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In 1876, the president of Western Union brushed off Alexander Graham Bell's telephone as little more than an "electric toy," and the company called Bell's proposal to put one in every home "utterly out of the question." Oxford University professor Erasmus Wilson predicted that when the 1878 Paris Exhibition closed, the electric light would "close with it and no more will be heard of it." A Michigan banker advised his client not to invest in Henry Ford's company in 1903 because "the horse is here to stay, but the automobile is only a novelty." And Microsoft founder Bill Gates freely admits he was years behind in seeing the promise of the Internet. If the past two centuries are any guide, great technological innovations--railroads, telegraph, telephone, electricity, cars, radios, the personal computer--must overcome initial skepticism, if not abject fear, before they can take root. But then there is the inevitable cycle: Entrepreneurs begin to recognize a novel technology's potential; newcomers rush into the market, drawing venture capital, which in turn spawns even more companies and investment. Because stock price in this phase is pegged to possibility, not revenue and profit, almost all of the players do well, even though most, if not all, bleed red. Some succeed spectacularly at this Ponzi-like scheme. Share prices shoot skyward in a speculative frenzy.

Eventually, though, reality sets in. After burning through their cash, companies start to fold, leaving investors to wonder when and how someone will actually make money. Pessimism supplants enthusiasm. Stock prices crash and the economy tanks until, over time, the core technology is woven into the fabric of life and the market stabilizes. It's a cycle of boom, bust, and sustained growth (a golden age, if you will), followed by decay when a better mousetrap comes along.

Bubbles don't recur because people have failed to learn from experience, however. They are a necessary stage of technological development. After railroads supplanted canals as the hot investment of the early 19th century, they followed essentially the same arc. According to Alasdair Nairn, author of Engines That Move Markets, between 1825 and 1826 about as many railroads were founded as had been started in the previous 20 years. And when the market crashed, it crashed hard. By the mid-1870s, 40% of American railway bonds were in default and bankruptcies surged.

But the bubble wasn't for naught. Before the crash, 45,000 miles of track had been laid; by 1900, there was a national network more than 200,000 miles long, and this made it possible for the United States to grow and prosper from the Atlantic to the Pacific. Similarly, the later rise of the automobile spurred the development of the American highway system, which ate much of the railroads' freight business but helped populate the entire country.

The Postcrash Push

Capacity, or rather, overcapacity, is the key to progress. And broadband is the new railroad, the new highway system, the new electricity. After all those years of laying fiber-optic cable, DSL, and other high-speed lines, we have almost more capacity than we know what to do with--so much that we use only a fraction of it, perhaps 1% or 2%.