The Long Boom

Back in 1993, WIRED had a cover story explaining how technology, everything from desktop computers to Prozac, was going to unleash an unprecedented surge in everything good. We were going to enjoy 25 years of growth: THE LONG BOOM. So, here we are, eighteen years into it, how are you liking it?

This was the old WIRED magazine, before it was bought by a big conglomerate and turned into what it is today. The magazine that would print articles in day-glo orange and silver. The magazine that would (a couple of years later) hire Neal Stephenson to write a 20 page article about a fiber optic cable. Nicholas Negroponte (more lately of OLPC fame) was still writing a column for the back page.

Actually, WIRED today is pretty good, but it did go through a bad patch after the acquisition.

It was interesting to see very similar arguments in the pages of The Economist a few days ago in its recent debate This House Believes That We Are In a New Tech Bubble.

Ben Horowitz (who opposes the view — you may recall his VC company just sold Skype to Microsoft, so to publicly endorse this view would be rude) essentially uses three arguments: programmers are 10x more productive now, Apple and Google are undervalued, and OK it’s a bubble but it’s early days yet — get on board while there are still some suckers around!

In 2001, Stewart Butterfield abandoned plans to build a massively multiplayer online game (MMOG) after costs became too great; he built photo-sharing service Flickr instead. Now Stewart’s new company, Tiny Speck, is again building that MMOG, but today it is working brilliantly. Why? Because Stewart’s programmers are ten times more productive than they were in 2001 due to massive advances in programming language technology.

Back in 1993, WIRED predicted a long boom because of the incredible benefits of information technology (Windows 3.11) and new antidepressants (Prozac) to productivity. It turns out that the former eventually freed up time to check Facebook while the latter was in large part illusory.

The idea that programmers are 10x more productive today than, say, back in 1993 is actually almost laughable. For web developers (which is what most programmers are today) development tools are now more primitive than they were in 1993. In 1993 we were all using pretty advanced debuggers. Today, we’re spitting out crap to logs and using grep.

Sure, we’ve moved through at least three major fads of software development (Process Maturity, XP, and Agile) but I don’t think Bill Atkinson used any of them. My friend Andrew Barry wrote an Acrobat clone in one evening using THINK C in 1993, I don’t think Eclipse and Java will let him do it in an hour.

I should note that EverQuest shipped in 1999 and was built using the bad old programmers who were presumably only a tenth as productive as programmers today. The difference between 2001 and 2011 isn’t that programmers got 10x better, but Stewart Butterfield is a lot more than 10x richer and can afford to fund a game startup.

“Apple’s stock price to earnings ratio has dropped to 16.72. Ex-cash it’s 13.5. On a forward basis (my estimates) it’s 8.3. Apple’s valuation is now a case for business historians to discuss because I don’t think there are modern precedents.”
-Horace Dediu, Asymco

If we are in a bubble, that is a bit of an odd commentary for a company that grew revenues 83% year-over-year and grew earnings 93% year-over-year. Similarly, Google, well on its way to owning the dominant smart phone operating system and which maintains a near monopoly position in search, trades at a price/earnings (P/E) ratio (ex-cash) of around 13.7.

This might be compelling if anyone thought that Apple and Google were enormously overvalued. In “Long Boom” terms these are Exxon and Sears. They’re big, powerful, established players with strong revenues, established business models, protected by huge moats. Yes, it’s odd that Apple is priced so low relative to earnings, but this is no different from non-tech stocks being undervalued during the dot com boom. “Sure, Amazon loses money on every sale, but it makes it up on volume.” To paraphrase Milo Minderbinder.

When we discuss whether there’s a bubble right now, we’re not talking about Apple or Google, but the “Social” networks such as Facebook, Twitter, LinkedIn, and GroupOn. (Let’s not forget Color.) These are outfits without long track records, established business models, or even much goodwill, who are being valued way more than large, profitable companies that do stuff. The fact that Apple and Google have each tried to create social networks and conspicuously failed (Ping, Buzz) has added fuel to the “it’s a new new thing” factor cited here.

By Mr Blank’s bubble indicators—some private valuations going up, some sunny reporting, more traffic in Silicon Valley and some venture capitalists doing stupid stuff—the “mania phase” of the last bubble surely started in August of 1995, at the point of the Netscape IPO. Getting on board with the bubble theory then proved to be a bad idea. It is also a bad idea now.

The fact that the first two arguments are weak doesn’t matter though, because this is where Horowitz is actually honest. The point isn’t that we’re not in a bubble, but that we’re in the early stages of one. It’s time to jump on board, grab some profits, and then sell before it bursts.

Steve Blank, arguing for the proposition, says:

I contend that we are approaching the early part of the mania phase.

Note that this actually agrees with Horowitz’s third argument. Horowitz is saying we’re in the early stages of a bubble (the time when the “smart money” gets on board) which is exactly what Blank is saying.

The question is, with two bubbles having burst in recent memory, will the suckers hang around as long?