The Wall Street Journal Interactive Edition -- July 14, 1998
Revolution or Just Evolution?
An Economist Looks at the Net
By GENE KOPROWSKI
Special to THE WALL STREET JOURNAL INTERACTIVE EDITION
WHETHER IT WAS at a cocktail party or a trade show, you've
probably heard this version of modern economic history: The Internet has
fostered a new industrial revolution, one that's changing the way everyone
from Silicon Valley to Wall Street does business.
Whether the sources are vendors of e-commerce software, analysts
covering those vendors, or journalists quoting the analysts, the
e-merchants or both, the outlines of the story are always the same.
Projections of billions to be made on-line at some safely distant date are
trotted out (the fourth quarter of the next fiscal year is a favorite). Stocks
are then bought and sold, and technologies purchased, based on this spin
cycle and on the underlying belief in a steady march of progress toward a
better, faster, cheaper world.
But one of the foremost U.S. economists, MIT professor Paul Krugman,
sees the story in a decidedly different way, one that flies in the face of all of
the conventional wisdom about the supposed light-speed progress of the
Web era.
Dr. Krugman says that years from now, when all is said and done, the true
economic impact of the Net will turn out to have been equal to that of the
fax machine. Communications will have been improved, true -- but the
change will have been more evolutionary than revolutionary.
"Within my memory, there's been a whole series of things that made a big
difference which are sort of comparable to what the Internet has done,"
says the 45-year-old economist. "The combination of fax machines and
Federal Express collapsed delivery times, and that had an impact on the
way business was done."
Now, the Net is in some instances displacing those alternative delivery
systems, and offering other functionality for consumers and businesses.
But, Dr. Krugman asks, is this really a revolutionary change? Or is it the
kind of incremental, steady progress -- a displacement of older
technologies -- that happens all the time in the economy?
"Why exactly are we are we getting so thrilled about this particular set of
innovations?" he wonders.
Technological forecasts, Dr. Krugman warns, have a way of not panning
out precisely as forecasters would like. He offers Herman Kahn's 1967
book, The Year 2000, as a case in point. While Mr. Kahn did get a
number of things right -- personal computers and cellular phones, are, as
he expected, commonplace today -- he also reckoned wrongly that a
portion of mankind would be living in undersea cities.
"We're ludicrously far short of where people in 1967 thought we would
be," says Dr. Krugman, who remembers first reading Mr. Kahn's book
while in high school. "The actual progress is often well short of what
people imagine. The idea that old rules don't apply -- there's a lack of an
historical perspective there."
The esteemed professor may be on to something, some Internet
cognoscenti reluctantly agree.
For example, Maureen Loftus, vice president of CyberCash, Inc., the
Reston, Va., firm that is trying to speed the adoption of digital money, says
that despite no shortage of hype, most transactions today are still
conducted through conventional payment mechanisms, like the check.
Ms. Loftus predicts that the vision of a society where all payments are
made electronically is a long way off. Why? For starters, companies "don't
want to lose the float" that they enjoy with established payment systems.
Bill Loller, director of the electronic-business practice at G2R Inc., a
Mountain View, Calif., market-research firm, says part of the problem
with forecasts about the Net's growth is that most of the media's attention
has focused on what the Net can do for consumers. Yet "the business
processes being carried out by consumers are not that sophisticated, at
this point," he says, adding that many firms dealing with consumers "don't
have the capital resources to Internet-enable all of their processes."
While on-line book purchases made with e-commerce poster child
Amazon.com Inc. are interesting, for example, they haven't really changed
the way books are distributed, notes Ms. Loftus. One can place an order
for a title on-line, but the books are still stored in a warehouse and shipped
by mail, just as if they'd been bought from a catalog.
Such new transactions are displacing older purchasing methods --
something travel agents know all too well -- but aren't creating a lot of new
economic value. And that suggests that our infatuation with the Internet
may appeal to human desires that are a lot more basic than pursuing
greater business efficiencies.
"This stuff is much more fun to play with," Dr. Krugman says. "Not many
had fun with the fax machine."
But executives like Larry Wasser, president of Beamscope Canada, Inc.,
a Toronto reseller of computer products, argue that the real story of
e-commerce is unfolding away from the spotlight being shone on consumer
purchases.
Business-to-business e-commerce has exploded for companies like
Beamscope, which says it has added approximately 100 million Canadian
dollars to its bottom line over the last year-and-a-half because of
electronic commerce.
Customers search through the company's on-line catalog,
beamscope.com, and can order software and other products. This saves
Beamscope's telemarketers time previously spent on the telephone or
wading through a database trying to help customers find what they desire.
Instead, Mr. Wasser says, they spend more time selling directly to larger
accounts.
Research by G2R shows that less-than-sexy businesses like
manufacturing, distribution, and banking concerns are dedicating the
greatest portions of their information-technology budgets to e-commerce.
G2R's recent study entitled "Electronic Commerce: The Next Generation,
1997-2000" indicates that manufacturers will spend around $8 billion over
the next three years on the infrastructure for e-commerce, while
health-care concerns and retailers, which are businesses closer to
consumers, will spend less than a billion each for that purpose.
"Business-to-consumer [e-commerce] has garnered a lot of attention and
media coverage," says Bill Lipson, president of Ironside Technologies,
Inc., a Toronto maker of e-commerce software. "But the largest
opportunity is business-to-business. Companies are being forced to take
costs out of their supply chain without sacrificing customer service, and
that is not something easy to do. A fax machine definitely could not do that
-- but the Net can."
Cost savings include reduced long-distance charges for toll-free numbers
and decreased costs for cross-continental faxes. Another savings for
businesses using the Web is that fewer personnel are needed to generate
more sales, says Russ Levinton, director of new business development at
PrimaView Inc., a Dallas maker of e-commerce software.
Still, Dr. Krugman isn't convinced that such developments amount to a
revolutionary change for the overall economy. At the very least, he is
calling on the Net industry to add a little caution to its statements about
economic revolutions and new economies. It'll be some time before
evidence of real economic progress -- not just sales projections and
forecasts -- is delivered to analysts. (And it will probably arrive by fax.)
"But it is an interesting sociological question," Dr. Krugman notes. "How is
it that we feel we're in the middle of a technological revolution, when in
fact we are so far short of where we once thought we were going to be?" |
