Another survivor who served new users was Thomas Edison. In 1869, Edison, a former telegraph operator, went to work on Wall Street at a company that supplied the prices of gold via telegraph to investors. Edison lived in a way that would be familiar to modern-day programmers, subsisting on the 19th-century equivalent of Red Bull and Twinkies--coffee and apple pie. Then one day he came up with the idea for a stock ticker that could deliver financial data more cheaply and efficiently than the telegraph. The invention was a hit, and Edison was able to sell the rights to it for $40,000. He used that money to set up his own shop, from which he invented the electric light bulb and various recording devices.
Fast-forward to today. Many nascent alternative energy infrastructure businesses are surely destined to fail. Companies that manufacture solar installations will likely have a tough time. Overcapacity inevitably leads to intense competition and falling prices--a natural process that can be deadly for those with high fixed costs. As companies bludgeon one another into oblivion, however, they attract new users, a process that snowballs as prices drop. And the real winners are likely to be service companies that develop expertise in customer service. A company that maintains and upgrades residential solar installations, for example, likely will find itself flooded with orders even as manufacturers of solar panels struggle. Again, entrepreneurs should think about services that don't require huge capital investments--say, providing kits that allow existing automobiles to run on ethanol or software that enables a home to switch between generating electricity from a small wind turbine and a solar panel.
3. Bubble survivors can get real big real fast. During infrastructure bubbles, bandwidth hogs are easily frustrated. What's a bandwidth hog? A company whose business model rests on distributing and transmitting a high volume of products and services over a new commercial infrastructure. In a bubble, bandwidth hogs struggle because costs are high and the emerging systems frequently don't function as advertised.
When a bubble bursts, however, bandwidth hogs are among the biggest beneficiaries of excess capacity. After the Civil War, for example, as railroads slugged it out, the cost of freight fell sharply. The average rate per ton mile of freight fell from $1.93 in 1867 to 84 cents in 1895. This made it possible for entrepreneurs to acquire agricultural commodities in bulk, process them efficiently in a central location, and then ship the finished goods to distant points of sale. Taking advantage of the new cost structure in 1882, Gustavus Swift began building a national meat-packing and distribution company with his famous refrigerated rail cars. He was followed quickly by Armour & Co. and Hormel (NYSE:HRL). Suddenly, a host of branded, processed food products burst onto what had suddenly become a national market: Campbell's (NYSE:CPB) soup, Pillsbury flour, Heinz (NYSE:HNZ) ketchup, Coca-Cola (NYSE:KO), and more.
Similarly, in this decade, a host of businesses that rely on universal, cheap broadband have minted money for their founders. YouTube went from zero to 100 million videos per day in literally the time it takes an infant to learn to walk. Skype, the Internet phone company, was launched in August 2003, dark days indeed for the Internet economy. It roped in millions of users by relying almost solely on viral marketing and was purchased by eBay (NASDAQ:EBAY) for $2.6 billion--half in cash--in 2005.
The biggest entrepreneurial success story of this past decade--and perhaps of all time--neatly encapsulates all three of these lessons. Google (NASDAQ:GOOG), which was founded in 1998, became the world's largest search engine just as the bubble was about to burst in 2000. Google was able to build a business on the cheap, hiring engineers and computer scientists, many of whom were seeking new employment after the bust. A bandwidth hog, it lashed together hundreds of thousands of inexpensive servers and capitalized on the steadily rising adoption of broadband.
The company's success is due in no small part to its superior search algorithms. But all that code would have been worthless if not for the hordes of new users who continued to throng the medium. Google thrived by tapping into the rapidly expanding installed base of U.S. Web surfers, which now stands at 172 million, by selling ads to hundreds of thousands of online advertisers desperate for leads, links, and clicks, and by placing ads on blogs and social networking sites. As of early April, it sported a market capitalization of $146 billion.
Stock analysts routinely point out that past performance should not be regarded as a guarantee, or even an indicator, of future performance. True enough. But when it comes to business, history does have a way of repeating itself.
