It's easy to understand why investors fled dot-coms like a house on fire. Lots of Net companies constructed dwellings out of highly flammable cards. But not everything they built burned to the ground. Collectively, they left a rich legacy: a huge leap in information-technology innovation that will pay handsome dividends for commerce for years to come.
To start with, they scared the bejesus out of Corporate America and sent it scrambling to the Net. Corporations took a decade or more to respond to earlier threats such as globalization, says Austan Goolsbee, a University of Chicago professor of economics. By contrast, the dot-com boom "got people off their duffs" and onto the Net in just a couple of years or so.
DaimlerChrysler, for instance, went from a Web site that was just an online brochure in 1997 to one offering online quotes and access to 70% of its dealers by 1999. Why the lead foot? New interlopers such as car-buying sites Autobytel.com Inc. (ABTL ) and Autoweb.com Inc. (AWEB ) Likewise, Glen Meakem, chief executive of the Web marketplace FreeMarkets Inc. (FMKT ), credits the dot-com bubble with frightening the likes of United Technologies Corp. (UTX ) and Quaker Oats Co. (OAT ) into joining its industrial auctions: "Clearly, the fear of being Amazoned is what caused a lot of traditional businesses to go online."
Perhaps even more important for the future of the Internet, the dot-coms spurred incredible investment in Net technologies and equipment. Thanks to tech's heady promise, entrepreneurs sank tens of billions of dollars into some 100 million miles of fiber-optic lines in the past two years, built dozens of independent Internet computer centers, wrote reams of productive software, and created valuable customer databases. All that vastly accelerated the Net's build-out. Intel Corp. (INTC ) Chairman Andrew S. Grove told a Stanford University audience recently that he thinks some 15 years' worth of Internet, telecom, and e-commerce infrastructure got built in just five years--producing a huge social benefit that the government could never afford to fund.
Of course, many telecom companies, software makers, and others are struggling to survive the resulting glut. But those resources surely will be exploited by hungry entrepreneurs and crafty Old Economy companies--or even remaining dot-coms. Amazon.com (AMZN ), for one, has started offering its underused distribution system to other retailers, such as Toys `R' Us (TOY ), that don't want to build their own warehouses. So far, that business accounts for only 6% of revenues, but it produces 15% of gross profits.
The Net infrastructure now in place is sparking new ideas and startups, too. Consider various peer-to-peer software programs, which aim to pool the idle processing power of millions of computers now connected on the Net for jobs that couldn't be done by individual machines. Silicon Valley-based SETI Institute, for one, gangs up volunteers' personal computers to analyze reams of cosmic data in its search for signs of extraterrestrial life.
Most of all, consumers will benefit. They'll save money and time through online comparisonshopping, tap into new communications services, and ultimately get faster Net connections. "It's fantastic for the consumers," says Goolsbee. "That isn't going away."
No doubt this is cold comfort to investors, who had hoped to reap the benefits themselves. But the fact is, without their investments in a lot of those lame-brained, wrongheaded dot-coms, the Net would have taken many more years to flower. No one ever said the process of innovation has to be pretty.