


In recent months, there has been a great deal
of handwringing about the demise of Internet-related companies that
raised hundreds of millions, and, in some instances, billions of dollars.
E-Toys, which came out of nowhere to completely alter the deadly serious
business of selling toys, filed for bankruptcy. Now, aggressively
entrepreneurial Internet infrastructure firms like Exodus Communications,
Level 3 Communications, and Global Crossing, are struggling for survival.
Of course, weve seen this all before. Technology booms have
always unleashed entrepreneurial enthusiasm and prodigious fundraising
and ultimately, bankruptcy and consolidation.
A century and a half ago, soon after
Samuel F.B. Morse invented the telegraph, hundreds of upstart telecom
moguls began erecting poles and stringing wire. Their network-building
efforts were funded by the antebellum version of venture capital:
subscriptions by local investors and government subsidies. By 1866,
with strikes, competition, and the Civil War disrupting business,
Western Union emerged as a powerful consolidator. With its solid balance
sheet, control of patents, and 44,000 miles of telegraph wire, Western
Union was in a position to absorb its two remaining serious rivals.
It went on to control 90% of the telegraph business.
Between 1860 and 1890, investors poured
nearly $9 billion into the next new thing: railroads. The hyper-construction
led to competition and excess capacity, which was good for freight
shippers and passengers. But when an economic crisis hit in 1893,
it spelled disaster. In 1895, about 20% of the nations rail
capacity was in bankruptcy. J.P. Morgan cleaned up the mess, and cleaned
up in the process.
By 1908, the year Henry Ford started
his company, some 515 car manufacturers had entered the decade-old
industry and half of them had already failed. Twenty years
later, General Motors, Chrysler, and Ford controlled 80% of the market.
Similar processes occurred with revolutionary
technologies such as telephony, radio, and the personal computer:
remember the Commodore, the TRS-80, and Packard-Bell?
But just as the failure of most of
the local telegraph companies in the 1850s and 1860s didnt signal
an end to the telegraphs influence on society, the present-day
trevails of dot-coms and Internet infrastructure firms doesnt
mean the Internet is done transforming the way we live.
Internet usage is still growing, albeit
at a slower pace than originally predicted. New products and services
that utilize this immensely powerful platform are introduced each
month.
Unfortunately, the aggressive first
movers may not be around to reap the ultimate profits. Creative destruction,
it turns out, is the mot juste to characterize our entrepreneurial
economy and especially the Internet economy. Many new companies
have been created; almost as many will be destroyed.
Daniel Gross is editor of Sternbusiness.