Where Did We Go Wrong? Next . . . Oh I've been to the edge,
My thoughts on the threads "On Falling Back Into the Chasm," and "False Tornadoes," plus a bunch of other stuff.
I think these two threads have covered a lot of important territory -- territory which is, I think, all connected in some way or ways I can't articulate cohesively at the moment. So, rather than torment myself in a hopeless endeavor, I'll simply toss my thoughts out to the list. If nothing else, I hope to foster further fruitful discussion.
Are We Ignoring the Macro Picture?
It seems to me that the bubble which is currently deflating did not occur in a vacuum (to coin a strange mixed metaphor). Most Gorilla Gamers I've observed have been careful not to blame Alan Greenspan for our current troubles. While this is based on a noble impulse, i.e., to take responsibility for one's own mistakes, I think that our depression may be blinding us to at least part of the reality of the situation.
Larry Kudlow, the Darth Vader of popular economics (like DV, he's obviously rotten to the core, but he's extremely compelling nonetheless), has been harping on Greenspan ceaselessly, not only calling for faster cutting, but daring to accuse Mr. Fed of causing both the bubble and its bursting. While I don't agree with blaming Greenspan (or anyone else, for that matter), I think his point is one we should look at.
" How about the wild go-and-stop money supply policy, where 12-month monetary base growth swung from 6.6 percent in December 1998 to 16 percent in December 1999, and then collapsed to negative 2.5 percent by December 2000."
Putting aside the blame issue, I think we should remember that it wasn't so long ago that the powers-that-be and those who purport to know were quite worried about the impending Y2K disaster. As a result, the Feds (I use the term "Feds" generically, since I don't know who is actually responsible for such things) opened up the taps and poured a large amount of cash into the economy. I'm so weak on economics I'm not even sure what this means, except that it seemingly became very easy for businesses, particularly tech businesses, to raise money, whether by borrowing or through IPOs or whatever.
I can't prove this, but I'd hazard to guess that quite a bit of this extra liquidity went into the Nasdaq, where it funded the beginnings of the NGN buildout. But, IMHO, it did much more than just that. My theory (hypothesis? guess?) is that this excess cash caused the telecoms (using the term in its broadest sense) to attempt an end run around the Technology Adoption Life Cycle.
To quote from TFM. In order to enjoy the benefits of a discontinuous innovation, "users had to adopt new technologies and put in place new infrastructures that were incompatible with what was prevalent at the time. That means, not only did they have to go through a whole learning curve on their own, they also had to wait for all the providers of complementary products and services to get their part of the overall system up and running." (p.22)
This is the "whole product" that is created by a Gorilla and its value chain. As PaulPhilp put it, "Whole products are hard. Crossing the chasm is not a walk in the park - it is an extreme sport. Tornados are caused by sudden increasing demand NOT sudden increasing supply."
But, one might say, the sudden increasing demand was there -- all those telecoms demanded that the NGN be built out as fast as possible, and they backed up their demand by throwing money at any company with a faster switch, router, fiber, etc. They were able to do this, for a time, because their cost of capital was low enough to let them borrow massively. They were compelled to do this for the simple reason that everybody else was doing it. Moreover, it had become obvious that the telecom industry faced a brutal shake out, and that many companies would not survive it. The thinking among the herd became, "Building is life."
As I understand it, the technology adoption life cycle (TALC) works like this:
First, the techies get wind of a new gadget and decide they simply must have it, to play with if nothing else. Then the visionaries of the world jump on the bandwagon. These two groups keep the product alive for a while, but they are fickle. The techies quickly move on to the next, more advanced toy, and the early adopting visionaries pull out once the product or process becomes common knowledge -- they go looking for the next "next thing." (TFM pp 22-28)
and I stood and looked down.
You know I lost a lot of friends there baby,
Ain't got no time to mess around.
David Lee Roth & Edward Van Halen,
Runnin' With the Devil, ca 1978
At this point, the fledgling technology or process is left hanging by its fingernails from the edge of the abyss, hoping that somebody finds it before it falls into oblivion. It has been abandoned by the innovators and early adopters, yet it is far too new and untried for the pragmatists of the herd to take a chance on. If everything in the industry as a whole remains peachy, then our new technology/process will probably die right there on the edge of the chasm.
(Bruce Brown, various)
If our technology/process gets lucky, then a few members of the pragmatist herd over on the other side of the chasm will, at an opportune time, be suffering from a "broken, mission-critical business process." (p.31) Thus our little technology edges across the chasm into the bowling alley, where it picks up its first pin (in a niche market).
I want to stop the narrative at this point, because I think that right here is one of the places where we got very badly fooled. What went wrong? Well, let's break it down.
First, did we have companies with discontinuous innovations looking for a way to cross the chasm? Sure we did. In fact, it seemed like a new one was popping up every day.
Second, were there managers under "broken process pressure?" (pp 32-33) Yes, certainly, in the economic sense at least. The telecoms were desperate for sources of revenue to replace the ever-shrinking dollars they earn from long distance. Web services of various kinds looked promising, but the web was too slow, and the established telecoms were stuck with many billions of dollars worth of legacy equipment, which just didn't cut it for data transmission. So, the telecoms needed to replace their networks and fast, because if they didn't do it fast enough, then the new kids on the block would do it first and wipe them out. (Remember those annoying Williams Communications ads where the guy babbles about how "Williams is growing bandwidth?")
Third, were there vendors who could supply an excellent product, while also "fielding a complete suite of products and services to solve the entire problem for the target segment?" But of course, right? I mean, Cisco, Ciena, and Sycamore, just to name three off the top of my head, pretty much offer one stop shopping to rebuild an entire network end to end. And they have all kinds of smart folks to set it all up for you too.
So, everything should have been just swell, right?
Yes, but, there were two problems.
First (and this is the part the media has focused on, so I'm pretty sure it's the relatively unimportant part), the telecoms just couldn't continue to spend at that rate for very long, at least in part because they were borrowed out, which was most likely partly a result of the Fed raising interest rates. But I think that a credit crunch is just not enough to explain what happened.
Second (and here's what I see as the real monkey wrench that brought the entire works to a screeching halt), the telecoms borrowed all these billions of dollars, and bought all of this new equipment, simply in order to prevent the other guys from getting "there" first. In their panic to keep up with the Williamses, they forgot one fundamental thing about value chains. "Ultimately, customers are the folk who pay for the value chain end-to-end, if and only if they receive appropriate value." (p.153)
The question that we should have been asking is, "Who is going to pay for all this stuff?"
The answers would have varied, I think.
First, there's the pass-the-buck model. Component manufacturer "A" would refer us to subsystem builder "B," who would point to end-to-end supplier "C," who would point to Telecom "D," who would point to ISP "E." ISP "E," had we bothered to ask, probably would have spouted a bunch of hooey about how they were in the process of developing their revenue models.
Then there's the efficiency argument. (We all are probably guilty of using this one at some point.) Sure, Telecom "X" is spending untold billions upgrading its network, but that's okay, because the new network is so much more efficient it will lower X's IT costs by 35% immediately. (Yeah, never mind that X spent 50 times that much on the equipment. We didn't ask that question very often, did we?)
Geoff Moore put it like this:
"I think 'falling back into the chasm' equates directly with 'got taken in by a false tornado' and 'mistook early market enthusiasm for genuine market adoption." The key thing to watch in all cases is whether there is genuine uptake of a killer app. Failure to create uptake can be a function of lack of a compelling reason to buy (broadband video in corporations) or lack of an easily deployable whole product (DSL to the home). In both cases telcos mistakenly concluded that if they would only build it, the market would come. They got way out in front of their market with their capital expenditures and the investors finally called a halt."
But, Bruce Brown, commenting on the ability of some companies to hold up well even in this market (I believe he mentioned Juniper and Ciena as specific examples), seems to say that all of the above is a bit too simple. "All of that being said, it seems to me there is more going on than simply a false tornado in terms of addressing some of the bottlenecks that some of these companies target. I guess we call it 'pockets of strength'."
I agree with Bruce, but I want to phrase it a bit differently. I know that much of what I have said so far has been covered by others in one form or another. I don't mean to belabor things, but I think it's important to my later points that I lay all this out first, partly to organize the material in my own mind in a more cohesive fashion, but mostly for what I consider to be a more important purpose. That purpose is to show how easy it is to get caught up in one explanation and accept it as "the truth" across the board.
Allow me to summarize quickly, then I'll show you where I'm going.
1. The excess liquidity in the market created a ridiculous level of competition in an industry that was already ripe for a blood bath, i.e., the telecoms.
2. Desperate to save themselves from oblivion, the telecoms threw vast amounts of cash at many companies that had no business going public yet, let alone circumventing the TALC by jumping across the chasm, largely skipping the bowling alley, and diving straight into a tornado whose winds were created by money being flapped back and forth.
3. When the telecoms ran out of credit (helped along at least in small part by the Fed's tightening), the bubble burst.
4. Here's my point (FINALLY!): Even if everything I've said so far is 100% true and correct (which I doubt), that does not mean there have been no legitimate Gorilla and/or Royalty games in action over the past year. It just means that the dozens or hundreds of false G/R Games makes it all the more difficult to spot the real ones.
This brings me back to Bruce's comment about CIEN and JNPR. I think it's just possible that these two companies have held up reasonably well because they are legitimately involved in Gorilla Games (well, probably more like royalty games). The point is that if Bruce's instinct(?) is correct, these two companies have been through the TALC in the correct sequence, with the result that they are stronger than many of their competitors. Thus, even if their prices do break down much further, they may well give us hints as to which companies will lead the way forward from here.
But, will Gorilla Gaming survive into the next bull market, or has it been wiped out by the Heisenberg Principle?
Michael Douglas said, "In fact, given that this is about psychology as well as fundamentals, couldn't the game lurch the other way, and an excited crew of GG readers, in various stages of understanding and adeptness, push share prices OVER what their intrinsic value might be? The answer would seem to be yes in both cases, but I'm interested in discussion."
I think that the answer is yes, especially in the context of what has happened in the last year or two, but much less so in the future.
Because, while it is certainly true that Gorillas ran up to ridiculous levels during the bubble, I don't think that it was Gorilla Gamers who caused them to run up. Rather, we had a momentum-based market in which many thousands if not millions of new and inexperienced investors jumped on everything that moved upward. Since Gorillas are always among the better performers in the market, they got pumped up by the momentum investors along with everything else.
But I think that, for those of us willing and able to do the hard work of identifying Gorilla-friendly markets and then waiting for and identifying the Gorilla, the future will be quite bright. Much brighter, for certain, than the past twelve months have been.
When the bull returns (by bull, I mean a normal bull that progresses generally upward, not this bubble beast of the past couple years), here is what I think will happen. Those of us who are truly Gorilla Gamers (and let's face it, there aren't honestly that many of us) will be ridiculed by the masses of investors for many, if not most, of our picks. Not having any real understanding of what GG is all about, they will think that we are vastly over valuing the companies in which we invest.
That's my first cut take on things. I apologize if I've bored you to death.
Where Did We Go Wrong?
Next . . .
Oh I've been to the edge,