AI Bubble: Why is AI being compared to the 'Dot-com Bubble'—and what will happen if this bubble bursts?

AI is being hailed as one of the greatest technological revolutions of this century. It is being described as the most significant transformation since the advent of the Internet. Today, every new tech company seeks to join this race by simply appending "AI" to its name. However, the reality of AI appears to be quite different from this dazzling hype. Major tech giants—ranging from Google and Microsoft to even the ride-hailing company Uber—have acknowledged that expenditures on AI are constantly on the rise. Microsoft, in fact, went so far as to discontinue its subscription to Claude due to these escalating costs.

Meanwhile, one company claimed that its entire annual budget was exhausted in just four months solely because of AI-related expenses. Driven by increasing investments in AI, global corporations such as Google, Microsoft, and Meta have collectively laid off over 100,000 employees to date. On one hand, people's jobs are at stake due to AI; on the other, the valuations of AI firms like OpenAI and Anthropic are poised to touch the $1 trillion mark.

Nevertheless, many tech experts believe that AI is destined to follow the same trajectory as the dot-com (.com) companies of the 1990s. Numerous experts predict that, much like the dot-com bubble, the AI ​​bubble is also on the verge of bursting. Let us explore in detail why these two eras are being compared and what potential consequences the bursting of this AI bubble could have on the global economy.

**What Was the Dot-Com Bubble?**
In economics, a "bubble" refers to a situation where the price of an asset or stock inflates to a level many times higher than its intrinsic value. The "Dot-Com Bubble" describes the period between 1995 and 2000, during which the share prices of internet-based companies (those featuring ".com" at the beginning or end of their names) experienced an unprecedented and unrealistic surge.

This phenomenon is also referred to as the "Internet Bubble" or the "Tech Bubble." During this period, every company with a connection to the internet was becoming worth billions in the stock market overnight—even if it lacked a solid business model or any viable means of generating profit.

**How ​​Did the Dot-Com Bubble Begin?**
**The New Era of the Internet:** In the 1990s, the World Wide Web (WWW) began to become accessible to the general public. Investors came to believe that the internet was the future, and that any company moving online would generate immense profits.

**Cheap Credit and Venture Capital:** At the time, interest rates were low, and there was no shortage of capital in the market. Venture capitalists were pouring money indiscriminately into internet startups, without scrutinizing how the companies would actually operate.

**The 'Growth Over Profit' Strategy:** Instead of focusing on generating profits, companies prioritized expanding their customer base as rapidly as possible. They were spending money lavishly—like water—on marketing, advertising, and offering discounts.

**IPOs by Unprofitable Companies:** Many companies that were operating at heavy losses launched their Initial Public Offerings (IPOs); upon listing on the stock market, their share prices skyrocketed. The tech-heavy U.S. index, NASDAQ, surged by over 400% between 1995 and 2000.

**When the Illusion of Internet Companies Shattered**
The bursting of the Dot-Com Bubble impacted not only the United States but also stock markets across the entire world.

**Losses Worth Billions of Dollars:** By October 2002, the NASDAQ index had plummeted by approximately 78% from its peak. In this downturn, investors lost nearly $5 trillion ($5,000 billion).

**Companies Went Bankrupt:** Many prominent and major companies—such as Pets.com, Webvan, eToys, and Kozmo.com—went bankrupt overnight and ceased operations entirely. Even Industry Giants Took a Hit: Shares of robust companies such as Cisco, Amazon, and Qualcomm witnessed a massive decline of 80 to 90 percent. However, thanks to their strong business models, these companies successfully managed to recover from this major shock. Amazon's stock, which had been trading above $100, plummeted to below $6.

The Impact of the Dot-Com Crash on India
The impact of the bursting of the dot-com bubble on India was significantly more limited compared to that on the United States and other Western nations. The primary reason for this was that, at the time, the Indian stock market was not heavily invested in the shares of technology companies. Nevertheless, amidst the global uncertainty, the Indian stock market also suffered heavy losses, and many investors lost their capital. However, the crisis was not widespread enough to trigger a severe economic recession in India.

Disclaimer: This content has been sourced and edited from Amar Ujala. While we have made modifications for clarity and presentation, the original content belongs to its respective authors and website. We do not claim ownership of the content.