I
The Silicon Valley–Wall Street production line swung back into action. In June 1997, Mary Meeker issued another Internet report—this one devoted to online retailing. “The Net provides a powerful, efficient new channel of retailing to more than 35 million Web users (we expect more than 150 million by 2000), who are just a mouse click away from consummating transactions 24 hours a day, seven days a week,” the report enthused.1 Meeker argued that online commerce would allow new companies, such as Amazon.com, to create powerful new brands in a low-cost environment, and she identified financial services, computer goods, travel, and books as the most promising areas.
Meeker didn’t mention food as a potential market, but June also saw Peapod, an online grocer based in the Evanston, Illinois, area, go public. Peapod wasn’t a new company. Andrew and Thomas Parkinson, two brothers, had founded the firm in 1989. The Parkinsons were graduates of Wesleyan University in Middletown, Connecticut, and, like Steve Case, they had both worked for Procter & Gamble. “I saw a lot of research that kept saying people disliked grocery shopping, but I couldn’t see how to make a (home-shopping) model work,” Andrew Parkinson explained to Progressive Grocer magazine.2 To begin with, Peapod supplied customers with its own software to use to place orders. In 1996, it started operating on the Internet. Customers in seven major metropolitan areas could select a wide range of goods, from fruit and vegetables to soap powder. After an order was placed, Peapod’s employees would pick up the supplies from a nearby grocery store and deliver them to the customer. The service wasn’t cheap. There was a monthly membership fee of $6.95, plus $4.95 for each delivery, plus a commission of 5 percent.
Other Internet companies also rushed to go public, including At Home, a Silicon Valley start-up that provided fast access to the Internet via cable television wires. At Home’s planned debut on Wall Street marked the return of the “concept” IPO. The company could boast neither a popular product nor much name recognition. All it had was a big idea—“broadband”—and the backing of the same team that had brought the world Netscape: Kleiner Perkins and Morgan Stanley. In early 1995, John Doerr and one of his partners at Kleiner Perkins, William Randolph Hearst III, the grandson of the legendary press baron, invited Milo Medin, a NASA computer scientist, to visit them in Northern California. Medin, who was only thirty-two, had led the team that built the NASA Science Internet, a high-capacity computer network linking researchers in sixteen countries. When Medin arrived in Palo Alto, Doerr asked if he would like to transform the regular Internet into a similarly high-capacity network by exploiting the cable wires that passed nine out of ten homes in the United States.
The vast majority of Internet users connected to the network via a modem attached to regular a telephone line, which was often a slow and tortuous process, especially if they were trying to download audio and video files. Cable wires have a lot more bandwidth than telephone wires, and connecting to the Internet through them is several hundred times faster. Doerr and Hearst believed that Web users would pay handsomely for a better connection, while companies like CNN and ABC would readily provide voice and video content. Medin agreed to move to Silicon Valley, and in March 1995 At Home incorporated itself, with Hearst as its interim chief executive and Medin as its first employee. Kleiner Perkins invested $2.3 million to get the firm going, and TCI, the cable television company, invested $7.7 million.
Even by Internet standards, At Home was an audacious venture. From the beginning, it swallowed cash at an alarming rate. Medin decided that merely giving people cable modems wouldn’t suffice for At Home’s purposes. If the firm really wanted to supply reliable fast access to the Web, it would have to build its own nationwide data network, which could bypass the bottlenecks on the Internet. This would cost a lot of money. With Kleiner Perkins’s reputation behind it, At Home raised more than $90 million in outside investment. Much of this cash came from TCI and other cable companies that saw providing Internet access as a way to generate extra revenues from their cable systems. At Home agreed to split its monthly subscription fee, upwards of $40 a month, with the cable companies. Netscape, one of Kleiner Perkins’s previous triumphs, also invested $5 million in At Home, in return for which At Home adopted a modified version of the Navigator browser.
With help from the media, Hearst and his successor as chief executive, Tom Jermoluk, who was recruited from Silicon Graphics, promoted broadband as the next-generation Internet experience. In January 1996, Hearst told Wired that At Home could gain a million subscribers inside a year.3 This proved a tad optimistic. In May 1997, when At Home announced that it was going public, with Morgan Stanley as the lead underwriter, it had a just 5,000 subscribers. The only impressive numbers in At Home’s prospectus were its losses. In less than two years, it had run through more than $50 million. Hearst and Jermoluk didn’t try to hide this figure: they presented it as a measure of At Home’s ambition. By now, some cynics on Wall Street were starting to suspect that the stock market values of Internet companies were correlated with their losses. At Home seemed intent on providing more evidence to support this theory. It warned of losses “for the foreseeable future,” and also acknowledged that its future depended on its cable partners’ willingness to roll out its service, and on the willingness of customers to pay more than double the price of regular Internet access. “Because of the foregoing factors, among others, the Company is unable to forecast its revenues with any degree of accuracy,” the prospectus said. “There can also be no assurance that the Company will ever achieve profitability.”4
Once again, investors ignored these warnings. On July 11, 1997, Doerr, Jermoluk and several other At Home executives gathered in Morgan Stanley’s Times Square headquarters to watch the firm’s stock start trading. At Home was issuing 9 million shares at $10.50 each. By this stage, Doerr was something of a public figure. A month earlier, he had appeared with Vice President Al Gore at a Nashville conference on the family, where he unveiled a new venture capital fund designed to rescue failing public schools. On the day of the IPO, John Heilemann, a writer for The New Yorker, was trailing Doerr for a profile in which he described what happened:
Now, as Doerr and a handful of At Home’s bosses and boosters hovered anxiously over a blue computer screen, the Nasdaq symbol “ATHM” flashed for the first time, and, with it, the stock’s opening price of nearly twenty-five dollars—more than double the offering price, and an amount giving At Home a market value, however fleeting, of almost three billion dollars. With mock solemnity, Doerr announced: “America’s capital markets are a national treasure,” and everyone burst into a chorus of grateful laughter.5
Later in the day, the stock fell back a little. It closed at $17, which valued At Home at about $2 billion—only slightly less than Netscape was worth at the end of its first day of trading. Kleiner Perkins and Morgan Stanley were starting to make a habit of creating sensational Internet IPOs.
II
The wave of Internet stock issues accompanied a renewed rally in the broader market. In the first six months of 1997, the Dow rose by another 7 percent, to above 6,800. On Independence Day, Louis Rukeyser, the host of Wall Street Week, a long-running show that goes out on PBS every Friday evening, celebrated the Dow’s push toward 7,000. “My-oh-my, you talk about a joyous Fourth of July!” he told his viewers. “The world of money hasn’t had such a festive celebration since Alexander Hamilton was arguing with Thomas Jefferson.”6 Rukeyser, a courtly white-haired figure who looked and sounded as if he had stepped out of Calvin Coolidge’s cabinet, was an exception to the generation gap on Wall Street. He was just as bullish as any twenty-eight-year-old mutual fund manager. Wall Street Week wasn’t his only stock market venture. He also published a monthly investment newsletter and organized investment conferences that attracted thousands of paying visitors.
So let’s make it three cheers for the red, white, and green. Red stands, not necessarily for the Communist takeover of free-market Hong Kong—we’ll have to wait and see on that one—but for the faces of all those wiseguys who have been telling us for years that the U.S. stock market couldn’t possibly keep on going higher. You betcha! White stands for ashen faces of all those alleged experts who kept telling us that a nation couldn’t keep on creating jobs and increasing profits without reigniting a terrible inflation. And green stands for you know what: all the money that’s still being made by those wise enough to keep the faith.7
Rukeyser had reason to crow about the U.S. economy. In the first quarter of 1997, the Gross Domestic Product grew at an annual rate of more than 5 percent, its best performance in more than nine years. The Consumer Price Index rose at an annual rate of just 2.2 percent. In April, the unemployment rate fell to 4.9 percent, its lowest rate since 1973. Americans were understandably optimistic. In June, consumer confidence reached its highest level since 1969. Even the official productivity figures finally seemed to be picking up. In the second quarter of 1997, output per hour in the non-farm business sector of the economy, which means most of it, grew at an annual rate of 2.7 percent, more than twice the average rate over the previous two decades. This was the second quarter out of four that productivity growth had topped two percent. “I remember when we held a press conference around this time in 1972 and I said what we had was the best combination of economic numbers in history—and then I amended that to say I meant the Christian era of history,” Herbert Stein, chairman of the White House Council of Economic Advisers in the Nixon administration, told The New York Times. “I think the numbers are even better now.”8
Of course, the news wasn’t all positive. Despite a recent up-tick, the average hourly wage of production workers, after adjusting for inflation, had hardly increased at all since 1973. (According to some measures it had fallen.) Credit card payments and other forms of consumer debt were growing strongly, as many families took out extra loans to finance their spending. The media didn’t linger over these trends. Instead, it produced a glut of articles arguing that there was a “New Economy”—one in which the old rules of economics no longer applied. Business Week, the weekly bible of corporate America, led the way in popularizing this argument. In December of 1996, Michael Mandel, a Harvard Ph.D. in economics who served as Business Week’s economics editor, wrote an article entitled “The Triumph of the New Economy.” A few months later, Mandel returned to the theme in a long cover story on “The New Business Cycle,” in which he argued that high-technology was now the driving force in the U.S. economy, accounting for a third of overall growth in the previous year. “The unique nature of an expansion led by high-technology explains why the U.S. has been able to sustain a lower unemployment rate with faster growth and less inflation than economists ever believed possible,” Mandel wrote. “Despite strong demand and rising wages for programmers, network technicians, and other high-tech workers, inflationary pressures are counteracted by constantly falling prices for such products as computers and communications equipment.”9 Mandel was careful to say that recessions hadn’t been abolished, but a few weeks later he appeared to change his mind. In yet another cover story, “The New Growth Formula,” he argued that the recent productivity upturn, if sustained, could lead to good times “for the foreseeable future.”10
Mandel’s argument was similar to those being made by Abby Joseph Cohen and other Wall Street bulls. Since the early 1980s, American firms had been spending heavily on computers and other forms of information technology, investments that should have led to higher productivity growth throughout the economy. The failure to find such a link was known to economists as the “productivity paradox.” Mandel claimed that the United States was now finally receiving the payback for the investments it had made in computers. The “productivity paradox seems to be over,” he wrote. “The big change is not in the computers themselves, but in how they are being used. With networks connecting anyone to anyone else, it’s now easier to use computers to streamline all sorts of business processes—and create totally new ones, such as letting your customers order goods from your electronic catalogue on a Web site.”11
All mass movements need an ideology to rally around. The idea that the Internet was transforming the American economy provided a seductive one for stock market bulls. Wall Street analysts began to pepper their investment circulars with references to the “New Economy” and the economic benefits of technology. Internet investors adopted the same language and assured themselves that they were helping to change society for the better by buying stocks like At Home and Amazon.com. This rationalization helps to explain why the anti–Wall Street bias of the 1980s disappeared. When Michael Milken and Ivan Boesky were plying their trade, the stock market was widely associated with selfishness, greed, and criminality—an attitude captured in Oliver Stone’s Wall Street. A decade later, there was no stigma attached to speculating in the stock market, especially if the object of speculation had anything to do with the Internet. Buying Internet stocks was almost a patriotic activity. Entrepreneurs like Steve Case and Jeff Bezos symbolized the old American values of individualism, hard work, and enterprise. How could there be anything morally suspect in financing their attempts to turn themselves into the next Rockefeller?
From a historical perspective, none of this was surprising. Speculative bubbles and idolization of businessmen invariably go together, as do speculative bubbles and talk of a “new era.” The New Economy arguments of the 1990s replicated those made during the 1920s, when they were known as the “new economics.”12 In the fall of 1928, Herbert Hoover, soon to become the nation’s thirty-first president, declared that the end of poverty was in sight. Around the same time, John Moody, the head of Moody’s ratings agency, published an article in Atlantic Monthly entitled “The New Era in Wall Street.” Moody didn’t restrict himself to finance. “Civilization is taking on new aspects,” he wrote. “We are only now beginning to realize, perhaps, that this modern, mechanistic civilization in which we live is now in the process of perfecting itself.”13 Within a few years of these words being written, the “civilization” that Moody referred to had given rise to the Great Depression and Adolf Hitler.
III
It was one thing for journalists and Wall Street stock strategists to argue that technology had transformed the economy. But New Economy thinking also penetrated to the highest reaches of the American government. In July 1997, when the Group of Seven nations held their annual economic summit in Denver, it was widely interpreted as an opportunity for the United States to teach the rest of the world how to run a successful economy. “America in the world: still on top, with no challenger,” a headline in Fortune announced.14 President Clinton tried not to gloat about the economic problems facing Europe and Asia, but many of his subalterns were not so polite. They advised anybody who would listen that the route to economic success was to copy the American example and open up their economies to competition and technological change. Many foreign delegates were furious at what they saw as U.S. arrogance.
The summer of 1997 also saw the Clinton administration publish its long-awaited policy paper on e-commerce. Ira Magaziner, who had masterminded Hillary Clinton’s ill-fated proposal to reform health care via extensive government intervention, was in charge of shaping the administration’s policy toward the Internet. In the case of e-commerce, he advocated a “non-regulatory, market-oriented approach.”15 Magaziner wasn’t just buckling to Silicon Valley campaign contributors, although the policy he recommended was the one they had been demanding. The Clinton administration had decided that a hands-off attitude to the Internet was in the country’s strategic interest. Online commerce was shaping up to be one of the biggest industries of the twenty-first century, and American companies dominated it. The only threat to this American hegemony was the possibility that foreign governments would seek to boost their own firms under the guise of imposing national standards on online commerce. As long as the Internet remained a government-free zone, it would be difficult to introduce this sort of protectionism.
The most influential proponent of the New Economy doctrine, although he carefully avoided using the phrase, was Alan Greenspan, who had continued to resist pressure from his colleagues at the Fed to raise interest rates beyond a quarter-point rate hike that was introduced in March 1997. On July 22, 1997, Greenspan went up to Capitol Hill to deliver his semi-annual report on monetary policy. These appearances are the only political accountability that a Fed chairman faces. Once nominated by the president and confirmed by the Senate, he can set interest rates as he sees fit, as long as he can persuade a majority of his fellow members of the FOMC to back him. In Greenspan’s case, this was seldom a problem. After ten years at the Fed, he dominated the FOMC like few of his predecessors.
In a wide-ranging presentation, Greenspan told the Senate Banking Committee that the economy’s recent performance had been “exceptional,” so exceptional that it might represent a “once or twice in a century phenomenon that will carry productivity trends nationally and globally to a new higher track.”16 As always, the Fed chairman hedged his statements with qualifications, but he clearly indicated his agreement with those economists and journalists who had argued that the benefits of computer technology were finally feeding through to the economy at large. He specifically mentioned the research of two Stanford economic historians, Paul David and Nathan Rosenberg, which suggests that even revolutionary inventions, such as the electric dynamo, often take a long time to produce sizeable increases in productivity. Other complementary technologies have to be developed before the benefits of the first one can be fully exploited. “What we may be observing in the current environment is a number of key technologies, some even mature, finally interacting to create significant new opportunities for value creation,” Greenspan said. “For example, the applications of the laser were modest until the later development of fiber optics engendered a revolution in telecommunications. Broad advances in software have enabled us to capitalize on the prodigious gains in hardware capacity. The interaction of both of these has created the Internet.”17
Wall Street traders reacted joyously to Greenspan’s testimony, concluding correctly that, despite the stock market’s continued rise, he had no intention of raising interest rates. The Dow jumped more than 150 points to close above 8,000 for the first time. Previous Fed chairmen would have been alarmed at such a reaction, but Greenspan didn’t seem concerned. Since his “irrational exuberance” speech the previous December, he had hardly mentioned the stock market publicly. Privately, he still regarded the question of whether there was a speculative bubble as an open one. After making the famous speech, Greenspan had ordered the Fed’s staff economist to determine whether there was any objective way to tell when a rising market had turned into a speculative bubble. After an extensive survey of past speculative episodes, the best economic brains in the Fed concluded that there wasn’t any reliable method. Speculative bubbles could only be identified definitively in retrospect.
Even if what was happening on Wall Street was a bubble, Greenspan was far from sure that the Fed should try to let the air out. While it may have been possible in theory to raise interest rates just enough to deflate stocks gently, he seriously doubted that such a policy would be feasible in practice. Falling stock prices—like rising stock prices—tend to feed on themselves; and the process can easily spiral out of control. In trying to preempt a crash, the Fed could just as easily cause one. Given this danger, Greenspan believed the Fed should stick to its traditional role: running the economy at the maximum rate consistent with stable or falling inflation. It couldn’t completely ignore what was happening on Wall Street, but the stock market should only affect monetary policy insomuch as it affected the economy at large.
In taking this position, Greenspan committed himself to a policy stance that had proved untenable for one of his predecessors during an earlier speculative boom. At the start of 1929, Roy Young, the then chairman of the Fed, turned down a senior colleague’s request for “sharp, incisive action” to quell the speculation that had caused the Dow to double in two years.18 Fearing that raising interest rates might cause a crash rather than prevent one, Young instead pleaded with the big banks to lend less money to speculators. This policy, which was known as “direct pressure,” proved ineffective. As stock prices continued to rise in the spring and summer of 1929, Young became demoralized. The Fed could only brace for the “inevitable collapse,” he said.19 But this hands-off policy didn’t last. It is a property of speculative booms, from tulip mania to the Japanese stock market and real estate bubbles of the 1980s, that they don’t remain contained in one sector. Eventually, they go to such extremes that they distort behavior throughout the economy. This is what happened in 1929, and it forced the Fed to act. In August, Young, against his better judgment, raised the interest rate that the Fed charges commercial banks for loans. A couple of months later the stock market crashed, and Young’s reputation was destroyed.
Greenspan was well aware of Young’s fate. In deciding to let the stock market boom take its course, he took an educated gamble that even if the stock market did eventually crash he would be able to deal with it. This decision was largely based on his experience following the stock market crash of October 1987, when the Fed pumped more money into the economy and successfully prevented a recession. If there was another crash, the Fed could do the same thing again. Its big mistake in 1929, Greenspan believed, had come after the stock market crash, when it failed to cut interest rates aggressively enough to revive the patient. “There’s no guarantee that even if you get a 1929, you’ll end up with a 1932,” he told a former colleague.20
Greenspan’s flexible approach to economics was partly a reflection of his age. He started studying the subject before much of its modern orthodoxy was established. This was especially true of macroeconomics, the field that relates to the economy at large. Most students who studied macroeconomics during the 1970s and 1980s were taught three basic theories: the economy has a natural speed limit, known as the “potential growth rate”; unemployment cannot fall below a certain level without inflation picking up; and an expansion in the money supply causes inflation. Greenspan didn’t have much faith in any of these theories, all of which had been invented well after he left school. In fact, he wasn’t really a macroeconomist at all. Ever since the early 1950s, when he took his first job at the Conference Board, an economic research organization, he had preferred to look at ground-level data from throughout the economy and work from there. When he became an economic consultant, he continued to focus on individual industries, such as steel, agriculture, and automobiles. He never had much time for the elaborate mathematical models that economists constructed during the 1960s and 1970s, with the help of computers, to forecast the economy as a whole. Even now, as Fed chairman, he preferred to burrow down and find out what was happening on the shop floor. Every day, he spent several hours alone in his office overlooking Constitution Avenue, making his way through page after page of numbers from all sectors of the economy.
Greenspan had a famous head for details. On one occasion recounted by Lawrence Lindsey, a former Fed governor who went on to become President George W. Bush’s senior economic adviser, the Mississippi had sprung its banks, interfering with road and rail links. “At the time of the weekly Board of Governors meeting, the U.S. economy was literally linked together by a single bridge,” Lindsey recalled. “Greenspan not only knew the location of the bridge, but also the various reroutings that could be used to get merchandise there.”21 In the summer of 1997, as Greenspan scoured the recent statistics from various sectors of the economy, he saw a pattern developing. Heavy investment in information technology was giving firms more timely information about their customers’ demands and their own production processes, enabling them to reduce inventories and eliminate spare capacity. As a result, corporate profits were rising sharply, which went some way, at least, toward justifying current stock prices. The exuberance of investors was not necessarily “irrational.”
But Greenspan’s reluctance to second-guess the judgment of investors was not purely a result of economic reasoning: it was also a matter of ideology. Although often portrayed as a moderate pragmatist, he is, in fact, a fervent free-market conservative. He has been one since the early 1950s, when he fell under the influence of Ayn Rand, the Russian-born libertine and philosopher who wrote The Fountainhead and Atlas Shrugged. “What she (Rand) did—through long discussions and lots of arguments into the night—was to make me think why capitalism is not only efficient and practical, but also moral,” Greenspan once explained.22 For many years, he was a member of Rand’s coterie of admirers, which she dubbed the Collective. Rand’s descriptions of capitalism in Atlas Shrugged, which she read out to the Collective, struck the young Greenspan as inspired. “Ayn, this is incredible,” he blurted out on one occasion. “No one has ever dramatized what industrial achievement actually means as you have.”23 Even in later years, when many of Rand’s former associates turned against her, Greenspan remained loyal. “She did things in her personal life which I do not approve of, but ideas stand on their own,” he said in early 2000. “What was a syllogism back then is a syllogism today.”24
To a Randian like Greenspan, the Internet provided fresh confirmation of capitalism’s infinite capacity to re-create itself. (He rarely dwelled on the central role that the federal government had played in the network’s development.) Guided by the profit motive, entrepreneurs like Marc Andreessen and Jeff Bezos were creating vital new industries and shaking up the tired corporate establishment, much as the heroic figures in Atlas Shrugged had done. Wall Street was playing a central role in this process of national renewal, channeling valuable resources from investors to entrepreneurs. Far from being a casino, as Keynes had once claimed, the stock market was acting as the creative hub of the economy. Its judgment had to be taken seriously. If millions of investors were saying that At Home was worth $2 billion, what business of the Fed chairman was it to say they were misguided?
IV
One of the oldest sayings on Wall Street is, “Don’t fight the Fed.” Once it became clear that Greenspan had aligned himself with the forces of the New Economy, even more of the bears retired from the battlefield. “Everybody is tired of being bearish and being wrong,” Barton Biggs told a reporter who caught up with him while he was puttering around his Connecticut garden in the summer of 1997. Earlier in the year, Biggs had once again advised his clients to sell stocks and raise cash, a recommendation that few of them had heeded. “The clients don’t want to raise cash,” he said. “And the portfolio managers who are competing against the market index don’t want their superiors telling them to raise cash.”25 Biggs and many of his friends, who had been on Wall Street since the 1960s, were feeling like dinosaurs. “I was at a dinner the other night,” he went on. “There were a lot of older people there who are very bearish, like Larry Tisch [the former chairman of CBS]. But Larry Tisch doesn’t run money anymore. The guys who have the cash flow, the ones who are running the money, are between twenty-eight and thirty-eight.”26
As stock prices kept going up, more renowned investors were publicly embarrassed. In July 1997, George Soros told a German magazine that the presence of so many inexperienced investors could lead to an “international stock market crash.”27 On the day that Soros’s comments appeared in the American press, the Dow rose by another 108 points. With the bears’ credibility in tatters, the public’s attention and respect had shifted to the likes of Abby Joseph Cohen and Ed Yardeni, the chief economist at Deutsche Morgan Grenfell. A few weeks after Soros’s gloomy comments, Yardeni said that based on “rational exuberance about profits and near-zero inflation” the Dow could reach 10,000 by 2,000 and 15,000 by 2005.28
The growing optimism about the economy at large only added to the enthusiasm for technology stocks. Between March and September 1997, the Nasdaq rose by almost 800 points. After Labor Day, Internet stocks rallied further. At Home was one of the big gainers. The cable venture still had only 7,000 subscribers, but the word broadband was being uttered in reverential tones on Wall Street. “[At Home] has built an outstanding platform that I think will in three to five years lead to some fairly significant profits,” Shaun Andrikopoulos, of Alex Brown & Sons, commented.29 (The fact that Alex Brown had helped to underwrite At Home’s IPO may have had something to do with Andrikopoulos’s support.)
Amazon.com also rallied. On September 22, it hit a new high of 55 1/2, which meant it had risen by more than 200 percent from its IPO price of $18. Thanks to some clever publicity stunts, the media was still providing the online bookseller with invaluable exposure. In July 1997, John Updike, the veteran novelist, agreed to supply the beginning and end of a story to be posted on Amazon.com’s Web site. Members of the public would be invited to write the intervening narrative, with a prize of $1,000 for each successful entry. Updike, the author of Rabbit Is Rich and The Witches of Eastwick, was hardly an obvious choice to promote online technology. At sixty-five, he composed most of his fiction by hand, and his personal computer didn’t have an Internet connection. Updike didn’t need the $5,000 that Amazon.com offered, but his publisher advised him to do it. He dug out a mystery story that he had started and abandoned thirty years ago, “Murder Makes the Magazine,” which revolved around Miss Tasso Polk, the founder and editor of The Magazine. By September 1997, when Updike sat down to write an ending, USA Today, The South China Morning Post, and the BBC World Service had all done stories about his venture online, prompting him to comment wryly: “This has gotten more ink than my last six books.”30
Mary Meeker also contributed to Amazon.com’s cause. Analysts at firms not involved in an IPO don’t usually start covering the new company until it has firmly established itself. Meeker, still outraged by her bosses’ refusal to do business with Amazon.com decided to flout this custom. In late September, she initiated coverage of the online bookseller with an “outperform” recommendation, telling her clients: “We are making a long-term bet on this company—we do not want to miss this one.”31 Despite Amazon.com’s heavy losses, Meeker argued that it satisfied the three most important criteria for investing in young companies: a big potential market, a sound management team, and an exciting product. Turning to the company’s heady stock price, and adopting the royal “we,” she provided her most detailed argument yet for discounting old valuation methodologies.
We have one general response to the word “valuation” these days: “Bull market.” We have been in the technology sell-side trenches for about a decade and simply—we believe that we have entered a new valuation zone. In addition to valuations being a function of a happy market, this zone is also a function of the Internet.
As we have said again and again—the world has never experienced as rapid/violent a commercial evolution of a fundamental business change as that being caused by the acceptance/usage of the Internet as a communications and commerce tool. Never before have companies like Netscape and Yahoo! gained so much mind share and market share (and market capitalization) so quickly. Anyway, it has all introduced a brave new world for valuation methodologies and it is a time of especially high risk/reward, in our view.
When you overlay the high valuation of many “start-ups” with the relatively high valuation of the general market, well, we are where we are, just trying to do our jobs and find some early stage great companies. If they execute, the valuations will take care of themselves. Again, it’s about monster markets, great management teams, and good products.32
Following Meeker’s plug, Amazon.com’s stock rose even further. In October it reached $60. The same month, Jeff Bezos announced that his firm had attracted its millionth customer, a Japanese reader who ordered a biography of Princess Diana, and flew to Asia to deliver the book personally.
America Online, another of Meeker’s stock picks, was also doing well, having recovered from the problems it faced in 1996. On September 2, 1997, the company announced that it now had 9 million subscribers, and its stock hit $70, up from a low point of $25 the previous fall. America Online’s revenues were now rising strongly, partly due to a sharp jump in advertising. Bob Pittman, the former MTV executive whom Steve Case had hired the previous year, was promoting America Online as the dominant media company of the Internet age, and advertisers appeared to be listening to him. In October, the stock hit an all-time high of $90. Investors were looking forward to America Online booking its first quarter of real earnings, and they weren’t disappointed. In the fourth quarter of 1997, the company made $20.8 million, giving at least some credence to Meeker’s argument that Internet companies, if they kept growing rapidly, would eventually generate big profits.
With stock prices soaring, the number of publicly funded Internet companies continued to increase. In October, N2K, an online music store based in New York, sold 3 million shares at $19 each, with Paine Webber acting as the lead underwriter. N2K had lost $10.1 million in the first six months of 1997 on revenues of just $2.9 million, and it wasn’t even the market leader. CDNOW, which was also preparing for an IPO, dwarfed N2K’s market share. Nonetheless, N2K’s IPO went well, and within a few weeks the stock hit $30. In November, Goldman Sachs took public Real Networks, a Seattle firm whose Real Player software allowed people to play music and video files downloaded from the Internet. The Real Player helped to bring the Internet to life, but Real Networks was in the same position that Netscape had been in a couple of years earlier—giving away its main product and facing imminent competition from Microsoft. At least Rob Glaser, the founder of Real Networks, knew what he was facing. He was a former Microsoft executive.