In the 20th century, scientists and thinkers predicted that technology would change our lives fundamentally. Despite our technological achievements, these changes have not materialized. As Peter Theil said, “We wanted flying cars, instead we got 140 characters.”
Transformative new technologies rise, create new sectors and help us achieve phenomenal things. Then, at some point, they stop advancing. Output and productivity gains plateau, often for decades.
‘Tether Theory’ is my explanation for this phenomenon.
Tether Theory: The elements which help to create and establish a disruptive new technology eventually become the limitations on that technology’s further growth and innovation.
The ‘elements’ from the definition could include: founders, investors, established actors in the sector (like VCs, incubators and professional services firms), regulators and various stakeholders.
Per Tether Theory, sectors created by disruptive new technologies go through 6 stages:
- Establishing Best Practices
- Consolidation & Entrenchment
- Regulation & Dependencies
Stage 1: Birth
As a disruptive technology gives birth to a new sector, it experiences a period of unregulated growth and innovation. Since great technologies tend to be ‘sui generis’ – in a class of their own – the sectors they create do not have established norms or regulation. In an environment of freedom, a disruptive technology enjoys explosive growth and unbridled experimentation.
Stage 2: Establishing Best Practices
Through multiple swift cycles of iteration and experimentation, early movers establish a set of best practices and norms for the new technology. The sector’s dynamics are still rapidly evolving at this stage.
In some cases, multiple competing versions of the technology could vie for supremacy, often in platform wars. Some examples include:
- AC vs. DC in the race to standardize the electrical system
- Betamax vs. VHS in the battle of video cassette recording systems
One version of the technology wins, a hybrid version of the technology emerges or multiple variations of the technology coexist.
Stage 3: Standardization
As the technology continues to evolve, stakeholders and regulators gain a good enough understanding of it to craft standards for its use. After standardization, light regulation follows. Sometimes regulators create a sandbox to experiment with the technology and with different regulatory approaches.
Standardization gives a clear shape and form to the sector. This enables capital markets to more confidently step in and fund new projects in the sector. Enterprise firms begin to evaluate the technology and consider how to engage with it. A period of excitement, high competition and growth ensues. The mix of capital and competition helps the technology further evolve and improve.
Stage 4: Consolidation & Entrenchment
As the sector grows and matures, a set of market leaders emerge. These firms wield a high level of influence in the sector and shape its dynamics. They also have large client or customer bases, deep pockets or both. Faced with competition from these incumbents, less competitive or smaller companies either go out of business or are acquired by the incumbents. The sector experiences consolidation.
A group of established stakeholders, such as financial and professional service providers, insurance firms, information providers and dependent industries form around the market leaders. These stakeholders usually crave stability and predictability.
The incumbent leaders of the sector work to retain their dominance. In doing so, they intentionally or unintentionally resist changes to the technology and to the industry’s dynamics.
Stage 5: Increased Regulation & Dependencies
As the technology becomes mainstream, it becomes subject to regulation. In the face of impending regulation, the market leaders, along with freshly formed industry associations, shape the conversation in a way that protects and furthers their interests. Complex regulation favors deep-pocketed market leaders and the professional ecosystem around them makes it difficult and expensive for new firms to enter the market.
However, regulation is a double-edged sword. Regulatory risk becomes a major concern at this stage. Even regulation that favors the industry’s status quo can hamper the incumbents’ further growth. Additionally, over time, the technology becomes subject to indirect regulation such as tax or trade policy. Each layer of regulation adds complexity, and consequently, incumbent attention to compliance.
As the sector matures, its processes develop dependencies with other industries and with established stakeholders. These dependencies further limit the flexibility of the sector’s companies.
Stage 6: Stagnation
The sector now operates in a mature, layered regulatory environment and is subject to dependencies with entrenched players in other industries. Thus, it enters a period of stagnation or incremental growth. Innovative ideas must now go through routine, slow and bureaucratic processes. In this environment, experimentation becomes difficult, creativity is stifled and even innovative companies may see their corporate culture begin to decline.
A sector can exist in the stagnation stage for decades. Innovation is limited to tinkering with already-tested ideas. In this risk-averse environment, major technological change is unlikely to occur.
The airline sector is a great example of a sector in stagnation. Commentators examining the sector observed that “travel time across the Atlantic…for the first time since the Industrial Revolution, is getting longer rather than shorter.”
Tether Theory suggests that the people and organizations that help create, establish and entrench a new technology eventually prevent that technology from achieving its full potential. While standardization and regulation are important steps for a sector to mature, visionary founders and savvy policymakers should vigilantly protect creativity, experimentation and competition.
Tether Theory does not suggest that the world is not making important technological advancements. These advancements happen all the time and have major societal impacts. However, preventing – or at least postponing – entrenchment and stagnation could increase the beneficial impact of a disruptive technology and make sure that the gains from the technology are shared by a wide variety of stakeholders of different sizes and capabilities.