August - 2000 - issue > Cover

On June 10, I woke up in a Washington D.C. hotel to a call from my colleague Professor Andy Whinston. “Anitesh, it’s everywhere — just turn on the TV,” he said. After flipping through the channels, I discovered that, indeed, they were all discussing the study of the Internet economy that I, Andy and other research partners had just conducted and released to the media (see www.internetindicators.com). Some were talking about our “four-layer” model of the Internet economy, while others were focused on our estimates of the size of the new economy.

Being academics, we are not used to such media attention; we do our research, submit articles to scholarly journals with limited readership, and feel elated when the fruits of months (sometimes years) of toil show up as a published paper in an esteemed journal. Obviously, we were unprepared for the media blitz that went on for months after the release of the study in the form of many television and radio appearances, and articles in thousands of newspapers and magazines worldwide.

The real work behind the Internet economy project started in December 1998, when our University of Texas at Austin colleague Dr. Ramesh Rao asked me and Andy to submit a proposal to study business on the Internet. The research would be funded by Cisco Systems. Sponsoring such a research project was the brainchild of none other than John Chambers, the CEO of Cisco Systems. Chambers was traversing the globe, spreading the gospel of the Internet, and was often asked to provide empirical evidence to back up his assertions. At the Center for Research in Electronic Commerce in the McCombs Business School at UT Austin, we had been conducting research in e-commerce and digital markets for a long time, and had built an international reputation in this area since 1994.

When our proposal was accepted by Cisco Systems, we were naturally excited about the possibility of being able to conceptualize and measure the growth of economic activity on the Internet. Around the beginning of 1999, the Internet was looked upon primarily as a marketing or a sales channel. For example, a senior manager from a large high tech company who had called to invite me to do a presentation said, “I don’t understand what this fuss is all about. Isn’t this electronic commerce stuff basically a glorification of the catalog business?”


It’s an Economy, Stupid

In the presentation of our research, we argue that the Internet has created an economy with its own infrastructure and characteristics, and that the relationship between the Internet and the physical economy is best described as import and export activities between two economies. We argue that while the technologies powering the Internet are not new and have their roots in the late ’60s and early ’70s, the economic forces behind the Internet make this new economy unique.

Take, for instance, how knowledge is created and used in the Internet economy. In a non-Internet world, information technology innovations used to occur in the laboratories of a few elite vendors; it would take a substantial amount of time before user organizations would assimilate this knowledge and transform it into system applications that would create a bottom-line impact. By contrast, such innovations take place in the market today, where, thanks to open standards, a group of “twenty something’s” can come up with the next generation optical router or a novel caching mechanism. And this knowledge does not even have to trickle its way to user organizations. Applications service providers will quickly provide a service out of this knowledge in an affordable way to almost every company. This new mode of transforming knowledge into services accelerates economic growth and reduces wasteful spending by individual firms in reinventing the wheel again and again.

We conceptualized the Internet economy as consisting of four distinct but interdependent “layers.” Two of these layers consist of the hardware and software infrastructure, while direct buyer-seller and electronic intermediary enabled transactions make up the two remaining layers. Based on a sample size of 3,400 companies, we estimated the Internet economy revenues at $301 billion in 1998. Since the first release of the study on June 10, 1999, we have come a long way. We have completed two more rounds of the study, and the latest, released on June 6, finds that the Internet economy brought in $523 billion in revenues in 1999, and may reach $850 billion by the end of this year. Further, we found dramatic growth rates in each of the four layers, suggesting a fundamental transformation of the US economy. Productivity measures such as revenue per employee are up sharply for the Internet economy players; we found that across the four layers, revenue per employee grew an impressive 19 percent from 1998 to 1999. Further, we showed that Internet-based companies whose products and services are purely digital are enjoying much higher levels of productivity than dot-coms selling physical goods over the Internet.


What Is the Internet Economy?

Prior to our Internet economy study, the term “digital economy” was in vogue, implying that the new economy was made up of all information technologies under the sun. We felt this was a grossly inaccurate portrayal of the underpinnings of the new economy. A case in point is Electronic Data Interchange (EDI), which managed to capture less than 2 percent of business in 20 years. Although there is nothing technologically wrong with EDI, the economic forces that have favored the Internet never really smiled on these non-Internet technologies and applications. Although all information technologies will eventually be subsumed by the Internet, counting non-Internet technologies today will seriously understate the productivity and efficiency of the new economy. Since our study was released, I have noticed that articles in the business press now prefer to use the term Internet economy, instead of digital economy.


Much Ado

While the three rounds of our Internet economy research portray a scenario of incredible growth and opportunity, the recent trials and tribulations of Nasdaq, and the tough times most dot coms are currently facing are likely to make one wonder whether it was just venture capitalists hyping and gambling, and whether there was nothing really new about e-commerce and electronic business.

The good news is that the Internet is not going away; the economic forces behind the Internet economy are too strong for the business world to ignore. Many of today’s dot-coms will go on to become great companies, whereas many others with weak business models and poor execution will soon be forgotten. The fact that the cost of capital has suddenly turned high for the dot-coms is not necessarily bad news from an economy-wide standpoint. We have always maintained that the Internet is not just about dot-coms. Although dot-coms certainly showed the way, smart bricks-and-mortar organizations have quickly come a long way in transforming their business models and processes through Internet-based “digitization.” Some articles in both the business and the academic press are suggesting that the best of the Internet is already behind us! Even though it has been about 6 and a half Internet years since the advent of the World Wide Web, my position is that you ain’t seen nothing yet. The US-based Internet economy accounts for no more than 1.5 percent of the $8.5 trillion U.S. gross domestic product.

Besides, we haven’t even considered the next wave in the form of broadband wireless creating endless opportunities.


Dr. Anitesh Barua is an associate professor of information systems, a Spurgeon Bell Centennial Fellow, a Bureau of Business Research Fellow, a Distinguished Teaching Professor and associate director of the Center for Research in Electronic Commerce (http://crec.bus.utexas.edu) at the Graduate School of Business at the University of Texas at Austin.