At this very moment, Merrill Lynch is behaving just as it
behaved during the boom: scrambling to get out in front of
the mob. It has coughed up the $100 million it was fined by
Eliot Spitzer, has run huge ads apologizing to American
investors for its behavior, has publicly humiliated Henry
Blodget and has said it will never again promote stocks it
doesn't truly believe in. It's a pity Merrill didn't try a
bit harder to defend itself. There is a lot to say, if not
exactly on behalf of Wall Street, then at least on behalf
of the recent boom Wall Street helped to fuel.
II. Silicon Valley Was Not a Bubble
The first good thing
to say about the boom is what it did to the value system of
the ordinary business schlep. It turned him from a person
who complained about the company he worked for to a person
who wondered, albeit for one brief moment, if maybe he
didn't have his own better idea of how to do things. If he
did, he went to Silicon Valley. What distinguished Silicon
Valley from every place else on the planet was a) it had
lots of start-up capital and b) the people who controlled
that capital understood that, if you wanted to win big, you
had to be willing to fail. Failure on Wall Street has
always been construed as a crime. Failure in the valley was
more honestly and bravely understood as the first cousin of
success.
It's odd that their quest for justice has led the various
regulators and prosecutors to big Wall Street firms. The
striking fact about the boom, as it happened, was the
insignificance of big Wall Street firms. The big Wall
Street firms would never have had the nerve. The people who
drove the stock market in the 1990's did not work on Wall
Street. They worked as venture capitalists; they created
companies. If in 1998 you told a venture capitalist that
Henry Blodget -- or any Wall Street analyst -- would
ultimately be held responsible for anything, he would have
wondered what you had been smoking. You might as well blame
the waiter for the size of the restaurant: the Wall Street
people were the help. It might have been one of the most
delightful aspects of the boom -- the way it inverted the
old financial status structure. All sorts of unlikely
characters -- seemingly half the population of India, for
instance -- now had a shot at fame and fortune.
Enron. WorldCom. Global Crossing. Adelphia Communications.
Tyco. Bad things happened inside these places, no doubt
about it, but these places were afterthoughts: the boom
could have just as easily happened without them. The
emblematic character of the boom was not Kenneth Lay or
Bernie Ebbers or Dennis Kozlowski. The emblematic character
was Jeff Bezos. Bezos was the original big-time Internet
entrepreneur. He famously quit his job on Wall Street,
threw his chattels in his car and drove across country to
Seattle, with a view to transforming the book business. He
thought it would take him 10 years. It took him 3, in large
part because a Silicon Valley venture capitalist named John
Doerr made sure Bezos had the capital to do it.
Three years ago Bezos was a hero and Doerr was the most
vocal, eloquent champion of the Internet entrepreneur. By
1999 people in Silicon Valley actually wore campaign
buttons that said ''Gore and Doerr in 2004.'' Today Doerr
has vanished from the public stage -- ''could not be
reached for comment,'' they usually write, of a man who was
just a few years ago impossible not to reach. Bezos has
become something like an antihero, one of those Internet
hypesters who was given a lot more capital than he deserved
to create an Internet business that still -- a full eight
years later -- has made only very small profits.
Many investors are trying to forget that they ever sank
money into Amazon, and why. Various editors are trying to
forget that they made Bezos their Person of the Year or
their Most Influential Man of the Internet. Anyone on Wall
Street who plugged Amazon.com is now a defendant, alongside
Bezos and Doerr, in lawsuits brought by small shareholders
who lost money on Amazon stock. There's now even a stage
play, Off Broadway, called ''21 Dog Years,'' in which a
former Amazon employee named Mike Daisey takes full
advantage of other people's willingness to believe the
stupidest cliches about the Internet boom. ''Daisey fears
that he lost his soul when he was blinded by talk of stock
options and strike prices and started to believe the myth
of uncountable riches for all as soon as the options
mature,'' reads an ad for the show. ''He wonders if he,
too, stopped being about something real.'' (It is
convenient how people seem to discover the need to be
''about something real'' only after the money dries up.)
There are two things to say about all of this. More than
two things, probably, but I'll control myself. The first
is: look what Jeff Bezos did. That a Princeton graduate
with a bright future on Wall Street would quit his
lucrative, prestigious but socially pointless job to create
a company -- well, that was a kind of miracle. That his
company would actually realize its original ambition: how
could that happen? But it did. Nearly $2.5 billion worth of
books a year are now sold over the Internet, and some huge
percentage of those are sold by Amazon. And even skeptics
understand that those numbers are merely the beginning of a
powerful trend. But who in 1996 had ever heard of
Amazon.com? It was a silly name on a plaque of a small
house in a bad neighborhood in Seattle. The very best a
reasonable person might have hoped for in 1996 was that the
oddly named Amazon.com would be acquired by Barnes & Noble
and then ruined, to prevent Barnes & Noble from having to
compete with it. Instead Amazon.com has lowered book
prices, made it far easier for readers to buy books and
thus increased the chances that an author will make a
living. Is that a bad thing? (Nobody suggests that Barnes &
Noble is unsound. But whose future would you rather have,
Barnes & Noble's or Amazon.com's? Whose name?)
The other thing to say about the excessive ambition of
Amazon.com is: was it so completely unreasonable for Jeff
Bezos -- or, for that matter, any other Internet
entrepreneur -- to behave as he did? It's easy to say so in
retrospect but, really, at the time, what should he have
done differently? He expanded as fast as he could because
a) the market threw capital at him and b) he believed,
rightly, that if he didn't he would be swallowed up by the
competition. The job of the entrepreneur isn't to act
prudently, to err on the side of caution. It's to err on
the side of reckless ambition. It is to take the risk that
the market allows him to take. What distinguishes a robust
market economy like ours from a less robust one like, say,
France's, is that it encourages energetic, ambitious people
to take a flier -- and that they respond to that
encouragement. It encourages nerve, and that is a beautiful
thing. As the business writer George Anders puts it, ''The
personality that allows you to be Jeff Bezos in the first
place does not have a shutoff valve.'' If it did,
Amazon.com wouldn't exist.
On June 3, 2002, Merrill Lynch published its first new,
improved research report about the Internet. It was, as you
might expect, designed to debunk all of the stuff Merrill
Lynch was saying about the Internet two years before. In
addition to the usual disclaimers, this one came with a
little box on the cover that said, ''Investors should
assume that Merrill Lynch is seeking or will seek
investment banking or other business relationships with the
companies in this report.'' The report, which promised to
poke holes ''in various Internet myths,'' focused on the
academic work of Dr. Andrew Odlyzko, formerly of AT&T Labs
Research and currently the director of the Digital
Technology Center at the University of Minnesota. It
quoted, derisively, both Business Week and the former
chairman of the Federal Communications Commission, Reed
Hundt, for saying that (in Business Week's words)
''Internet traffic is doubling every three months.'' The
problem with all that was said and written about the
Internet, according to Dr. Odlyzko, was that ''there wasn't
any hard data behind it.'' The doubling of traffic every
three months? ''In every single instance that I tried to
investigate, I always ended up with statements by people
from WorldCom's UUNet unit. . . . I did not hear anybody
else make authoritative statements that their traffic was
growing at this rate. My management at AT&T would often
talk about such growth rates, but they were always careful
to say Internet traffic, not our Internet traffic.''
The point was: all sorts of seemingly reliable sources were
assuming that Internet traffic was growing at a rate that
amounted to 1,000 percent or more a year, when it was
actually growing at somewhere between 70-150 percent a
year. (It still is.) This is the assumption that
underpinned Amazon's mad expansion, and, for that matter,
the entire Internet boom. Many Internet businesses that
failed would certainly have succeeded if more customers
were online. Internet businesses that succeeded would have
done better, more quickly. If Internet usage had grown the
way people were saying it was growing, back in 1996, all
that unused pipe laid by Global Crossing and WorldCom would
look inadequate to meet the demand. If that many more
people had come online that quickly, Amazon might indeed
have put Barnes & Noble out of business in those first few
years.
And so Dr. Odlyzko makes an interesting point. But in doing
it he makes another, even more interesting one, albeit
without meaning to, that helps to explain the exuberance of
the late 1990's. That feeling of fantastic possibility
everyone seemed to have by early 1997 wasn't just
manufactured out of whole cloth. Between December 1994 and
December 1996 Internet traffic had grown at an unthinkably
rapid rate. ''During those two years,'' says Dr. Odlyzko,
''the annual growth rate was about 1,000 percent per year,
doubling about every 100 days. . . . That really was a
period of manic growth.'' It wasn't until the end of 1997
that traffic-growth rates began to slow, and no one
noticed.
In short, the financial climate the manic adoption of the
Internet had given rise to persisted for several years
after the manic growth slowed. In retrospect, this is
hardly surprising, as by 1997 all manner of social and
financial interests had aligned themselves with the growth
rates of the previous two years. And, really, what happened
technologically in this country between 1994 and 1996 was a
kind of miracle. At the time who could honestly foresee
what was going to happen next? Everyone was guessing; and
if even Alan Greenspan couldn't exactly figure out what was
going on, you and I can be forgiven our lack of prescience.
It wasn't a question of whether this technology was going
to transform many aspects of American business. It was only
a question of how quickly it was going to do it.
A year or so ago a reporter who covers Silicon Valley for
The Wall Street Journal sat in on a new technology
company's conference call. Back when success was
fashionable, they used to do this a lot, to get the feel of
the thing, to write a ''color'' piece that served as a kind
of invitation to investors interested in the I.P.O. The
Journal's reporter had given the impression to the
company's founders that she was sincerely interested in the
company, but only on the condition that one of its
investors, Jim Clark, the founder of Silicon Graphics,
Netscape and Healtheon/WebMD, join the discussion.
(Disclosure: My book ''The New New Thing'' was about
Clark.) The reporter was shrewd. Had she called Clark
directly, he would have no doubt avoided her. Like everyone
else in Silicon Valley, Clark seems to have figured out
that the media were happy to hold everyone but themselves
accountable for the Internet frenzy, and so the best thing
to do in these dark times is to hide in some well-stocked
cellar. And sure enough, the minute Clark came on the line,
the Journal reporter turned the conversation from the
matter at hand into a grilling about Clark's behavior
during the 1990's.
Of course, this very same journalist was, just a few years
ago, a great fan of Internet companies. Like every other
newspaper, The Journal was once interested mainly in
fantastic success and added its share of fuel to the
Internet boom. Now, like every other newspaper, The Journal
is interested mainly in failure. Failure, even in Silicon
Valley, is suddenly a form of corruption. And that's a
pity. Because the other, earlier attitude actually produced
some real, measurable returns.
III. Throwing Out the Boom With the Bath Water
If your
measure of social progress is corporate profits, it is easy
to take a dim view of the boom. It is more difficult to do
so if you step back a bit and survey the bigger economic
picture. |
