- The Observer,
- Sunday December 31 2000
Those who would forget history are condemned to repeat it. Readers of the lurid accounts of the Great Internet Bubble of 2000 could be forgiven for thinking that this was a folly unique in human history, rather than just one of those periodic outbursts of irrational exuberance to which humans with more money than sense are prone.
And as the bubble burst, irrational exuberance gave way to an equally irrational pessimism, and a conviction in some quarters that the whole technology thing was really just a passing fad, with the result that even serious, well-managed companies such as Cisco, Microsoft and Sun have seen their stock market valuations plummet.
The strange thing is that we have been here before; with radio in the Twenties. Even the ubiquitous acronym www, nowadays an obligatory part of every beer commercial and billboard hoarding, has been around a long time. It was an integral part of the corporate logo of RCA, the Radio Corporation of America, from 1920 to 1927, though the letters then stood for 'World Wide Wireless' rather than World Wide Web.
When radio emerged from military control after the First World War, nobody really knew what to do with the technology. It was initially perceived as a point-to-point medium and thus a competitor to the (wired) telegraph. It took quite a time before people figured out that it was best employed as a broadcast (few-to-many) medium.
This led to a scramble to (a) build receivers and (b) transmit content which would persuade people to purchase them. But for a time, the only people who made money from radio were the manufacturers of receivers. Nobody could work out how to make profits from broadcasting itself, and hundreds of companies went under in the search for a viable business model which could harness the potential of this radical new technology.
In the end, of course, the problem was cracked: audio broadcasting became a profitable business which shaped the evolution of mass culture based on national advertising. But it took a long time and there were innumerable casualties on the way.
Much the same is happening now with the internet. The business world reckons that the netis the Next Big Thing, but few have yet figured out a viable way of making serious money from it. Many of those who thought they had it sussed have already gone bust, or are in the process of doing so. According to the Economist, 60 of the biggest internet firms have seen their share price fall by 90 per cent from their March 2000 peaks, and hundreds more have fallen by more than half.
Accordingly, the stock options customarily offered to dotcom employees in lieu of proper salaries are now rarely worth the paper they're printed on, bringing a totally new interpretation to the phrase 'negative equity'. And the original quick-exit route for dotcom investors - the stock market flotation or IPO, which converted stock holdings and options into real money - has effectively been closed off. Cancellations of forthcoming IPOs now exceed new listings. And the Nasdaq has gone through the floor.
Does all this matter? No and yes.
No, because the bankruptcy of half-baked fantasy firms does not constitute a definitive test of anything. Some of the most spectacular dotcom failures of 2000 were basket cases, managerially speaking, whose only measure of performance seemed to be their 'burn rate' - the speed with which they got through investors' money. Boo.com, an aspirant fashion etailer, consumed $185 million in 18 months and never even managed to get its site working properly.
British visitors to San Francisco start-ups returned with awed tales of executive prodigality. They told of one company which employed FedEx to move parcels from one floor of its building to another. Or of a senior manager in another firm who ordered Mont Blanc pens by the gross because he 'kept losing them'.
Publicity surrounding the collapse of such preposterous enterprises has diverted attention from the radical economic and social changes being brought about by the net. So yes, all this stuff does matter. Even in the uncool area of online retailing, companies such as Amazon continue to change the commercial landscape. Ask any bricks-and-mortar bookseller. As Bill Davidow, a prominent US venture capitalist, remarked recently: 'There was a tulip business even after the tulip mania.'
The internet is bringing far-reaching changes to our economy, in the form of new ways of doing business, greater productivity in important sectors, lower transaction costs as buyers and sellers come together without the intervention of middlemen, new exchanges in which everything from electricity to broadband capacity can be traded efficiently, and increased consumer the power to resist price rises.
These developments represent permanent changes to the economic landscape. And the indifferent commercial performance of early Business-to-Business (B2B) exchanges will not reduce the determination of global firms such as Ford, General Motors, Boeing and General Electric to conduct most of their supply-chain transactions online. Why? Because it costs them about $65 to process a paper-based order and less than $5 to do the same thing online - and to an accountant that's the nearest thing in life to a cast-iron argument.
So whatever happens to dotcoms, the commercial world will increasingly adopt the net, and anyone who wants to do business with large firms will have to adopt it too. Andy Grove's prediction that 'companies that are not internet companies by 2005 will not be companies at all' is beginning to look like an understatement.
Meanwhile, the underlying technology continues to develop and mutate in unexpected and sometimes subversive ways. A little over two years ago a teenager named Shawn Fanning wrote a program for swapping music files over the net. He then founded a company called Napster to provide a central database enabling subscribers to locate MP3 files on other people's machines, and download from those machines if desired. What he created, in effect, was a system which turned computers used by Napster subscribers into mini-servers, doling out MP3 files on request, using what has become known as 'peer to peer' (P2P) networking.
In less than 18 months, Napster attracted 38 million members, which made it one of the fastest-growing enterprises in history. And all on the back of a small program hacked out in a teenager's attic.
The record companies eventually sued Napster for copyright infringement in a case which has attracted huge amounts of media attention but is, as yet, undecided. From a long-term perspective, however, the fate of Napster is unimportant: in the end it's just another dotcom. What matters is that it has spawned an internet technology - P2P networking - which is potentially as revolutionary as the web.
We are rapidly moving to an era when millions of people will have broadband connections to the net via fixed and wireless links. If even a fraction of these newly wired users allow their machines to become P2P hosts, which means acting as servers for particular purposes, none of which need have anything to do with pirated music, the collective power of the net will be enormously amplified, with consequences that we can barely imagine.
P2P technologies could unravel the elaborate structure of search engines and portals which dominate today's web, and turn it into a system where resources are much more dispersed and distributed. Ten years ago, Tim Berners-Lee invented the web and turned the world upside down. A decade from now, we may be looking back at the emergence of P2P and saying much the same. In the circumstances, the collapse of Boo.com & Co. seems a price worth paying.
