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Long Waves: The History of Innovation Cycles

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Innovation Cycles

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Long Waves: How Innovation Cycles Influence Growth

Creative destruction plays a key role in entrepreneurship and economic development.

Coined by economist Joseph Schumpeter in 1942, the theory of “creative destruction” suggests that business cycles operate under long waves of innovation. Specifically, as markets are disrupted, key clusters of industries have outsized effects on the economy.

Take the railway industry, for example. At the turn of the 19th century, railways completely reshaped urban demographics and trade. Similarly, the internet disrupted entire industries—from media to retail.

The above infographic shows how innovation cycles have impacted economies since 1785, and what’s next for the future.

Innovation Cycles: The Six Waves

From the first wave of textiles and water power in the industrial revolution, to the internet in the 1990s, here are the six waves of innovation and their key breakthroughs.

First WaveSecond WaveThird WaveFourth WaveFifth WaveSixth Wave
Water Power
Textiles
Iron
Steam
Rail
Steel
Electricity
Chemicals
Internal-Combustion Engine
Petrochemicals
Electronics
Aviation
Digital Network
Software
New Media
Digitization (AI, IoT, AV,
Robots & Drones)
Clean Tech
60 years55 years50 years40 years30 years25 years

Source: Edelsen Institute, Detlef Reis

During the first wave of the Industrial Revolution, water power was instrumental in manufacturing paper, textiles, and iron goods. Unlike the mills of the past, full-sized dams fed turbines through complex belt systems. Advances in textiles brought the first factory, and cities expanded around them.

With the second wave, between about 1845 and 1900, came significant rail, steam, and steel advancements. The rail industry alone affected countless industries, from iron and oil to steel and copper. In turn, great railway monopolies were formed.

The emergence of electricity powering light and telephone communication through the third wave dominated the first half of the 1900s. Henry Ford introduced the Model T, and the assembly line transformed the auto industry. Automobiles became closely linked with the expansion of the American metropolis. Later, in the fourth wave, aviation revolutionized travel.

After the internet emerged by the early 1990s, barriers to information were upended. New media changed political discourse, news cycles, and communication in the fifth wave. The internet ushered in a new frontier of globalization, a borderless landscape of digital information flows.

Market Power

To the economist Schumpeter, technological innovations boosted economic growth and improved living standards.

However, these disruptors can also have a tendency to lead to monopolies. Especially during a cycle’s upswing, the strongest players realize wide margins, establish moats, and fend off rivals. Typically, these cycles begin when the innovations become of general use.

Of course, this can be seen today—never has the world been so closely connected. Information is more centralized than it has ever been, with Big Tech dominating global search traffic, social networks, and advertising.

Like the Big Tech behemoths of today, the rail industry had the power to control prices and push out competitors during the 19th century. At the peak, listed shares of rail companies on the New York Stock Exchange made up 60% of total stock market capitalization.

Waves of Change

As cycle longevity continues to shorten, the fifth wave may have a few years left under its belt.

The sixth wave, marked by artificial intelligence and digitization across information of things (IoT), robotics, and drones, will likely paint an entirely new picture. Namely, the automation of systems, predictive analytics, and data processing could make an impact. In turn, physical goods and services will likely be digitized. The time to complete tasks could shift from hours to even seconds.

At the same time, clean tech could come to the forefront. At the heart of each technological innovation is solving complex problems, and climate concerns are becoming increasingly pressing. Lower costs in solar PV and wind are also predicating efficiency advantages.

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Visualizing Microsoft’s Revenue, by Product Line

This graphic breaks down Microsoft’s revenue by segment—from cloud office software to AI search engine capabilities in 2023.

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Visualizing Microsoft’s Revenue, by Product Line

This was originally posted on our Voronoi app. Download the app for free on iOS or Android and discover incredible data-driven charts from a variety of trusted sources.

Over the last decade, Microsoft’s revenue has more than doubled, driven by key product lines like its intelligent cloud infrastructure.

Adding to this, Microsoft launched its AI-enabled search engine, Copilot last year, which has already generated $12 billion for the company. Beyond this search engine, Microsoft is developing a range of AI-based services, such as Azure Arc, a cloud computing platform with 18,000 customers.

This graphic breaks down Microsoft’s revenue in 2023, based on data from Affinity powered by Syntax.

Microsoft’s Most Lucrative Business Segments

In 2023, Microsoft revenues soared to a record $211 billion as demand for AI services accelerated.

As one of the world’s largest companies by market cap, Microsoft reached a $2.8 trillion valuation as investors flocked to big tech and AI-related stocks last year. Amid strong growth, here’s how much revenue was generated from Microsoft’s product lines in 2023:

Product LIneFY2023 Revenue Share of Revenue
Cloud Computing Services$80B38%
Cloud Office Suite Software$49B23%
Operating Systems$22B10%
Gaming Consoles$15B7%
Employment Listing Platform$15B7%
AI-Enabled Search Engine$12B6%
Other$19B9%
Total Revenue$211B100%

Comprising 38% of total revenues in 2023, Microsoft’s cloud computing services segment earns more than any other by a long shot.

These intelligent cloud services provide the servers, storage, and data centers that enable businesses to run websites and other computing services without the need for buying individual hardware and software.

The second-highest revenue driver was cloud office suite software, with sales of Microsoft 365 bringing in $49 billion in revenue.

Meanwhile, Microsoft’s gaming consoles segment pulled in $15 billion in one of its best years ever. In 2023, the company acquired Activision Blizzard for $68.7 billion, known for World of Warcraft and Call of Duty. It was the company’s biggest acquisition in its history.

Falling after gaming revenues is Copilot, its AI-enabled search engine, making up 6% of 2023 revenues. This productivity tool can be embedded into Microsoft 365, allowing companies to use natural language prompts to gain data on their company, summarize insights from meetings, and a host of other functions.

As AI-related services continue to gain momentum, it remains to be seen whether Microsft’s revenue will continue to see strong growth. So far, investor optimism has remained elevated.

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