The ideological hatred that many journalists and influencers feel towards Elon Musk hThey make Twitter layoffs seem like an isolated event when they are just a drop of water in the sea of layoffs that exposes the crisis of the technological sector.
In this article we will try to answer the question of whether we are facing a simple rearrangement of an industry that has reached market saturation or a bubble burst as it happened in the year 2000
what is a bubble
We can explain what a bubble is with something we learned in the old cartoons: "What goes up must come down." To give a more formal definition we can define it asor a process of exaggerated increase in the value of an industry (Expressed in the value of the price of its shares on the stock market) followed by a decrease as abrupt as the rise. This occurs in a relatively short amount of time.
development of a bubble
The economist Hyman P Minsky identified the process that a bubble follows:
- Displacement: Investors discover a new business opportunity such as a new product or technology with which they expect to earn high profits.
- Boom: More investors join for fear of being left out of business. This causes the share price to rise.
- Euphoria: Investors throw aside any kind of caution causing prices to rise uncontrollably.
- Take profit: The most conservative or savvy investors start pulling out when they have made a reasonable amount of profit or see the first signs of the end of the cycle.
- Panic: Finally, everyone becomes aware that prices are going to drop and tries to get out, which causes an even greater drop in the price.
Another aspect to consider in the development of a bubble is from the point of view of the consumer.
Moore's scheme indicates that every product needs a period of maturation before being available to the general public. It is first adopted by a small group of innovators, then spread to a small minority of early adopters. If the product is successful then it will be used by the majority until something else appears and only a minority will continue using it.
It is easy to find the intersection points between the Minsky steps and the Moore scheme, And, it will be easier if we add a third analysis tool: The growth-share matrix.
This matrix takes into account two factors:
- The growth rate of the market.
- The participation rate of a product in that market.
From there he defines four classes of products. I am going to alter the order that is usually used to make it coincide with the Minsky steps.
- Question products: They have a low market share but there are people who think it has great growth potential.
- star products: They generate huge profits and are expected to have high growth potential.
- Cow products: They generate profits, but they are not going to grow much more.
- dog products: They do not generate profits and their market share is declining.
Since most technology-related products require huge resources to develop, there needs to be a balance between investor and consumer interest.s. A certain proposal may be what consumers need, but if it fails to arouse investor support, it will never reach the market. The same happens if investors see growth potential in something that consumers do not find useful.
The dot com bubble
In the early XNUMXs there was an overabundance of venture capital that went into technology-based companies. In 1995 with the advent of the Internet, much of that money was funneled to companies whose business was based on the new service in the hope that they would become profitable.
However, Many of these companies were barely profitable and in most cases were unable to present a product that justified the price. that its shares achieved during its IPO.
Finally, the market came to its senses and by 2001 most of those companies had disappeared.
In the next article we will see what are the common points of the current crisis with that of 2001 and if it can be described as a bubble.
If we take the thought of the Austrian School of Economics to its ultimate consequences, every market would be to a greater or lesser extent in a bubble... However, the shortage of components for the manufacture of technological parts and equipment can be considered a bubble, due to the regulation and state intervention that has made possible the concentration of the majority of suppliers to a few (there being exploitable rare earths in other countries that for State reasons it was preferred to reserve as much as possible) instead of «Laissez faire et laissez passer, le monde va de lui même» (Let do and let pass, the world goes by itself). The consequences of this are the increase in prices (an economic indicator of the scarcity of the item), this also being partly responsible for the fall in the area of software due to the cost of maintaining new software with more capacity (which in turn requires more hardware), on the other hand, if we focus on the models of social networks such as the aforementioned twitter, they can and will decline as long as they do not innovate, update their software platform, the additional services they may have and its scope; Since the markets always move towards what offers the greatest benefit, this is how companies considered solid like Blockbuster or Kodaq or 3dfx go into being reduced to almost nothing or go into complete bankruptcy.
True, there are too many factors to consider. But, I think in this particular case it is more due to a failure to adapt to changes in the market.