Boom, Bust, and Beyond

Adam L. Penenberg
Fast Company, 3/2006

In 1876, the president of Western Union brushed off Alexander Graham Bell’s telephone as little more than an “electric toy,” and the company called Bell’s proposal to put one in every home “utterly out of the question.” Oxford University professor Erasmus Wilson predicted that when the 1878 Paris Exhibition closed, the electric light would “close with it and no more will be heard of it.” A Michigan banker advised his client not to invest in Henry Ford’s company in 1903 because “the horse is here to stay, but the automobile is only a novelty.” And Microsoft founder Bill Gates freely admits he was years behind in seeing the promise of the Internet.

If the past two centuries are any guide, great technological innovations — railroads, telegraph, telephone, electricity, cars, radios, the personal computer — must overcome initial skepticism, if not abject fear, before they can take root. But then there is the inevitable cycle: Entrepreneurs begin to recognize a novel technology’s potential; newcomers rush into the market, drawing venture capital, which in turn spawns even more companies and investment. Because stock price in this phase is pegged to possibility, not revenue and profit, almost all of the players do well, even though most, if not all, bleed red. Some succeed spectacularly at this Ponzi-like scheme. Share prices shoot skyward in a speculative frenzy.

Eventually, though, reality sets in. After burning through their cash, companies start to fold, leaving investors to wonder when and how someone will actually make money. Pessimism supplants enthusiasm. Stock prices crash and the economy tanks until, over time, the core technology is woven into the fabric of life and the market stabilizes. It’s a cycle of boom, bust, and sustained growth (a golden age, if you will), followed by decay when a better mousetrap comes along.

Bubbles don’t recur because people have failed to learn from experience, however. They are a necessary stage of technological development. After railroads supplanted canals as the hot investment of the early 19th century, they followed essentially the same arc. According to Alasdair Nairn, author of Engines That Move Markets, between 1825 and 1826 about as many railroads were founded as had been started in the previous 20 years. And when the market crashed, it crashed hard. By the mid-1870s, 40% of American railway bonds were in default and bankruptcies surged.

But the bubble wasn’t for naught. Before the crash, 45,000 miles of track had been laid; by 1900, there was a national network more than 200,000 miles long, and this made it possible for the United States to grow and prosper from the Atlantic to the Pacific. Similarly, the later rise of the automobile spurred the development of the American highway system, which ate much of the railroads’ freight business but helped populate the entire country.

Capacity, or rather, overcapacity, is the key to progress. And broadband is the new railroad, the new highway system, the new electricity. After all those years of laying fiber-optic cable, DSL, and other high-speed lines, we have almost more capacity than we know what to do with — so much that we use only a fraction of it, perhaps 1% or 2%.

So begins the postcrash push, when all of this investment begins to pay off. Broadband Internet use in the United States jumped from 6% in June 2000 to more than 30% in 2003. Today, more than half of us have access to broadband at home or work. (Most of us, significantly, signed up for it after the dotcom crash.) Now, instead of engaging in theoretical thumb sucking about “what broadband will mean,” we’re doing something with it. And unlike the 1990s, when experiments failed because entrepreneurs misunderstood the Internet’s usefulness, or because it simply wasn’t ready, we’re working with a known quantity. It took 30 years for electricity to have a serious impact on the U.S. economy, after all, but by 1930, virtually every home had juice and it was driving refrigerators, toasters, lamps, radios, and other appliances. As Henry Blodget put it, our exuberance, irrational or otherwise, builds industries.

We are about to experience a similar, but vastly accelerated, process. With the data pipes open, though, we’ll quickly see what our companies are made of. Those most adept at leveraging all of that capacity within their own markets are most likely to flourish over the coming decade and beyond. It’s an almost Darwinian challenge.

In the pre-pipe era, economists classified companies in one of three ways: the service sector, manufacturing, and extractive industries like mining and fishing. Now the relevant categories might better be thought of as natural techs, eager adapters, and foot draggers. Natural techs — companies that sprouted from technology, such as online media empires (Google, Yahoo), software vendors (Microsoft), chip manufacturers (AMD, Intel), computer-hardware producers (Dell), and mobile-device makers (Apple, Sony) — have broadband in their veins. Most of them got their starts back before the days of the 56k modem, but broadband only makes them fatter.

For the willing adapters — traditional companies that were quick to integrate broadband, building all manner of internal systems around it — this is also a time of great opportunity. Wal-Mart jumped on info tech early and rode it to the top of retail; the company has even begun using radio-frequency identification (RFID) tags to track products from supplier to store. But broadband doesn’t discriminate based on size. Small startups already shave serious money off their phone bills with Skype’s Internet telephony. Others harness the power of peer-to-peer computing to distribute everything from software to video, and skimp on rent by setting up completely virtual offices, with employees spread across the globe.

Then there are the foot draggers, the conflicted companies whose very souls are threatened by this digital efflorescence. To survive, they’ll need to negotiate a gigantic psychological hurdle, relocating from the material world to the ether. That will often mean becoming complicit in the creative destruction of their own business models and finding new ones to replace them.

Newspapers, for example, have to commit to a world without paper and ink. The efficiency of Web distribution makes all of that tree cutting and printing, trucking, and delivering seem so last century. But abandoning print is terrifying for a business that, until Google and Craigslist began siphoning off advertising, enjoyed 30% profit margins. And it’s made even harder by the fact that the identity of nearly everyone in the industry is bound up with seeing that paper — that unwieldy, inky object — appear every morning. Likewise, book publishers, hobbled by return rates of 40% or more, are going to have to follow HarperCollins and Random House in digitizing their catalogs for e-books. That would likely bail out their notoriously low-margin businesses, but it’s a leap many tweedy types are loath to take.

But leap they must. The pipes have been turned on, and those data are going to seep into everything. Yes, that means 50 more iterations of the iPod and TVs wrapped around PCs, complete with cheap downloads of every movie on the planet. But in the next 10 years, the Internet also will invade your appliances, even your clothes. And just as you wouldn’t dream of being without a telephone now, the thought of being offline will be unthinkable. Universal wireless broadband — which is where all this is heading — will mean that firefighters can turn red traffic lights green from a speeding truck, download building blueprints en route, and perform real-time tests on hazardous materials once they reach the fire. Police will be able to tap into a bank’s surveillance cameras to get a head start on cracking crimes. Electric utilities will read meters remotely. Citizens could feed parking meters with credit cards instead of hunting around for quarters, and report potholes, poor garbage pickup, or dead streetlamps by emailing cell-phone-camera pictures to city officials.

More generally, though — and more important — the fluidity of information will bring about a radically democratized society where consumers enjoy unprecedented power. Businesses will be forced to meet our expectations or face our ire, which will be amplified through countless channels (from blogs to search engines of video and text, to others yet to be developed; there will be such a thing as bad PR). Government, too, will have to reckon with us, as millions of interconnected eyes keep watch. Confronted with the ever present threat of cascading viral protests, boycotts, and bloc voting, our representatives will be brought to a level of accountability they’ve never known. The ombudsman will live within us all.

Of course, any leap into the unknown leaves some bodies broken on the rocks below. After the introduction of electricity, the U.S. population grew by 15% between 1910 and 1920, but the number of personal servants fell 25%, replaced, in large part, by appliances. The same process — “disintermediation” in Web jargon — is happening right now: Since last summer, retail employment has been sliding, even as online holiday sales rose 24% from last year, to almost $20 billion. Ten years ago, online retail barely existed; 10 years from now, it may be the only kind that’s left.

There is another downside to the coming ubiquity of the Web: the threat to privacy will get worse before it gets better. All of this digital connectedness means that marketers can rifle through our credit files, hackers can steal our personal information, and the government can spy on us. It wasn’t until George Westinghouse invented the air brake in 1868 that trains could run faster and pull hundreds of cars. Our technology-saturated society needs an analog to keep our private lives from being crushed. You leave footprints everywhere you go in cyberspace: Google conceivably knows every term you’ve searched for; Yahoo can store every email you’ve sent and received; your ISP knows who you are; and if you talk on a cell phone or send text messages from your PDA, your provider (and the FBI) can find you. You have only the illusion of anonymity.

Until someone picks the lock on that little problem, we’ll have to cough up the Internet equivalent of protection money. (You weren’t counting on the government for help, were you?) In the same way we pay extra for an unlisted phone number or caller-ID block, we’ll pay companies to mask our identities online and assure our credit offline. In an imperfect world, the more our personal information gets out there and the more valuable it becomes, the more incentive there will be for companies to guard it for us. It becomes just another industry born of all this postcrash excess bandwidth.

Historian David Nye wrote, “People do not merely use electricity. Rather, the self and the electrified world have intertwined.” The Internet, too, is being braided into our lives, and that will probably make us stronger — even if it leaves a few of us hanging.

Copyright 2006 Adam L. Penenberg (