This Is How a Bubble Bursts

Well, if you wanted to know what it was going to look like when the Net bubble burst, now’s the time to find out. Amazon is at $92 a share, down from a high of $221. CMGI, whose CEO, David Wetherell, told Barry Diller that he had no idea how valuable Lycos (which CMGI owns a big stake of) really was, is now at $75, down from $165. Lycos is at $70 a share, down from $145. Yahoo is at $119, down from $244. And AOL (which I, painfully, own) is at $90, down from $175. That, by any account, is a real sell-off, especially when you consider that most of these stocks hit their all-time highs just a few months ago.

The carnage among the non-blue-chip Net stocks has been, if anything, even more savage. is at $25 a share. On its first day of trading–which was, oh, about a month ago–it hit $71 a share. iVillage, meanwhile, whose precipitous rise prompted so much breast beating among New York journalists, is now at $33 a share, down from a high of $130 (that’s a 75 percent decline). And, whose stock rocketed something like 600 percent on its first day of trading, is now at $15 a share, down from an all-time high of $48 a share.

What’s happened was, of course, in some sense inevitable. So much of the money that went into Net stocks was “hot money” looking for short-term gains and trading off momentum that when sentiment turned against the sector the floodgates were bound to open. And the sell-off has been compounded by the fact that people are still buying Net stocks on margin, which means they’re getting margin calls, which means they’re having to sell stock to meet them. Ah, memories of 1929.

But it’d be a mistake to downplay other, more important factors. The rise in interest rates to above 6 percent has made equities in general and high-risk equities in particular less attractive as investments. (If you can earn 6 percent instead of 5 percent on your money with no risk, the bar for what return you expect from a very high-risk stock is raised accordingly.) So many Net companies have gone public in recent months–many of them with dubious business prospects–that the supply of Net stock may finally be outpacing demand, at least in the short term. And then there’s eBay.

The Net crash has been going on for so long–long in Net time, that is–that you can’t blame it on the 22-hour outage that crippled eBay last week. But it’s no coincidence that the stock plummeted 18 percent today after falling 12 percent on Friday and that the rest of the sector tumbled with it. For what eBay’s outage illuminates is what you might call the negative network effect.

The network effect is the name for the by-now well-known phenomenon that any network–a phone network, the Internet–becomes more valuable (arguably geometrically more valuable) the more people use it. If one person has a phone, it’s decoration. If two do, suddenly the phones are useful. And if 10 million do, the phone’s impact becomes really important. And so on.

The same is true of eBay. Because it has signed up so many millions of auctioneers and auction-goers, it has become the first place that people interested in buying and selling go. There’s just so much more stuff available there and so many more people to sell stuff to that going anywhere else, even to Amazon (which now offers auctions), seems foolish. And so eBay has kept getting more customers because it has so many customers.

In the wake of last week’s outage, though, the number of items offered on the site has noticeably fallen, by at least 100,000, as far as I can tell. (eBay puts the overall number of items up for sale on its main screen.) For some reason I always check a few specific categories, and I’ve always been struck by how consistent the number of items offered is. There have always been somewhere between 65 and 75 items having to do with Secretariat, for instance. And there have usually been around 11 to15 Cormac McCarthy books. Today, there were just 43 Secretariat items and just seven McCarthy books. To me, those seem like significant drop-offs.

The negative network effect, then, is that even if the number of auctioneers and customers drops as a result of concern about the eBay system’s reliability, it will continue to drop just because it’s dropping. I wouldn’t be surprised if a month from now eBay’s numbers are back where they were before last week. The Internet is not going away, and its economic potential has not dimmed because of what’s happened in the past week. But the fragility of that potential–and of the entire economic landscape of the Net–is startling, and a lot of the investors running for the door these past few days apparently don’t like being startled.