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With the bursting of the high-tech bubble, the prevailing social mood is shifting from Internet worship to cynicism. The attitude that “the Internet changes everything” has given way in some quarters to denigration of the Net as a fad-the citizen’s band radio of the 1990s. Yet just as the early tone was overoptimistic, the new one could easily become unjustifiably pessimistic. To avoid overreactions, it might be useful to analyze what propelled the dot-com craze to the ridiculous heights it reached in 1999 and early 2000.

That this was a craze is becoming ever clearer. In the spring of 1999, for example, Silicon Valley venture capitalists vied for the privilege of funding more than half a dozen companies operating Web-based portals for pet-related products, services and information. In retrospect, it is clear that not even one of those companies could have been successful. Yet somehow all those venture capitalists, as well as the staffs of the startups, went along for the wild ride. The press and the general public also willingly and enthusiastically joined in the celebration of what promised to be a brave new world, where conventional business principles no longer applied.

Why were they all so wrong?

A few key interrelated and mutually reinforcing ideas appear to have led even the most experienced people astray. The most important was that of “Internet time.” This was the perception that product development and consumer acceptance were now occurring in a fraction of the time that they traditionally took. Closely related to the concept of Internet time was the idea that the first company to establish itself in a new market would have an almost unassailable advantage over latecomers-the so-called first-mover advantage. Further support for the dot-com craze was provided by the notion of “network effects,” in which consumers and producers adopting a new product or service would induce others to do the same.

Network effects are real enough, and they are much more important on the Internet than in the traditional economy-although probably not as important as their main proponents argue, nor as easy to practice. But it is the idea of Internet time that was the most fundamental. If indeed product cycles were now compressed from the traditional seven years down to one year, then anything might change in the blink of an eye. Internet time appeared to give special power to the first-mover advantage. A company that could quickly establish itself as a pets portal, for example, might be able to gain a high enough market share to discourage competition. The world would fall into utter dependence on the startup for anything remotely related to pets. In that environment, any notion of due diligence gave ground to the overwhelming compulsion to be a part of the new gold rush.

The fatal defect of this line of reasoning is that it is based on myths. As with all myths, they do have some evidence supporting them. For example, Yahoo!, the first portal company, has managed to maintain its preeminence. has also remained the dominant online retailer for many years (although whether it can ever be profitable is increasingly in doubt). However, being first-or even one of the first-doesn’t necessarily confer an overwhelming advantage. Just consider the early personal computer pioneers, such as Atari. Where are they now? Even the recent history of the Internet abounds in counterexamples to the thesis of first-mover advantage. Look at the market for Internet search engines. Five years ago, AltaVista achieved a technical breakthrough that propelled it to dominant status on the world’s desktops. Today, AltaVista is a distant also-ran.

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