32:26He was named Time Magazine's Person of the Year as the embodiment of e-commerce.
32:30For Bezos, this was quite an honor, a sign that he'd been elevated
32:33into the pantheon of American business icons.
32:36But more cynical minds read it another way, as a sign that the end was nigh.
32:47The epicenters of the Internet bubble may have been Silicon Valley and Wall Street,
32:51but there was one central player who resided in Washington, D.C.,
32:54the chairman of the Federal Reserve Bank, Alan Greenspan.
32:57Though Greenspan famously said that irrational exuberance was fueling the bubble,
33:02he'd done precious little during the 1990s to try and prick it.
33:05Greenspan believed that technology was creating a new economy,
33:09one where the old rules no longer applied.
33:13But after witnessing the stock market's crazy run-up in 1999,
33:17and after glimpsing signs that the overall economy was dangerously close to overheating,
33:22Greenspan decided that the time had finally come to cool things down.
33:25In February of 2000, and then again in March,
33:28the Fed raised interest rates to their highest level since 1995,
33:32moves that signaled that Greenspan was now determined to put the bubble to an end.
33:38At the same time that Greenspan was making his moves,
33:41Wall Street began to train a more sober eye on its dot-com darlings.
33:45The holiday season that many had expected to bring a rush of revenues
33:49into the e-commerce companies had proved a major disappointment.
33:51Suddenly, Wall Street began to doubt the wisdom of Get Big Fast,
33:55and to suspect that many of the web retailers were nothing but a house of cards,
33:59something that programmer and messed-up company chronicler Philip Kaplan had known for some time.
34:05There would be e-commerce sites that we would build,
34:08where I know that the client would have spent two, three, four million dollars on these websites.
34:13I'd log into the database every now and then and see they had like, you know,
34:16$20 worth of sales, $25 worth of sales, $100 worth of sales,
34:20$25 worth of sales, $100 worth of sales.
34:25On April 14th, 1912, the Titanic had its fateful collision with an iceberg
34:31and dropped to the bottom of the ocean.
34:33And exactly 88 years later, to the day, the internet economy met a similar fate.
34:38On what would forever after be known on Wall Street as Black Friday,
34:42the Nasdaq fell an astonishing 355 points,
34:45bringing to an awful end a week in which the index had fallen by more than 25 percent,
34:51the single greatest collapse in the history of the stock market.
34:5518 months after Black Friday, September 11th happened,
34:59thus bringing to a conclusive end the long boom that had buoyed the American,
35:04and indeed the world economy, during the 1990s.
35:07From its peak above 5,000, the Nasdaq had lost more than two-thirds of its value.
35:12Even the most venerable high-tech giants, such as Intel and Sun Microsystems,
35:17were now walking wounded.
35:19And countless dot-com wunderkinds were now pushing up the daisies.
35:23Webvan, dead.
35:25Excited Home, dead.
35:27TheGlobe.com, Pets.com, Boo.com, dead, dead, dead.
35:34Elizabeth Kubler-Ross famously said that in the face of death,
35:38there are five stages of grief.
35:39Denial, anger, bargaining, depression, and acceptance.
35:44But when it comes to the demise of stock market bubbles,
35:47there's an additional stage that comes before acceptance.
35:50Recrimination.
35:52The mourners feel ripped off by the deceased,
35:54so they look for someone else to blame,
35:56which in this case meant Wall Street.
36:00On behalf of irate shareholders,
36:02New York's then-Attorney General, Elliott Spitzer,
36:04launched a crusade to reform the IPO industry
36:07and punish its supposed villains.
36:09His most famous target was Martha Stewart.
36:12But coming in a close second was our old friend, Henry Blodgett.
36:16Obviously people are angry. People lost a ton of money.
36:19Using the critical emails that Blodgett sent as evidence,
36:23the U.S. Securities and Exchange Commission charged Blodgett with civil securities fraud.
36:28He settled without admitting or denying the allegations
36:30and was banned from the securities industry for life.
36:34Unfortunately, I can't go into a lot of detail on the emails,
36:37but certainly from a larger perspective, yes,
36:40I rode the internet wave up incredibly.
36:44I was incredibly fortunate in terms of the timing of my being there,
36:48and I was optimistic about the right companies at the right time,
36:51and so I saw a tremendous benefit from the boom.
36:55And then I think probably more than any other analyst felt
36:59the brunt of the crash, which was like hitting the rocks full speed.
37:03Five years later, the bitterness over the dot-com bubble has subsided.
37:08Acceptance has set in.
37:10But for most people looking back on it,
37:12the bubble still seems like a moment of temporary insanity,
37:15in which lots of good people got fleeced by a bunch of digital future hustlers.
37:19All in all, a very bad thing.
37:22But there is, in fact, another school of thought.
37:25One imbued with a greater sense of historical perspective
37:27and economic logic.
37:29One that sees the bubble as having had its virtues,
37:32and the pain it caused as the price we pay for progress.
37:37The great dot-com crash of 2000 and 2001
37:41was indeed great by any standard.
37:43Some $3.5 trillion in paper wealth
37:46evaporated in the space of one year.
37:49But it was hardly a unique event.
37:51When the railway bubble popped,
37:53railroad stocks lost 85% of their value almost overnight,
37:55and the collapse of the automobile, canal, and telegraph bubbles
37:58caused panic and recession too.
38:01But out of those bubbles came mass communications
38:04and the road and railway networks
38:06that are so crucial to our daily lives.
38:09The same has proven to be the case with e-commerce.
38:12A jillion dum-dum dot-coms may have perished,
38:15but a handful of companies have not only survived,
38:17but turned into hugely profitable behemoths.
38:20You could say, in fact, that Amazon and eBay
38:22are the Ford and GM of the web economy.
38:25What Amazon and what eBay did
38:27was fundamentally different.
38:29And they did it early,
38:31they did it aggressively,
38:33and they did it extremely well,
38:35recognizing that the customer experience was paramount.
38:37And that's why they exist today
38:39in our global, multinational corporations.
38:43The lessons of both eBay and Amazon, indeed,
38:46are that the most successful e-commerce companies
38:48did more than just use the web to sell stuff.
38:50They understood that you have to use it
38:52to give power to ordinary people
38:54in ways that are fundamentally different
38:56from the old top-down,
38:58one-way, one-dimensional,
39:00one-size-fits-all mass-production ethos
39:02that dominated business in the pre-web economy.
39:05A business like eBay is all about empowering
39:07the people, regular people,
39:09to use the tools in the way that they see fit,
39:12and then sort of, you know,
39:14stepping back, getting out of the way,
39:16and letting the people run with it.
39:18Though the details are different,
39:20Amazon's approach is similarly
39:22about the empowerment of its customers,
39:24even when that empowerment sometimes
39:26annoys its suppliers.
39:28Consider, for example, Amazon's policy
39:30of letting readers add uncensored book reviews
39:32to the site.
39:34Once, I heard Bezos talk about the complaints
39:36he received from publishers on this score.
39:38What if people trashed the books,
39:40they said to Bezos?
39:42Surely that would be bad for business.
39:44That's where you're wrong,
39:46Bezos told the publishers.
39:48You're in the business of selling books.
39:50The most important thing for me
39:52about, you know,
39:54what people could say about Amazon.com
39:56at some point 50 years
39:58or 100 years in the future,
40:00what I would love to hear
40:02is that we set a new standard
40:04for customer service.
40:06What made the survivors survive
40:08is first, a deep understanding
40:10and a relentless focus
40:12on their customers.
40:13But what about the losers,
40:15you might ask?
40:17Surely all the pain and suffering
40:19and the decimation of wealth
40:21outweighed the survival
40:23of a few perennials.
40:26At the depths of the crash,
40:28I put that question to Andy Grove,
40:30the legendary chairman of Intel.
40:32Grove is a congenital skeptic
40:34and during the dot-com bubble,
40:36there'd been no louder naysayer.
40:38But now Grove argued
40:40that the bubble had actually been a good thing.
40:41What this incredible evaluation craze did,
40:43he said,
40:45was draw untold sums
40:47of billions of dollars
40:49into building out
40:51the internet infrastructure,
40:53everything from fiber-optic cable
40:55to Amazon's customer database.
40:57And while that infrastructure
40:59would probably have been built
41:01anyway, he went on,
41:03it happened over five years
41:05instead of 15,
41:07a huge advantage to America
41:09and the world.
41:11The dot-coms provided an invaluable service
41:13by putting the fear of God
41:15into brick-and-mortar firms,
41:17by forcing them to get serious
41:19about the web,
41:21to turn themselves into internet companies
41:23almost against their will.
41:25So the dot-coms didn't die in vain,
41:27I asked?
41:29No, Grove replied.
41:31The dot-coms threw themselves
41:33on the bonfire,
41:35but they created a bigger flame
41:37as a result.
41:39Many jobs were lost,
41:41new companies were created,
41:43became durable,
41:45and the economy
41:47was genuinely transformed.
41:49The concept of creative destruction
41:51is famous in economics,
41:53and it seems an apt description
41:55of what happened in the dot-com era
41:57and what's happening now.
41:59First a wave of innovation,
42:01then a financial mania,
42:03then a terrible crash,
42:05followed by a golden age
42:07built on what remains.
42:08Arising out of the dot-com ashes
42:10and the successes
42:12of Amazon and eBay
42:14are a new breed of companies
42:16run by a new breed
42:18of entrepreneurs.
42:20Who are these entrepreneurs?
42:22They're the people
42:24who were burned before,
42:26and so they have that experience
42:28to make sure that they don't
42:30make the same mistakes again.
42:32I think it's just,
42:34this is what the internet's all about.
42:36The internet's about connecting
42:38outside Silicon Valley,
42:40it's true,
42:42you won't find as much consensus
42:44that we're entering a digital golden age.
42:46But in a way,
42:48that may be the strongest testament
42:50to how far the web,
42:52and e-commerce in particular,
42:54have come in the past decade.
42:56The futurist John Seely Brown
42:58once observed that
43:00when a technology achieves amenity,
43:02when it becomes ubiquitous
43:04and essential,
43:06it disappears,
43:07think of airplanes,
43:09and automobiles,
43:11and air conditioning.
43:13Like the railroad tracks
43:15crisscrossing the country,
43:17the web is becoming the foundation
43:19of our economy,
43:21carrying us along to our destination
43:23so smoothly and efficiently
43:25we don't even realize
43:27how fast we're moving.
43:37www.microsoft.com
43:39www.microsoft.com
43:42www.microsoft.com