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no. 11: virtuelle städte ->

The Rise and Fall of Dotcommania

by Geert Lovink

With the NASDAQ down by half its prior value, tech stock owners wished Baudrillard's saying "The Year 2000 did not happen" had come true. Arguing from a perspective of critical cyberculture, there is little reason to celebrate the downfall of Internet start-ups. Populist anti-speculative sentiments and moral anti-capitalist stands are on the rise. History is not on the side of those who predicted the failure of the New Economy and stayed out of business, whatever the reason. Let's leave the bashing of failed millionaires to others ("Dotcom is the weakest link, goodbye."). No matter how silly and fraudulent the business plans of the dot.bombs were, that which is going to replace them certainly won't be be any better. The dialogue between techno-anarchists and libertarian entrepreneurs is fierce, the one between corporate media and IT-moguls is not even taking place. Those who care about civil liberty, open standards, and social change towards an innovative, technological culture through software development, investment strategies and cultural activities should prepare for a phase of relentless market nihilism. The festive season of the Internet economy is over. An age of normalization is setting in, necessary for making up for the losses and failed investments.

Forget business magazines such as Red Herring, Fast Company, Wired and Business 2.0 and their religious positivism. With the possible exception of The Standard, the watchtowers of the New Economy have willingly been blind after what happened in the aftermath of the April 2000 NASDAQ downfall. The resemblance with Communist party news media in post-war Eastern Europe is remarkable: organized optimism, neglect of basic figures, mixed with portraits of its heroes, celebrating their miraculous breakthroughs at the forefront of financial schemes. The dotcom propagandists keep on repeating their mantra of bankruptcy as a spiritually cleansing experience, hoping that the storm won't be that bad after all. VC money moved on from the unsafe, open, and free web to the next big thing: the proprietary wireless systems where at least a payment system is already in place. However, the world of venture capital has remained rigorous as ever, blaming "overpublicized dotcom failures and an unfriendly stock market" (Tornado-Insider.Com) for the general malaise.

Lacking critical assessment, it will be hard to redirect struggling companies that are stubbornly sticking to their Darwinist survival-of-the-fittest world view. But there is no time left for an evolutionary end game. The curtains fell too early. There was a lack of serious competitors, after all. Only mature markets know serious competition.


"We are bullish on Positivism"

What was striking about New Economy believers was not the fear and greed, the goldrush obsession with money, but the blatant lack of self reflection. There was a collective refusal to analyze the broader economic and political context of information technology; basic economic laws weren't being taken into account. The presumption of the dotcom era had been that the individual entrepreneur would succeed together with his company, no matter what, as long as the will remained unspoiled and focused. Reflexivity was dirty and could only lead to trouble. Doubts or setbacks were not allowed. They could not and did not happen. If they did, there were others to blame (mainly the 'old media' press). Internal criticism was non-existent because it could potentially undermine the company strategy to gain value (measured in click rates) in no time. Through the distribution of stock options, dotcom workers were made complicit with this 'post-democratic' business model. The atmosphere was one of organized positivism, a self imposed dictatorship of the positive, comparable to religious sects. Internal discipline was handled in ways known only in former communist parties: dissidents simply do not exist. Everybody is happy, can't you see? Shut up and party. Smile :-). Don't worry, be happy. Unleash your positive energies.

Dotcom management goes like this: be playful and don't even think about anything other than accomplishing your task. Play your round of table tennis, write the damn code, and as for the rest, shut up. Negative thinkers had to be marginalized and were considered simplistic, one-dimensional, outmoded ideologists.


Complex society and its enemies

Critique was essentially viewed as a dinosaur phenomenon, coming from those who could not keep up with the pace. Feedback, a fundamental mechanism of cybernetics, got banned because it could endanger the precarious market position of the company. This rigid ideology of permanent success was the main reason why the dotcom crash was not anticipated by most insiders of the network revolution. It simply could not happen. Hadn't we gotten rid of dialectics a long time ago? Differentiation and rhizomatic growth had replaced the linear thesis-antithesis-synthesis model. In the exiting age of viral guerrilla marketing there is no place for ordinary ups and downs. Long and short waves, crisis and recession, "irrational exuberance", all of these are constructs of evil minds, attempting to play down and deny the seemingly endless growth potentials of the web and the global market in general. Those pointing at possible signs of a downturn are secret agents of negativism. Constant talk of overvalued stocks eventually brought down the stocks. (Fast Company, February 2001).

In good or bad times, Internet business consultants are always right. In plentiful times they will predict infinite growth of stock values because of predicted hypergrowth. In times of recession they will blame the very same market they trusted a few months earlier. Is there anyone to blame here, one wonders? The experts of Andersen Consulting, Deloitte, etc. seem to get away with everything. There is no accountability whatsoever. It would be like suing the weatherman for an incorrect forecast. How about bringing Internet gurus to court, charging them for ignoring key business figures, selling unrealistic high price-earnings multiples?

Take Mr. Nicolas Tingley of Morgan Stanley. In the midst of the NASDAQ crisis, the Australian Financial Review of Dec 1, 2000 portraits this investment banker as an "interested bystander at the downturn of the technology sector". I am sure he would not have presented himself this way a year or so ago. Tingley is portrayed as a high tech sceptic. He is commenting on "Six Myths of Technology Stocks", an article in the Wall Street Journal (October 17, 2000), written by E.S. Browning and Greg Ip. "People desperately wanted it to be true, wanted it to be a new era. And it always is different -- until it turns out it isn't." Tingley is trying to talk himself out of the episode of the short boom of 1999, blaming the overvaluation of tech stocks on 'psychology'. However, the agents of 'psychology' remain anonymous. Morgan Stanley is certainly not one of them. No. They are only interested in 'fundamentals', focusing on "opportunities that it can understand and adequately forecast." Who then, if not US American investment banks, such as Morgan Stanley, were the driving forces behind the speculative dotcom.mania?

Or perhaps the question should rather be: who talked up these stocks in the first place? Chances are it was the same journalists, column writers, analysts and consultants who are now predicting further losses. Why are these experts getting away with such a lack of memory? But I don't want to shoot the piano player. Peace, love and understanding for the poor messengers and running dogs. As Carl Gunderian wrote in a private response to my call for accountability: "Before we start marching these paid dot.flacks to the scaffold, we should remember that they merely fed the investors' capacity for greed and self-delusion. Or, as W. C. Fields once put it, you can't cheat an honest man! On the other hand, self-delusion can survive even this downturn."

Within the Internet economy, technological change is a complex, dynamic, integrated system. Its direction is increasingly dictated by financial markets that are no longer just 'feeding' the IT industry with capital from the outside. Investment decisions of venture capitalists direct the way in which technology is being developed, thereby effecting the course of technology. A cloudy, dense information structure is intrinsically intertwined with its object (Internet technology, wireless applications, telecoms, hardware, etc.). This hypersensitive environment is also open for a variety of factors such as currency exchange rates, interest rates, and even -- to some extent -- domestic and foreign policy. And let's not forget the price of crude oil. Factors that all define the technological state of the art itself as parameters, constantly changing settings that have to be monitored closely. The media, be it television, print magazines, or the Internet, are in constant feedback with both the financial markets and the technological sector, turning it one big PR marketing machine. Competition does not lead to diversification of opinions and formats. Within this turbulent climate of 'digital convergence' there is little interest in independent reporting and critical research in new media and IT development.


"Napster This!"

Does art really want to be free? The decentralized exchange of music files through the so-called Napster service has caught the recording industry off guard. With Metallica in court against Napster, Bertelsmann started making deals with Napster and altered its model of free content exchange into a subscription-based, money-making operation. Whereas post-Napster initiatives such as Gnutella and Freenet are gradually establishing themselves as true 'peer-to-peer' models without any central server, announced it would pay back the recording industry hundreds of millions of dollars for loss of copyright.

The overall picture here is confusing. Obviously, some very real contradictions within global capitalism are on a sharp increase, without a synthesis or compromise in sight. There is no such thing as a 'Digital Third Way'. On the electronic frontier there is a real (conceptual) battle going on, with little or no room for the Polder model of consensus. Whereas more and more data are flowing through the networks, there is a similar hypergrowth of data stored away behind password protected IP walls. The pressures on the New Economy to finally come up with some real cash flow are at odds with the marketing tactics of the very same breed of people who put out free content, attracting new audiences in order to establish a customer base. Two contradictory strategies, dubbed "facilitating" and "harvesting" by Arthur Kroker, are colliding in a spectacular fashion.

Content producers seem to be as confused and divided as everybody else. There is no right or wrong here. There is not even a common sense liberal-leftist position. Debates on the international mailing list nettime, for instance, did not show any direction nor came to any conclusion over the Napster issue. You can follow the thread in the nettime archive, starting on July 23, 2000 with a posting called "Terror in Tune Town". Against the aggressive libertarian stance ("information wants to be free"), which is embedding itself into code and network architecture, there is the legitimate call of those who have to make a living from the very same piece of information that hackers and others are putting out into the digital public domain. Did anyone ever hear it said that art wants to be free? No. Art wants to be paid for. With lots of money, if possible. Or a decent price, depending on one's expectations of what life is all about. Code writers are taking the avant-garde position here. Those who write the software are creating the facts, not the artists, and neither are the other 'content' producers, such as journalists, critics, or activists. Sadly, all they can do is discuss the consequences of the technologies. Lawyers could do some harm to the further spreading of peer-to-peer software, but probably not much. The situation seems to be pretty much out-of-control, with the average user benefiting the most.

One 'lesson' disturbed the traditional business community most: "Giving stuff away is an easy way to make friends and a lousy way to make money." Related to this is the secret wish of many CEOs that "some day e-mail will not be free," resulting in the statement "the person to figure out e-cash will be a billionaire." (thereby showing that this duo hasn't learned a thing from dotcom.mania). The proposal by Esther Dyson, J.P. Barlow and others to build the Internet economy based on the principle of gift giving may have worked in the mid and late nineties. Free information, entertainment (MP3), access, and at some stage even free hardware created the critical mass of users for business to step in. In retrospect, we can call this the age of hypergrowth (1995-2000). Venture capitalists would finance anything, as long as it was growing. Growing in terms of click rates, that is. During this first Internet recession, there is a tendency to focus on core information technologies, thereby excluding content and even services. Any business using the Internet as a mere marketing tool to sell non-tech items such as real estate, pet food, or wine will eventually face hard times.

The magic year 2000 turned out to be a turning point. The internal contradiction between the fascinating 'luring' aspect of free stuff on the one hand, and the pressure on Internet companies to come up with real revenue on the other came to the surface. Many startups found themselves in a downward spiral after the first quarter, with tax payments coming up, faced with high bills for marketing (billboards, TV commercials and adds in other 'old' media) and the first rounds of venture capital having dried up. And it turns out that costs are growing exponentially: "It takes $10 to create a technology, it costs $100 to create a product and $1000 to take it to market with distributor channels and marketeering materials." (Cisco CEO John Chambers) The burn rate of concepts, friendships, health, and communities has been remarkably high.

In 2000, e-commerce was scheduled for a breakthrough. A certain percentage of the created client base was supposed to reach the trust level of buying goods and services online. As an avant-garde of the herd grazing for free, early converts would cross the dam, creating a true Internet economy, based on real dollars, extracted from the old economy, diverted to the Internet via the credit card system. Presuming that the model that worked for the vanguard of early to mid-nineties Internet users could successfully be repeated (the ISP-phase), thousands of businesses were hastily founded, first in the United States, soon followed by like-minded entrepreneurs in Europe and Asia, ready to receive the first electronic consumers. Some indeed showed up. The 'prosumers' purchased a bit here and there (mainly software and books), but not enough to match the wildly optimistic predictions.

By mid 2000, e-commerce was dead, meaning that its modest growth had proven unable to yield the predicted revenues that the Internet economy needed to enter the next round of hypergrowth (and VC funding). The dependency of the IPOed companies on their overvalued stocks was the main reason why the downward spiral after April 2000 set in so rapidly. The speed religion of the New Economy ("Not the big will eat the small but the fast will eat the slow") turned against itself: the higher you fly, the deeper you fall, with the unfortunate -- some would say inevitable -- result that the mammoth chewed the hasty.

Most likely to survive are the companies in the shadows, not listed on the stock market, with a sustainable growth model and real revenues, or even profits. "Cash will be king," as Shannon Henry stated in his 2001 outlook in The Washington Post (December 28, 2000): "The gleeful, easy, everyone-is-getting-funded attitude has been replaced by skepticism, gloom and massive reversal of fortune. The shakeout will continue until many companies' pockets are completely emptied." After a golden age of fifteen years we would come under the law of diminishing profit, as Brad Delong stated back in 1997 (see: Rewired).

The Napster craze of mid-2000 did not help establish the badly needed stream of real dollars. According to the prophets of Free, services such as Napster would reduce the old economy -- in this case the recording industry - to dust and install a new one, with new rules and new players. The first goal may have been reached to some extent, but the latter certainly is a long way off. Even though sales may have been substantial in individual cases for independent artists offering work for free on the web, the overall economic situation of 'content providers' remains bleak. With no e-cash system in place, users will only pay for essential information such as financial newsletters. First attempts to sell PDF documents online such as were promising, until this service, which did have a revenue stream, suddenly closed in February 2001 as well.

First it was software code, then the written word (essays, articles) that got 'napsterized'. With the increased capacity of chips and pipes, technology then enabled us to turn music into files of a reasonable size. The MP3 files Napster users download seem really tiny by today's standards. It will only take a few years for the free exchange of compressed feature MP4 films with a fabulous screen quality to be realized. Watermarks against copying could split the consumer base in two -- with the ones who don't care about copyright on the one hand, and those who are not that tech-savvy on the other. A similar split is happening in the case of software. Those who are somewhat clever and think they can get away with pirated software will do so, and will even state publicly that they no longer want to support the Microsofts financially. The innocent majority will by and large agree with this, but won't know what to do, until a Napster-type service will enter the scene from offshore. It will offer free video porn, software, exclusive financial information, anything people now pay a lot of money for.

Given this situation, artists who have resorted to -- or stayed within -- the world of material objects seem to be the only ones likely to remain unaffected by the inevitable napsterization of all 'content'. Everybody else will be drawn into endless fights between the freedom of distribution and intellectual property. The answer of the libertarian guru is simple: give it all away and make your living with dish washing, with the promise that you may be invited to participate in some conference, exhibition or performance. The alternative is to get involved in software and create a micro-payment situation outside of the credit-card-based old economy. That seems to be the only truly utopian option if we want to rid ourselves of the Napster dreadlocks. The gift economy communities are ideal candidates for developing a neutral, global platform for e-cash, thereby making the gesture of giving away code and content a truly altruistic act, not merely the only option available.

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