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.
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.
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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.
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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.
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.
Ben Bajarin is the Director of Consumer Technology Analysis and Research at Creative Strategies, Inc, a technology industry analysis and market intelligence firm located in Silicon Valley.