Mark Twain is reputed to have said, "The past may not repeat itself, but it sure does rhyme." The feeding frenzy surrounding the Internet looks new, and it is, at least in our lifetime. But the same patterns of behavior occurred in the development of earlier technologies, including steam engines, telegraphy, automobiles, airplanes, and radio. Investors who know something of the history of these eras can extract valuable lessons to help them understand how the Internet economy is likely to evolve.
Typically, a technological innovation passes through five main stages as it undergoes industrial development: experimentation, capitalization, management, hypercompetition, and consolidation. Let's look at these stages in turn to see how they might manifest themselves in the Internet age.
Entrepreneurs are the first to recognize the potential of new technology. Initially, entry costs are low--which is why many industries are born in garages and basements. Rarely is there a single inventor of any fundamental technology: Who invented the railroad, the automobile, or the Internet? Even when textbooks name specific inventors, such as Morse, Marconi, or the Wright brothers, closer examination reveals parallel inventive activity, so that we almost certainly would have had telegraph machines, wireless communications, and airplanes even if these great inventors had never lived.
Once the building blocks of new technology are present, hordes of inventors and entrepreneurs frantically experiment with different ways of recombining those components to create new value--hence "experimentation."
The modern telegraph rapidly developed once there were reliable ways to send electric pulses down wires, which required a whole host of supporting technologies. The Wright brothers retooled mechanical components from their bicycle shop and combined them with wings and wind to create an airplane. By the same token, today's entrepreneurs are taking the building blocks of chips, software, and Internet protocols, and combining them in countless ways to create new value.
Sometimes the major innovation is a new business model. This happened with the radio industry. Initially, people viewed radio as a substitute for the telephone. That others could overhear a conversation was regarded as a nuisance. Then, in 1923, AT&T started WEAF in New York, the world's first "radiotelephone toll station," and a whole new business model was born-- advertiser-supported radio broadcasting.
Edison's original business model for electricity required customers to pay a flat fee for connection to the network, much like today's model for Internet access. But he soon realized that the dramatic difference in wealth between his first customer, the mighty J.P. Morgan Bank, and his subsequent, small-business customers necessitated a more flexible model, so he invented a device to measure electricity use and charged accordingly.
Today, much of the experimentation on the Net involves this same kind of groping for the right business model: Revenue-making ideas such as subscriptions, advertisements, banners, links, bundling, licensing, and auctions are run up the flagpole, and investors wait to see who--if anyone--salutes.
Some, perhaps most, of these experimenters are bound to be disappointed. As with past technologies, there is a lot of money to be lost on the Internet.