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, we’ve 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 nation’s 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 didn’t signal an end to the telegraph’s influence on society, the present-day trevails of dot-coms and Internet infrastructure firms doesn’t 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.