What the Bubble Taught Us About Tech

The Nasdaq 100 peaked on March 10, 2000. Over the next two and a half years, it lost 78% of its value, and many of the Internet companies that survived still sell below their all-time highs. In this remembrance, we ask what we've learned over the past 10 years.

In the battle of the bubbles, the dot-com disaster may have been less devastating than the recent financial fiasco and housing hullabaloo, but it still destroyed about $5 trillion in stock market value.

Too many of us spent precious dollars chasing the next eMeringue.

Bad enough to write a book about
The bust was so ugly that the co-founders of one of Wired's notable dot-com survivors -- our very own David and Tom Gardner -- felt compelled to publicly confess their mistakes in their 2002 book, The Motley Fool's What to Do With Your Money Now. Among them: paying too much for growth, and failing to give profits due respect.

Tom and David weren't the only ones. Consider the poor souls who bought shares of these dot-com dynamos at the height of the bubble. They have yet to break even:

Source: Yahoo! Finance. Returns calculated through closing on May 11, 2010.

For the most part, Fools haven't warmed to these stocks. They have good reason not to in the case of Level 3, which gets appropriate kudos for operating one of the industry's better content delivery networks, yet remains burdened by more than $6 billion in long-term debt and hounded by fast-growing competitors Akamai Technologies (Nasdaq: AKAM) and Limelight Networks (Nasdaq: LLNW).

United Online's problem isn't competitors so much as relevance. Like United, EarthLink (Nasdaq: ELNK) and AOL (NYSE: AOL) have suffered years of inconsistent and often declining revenue. All three have spent years and capital trying to become more than simple Internet service providers. The transition has been tough.

But transitions are always tough, especially in markets defined by technical standards and well-funded peers. Just ask RealNetworks. The company has yet to recover from the introduction of iTunes, YouTube, and Pandora. I'm guessing it never will.

When sock puppets were all the rage
Too many other dot-com stocks proved unsustainable. None of these one-time wonders exist today:

Pets.com. The sock puppet dot-com. Made famous in a series of clever TV commercials, the mic-clad pitch pooch never was able to convince pet owners they'd do better by ordering food and supplies on the Web. Our own Jeff Fischer put the flameout in perspective in a November 2000 column:

Pets.com raised millions with nary a sustainable advantage to its name (it was not a Rule Breaker), and the venture capitalists knew that most of the money would be blown on marketing. Then, Pets.com was able to go public without a penny of value creation, let alone meaningful experience, under its belt.

Webvan. The solution-to-a-problem-that-didn't-exist dot-com. Consumers never showed signs of preferring grocery delivery to shopping at their local store, yet Webvan was still able to raise $375 million in a 1999 IPO. The company would be out of business two years later, denting the reputation of former Accenture boss George Shaheen.

DrKoop.com. The buy-a-brand-name-and-see-who-shows-up dot-com. Founded in 1998 with $6 million in financing and rights to the name of former U.S. Surgeon General Dr. C. Everett Koop, this site was supposed to draw advertisers who would pay to connect to millions of health-conscious users. Turns out that was (ahem) optimistic thinking. Today, the company is a shell of its former self, embedded within the HealthCentral Network.

Kozmo.com. The great-idea-that-never-IPO'd dot-com. Kozmo.com promised free delivery of, well, anything. Sort of like your own personal fido-cum-pizza delivery boy, except the service would fetch everything from DVDs to snacks. Problem was, Kozmo.com treated pricing as an afterthought. You know what happened next.

The dark before the dawn
We can learn a lot of from these flimsy business models -- lessons that apply to this day, 10 years after the "Pop Heard 'Round the Digital World." Here are three:

1. It's never, ever "different this time." Sock puppets don't change the rules of economics any more than Wile E. Coyote gets to change the laws of physics by strapping on a ragged pair of cartoon wings.
2. Owners usually beat flippers. Businesses run by owners with a lot to lose tend to do better than opportunistic entrepreneurs who hope to seize the moment and cash out. Don't believe me? Check the list of the world's billionaires sometime. You'll find long-term winners such as Oracle's Larry Ellison, who still owns more than 23% of the business he co-founded in 1977.
3. There's no substitute for a competitive advantage. Flippers fail because they build for the moment, rather than for longevity and need. Companies that sell in-demand products and services generate healthy margins, profits, and cash flow -- the fire that fuels stock returns.

Bubbles are always fun -- until they pop. A decade ago, a lot of us got seriously deflated. But that was then, and this is now. We're smarter, more Foolish, and we have just as many ways to profit. But the lessons still hold -- and they can help us figure out not only which companies to buy, but also which companies to short.

If you're interested in learning how to spot short-worthy stocks, enter your email address in the box below. We'll also send you our latest research the instant it's published, and our brand-new report, "5 Red Flags -- How to Find the BIG Short," absolutely free right now.

This article was originally published on March 10, 2010. It has been updated.