I
George Soros is one of the most successful investors of the modern era. In 1987, he published The Alchemy of Finance, in which he introduced the concept of “reflexivity” to explain why financial markets go to extremes.1 In a bull market, Soros argued, the very fact that stock prices are rising appears to improve the economic outlook, which prompts investors to become even more optimistic. This leads to more buying, and the market rises further, thus restarting the cycle. Soros used the word “reflexivity” to describe this self-reinforcing process because the rise in stock prices reflects the apparent improvement in the economic outlook, and the improvement in economic outlook reflects the rising stock prices. With each oscillation of the cycle, investors’ expectations about future profits and economic growth ratchet upward. Eventually, their expectations move so out of line with reality that they are impossible to fulfill. At this point, the market becomes vulnerable to a correction. Disappointed expectations have a negative effect on stock prices, and falling stock prices make the economic fundamentals look worse. Unless more good news arrives quickly, reflexivity starts to work in the opposite direction. The drop in stock prices feeds on itself, eventually leading to a collapse.
Professional economists, who tend to see financial markets as omniscient calculating machines, gave Soros’s book a cool reception, but he is a lot richer than they are. Certainly, his theory fits the Internet boom. Rising stock prices boosted consumption and investment, which boosted economic growth, which, in turn, underpinned further rises in stock prices. The reflexive process was most powerful in the technology sector, which generated perhaps a third of all the growth in the economy between 1995 and 1999. Technology component manufacturers like Cisco Systems, Lucent Technologies, and Nortel Networks expanded at unprecedented rates. Their biggest customers were upstart telecommunications companies, such as Qwest, Williams Communications, and 360 Networks, that owed their existence to the buoyant financial markets. Some of these firms were building national networks to challenge long-distance carriers like AT&T and Sprint. Others were building local networks to compete against the Baby Bells. But they all depended on the financial markets to raise the vast sums of money needed to finance their expansion. In attempting to justify the prices investors were paying for Cisco, Nortel, and other technology favorites, Wall Street analysts looked at their current growth rates and extrapolated them into the indefinite future. This valuation method conveniently ignored the fact that the high growth rates were themselves a product of the stock market’s rise. Should the market falter, they would almost certainly disappear.
Most technology investors didn’t query the upbeat analysis that Wall Street was peddling. With a stock market downturn unthinkable, there wasn’t much point in worrying about the consequences should one arrive. In fairness, it is always difficult to tell when the market has left reality so far behind that a downturn is imminent. History isn’t much of a guide. In early 1929, legend has it, Joseph P. Kennedy liquidated his portfolio after a shoe shine boy gave him a stock tip. If Kennedy had been alive in the 1990s he would have sold out years before the peak. With confidence in the economy and the Internet practically unbounded, more and more Americans were getting into the market. According to one story, unconfirmed but from a reliable source, even the surgeons at New York’s Mount Sinai Hospital were taking time out from their regular jobs to trade stocks. Between patients, they were reportedly using a computer in the operating room to place buy and sell orders.
II
In the summer of 1999, Barton Biggs traveled to Sun Valley, Idaho, where he had been invited to present his dyspeptic views in a debate with James Glassman, an economics columnist at The Washington Post. Glassman had coauthored Dow 36,000, a new book that was receiving a lot of attention. In it, Glassman and his co-author, Kevin Hassett, argued that stocks are no riskier than bonds over the long term and should be priced accordingly. Traditionally, investors have demanded a “risk premium” for holding stocks. Glassman and Hassett calculated that if this premium were eliminated the Dow, which was then hovering around 11,000, would more than triple. This argument didn’t make much sense—the whole point of bonds is that they are safer than stocks—but it showed how far New Economy thinking had progressed. In the fall of 1929, Irving Fisher, an eminent Yale Professor, earned a place in the history books when he suggested, a few weeks before the Great Crash, that stock prices had reached “a permanent and high plateau.” Glassman made Fisher sound like a pessimist. During the debate with Biggs, he argued that the Internet was the transcending invention of the twentieth century, more important than the jet aircraft, the contraceptive pill, and nuclear fission. Biggs considered Glassman’s argument to be ridiculous. Even the humble air conditioner had altered history more than the Internet, he said. Without air conditioning, Atlanta would be a small town and modern Singapore wouldn’t exist. After the speeches were over the issue was decided by a show of hands. Glassman won by 180 votes to 2. One of the people who voted for Biggs was his wife.
Biggs flew back to New York and brooded. Morgan Stanley was underwriting more Internet IPOs by the week. (It would end up doing twenty-seven Internet IPOs in 1999, more than it had done in the previous four years combined.) Mary Meeker and her colleagues were still being more discriminating than some of their rivals, but nobody could pretend that drugstore.com and Ask Jeeves, two of Morgan’s latest Internet IPOs, were future members of the Fortune 500. In trying to justify her buy recommendation on stocks like these, Meeker was being forced to rely on increasingly suspect valuation methods. In a report on drugstore.com published in October, she pointed to the fact that the average user of its Web site viewed 14.9 pages a month in August, compared to 10.3 on its rival’s, PlanetRx, site. “Additionally, drugstore.com maintained a level of 48 percent engaged shoppers (a unique user who views at least three minutes of content within the category) ahead of PlanetRx, which had 45 percent.”2 There was little mention of whether “engaged shoppers” actually bought anything, or when either drugstore.com or PlanetRx, both of which were taking heavy losses, would turn a profit.
Few of the Internet companies that Morgan Stanley was preparing for IPOs satisfied the criteria that Meeker had once insisted to met before she would even consider taking a firm public: big potential market, sound management, and clever products. Biggs privately suspected that the investment bankers, at Morgan and elsewhere, would keep pumping up the bubble until it burst. He could understand why, and he even had some sympathy for the investment bankers given the competitive pressures they were facing. In asset management, his part of the business, the competition was equally intense. If you renounced the latest investment craze too early, and fell down the performance league tables, you placed the future of the firm at risk.
After Labor Day, as traders returned to their desks, stocks of all kinds were trading at levels never before seen relative to earnings and dividends. The PE ratio on the S&P 500 index was 33, compared to a previous high of 22.3 in August 1987, two months before Black Monday. Ray Fair, a Yale economist, tried to answer a question that was on many minds: Did current stock prices make any sense? In order for the answer to be “yes,” Fair calculated, corporate earnings would have to grow at an annual rate of 14.5 percent for ten years, and the ratio of after-tax profits to GDP would have to double—from 6 percent to 12 percent.3 This wasn’t impossible, but it would involve an unprecedented redistribution of income from workers to corporations. Much more likely, with unemployment at its lowest level in thirty years, was a profit squeeze, as workers demanded higher wages.
Lending from brokerage houses, another time-tested sign of excessive speculation, was rising sharply. Since Alan Greenspan’s “irrational exuberance” speech in December 1996, margin debt had almost doubled. As a percentage of GDP, it was now at its highest level in more than sixty years. Other types of borrowing, including bank loans, credit card loans, and home-equity loans, were also rising fast. Total household debt stood at 102 percent of personal disposable income, compared to 85 percent in 1992. There were increasing signs that all of this extra debt was having an effect. Amid the ongoing boom, more people than ever were defaulting on their debts. Personal bankruptcies were running at record levels.
These indicators strongly suggested that the American economy was in a credit-driven speculative bubble of the sort Japan went through in the 1980s, but investors preferred to believe the upbeat explanations provided by Glassman and others. This, too, was typical of the late stages of a speculative mania. The September issue of Wired contained a number of articles on the coming age of “ultra-prosperity.” Kevin Kelly, the magazine’s executive editor and the author of New Rules for the New Economy, sketched an America in 2020 where the average household income was $150,000, middle-class families had their own personal chefs, and the Dow was north of 50,000 and heading for 100,000. Such a scenario “looks more plausible all the time,” Kelly wrote. “How many times in the history of mankind have we wired the planet to create a single marketplace? How often have entirely new channels of commerce been created by digital technology? When has money itself been transformed into thousands of instruments of investment?”4
Kelly also interviewed George Gilder, who was now himself an Internet entrepreneur of sorts. Gilder published the monthly Gilder Technology Report, which, for $295 a year, alerted investors to the latest developments in science and technology and provided a list of stocks that stood to benefit. Qualcomm, which rose more than 2,500 percent in 1999, was one of Gilder’s favorites. JDS Uniphase was another. “I don’t think Internet valuations are crazy,” Gilder declared. “I think they reflect a fundamental embrace of huge opportunities. Virtually all forecasts estimate something like a thousand-fold increase in Internet traffic over the next five years. . . . In ten years, at this rate, there would be a million-fold increase.”5 It is to be hoped, for the sake of his subscribers, that Gilder’s prognostications about technology were more firmly grounded than his arithmetic. According to most estimates, there were at that time about 150 million Internet users. A millionfold increase from there would have produced 150 trillion Internet users. The world’s population is only about 8 billion.
Kelly also contacted another name from the past, Harry Dent Jr., the baby-boomer theorist, who back in 1992 had predicted that the Dow would reach 8,500 sometime between 2006 and 2010, a forecast that turned out to be too conservative. Dent now had his own advisory firm, and he was giving speeches. A few months previously, AIM Management Group, a mutual fund company, had paid him the ultimate tribute by setting up the AIM Dent Demographic Trends Fund, which invested in companies that looked set to exploit the aging of the baby boomers. Dent had just published a paperback version of his latest book, The Roaring 2000’s Investor, in which he predicted that the Dow would reach 41,000 in 2009. “For the past ten years I have been one of the most bullish forecasters about the future, and yet even I have underestimated the market,” he told Kelly. “We did not really account for the international growth—we now have five billion new consumers to sell to. And historically, at about the middle part in a boom, you get a transition to higher valuation levels when people understand the boom is here to stay. The investment cycle kicks in and floods the market with money. That’s where we are now.”6
III
“Face it: Out there in some garage an entrepreneur is forging a bullet with your company’s name on it,” Gary Hamel, a Harvard Business School professor, warned the nation’s CEOs in the September 1999 issue of the Harvard Business Review. “You’ve got one option: you have to shoot first.”7 Across the country, companies were heeding Hamel’s advice, and, as a result, the dividing line between the old and new economies was becoming blurred. The Walt Disney Company, which already owned Go.com, the fifth most visited site on the Web, was buying the rest of Infoseek. Time Warner, which had finally shuttered its Pathfinder portal after years of heavy losses, had teamed up with Sony to buy CDNOW. NBC had issued its own Internet tracking stock, NBCi. News Corporation had set up a $300 million venture capital arm, which took a stake in Healtheon. The melding of the old and the new wasn’t confined to the media. Barnes&Noble. com, which went public in the spring of 1999, was expanding into music retailing. Wal-Mart and Toys “R” Us were both launching online divisions. Jack Welch, the chairman of General Electric, had decreed that the Internet was GE’s number-one priority. Ford and General Motors were preparing to move their vast purchasing operations online.
The inspiration for much of this activity was Amazon.com, which was now “Earth’s Most Talked About Company.” In just four years, the Seattle start-up had reached $1 billion in revenues, and Jeff Bezos had turned into what his hometown paper, The Seattle Times, called “The Internet’s Ultimate Cult Figure.”8 When he appeared at company events his own employees asked for his autograph. Bezos was no longer just a businessman. To many, he was a totem, a messianic savant to whom the divine truth had been revealed. “When we try to comprehend something as vast, amorphous, and downright scary as the Internet, it’s no wonder we grope for familiar historical precedents—the railroads, the interstate highway system, the telephone network,” a Business Week cover story on “The Internet Age” declared in October 1999. “But none of those really captures the Internet’s earthshaking impact on the business world. For that, we must take the advice of Internet commerce pioneer Jeffrey P. Bezos.”9
The Gospel According to Jeff, which he proclaimed to Business Week and anybody else who would listen, was that capitalism had entered its Cambrian era, the equivalent of the period 550 million years ago when multicelled life first appeared on earth. “It was the greatest speciation ever seen, but it was also—which people forget—the greatest rate of extinction ever seen,” Bezos said. “We’re going to see all kinds of ideas tried, and the majority of them are probably going to fail.” One of the businesses whose survival was rarely called into question these days was Amazon.com. “It’s not only the dominant bookseller (valued at $22 billion, while Borders, with 260 physical superstores, is worth a bare billion), but has quickly become the biggest music retailer on the Net, as well as a seller of toys and consumer electronics,” Newsweek reported. “Amazon.com is the flagship for Internet commerce, living proof of the viability of its business model—selling goods directly to customers on the Net.”10
The scale of Bezos’s ambition was stunning. Some commentators said he wanted to create an online Wal-Mart, but that was an understatement. Wal-Mart doesn’t compete directly with Toys “R” Us, Nobody Beats the Wiz, Home Depot, and Tower Records. Amazon.com now competed with all of these stores, and that was just a start. Bezos wanted to dominate the entire online shopping market. At the end of September, he announced the formation of zShops, an online shopping mall where Amazon.com’s 12 million customers would be able to buy everything from jam to sailboats. When a customer typed in something she wanted—a fishing rod, say—the software would check if Amazon.com carried it. If the item wasn’t in stock, the customer would be directed to the home page of an affiliate store that did stock it. “Sixteen months ago, we were a place where people came to find books,” Bezos said. “Tomorrow, we will be a place to find anything, with a capital ‘A.’ ”11
Unlike some Internet zealots, Bezos never claimed that traditional retailing would go away. He knew that human beings were active and gregarious creatures that liked to go out and shop. But he believed about fifteen percent of retail spending—more than $500 billion—would eventually go online, and he wanted to grab a large part of that for Amazon.com. Bezos insisted that his strategy was based not on a Napoleonic ego, but on increasing returns to scale. As Amazon.com expanded into new areas, its revenues would grow faster than its costs, he argued. Unlike regular retailers, it didn’t have to build new stores and staff them up in order to grow. The zShops initiative was a good example of this strategy. Whenever an online customer bought something in a store that he or she had entered from Amazon.com, Amazon.com received a commission. If Amazon.com also handled the billing, which it often did, the commission was 5 percent of the purchase price. “It’s a completely new model,” Bezos insisted.12 Investors seemed to believe him. The day of the zShops announcement Amazon.com’s stock jumped $15, to 80 3/4.
Bezos was a persuasive talker, but Amazon.com’s costs weren’t as fixed as they looked. In addition to its existing distribution centers in Seattle and Delaware, the company was building another five huge warehouses across the country. These facilities employed thousands of blue-collar workers, who earned $7.50 an hour, more when they worked overtime, as they often did in busy periods. As its business grew, Amazon.com also had to hire a lot more customer service representatives, plus computer technicians and marketing and sales people. Advertising costs were growing strongly too. In 1997, Amazon.com had spent about $30 for each customer it acquired; in 1999 it was spending more than $35 for each new customer.
Companies that really exploit increasing returns to scale, such as Microsoft, make more money the faster they expand. The faster that Amazon.com grew, the more money it lost. At the end of October 1999, it reported a third-quarter loss of $197 million, on revenues of $356 million. Compared to the same quarter in 1998, sales had increased by 130 percent, but losses had risen by 437 percent. Even Henry Blodget was shocked by this development. If Amazon.com didn’t move toward profitability soon, he warned, investors would become “as tired as we are of endless postponement of gratification.”13 Blodget downgraded Amazon.com’s stock from “strong buy” to “accumulate,” and four other analysts also issued downgrades. In a week, the stock dropped from $76 to $63.
Fortunately for Bezos, Christmas was approaching. Some analysts were predicting that online sales during the holiday season could top $10 billion. Amazon.com, which had purchased 181 acres of wrapping paper and 2,500 miles of red ribbon in anticipation of packing about 15 million gifts, stood to be the major beneficiary of this shopping bonanza, and its stock recovered strongly. On December 9, it hit an all-time high, on a split-adjusted basis, of $113, before falling back on profit taking. The following day, it closed at 108 11/16, valuing the company at about $37 billion. Amazon.com’s stock, like its founder, was now larger than life. No longer a mere paper claim to the prospective profits of a single company, it had turned into a barometer of the public’s faith in the high-tech future. With the new millennium approaching, that faith seemed limitless. The same day that Amazon.com’s stock reached $113, VA Linux, a small computer company, went public amid a welter of publicity about the Linux operating system, which was being touted as a possible challenger to Microsoft Windows. VA Linux’s stock soared from $30 to 239 1/4, a rise of almost 700 percent. This was an even bigger jump than TheGlobe.com’s stock enjoyed on its first day, and it set a new IPO record.
While all this was happening, the editors of Time magazine were settling on their “Man of the Year.” Previous choices had included Joseph Stalin, Mohandas Gandhi, and Martin Luther King Jr. This year, the pick was Bezos, the cackling thirty-five-year-old embodiment of e-commerce. A few days before Christmas, Bezos’s smiling face appeared on the newsstands. Inside the magazine there was a five-thousand-word profile, which revealed that Bezos’s role models were Thomas Edison, an obvious choice, and Walt Disney, not an obvious choice at all. “The thing that always amazed me was how powerful his vision was,” Bezos explained. “He knew exactly what he wanted to build and teamed up with a bunch of really smart people and built it. Everyone thought it wouldn’t work, and he had to persuade the banks to lend him $400 million. But he did it.”14 The implication was clear: Bezos had struggled against similar odds as Walt Disney to build Amazon.com, and his vindication was approaching.
On Friday, December 29, 1999, Muhammad Ali rang the opening bell on the New York Stock Exchange. When the closing bell rang a few hours later on a session shortened for the holiday, the Dow was at an all-time high of 11,497.12. For the year, it was up 25.22 percent. The Nasdaq, which only the previous day had closed above 4,000 for the first time, was also in record territory, at 4,069.31. Since the start of 1999, it had risen by 85.6 percent, the best performance ever by a major American stock index, surpassing the Dow’s 81.7 percent surge in 1915. Some narrower indexes had performed even better. The Dow Jones Internet Composite Index had climbed 167 percent on the year.
IV
On the morning of Monday, January 10, Steve Case, the chairman of America Online, walked onto a stage at the Equitable Center in midtown Manhattan and announced that America Online was buying Time Warner for $165 billion. “We are pleased to have you with us today as we announce the merger to create the first global media and communications company of the Internet century,” Case said. The fourteen-year-old “Cockroach of Cyberspace” was taking over the world’s largest media company, a sprawling behemoth whose antecedents dated back to Henry Luce and Jack Warner. Case, the Internet entrepreneur, had put on an expensive blue suit and a yellow power tie for the occasion. Gerald Levin, the chairman of Time Warner, was casually dressed in an open-necked shirt and khakis. Case presented the deal as a “merger of equals,” but there was no doubt which side would be in charge. Case would be AOL Time Warner’s chairman. The new company’s stock symbol would be “AOL.” America Online’s shareholders would own 55 percent of the merged company. While Case was speaking, Time Warner’s three top executives—Levin, Ted Turner, and Richard Parsons—were sitting behind him like ornaments.
America Online was planning to pay for the acquisition with its stock, which a month earlier had reached an all-time peak of $91.75. Time Warner’s shareholders, in return for surrendering their company’s independence, would receive a premium to the current stock price, but they would end up owning just 45 percent of the combined company. In agreeing to accept America Online’s stock as payment, Levin and his colleagues were declaring their faith in America Online’s stock market capitalization of $163 billion. “The new media stock market valuations are real,” Levin insisted. “Not in every case of course. But what AOL has done is get first position in this New World. Its valuation is real, and I am attesting to that.”15
This was a remarkable claim. America Online had made a lot of progress since 1996, when the company’s survival had been called into question. It now had 20 million subscribers, and more than half of all Internet users in the United States were its customers. Its new instant messenger service was extremely popular. In the last four quarters, it had made a profit of $879 million, far more than any other Internet company. In short, America Online had demonstrated that providing mass-market access to the Internet on a subscription basis was a viable business model. But this was a long way from saying it was worth $163 billion.
Time Warner, which was valued at $83.5 billion before the merger announcement, had revenues of more than $26 billion from its cable systems, film studios, and publishing operations. This was more than five times America Online’s revenues of $5.2 billion. Time Warner also had heavy debts to service, which kept its earnings down, but it was generating about $6 billion a year in cash flow, four times as much as America Online was producing. Moreover, Time Warner was far from a neophyte when it came to technology. Many of its cable systems had already been upgraded to provide high-speed access to the World Wide Web. In terms of preparing for the next generation of Internet technology, Time Warner was much better placed than America Online, which still relied on slow telephone connections.
Despite this obvious imbalance, most media observers accepted Levin’s argument that the merger represented a sensible vote of confidence in Internet stocks. “The Internet boom looks less ephemeral today,” the editorial page of The New York Times opined.16 Peter Huber, a fellow at the Manhattan Institute, was even more emphatic. The merger “marks the beginning of the end of the old mass media, and the end of all serious debate about the triumph of the new,” he wrote in The Wall Street Journal.17 Huber went on: “Time Warner chairman and CEO Gerald Levin has grasped what many casual observers, especially older and wealthier ones, just can’t yet believe: For the old media, now, it’s go digital or die.”
Such reactions were predictable and confused. A year earlier, when Lycos had tried to merge with USA Networks, its shareholders had refused to accept the deal. Case was repeating the Lycos–USA Networks strategy, but on a much grander scale. Clearly, he didn’t think that the old media was doomed. “Traditional media assets have a vibrant future if they can be catapulted into the Internet age,” he explained. After merging with America Online, Time Warner would be able to promote its magazines, films, and television shows online. At the same time, America Online could create more content based on Time Warner’s properties, which would attract more people to its service. In the new media world, more than ever, companies needed famous brands like People, CNN, and Bugs Bunny to attract people’s attention.
The real significance of the merger between America Online and Time Warner was the confirmation it offered that the old media and the new media were converging—a convergence that had devastating implications for Internet stocks. After all, the main rationale put forward for the high prices of these stocks was that Internet companies were completely unlike ordinary businesses, so standard methods of valuation didn’t apply. In using America Online’s inflated stock to buy Time Warner, Case held this argument up to the light, where it could be examined. Once there, it didn’t look very convincing. America Online and Time Warner, it turned out, were both media companies that sold editorial content to the public and charged for it, largely, by subscriptions. True, America Online’s chat rooms were accessed via phone lines, whereas Home Box Office movies were sent down cable wires, but that wasn’t a big difference, especially if such distinctions would soon be obliterated with the arrival of high-speed Internet connections. The only big differences between America Online and Time Warner were in the size of their businesses and, most especially, the valuations accorded to their stocks. Before the merger announcement, Time Warner was valued at about twenty times its annual cash flow. Applying this multiple to America Online, the company was worth about $30 billion, less than a fifth of its current stock market capitalization. Case was well aware of this discrepancy, which helps to explain why he had called Levin in October 1999 and suggested a merger. In joining with Time Warner, Case exploited the stock market bubble to convert his company from an Internet service provider with uncertain prospects in a future where broadband access to the Internet would eventually become the norm into a global media colossus that could survive and prosper in any environment. At least one old media mogul looked on in admiration. “It was a brilliant piece of financial engineering,” Rupert Murdoch commented. “He jumped in and bought something with $6 billion in cash flow.”18
The day after the merger announcement, America Online’s stock fell by almost 10 percent, to $64.50. Investors were starting to focus on the fact that it was no longer solely an Internet company, with Internet growth rates. After the merger, it would be a new media–old media hybrid, growing at 20 percent or 25 percent a year instead of 50 percent. With America Online’s stock falling, Time Warner’s stock was dragged down too, because the company’s shareholders were being paid in stock. This went on for several weeks. By the end of January, America Online was trading below $60, down more than a third from its December peak. Case had torpedoed his company’s stock, but he had secured its long-term future.
V
Few Internet entrepreneurs were as shrewd as Case. Many of them mistakenly believed that the Internet was a viable business in itself, rather than a distribution vehicle that worked for some products (financial information, music, pornography, auctions) but didn’t work for others (food, clothes, and anything that people liked to touch). No firm guarded its status as an Internet company more zealously than Yahoo! In the four years since it went public, the Silicon Valley company had transformed itself into a full-service online network, offering everything from online shopping to auctions to stock quotes. Yahoo! now had more than 40 million users, making it the second most popular site on the World Wide Web after America Online. It operated sites in fourteen foreign countries (in twelve languages), including the United Kingdom, France, Germany, Korea, Ireland, and Mexico.
Yahoo!’s financial strategy, which relied on advertising for revenue, also seemed to be paying off. The day after the America Online–Time Warner press conference, it announced profits of $44.7 million for the fourth quarter of 1999. For the year as a whole, Yahoo! earned $61.1 million on revenues that had jumped 140 percent to $588.6 million. More than three thousand companies were now advertising on Yahoo! In anticipation of the earnings release, Yahoo!’s stock broke through $500, a new all-time high, valuing the firm at $131.6 billion. There is a lot of competition, but this may well have been the most exaggerated valuation ever placed on an American company. Yahoo! was now worth more than Walt Disney and News Corporation combined. Its stock market valuation was 224 times its 1999 revenues and 2,154 times its 1999 earnings.
On Wall Street people were speculating that Yahoo! would soon follow America Online’s lead and buy Disney or News Corporation. Jerry Yang, Yahoo!’s cofounder, had been talking to a number of media companies, including News Corporation, but only about setting up some joint ventures. Yang and his colleagues had decided to remain independent. “We really believe in saying, ‘Hey, these are the opportunities that are ahead of us,’ ” Yang explained a few weeks after the America Online–Time Warner announcement. “ ‘We are purely on the Internet. We are anchored in Silicon Valley. We believe in partnering so that consumers end up having the best experience.’ Does that mean that ultimately we will have to combine with a big media company? I think that is a conclusion that people rush to get to.”19 In some ways, Yang’s determination to remain independent was commendable. If any company still represented the Internet’s freewheeling tradition it was Yahoo! But from a business perspective, the failure to buy a Disney or a Viacom, or another big cash-generating asset, was a grave error. Before long the opportunity to do a transforming deal would be gone. By the end of January, Yahoo!’s stock had already fallen back to below $325.