PAgre on Internet stock bubble

From: Eugene Leitl (
Date: Wed Oct 11 2000 - 11:52:09 MDT

From: Udhay Shankar N <>
Subject: [silk] Phil Agre on the internet stock bubble
Date: Wed, 11 Oct 2000 10:57:41 +0530

Excerpted from -- Phil always makes
for very interesting reading, though I haven't devoted enough thought to
this post to make up my mind whether I agree or not. Seems reasonable,
though. YMMV.



A theory of the Internet stock bubble.

I have a theory of the Internet stock bubble. A technical standard
such as TCP/IP or HTTP is a coordination mechanism: it helps people
to interrelate their activities with much less negotiation than they
would otherwise need. Establishing a standard is a major coordination
problem, since a critical mass of users have to be persuaded that
a critical mass of users will actually adopt the standard. But once
that condition is achieved, everyone can go on back to work and the
standard will keep everyone interoperating. A standard thus creates
wealth in society, and the big economic question is who will capture
that wealth. The answer to this question will depend on many factors.
It might be a single vendor who captures all of the wealth through
its proprietary control of the standard, or else it might be content
providers who withhold their intellectual property until they can
extract rents from everyone else. It might be the early adopters
who won't use the standard unless they get subsidies from the vendor.
It might be the applications developers. Underneath every standard is
a hidden struggle among all of these players, each of them trying to
capture the largest slice of the pie by adjusting the standard itself
or the legal or contractual arrangements around it. The winner will
be determined by a hundred factors: who is best organized, who can
leverage their control of existing standards, who has other options
they can choose, who can wait, who has money in the bank, who has the
manufacturing capabilities, who happens to think of the idea first,
and so on. If the players push too hard then the standards process
can fail altogether, leaving no pie at all to divide. It's quite a
complicated game.

By coordinating a vast number of diverse activities, the Internet
creates enormous wealth. So it stands to reason that large numbers of
investors have tried to cut themselves a slice of the pie by providing
capital to one or more of the players. Some of them, obviously, have
succeeded, such as the early investors in Cisco. But an huge number
of them have failed, and it's interesting to consider why. Despite
its great fame, as standardization processes the Internet is wildly
atypical. In the Internet's case, one player, the philosopher-kings
at ARPA, held nearly all the cards; they were the smartest, richest,
best-organized, and most prescient of anyone, and they chose to rig
the game to ensure that almost all of the wealth went to the ordinary
users, that is, the taxpayers. This poses a problem for the players
who want bigger slices of the pie than they get just from having a
computer on their desk. The pie is sliced so thinly that it's almost
impossible to assemble a large slice. Some people have done it, of
course, but even the billionaires of Silicon Valley have captured a
tiny proportion of the entire wealth that the Internet has created.

The rest of the wealth is out there, of course, but to capture it you
have to come up with an investment strategy that separates the value
of the Internet from all of the other factors that affects investments
in particular contexts. For example, you could invest in whichever
auto company is doing the best job of using the Internet, but then
you're exposed to all of the other issues that affect auto companies.
Investors, therefore, are looking for the "pure plays" that depend
on nothing except the success of the Internet. And this is where the
Internet stock bubble comes from: the amount of capital that is out
there chasing Internet stocks is probably not out of line, given the
amount of wealth that the Internet has created. It's just that the
capital is all squeezing into a tiny portion of the space where that
wealth is getting created. There's only so much Cisco to go around.

This all leads to the only proven method of making money by investing
in high technology: do a huge amount of research until you identify
the standards that are going to build critical masses, analyze the
players and their strategies, and put your money on the player that is
going to capture most of the wealth. If you arrive too late then that
player will already have enough capital to grow on its own steam, and
in that case you should walk away. Two years ago you should have been
studying the players in optical networking. And now? Well, if you
were reading about it here then you'd be too late. That's the point.


             Unimobile -  the world's first internet mobile

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