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Inside the Dot.Com Crash

Aired December 26, 2000 - 10:00 p.m. ET


STUART VARNEY, CNN ANCHOR: They were high tech trail blazers paving a road to riches and a brand-new economy, stocks rising fast, so fast some thought they would conquer the corporate world.

But then the bubble burst.

ANNOUNCER: This is a MONEYLINE special report, "The Dot.Com Crash."

Reporting tonight, Stuart Varney.

VARNEY: Welcome to this special "MONEYLINE" report inside the most important business story of the year 2000: "The Dot.Com Crash."

One year ago at this time, Internet stocks were in the midst of an astonishing rally, and their future seemed limitless. But since then, investors have been facing a brutal reality check, watching their shares fall 70, 80, 90 percent from their highs and in some cases disappear completely.

Now it doesn't mean that many people didn't make many millions of dollars during the boom time, and it doesn't mean that the Internet as a force in business is going away. It does mean, however, that investors, executives and many workers are suffering through painful adjustments and possibly will for years to come.

During this program, we'll chronicle the spectacular rise and stunning decline of this fledgling industry and ask, how could so much value be created in so short a time only to see it vanish twice as fast?

And we'll look to the future to find out whether the downturn for dot.coms could drag down the rest of the economy.

But first, we begin with a look at what fueled the run-up and what caused the stocks to crash.

Bruce Francis takes us from Netscape to now.


BRUCE FRANCIS, CNN CORRESPONDENT (voice-over): Ryan Jacob will not miss the year 2000. His Internet fund is the worst performing U.S. stock fund this year, down more than 75 percent. But it wasn't always that way; from late 1997 through mid-1999, it seemed Jacob could not lose on Internet stocks. As his funds swelled from less than $200,000 to more than $700 million.

RYAN JACOB, JACOB ASSET MANAGEMENT: It happened much quicker than people expected -- the technological innovation and people flocking to the Internet just were growing in greater and greater numbers. So people became more convinced that the Internet would become a mass-market medium.

FRANCIS: It started with Netscape; its Web browser inspired a generation of companies and its initial public offering in August of 1995 inspired a generation of investors to bet on the Internet as a transforming technology and an engine of wealth creation on par with the railroads, electricity and the automobile.

Randy Komisar, a Silicon Valley venture investor who's written about the Internet craze, says Netscape blazed the trail.

RANDY KOMISAR, VENTURE CAPITALIST: It was quite exceptional, because it was the first time a technology company was able to go public so early with only the prospect of future profits.

FRANCIS: The unusually high demand for Netscape's offering was also the birth of a bubble. Slated to go public at $12 to $14 a share, Netscape ultimately priced at $28. On the first day of trading, it's shares hit $75.

For the Internet IPOs that followed, staggering investor demand made stratospheric launches a regular occurrence. Yahoo! stock jumped 155 percent on its first day in 1996. At Home and Real Networks followed with impressive pops the next year. Verisign, Exodus and Inktomi continued the trend in 1988. Priceline and eToys led the bumper crop of 1999. None had profits at the start, but many had dazzling growth.

GREG KYLE, PEGASUS RESEARCH INTERNATIONAL: One of the factors I think that really causes trouble is that people were seeing that these companies were able to accelerate their business model at a scale that we really haven't seen before. If you take a company, for example, like eToys that went from $30,000 to $30 million in revenue just in one year, or a company like Amazon, where it effectively in five years, it was able to generate more revenues than Microsoft took to generate in 16 years.

FRANCIS: Many investors tossed aside concerns about profits or sales, focusing instead on new ways to measure success: page use, unique customers, eyeballs -- anything as long it was growing. Other so-called "momentum investors" jumped on board fearful of missing out on gains like these: iVillage, eToys,, and VA Linux.

From the time Netscape went public in August of 1995 to March 10th, 2000, the Nasdaq -- home to virtually all the stocks -- rose an astonishing 441 percent.

(on camera): But that record run would soon turn to a rout. In hindsight, the signs of a bubble ready to burst were all around. (voice-over): In January 2000, Nasdaq opened its marketsite in Times Square, an eight-story electronic billboard competing for attention on one of the world's glitziest stages. That same month, the high-five and hug that shook the business world.

America Online, the once-struggling Internet service provider, announced it would buy one of the world's leading media companies: CNN parent Time Warner. Jeff Bezos named "TIME" magazine's "Person of the Year": the CEO of a company that had never turned a profit and could not predict when it might.

And Silicon Valley's culture of excess hit the accelerator.

RANDY KOMISAR, VENTURE CAPITALIST: Boxters became more numerous than Camrys in Silicon Valley.

Ferraris were passe, and everybody was talking about their private plane.

FRANCIS (on camera): As the Nasdaq continued its record run in the early part of this year and stock valuations continued to defy logic, some investors began to question what was really fueling the rally.


VINCE FARRELL, SPEARS BENZAK SALOMON: I wonder if the Nasdaq can continue this strength when you've got the old economy faltering so badly. You know, the new economy has got to sell its stuff, and it is the old economy that buys it. So I'm not sure that you can continue this incredible string on the Nasdaq without at least a hiccup somewhere down the road very soon.


FRANCIS (voice-over): Farrell was right. Just days after the Nasdaq peak on March 10th, a number of events spooked investors: events that would be the first to prick the Internet bubble.

March 20th: Investors react to a "Barron's" report on a study by Pegasus Research suggesting some Internet companies might soon run out of cash. The Nasdaq falls 200 points.

KYLE: We looked at the entire universe of Internet stocks, and found that roughly 80 percent of them were operating at a loss, sometimes quite significant.

FRANCIS: Same day, revelations of accounting problems at Microstrategy, a former Net high-flyer, raising concerns about the quality of earnings at other tech companies.

March 21st, the Federal Reserve raises interest rates for a fifth time. During that time, lock-up periods begin expiring on 1999's IPOs, clearing the way for insiders to take profits by selling stock.

And in April, Microsoft's stock tumbles after a federal judge rules the software giant violated antitrust laws. And influential analyst Rick Sherlund cuts his revenue estimates on the company. And then the tax man...

DAVE READERMAN, THOMAS WEISEL PARTNERS: The trigger was April 14th, the day before tax day: people selling stocks to take profits and pay capital gains for calendar '99.

FRANCIS: Despite some short-lived rebound rallies, the Nasdaq has yet to regain its high ground and has fallen 48 percent since March 10th. Damage to stocks has been particularly severe. Greg Kyle estimates that Internet-related companies have lost $800 billion of market value.

KYLE: Just to put that in perspective, that's greater than the amount of U.S. currency in circulation today.

FRANCIS: And those losses hit all types of Internet businesses. Thomas Weisel Partners tracks 10 sectors, a total of 330 stocks, and found losses between 44 and 91 percent.

And generally speaking, the more recent the IPO, the greater the loss. Internet stocks sold to the public before '98 are off 45 percent. The class of '98 is off 66 percent. '99, down 76 percent. And the freshmen are a whopping 86 percent.

READERMAN: There is no question in my mind that many of the sectors, particularly in consumer space -- whether it's e-tailing, e- media, e-marketing -- will be tarred for a long time to come.

FRANCIS: But Ryan Jacob, who has seen 5,000 of his 30,000 individual investors pull out of his new Internet fund, is still a believer.

JACOB: If we're correct in our stock selection and these companies become profitable enterprises, that's when you can make an exponential gain in your investment.

FRANCIS: Exponential gains are what Jacob's clients and many Internet investors need right now just to break even.

Bruce Francis, CNN Financial News, New York.


VARNEY: Those "exponential gains" are now a fading memory. And one look at Yahoo! shows how dramatic a reversal of fortune has been. When Yahoo!'s stock hit its high of $250 early this year, its market value back then was roughly the same as Disney, Newscorp and Viacom combined. Today? Yahoo! is worth less than a third of just one of those companies: Disney.

Next up in this special on the crash, who fueled the Internet mania?

We'll look at the roles that entrepreneurs, Wall Street analysts and the media played in inflating the bubble. (BEGIN VIDEO CLIP)

UNIDENTIFIED MALE: I would think this is probably the biggest bubble there ever has been, and strangely enough with the most sophisticated investors and the best motion we've ever had.


VARNEY: Plus, an in-depth look at one company that went from great promise to deep peril in a matter of months. The story behind Priceline. But even as their stocks have deflated, some companies are persevering, even expanding. What challenges are the survivors facing. Our guest thinks the challenges are immense. "Business Week" editor Michael Mandell, whose book says it all, "The Coming Internet Depression." Is the damage spinning over to the rest of the economy? We'll ask him.

Stay with us, as we continue our special MONEYLINE report, "Inside the Dot.Com Crash."


VARNEY: We continue now with our special report, "Inside the Dot.Com Crash."

It seems like we're watching valuations head lower in every session on Wall Street. And earlier, we gave you one estimate of just how much Internet market value has been lost this year: $800 billion. That is close to $3,000 for every American. So just who is responsible for feeding the frenzy in the first place?

As Peter Viles reports, it's a combination of analysts, entrepreneurs and a willing public.


PETER VILES, CNN CORRESPONDENT (voice-over): There was a time when investors believed: They believed the Internet would create a new economy, would revolutionize commerce, would even help parents connect with their children. They believed money-losing startups like eToys were great investments.

So they made eToys an $11 billion company, even though it was losing $2.46 on every dollar of sales.

JEREMY SIEGEL, WHARTON BUSINESS SCHOOL, UNIVERSITY OF PENNSYLVANIA: I think what happened was at cocktail parties, at meetings, people were saying: Hey, did you hear about this stock? I made so much money on that stock. And then people say, well, I could do the same thing. And people forgot about the financial statements. They forgot about all the cautions that the analysts and the investment bankers were essentially saying about that industry, and said, this is an easy ride to riches.

VILES: EToys has collapsed. The $11 billion of market value gone. In hindsight, it all appears so obvious. The Internet mania was a giant bubble destined to burst.

DAVID DREMAN, CEO, DREMAN VALUE MANAGEMENT: I would think this is probably the biggest bubble there ever has been, and strangely enough, with the most sophisticated investors and the best information we've ever had.

VILES (on camera): So how did it happen? Why did so many investors put so much money behind so many companies that had never made a dime?

Well, like many speculative bubbles before it, this one was built on the promise of a new technology and on the greed to cash in on it.

(voice-over): Jeremy Siegel has been studying stock markets for 30 years.

SIEGEL: Usually, bubbles form when there's a new technology, new techniques, things that people had not seen before. And certainly, the Internet was just such a new technology that captured the fascination of the public.

VILES: The technology had help. It was hyped, advertised and sold by a cast of characters from Wall Street to Seattle, all of whom benefited as the bubble expanded.

There were the executives who built the companies and became paper billionaires when they sold shares to the public. This was Jay Walker, the founder of, in May 1999.

JAY WALKER, FOUNDER, PRICELINE.COM: The Internet is going to change all the rules, and I think everybody knows that.

VILES: The Priceline bubble: $26 billion of market value now gone.

The news media played a roll, praising the genius of entrepreneurs like Jeff Bezos, whose company lost $184 million the year he was named "TIME's" "Man of the Year."

Wall Street literally sold the bubble, in the past three years raising $32 billion in Internet IPOs, raking in 2.1 billion in underwriting fees. The most aggressive underwriters were Credit Suisse First Boston, Goldman Sachs and Morgan Stanley Dean Witter. And there is sharp division now on how much blame Wall Street should shoulder.

MURIEL SIEBERT, FOUNDER & CEO, MURIEL SIEBERT & CO.: Must greed be the creed. I mean, we brought out deals that were not ready to come public yet.

We didn't see any negative research coming out, because they, every firm on the Street, wanted to be in their next underwriting.

VILES: A new breed of Wall Street superstar was born, the Internet oracle: Mary Meeker at Morgan Stanley Dean Witter, Henry Blodget at Merrill Lynch.

No traditional analysis could explain the spiraling prices, so analysts invented new ways to value stocks.

This was Blodget in April of 1999.

HENRY BLODGET, MERRILL LYNCH: Really our argument has always been that nobody knows what they're worth. It's very hard to say how important the Internet will be, how large these companies can get.

VILES: Blodget still rates an accumulate even though the stock has dropped 80 percent, losing $30 billion of market value. Goldman Sachs, by reputation one of the Street's best underwriters, counts these companies among its Internet IPOs:, down 95 percent since its first day close;, down 96 percent; Webvan, down 97 percent; and eToys, down 99 percent.

And until this week, these were Goldman's recommendations on those stocks: market outperform, outperform, recommended for purchase, and outperform.

Goldman finally downgraded those stocks yesterday. Anthony Noto defends the decision to stick with them as long as Goldman did.

ANTHONY NOTO, GOLDMAN SACHS: And the market sentiment unfortunately ran away from these stocks and caused the stocks to come down significantly. We at that time didn't change our ratings when the stocks were down 50 or 60 percent -- it didn't seem appropriate. Now we're at a point where there are significant fundamental concerns, and that's why we're sending that signal to the market.

VILES: Holly Becker, who has made her reputation by questioning Internet valuations, say analysts must shoulder some of the blame for not warning investors sooner.

HOLLY BECKER, LEHMAN BROTHERS: I do think that it was our responsibility to say, I don't believe in this business model, I don't believe that these economics worked, and I don't believe that this company can ever really make money.

VILES: But Siegel, the veteran market-watcher, disagrees. His argument: Wall Street will always sell what the public wants to buy.

SIEGEL: The public was wanting these stocks, and clearly, Wall Street said, OK, we'll provide people who will tell you about these stocks.

VILES: In the end, Siegel and many others maintain the Internet bubble was created by the investors who believed in it.

Madison Avenue certainly helped, sending the message that day trading could be cool, like Stuart in the Ameritrade ads, and could make you rich, like the truck driver who owned a tropical island.


UNIDENTIFIED ACTOR: Technically, it's a country.


VILES: So spoiled by the bull market, investors believed they could get rich quick by buying Internet stocks.

SIEGEL: I think who's to blame for this is the greed that is in you and me, almost in every person that wants to make money fast. And what I think is that it is the individual investor that is the beginning of the excitement that we saw with the Internet.

VILES (on camera): Market bubbles by their nature are irrational. So investors in a bubble will always ignore the best advice. And the best advice probably came from Alan Greenspan, who warned nearly two years ago that investing in Internet stocks is like buying lottery tickets, because the vast majority of Internet companies, he predicted, will fail.

Peter Viles, CNN Financial News, New York.


VARNEY: And what about the venture capitalists? They certainly played a role, building up the dot.coms before they ever made it to Wall Street. And now it appears they're pulling back.

"Business Week" Online recently showed just how much. It's reporting that the VC dollars into e-commerce, B2B and content companies peaked in the fourth quarter of 1999 at $4.8 billion. By the third quarter of this year, it was half that. By the third quarter of this year, it was half that, at $2.4 billion. Now during that peak period, dot.coms grabbed nearly a third of all VC investments. Last quarter, it had dwindled to less than 15 percent.

Up next in our special MONEYLINE report, Willow Bay talks to some of the rank and file casualties of the crash. Dreams of quick Internet riches up in smoke.

We'll be back.


VARNEY: And welcome back to our special MONEYLINE report: The Dot.Com Crash. While investors have clearly suffered during the crash, so have tens of thousands of workers.

That inspired one consultant firm to sponsor a very different kind of office party this season: the "pink slip holiday bash." It was thrown in New York's Silicon Alley for those who have lost their jobs during the downturn. This party is less about celebrating, and more about commiserating over collapsing stock prices, and near-worthless options.


UNIDENTIFIED MALE: I have stock options at more than one company. I'll take them, but it's not a deciding factor in the company. It's sort of like a tee-shirt they gave you when you signed on.



UNIDENTIFIED FEMALE: Let's say it's gone from 14 to 35 to 50 cents a share.



UNIDENTFIED MALE: I have lots of stocks options. Lots and lots. It's all wallpaper, unfortunately. I think.


VARNEY: Of course, the casualties are not confined to Silicon Alley, and recently Willow Bay sat down with some laid-off workers on the West Coast to get their take on the rise and the fall of the industry.

She talked with Andrew Sukahira, an M.B.A grad laid-off after seven months at a Rob Orescan who landed a job at after graduating from Pepperdine's business school. He got a pink slip nine months later. Ryan brewer, he lost his job after six months on the payroll. And Joyce Christiano who left her KPMG to enter the world. She's been laid-off from the and And Jeff Kaltraider who left a job at Procter & Gamble for a He was laid off nine months later. Here's a look at Willow's talk with some of the downsized.


WILLOW BAY, CNN CORRESPONDENT: You all did not work for publicly traded-companies, correct?


BAY: Did you expect that the companies that you working for were going to go public fairly shortly?

UNIDENTIFIED MALE: Yes, I think we all get that pitch when you start interviewing. Yes, our plan is in a year to year and a half, we're going to go public and then, you know, things will be very good for you and -- but things don't work out that way anymore.

BAY: What was the net effect financially of your experiences working for a

UNIDENTIFIED MALE: Well, I think, personally, if I had stayed in the company I was at before, you know, I would have worked my way up the ladder and been receiving raises. Rather, I took a lateral move salarywise and took the options. As it turns out, they're not worth anything.

JOYCE CHRISTIANO, FORMER DOT.COM EMPLOYEE: Definitely, if I had stayed in consulting, I would be in a different place. I think the net effect isn't equal for me, but I have enjoyed the process, and I think it was a good experience, so financially...

BAY: So, by now we have all heard this, B2B, back to banking, B2C, back to consulting. Do you find that that's the case amongst your peers, that a lot of them laid off from dot.coms are heading back to banking, to consulting, to consumer products?

JEFF KALTRAIDER, FORMER DOT.COM EMPLOYEE: It is a lot more appealing to go back into the old world and know that you will be getting a paycheck for the next 10 years and not have to worry about it. But at the same time, it's like you're addicted to it, you're addicted to the rush of starting a company and working in a really dynamic environment. It'll be hard to give that up.

BAY: After having been in that world, is it for real? Is this revolution for real?

CHRISTIANO: Definitely.

BAY: Did the market expect too much too soon, or just too much?

UNIDENTIFIED MALE: Too much too soon.

UNIDENTIFIED FEMALE: Too much too soon.

ANDREW TSUKAHIRA, FORMER DOT.COM EMPLOYEE: I think it's all going to materialize, it's just going to be in a different form than we can even imagine right now. It's just all going to shake out and morph into something that works.

BAY: If you could characterize the difference between last year and this year, how would you characterize it?

CHRISTIANO: I think there's a lot more tap dancing now than there was before. It's just people are a little more edgy I think than they were.

TSUKAHIRA: Yes, I would take it a step further and say that a lot of people are even cynical at this point. But, you know, the way I look at it is that if I get another six months with another good company and get some great experience and get the kind of experience I had in my last company, then it's going to be worth it again.

BAY: When you say you're -- you'd go back for six months, why go back given all the uncertainty?

TSUKAHIRA: I think the degree of responsibility, the feeling that you actually can do something and make a difference, it's so huge in my choice of a job, because I've been in positions where you're just the smallest peon and you feel like you're really just turning a wheel in, you know, this big machine and it really doesn't impact anything. KALTRAIDER: My first day at FreePC, you know, this is -- I move from San Diego up to L.A. to go into the Internet, and came from bartending. And, you know, my first day the CEO comes up to me, shakes my hand and says, you know, I heard a lot about you, anxious to have you on board. And I was just like -- you known, we had meetings with him on a regular basis. Our input was -- it was used and taken seriously.

BAY: Should it have been?

KALTRAIDER: Yes. I mean, we did get bought, which is -- which was a good thing for us. I mean, the young people are the people who really made the Internet what it is, I think.

BAY: If you could describe how the world has changed in our view, how would you describe it?

KALTRAIDER: Retire at 50 instead of 30, probably -- the big change

UNIDENTIFIED MALE: The enthusiasm is not there as it was, definitely not there.


VARNEY: Now, that was Willow Bay talking with some of the downsized on the West Coast. So, just how many workers have been laid-off during the Internet shakeout? Take a look at how these job cuts have been mounting. Back in March when the Nasdaq hit its record high, Challenger Gray counted just 25 cuts. They've exploded since then to more than 8,500 in November. All told, more than 31,000 dot.commers laid-off over the past year, and that doesn't even include damage in December of 2000.

Stay with us. We'll be right back.


VARNEY: As investors lick their wounds, the biggest losers from the demise may be the once-golden Internet CEO's. David Wetherell was hailed as a visionary at Internet investment company CMGI. That is, until his stake plunged from a high of $1.3 billion, to a mere $43 million.

Candace Carpenter, founder of the women's network, I-Village, used to have her personal hairdresser come on business trips. Those days may be over. Today her stake in I-Village, once worth as much as $60 million, is valued at less than $400,000.

And then there's Fernando Espuelas, CEO of the Hispanic portal Starmedia. His stocks and options were once worth $450 million. Today that has declined to only $13 million. Still, at age 33, that is not at all bad.

Ahead on this special MONEYLINE report: an in-depth look at Priceline. VARNEY: Even Captain Kirk couldn't steer the name-your-price pioneer away from market disaster. Here's how one angry investor describes what it feels like.


UNIDENTIFIED MALE: Terrible. Nightmares. Can't sleep at night knowing that the money was here one day and now it's gone.


VARNEY: Plus, the companies still standing after the devastation. We'll hear from chief executives like Meg Whitman of eBay, who say their companies will survive and so will the Web.


MEG WHITMAN, CEO, EBAY: The Internet is going to play a very big part in our economy. The Internet is going to be here to stay.


VARNEY: All that and much more as our special MONEYLINE report: "The Dot.Com Crash."


VARNEY: And welcome back to this special MONEYLINE report: "Inside the Dot.Com Crash."

We continue now with an in-depth look at Priceline. Just a year ago, it was known as an innovative company with billionaire backers, a high-profile pitchman, and a high-flying stock. Now, it costs more to buy a cup of Starbuck's coffee than a share of Priceline, and that makes Priceline a compelling case study for anyone trying to chronicle the crash.

Terry Keenan has a profile Of Priceline's stunning decline.


TERRY KEENAN, CNN CORRESPONDENT (voice-over): Freddy Marzouk was a true Priceline believer. He bought the stock as he shopped the name-your-own-price Web site for gasoline. That was this summer. Today, Marzouk doesn't buy gas from Priceline. They no longer sell it.

His investment, his worst ever. He lost $25,000 on Priceline and a lot of sleep.

FREDDY MARZOUK, PRICELINE.COM INVESTOR: Terrible, nightmares, can't sleep at night knowing that the money was here one day and now it's gone.

KEENAN: Welcome to the anatomy of a disaster. One Web site dedicated to discounted gasoline, groceries and travel has cost thousands of investors billions as its stock price vaporized. Shareholder lawsuits abound.

DAVID SCOTT, CLASS ACTION ATTORNEY: The shareholders purchased the stock at an artificially inflated price, and the house of cards all came crashing down.

KEENAN: It wasn't supposed to end this way. The concept at first was smart and simple: sell empty airline seats before the planes took off. Wall Street analysts gushed at the prospects and a mania was in the making. Here's what the analysts were saying last spring.


JASON ADER: The last great innovation to change the economics of booking was the introduction of toll-free numbers back in the '60s, and the Internet has a much more powerful punch than even that.


KEENAN: Armed with praise like that, Priceline's founder, Jay Walker, got his hype machine rolling. And what a machine it was.

First, Walker signed on some rich-and-famous investors, including George Soros, Paul Allen and John Malone. He then hired Morgan Stanley to sell his stock, a choice that put Wall Street's most powerful Internet cheerleader, Mary Meeker, on board as well. The media completed the cocktail. "Forbes" magazine, for example, called Walker a "New Age Edison."

But Walker himself was his own best salesman.


JAY WALKER, PRICELINE.COM: In the second generation, there are going to be entirely new companies with entirely new DNA which create an entirely new benefit for the consumer.


KEENAN: When Priceline went public in March 1999, investors beamed it up into the stratosphere: from $16 to 85 on day one of public life, $162 five weeks later. In an Internet minute, a $20 billion company was born. Pitchman William Shatner made Priceline a household name.


WILLIAM SHATNER, ACTOR (singing): So I went to, where you can name your own price for low-cost, long-distance (UNINTELLIGIBLE) all of that screwy jive-talking.


KEENAN: At its high, Priceline stock was worth more than most major U.S. airlines, and founder Jay Walker was a billionaire many times over. And Priceline lavished that stock on key employees. The biggest get: Citigroup CFO Heidi Miller, who came on board this spring.

(on camera): There was just one big missing ingredient. Behind the scenes, Walker's discounting was still losing money and the competition was closing in fast.

(voice-over): In June, six major airlines announced plans to start their own service, called Hotwire. Priceline shrugged off the challenges. By July, the company said it was on the home stretch toward profitability.

That was not the case. In fact, the more Priceline sold, the more it lost. And on September 27th, the company warned of a revenue shortfall. The stock fell to just under $11 a share.

By then, some big early investors were already bailing out. Among the sellers, the investment bank Allen & Company, and even pitchman Shatner himself.

BOB GABELE, FIRST CALL/THOMSON FINANCIAL: The amount of shares in Priceline sold near the lows rivaled some of the largest insider- selling situations in new economy stocks since the meltdown in March.

KEENAN: On the surface, it looked as if Priceline founder Walker was sticking with his stock. But a closer examination of insider- selling records shows that was not the case. In fact, Walker's affiliate, Walker Digital, began dumping Priceline stock this spring.

Then in August and September, Walker engineered a series of transactions that let Priceline announce that some very smart investors were buying in even as Walker himself was selling out. The most notable, Saudi Prince Alwaleed, who bought 2 million shares from Walker in September at the now princely price of $25 a share. Walker claims he reinvested the money from these sales into Webhouse, a private affiliate that sold the discounted groceries and gasoline. But within a month, Webhouse was all but out of business, customers were complaining, and the Priceline myth machine had shifted into reverse.

BOB OLSTEIN, OLSTEIN FINANCIAL: The analysts and the director of research, everyone got caught up in this game, and as you well know, the bubble then burst.

KEENAN: And in the aftermath, hundreds of small investors are taking their case to court. In recent weeks, dozens of class-action lawsuits have been filed against the company, alleging Priceline did not disclose its deteriorating business picture even as executives dumped their stock.

Priceline would not comment on shareholder suits and declined our request for an on-camera interview. With the stock now trading at less than $2, more than $20 billion in market value has been wiped out and one of the hottest stocks of 1999 is now a laughingstock.


UNIDENTIFIED ACTOR: Tech stocks went down the toilet. Now you can name your own price for shares of Priceline, and most folks are naming it around a buck-78.


KEENAN: Can Priceline survive without a lifeline? It does have some cash and little debt, but that may not be enough. While Priceline customers crave discounts, few investors seem to crave the stock that is now 99 percent from its highs.

Terry Keenan, CNN Financial News, New York.


VARNEY: As the stock collapsed in 2000, Priceline lost key members of its leadership team, including Heidi Miller, the "big get" that Terry mentioned. She left in the fall, just months after giving up a top spot at Citigroup.

Next up in our special report on the crash: dozens of companies going from to dot.gone. But there are the survivors: We'll look at the obstacles they face.

And later, the author who says if anything, we're understating just how bad the decline is for the tech industry and the economy. We'll talk with "Business Week" editor Michael Mandel.


VARNEY: We continue now with our special report: "Inside the Dot.Com Crash"

Not a day goes by it seems without hearing a new Internet horror story. And the drumbeat of gloom and doom obscures one encouraging fact: Some companies are still pulling in business, even if their stocks have tanked. But encouraging or not, these companies are still facing many obstacles.

Casey Wian reports from Sunnyvale, California.


CASEY WIAN, CNN CORRESPONDENT (voice-over): While the technology landscape is littered with the remains of failed Internet companies, a few dot.coms have emerged as survivors, largely thanks to an old- fashioned focus on the bottom line. Take eBay. Yes, the online auction pioneer's stock has plunged to about 1/4 of its split-adjusted all-time high of more than $120 a share reached in March.

But if you bought eBay when it went public in late 1998, you'd still have a gain of almost 300 percent. In other words, a $10,000 investment would be worth nearly 40,000 now.

CEO Meg Whitman says her company has been profit-oriented from day one. That foundation gives eBay the financial clout to grow while others scale back.

MEG WHITMAN, CEO, EBAY: EBay is very much on the offensive right now. We have a great business model, we are making money, we're meeting all of our targets. And I think in the next six months there's going to be tremendous opportunity to acquire companies that can't get funding in this environment.

WIAN: Now that the economy is slowing, analysts expect eBay to further distance itself from the pack. They say it's largely immune to the drop in advertising revenue that's hurting many Internet companies. And eBay's business model is well-suited for tougher economic times.

DEREK BROWNE, W.R. HAMBRECHT: Many of the goods being bought and sold through eBay are second-hand products. And in some respects, a second-hand product may actually increase in relevancy, increase in importance to consumers. both buyers and sellers, in a down economy. Buyers want to have a better value for the money that they're spending, and sellers may want to get extra money for the products that they have and they realize that they don't need, they need extra cash.

WIAN: EBay expects to generate cash revenue growth of 50 percent a year for the next five years, projecting $3 billion in revenue by 2005. Some analysts, notably Lehman Brothers skeptic Holly Becker, say that may be too optimistic.

HOLLY BECKER, LEHMAN BROTHERS: In eBay's case, we have a situation where they've built a terrific niche business of a trading site for collectible items, and they're looking to expand that into a bunch of new markets globally and in the U.S. in new categories, and their biggest challenge is really extending that platform. We saw companies like Priceline try to do that from airline tickets into gasoline and groceries, and it backfired.

WIAN: Yahoo! is another online aberration. Starting as a simple search engine, it now bills itself as a global Internet communications, commerce and media company. With more than 160 million users a month and 16-straight profitable quarters, Yahoo! faces few of the cash-crunch issues hammering other Internet firms.

Despite that, Yahoo!'s stock is down more than 85 percent from its January peak, largely the result of worries about the Internet advertising slump. Yahoo! depends on ads for about 80 percent of its revenue.

(on camera): Instead of scaling back, like so many other dot.coms, Yahoo! is aggressively expanding. The company is building this 800,000-square-foot corporate headquarters, with plenty of room to grow.

(voice-over): While Yahoo! declined several requests to speak on-camera for this story, executives have said publicly they're trying to diversify toward more fee-based services and ad deals with bigger, more established companies.

BROWNE: Unfortunately, that means that things may be rough until they really do penetrate these accounts. Fortunately, when they do -- when they do make that breakthrough, the company is really going to have the wind at its back.

WIAN: Like Yahoo!, business-to-business Internet software leader Ariba is also building a splashy new headquarters. It recently boasted of becoming the first Internet b2b company to break even. While b2b, in the words of "Fortune" magazine, has gone from the hottest ticket in town to one of many Internet flops this year, Chairman and CEO Keith Krach says Ariba will be profitable early next year. The company has a growing base of well-capitalized customers saving from 5 to 20 percent on purchasing costs using Ariba's b2b services.

KEITH KRACH, CEO, ARIBA: When you talk to many of our nameplate customers, whether it's an HP, an Intel, a Cisco, Motorola, Sony -- you name it, across the world -- the thing that's really driving our business so fast is the hundreds of thousands of dollars that gets put to the bottom line because of using Ariba as the standard from an e- commerce standpoint.

WIAN: But that hasn't insulated Ariba from the stock market's shift in sentiment. It lost 20 percent of its value on Wednesday alone, even though the company made no major announcements.

One issue facing even successful Internet companies is how to attract good employees now that the lure of stock options is gone.

BECKER: It's an issue in attracting new employees and it's an issue in retaining who they have. The two things going on are, first, cash compensation is going up and options are being repriced.

WIAN: Another concern: no one knows how Internet companies will perform in an economic slowdown or a recession, because they've never been through one. Whitman says the question is not how dot.coms will survive; rather, how many.

WHITMAN: The Internet has changed a huge number of things in the economy, and what happened is you had this huge amount of companies that will shrink to a handful of very big, very strong companies that will emerge from this new technology. So contrary to a lot of popular opinion, I actually don't think the Internet is dead.

WIAN: Not dead, but at least suffering intense growing pains.

Casey Wian, CNN Financial News, Sunnyvale, California.


VARNEY: And just ahead, we'll speak to one journalist who sees wider consequences to the bust: Michael Mandel, who forecasts a coming Internet depression.


VARNEY: We're back with our special report on the crash.

So far we've offered you a glimpse of how the Internet bubble was created, how it burst, and how much value has been lost. But the key question remains: What is the impact on the entire economy?

Our guest is not offering a pretty picture of the future. Michael Mandel, the economics editor at "Business Week" and the author of "The Coming Internet Depression." He joins us now from Washington.

Michael, welcome back?


VARNEY: Now we have seen the crash, we have seen layoffs, we've seen that crash move over to other sectors in the Internet on the Nasdaq stock market. But how do we get from here to a full-scale depression? Spell it out for us.

MANDEL: Well, what's going to happen is that the dot.coms are kind of like the canary in the mine. They're the signal that things are getting tough, that capital is getting short. And what's going to unfold in the next year or two is that first there's going to be a capital squeeze in the telecom companies. And that's where they started. The telecom companies are enormous spenders. They're spending about $100 billion a year, and they're being forced to cut back because they can't raise the capital that they need.

Now that's going to have a big effect that's already slowing the technology sector. And if we look out to the middle of 2001, what we're going to see is that the venture capital firms, which have been pouring out money also at a rate of about $100 billion a year, are also going to be forced to cut back.

And the combination of the dot.coms folding, the telecoms cutting back and the VCs cutting back is going to really put an enormous drag on the economy.

VARNEY: But what you're saying, surely it's not inevitable that we slide towards recession or depression. We do, after all, have the Federal Reserve that can cut interest rates aggressively, and we do have an administration coming in that at least likes the idea of a large scale tax cut to goose the economy a little bit.

MANDEL: Well remember that it takes 12 to 18 months for interest rate cuts to really affect the economy. So even if Alan Greenspan cut rates tomorrow, it would take a year for that to have full effect. So we have a year ahead of us of a slowing tech sector and a slowing economy.

See, the problem is that technology been driving the boom of the 1990s. It's been driving the new economy. And as tech slows, the rest of the economy goes down with it.

VARNEY: Can I just ask the other side of the question here, which is this: In the early part of this century, there were literally hundreds of automobile companies as that new innovation came on board. Now many of those companies of course went bankrupt, they went under. There was a bubble, it burst, the winners emerged. Could you identify for us now some of the winners that you think are on the ground in play now which will emerge as true winners in the Internet later?

MANDEL: It basically is going to be the companies that don't have to go back to the capital market. When you have a closing capital market, it tends to favor larger companies and companies without much debt. So if you have a company that has to either borrow or go to stock market, it's going to have big problems.

And also, if you go back to the auto industry, it was the bigger companies that survived the Depression of the 1930s.

VARNEY: You think that's what's going to happen again this time. You think the bigger...


VARNEY: ... well-capitalized, no-debt companies, they're the ones to bank.

MANDEL: That's the ones that are going to be the winners in the end.

VARNEY: Do you think that the crash will cut innovation in America?

MANDEL: Absolutely. One of the great things about the dot.coms was that you could have a new idea and you could get it funded. And over the course of the next year or so, what you'll see is a real pull back in the amount of funding available for new businesses. And that's really too bad, because that's one of the -- America's big advantage over Europe and Asia: the ability to fund these new businesses. And in fact, it's one of the hallmarks of new economy. So I'd like to see this not disappear but I'm really worried that it will.

VARNEY: All right, Michael Mandel, the author of the book that tells the whole story "The Coming Internet Depression."

Michael, many thanks for being with us tonight.

MANDEL: Oh, glad to be here.

VARNEY: We'll be right back for you.


VARNEY: And that is it for this MONEYLINE special look at the crash. For more information, visit our Web site at

I'm Stuart Varney. Good night from New York.



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