My friend Ben Horowitz and I debated the tech bubble in The Economist . An abridged version of this post was the “closing” statement to Ben’s rebuttal comments. Part 1 is here and Part 2 here . The full version is below. ———————————- It’s been fun debating the question, “Are we in a tech bubble?” with my colleague Ben Horowitz. Ben and his partner Marc Andreessen (the founder of Netscape and author of the first commercial web browser on the Internet) are the definition of Smart Money . Their firm, Andreessen/Horowtiz , has been prescient enough to invest in social networks, consumer and mobile applications and the cloud long before others. They understood the ubiquity, pervasiveness and ultimate profitability of these startups and doubled-down on their investments. My closing arguments are below. I’ve followed them with a few observations about the Internet that may help frame the scope of the debate. Are we in the beginnings of a tech bubble: yes. Prices for both private and public tech valuations exceed any rational valuation to their current worth. In 5 to 10 years most of them will be worth a fraction of their IPO price. A few will be worth much, much more. Is this tech bubble as broad as the 1995-2000 dot.com bubble: no. While labeled the “dot-com” bubble, valuations went crazy across a wide range of technology sectors including telecommunications, enterprise software and biotech, not just the Internet. Are tech bubbles necessarily bad: no. A bubble is simply the redistribution of wealth from Marks to the Smart Money and Promoters. I hypothesize that unlike bubbles in other sectors — tulips, Florida land prices, housing, financial — tech bubbles create lasting value. They finance companies that invest in new technologies, new ideas and new products. And it appears that at least in Silicon Valley, a larger percentage of money made in the last tech bubble is recirculated back into investments into the next generation of tech startups. While most of the social networks, cloud computing, web and mobile app companies we see today will fail, a few will literally remake our lives. Here are two views how. The Internet May Liberate Us In the last year, we’ve seen social networks enable new forms of peaceful revolution. To date, the results of Twitter and Facebook are more visible on the Arab Street than Wall Street. One of the most effective weapons in the Cold War was the mimeograph machine and the VCR. The ability to copy and disseminate banned ideas undermined repressive regimes from Poland to Iran to the Soviet Union. In the 21st century, authoritarian governments still fear their own people talking to each other and asking questions. When governments shut down Google, Twitter, Facebook, et al, they are building the 21st century equivalent of the Berlin Wall , they are admitting to the world that the forces of oppression can’t stand up to 140 characters of the truth. When these governments build “homegrown” versions of these apps, the Orwellian prophecy of the Ministry of the Truth lives in each distorted or missing search result. Absent war, these regimes eventually collapse under their own weight. We can help accelerate their demise by building tools which allow people in these denied areas access to the truth . Yet the same set of tools that will free hundreds of millions of people may end their lives in minutes. The Internet May Kill Us The next war will more than likely occur via the Internet. It may be over in minutes. We may be watching the first skirmishes. In the 20th century, the economies of first-world countries became dependent on a reliable supply of food, water, electricity, transportation and telephone. Part of waging war was destroying that physical infrastructure. (The Combined Bomber Offensive of Germany and occupied Europe during WWII was designed to do just that .) In the last few years, most first world countries have become dependent on the Internet as one of those critical parts of our infrastructure. We use the net in four different ways: To control the physical infrastructure we built in the 20th century (food, water, electricity, transportation and communications) As the network for our military interconnecting all our warfighting assets, from the mundane of logistics to command and control systems, weapons systems and targeting systems As commercial assets that exist or can operate only if the net exists including communication tools (email, Facebook, Twitter, etc.) and corporate infrastructure (Cloud storage and apps) For our banking and financial systems Every day hackers demonstrate how weak the security of our corporate and government resources are. Stealing millions of credit cards occurs on a regular basis. Yet all of these are simply crimes not acts of war. The ultimate in asymmetric warfare In the 20th century, the United States was continually unprepared for an adversary using asymmetric warfare — the Japanese attack on Pearl Harbor, Soviet anthrax warheads on their ICBMs during the cold war, Vietnam and guerilla warfare, and the 9/11 attacks. While hacker attacks against banks and commercial institutions make good press, the most troubling portents of the next war were the Stuxnet attack on the Iranian centrifuge facilities, the compromise of the RSA security system and the penetration of American defense contractors. These weren’t Lulz or Anonymous hackers, these were attacks by government military projects with thousands of programmers coordinating their efforts. All had a single goal in mind: to prepare to use the internet to destroy a country without physically killing its people. Our financial systems (banks, stock market, credit cards, mortgages, etc.) exist as bits. Your net worth and mine exists because there are financial records that tell us how many “dollars” (or Euros, Yen, etc.) we own. We don’t physically have all that money. It’s simply the sum of the bits in a variety of institutions. An attack on the United States could begin with the destruction of all those financial records. (A financial institution that can’t stop criminal hackers would have no chance against a military attack to destroy the customer data in their systems. Because security is expensive, hard, and at times not user friendly, the financial services companies have fought any attempt to mandate hardened systems.) Logic bombs planted on those systems will delete all the backups once they’re brought on-line. All of it gone. Forever. At the same time, all cloud-based assets, all companies applications and customer data will be attacked and deleted. All of it gone. Forever. Major power generating turbines will be attacked the same way Stuxnet worked — over and under-speeding the turbines and rapidly cycling the switching systems until they burn out. A major portion of our electrical generation capacity will be off-line until replacements can be built. (They are currently built in China.) Our transportation infrastructure — air traffic control systems, airline reservations, package delivery companies — will be hacked and our GPS infrastructure will be taken down (hacked, jammed or physically attacked.) While some of our own military systems are hardened, attackers will shut down the soft parts of the military logistics and communications systems . Since our defense contractors have been the targets of some of the latest hacks , our newest weapons systems may not work, or worse if used, may have been reprogrammed to destroy our own assets. An attacker may try to mask its identity by making the attack appear to come from a different source. With our nation in an unprecedented economic collapse, our ability to retaliate militarily against a nuclear-armed opponent claiming innocence and threatening a response while we face them with unreliable weapons systems could make for a bad day. Our attacker might even offer economic assistance as part of the surrender terms. These scenarios make the question, “Are we in a tech bubble?” seem a bit ironic. It Doesn’t Have to Happen During the Cold War the United States and the Soviet Union faced off with an arsenal of strategic and tactical nuclear weapons large enough to directly kill hundreds of millions of people and plunge the planet in a “Nuclear Winter,” which could have killed billions more. But we didn’t do it. Instead, today the McDonalds in plaza labeled “Revolutionary Square” has been the victory parade for democracy and capitalism. It may be that we will survive the threat of a net war like we did the Cold War and that the Internet turns out to be the birth of a new spring for us all. Steve Blank’s blog : steveblank.com
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