knows that it faces the
opportunity and threat of
being transformed by the
Internet, and this was the
year that happened," said
Daniel Yergin, a business
consultant and author.
The Economy Transformed, Bit by Bit
By STEVE LOHR
In
1995, Bill Gates of Microsoft wrote an
impassioned
memo to his lieutenants stirring them to
confront the challenge of
"The Internet Tidal Wave."
That wave hit corporate
America as a whole in 1999,
when companies large and
small recognized that the
impact of the Internet would
not be confined merely to
Silicon Valley or to the
proliferating dot-com start-ups.
"Every business now
knows that it faces the
opportunity and threat of
being transformed by the
Internet, and this was the
year that happened," said
Daniel Yergin, a business
consultant and author.
The Internet has also
become a powerful
symbol of society's
expectations about the
future -- a future of
fast-moving, disruptive
technology that is shifting the
terrain not only in business,
but also in politics and
culture.
The truth, of course, is
that it is probably too early to
judge whether an Internet
revolution is truly under way.
Historians say the Internet
should be viewed mainly as
the latest advance in communications,
a successor to
the telegraph and the telephone,
more a technological
step than a leap forward.
Still, whether labeled a
revolution or an evolution, the
Internet's impact on the
economy seems destined to
become greater and greater.
When people speak of the
"Internet economy," they
do not really mean that Internet
businesses themselves suddenly
loom so large in the
nation's $9 trillion economy.
They are talking of a
technology and a pattern
of business behavior that feels
like the future.
The Internet is seen as a
technology of borderless free
markets. It is a global
network with open technology
standards, not owned or
controlled by a single company
or nation. And it is magic
on Wall Street these days,
driving the shares of many
Internet companies to
astronomical heights.
Because it is such a low-cost
communications technology, the
Internet holds the promise of
drastically reducing transactions
costs. This opens the door to
what Michael Porter of
Harvard's business school has
called "atomistic competition,"
as market forces and
entrepreneurial ways are driven
further down toward the
individual level. Organizational
bureaucracies of every kind --
corporate, government and union
-- suddenly look vulnerable to
the Internet's decentralizing
powers.
Even the power of nation
states, already eroding, seems
at risk. Mr. Yergin, the
co-author with Joseph
Stanislaw of "The Commanding
Heights," a history of
the rise of the global marketplace,
observed: "Nothing
so symbolizes globalization
as the Internet, a
technology with the power
to leap across the
geographic borders of nation-states
and across time
zones."
Prediction tends to be a
humbling, hit-or-miss endeavor
even for the gifted or lucky.
In the late 1960's, for
example, Sir Arthur C. Clarke,
the science fiction
writer, predicted that by
2000 a vast electronic "global
library" would be developed
-- and the Internet and the
World Wide Web could arguably
qualify as one. Then
again, Sir Arthur also predicted
that the planets would
be colonized by next year.
But technologists, economists
and futurists say that
some questions are worth
asking when thinking about
how the Internet economy
might evolve over the next
few years. What was the
mixture of technology and
policy decisions that created
today's Internet? What key
technology and policy issues
are likely to affect the
Internet over the next few
years? And, finally, since the
future is usually the past
with a twist, what can be
learned from earlier technology-driven
transitions?
The Internet has been embraced
by libertarian
free-marketers as the embodiment
of their values, but,
to be sure, it began with
government financing. Yet
liberals who point to the
Internet to support a
pro-government stance --
at least in any conventional
sense -- are ignoring certain
facts. The early money for
the Internet -- as well
as for pioneering research in
computer graphics and speech
recognition software --
came from an elite, the
Pentagon's Advanced Research
Projects Agency. Its money
came from the military's
largess, and ARPA's leaders
spent it pretty much as
they pleased with little
accountability. From the
mid-1960's to the mid-1970's,
the agency's leaders
displayed an uncanny knack
for backing long-term
winners in technology.
For two decades, the Internet
was developed gradually
in the distinctive milieu
of the nation's research centers
by scientists who believed
in the free sharing of
information and in open
technology standards. The next
major policy pronouncement
about the Internet did not
come until 1997, when the
Clinton administration
released its "Framework
for Global Electronic
Commerce." Written by Ira
C. Magaziner, a senior
White House adviser, the
report called for a
market-driven Internet.
"Business models must evolve
rapidly to keep pace with
the breakneck speed of
change in the technology,"
the report said. "Government
attempts to regulate are
likely to be outmoded by the
time they are finally enacted."
So the pattern of policy
to date: shrewd government
seeding of research followed
by benign neglect. But as
the Internet increasingly
becomes a main thoroughfare
of commerce, a host of new
policy issues loom -- how
to deal with taxation, privacy,
security and international
trade in a global networked
economy.
"The Internet has given us
the greatest rate of return on
a public infrastructure
investment ever," said Robert
Litan, director of economic
studies at the Brookings
Institution. "And it has
flourished because we have not
yet taxed or regulated it
to death -- though those are live
issues."
Technologically, the Internet
is almost an economy unto
itself -- a network, yes,
but also a complex and
interacting set of technologies.
Today's Internet is a
result of a torrid pace
of improvement in recent years in
computer networks, processing
power, data storage,
software, display technology
and user interfaces like
the Web browser.
The sheer firepower of computers,
experts say, is
certain to race ahead to
startling effect over the next
few years. Data storage
technology, for example, is
advancing at a particularly
rapid rate. By 2003,
personal computers may well
come with terabyte hard
drives, which are roughly
100 times the capacity on
new PC's today, featuring
about 10 gigabytes on
average. A terabyte drive
would be able to hold every
conversation that even the
chattiest person has had in a
lifetime. Think of a supercomputer
on every desktop, in
terms of giving individuals
the ability to mine personal
or business information.
In every field of academic
and scientific research,
computing will increasingly
be used for simulation and
analysis. The real payoff
from the Human Genome
Project, for example, will
come not from identifying the
complete DNA sequence, but
from understanding how
these complex proteins work.
Such knowledge, medical
experts say, will be the
basis for everything from
developing personally tailored
drugs to discovering
new ways to treat disease.
The main tool for stalking
that breakthrough knowledge
is computational biology
-- microbiological simulations
run on powerful
computers.
The real technical challenge
to the Internet economy
will not come from any shortcoming
in raw computing
power, but from the difficulty
of building up the global
network to meet demand.
The next-generation vision of
the Internet is of a high-speed
global network to which
billions of devices are
connected, from TV set-top
boxes and hand-held computers
to refrigerators and
washing machines that would
be able to do everything
from optimizing fuel use
to requesting a repair call
automatically online.
But that kind of global nervous
system of commerce and
communication will require
far more than adding
computers and laying more
wire. The Internet, after all,
was originally designed
as a computerized "party line"
for a small community of
researchers -- who knew and
trusted each other -- to
send e-mail. And network
complexity can increase
exponentially -- that is, a
network with 200 million
users is far more than twice
as complex as one with 100
million because each user,
each computer and each line
of code can interact with
others in the network in
unpredictable ways, just as in a
biological organism.
A presidential advisory group
of leading computer
scientists concluded earlier
this year that new research,
fresh approaches and more
government money were
needed to cope with the
problem. "Scaling the Internet
to handle the expected growth
over time is a major
challenge," said Irving
Wladawsky-Berger, general
manager of the Internet
division at I.B.M. and a member
of the group. "And the current
infrastructure can't scale
up."
The group's report to the
White House warned that
there would be "catastrophic
failures" in the computer
networks that increasingly
support the nation's defense
and economy, unless those
networks were retooled.
Still, Mr. Wladawsky-Berger
predicts that the technical
challenge can be overcome,
provided the government
and industry make the needed
research investments. "It
should not be a showstopper,"
he said.
Indeed, given the track
record of success in
computing, the visceral
optimism of the
technologists seems
justified. "Sure there are
some tough problems,
but it'll work," said Rick
Rashid, head of research
at Microsoft. "We can
do it. We always have.
In information
technology, that is the
way it's always worked."
That information
technology is delivering
a problem-solving payoff
has been an article of
faith in the corporate
world for years, far more
so than among
economists. Business
investment in computer
hardware and software
is running at $380 billion
a year, up steadily from
the annual rate of $110
billion five years ago.
And corporate America
is expected to keep
increasing such
spending.. By the end of
2001, Macroeconomic
Advisers, a research
firm in St. Louis,
projects that business
investment in computer
hardware and software
will be running at a
yearly rate of $513 billion.
Economists expect the nation's
extraordinary growth to
continue next year, though
at a somewhat slower pace.
The consensus among the
50 forecasters in the Blue
Chip Economic Indicators
survey is that the economy
will expand 3.9 percent
this year, with inflation at 1.4
percent. For 2000, the consensus
is growth of 3.2
percent and inflation of
1.7 percent. In February, the
economy should set the record
for the longest
expansion, surpassing the
106-month record set in the
1960's.
Just what impact information
technology has had on the
economy's uncommon run of
growth, productivity gains
and low inflation is a subject
of heated debate within
the economics profession.
It is probably too early to
tell, but Mr. Litan of Brookings,
who is leading a
yearlong study on the issue,
sponsored by the Internet
Policy Institute, said,
"My instinct is whatever we find
the economic impact to be,
it will be a lot greater five
years from now."
The sense of being at the
start of a business and
economic transformation,
of course, has fueled the
Internet start-up fever.
It seems a speculative bubble,
but such periods of investment
mania foster a rapid
pace of business experimentation.
Thomas Eisenmann,
an assistant professor at
the Harvard Business School,
notes that from 1900 to
1925 there were more than
3,300 automobile start-ups
in America turning out cars
of many types -- some sporting
three wheels, some six;
one model featuring a shiplike
tiller for steering; others
trying electricity or steam
as power sources.
"We'll see the same kind
of winnowing in
e-commerce," Mr. Eisenmann
said. "Some will
succeed, but most will fail.
We'll repeat the past again,
only faster."
For established companies,
the Internet challenge is to
adapt to an accelerated
technological shift. That was
precisely the quandary Mr.
Gates was sketching out in
his 1995 memo: Microsoft
was threatened by the rise of
Internet software; yet if
it scrambled, he wrote, the
company could benefit from
the Internet. The speed of
Microsoft's response is
regarded as an exceptional case
of a big company's moving
nimbly to change course, but
the tactics it used became
the subject of the
government's sweeping antitrust
suit against Microsoft.
The Internet's openness,
low-cost use and speed are its
distinctive features. The
telegraph, historians note, had
many of the same qualities
-- it was an electronic
network that transformed
many business practices and
was a new medium of informal
communication for
many. Yet the telegraph
was expensive in contrast to
the Internet. Sending a
message was a household
budgeting decision; firing
off an e-mail message today
is not. "The Internet is
the telegraph for the rest of us,"
noted Paul Saffo, a director
of the Institute for the
Future.
The speed at which the Internet
is spreading across the
globe, pushing both the
tools and values of high
technology onto people,
could prompt a backlash. Peter
Schwartz, a leading futurist
and business consultant, is
a technology optimist. Along
with Peter Leyden and
Joel Hyatt, he wrote, "The
Long Boom: A Vision for
the Coming Age of Prosperity."
Yet Mr. Schwartz, while predicting
that the pace of
technological change will
not slow, adds that the
willingness of people to
accept new technology could
reverse sharply if companies
and governments do not
make the right policy choices.
The Internet economy carries
the potential for creating
"a deep divide between those
who have the skills to
prosper and those who don't,"
he said.
"That's why education policy
is so important," he
added.
The social tolerance for
technology, Mr. Schwartz
added, could also cool.
The advance of nuclear power
in the United States, he
said, came to a standstill
because the public fears
after the Three Mile Island
accident were not allayed.
The recent resistance to
genetically altered foods
and the protests in Seattle
over the World Trade Organization's
global influence
on environmental and labor
protections, he said, are
warning signs.
"An inadequate appreciation
of either the losers in this
new economy or of the people
with legitimate concerns
could be real problems,"
Mr. Schwartz said. "If you
don't address those groups
early on, it will come back
to bite you."