How to stimulate economic growth through technology investment is a continuing discussion. So a commonly asked question is: What is the next big technology “thing” that will create major new economic opportunities?
I believe that the first place to look is investing in communications technology, because the historical record shows that breakthrough innovations in communications tech that substantially increase the ability of people to interact and conduct business are key drivers of economic growth.
To support this conclusion, consider five major developments in electronic communications that had profoundly important consequences, starting with the electrical telegraph.
The first electronic communications system was the telegraph link developed by Samuel Morse and demonstrated in 1844. In addition to enabling rapid long-distance personal and business communications, the telegraph lines along railroad tracks revolutionized the ability to synchronize train traffic over big networks.
As big railroad networks proved their economic value, their construction generated investment booms that lasted decades as railroads in the second half of the 19th century proliferated around the world.
The second big communications breakthrough was the telephone that was introduced in the 1870s. Telephony set the stage for numerous new businesses and services, but an important consequence was the consolidation of the industry.
Because overlapping competing telephony networks were ruinous, to ensure national service AT&T was established as a US monopoly. The company was responsible for decades of innovative contributions through Bell Labs research and its many service subsidiaries.
Its monopoly position and consistent profits allowed the company to conduct long-range research, and the transistor was one of the results. I think of this momentous invention as the offspring of the telephony industry, since it was funded through the profits of that industry.
The invention of the transistor at Bell Labs in 1948 opened the digital computation era and led to all subsequent communications innovations that relied on computer operation.
But it took a team of brilliant innovators to go to the next stage of exploiting the transistor value in computation. A team of scientists, including former Bell Labs people, saw the market opportunity opened by digital circuits and founded Intel. The business plan was about one page long and defined no specifics.
Through its innovative endeavors, Intel created the integrated-circuit market, and its microprocessor chips were increasingly valuable in large part because of their use in growing digital communications networks of increasing data-carrying capacity.
Again we see the impact of communications on business development. So a key enabler of Intel’s growth was the fact that ever larger computer communications networks linking ever more powerful computers were being built, thus creating a demand for increasingly powerful Intel data-processing chips.
But the long-distance data-carrying capabilities of networks was being limited by the available technology that relied on copper or coaxial transmission lines.
This brings us to our third communications technology breakthrough that eventually solved that problem. This data-rate limitation was overcome in the 1970s by fiber-optic communications technology, which used light transmission through thin glass lines, with lasers providing the light pulses.
It took years of development but by the 1990s multi-gigabit fiber-optic systems were being deployed globally – enabling the Internet, our fourth communications breakthrough.
The Internet had its roots in the idea of communications networks based on digital data packets provided with headers for addressing and moving through computer routers that read their destination addresses and moved the packets to their destination through multiple hops.
Fiber-optic links combined with high-speed processing chips at routers enabled gigabit networks that had not been practical with prior copper-based transmission lines.
So the modern Internet was born, and we have witnessed thousands of new companies since the late 1990s that have leveraged its capability to provide new services that now dominate our economy, such as Amazon.com, Google and Facebook, to name a few of the most successful.
The Internet has left few industries alone. Witness Netflix, which using Internet distribution, successfully competes with cable access to the home – a business that was deemed an impregnable monopoly.
For the next big development, we go to our fifth breakthrough: ubiquitous two-way consumer wireless communications. Wireless communication was demonstrated in the late 19th century, but it took until the 1990s for two-way service at affordable consumer rates to become a mass service with billions of subscribers globally.
As a measure of its importance, wireless equipment now consumes annually 40% of all the chip value produced in the world. The industry is now embedded in the global economy, and among others, has made Apple one of the most valuable companies in the world while benefiting untold numbers of businesses around the world.
Of course, easy Internet access had to be developed. So here wireless technology played a key role. Internet access needs local networks, and a world without Wi-Fi is unthinkable. It has transformed the way people shop and communicate.
What we have described is a historical process in which new communications technologies enabled world-changing economic development. But the process is always painful, with winners and losers galore.
Identifying breakthrough communications technologies is the easy part. Exploiting market opportunities after revolutionary technologies emerge is where winners and losers part company.
For example, wireless telephones became highly popular after the 1990s, but the industry leaders of the time, Nokia and Motorola, focused on cost reduction of handsets and missed the enormous market for smartphones pioneered by Apple. Both went out of the handset business.
One lesson from history is that breakthrough technologies may emerge slowly in the face of skepticism that stops companies from taking them seriously until it is too late. Extensive and costly private and government investment is needed over years.
For fiber-optic communications, for example, industry conferences in the late 1970s included discussions dismissing their use in undersea cables because of inadequate reliability. Corning persevered in the fiber market, becoming the world leader.
Let me note that sometimes going against accepted wisdom can be rewarding. My favorite example involves an investment we made at Warburg Pincus in a company called Level One Communications the late 1980s.
Its proprietary technology allowed transmitting megabit-rate digital data on ordinary twisted-pair telephone copper lines.
There was common belief that computer data would be transmitted over fiber-optic links in office environments. On the other hand, we believed that if megabits of data per second could be transmitted for short distances over phone lines, the lower cost and ease of installation of copper lines would ensure a large market for local office digital data distribution.
This turned out to be correct, as Ethernet became a standard at 10 megabits per second over copper lines and, being early, Level One captured a large share of the market for chips enabling the service, and the company was eventually acquired by Intel.
Where are we today in breakthrough communications technology? Is there a number six?
It is still early, but the new 5G (fifth generation) wireless technology rolling out across the world is likely to fit the category, because it ushers in the age of widespread wireless machine networks.
The reason is that 5G greatly improves the data-carrying capacity of wireless networks and is well suited for machine-to-machine wireless communications, enabling remote high-speed data interconnections previously impractical. For example, this will enable robotic operations remotely controlled through wireless connectivity and machine maintenance serviced remotely.
One much-discussed application that could revolutionize transportation is driverless vehicles. Other applications in manufacturing and remote sensing as well as remote medical system monitoring will greatly reduce business costs.
But that will be true only for companies prepared to invest and use this new technology. And government support for communications infrastructure is critical because it is a vital economic asset for growth.
But this has always been the case. Companies either invest in the future or they disappear.
Henry Kressel is a technologist, inventor and long-term Warburg Pincus private equity investor. Among his technological achievements is the pioneering of the modern semiconductor laser device that enables modern communications systems.