New Hope for the New Economy

January 15, 2001 | WSJ | By Anthony Perkins. Mr. Perkins is editor-in-chief of Red Herring and co-author of "The Internet Bubble" (HarperBusiness, 1999).

By the end of last year, more than 100 dot-com businesses had shut their doors and 211 public Internet companies were trading at least 80% off their 52-week high. This shakeout in the Internet market has been so brutal that someone recently asked me if my next book is going to be called "The Internet Depression."

But Internet investors shouldn't despair. Many of the smartest technology investors in Silicon Valley are preaching a recharged Internet gospel. John Doerr of venture capital powerhouse Kleiner Perkins Caufield & Byers says that he doesn't feel the least bit disheartened by the recent decline in the technology stock market. "The Internet opportunity is still largely ahead of us," he asserts. I agree.

The Evernet

The positive spin is that the multibillion-dollar investments made during the first phase of the Internet created a completely new computing and networking architecture that is ripe to be exploited. In the second phase of the Internet boom, we will see the emergence of what industry insiders are beginning to refer to as the Evernet, where literally billions of digital devices -- from PCs to cellular phones -- will be connected to an increasingly powerful high-speed, broadband, multiformatted Web.

The most significant new opportunities will be in building applications and services that help companies leverage the Web to communicate and manage their relationships with customers and suppliers more efficiently. Companies such as Zaplet, for example, are creating new Web applications that incorporate dynamic spreadsheet, database and messaging capabilities into your standard e-mail. We have also seen the rise of companies like MarketSoft, Ventaso and eConnections, which have created applications that enable supply-chain management in ways that could never have been imagined in the past. Two promising infrastructure service companies are LogicTier and Netscape founder Marc Andreesen's new venture, Loudcloud.

"These new Internet applications and services are giving companies that successfully deploy them a significant productivity boost," contends Dell Computer CEO Michael Dell. "Look at Dell: We have been able to increase our return on investment capital by 250%!"

Andy Grove, co-founder and chairman of Intel, also observed recently that the brick-and-mortar companies are leveraging the Internet to modernize their businesses faster than he expected. By 2003, almost 100% of businesses are projected to have a Web presence of some sort, and these new applications are expected to help drive revenues from world-wide business-to-business electronic commerce into the trillions in the coming years from an estimated $131 billion last year.



Another reason for optimism is that the rapid proliferation of mobile Internet devices, which are projected to number over a billion by 2005, may well pave the way for a boom in mobile electronic commerce. Mobile commerce numbers already surpassed $3 billion in 2000 and are projected to shoot up to $210 billion by 2005. So just when business-to-consumer electronic commerce was looking like a passing fad, the rise in mobile commerce may well revitalize the fledgling industry.



As part of the mobile Web phenomenon, we should also witness the rise of what Bill Joy, the crafty co-founder and chief scientist at Sun Microsystems, likes to refer to as the "voice Web," where telephone functions and voice services will become available over the Internet. "Clearly, voice, data and video are all converging into a single Internet protocol-based network even faster than we perhaps thought," Cisco Systems CEO John Chambers remarked recently. To help facilitate these new voice services, companies like Cisco and Nortel Networks are beginning to create routers that will allow traditional telephone switch technologies to operate over the Internet.

Of course, all this new excitement out on the Web wouldn't be possible without advancements in communications hardware. The consensus in Silicon Valley is that the future of the communications business rests upon optical network technology, which will allow all forms of digital information to be transmitted by light waves, creating, in the words of George Gilder, the visionary author of "Telecosm," a "bandwidth bonanza."

According to what has become known as Gilder's Law, "bandwidth grows at least three times faster than computer power." Therefore, if computer power doubles every 18 months, communications power doubles every six months. Mr. Gilder notes that the backbone bandwidth on a single cable is already a thousand times greater than the entire average traffic on the global communications infrastructure was five years ago. More information can be sent over a single cable in a second today than all the information that was sent over the entire Internet in one month in 1997.

As Gilder's Law kicks in, we will finally witness the successful emergence of the broadband entertainment version of the Web, where interactive games, music and full-motion video are starting to become available. This content will continue to be leveraged by interactive TVs, media-rich PCs, MP3 players and game platforms. The broader deployment of video servers like TiVo, Replay TV, and Geocast will also help foster the development of this face of the Web. Most entertainment experts I have spoken to think that at least 10 million U.S. consumers will have to have broadband capability before the economics kick in and one can start creating profitable broadband-based entertainment.

Of course, to keep the economic ground fertile to help nurture all this new innovation, entrepreneurs will need a government that encourages innovation. In this regard, Silicon Valley heard some encouraging words at the beginning of this year from President-elect George W. Bush. In a meeting with two-dozen tech CEOs in Austin, Mr. Bush renewed his commitment to cut taxes, reduce regulation, reform litigation laws, promote global trade (including expanding the North American Free Trade Agreement), and increase the number of H1B visas, which companies need to recruit highly skilled workers from around the world. Mr. Bush also told the executives that he might appoint a high-tech czar to specifically promote their agenda. "President-elect Bush clearly understands the correlation between growth and innovation in high-tech, the competitiveness of our economy, and job creation," said Cisco's John Chambers, who attended the two-hour private meeting.

New Era

So while we are still in a transition period technologically and politically, there is new hope in the high-tech community. While it will still take time for the Internet and all its new applications to be integrated with the business processes and systems that many companies are still using, the old PC and database-centric era is in full decline. On the rise is a new network-based, real-time computing era, where businesses and individuals will be communicating and transacting business from any location at any hour.

Smart investors will focus on these emerging technology sectors, invest in ones that they think will be the leaders, and regularly stay on top of product-cycle dynamics. In the words of Mr. Grove, "Inside all new industry sectors, some companies will win and some will lose. The high-tech industry is humongous! Over any period of time, the high-tech megasector has rewarded investors pretty well, and there's no reason to believe that won't continue." As usual, I think Mr. Grove is offering some very sound advice.
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