The Futurist

The Psychology of Economic Progress

The human brain may not have evolved significantly in the last 35,000 years, but the human mind has evolved greatly in just the last 200, in many parts of the world.  This is apparent once we observe the world through Maslow's Hierarchy of Needs. 

Abraham Maslow was an eminent psychologist in the 20th century who realized tthat the spectrum of human needs is more universally straightforward than it might appear, irrespective of culture.  He constructed a hierarchy of human needs based on each level of prosperity and satisfaction, and the Maslow hierarchy became a foundation of modern psychology.  He categorized each bracket of need-driven behavior as follows (sometimes, there are five levels).

1. Survival : The most basic human urge to survive is one where a person may disregard courtesy, culture, or religion in the pursuit of urgent necessities. An otherwise normal person may become unreasonable or even violent when his survival itself is uncertain. Animalistic behaviors may manifest themselves in the most desperate times.
2. Belonging : Once a human has progressed to a level where his most fundamental needs are no longer a cause of daily concern, then he seeks to be part of a community, whether it be his place of work or his social community. Harming another person to seize his possessions is no longer tempting or worthwhile.
3. Esteem : Once a person is secure in his career and community, and has progressed beyond the need to feel accepted by his friends or respected at his workplace, he strives to excel in multiple areas of his life. Building and maintaining an ego become the most important priority. Thinking of new ways to entertain himself is high on the priority list of the person at this level, and surplus money translates into materialism.
4. Self-Actualization : A person who has reached a level where his means greatly exceed his requirements of material contentment then may choose to focus his energies on activities that permit him to achieve his full potential.  He is no longer concerned with pure material gain or enhancing the quality of his recreation, nor does he feel he needs to impress others beyond the extent that he already has.  He seeks to become everything that he has the potential to become, and any time not spent pursuing this is treated as a waste. He seeks the company of other actualized people, and in such groups respect is gained from intellectual or artistic accomplishment. 

In centuries past, killing another person in order to take his belongings was common.  Today, the downside risk to one's career of even petty theft or minor fraud is enough that most people in the US today don't consider it.  As the world economy accelerated from centuries of slow growth to a period of rapid growth starting from the middle of the 20th century, we have seen a general decline in violence and disorder in developed societies, and also a decline in large-scale warfare in general.  Simply put, when more people have a stake in the stability and health of the system, they are more interested in maintaining and strengthening it, rather than disrupting it or trying to bypass it.

At the same time, a large segment of US society is stuck within the third level, esteem.  The pursuit of fancier cars, bigger homes, and more material status symbols is seen as the ultimate achievement in life, through a belief that quality of life improves in direct proportion to the degree of conspicuous consumption.  Relatively few have broken out of esteem and rise to actualizaton, the level where the great ideas that move humanity forward can emerge. 

In the US, perhaps 3% still reside in survival, 65% in belonging, 30% in esteem, and just 2% in self-actualization.  There is no country in the world with any more than a tiny minority attaining self-actualization yet, and such a nation would have to emerge in order to surpass the US in global power and influence.  Similarly, some cultures make it difficult for individuals to rise out of survival or belonging at all, ensuring that some nations have systems that cannot reduce poverty or nurture knowledge-based businesses. 

This is why globalization can benefit the world greatly.  While anti-Americans deride the spread of American culture, this also means that people in cultures that inhibit upward psychological advancement are now presented with a guide on how to rise until esteem.  The rapid growth in India and China, despite their cultures being heavily organized along belonging to a family and a community, has featured young people rising to embrace American-style esteem.  Thus, massive reductions in both monetary and intellectual poverty are underway.  At the same time, the complacent Americans stuck in esteem are forced to compete harder with India and China to prosper within globalization, which could induce more Americans to innovate their way to self-actualization. 

As we evolve into an information economy, where more and more people are occupied in knowledge-based careers, self-actualization will be attainable for millions of people. Through actualization arises the greatest examples of social innovation, entrepreneurship, and charity, and these forces will be the key to creating the wondrous new technologies and robust economic growth that we expect in the 21st century. 

This is a vast subject, on which more articles will follow. 

The US Economy grew 4.8% in Q1

US GDP grew at 4.8% in Q1, clocking the second-highest growth in any quarter in the last 5 years.  This also made up for the weak growth in Q4 2005, and has ensured that the US economy remains on a trajectory of robust growth.

    

What is noteworthy is that this high growth has continued despite high oil prices (where were in the $60s per barrel in Q1), and despite the high trade deficit.  In the late 1990s, despite inexpensive oil and a much smaller trade deficit, GDP growth rates were not much higher than what we have seen over the last 3 years.  This shows of structurally sound the US economy is at the moment, and how it is growing at a rate much, much higher than the EU.  The so-called 'oil-crisis' is a media circus, nothing more. 

Related : The World Economy Grew 4.3% in 2005.

$70+/Barrel Oil, the Non-Crisis

Humans are not rational beings.  This is evidenced by how much agony there is over having to pay $500 more per year on gasoline than initially expected, against the relatively muted criticism towards real estate agents charging $10,000 to $60,000 for their services, or income tax preparation consuming over 10 hours of time per household per year (is 10 hours worth so much less than $500)? 

I have written before about why $70/barrel oil is good for America, as it will accelerate technological progress in energy.  In fact, it already has begun to do this. 

But yet another interesting thought arises.  Expensive oil affects the price of many things, as it inherently raises the cost of moving an object from one place to another.  Corporations that need to do a lot of this, such as Wal-Mart, Federal Express, or United Airlines, see their costs rise, and have to both raise their prices and trim their staffing levels. 

This seems like bad news for the US economy, until one considers the following :

Other countries also have such industries, and are also hit by higher oil prices.  Countries that many fear will overtake the United States, such as India and China, have economies even more dependent on oil than the US.  Sectors like automobiles, steel, aluminum, airlines, and concrete are actually growth industries in India and China, where the majority of people are yet to become consumers.  If half of the people who have cars today did not have cars five years ago, then the increase in gasoline costs is a much larger percentage of their income than it is for an American.  $500 a year more for gasoline actually is a lot for those who make $10,000 a year and just bought their very first car.  Chinese and Indian consumer spending is much more sensitive to $70 oil than US consumer spending is. 

At the same time, US corporations such as Google, Yahoo, Goldman Sachs, Pixar, Citigroup, or Oracle are much less vulnerable to high oil prices.  Yet, these knowledge-based businesses are the ones that have created most of the new wealth in the US during the last 25 years, and are the industries in which America's dominance over the rest of the world is the largest. 

So in conclusion, high oil prices hurts some of our industries, but it hurts those industries in other countries to the same degree if not more, and the industries which are less affected by high oil prices are already the industries in which America is ridiculously far ahead of the rest of the world. 

So high oil prices actually increase the gap between the US economy and those that would seek to catch up to it.  If oil hits $100/barrel, US GDP growth may drop from 3.5% to 2%, but China's GDP growth may drop from 10% to 4%.

Food for thought...

Virtual Worlds - BusinessWeek Catches On

The cover story of BusinessWeek this week is devoted to virtual game worlds and the real economic opportunities that some entrepreneurs are finding in them. 

I spoke of exactly this less than a month earlier, on April 1, about how video games would evolve into an all-encompassing next generation of entertainment to displace television, and also become a huge ecosystem for entrepreneurship.  It seems that we are on the cusp of this vision becoming reality (by 2012, as per my prediction). 

Milli, Micro, Nano, Pico

What would be the best way to measure, and predict, technological progress?  One good observation has been The Impact of Computing, but why has computing occurred now, rather than a few decades earlier or later?  Why is nanotechnology being talked about now, rather than much earlier or later?

Engineering has two dimensions of progress - the ability to engineer and manufacture designs at exponentially smaller scales, and the ability to engineer projects of exponentially larger complexity.  In other words, progress occurs as we design in increasingly intricate detail, while simultaneously scaling this intricacy to larger sizes, and can mass produce these designs. 

For thousands of years, the grandest projects involved huge bricks of stone (the Pyramids, medieval castles).  The most intricate carvings by hand were on the scale of millimeters, but scaled only to the size of hand-carried artifacts.  Eventually, devices such as wristwatches were invented, that had moving parts on a millimeter scale.

At the same time, engineering on a molecular level first started with the creation of simple compounds like Hydrochloric Acid, and over time graduated to complex chemicals, organic molecules, and advanced compounds used in industry and pharmaceuticals.  We are currently able to engineer molecules that have tens of thousands of atoms within them, and this capability continues to get more advanced. 

The chart below is a rough plot of the exponentially shrinking detail of designs which we can mass-produce (the pink line), and the increasingly larger atom-by-atom constructs that we can create (the green line).  Integrated circuits became possible as the pink line got low enough in the 1970s and 80s, and life-saving new pharmaceuticals have emerged as the green line got to where it was in the 1990s and today.  The two converge right about now, which is not some magical inflection point, but rather the true context in which to view the birth of nanotechnology. 

As we move through the next decade, molecular engineering will be capable of producing compounds tens of times more complex than today, creating amazing new drugs, materials, and biotechnologies.  Increasingly finer design and manufacturing capabilities will allow computer chips to accomodate 10 billion transistors in less than one square inch, and for billions of these to be produced.  Nanotechnology will be the domain of all this and more, and while the beginnings may appear too small to notice to the untrained observer, the dual engineering trends of the past century and earlier converge to the conception of this era now.

Further into the future, molecule-sized intelligent robots will be able to gather and assemble into solid objects almost instantly, and move inside our body to monitor our health and fight pathogens without our noticing.  Such nanobots will change our perception of physical form as we know it.  Even later, picotechnology, or engineering on the scale of trillionths of a meter - that of subatomic particles - will be the frontier of mainstream consumer technology, in ways we cannot begin to imagine today.  This may coincide with a Technological Singularity around the middle of the 21st century. 

For now, though, we can sit back and watch the faint trickle of nanotechnology headlines, products, and wealth thicken and grow into a stream, then a river, and finally a massive ocean that deeply submerges our world in its influence. 

US Wages May Finally Rise, Through Biotechnology

For the last few years, despite robust GDP, productivity growth, and job creation, the average income of US workers has been rising at a very slow rate.  Some of this was attributed to 'outsourcing', but this is not the case, as job creation would also have been weak, rather than just wage growth. 

The reason for low wage growth has been healthcare costs greatly outpacing inflation during 2000-05.  This consumes money that employers would have otherwise distributed towards employee salaries.  Some of the rise in healthcare costs is due to an aging population, and some of this is due to the growing number of illegal immigrants not paying into a system they are using. 

The chart below from the Bureau of Labor Statistics shows how the increased costs of benefits (mostly health insurance) has left little remaining money for salaries to rise.  This is in sharp constrast to the late 1990s, when salaries could rise more rapidly due to subdued increases in healthcare costs. 

In fact, the perception that the economy is weaker now relative to the late 1990s, despite nearly every economic indicator being comparable between the two periods, could be entirely due to this.  People are getting weaker raises even when employers have increased spending on employees each year. 

But we may be over the hump, as the data is finally trending in a favorable direction.  Michael Mandel's blog has observed a decline in some of the technology-related components of healthcare costs.  The costs of medical labs and imaging centers stopped rising altogether in the last year.  Mandel says this may be due to competition, but I think this is due to technology.  Not only are many advanced instruments subject to The Impact of Computing, and thus improving in power and number every year, but new drugs and gene therapies provide treatment that sometimes avoids hospital stays altogether.  Exponentially improving technologies are pervasively moving into medicine to deliver faster, cheaper, more effective treatments, and this saves money even for people who are not users of them. 

If the moderation in the price of high-tech medical costs continues, US wages may rise as employers can pass more on towards salaries instead of health insurance premiums. 

Related : Are you prepared to live to be 100?

The Next Big Thing in Entertainment - Part III

Here is a follow up to the two-part article, the Next Big Thing in Entertainment, where a prediction is made that the video game industry will give rise to something much larger, that transforms many dimensions of entertainment entirely.

I feel one additional detail worth discussing is the performance of stocks that may do well from this phenomenon.  A 5-year chart of four game development companies, Electronic Arts (ERTS), Activision (ATVI), Take-Two Interactive Software (TTWO), and THQ Inc. (THQI), plus retailer Gamestop (GME) provides an interesting picture. 

   

All 5 companies appear to have greatly outperformed the S&P500 over the last 5 years, despite this being a poor period for technology stocks.  Past performance is no indication of future returns, and it is difficult to predict with competitors will prevail over others, but a basket of stocks in this sector will be very interesting to watch for the next 6 years. 

The Housing Bubble - 20-Year Gains May Never be Repeated

There are many reasons to believe that housing is in a bubble in many countries, and that in the US, residential real-estate in certain markets peaked in late 2005, and is now on the brink of a multi-year decline.  This is a vast subject, but to summarize the main reasons to think this is a bubble are :

1)  Interest Rates were at 46-year lows in 2002-04, which reduces mortgage payments for a given house, but inflates home values.  This causes the ratio of home prices to salaries and home prices to rent to rise far above the trendline.  At the same time, when interest rates rise (as they have since early 2005), home prices fall a couple years later as payments for a given home price rise and buyers are forced to adjust downwards. 

2)  Speculation is rampant, because the low interest rates from 2002-04 caused price increases of 15% a year to occur, and lead people to believe this is the normal trajectory of the trendline.  This has tempted people to buy additional homes for investment, and happily accept the fact that rent income is much less than the mortgage payment, under the expectation that equity gains will offset the negative monthly cash flow. 

Now, the bubble of the last 3-4 years was due to low interest rates at the front of the yield curve, which is something that the Federal Reserve controls, and which has given rise to new types of adjustable-rate mortgages that are advantageous only when short-term rates are very low.  The rise of the Fed Funds Rate back to moderate levels guarantees a correction of the recent bubble, and is easily predictable. 

However, there is another unrepeatable phenomenon residing beneath the first bubble, at the other end of the yield curve - the decline in long-term rates over the last 25 years.

    

The yield of the 10-year bond, which somewhat corelates to 30-year mortgage rates, peaked in the early 1980s and bottomed out in 2003.  This long downward drift in mortgage rates generated upward movement on housing, and permitted housing to rise at a rate greater than nominal per capita GDP over this period.  Even if someone purchased a house in the early 1990s, their mortgage rate was 10%, vs. just 6% in 2001 (before the recent bubble).  This is the reason why the old rule of thumb of prospective homeowners being wise not the purchase a house priced more than 2.5 times their annual income was applicable in the 1970s and 1980s, but somehow gave way to home prices of 5-7 times income being considered normal.  The hypothetical example below may help illustrate this phenomenon.

Now, the 10-year note yields (and mortgage rates) have begun to rise.  While the rise has merely been by 1% so far, and even if rates never get that much higher than they are is now, it is impossible for the drop in yield from 1981 to 2001 to be repeated.  When the 10-year yield is 5% and mortage rates are 6.5%, there is no room for them to drop another 3%.  Theoretical 3% mortgage rates would result in homes being priced at 10 times average salaries nationwide, and even then have no further room for appreciation from that point.  The floor has been hit, and there is nowhere else to go for further rate declines. 

Thus, while the bubble created by low short-term rates from 2002-04 may dissipate in the next two years, after that, the next 20 years will additionally no longer have a tailwind of declining long-term rates behind housing, and the trendline of housing prices will be forced to converge towards mere increases in inflation and per-capita real GDP, or about 5% a year in the US.  This is after the short-term bubble corrects. 

While I do believe that economic growth rates are exponential and accelerating, housing, being a product without a knowledge-based component, is less likely to participate in this accelerating curve.  Increasingly greater returns will be seen in the stock market, and stocks, particularly those of knowledge-based businesses, will continue to draw capital away from real-estate, over the next 20 years. 

Europe is Giving Up on the Future

Two events on April 10, 2006 pushed continental Europe closer to the irreversible extinction of their civilization. 

In France, a very modest law to let employers terminate underperforming employees before the age of 26 was scrapped after socialists rioted in protest.  This could have been the first step in halting France's slide down the economic and demographic slippery slope they are on, but rioting socialists proved they can intimidate the government.  No business started in France in the last 40 years is among France's 25 largest corporations.  A culture of low birth rates, aspirations of mediocrity, and segregation of angry Islamic immigrants spells disaster for France before 2020. 

In Italy, one of the last staunchly pro-US leaders in Europe, Silvio Berlusconi, may lose his bid for re-election.  Italy, like France, also has a sluggish economy and birth rates far below replacement levels.  His opponent, Romano Prodi, is bound to continue and even increase socialist practices such as 4-day workweeks.

The leftward shifts follow in the footsteps of Spain, which, in reaction to the March 11, 2004 Madrid Train Bombings, chose appeasement over counterattack, and voted out a pro-American government in favor of an anti-American socialist government.  Predictably, Spain also has a sluggish economy, anti-business labor laws, and a severe shortage of new children being produced.

There are still small pockets of hope in Europe.  Germany voted out anti-American Gerhard Schroeder and voted in pro-American reformist Angela Merkel.  Denmark stood firm in the cartoon controversy.  But these events, unless they cascade into much larger movements, are not enough to shift the center of gravity of European culture away from the path to demise.  The hope some had for Europe to fight for their future fell into the abyss on April 10, 2006. 

Remarkably, for the high opinions that many Europeans have of their culture, they have little interest in continuing that culture through producing new Europeans.  When many Europeans are asked about this, they don't even want to think about it.  Try a small experiment the next time you get a chance to ask this of anyone from continental Western Europe.

"In Europe, far fewer children are being produced to replace the existing population of Europeans, even while immigrant Muslims have many children.  How can European civilization continue, under these circumstances?"

Try it, and see what happens.  Notice how their answer will avoid the question posed and somehow deviate into a criticism of America.  Anti-Americanism is not merely their fashion, but now a drug that they use to distract them from their self-inflicted troubles.  The European Union, formed to be an economic couterweight to the US, still produces just half of the new wealth that the US produces, and has a growth rate much lower than the world average.  By 2020, the EU will not even be a counterweight to China or India, let alone the US.   

It is sad when a civilization with a rich history and culture stops making an effort to build a future.  Perhaps, in a Darwinian sense, we are seeing evolution and extinction at work, where societies than can't adapt to new realities are unable to take action to continue their survival. 

Cox and Forkum puts a thousand words in a picture.

The 2008 Presidential Election - Immigration and The Third Party Wild Card

The recent debate over immigration into America (both legal and illegal) has thrown the entire political status quo into disorder.  The American political map has been shown to be not just a horizontal axis of Left and Right, but also a vertical axis of globalizaton or isolation.  Allow me to explain. 

Before, the most heavily debated issue was Iraq.  The Democrats, despite many of them voting for the Iraq War in 2002, managed to collaborate with the anti-Bush media and persuade single-sentence-depth fashion sheep that either 'Bush lied about WMDs', or 'Saddam had nothing to do with Al-Qaeda', or 'The war is for oil'.   Logic and facts could be ignored, as the 'Right' was the clearly defined enemy, and the end of opposing them justified the means. 

Most Americans neatly found homes on one of two sides of this issue, and the prominent generals of both armies were clearly defined and recognized.  One could predict what a particular person's position on the Iraq War was merely by hearing their opinion on tax cuts or Supreme Court Justices. 

Then, along came an issue that entirely scattered the ideological bastions of both hordes - the issue of how America should deal with and categorize those who would seek to come immigrate here.  On the venerable conservative magazine National Review, Larry Kudlow and Rich Lowry, joined like Siamese twins on every other pillar of conservative thought, had entirely opposing articles on immigration, on the same day.  Lou Dobbs, previously disdained by conservatives as an isolationist, is now praised by some conservatives and smeared by leftists as a racist.  Pat Buchanan and Tom Daschle, thought to be opposite extremes, agree with each other wholeheartedly at panel symposiums on C-SPAN. 

Why have the battle lines been blurred?  Because the vertical axis of globalization and isolationism splits political ideologies into 4 quadrants, effectively four rather than two columns of fighters. 

The only predictable column is the fifth one. Anti-American fifth columnists (8-10% of the US population) invariably support the position that hurts America, but they are not sure how to use this particular issue to do that.  Other than demand bilingual public schools, in-state college tuition for illegals, and support fringe separatist groups, they are unable to figure out what other indisputably harmful schemes they can inflict upon America within this issue. 

The fifth column only has power when the media, and hence the 35-40% of the US population that are fashion sheep, side with them (as in the case of the Iraq War).  But in the same way, it is difficult for the fashion sheep to determine what view, in fact, is fashionable. 

Is it fashionable to say that businesses need cheap Mexican labor for jobs that Americans won't do?  Is it fashionable to declare that India and China are producing more engineers than the US, and so the US needs to import as many engineers as possible?  Is it fashionable to say this is eroding the wages of the American middle class?  Is it fashionable to say that politicians are pandering to the 'Hispanic' vote?  If so, which party is it fashionable to criticize?  Is it fashionable to accuse people of racism, even if the celebrity in question opposes the Iraq War?  Fashion sheep are bewildered by the complexity of this issue, and will not come to agreement on what fashionable statements they can collectively unite behind to memorize.  Thus, they will not unify behind one position solidly enough to be a factor in this debate. 

The only fashionable nuance that has permeated this debate is the deliberate refusal of the American public to distinguish between :

Legal immigration, and

Illegal immigration. 

This cognitive dissonance is astonishing, and is at the source of the massive galaxy of contradictory one-liners flying around the stadium of political discourse.  Herein lies the soft underbelly of America's future as we head to the crossroads of our civilization, the 2008 election. 

When the public demands something they don't fully understand, that neither party can address without offending large groups, while there is so much confusion about what benefits America and what hurts it, the climate is ripe for a third-party candidate to emerge and cannibalize voters from the other two parties.  The passions are running high enough that a candidate running solely on the issue of sealing the southern border could easily siphon 6% or more of the popular vote, leaving a major-party candidate with 47% to garner more electoral votes, and defeat an opponent with 46%. 

This has already happened in the 1992, 1996, and 2000 elections, where a third party ensured that the winning candidate had less than 50% of the popular vote.  The question is, would such a candidate in 2008 siphon away more voters from Democrats or Republicans?

Therein lies the true unpredictability that the vertical axis introduces.  Unions oppose immigration but classical liberals and university intellectuals support it.  Evangelicals may see Catholic Mexicans as undesirable non-adherents, or as prospective converts.  Uneducated illegals consume taxpayer resources, but white-collar immigrants effectively subsidize the US economy to the extent of $200 billion a year by being educated at the expense of another country.  Legislation that Mexicans in California welcome, Cubans in Florida might vehemently oppose, particularly as stereotypes of Mexicans also engulf them.  Agribusinesses benefiting from inexpensive illegal labor will be in opposition to Silicon Valley knowledge businesses seeing their California taxes rise.  Which party comes out ahead in forming a conglomeration to appease more of the above lobbies than their opponent?

Throw the large and powerful 2008 blogosphere into the mix, and we can expect a maddening political pandemonium ahead of us. 

The Next Big Thing in Entertainment - Part II

Continuing from Part I, where a case is made that the successor to video games, virtual reality, will draw half of all time currently spent on television viewership by 2012. 

The film industry, on the other hand, has far less of a captive audience than television, and thus evolved to be much closer to a meritocracy.  Independent films with low budgets can occasionally do as well as major studio productions, and substantial entrepreneurship is conducted towards such goals. 

This is also a business model that continually absorbs new technology, and even has a category of films generated entirely through computer animation.  A business such as Pixar could not have existed in the early 1990s, but from Toy Story (1995) onwards, Pixar has produced seven consecutive hits, and continues to generate visible increases in graphical sophistication with each film.  At the same time, the tools that were once accessible only to Pixar-sized budgets are now starting to become available to small indie filmmakers. 

Even while the factors in Part I will draw viewers away from mediocre films, video game development software itself can be modified and dubbed to make short films.  Off-the-shelf software is already being used for this purpose, in an artform known as machinima.  While most machinima films today appear amateurish and choppy, in just a few short years the technology will enable the creation of Toy Story calibre indie films. 

By democratizing filmmaking, machina may effectively do to the film industry what blogs did to the mainstream media.  In other words, a full-length feature film created by just 3 developers, at a cost of under $30,000, could be quickly distributed over the Internet and gain popularity in direct proportion to its merit.  Essentially, almost anyone with the patience, skill, and creativity can aspire to become a filmmaker, with very little financing required at all.  This too, just like the blogosphere before it, will become a viable form of entrepreneurship, and create a new category of self-accomplished celebrities. 

At the same time, machinima will find a complementary role to play among the big filmmakers as well, just as blogs are used for a similar purpose by news organizations today.  Peter Jackson or Steven Spielberg could use machinima technology to slash special-effects costs from millions to mere thousands of dollars.  Furthermore, since top films have corresponding games developed alongside them, machinima fits nicely in between as an opportunity for the fan community to create 'open source' scenes or side stories of the film.  This helps the promotion and branding of the original film, and thus would be encouraged by the producer and studio. 

Thousands of people will partake in the creation of machinima films by 2010, and by 2012 one of these films will be in the top 10 of all films created that year, in terms of the number of Google search links it generates.  These machinima films will have the same effect on the film industry that the blogosphere has had on the mainstream media. 

There you have it, the two big changes that will fundamentally overturn entertainment as we know it, while making it substantially more fun and participatory, in just 6 short years. 

The Next Big Thing in Entertainment - Part I

Previously, I had written about why the biggest technological changes take almost everyone by surprise.  Not many people recognize the exponential, accelerating nature of technological change, and fewer still have the vision to foresee how two seemingly unrelated trends could converge to create massive new industries and reconstruct popular culture.

Today, we will attempt to make just such a prediction.

Computer graphics and video games have improved in realism in direct accordance with Moore's Law.  Check out the images of video game progression to absorb the magnitude of this trend.  One can appreciate this further by merely comparing Pixar's Toy Story (1995) to their latest film, Cars (2006).  But to merely project this one trend to predict that video games will have graphics that look as good as the real thing is an unimaginative plateau.  Instead, let's take it further and predict :

Video Gaming (which will no longer be called this) will become a form of entertainment so widely and deeply enjoyed that it will reduce the time spent on watching network television to half of what it is today, by 2012.

Impossible, you say?  How can this massive change happen in just 6 years?  First, think of it in terms of 'Virtual Reality' (VR), rather than 'games'.  Then, consider that :

1) Flat hi-def television sets that can bring out the full beauty of advanced graphics will become much cheaper and thinner, so hundreds of millions of people will have wall-mounted sets of 50 inches or greater for under $1000 by 2012.

2) The handheld controllers that adults find inconvenient will be replaced by speech and motion recognition technology.  The user experience will involve speaking to characters in the game, and sports simulations will involve playing baseball or tennis by physically moving one's hand.  Eventually, entire bodysuits and goggles will be available for a fully immersive experience. 

3) Creative talent is already migrating out the television industry and into video games, as is evident by the increase in story quality in games and the decline in the quality of television programs.  This trend will continue, and result in games available for every genre of film.  Network television has already been reduced to depending on a large proportion of low-budget 'reality shows' to sustain their cost-burdened business models. 

4) Adult-themed entertainment has driven the market demand and development of many technologies, like the television, VCR, DVD player, and Internet.  Gaming has been a notable exception, because the graphics have not been realistic enough to attract this audience, except for a few unusual games.  However, as realism increases through points 1) and 2), this vast new market opens up, which in turn pushes development.  For the first time, there are entire conferences devoted to this application of VR technology.  The catalyst that other technologies received is yet to stimulate gaming.

5) Older people are averse to games, as they did not have this form of entertainment when they were young.  However, people born after 1970 have grown up with games, and thus still occasionally play them as adults.  As the pre-game generation is replaced by those familiar with games, more VR tailored for older people will develop.  While this demographic shift will not make a huge change by 2012, it is irreversibly pushing the market in this direction every year. 

6) Online multiplayer role-playing games are highly addictive, but already involve people buying and selling game items for real money, to the tune of a $1.1 billion per year market.  Highly skilled players already earn thousands of dollars per year this way, and with more participants joining through more advanced VR experiences described above, this will attract a sizable group of people who are able to earn a full-time living through these VR worlds.  This will become a viable form of entrepreneurship, just like eBay and Google Ads support entrepreneurial ecosystems today.

There you have it, a convergence of multiple trends bringing a massive shift in how people spend their entertainment time by 2012, with television only watched for sports, documentaries, talk shows, and a few top programs. 

The progress in gaming also affects the film industry, but in a very different way.  The film industry will actually become greatly enhanced and democratized over the same period.  For this, stay tuned for Part II tomorrow.