We’ve Seen This Movie Before
One of the many aspects of the technology industry I have to study as an industry analyst is the macro-economic trends. With that in mind, I have been following with great interest media and financial analysts’ discussions about whether a new tech bubble is in the works. I live and work in Silicon Valley so I hear a lot of diverse viewpoints on this topic.
There are certainly things to fear if and when any type of tech bubbles happen; however I believe that what we are entering is a not a new tech bubble. Instead we are starting a massive global technology build out.
Technology Is Embedded into Our Social Fabric
There are a number of market principles at play that give me confidence that this is what is really going on at the moment. For most of the last two decades, we were quite happy when each year we sold hundreds of millions of PC’s worldwide. But now we are selling just over a billion digital devices a year now, and by the end of 2015 it is predicted that we will sell closer to 2 billion digital products each year worldwide.
The first principle is that the personal technology industry as a whole has reached maturity.
A mature market is one where consumers have reached a level of familiarity with a product segment, and their personal choices and preferences are being factored into their buying decisions. Automobiles are a mature market, for example. We shop for cars knowing mostly what we are interested in; our preferences factor into our decision. Prior to a market maturing there is the unknown. Consumers have to experience and understand a product before they know exactly what they want. Tablets, for example, are a new segment and by no means a mature one yet. And smart phones are in the early stages of maturity as well.
When an industry is in the process of maturing, it is more volatile; very similar to the internet tech bubble of the late ’90s. There is more product experimentation and fragmentation as the industry learns what the market wants. The technology industry is currently in a very different and much more mature place in its lifecycle than it was 10 years ago.
Technology has also reached the point of maturity where it is now embedded into our social fabric. This means that many of the products in the market, whether PC’s, cell phones, or the internet, would be hard to live without for many people. Ten years ago most of those things had not been fully embraced by the consumer market, whereas today they are mainstream.
Another one of the stronger case studies I use to validate the point of market maturity and build-out growth is Apple. In a mature market there is more consumer choice and more educated customers. This makes it possible for a more diverse range of products to appeal to larger segments of the market.
Apple’s turnaround, I would argue, could have only happened in a mature market. I have been quoted in the media saying, “Apple was a consumer product company waiting for the consumer market to arrive.” And arrive it did. The arrival of a mature consumer market for personal technology is at the foundation of why Apple is not doomed.
Secondly their continued growth in earnings is unprecedented. What’s more is that during the recent recession they defied the industry and continued to grow even as the entire economy suffered. Those points are both signs of a mature industry as well as one where technology is essential in society.
If history is an indicator we are in for quite a ride.
The Boom, Bust, Build-out Theory
I have a penchant for technology history. After the last bubble burst, I had a conversation with the then-CEO of National Semiconductor, Brian Halla. He’s also a tech history connoisseur and he explained to me what is called the Boom Bust Build-out Theory. The theory, in short, details how every major industry during the industrial revolution until now went through an initial boom, followed by a bust, followed by a market build-out that lasted several decades and sometimes longer.
The “boom” period is a period of euphoria where entrepreneurs, investors and early adopters rally around the product; followed by a relatively short “bust” where tough economic realities are faced; followed by an extraordinary “build-out.”
During the boom, an industry first gains traction and investment money floods the market. The result is that the supply outpaces the demand of the current market state. This is because the early interest is driven by early adopters, which is not a large market. The overflooding of capital, combined with an immature market, leads to the bust. The bust, however, causes a drop in price of essential market components, which leads to innovation.
In an example with the railroad industry, the “bust” led to such cost declines in essential components that it made it possible for enterprising entrepreneurs to create the frozen car, thus spurring the meat packing industry. The two-year railroad bust, however, was followed by a global build-out that lasted a century. That build-out occurred all around the world and forever changed transportation and commerce.
A similar cycle of boom and bust in the automobile industry led to the creation of the V8 engine, power steering, electric indicators and safety glass.
Looking over the history of the personal computing industry, we can spot many similarities with mega industries of the past. The technology industry was not immune to the boom, bust, build-out cycle and if the signs are true, we are right at the beginning of the build-out stage.
Much of the innovation we are seeing today around smart phones, tablets and new PC form factors is the beginning of this build-out. This phase of the build-out is being called the Post-PC era and we are just at the beginning of some of the most innovative times in our history.
The devices we use are going to get smarter, thinner, faster and more. The internet in five years will look and feel nothing like it does today. The build-out that we are at the very beginning of will drive new businesses, new markets, new technologies, and new opportunities.
The build-out we are currently in also explains the hardware renaissance we are seeing in Silicon Valley. I’m absolutely confident that we will look back at this period in 30 years and see the re-invention of the computing industry to what I am calling the birth of the personal electronics era.
That fact alone should give us confidence in the sustainability of this industry and its long-term growth. I can’t speak for other elements of the economy or other industries but I firmly believe that the tech sector has a very bright future. We may have some ups and downs once in a while, but it’s on track to be one of the most significant growth industries for quite some time.