Boom and Bust

Business , Social Jun 06, 2002 No Comments

From supernovae to Silicon Valley, the whole universe has rules to follow. Breaking those rules may lead to disaster—not breaking them will lead to stagnation.

Boom and bust: the words conjure black and white images of giddy 1929 flappers, flasks of bootleg booze, and horrified stock traders watching their speculative fortunes fall like yesterday’s tickertape. Our generation’s boom and bust sent scooter-riding, Starbucks-sipping Americans clicking to seeking ever bigger paychecks before bemoaning the loss of their stock options and plans to retire by 30.

Like Icarus, many high-flyers rose magnificently, only to fatally fall back to the old economy’s terra firma. Companies such as MarchFirst, Napster, and, stormtroopers of a seemingly inevitable economic and cultural blitzkrieg, crumbled under the weight of unattainable dreams—a modern day Greek tragedy.

The sharp prick of reality that finally popped the inflated bubble of VC funded, speculative start-ups shouldn’t have surprised anyone with the intelligence to run a lemonade stand. In hindsight, it’s appallingly obvious that profitless companies worth billions on paper and nursed along by Pollyannaish investors are about as competitively viable as a three-legged gazelle. A new and sustainable business model needed to emerge for legitimate and innovative ideas to prosper in the marketplace.

But how could a boom have gone so wrong? Were the dot com dreams of Net-driven innovation and boundless optimism for the future just the folly of a pampered, technologically obsessed American generation out of touch with economic reality? Sure, a little bit. But booms and busts are a phenomenon that can happen to anyone in any industry.

Pipe dreams and tulip troubles
Culturally, telephone companies are as far from the dot com image as you can get—all geek, no chic. Yet they also succumbed to the boom and bust cycle.

Predicting an exponential growth in data traffic with the rise of the Internet, Qwest spent tens of billions of dollars to install as much new fiber optics as the combined existing networks of AT&T, MCI and Sprint. Other billion dollar spenders like Winstar, e.spire, Teligent and Covad went bankrupt building fiber networks to compete with local phone giants like Verizon or Southwestern Bell.

All these new fiber networks required routers and switches. So equipment makers like Cisco and Lucent became Wall Street sweethearts with market caps to prove it.

The entire industry bought unabashedly into a ‘build it and they will come’ mentality. The result was a staggering glut of fiber capacity that all the voice calls, spam, porn, warez, and assorted silly multi-megabyte Quicktime movies that North Americans email to each other didn’t come anywhere close to fully utilizing.

Profits evaporated in a previously robust industry. Long distance prices fell so precipitously that telecom icon AT&T was forced to break into pieces just to survive. Lucent is similarly plotting how to fashion a raft from its shipwrecked stock price.

But booms and busts aren’t confined to technological sectors or even this century. Another older and non-technological example of economic bubbles is what history has dubbed the Great Dutch Tulip Fiasco. Along with windmills, dykes, and wooden shoes, 17th century Holland produced top-notch tulips. In fact, Dutch tulips were so highly prized that the market went insane—for a while at least.

Speculative investors leveraged all they owned to buy into the tulip bulb market. If you thought dot com stocks were through the roof, wait till you hear that really, really nice tulip bulbs once went for the equivalent of tens of thousands of dollars. Finally the absurdity of all this occurred to merchants and a cascade of sensibility returned the tulip market to reality. But, in doing so, many were left penniless.

The cosmic connection
Economies, markets, and individual companies actually behave with the comforting regularity of any ordered system. Corporations compete according to the same Darwinian rules that any living species must follow. Creatures or markets that expand too rapidly will overpopulate, consume too many scarce resources and suffer the consequences.

Like stars that transform their nuclear fuel into new elements then explode them across the galaxy to form new suns and planets, economic booms forge new business models, technologies, attitudes, and workers that become the fuel for future growth.

Workers of failed dot coms are using their knowledge to start new ventures and invigorate older stable companies. Innovations like broadband access, online shopping, digital music, and Net-enabled B2B transactions aren’t going away because a company that popularized it went belly up.

Booms and busts are inescapable cycles. Like good and evil or Yin and Yang, they must be accepted as a package deal. The bust times are the price we pay for the advances that come during the boom.