Life in a Tech Bubble

If a new technology bubble were emerging, what advances and innovations would we be left with at the end? Some argue the answer would be very little.

Facebook recently received a $50 billion investment from Goldman Sachs, Microsoft has purchased Skype for $8.5 billion, and Groupon, and Zynga have both expressed forthcoming high-value initial public offerings.

With LinkedIn valued at $8.9 billion and an opening day increase of over 100 percent, the “World’s Largest Professional Network” is now “worth more than household names like JC Penney, Electronic Arts, and Chipotle” according to CNN.com’s Adam Ostrow. According to a poll on The Wall Street Journal’s website, 64 percent view this as evidence of a bubble.

A market bubble occurs when speculation spurs products or assets to be traded at an inflated value. Markets see a steep increase of prices in the bubble sector, as prices rise to match speculative demand. Market bubbles are typically marked by defined “boom and bust” periods, as a sharp drop follows the rapidly inflated growth period. Examples of this inflation-and-burst pattern are the dot-com tech bubble and, more recently, the housing bubble leading up to the 2008 financial crisis.

Social media sites may be the next bubble in the U.S. economy. Even though market bubbles can harm the economy when they burst, they also create innovation and fuel the creation of new ideas.

As shown by the US housing bubble, speculative bubbles can have damaging effects on an economy. The illusion of rapid growth in the bubble sector draws investment that could have otherwise supported growth in another sector.

Bubbles can, however, also bring positive results. Often the investment poured into a bubble sector will drive innovation. From the computer tech bubble in the 1980s associated with Microsoft, Compaq and Intel, we received personal computers. Despite the falling stock prices of these companies in the late 1980s, innovation in the form of inexpensive microprocessors remained, and therefore allowed further growth.

Even the dot-com bubble that many assume to have been largely unbeneficial left us with Internet infrastructure that has benefited both consumers and businesses. So the important question isn’t if there is a new technology bubble forming from social networks such as Facebook, Groupon, and LinkedIn, but what is there to gain from it if there were?

In a Businessweek article titled “This Tech Bubble is Different,” Ashlee Vance claims that a bubble “driven by social networking could leave us empty handed.” Social networks function to develop precise advertisements, tailored to individual users, increasing sales for those who choose to advertise and luring even more advertisers.

In Vance’s article, Jeff Hammerbacher, a former research scientist for Facebook, asserts, “the best minds of my generation are thinking about how to make people click ads … If instead of pointing their incredible infrastructure at making people click on ads … they pointed it at great unsolved problems in science, how would the world be different today?” Hammerbacher’s views point to the fact that resources and highly skilled workers have shifted to the technology sector, particularly focusing on advertising.

With such intense focus and investment on the ads selling products and services, less is invested in actual research and development of new ideas. Unless the innovations made in analytical technology used for advertising can be used in other fields such as medicine or finance, the boom and bust cycle of a new technology bubble will be largely for naught.

This article was published in the University of Hawaii at Manoa’s student newspaper “Ka Leo” and can also be viewed at here.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: