Many catchy phrases have been inspired by the dot-com downfall: dot-bomb, dot-carnage, dot-gone. Now you can add dot-con to the list.

John Cassidy
Author,
Dot.con: The Greatest Story Ever Sold
Recent Meet the Streets
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Frank Glassner
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Jim Fiore

In Dot.con: The Greatest Story Ever Sold , business and economics writer John Cassidy tells the sorry tale of the billions of dollars raised and subsequently lost during the dot-com gold rush of the mid-to-late 1990s. Two of the leading analysts at the eye of the storm, Mary Meeker of Morgan Stanley Dean Witter and Henry Blodget of Merrill Lynch, certainly bear some of the responsibility, Cassidy says.

But so does the rest of the investment industry, he says, from the venture capitalists in Silicon Valley to the underwriters in the canyons of Wall Street.

Here, Cassidy gives an overview of what went wrong with the Internet revolution, and why.

TSC: Do you think there are any blue-chip Internet stocks out there?

Cassidy: I define a blue-chip as a company that has proved that it can survive and prosper through several economic cycles. If you use that definition, then Internet stocks are just too new to be blue-chips.

There are some of what appear to be blue-chips, like eBay ( EBAY), AOL Time Warner ( AOL), which is a hybrid Old Economy/New Economy company. Some of the travel agencies, like Travelocity ( TVLY) and Expedia ( EXPE), might be solid companies, although it's still too early to tell.

TSC: There were many parties involved in the Internet hysteria. To what extent do you think they knew they were part of, in your words, one huge "dot-con"?

Cassidy: They all knew that it was getting out of hand. Take a look at any of the investment bankers getting involved. In 1999, Mary Meeker freely admitted that things were getting crazy and compared it to tulip bulb mania of the 16th to 17th centuries .

But there was a competitive logic, which kept people on the Internet bandwagon. It would have been very difficult for Morgan Stanley or Goldman Sachs or Merrill Lynch to say, "We're not going to deal with Internet stocks" because their big competitors would have carried on doing it, which would have hurt their own profits. As long as the market's going up, it's very difficult to pull out of what's going on, on the rest of Wall Street.

TSC: Other than the four potential "blue-chip" Internet stocks you mentioned, are there any other Internet companies that you believe could survive, and why?

Cassidy: AOL Time Warner is sort of a model of the future: a merger between Old Economy and New Economy companies. I think we'll see more of that. Like Yahoo! ( YHOO) -- I'd be very surprised if Yahoo! doesn't end up being bought or taken up by a company like Disney ( DIS) or News Corp. ( NWS)

TSC: What about the promise of the Internet becoming such a rich medium that it can compete with the likes of television?

Cassidy: Who can predict the future? It is impossible to say what the world will look like when everybody has a broadband connection. Broadband is a good technology, and the Internet is an amazing information tool, but both in combination have been disappointing so far. The idea that the Internet will replace television is at least 10 years old now. And it hasn't come to anything. People who have made that bet have lost a lot of money.

Now, it's very difficult to raise any money for any broadband initiatives. Most of the broadband networks, like Global Crossing ( GX), have gone broke, or are on the verge of going broke.

TSC: What about this whole notion of the New Economy?

Cassidy: The whole New Economy debate is much larger than the Internet itself. It took place in the Federal Reserve; it took place on Wall Street; it took place in economic departments up and down the country. The real New Economy enthusiasts argue that none of the old rules of economics work anymore. That the economy can grow 4% to 5% a year, indefinitely, without producing inflation. If that's what the New Economy means, then I do not believe in the New Economy.

The basic argument is whether information technology, broadly speaking, not just the Internet, has transformed the American economy and raised the productivity and GDP levels at which the economy can grow. I think most economists, myself included, would accept that there has been some increase in trend productivity growth. During the '70s and '80s, productivity grew at only 1.5% a year. Since 1995, it's been growing at about 2.5%. I think some of that is probably permanent. If you add 1% annual labor force growth, maybe the economy can grow at about 3% a year. That might be the case. It's impossible to be dogmatic, but maybe there is something to the New Economy.

This is a significant change, but it's not a revolutionary change. And the New Economy is not as new as it looks.

TSC: Do you put any stock at all, then, in Internet business models?

Cassidy: There is no such thing as an Internet business model. There're just business models. If you can use the Internet to use a viable business model, then sure, it's a good business model. eBay is one of the exceptions of an Internet business; they have been able to provide goods at less than cost.

The key to any business model is to provide a good or service at less than the cost at which you produce it, and to avoid ruinous competition. Very few Internet companies managed to achieve that. They either didn't have a real source of revenue, because a lot of people are reluctant to pay for services online, or if they did have a source of revenue, they also had enormous competition because barriers to entry on the Internet are low. It's easy to set up a Web site and compete.

TSC: During the Internet run-up, investors and analysts alike were willing to buy into companies using nontraditional metrics. Do you ever foresee a time when investors might, once again, be willing to buy a stock on a basis other than its fundamental earning power?

Cassidy: While there was a bubble over space stocks in the 1960s, and another one over computer-leasing companies in the 1970s, the dot-com craze was the biggest speculative bubble since the 1920s. Certainly, there will be a time again when Wall Street analysts promote stocks that don't have any real value. That's what Wall Street does occasionally.

But I don't think there'll be a return to the Internet boom. It takes a generation of people to forget a speculative bubble of this magnitude.

TSC: Have you heard of any interesting "second acts" of a young dot-com entrepreneur once worth millions on paper now doing something really interesting?

Cassidy: Stephan Paternot, co-founder of TheGlobe.com, is pursuing an acting career. You could say he's gone from one performance to another. ...

TSC: And what about embarrassing moments during both the dot-com run-up and subsequent bust? In Dot Con, you mention the Pets.com sock puppet's appearance on Good Morning America, telling the American public he was a little burned out and advising them not to invest in Internet stocks.

Cassidy: One story that sticks in my mind was about funerals.com, one of the few Internet start-ups that failed to raise money. Silicon Valley venture capitalists, upon meeting the kid, whose slogan was "We put the fun back into funerals," told him it was still too depressing.

TSC: Do you want to venture any opinion on Mary Meeker and Henry Blodget?

Cassidy: For a while if you followed their advice, you made a lot of money. But in the end, a lot of their arguments turned out to be bogus. It's the harsh truth, but both have turned out to be the laughingstocks of the Internet boom.
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