The Media Meltdown

The Internet is a digital outlet for analog media. The tech sector calls it new media, but that's intentionally vague. So what is the media? It is any technology capable of storing, manipulating, delivering, or displaying information!

The Internet is an outgrowth of the computer, which places the computer at the root of today's media business. What separates the computer from every other machine that preceded it is that it's the only machine ever invented to do nothing. It takes an OS and software for a computer to do something, and today's computers can do virtually anything!

"Computers are now commodities" is a familiar refrain since the tech boom fizzled. Meanwhile, computer peripherals have become the superstars! Attach an ink-jet printer and you have a photo lab, attach a scanner and you have a copier , install a DVD player and you can watch a movie, install a 3D graphics card and you can turn your PC into a gaming machine. Diamonvision billboards, movie theater projection systems, cell phones, PDAs, PVRs, TiVos, iPods, camcorders, cameras , digital cable boxes ”computers power the world! Yet the stocks of tech bellwethers such as Intel and Microsoft plunged while the shares of peripheral darlings such as NVIDIA soared. Why? What happened ? What really caused the tech bubble to burst? Perhaps this is an oversimplification, but aside from voodoo accounting, shill analysts, crooked CEOs, and cooked books, I believe there are aspects of this story that haven't yet been told.

Broadband: The Internet's Baby

Flash back to the good old days, the Internet boom of the mid-nineties. Based on general consensus, everyone agreed on a simple plan. The content creators (media conglomerates) and content providers (tech titans) would form a partnership to acquire telephone companies, which had been a dead sector for years . The goal was to create an infrastructure to usher in the era of broadband delivery on demand. Thanks to the promise of the "fat pipe" (broadband), you could theoretically come home at four in the morning, turn on the TV, and watch Friends, last night's Yankees game, or Reverend Gene Scott ” assuming you'd want to watch anything at four in the morning. Broadband is the Internet's baby! It didn't exist before, and it would never have been invented were it not for the Internet. Broadband was a plot hatched by content providers and content creators ”in other words, technology and the media ”to control the delivery of digital content.

Napster

Everything was going fine until Napster upset the apple cart! The record labels were already up in arms over MP3, an algorithm that enabled users to compress their audio CD files to a tenth of their original size with no discernable loss in quality.

There were reasonable arguments to be made. MP3 is an archival technology that enables users to back up their music libraries. MP3 would be a boon to the floundering music business because young listeners would be introduced to generations of music that were all but forgotten. Many aging rock stars agreed with this as their record labels rushed to reissue CDs of hits from the sixties and seventies. Queen and Ozzy Osbourne were reborn! The media business remained indifferent to the music industry's objections over MP3 until Napster perked up their ears (a little like the ears on their logo)!

Figure 9.1: The Napster logo

Napster was a Perry Mason moment for the media. Silicon Valley was out to screw Hollywood! If technology could enable people to pirate and swap music, the same rules applied to other forms of intellectual property, such as television shows, movies, and books. This was war! The media no longer trusted technology, and the tech companies accused the media of screwing up a business plan that had been years in the works. The marriage was over and the partnership was off!

The Day the Tech Bubble Burst

The NASDAQ peaked at 5048.62 on March 10, 2000 and then tanked. The prevailing wisdom is that a March 20, 2000 research report in Barron's magazine predicting a cash crunch triggered the slide. The new economy had to sell its wares to somebody. The old economy was buying, but Barron's suggested that the old economy was faltering. The NASDAQ slid more than 200 points that day. The next day, the Fed hiked interest rates for the fifth meeting in a row, and the lockup period for 1999 IPO stock options expired . Suddenly more people were selling tech stocks than buying them!

On April 3, 2000, there was another coup de grace. Microsoft was found guilty of antitrust violations. April 15, 2000 ”tax day, when profits are traditionally taken and losses are declared ”was the straw that broke the camel's back. The NASDAQ closed at 3321 on April 14, 2000. It slid 1727 points from its high of 5048 on March 10, 2000. Thirty-five percent in 34 days!

That's Wall Street's side of the story, and I don't necessarily disagree . But in my humble opinion, the tech bubble actually burst a year earlier on June 1, 1999, the day Shawn Fanning launched Napster! This rudimentary peer-to-peer file-sharing program stopped the media freight train in its tracks. Delivery on demand was suddenly on hold, and broadband, which was almost ready for prime time, now had nothing to deliver. The tech companies and media conglomerates began divesting themselves of phone companies, and the communications sector was the first to tank. The media rallied behind the Recording Industry Association of America (RIAA), which sued Napster for copyright infringement. The RIAA won and put Napster out of business, but a bitter taste has lingered ever since ”the media's distrust of technology. The bottom line is that Napster froze progress, and the two biggest casualties were Silicon Valley and Hollywood!