The ‘new economy’: 20 years after the dotcom crash

The dotcom revolution of the 1990s — also commonly and more generally referred to as the “new economy” — was dead! That was the theme song of many editorials at the turn of the century 20 years ago.

It is understandable because many of the promises of the dotcom revolution — or bubble in 1999-2000 — did not materialize at the time. Almost every day between 2000 and 2002, we heard figuratively the popular song “Another one bites the dust” or “Something stupid”.

In Indonesia, Astaga!com — the symbol of the go-go dotcom pioneer — and its successor Mweb Indonesia faced a very tough and rough reality. In retrospect, the failure of Astaga!com and similar companies at that time in Indonesia is understandable. At that time, 1999, the total number of internet users and mobile phone connections in Indonesia was still small, at around 1 million. Moreover, online transactions were also not common.

Even worse, the prices of the shares of the dotcoms in stock markets all over the world simply crashed. It seemed that the prophecy of Daniel Kahneman and Richard Thaler — the 2002 and 2017 Nobel laureates in economic science — about the “irrationality” of human decisionmaking received very strong confirmation from the stock markets. This could be seen from the irrational exuberance (to borrow Allen Greenspan’s famous terminology) and irrational pessimism reflected by the extreme roller coaster of the NASDAQ Composite Index (NCI).

The rise of the NCI during the second half of the 1990s was widely regarded as the symbol of the success of the dotcom revolution. At the peak of the dotcom boom, the NCI rose in March 2000 to above the 5000 level. However, at the nadir point of the bust period, the NCI fell to as low as 1000 in October 2002. The percentage of the decrease of the NCI (about 70 to 80 percent) was worse than that of the Jakarta/ Indonesia Stock Exchange Composite Index (IHSG) in 1998 and 2008 — which was only about 50 to 60 percent.

This severe blow to investors caused a widespread perception that the dotcom revolution of the new economy was dead. But was it true that the new economy was dead? The answer is a big NO!

We need to separate the prices in the stock market (or the market indices) from the real economy. The movement of stock prices is mostly determined by the supply and demand of the stocks. Supply and demand are determined by the general perception of investors regarding the fundamentals of the companies.

The new economy, according to McKinsey & Co, is essentially the old economy plus digitization, liberalization, capital mobility and standardization. These four factors triggered the new economy, in which tangible/physical assets are no longer the main success factors for companies. These four factors — supported by accelerated progress in information and communication technology — caused a significant reduction in the interaction costs and created more incentives to be innovative and efficient.

The forces that push and pull the new economy are real and continue to affect the way of doing businesses. The digital disruption, as we have come to know it recently, is real. For example, with the emergence of online trading, the cost of trading shares is more than 90 percent cheaper now compared to the mid of 1990s.

The cost of transferring funds through internet banking is also 99 percent cheaper than its traditional alternatives. Still another example, the time it takes to search for goods/services and to coordinate and monitor business activities has decreased significantly. As a result, industries that are interaction intensive, such as the banking and retail industries, face a significant threat from fintech and marketplace platforms.

Even during the pandemic lockdowns, many people have still been able to conduct business from home or anywhere else, utilizing fixed-line phones, mobile phones, facsimile and the internet. I was recently stuck in New York and could not return to Jakarta for more than five months because of the lockdown in New York and later in Jakarta. However, I could still perform my duties as a lecturer and as a webinar speaker/trainer online by utilizing several online platforms, such as Zoom, Teams, EdLink, InterSkill, etc. People did not stop using the internet and other communication technologies just because the stock prices of some companies dropped.

According to a special report from Business Week, published on May 12, 2003, right after the 2000-2002 dotcom crisis, many surviving e-biz companies started to book real positive profits. Many bad perceptions (perhaps better called myths) about ebiz have been refuted by recent facts. Even in the capital market, the good news returned. In July 2016, the NCI, which is regarded as the representative of tech or new economy companies, finally passed its previous high, the dotcom bubble high of 5100 recorded at the end of Mach 2000, and has not fallen below that level until today. The most recent data on the top 10 most valuable companies in the world revealed that seven are new economy-type companies: Apple, Microsoft, Alphabet

(Google group), Amazon, Facebook, Alibaba and Tencent.

In Indonesia, the digital economy has grown significantly since 1999/2000. Mobile phone connections have exceeded 300 million, and there are more than 150 million internet and social media users. Moreover, online transactions have become part of everyday life.

Consequently, it makes sense that five unicorn new economy companies have become household names in Indonesia: GoJek, Traveloka, Tokopedia, Bukalapak and OVO. Other unicorns are predicted to emerge in other sectors, such as education and health care. Moreover, the recent digital disruption trend, strengthened by the external force of the COVID-19 crisis, has forced businesses around the globe to expedite their transformations toward new economy type digital business models.

In summary, 20 years after the dotcom revolution, the new economy is not dead! Its revised and improved versions have become the new reality over the last two decades. Applied and utilized properly, the positive driving forces of the new economy will help and support economic recovery around the world and specifically in our beloved country. Welcome to the new and better version of the new economy — a healthier and more realistic new dotcom revolution!

By : Roy Sembel (Professor at IPMI International Business School.) – THE JAKARTA POST

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