History Repeats Itself…Again
The following post is a piece I wrote a few years ago related to the .com bubble. It occurred to me today just how similar it is to the more recent housing and financial bubbles…
Retracing Old Steps: the 1860s and the 1990s
In 1860, travel between NYC and Sacramento took six months. Explorers could either hoof it across the landscape like Lewis and Clark, or they could take to the seas. Because the Panama Canal did not yet exist, an ocean voyage meant sailing clear around the tip of South America and back up to California. In 1869, the transcontinental railroad was completed, and immediately reduced the travel time between New York City and Sacramento, California from six months to five days. Accompanying this transportation innovation was the telegraph line, which provided nearly instant communication between parties anywhere in the country.
Before the transcontinental railroad opened for business, each region of the United States operated its own self-sustaining economy. The advent of the railroad allowed the South to sell its cotton to the Northeast, and purchase textiles in return. America began to form a national economy rather than a series of regional ones. The same phenomenon took place on a global scale when the Internet connected retailers and consumers on opposite sides of the globe – the first of four parallels between the railroad economy and the Internet economy.
The second parallel concerns time. Today, we live on Web time, which is urgent, hectic, and thrilling. In the 1860s, Americans referred to a development called “track time.” Tens, if not hundreds, of thousands of dollars were lost each year that the railroad was not complete. The frantic race to completion was encouraged by the U.S. government, which paid train companies for each mile of track laid. In fact, the government pitted companies against each other, prompting Southern Pacific to feverishly lay track from west to east while Union Pacific laid track east to west. Once the track was laid in a town, the first train literally followed the same day. Similarly, once an e-commerce server is online today, the first orders come streaming in within hours. Well, at least they used to…
Larger-than-life leaders dominated both eras as well. Just as the Internet age evokes images of Bill Gates and Jeff Bezos, people defined the era of the transcontinental railroad. General TK Dodge was the main railroad engineer during the Civil War. He built the Union Pacific. Doc TK Durant was the one of the principal business leaders behind the railroad, and a notoriously shady character.
And TK Huntington brought together the original financiers. These men became poster boys and scapegoats for the railroad enterprise. Just as Bill Gates was vilified during the Microsoft anti-trust case, these leaders took the heat for problems – and there were many – related to railroad construction and operation.
Finally, the fourth shared characteristic is government funding. The railroad was a physical entity made of steel and wood. The Internet is virtual. But both projects were originally funded by the United States government. The railroad was funded more obviously, with its per-mile payments. Though its mentioned today, the Internet was also first funded by the government, which intended to use it in the military and in universities.
The More Things Change: Economic Similarities
Evolving Adaptability
In the same way that the Net concentrates on evolving adaptability, the builders of the railroad adjusted quickly and efficiently to the immediate environment. When it proved too expensive to transport the strong wood of the east to the west for construction via ship, the workers in the west took laid down temporary tracks with poorer quality wood so that they could transport the new wood by train. They built temporary tracks on ice so that they could bring in new materials, then remove those tracks before the spring thaw. They also scrapped complete lines when a town offered a financial bonus for running tracks run through it.
Wild Speculation
At first, the railroads could not sell a share of stock. Once word got out about the advances possible with a transcontinental line, shares sold like wildfire. Five years ago, it would have been tough to convince a venture capitalists to fun a cheese-selling operation online. Then, in 1998, every angel investor, VC, and shareholder wanted a piece of the dotcom action. You want to devoted a site to mozzarella? Great. Here’s $50 million.
Finance Structuring
Railroad and Internet deals were structured similarly. Railroad financiers were silent partners in companies paid to build the railroad. No part of their financial success was tied to the eventual success or failure of railroad transportation. An IPO is no different when you think about it. E-commerce companies did not need to provide profits margins during the heyday of VC-funded dotcoms — they only had to show potential growth. Fortunes were made when companies went public, not when their services turned a profit.
The Aftermath
Just as profit-starved dotcom companies are facing extinction today, many railroad lines have faced bankruptcy in the last century, particularly those that made basic business mistakes. However, some railroad lines have survived the general decline of rail travel in America. They learned to stick it out longer than rivals, just as hearty dotcoms like Amazon are fighting their way toward profitability.
The Morals of the Story
There will always be some invention that is “like nothing else.” Although it’s interactive on a mass scale, The Net is merely a new infrastructure channel. The Net is not the end of our constant evolution. It is not the be-all, end-all. In the next decade, we could increase life expectancy to 150 years, and then that would be “like nothing else.” All that we can do is keep on eye on the past at all times.
