The Interplay of Market Bubbles and Technology
Various Technology Diffusion Curves from an IBM Prospectus dated March 2005
Various Technology Diffusion Curves from an IBM Prospectus dated March 2005

There have been many discussions on the Internet and in the press about the bubbles that happen in markets and when they might be recurring in the same or other markets. There is a substantial body of impirical evidence that supports not only the existence of bubbles but their recurrence on a regular basis in mature markets. Some mature markets such as real estate development can be relied upon to produce bubbles on a regular basis. It happens in any market where developments on land become scarce relative to their value. This artificial scarcity causes prices to rise steeply. The rise in values has typically had two major effects:

  1. It attracts buyers who either panic because they are potential first time buyers and see their entry possibilities getting out of reach, or experienced buyers who see the potential returns exceeding other competing investment choices, and
  2. Developers who suddenly can see an acceptable ROI on land purchases and set about to develop to meet the escalating market demand.
This has the effect of initiating a process that will see large amounts of real estate being put on the market in 18 to 36 months after the start of the runup in values. Depending on the sustainability of the runup, the relative glut of this new supply of real estate parcels works to dampen demand as buyers suddenly see lots of choices and some actual price stability. The effect is that the sellers must now work their way through their inventory and often sell off the final few units at below their expected returns. After this, they are cautious and do not embark on any major new developments until they see the solid evidence for the next runup in prices. More about this here.

There have also been other market bubbles like the infamous Dutch tulip bulb bubble. Rather than any inherent value, it was purely driven by market speculation and greed. These are not structural like the ones depicted at the right. The ones depicted are major new technologies that go through several stages of growth before reaching the contagion stage of rampant growth. Then some major force causes a return to a more rational baseline after which more normal growth re-emerges after a period of time.

An example in the technology field is that the advantage of the "openness" of the Internet that resuloted in such growth is now threatening to bring it down. Many of the features or networked systems that have been taken for granted in private networks are now being reinvented for the Internet. When this new set of capabilities and standards have matured, growth will rebuild as the benefits no longer drag along a set of disadvantages. (p)Another example in the technology field is the impact pf product lifecycles. In a classical market, shipped inventory of a specific product type build up in an S-curve, while product shipments mirror this curve with a Bell curve. These curves are often impacted by cross-technology impacts. For example, cell picture phones will impact digital cameras, DVDs impact CDs and VHS machines. But the bell curve underlies every product category. Personal Computers started to slump seriously until they were reintroduced as multimedia machines for music and movies. Now they are slumping again and also being impacted by Tivo types of devices.

Without doubt the iPod is following and S-curve as it continues ot ramp up shipments worldwide. Other vendors and expanded functionality promise to position it as the PC of the pocket. In spite of dozens of vendors trying to create the buzz for the palmtop over several years, it was the easy integration with iTunes that gave Apple its "Tipping Point" in the marketplace. Excellent design also played a large part.
Technology Evolution in Computation
Technology Evolution in Computation

Better understanding can be gained by looking at the history of computation technology. The punched card made it possible to associate characteristics with a data records and use mechanical sorting to produce various result with that data. Before that all data was manipulated by hand and with adding machines. Such machines could not multiply. THe advent of the vacuum tube made it possible to build more complex circuits that could multiply and perform other complex logical operations. Early computers combined mechanical relays with logic circuits to produce more complex results.

The introduction of transistors reduced costs, space and power, making it more practical to build more complex machines without filling warehouses with equipment. It brought the computer into business applications in a serious way for the first time. Computers were still bult for specific purposes and markets. This meant that many larger companies had many dissimilar computers that could not communicate with each other.

The next breakthrough was the introduction of standards that enabled a whole family of computers to not only communicate but also to upgrade as the business adopted more uses for their computer. In IBM terminalogy, this was their System/360. Several other vendors such as Burroughs and Sperry Rand offered comparable computers in the Sixties. To some degree, these systems represented the end of the era of introduction of computing and calulating machines. After that, more and more software began to dictate the effectiveness of computer systems.
Technology Evolution in Computer Systems
Technology Evolution in Computer Systems"

The introduction of integrated circuits and thin film technologies drove the cost and size of the technologies for the next thirty years. The decade of the Seventies saw the introduction and proliferation of minicomputers by the traditional vendors (IBM had their System/3) but also generated a whole new set of vendors such as DEC, Data General, HP and Tandem who specialized in minicomputers. This focus brought the technology to many new users and for many new uses.

Meanwhile Intel invented a computer on a chip and was looking for ways to commercially deploy it. Many hobbyists were embracing the so-called microcomputer but they were lacking robust commercial software. They were largely regarded as curiosities with little commercial potential. It was Apple who saw their potential and introduced their computers in 1977. They remained a niche market until IBM introduced their PC in 1981. Suddenly many new software companies sprang up to capitalize on these new technologies. Microsoft is the most notable of these new startup software companies.

The decade of the Eighties saw the proliferation of all three classes of computers as software vendors found increasingly creative ways to deploy them in combinations to address business needs. This lead to the growth of the network needed to tie all these disparate computers together and the emergence of Cisco as a dominant player in network solutions. This decade could be characterised as the Network Decade.

Around the beginning of the Nineties, the US government decided to open up access to its proprietary research network (DARPAnet) for commercial use. This was made feasible by the robust network products and firewalls that networking vendors such as Cisco had created in the Eighties. This network came to be known as the Internet. The final breakthrough was the introduction of the browser and its set of standards called the Worldwide Web. The Nineties was best described as the decade of Internetworking (but often shortened to the decade of the Internet).

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