High-tech shakeout shows
the market is working

Here’s the real news about the high-tech boom and bust: The markets are working just the way they are supposed to work.

That there was a speculative bubble that burst is nothing out of the ordinary, or out of keeping with the workings of the economy. Economic theory holds that markets must be efficient, but that does not mean that they also must be tidy. If the sustainable growth rate for an industry is, say, 10 percent per year, the markets don’t care if that growth is a constant 10 percent annually or one year of 100 percent growth followed by nine years of zero growth. Market efficiency only requires that, at the end of the day, things must even out.

Exactly how surprising is the discovery that if a company continually spends more than it takes in, eventually it will run out of money?

Historically, bubbles happen once every decade or so. They happen mainly because, to quote the famous monologue in the movie “Wall Street,” “Greed works. Greed clarifies.” Typically, the lust for obscene profits in connection with the pursuit of the Next Big Thing causes a drastic acceleration in the evolution of trends that were already in place. Developments take place that for the most part would have happened anyway, but they take place faster.

This is not to minimize the genuine pain of people who have lost jobs or, for that matter, the drop in the value of thousands of personal portfolios (mine among them) over the last 18 months. Nevertheless, the fact is that, as bubbles go, the high-tech frenzy had more positive results than most.

First of all, technology is one of the few areas of human endeavor that can benefit from throwing money at it. Money buys more avenues of experimentation, mare lines of software code being written, more pieces of hardware being prototyped. In this regard, the high-tech bubble looks more like the Apollo moon landing than, say, Florida land development scams. As with Apollo, the drama seems to be lacking a second act, but in time it will become evident that greed helped finance a 10-15 years’ worth of R&D in the space of three or four years. (Also, don’t forget that, notwithstanding the many burst bubbles, Florida real estate has proven its value.)

Second, the boom and bust have had appropriate Darwinian survival aspects. There never was room in the market for all the contenders, but the flood of investment made it possible for a large number of contenders to determine which one was the fittest. Moreover, some companies that may prosper over the long haul never could have launched without a prodigious “burn rate” allowing them to gain scale and market share.

However, let’s not overdo the meaning of it all. Yes, Furniture.com, MotherNature.com, Toysmart.com, Streamline.com and Shoplink.com all bit the dust. But so did Jordan Marsh, Lechmere, Zayre, Bradlees, Grover Cronin and Remicks. Businesses old and new often run out of gas. The tech companies just flamed out faster.

In the end, though, the key product of high-tech greed has been the creation of a new class of businesses and expert professionals, schooled in the previously obscure art and science of e-commerce. They are now available far future projects—and there will be such projects, sooner rather than later. Ask yourself. Will there be more technology or less technology in the years ahead? More communications or less?

Moreover, another characteristic of technology is that the whole is always much more valuable than the sum of the parts. The last few years made possible the launch of a number of companies that have no long-term future on their own, but will be important to the growth of the Ciscos, Microsofts, Intels or Sun Microsystems that ultimately will purchase the startups and their innovative technologies.

It is famously said of technology products that one should be wary of Release 1.0 versions from anyone. We have just gone through Dot-coms 1.0—and there is still some development work left before we get the new economy debugged.

 

AL GORDON, an executive with the Brookline strategic consulting firm. Mary Fifield Associates, was a business writer and editor for Newsday and is a contributor to several books and magazines on computing.