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6 February 2001Printer-friendly versionEmail a friend

IT's potential: the internet
Unravelling the worldwide web: the fifth in Phil Mullan's series demystifying the 'information society'.

by Phil Mullan

Given the acres of print and the many thousands of web pages devoted to the growth of the internet, it is worth first drawing a distinction between the real and the imaginary web. The 'imaginary' web is conjured up particularly by speculative futurology about how it will change everything utterly.

From this perspective the internet as a technology has even been imbued with the power to resolve all sorts of social and cultural problems, from political and electoral disengagement to third world development. As a rejoinder to this view the words of Intel's chairman Andy Grove provide more balance on what the internet really means: 'Ecommerce is here to stay. Will it change the way people live their lives? The short answer is no. We will still shop, go to the cinema, read books, eat in restaurants. But it is revolutionising the way we do business.' (1) The 'imaginary' bracket also includes the financial world of dotcom and technology share prices. Contrary to popular belief, the sky-high valuations of internet stock of a year ago, including for a time any existing stock that could tell a good internet story, owed far less to the fundamentals of what the web could do than it did to the way that the financial economy has been elevated over the real.

Especially since the early 1990s corporate attention, starting in America and Britain, has shifted from the provision of goods and services into financial activities. Financial re-engineering, with or without mergers and acquisitions, has moved to the top of corporate strategy. At the same time non-financial companies have moved into trying to make money from finance, rather than from their core business. For example, struggling fashion and food retailer Marks and Spencer makes about one fifth of its profits from financial services.

When non-financials are not selling financial services to their customers, there is a growing trend for them to mimic investment institutions. Corporate venture capital, provided by non-financial companies which prefer to invest their resources in start-ups rather than in expanding their own businesses, has been one of the fastest growing sources of finance to new companies. Even some of the stars of the New Economy such as Intel and Microsoft derived a good chunk of their profits in 1999 and 2000 from either selling or revaluing in their books their successful investments in other TMT (technology, media and telecommunications) companies.

This extensive reorientation to financial activity during the 1980s, and especially the 1990s, provided the underpinnings for all the 'irrational exuberance' in the stock markets we have seen. The American and British stock markets have become even more of a betting shop than ever. The technical term is 'momentum' investing. Pay no heed to what a company makes or what service it provides; and pay no heed even to profits or potential profits - if enough investors think a particular stock will rise and buy it, then the share price becomes a one-way bet.

From about 1997 until April 2000, the TMT sector was the main beneficiary of this elevation of the financial economy, with the results that the internet has been the prime sector for stock market growth and, more recently, volatility. Liquidity and a heightened business orientation to financial activity has been the driver of the stock markets; technology and internet stocks have been the biggest price movers because every speculative bubble needs a focus, and the New Economy companies were for a couple of years the flavour of our times.

This dynamic is very different to the belief held by the New Economy school: that the internet or web are the cause of rising stock markets. Such a perspective is conveniently self-serving: society elevates IT and the internet to a central obsession, while mountains of spare capital deriving from the long-term weakness in productive investment enter the financial economy and attach themselves to this privileged sector. The share prices rise rapidly and thereby provide the 'evidence' for the reality of a New Economy.

Not so long ago people attempted to illustrate the new 'intangible' types of wealth creation ushered in under the New Economy by pointing to the enormous gap between stock market capitalisations of TMT companies (what the share price values a company at), and the net asset value (the valuation given by the balance sheet). This gap, which was often more than 50 percent of market capitalisation, was attributed to the 'value' created by the New Economy. The sharp fall of many TMT shares since March 2000, by up to 95 percent in some cases, may prove to be a more effective demolisher of this misleading assertion than the rational argument that the shares were overvalued by a market overflowing with liquidity.

If that's the imaginary web, what has been the economic impact of the real web?

From its origins in computing and specifically computer-enhanced telephony, it is evident that the internet in its fundamentals represents the latest means of communication. In this function it is a significant incremental improvement to pre-existing telegraphy and telephony. The internet is vastly cheaper than the telegraph, can handle much greater volumes of information and is slightly faster. It also has a crucial distinguishing feature in the sort of applications which its attributes - speed, cheapness, and the ability to handle large amounts of information - make possible. It is these applications which give the internet its legitimate association with speed (assuming you have a broadband connection), convenience and universality.

While a more powerful means of communication allows more to be communicated, communication, the hype-merchants should note, is only one contributor to economic and social life. It is more often a means than an end. But this does not excuse or justify the relative narrowness of the internet's applications that we have seen so far. Unfortunately, the most common uses of the internet reveal most clearly its failure to date to move very far towards reaching its potential.

Email, for example, is the most used application of the internet. Despite its ubiquity and whatever its merits, email is a fairly basic and limited application of what the internet makes possible.

Although the results of email are not that different to faxing - information is sent instantaneously from A to B and stored to be accessed by B when desired - certainly it is immeasurably more convenient. Email has replaced, and will continue to replace, other means of communication - the letter, the phone call and the fax - and has already established a secure place alongside them. One potentially important application of this improvement in communications is in research and development. Email and file transfers alone can stimulate cooperation in research and should over time produce better results.

But as a development from these older forms of communication, email is not necessarily more efficient, or effective in all circumstances. The very ease and cheapness of information transmission mean that greater volumes of less valuable information are also exchanged, wasting time in writing, sending, receiving and reading the information. The important can get lost in the sea of trivia and spam. Moreover, the ubiquity of email can lead to its use in inappropriate circumstances. An email is great when you want to impart information, especially on a one-to-many basis, or get a straight response. But it is a time-waster for conducting many types of discussion: in some circumstances, a face-to-face meeting or a phone conversation can be much more effective than a long chain of emails going to and fro.

While email is still the most used application of the internet, by far the most discussed is the worldwide web, or www, or the web. The web makes possible locating and linking between multitudes of stores of information. What the web is really suited for and good at is information provision. There are reputed to be 10 million websites and four billion web pages in existence; yet the web allows one to find these relatively effortlessly, and to move with ease from one to another.

For businesses having a website is as normal as it used to be to have a fax number
The three main possibilities provided for by the web are:

its use as a research tool, acting as a superior means of locating and exchanging information;

its status as a new medium for publishing information;

and its ability to provide a new means of commerce. We will look at each in turn.

The web significantly enhances the tools available for academic, commercial and private research. A researcher can both exchange and gain access to a wealth of primary and secondary information with much greater convenience and speed than previously, and at reduced cost. Leaving aside the genuine (though exaggerated and solvable) problem of 'information overload', it is worth pointing out that the existence of the web cannot itself offset an intellectual climate which has become unsympathetic to innovation and progress. Given this social reservation it is unfortunate that the web as research tool is unlikely to have yet contributed significantly to improved research results and heightened creativity. However, these benefits deriving from the enhancing of human cooperation represent one of the web's most exciting possibilities.

A few companies such as IBM have begun to put these new capabilities to work for their own advantage, with 24-hour global research operations. Every eight hours, the results of the day's work are forwarded to the team in the next time zone, from Japan to Germany to the USA and back to Japan. The question remains open as to how much more productive and fruitful this will be than its predecessor - a multinational team assembled in one place, working for a research project in three teams in shifts around the clock. But it is an attractive way to organise to take advantage of an international division of labour, and is certainly more socially acceptable than night work.

The website has created an additional means for commercially publishing information. Unfortunately this is another area where reality lags behind potential due to an insufficiency of human creative input. While the website itself is an innovation, there is nothing necessarily innovative with simply having a website. To believe that, by having a URL, a company joins a 'New Economy' and moves to the leading edge of its sector is simplistic and misleading. Yet this is the message repeated every day in business advertisements and magazine articles, and forms the assumption behind the common view that setting up a website will in itself improve your company's competitiveness rating.

To assess the specific possibilities of the web as medium for publishing information, it is best to break down by business sector.

For anybody in the information provision business, the web offers a significant new channel. It is often cheaper to use than print, TV or CD Rom, and can be more convenient to access at one's desk or, for time-sensitive succinct news items, by mobile internet. In addition, the width and depth of content available on the web is unrivalled by other media.

These advantages have given new life to the information content business and created the opportunities for a new breed of infomediaries - essentially packagers of information. The best of companies such as Reuters, the Press Association, Hemmington Scott, Bloomberg, Pearsons (publishers of the London Financial Times), McGraw Hill (publishers of Business Week), the Economist group, picture libraries Corbis and Getty Images, and the newer information aggregators like Dialog (now part of the Thomson Corporation of Canada) and moreover.com can expect to prosper in an information-hungry world.

For some of the existing content providers, initial concerns over cannibalisation were assuaged as they began to recognise the web as an additional, rather than a replacement, medium. The same content sold in print and/or TV formats can now be sold again over the web. And for them, and the newer entrants, the web offers a much more versatile way of delivering content. The content is not just sold once over the web, but can be repackaged and rebundled in a multitude of ways. As Rosalyn Wilton, chief executive of the Hemmington Scott online spin-off Hemscott, explains, 'Content [in this case, a 15-year archive of extensive information on UK-quoted companies] is no good unless you have an application.... Take the data, make it do 25 things, and charge every time' (2).

For the rest of the economy, the effects of this new information medium are less transformatory. There are clear benefits for research operations - paying for a few specialist online content subscriptions is both much cheaper and more convenient than having in-house libraries. This advantage goes beyond the R and D sector and academia to other information-rich commercial services, such as accountants, lawyers, financial brokers and features journalists. Beyond these heavy information-using tasks, however, the potential gains in both time and money for most other sectors will be marginal in relation to the rest of their operations. Consider, for example, the limited role information access plays for the utilities, for catering, leisure, software and design, and for most manufacturing, even including that of IT hardware, the foundation of the 'information economy'.

Meanwhile, the use of the web to publish information about one's own business or service is generally recognised to be a useful, but non-value generating, additional channel. In the early years of the www, having a website could be used as a differentiator from ones more 'Luddite' competitors - but now that over 80 percent of US businesses and 60 percent of British ones have a website, this is as normal as it used to be to have a fax number. Of course, print bills will be cut when investors or customers or suppliers use the website as an alternative way of finding out about your company, but outside the information provision sector and the catalogue retail sector, this represents a tiny proportion of operating expenses.

The web's potential for sales excites most New Economy proponents. At a time when consumption is constantly elevated over production as being at the centre of economic life, it is not surprising that the area of selling, especially personal consumption, is where the web was first extensively applied. The notion of the web as commerce is also the one where the utopias have most lost touch with reality. What many heralded as the web's killer application a year ago still accounts for only about 0.5 percent of retail sales in the USA, while Britain leads Europe on a tiny 0.37 percent (source: Merrill Lynch, September 2000).

E-tailing will not change all our shopping habits. Nor will it cause the demise of the physical retailer. Instead the web simply provides an additional sales channel. In some cases it is a superior sales channel, but it will not have the same effect across all retailing. Consequently, forecasts which use the current best examples as evidence of where the whole retail world is heading are bound to be wrong. For example, the selling of second-hand cars is unlikely to ever reach even the current levels attained by the most web-orientated travel companies.

Ironically for a 'youthful' technology, the bed-ridden and homebound will have most to gain from ecommerce
Some of the broader ecommerce discussion is particularly erroneous and misleading. Take, for example, the argument that the internet empowers the consumer over the manufacturer and retailer. Can it really be possible that the web has an innate ability to unite its users into some more powerful collective?

Joining together is an active process not a technical one. Even commerce websites which work by aggregating buyers, like letsbuyit.com (the site that recently joined the list of dotcom casualties), cannot outweigh the logical relationship that suppliers dominate purchasers. It is the makers and retailers who decide what commodities to provide and in what format, and consumers only have two alternatives: to buy or not to buy. Supermarkets in their early days were also credited with empowering the consumer, through delivering bulk purchasing power - nobody says that anymore.

Web commerce is also said to cut prices. E-tailers can for a time subsidise prices, in a strategy known positively as 'building the customer base', which usually goes alongside costly marketing campaigns. This has already led to the downfall of hundreds of dotcom operations, with hundreds more likely to follow. A business model for commerce where margins are squeezed to zero and marketing costs move rapidly in the opposite direction can never produce a profitable operation.

The second, more durable, way for the web to cut prices is through the reduction of transaction costs. A website eliminates much of the labour and costs involved in the sales process: no need for sales staff and paying high street property costs and for fancy shop-fittings. This represents a genuine economy for society but is of limited scale as a percentage of selling price. And price is not the only factor in the decision about how, or what, to buy.

The reduction of transaction costs links to another anticipated but largely unproven gain from ecommerce - the process known as 'disintermediation'. That the web can put the buyer in direct contact with the supplier can eliminate the role of middle men, which would represent a further economy for society. Who needs bookshops or travel agents when you can buy straight from the publisher or the airline? This is happening to some extent. In travel, for example, the Easyjet model relies on cutting out travel agents to keep prices down and claims savings of 30 percent (though this is not a unique attribute of the web, since Easyjet began as a tele-selling company and only later moved to online selling).

However, in reality the internet has also created a lot of new intermediaries. This ranges from the brand leaders such as Amazon, Ebay and lastminute.com, to 'reverse auction' sites like the financially troubled priceline.com, to comparison shopping sites, to a host of shopping portals, to hundreds of speciality and niche retailers. Those intermediaries that survive in the online, as in the bricks and mortar world, will only do so by taking their middle man cut.

An important limitation of the web when it comes to selling is the same as that of mail order or TV or telephone shopping. It separates the purchase of a good from its delivery to the purchaser. This is the prime advantage of 'traditional' retailing for material purchases: for most such purchases (except bulky ones requiring home delivery) you take possession of your item at the point of purchase. This is one form of convenience which the web, as an interrupted or delayed form of buying, can never match. The additional resources and costs involved in the delivery process can offset the savings the web makes in transaction costs.

Whereas content is key to the web as publisher, the delivery process or fulfilment is key to the web as commerce. The issues are how do you get the good to the purchaser economically (at a price the consumer will pay) and how, practically, do you get it through the front door? The problem, of course, is that most goods are too big for letterboxes and most homes are unoccupied most of the time. Other problems can arise. Without seeing it in the 'flesh', the good delivered may not be what you wanted. How can returns be dealt with easily and economically, especially if the supplier is in a different country? But once again, the discussion fetishises IT when it views these solely as internet or ecommerce problems. These fulfilment problems are exactly the same difficulties faced by any delayed form of commerce, like buying through a mail-order catalogue.

So what are the conclusions to be drawn from this? First, just as with other non-shop forms of buying, ecommerce will be more appropriate for some commodities and appeal more to certain sections of the population. The specific conveniences and advantages of the web will count more in certain circumstances and for certain people.

Greater choice is available online. Online buying is (usually) quicker than going to the shops and avoids the need to leave one's home, or office desk. These conveniences are more likely to benefit certain products and certain people. For example, the highest shares for online selling will go to 'low touch' goods and services, like books, CDs, financial services, information products, entertainment and travel tickets. Goods which you want to see close-up or feel, such as perishables, or shoes and clothes, will have a more difficult transition from the physical to the virtual world. Also, the rates for ecommerce take-up will vary demographically. The elderly (ironically for a 'youthful' technology), the bed-ridden and homebound, and the 'cash-rich, time-poor' sections of the population will have most to gain from ecommerce.

A second conclusion is that much more thinking and effort is required to make the most of the web for commerce. For example, there are potential solutions to most of the practical problems to do with fulfilment. Deliveries will tend to be taken on by the existing experts such as the postal service, FedEx and UPS. A few specialist e-fulfilment companies will probably join them but the scaling back or closure of many of the new entrants - Webvan, BagsofTime, Urbanfetch and Kozmo - point to the logistical difficulties especially at this early stage, when the absolute quantity of ecommerce remains so low.

The difficulties of finding the customer at home will probably be resolved by a combination of 'collective delivery points' (in the local 24-hour convenience store, perhaps), and the installation of secure lockers outside your home with multiple temperature-controlled compartments (hot for the pizza delivery, a freezer for your frozen food).

Overall, ecommerce can be expected to grow substantially over the next few years, especially as people become used to buying over digital TV. Ecommerce will then follow the trajectory of mail order and reach a fairly stable share of retail varying between countries on the basis of different cultural shopping habits, and varying between products and between sections of the population. Later on in the more distant future we can expect the next 'new form of retailing' will take off and cannibalise some online sales, as the web is now doing to mail order and the existing versions of TV shopping.

One area of exception, where the web excels as a commerce tool and should dominate the market, is where the internet is itself also a new distribution mechanism. Anything that can be digitised has the potential not just to be sold but also delivered electronically, including information products, computer software, music, travel tickets and videos to buy and rent. Some forecasters anticipate levels of 50 percent for the online delivery of such goods and services in the future. This could be an underestimation for some specific items. How can Blockbusters survive when the spread of low-price broadband access - within hopefully the next few years - makes pay-to-view films easily and cheaply downloadable to your hard drive integrated in your digital TV?

But these exceptions perhaps prove the rule about the web's inconvenience as a separator of purchase from possession. The exceptions use the web's strengths not as a commerce tool but as an information publisher. In these cases you are making use of your computer's local data storage, processing or printing facilities to turn the information obtained over the web into something you take possession of: music to listen to, an article to read, an airline voucher to board your plane with. In theory you could make the purchase in an 'old-fashioned' way, by phone or mail order, with only the delivery being done over the internet.

The model assumes that the internet is innovative because we believe it is an innovation
In practice, the genuine consumer innovation offered by the web is when it doubles as a vehicle for both exchange and delivery. The passing of time should produce a more balanced appreciation of the heterogeneous and differential impact of the web as a consumer sales channel.

When the price of consumer dotcom shares crashed in April 2000, the hype turned from business-to-consumer (B2C) to business-to-business transactions: the B2B market. This essentially relates to the way businesses source their supplies, whether general supplies such as office stationery, known as a horizontal market, or raw materials or services inputs specific to a business, known as a vertical market.

With B2C out of favour B2B replaced it as the real 'killer application' of the web. Sarah Hogg, for example, from Frontier Economics, claims 'lower business costs are the real dotcom prize' (3). Away from the PR and marketing froth of the B2C market it became widely argued that 'the main economic effects of the internet are likely to stem from the growth of business-to-business commerce' (4). B2B is expected to grow to be at least four or five times bigger in volume than B2C transactions.

British Telecom (BT) has well publicised its internal forecasts of the gains achieved by moving its own procurement online. The company expects to save $1 billion on the cost of goods and services from a total procurement budget of $9 billion, and so reduce the cost of processing each transaction by 90 percent from $80 to just $8. Other estimates for savings in procurement costs range from three to five percent by the World Wide Retail Exchange, to 20 percent by Ford and GM, who have launched a vertical exchange for the auto market.

The claimed benefits from B2B fall into two main areas: lower prices of inputs because of greater competition through transparency, and lower costs of doing the procurement. As with electronic retailing the possibilities vary across sectors. A Goldman Sachs report estimates savings on input prices from two percent in coal to 39 percent in electronic components, with an average of about 10 percent (5). It should be noted that savings on input prices provide no overall economic gain: when prices fall, it is about the big producers and retailers using the web as another means to show their muscle and force their suppliers to reduce prices below their prices of production. What the companies higher up the supply chain gain, businesses lower down lose.

Unfortunately many of the studies about the economic effect of B2B seem to concentrate on the lower prices of inputs and assert that this 'shock' effect of the technology will stimulate output growth. For example, the econometric model used by Brookes and Wahhaj concludes that the knock-on effect from lower supply prices should raise GDP in the large industrialised countries by an annual 0.25 percent over 10 years, with a total gain over the long term of 4.9 percent.

One might conclude that this is not much of an economic prize from a technological 'revolution', but a caveat Brookes and Wahhaj give to their calculations is just as telling: 'We are implicitly assuming that the technology of the internet is different from normal technical progress.... It is our belief that the scale of the savings which B2B commerce is leading to are sufficiently large that it falls outside of the normal process of innovation. Therefore, it represents a shock over and above the normal trend rate of productivity growth,'

Consider what this means. In other words: we have developed an economic model to prove that the internet will boost output growth (even if by only 0.25 percent a year), on the basis of assuming that the internet is a technology that will boost output growth. The internet is innovative because of our belief it is an innovation. The model assumes what needs to be shown. However, the second genuine benefit of cost savings from B2B, although less studied by economists to date, should produce a bigger social gain. Online procurement can reduce the administration and labour costs of sourcing and then of organising the fulfilment process. The purchasing companies can economise, the supplying companies can economise and, as with some B2C, intermediary agents can be eliminated. The impact for the procurement process could be a huge one-off gain as labour employed in this area is dispensed with. This is a big reduction if only a small part of national economic operations.

Remember again that this is only a saving in administering the procurement process: goods and services still have to be bought, delivered and in many cases stored pending use. It is unlikely therefore that the resulting one-off economic gains would have any significant impact on trend productivity growth. It is also worth noting that, in principle, an electronic means of procurement with all these potential efficiencies has been available for many years - called EDI (Electronic Data Interchange). Its limited deployment - amounting to less than 0.5 percent of all inter-company transactions - points to barriers in computerising this process which even the cheapness and non-proprietary advantage of the internet may not necessarily overcome completely. This is because price is not the only criteria for determining suppliers: special quality, customisation, personal knowledge, flexibility are all features a corporate buyer may need from a supplier.

When approached primarily as a cost-cutter, as is the case today, the web does not do much to facilitate delivering any of these.

This highlights again that the bigger problems hindering the internet's more extensive and effective deployment by business are not technical ones. With sufficient input and effort technical limitations can always be overcome or at least minimised. It is the way society and business are approaching the problems and possibilities which represent the real constraints. So even the shift in attention from the quick-fix consumer-orientated website to websites for business-to-business transactions that we have discussed seems stuck in a short-termist business mode. In this respect, B2B carries on the tradition of the 1990s approach to business: a succession of short-term measures, both in effect and in duration.

The B2B fad has mainly been about the narrow use of the internet to help cut supply and procurement costs. Given that it is being adopted without the sort of longer-term strategic thinking and business planning that has fallen out of fashion during the 1990s, in its present form it will probably have as limited a beneficial impact for business as all those other fads of the past decade. Yet again we see the holding back and the wasting of opportunities provided by an exciting new technology.

The 'real' web does and can have a real impact on the real economy. This impact, of course, should not be overstated, hyped, or mystified. As with any technology, there are some technical limits to how radically it can transform how we live and work. But the internet has the potential to go much further to restructure business than we have seen so far.

But as long as the broader social constraints on the web continue to exist - from fetishising its problem-solving abilities to a reluctance to invest sufficient time, thinking and resources to short-termist management strategies - we will remain unable to put its potential properly to the test.

Phil Mullan is the author of The Imaginary Time Bomb: Why an Ageing Population Is Not a Social Problem, IB Tauris, 2000 (buy this book from Amazon (UK) or Amazon (USA))

This is the fifth in his series demystifying the 'information society'.

Read on:

From dotcom boom to dotgloom by Phil Mullan

Don't Blow IT by Sandy Starr

spiked-issue: Don't blow IT

(1) Sunday Times, 19 September 1999

(2) Independent, 16 October 2000

(3) Independent, 14 February 2000

(4) Martin Brookes and Zaki Wahhaj, 'The Shocking Economic Effect of B2B', Goldman Sachs Global Economics Paper, No: 37, 3 February 2000

(5) Martin Brookes and Zaki Wahhaj, 'The Shocking Economic Effect of B2B', Goldman Sachs Global Economics Paper, No: 37, 3 February 2000

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