Volume Number: 16 (2000)
Issue Number: 8
Column Tag: Viewpoint

Viewpoint

by Jordan Dea-Mattson

Of Tulips and Dot.COMs

A Mania for Tulips

In his book Extraordinary Popular Delusions & the Madness of Crowds, Charles MacKay recounts the history of the Danish Tulip Mania of the 17th Century. It is a fascinating story that has definite lessons for us today.

Tulips were originally introduced to Europe from Turkey in the mid-1500s. Their beauty made them popular among the well to do and having various varieties in your garden soon became a status symbol, if not a requirement for being considered a cultured individual. Soon, connoisseurs, desiring to one-up one another, would focus on getting the right variety of bulbs, so that their gardens would be "just right".

As you might suspect, as the popularity of tulips grew, the demand for tulip bulbs drove their prices higher and higher. Ordinary people seeing the price for individual bulbs double and then double again soon started buying them - not to have them in their gardens - but as investments.

Holland was hit particularly hard by the mania for tulips. An entire industry of tulip exchanges and brokers sprung up, and soon ordinary folks were emptying their bank accounts and mortgaging their homes to get in on this sure-fire way to riches.

A "crash" - or to use the new and improved, politically correct phrase, a "correction" - finally came, and when it did it was bloody. People lost their homes. Families were bankrupt. People's "sure thing" investments in tulip bulbs returned to being what they were originally: the source of beautiful flowers.

Today's Tulips

For the last several years - up through March of this year - anything that smelled of "dot.com", "Internet", "digital convergence", or "new economy" was the "sure thing" that would bring you untold riches. For a while - as in the Danish Tulip Mania - it seemed to hold true. You could invest in almost any "half-baked" idea - and lets be honest here, they were ideas not companies - and you would double your money in a couple of months.

But when you dug into these ideas you found that many of them weren't and wouldn't ever be ready for baking. People were launching magazines on the Internet - a very tough business, just ask our publisher - like Salon.com, and commanding valuations that you would never find placed on an established magazine with a stable subscriber base and lots of faithful advertisers. It was absurd.

Even that darling of the Internet's new economy, Amazon.com - which when you dig into it is only a very slick and efficient retailer - was and still is, even at around $30 a share, absurdly overvalued.

And like in the Danish Tulip Mania, a whole industry has grown up around the trading of our latest mania. There are web sites - many of which, in the greatest of ironies, have gone public as part of our Internet Mania - chat rooms, magazines, and mutual funds, all of which are focused on driving the Mania forward.

And, like the Danish Tulip Mania, our Internet Mania seems to be unwinding itself to an extent. As I write this column, the NASDAQ has finished a week long decline. A decline that has former Internet darlings like Amazon.com and e-toys further in the red than ever before. The mania part of the Internet seems to be - unlike the Danish Tulip Mania - imploding softly.

It Isn't All Mania

If you are reading this column, you in all probability agree with me that the Internet is going to change the way that we live across the board. You probably agree that we haven't seen but a glimmering of the beginning of the changes it will bring. This is true, but it is going to be a long-hard road to the "Promised Land". Unfortunately, it is going to be a long road with a lot of potholes along the way.

The mania isn't over. It has just subsided for a while. In the years ahead, there will be Internet related gold rushes from time to time. Gold rushes that will happen, because in large part "there is gold in them hills..." This is the fundamental difference between the Danish Tulip Mania and our present dot.com mania: if you dig hard enough, you can find value.

Making Money in a Gold rush

In the California Gold rush of 1849 - and any of the others I have studied - for every person that struck it rich prospecting for gold, there were hundreds that lost everything. It wasn't the miners or the prospectors that made fortunes.

The folks that struck it rich in each and every gold rush were those that provided goods and services to the miners and the prospectors. It was people selling denim jeans - does the name Levi-Strauss ring a bell, food, laundry service, tools, banking, and recreation.

This is a lesson that we should keep in mind as we survey the business prospects in the "new economy". Over the last few years I have watched friends and acquaintances stream into the businesses of the "new economy" one by one. I have seen them go to one "sure thing" after another. They have gone to web-tailers, and business to business exchanges. They have joined network infrastructure companies and system integrators. By and large they are all doing well, but the ones that are most secure are the ones that are selling something to the "miners" and "prospectors" of the Internet gold rush.