The Role of Bubbles in Technology Shifts

The What

I gave a talk at the Design Of Understanding conference few weeks ago about technology prediction, a part of which was about the role of hype and bubbles in technology, been meaning to write it up, but this is it in a nutshell.

Bubbles are the last stage in the Creative Destruction cycle as one technology overtakes another.

This sequence is quite well described by Carlota Perez (see slide above)

In essence, the new is always suspect and the old has all the big battalions on its side to prevent the new succeeding. Machavelli recognised this a long time ago when he wrote:

“There is nothing more difficult to take in hand, more perilous to conduct, or more uncertain in its success, than to take the lead in the introduction of a new order of things.

For the reformer has enemies in all those who profit by the old order, and only lukewarm defenders in all those who would profit by the new order, this lukewarmness arising partly from fear of their adversaries … and partly from the incredulity of mankind, who do not truly believe in anything new until they have had actual experience of it.”

The Why

For the Best New to emerge, there is a period of Darwinian evolution as all the new new things compete to get over The Chasm and establish themselves in the market. In technology, the very disruptive new things can often asymmetrically hurt the business models of the Old (ie the small newcomer can afford to undercut the existing behemoths for a while), and this is of course exploited (in what we call "Pirate World" )

But the Pirate World in itself is not enough to shake the Old, which has many advantages - cashflow, and typically recourse to other blocking forces like political access and regulation, and besides has the resistance of the late adopters and the reluctance of the lukewarm supporters of the new on its side. Also, the New often needs complementary infrastructure and other parts of its own value delivery chain to be built, plus money to bribe persuade the reluctant mass market to buy early.

The How

The role of the Bubble is to give the New Things a sufficiently large amount of fast, cheap money (as in you know most of it will be worth nothing) - a Tsunami of Cash - to wash the foundations of the Old away. The role of Hype is to stoke the Bubble, so that the Wisdom of Crowds is converted via Irrational Exuberance into the Madness of Crowds.

Perez's view is that the bubble then leads to a "Golden Age" when the services can be built out in relative calm, on massively discounted assets (eg the huge amount of pipe, power, port and ping left over by the dotcom crash). My observation is that the creation of the new involves the destruction of the old, but also carries significant collateral damage - the destruction of the Irrational Investors' wealth (or not, if you are a bank and too big to fail) which means not all new agers will see it as Golden.

The So What.

In my view, the Facebook IPO is the final act of the Hype cycle of the coming Social Media bubble. Just make sure, in your Irrational Exuberanace, that you are not one of those creatively destroyed in this last part of the cycle.

Incidentally, for the Dinosaurs, Riepl's law shows that the Old do not die, they gradually fade away....

A very useful update comment:

I found Fred Wilson interviewed Carota Perez at Web 2.0 Expo last year, and this copy of her presentation at Web Expo 2.0. Soem of what i mention here she talls about. Cracking stuff, though I'm not sure about her synthesis of the latest financial bubble burst.....