The boom is back

Amazon, the pioneering online retailer, celebrated its 10th birthday last night with a live concert, streamed on its website, featuring Norah Jones and the B-52s; eBay, the auction site, celebrated its 10th anniversary by inviting the B-52s to perform at its users' conference earlier this year. But the biggest celebrations are likely to be among the shareholders who bought in early and stayed on board through the lean years of 2000 and 2001. For dotcom shares are back in vogue, in America at least, and valuations are once again at eye-popping levels.

Google, the web search company and the youngest of the dotcom giants at just seven years old, is valued at $84 billion - or around six times the value of Reed Elsevier, which publishes more than 10,000 journals, books and periodicals and has 3,000 websites. At $47bn, eBay's market value is almost twice that of Sears Corporation, yet the auction site's $3.3bn of revenues is less than one-sixteenth of those generated by 3,800 Sears and Kmart stores. Amazon is worth five times as much as bricks-and-mortar bookseller Barnes & Noble even though its total sales - a quarter of which are electronics and other general media - are only 50 per cent larger. So, has dotcom hysteria returned, at least on the other side of the Atlantic?

The performance of Google since its flotation certainly suggests it has. Floated at what some commentators thought was an inflated $85 last August, Google shares have soared to more than $300 and analysts are now setting targets of $350 or even $400. That has echoes of the bubble years of 1999 and 2000, when analysts competed with each other to set the most stretching targets for dotcom shares - targets which were rapidly exceeded as the prices soared to ever-dizzier heights.

The other dotcoms are also doing well, although they are off the highs hit earlier this year. However, eBay's shares are well above the peaks reached during the bubble and, while Amazon and Yahoo have yet to get back to those levels, both are trading at more than 10 times their post-bubble lows.

On the plus side, these dotcoms can claim they survived the lean years while many others - like webvan, etoys, pets.com and our own boo.com - have disappeared without trace. And all four giants can also claim to dominate their space: Google is the first port of call for most web searches; eBay has 147 million users, roughly equal to one in every 40 of the world's inhabitants; Amazon, despite intensifying competition, is still the leading internet retailer; and Yahoo has succeeded in establishing itself as the leading operator of internet communities where others such as AOL have failed.

And while big traditional companies - including even the mighty Wal-Mart - are struggling to maintain their sales growth, most of the dotcoms are still on an exponential curve. At Google, although the rate of sales growth has halved in each of the last two years, in 2004 it was still running at 118 per cent. And eBay has the distinction of having been profitable ever since founder Pierre Omidyar sold the first item, a broken laser printer, for $14 in 1995. Last year, its sales and net income rose by 50 and 75 per cent respectively.

However, some are now starting to question how long such spectacular growth rates can be sustained. A couple of disappointing earnings statements from eBay and Amazon, in particular, have taken some of the froth off their share prices. And investors will be closely watching the second-quarter earnings statements, due out over the next three months, for signs of what the future will hold.

Scott Devitt, vice president of internet equity research at Legg Mason Wood Walker, thinks that all the dreams that fuelled the Nineties internet bubble are now coming to fruition. He sees 'massive opportunities' for switching more and more of our media viewing from the television to the internet as broadband connections get faster and faster. And he thinks eBay and Yahoo will justify their share prices - although Google, he says diplomatically, 'has not yet reached the point where its valuation starts to look rational'.

If that does happen, the potential for revenue growth in some of the online companies is enormous. Google and Yahoo, for example, still generate the majority of their revenues - 99 per cent and 80 per cent respectively - from advertising, whether in the form of 'paid search' (where businesses pay to appear high up in a list of search results), pop-ups or banner adverts. And, while that revenue has been growing strongly, it still represents just 4 per cent of global advertising budgets. Yet, on average, we spend between 15 and 20 per cent of our time online - about the same amount of time as we spend watching television.

Also, advertisers are starting to appreciate the greater potential of online advertising. Jaap Favier, research director with Forrester Research, points to the success of Volvo's advertising campaign in the US last year, where internet users were given the chance to win a new car if they registered their email address, which was then used to remind them about new models and offers. Volvo reports that three times more people than usual visited its dealerships after the campaign, and it retains the email addresses of millions of people who have actually expressed an interest in its products.

Favier says that traditional media such as newspapers are already suffering from adverts migrating online. Many of the items in old classified 'for sale' columns, for example, are now auction items on eBay; and monster.com was last week offering 44,000 jobs in Britain alone and has sites in 22 other countries.

The dotcoms are also working hard at expanding their own businesses. While the early years were all about technological wizardry, these days the businesses require more conventional management that is able to work out how services can be extended - and how the companies can generate extra revenues from them. Indeed, of the four giants, only Amazon is still run by its founder, Jeff Bezos, and there have been some rumblings among investors that he should consider standing down in favour of an outside professional. At Google, Yahoo and eBay, the founders remain on the board, but chief executives and other officers have been hired from outside the group

Amazon is perhaps most at risk from competition, both from other shopping websites and conventional retailers with internet services. Already it has expanded to offer electronic products and secondhand book sales as well as offering web services to companies such as Marks & Spencer that do not want to run their own online operations. Meanwhile, eBay has recently bought shopping.com, a price comparison website that will be integrated with its own services, and Yahoo is working on new products that will help it raise more revenues from searches.

Nick Evans, who runs Framlington's Netnet and Nasdaq funds, thinks there will be a lot more consolidation among internet offerings. 'Content will become increasingly important,' he says, as broadband allows internet service providers and companies like BT to compete with cable and other television channels.

Will that mean more deals like AOL's purchase of Time Warner, the - now largely unwound - merger that epitomised the madness of the internet frenzy? 'That was ahead of its time,' said Evans 'And it was flawed because AOL, the purchaser, did not have a very good business model. It charged for a "walled garden" of information which was available elsewhere on the internet for free.'

Generating, and growing, revenue in those circumstances remains the dotcoms' biggest challenge.

Victims of hype

Amazon, eBay and Yahoo were not the only dotcoms generating excitement five years ago, but many of the others are remembered only in the annals of business books on how not to run a company, or in the website www.f***edcompany.com, which posts example of corporate excess to this day.

Britain's most famous dotcom was undoubtedly Lastminute, whose flotation in 2000 marked the peak of the internet boom. While its website still exists, it has never lived up to the hype. Briefly valued at £800 million, it was sold earlier this year to US Sabre Holdings, owner of the Travelocity brand, for £577m. Brent Hoberman, one of its co-founders, remains its chief executive but his partner, Martha Lane Fox, left in 2003. Both have, however, done rather nicely out of the business: Lane Fox's stake was worth £13.5m when sold; Hoberman pocketed £26m.

The prize for the most notorious dotcom goes to Boo.com, which managed to burn through more than £85m without creating a viable business. Founded by Swedish model Kajsa Leander and her partner Ernst Malmsten, its lavish spending and expensive advertising during a short life as a business epitomise the excesses of the era.

But there were plenty of other casualties. Pets. com was one of the first e-tailers to file for bankruptcy, but it was quickly followed by others, such as etoys.com (valued at $2 billion when it floated in 1999) and clickmango.com, which featured actress Joanna Lumley on its website.

QXL.com, our homegrown rival to eBay, still exists, but it never really challenged eBay, which had launched two years earlier in the massive US market. Earlier this year, Dutch group Florissant launched a £13.6m bid for the group. That is a little over a third of the value of founder Tim Jackson's stake when the business was floated.

The dotcom frenzy sparked a similar mania among advisers: every venture capital firm had an internet team, many of whom rubbed shoulders at the First Tuesday networking forums for financiers and entrepreneurs.

It also spawned a network of analysts who vied with each other to talk up stocks. The most famous was Merrill Lynch's Henry Blodget, who was barred from the securities industry for life because of claims that he was talking up internet stocks to win business for the broking firm.