Flipped Lecture: Bubble

This is a story about the founders of Amazon and eBay and how they turned their businesses from nothing into something everyone wanted to be a part of. Even back in the day, we humans have always been obsessed with shopping, be it clothes, furniture or even groceries, and it is exactly this activity that led to the imminent evolution of capitalism. But then came a new phase of capitalism and this new phase, ushered in by a revolutionizing technology – the World Wide Web, Amazon and eBay, changed the way we buy and sell.

Amazon and eBay first emerged on the market in the 1990s. Amazon was born in a garage in suburban Seattle and it was created by a man named Jeff Bezos. Bezos started out on Wall Street in the early 90s and was known as a “spreadsheet junkie”. Bezos had an idea, one that revolutionized the way we do business. His idea was online shopping. He created a list of potential products to be sold and books were first on his list. He dreamt of creating a place where people could look up book titles and buy them without the hassle of taking a trip out just to get it. His dream was to create the world’s largest online library, and he succeeded. Amazon went live in the summer of 1995. Around the same time, the founder of eBay, Pierre Omidyar, came up with a similar idea. His plan was to construct an online auction place for the general public. This project was later dubbed, eBay and was launched in September of 1995.

Both Bezos and Omidyar thought of the web as a place to do business and the moment they went live, they were an instant success. 30 days after Amazon was launched, the site shipped books to 45 different countries and in all 50 U.S. States, while Omidyar earned thousands of dollars in fees in the span of a few months. Both companies had explosive growths. Things were looking up for both Amazon and eBay. But little do they know, their successes were short-lived. History shows us, time after time, where there is a breakthrough in technology, there will be consequences. To illustrate my point, an advance in technology results in a large number of risky startups. Investors will dash to lay their hands on the latest piece of technology, this in return causes bankruptcies, foreclosures and stock market emulations.

Amazon’s IPO took place in the year 1997 and back then, it had little or no revenue and was not earning any profits. Regardless, Bezos would still lower the book prices whenever he got the chance. His argument for this being, and I quote,

Profits could and should be sacrificed temporarily in favor of rapid growth.

It wasn’t that profits weren’t important, it just wasn’t his priority at that time. Bezos’ marketing strategy could be expressed in three simple words – get, big, fast. But for this strategy to work, Amazon needed their customers to trust them with their credit card numbers. This problem was later solved with an invention by some mathematicians who go by the names Diffie, Hellman and Merkle. The mathematician trio introduced public key cryptography, which in time became vital in secure e-commerce.

On the other hand, Omidyar too was having problems of his own. eBay was scheduled to go live in September 1998, but nobody, especially those on Wall Street, took him or his business seriously. So, the reached out for help and Meg Whitman, marketer at World Disney and top executive at Hasbro, was the woman for the job.

Both Amazon and eBay had yet again managed to come out on top. eBay’s stock went through the roof on the same day they got their IPO, while Amazon’s shares doubled in the span of just a few weeks, and that was but the beginning of the crazed bubble.

Amazon and eBay got insanely popular, which resulted in imitators and sites like Razorfish, Pets.co and Loudey emerged on the market. The minds behind these sites, however, had no strategy or basics of economics, but they still manage to round-up enthusiasts and/or investors. The reason for this being, people were willing to bet and they were willing to throw out a couple of million just so they wouldn’t miss out on the big score.

A lot of e-commerce companies were fundamentally unsound. But this wasn’t necessarily a good reason not to buy their stocks – Henry Blodget

By that time, it was blatant that we were living in a speculative bubble and after realizing that the overall economy was close to overheating, Alan Greenspan, Chairman of the Federal Reserve Bank took matters into his own hands. Wall Street too started getting more sensible. But it was too late. The stock market crashed, people got angry and throughout everything, approximately 300 trillion was lost. It was the biggest collapse in the history of the stock market and people referred it as Black Friday. Many big companies went out of business, Amazon and eBay however survived. They prevailed because they both understood the importance of the masses.

We set a new standard for customer service – Jeff Bezos

It’s all about the empowering people, regular people, to use the tools in a way that they see fit – Pierre Omidyar

Some people see the bubble as a bad thing, to which the Chairman of Intel disagreed.

what this bubble craze did was draw untold sums of billions of dollars into building out the Internet infrastructure. Everything from fiber optic cable to Amazon’s customer database and while that infrastructure would probably have been built anyway, it happened over 5 years instead of 15 – Chairman of Intel

In the span of a few years, we have gone through a wave of innovation, financial mania and a horrible stock market crash and the companies that suffered from the crash acted as a guideline to make the newer ones more sustainable. Since then, new classes of companies, such as YouTube, Digg and Facebook have materialized. Take YouTube for instance. YouTube was founded by Chad HurleySteve Chen and Jawed Karim and like Amazon and eBay, it was started in a garage. When it went live, the company encountered rapid growth within its first few months. As of 4th April 2006, Venture firm Sequoia Capital invested a total of 11.5 million dollars into the company and a day after that, Judson Laipply uploaded a video titled “The Evolution of Dance” and it became the most popular clip in YouTube history, with a combining total of approximately 131 million views. After that, YouTube continued gaining popularity and today, YouTube is localized in 43 countries and across 60 languages, it gets over 800 million visitors each month and has 72 hours of video uploads every 1 minute.





1 comment
  1. epistem5 said:

    That is a cool story. Makes me want research eBay and the others to get an understanding of their approach.

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