DIGITAL ECONOMY 2000

INTRODUCTION<= /SPAN>

CHAPTER I: INFORMATION TECHNOLOGY AND THE = NEW=20 ECONOMY

CHAPTER = II: =20 ELECTRONIC COMMERCE: THE LEADING EDGE OF THE DIGITAL ECONOMY

CHAPTER III: =20 INFORMATION TECHNOLOGY INDUSTRIES=20

CH= APTER=20 IV: =20 CONTRIBUTION OF INFORMATION TECHNOLOGY TO U. S. PRODUCTIVITY = GROWTH=20

CHA= PTER=20 V: =20 THE INFORMATION TECHNOLOGY WORKFORCE=20

CHAPTER VI: =20 TRADE IN INFORMATION TECHNOLOGY GOODS AND = SERVICES

CHAPTER VII: =20 WHAT IS NEW IN "THE NEW ECONOMY?"

ACKNOWLEDGMENT= S=20

DIGITAL ECONOMY 2000

ECONOMICS AND STATISTICS=20 ADMINISTRATION

Office of Policy = Development

AUTHORS

Chapter II

Patricia Buckley &nbs= p; = ; = =20 &nbs= p; = ; =20 Sabrina Montes

patricia.buckley@mail.doc.gov &nbs= p; = ;=20 &nbs= p; =20 sabrina.montes@mail.doc.gov

Chapter=20 III

David Henry &nbs= p; = ; = &= nbsp; &n= bsp; &nb= sp; &nbs= p; =20 Donald Dalton

david.henry@mail.doc.gov &nbs= p; = ; = &= nbsp; &n= bsp; =20 donald.dalton@mail.doc.gov

Chapter IV

Gurmukh Gill &nbs= p; = ; = &= nbsp; &n= bsp; &nb= sp; &nbs= p; =20 Jesus Dumagan

gurmukh.gill@mail.doc.gov &nbs= p; = ; = &= nbsp; &n= bsp; =20 jesus.dumagan@mail.doc.gov

Susan LaPorte

susan.laporte@mail.doc.gov

Chapter V

Sandra Cooke

sandra.cooke@mail.doc.gov

Chapter VI

Dennis Pastore

dennis.pastore@mail.doc.gov

Chapter VII

Lee Price

lee.price@mail.doc.gov

Contributing Editors

Robert Shapiro &nbs= p; = ; = &= nbsp; &n= bsp; =20 Lee Price

Under Secretary for Economic Affairs = &nbs= p; = ; = =20 Deputy Under Secretary for Economic Affairs

robert.shapiro.@mail.doc.gov &nbs= p; = ; = &= nbsp; =20 lee.price@mail.doc.gov

Jeffrey Mayer &nbs= p; = ; = &= nbsp; &n= bsp; &nb= sp;=20 For further information, contact:

Director of Policy Development &nbs= p; = ; = =20 Secretariat on Electronic Commerce

jeff.mayer@mail.doc.gov &nbs= p; = ; = &= nbsp; =20 U. S. Department of Commerce

Washington, DC 20230

(202) 482-8369

http://www.ecommerce.gov/ =

THE=20 SECRETARY OF COMMERCE

Washington, DC 20230

I am pleased to release Digital Economy 2000, the Commerce = Department's third annual report on the information-technology = revolution and=20 its impact on our economy. Understanding sweeping economic changes as = they are=20 happening is a formidable challenge. In government agencies and research = institutions around the world, analysts are trying to meet this = challenge.=20 Digital Economy 2000 is an important contribution to this effort = and a=20 measure of its progress. =

In the twelve months since our previous digital economy report, = confidence=20 has increased among both experts and the American public that the new,=20 proliferating forms of e-business and the extraordinary dynamism of the=20 industries that produce information-technology products and services are = harbingers of a new economic era. For most economists, the key measure = of our=20 new condition is the exceptional increase in productivity of the last = five=20 years, which has helped drive a welcome combination of falling inflation = and=20 very strong growth. For many people, however, the clearest evidence lies = in the=20 extraordinary increase in the electronic connectedness among individuals = and=20 businesses through the Internet. Three hundred million people now use = the=20 Internet, compared to three million in 1994. They can access more than = one=20 billion web pages, with an estimated three million new pages added every = day.

These numbers do not tell the full story. We are witnessing an = explosive=20 increase in innovation. Using open standards, people around the world = are=20 creating new products and services that are instantly displayed to a = global=20 audience. We are witnessing myriad new forms of business activity, such = as=20 electronic marketplaces linking buyers and sellers in seamless global = bazaars,=20 and changes in business processes from customer service to product = design that=20 harness the new technologies to make businesses more efficient and = responsive.=20

Nor are our numbers complete. Surveys by the Census Bureau, for = example, now=20 measure business to consumer e-commerce or "e-tailing" and have begun to = measure=20 business-to-business e-commerce. Hard questions of definition and = measurement=20 will still have to be resolved, however, before we can understand the = full=20 impact of these changes on our economy.

What we can see clearly are expanding opportunities. To meet these=20 opportunities, we will have to ensure a stable and conducive economic = and legal=20 environment for continuing innovation in information technologies and=20 e-commerce. We need to encourage the building of a broadband = infrastructure that=20 allows all Americans to have access to the advanced services that = support the=20 Internet, and take the steps necessary with respect to privacy, consumer = protection, security, reliability and intellectual property rights that = will=20 inspire confidence in the Internet. =20 To realize the full potential of this digital economy, every = person and=20 every business must be able to participate fully and make their own = unique=20 contribution to its development.

William M. Daley=20

EXECUTIVE = SUMMARY

The U.S. = economic=20 expansion is now in its tenth year, showing no signs of slowing down. = The rate=20 of labor productivity growth has doubled in recent years, instead of = falling as=20 the expansion matured as in previous postwar expansions. Moreover, core=20 inflation remains low despite record employment and the lowest jobless = rates in=20 a generation. Our sustained economic strength with low inflation = suggests that=20 the U.S. economy may well have crossed into a new era of greater = economic=20 prosperity and possibility, much as it did after the development and = spread of=20 the electric dynamo and the internal combustion engine.

The advent of this new era has coincided with dramatic cost = reductions in=20 computers, computer components, and communications equipment. Declines = in=20 computer prices, which were already rapid--roughly 12 percent per year = on=20 average between 1987 and 1994--accelerated to 26 percent per year during = 1995-1999. Between 1994 and 1998 (the last four years for which data are = available), the price of telecommunications equipment declined by 2 = percent a=20 year.

Declining IT prices and years of sustained economic growth have = spurred=20 massive investments not only in computer and communications equipment, = but in=20 new software that harnesses and enhances the productive capacity of that = equipment. Real business investment in IT equipment and software more = than=20 doubled between 1995 and 1999, from $243 billion to $510 billion. The = software=20 component of these totals increased over the period from $82 billion to = $149=20 billion.

The new economy is being shaped not only by the development and = diffusion of=20 computer hardware and software, but also by much cheaper and rapidly = increasing=20 electronic connectivity. The Internet in particular is helping to level = the=20 playing field among large and small firms in business-to-business = e-commerce. In=20 the past, larger companies had increasingly used private networks to = carry out=20 electronic commerce, but high costs kept the resulting efficiencies out = of reach=20 for most small businesses. The Internet has altered this equation by = making it=20 easier and cheaper for all businesses to transact business and exchange=20 information.

There is growing evidence that firms are moving their supply networks = and=20 sales channels online, and participating in new online marketplaces. = Firms are=20 also expanding their use of networked systems to improve internal = business=20 processes--to coordinate product design, manage inventory, improve = customer=20 service, and reduce administrative and managerial costs. Nonetheless, = the=20 evolution of digital business is still in an early stage. A recent = survey by the=20 National Association of Manufacturers, for example, found that more than = two-thirds of American manufacturers still do not conduct business=20 electronically.

Advances in information technologies and the spread of the Internet = are also=20 providing significant benefits to individuals. In 2000, the number of = people=20 with Internet access will reach an estimated 304 million people = world-wide, up=20 almost 80 percent from 1999; and, for the first time, the United States = and=20 Canada account for less than 50 percent of the global online population. = Further, according to Inktomi and the NEC Research Institute, the amount = of=20 information available online has increased ten-fold over the last three = years,=20 to more than a billion discrete pages.

As more people have moved online, so have many everyday activities. = In March=20 2000, the Census Bureau released the first official measure of an = important=20 subset of business-to-consumer e-commerce, "e-retail." Census found that = in the=20 fourth quarter of 1999, online sales by retail establishments totaled = $5.3=20 billion, or 0.64 percent of all retail sales. People increasingly use = the=20 Internet not only to make purchases, but also to arrange financing, take = delivery of digital products, and get follow-up service.

The vitality of the digital economy is grounded in IT-producing=20 industries--the firms that supply the goods and services that support = IT-enabled=20 business processes, the Internet and e-commerce. Analysis of growth and=20 investment patterns shows that the economic importance of these = industries has=20 increased sharply since the mid-1990s. Although IT industries still = account for=20 a relatively small share of the economy's total output--an estimated 8.3 = percent=20 in 2000--they contributed nearly a third of real U.S. economic growth = between=20 1995 and 1999.

In addition, the falling prices of IT goods and services have reduced = overall=20 U.S. inflation--for the years 1994 to 1998, by an average of 0.5 = percentage=20 points a year, or from 2.3 percent to 1.8 percent. The rates of decline = in IT=20 prices accelerated through the 1990s--from about 1 percent in 1994, to = nearly 5=20 percent in 1995, and an average of 8 percent for the years 1996 to 1998. =

IT industries have also been a major source of new R&D = investment.=20 Between 1994 and 1999, U.S. R&D investment increased at an average = annual=20 (inflation adjusted) rate of about 6 percent--up from roughly 0.3 = percent during=20 the previous five-year period. The lion's share of this growth--37 = percent=20 between 1995 and 1998--occurred in IT industries. In 1998, IT industries = invested $44.8 billion in R&D, or nearly one-third of all = company-funded=20 R&D.

New investments in IT are helping to generate higher rates of U.S. = labor=20 productivity growth. Six major economic studies have recently concluded = that the=20 production and use of IT contributed half or more of the acceleration in = U.S.=20 productivity growth in the second half of the 1990s. This has occurred = despite=20 the fact that IT capital accounts for only 6 percent of private business = income.=20 Such remarkable leverage reflects in part the fact that businesses must = earn=20 immediate rates of return on investments in IT hardware high enough to=20 compensate for the rapid obsolescence (i.e., depreciation) and = falling=20 market value of these assets. In short, IT investments must be = extraordinarily=20 productive during their short lives. Recent firm-level evidence = indicates that=20 IT investments are most effective when coupled with complementary = investments in=20 organizational change, and not very effective in the absence of such=20 investments.

Although the official data show declining productivity for a number = of major=20 service industries that invest heavily in IT (e.g., health, = business=20 services), this probably reflects the inadequacy of official output = measures for=20 those industries. Until these measures are improved, the full effect of = IT on=20 service industry productivity will remain clouded.

In 1998, the number of workers in IT-producing industries, together = with=20 workers in IT occupations in other industries, totaled 7.4 million or = 6.1=20 percent of all American workers. Growth in the IT workforce accelerated = in the=20 mid-1990s, with the most rapid increases coming in industries and job = categories=20 associated with the development and use of IT applications. Employment = in the=20 software and computer services industries nearly doubled, from 850,000 = in 1992=20 to 1.6 million in 1998. Over the same period, employment in those IT job = categories that require the most education and offer the highest = compensation,=20 such as computer scientists, computer engineers, systems analysts and = computer=20 programmers, increased by nearly 1 million positions or almost 80 = percent.

At the same time, the rapid pace of technological change and = increased=20 competition have added an element of uncertainty to IT employment. The = number of=20 jobs has declined in some IT industries, such as computers and household = audio=20 and video equipment. Moreover, while IT-producing industries as a whole = paid=20 higher-than-average wages in 1998, some IT jobs remain low-skilled and = low-paid.=20

Paradoxically, although America's IT-producing companies are clearly=20 world-class, the United States regularly runs large trade deficits in IT = goods--an estimated $66 billion in 1999. One reason is that American IT = firms=20 more often service foreign customers with sales from their overseas = affiliates=20 than by exports from their U.S. operations. In 1997, foreign sales by = overseas=20 affiliates of American IT companies totaled $196 billion, compared to = U.S.=20 exports by firms in comparable industries of $121 billion. In the same = year,=20 American affiliates of foreign-owned IT companies operating in the = United States=20 reported sales here of $110 billion. Therefore, while the U.S. balance = of trade=20 in IT products was negative, the "balance of sales" favored American = companies=20 by $86 billion.

IT has not only propelled faster growth during this expansion, but it = will=20 have a tendency to dampen the next business cycle downturn. Because IT=20 investment is driven by competitive pressures to innovate and cut costs = more=20 than to expand capacity, it will be less affected by a slowdown in = demand. In=20 addition, by creating supply chain efficiencies that reduce inventories, = IT=20 should dampen the inventory effect that has worsened past = recessions.

The strong performance of the U.S. economy since 1995 contrasts both = with=20 U.S. performance from 1973 to 1995 and with the rest of the industrial = world in=20 recent years. Historically, there have been long lags between = fundamental=20 technological breakthroughs, such as electricity and electric motors, = and large=20 economic effects from them. Although IT is generally available in world = markets,=20 the U.S. economy to date has achieved greater gains from IT than other = countries=20 at least partly because of favorable monetary and fiscal policies, a=20 pro-competitive regime of regulation, and a financial system and = business=20 culture prepared to take risks. =20

Even in this country, however, the diffusion of IT has been uneven. = Although=20 the number of homes with computers and Internet connections has been = rising=20 rapidly, the majority of Americans do not have online connections at = home. Those=20 on the wrong side of the digital divide--disproportionately people with = lower=20 incomes, less education, and members of minority groups--are missing out = on=20 increasingly valuable opportunities for education, job search, and = communication=20 with their families and communities.

In conclusion, a growing body of evidence suggests that the U.S. = economy has=20 crossed into a new period of higher, sustainable economic growth and = higher,=20 sustainable productivity gains. These conditions are driven in part by a = powerful combination of rapid technological innovation, sharply falling = IT=20 prices, and booming investment in IT goods and services across virtually = all=20 American industries. Analysis of the computer and communications = industries in=20 particular suggests that the pace of technological innovation and = rapidly=20 falling prices should continue well into the future. Moreover, = businesses=20 outside the IT sector almost daily announce IT-based organizational and=20 operating changes that reflect their solid confidence in the benefit of = further=20 substantial investments in IT goods and services. The largest and = clearest=20 recent examples come from the automobile, aircraft, energy and retail=20 industries, which all have announced new Internet-based forms of market=20 integration that should generate large continuing investments in IT=20 infrastructure. These examples mark only the beginning of the digital=20 economy.

=20

INTRODUCTION

Robert J. Shapiro

Under Secretary of Commerce for = Economic=20 Affairs

This is the third annual report = from the=20 Commerce Department on the digital economy. The first two reports were = titled,=20 The Emerging Digital Economy. This third edition has a new title, = because=20 the digital economy and digital society are no longer "emerging." They = are here.=20 Americans have definitively crossed into a new era of economic and = social=20 experience bound up in digitally-based technological changes that are = producing=20 new ways of working, new means and manners of communicating, new goods = and=20 services, and new forms of community.

This report, like its two=20 predecessors, measures the economic performance of information = technology (IT)=20 industries and their substantial impact on growth and inflation, and = sketches=20 the emerging dimensions of e-commerce. For the first time, it can be = reasonably=20 claimed that the extraordinary dynamism of the IT sector and the new,=20 proliferating forms of e-business and e-commerce are part of an enduring = and=20 broad economic pattern. The rapid pace and proliferation of innovation=20 associated with IT, and the substantial increases in U.S. productivity = and=20 growth associated with IT-related innovation, now appear to be=20 persistent. =20

At the core of the = proposition that=20 the digital economy can produce higher long-term productivity gains and = national=20 growth than we knew in the 1970s and 1980s are certain singular = qualities=20 associated with information technologies. Most obviously, these = technologies=20 provide new ways of managing and using a resource that is common to = every sector=20 and aspect of economic life; namely information. Compared, for example, = to the=20 introduction of refrigeration or jet propulsion, IT innovations can be = applied=20 across the economy and throughout the economic process. As a result, = economic=20 gains directly associated with improving the capacity to obtain, process = and=20 transmit information mount up. =20

Further, many IT markets = exhibit=20 what economists call "network effects": The more the technology is = deployed, the=20 greater its value. Compare certain information technologies to = automobiles. When=20 you own a car, its value to you is basically the same whether 5,000 or 1 = million=20 other people own the same brand of automobile. When you buy a computer = operating=20 system or graphics program, its value to you increases as more people = buy it,=20 because their purchases of the same program increase your ability to = digitally=20 communicate and interact. As these forms of innovation spread, the = productivity=20 benefits may increase at a faster rate than simply arithmetically. =

The spread of IT = innovations in the=20 digital economy affect growth in other ways. For example, IT innovations = appear=20 to raise business investment in equipment. The last seven years have = seen the=20 fastest growth of business investment in equipment on record, and IT = investments=20 have accounted for almost two-thirds of that growth. The digital economy = also=20 can stimulate improvements in workers' skills, since many firms have to = train=20 their employees to use information technologies. This may be one reason = why=20 Americans across the work force are making real wage gains for the first = time in=20 two decades. Further, IT markets with the network effects described = above tend=20 to be dominated by a handful of products and companies, and this = tendency=20 creates the possibility of beneficial economies of scale.

Perhaps most important of = all, a=20 dynamic of cascading or continuous innovation has characterized the = development=20 and deployment of information technologies in this period. Productivity = gains=20 come not just from deploying innovative technologies that enable workers = to=20 process information faster. In addition, firms intent on taking = advantage of=20 innovative new technologies often have to rethink the way they operate = and=20 reorganize their operations, which can produce a round of organizational = innovation. Many firms also have discovered that the new technologies = can be=20 used to develop and produce new goods or services for themselves, = producing yet=20 another round of innovation. Furthermore, as these areas of potential = are widely=20 recognized and the process spreads from firm to firm, this generates = demand for=20 faster information processing. This can lead to another round of = innovation in=20 IT itself-- part of the basis for the doubling of chip capacity every 18 = months,=20 articulated as Moore's Law-- and the cascade can begin again. A leading = example=20 of this dynamic is the Internet itself. Regular and large increases in = chip=20 power provided a technological foundation for the Internet, which in = turn=20 generated myriad innovations first in software and then in how = businesses=20 organize themselves and operate, which in turn has led to more myriad=20 innovations in the goods and services available to businesses and=20 individuals.

The complex of hardware = and software=20 innovations that encompass the IT sector have made information the most=20 important basis for creating value in the economy. The process of = creating value=20 from information, throughout and across the economy, is the ultimate = basis for=20 the digital economy. This digital economy is just beginning today, and = this=20 report will provide a sketch of its current bounds.
=20

CHAPTER I =
=20
INFORMATION TECHNOLOGY AND

THE NEW ECONOMY

Two remarkable developments occurred in the second half of the 1990s. = After=20 quietly improving in speed, power, and convenience since 1969, the = Internet=20 burst onto the economic scene and began to change business strategy and=20 investment. At the same time, the U.S. economy has enjoyed a remarkable=20 resurgence. Productivity growth, one of the most important indicators of = economic health, doubled its pace from a sluggish 1.4-percent average = rate=20 between 1973 and 1995, to a 2.8-percent rate from 1995 to 1999 (Figure=20 1.1).⁽¹⁾

=20

Evidence is increasing = that these=20 two phenomena are not coincidental but derive substantially from the = same=20 phenomenon: the synergistic convergence of dramatic increases in = computer power,=20 an explosion in connectivity, and increasingly powerful new software. = These=20 advances in technology have produced sharp declines in the prices of = computer=20 processing, data storage and retrieval, and communications, that are in = turn=20 driving both the surge in Internet activity and the increases in = business=20 investment in IT hardware and software. Such investment has been a major = source=20 of recent U.S. economic strength.

The advances in computer = power=20 overwhelm imagination. Since the 1960s, the number of transistors per=20 microprocessor chip has been doubling roughly every 18 to 24 months, = resulting=20 in a massive increase in processing capability and sharply declining=20 costs.^=
(2)=20 (Figure 1.2)

Technologies associated = with=20 computer use, such as data storage technologies, have also shown = dramatic=20 improvements in performance and even more dramatic cost reductions. The = capacity=20 of today's hard- disk drives is doubling every nine months and the = average price=20 per megabyte for hard-disk drives has declined from $11.54 in 1988 to an = estimated $.02 in 1999.^=20
(3) As a consequence of technological advances in = microprocessors,=20 storage, and other components, already steep annual declines in computer = costs=20 from 1987 to 1994 accelerated sharply beginning in 1995 (Figure=20 1.3). =20

Similar improvements have = occurred=20 in communications technologies. In recent years, for example, wavelength = division multiplexing, digital subscriber lines, and cable modems have = produced=20 exponential increases in the speed of data communication and the = carrying=20 capacity of the communications infrastructure. The carrying capacity of = fiber is=20 currently doubling every 12 months.⁽⁴⁾ Between = 1994 and=20 1998 (the last four years for which data are available), the price of=20 telecommunications equipment declined by 2 percent per year.

Price declines for = computers and=20 peripheral equipment and for communications equipment have spurred major = increases in business IT investment and extraordinary growth in U.S. = production=20 of computers, communications equipment and semiconductors. (Figure 1.4) = Output=20 growth in these industries has jumped from about 12 percent a year in = the early=20 1990s to roughly 40 percent in the past six years.

In addition, the declining = costs of=20 computing and communications are helping to drive complementary = investment in=20 new software that harnesses and further enhances the productive capacity = of IT=20 hardware and infrastructure. Overall, U.S. businesses have increased = their=20 investments in new software from about $28 billion in 1987 to $149 = billion in=20 1999. (Figure 1.5)^=20
(5)=20

The new economy is being = shaped by=20 developments not only in computer hardware and software, but also in = electronic=20 connectivity. Larger businesses have been increasing efficiencies = through=20 standardizing and automating routine transactions electronically for = some time.=20 Until recently, however, most small and medium sized businesses found = that the=20 costs of necessary hardware, software, and communications service for = these=20 systems exceeded the benefits.=20

The advent of the Internet = as an=20 instrument of commerce fundamentally altered this equation by cutting = the costs=20 of software and communications services needed to conduct electronic=20 transactions. Beginning in the mid-1990s, as a result of the convergence = toward=20 digital formats and the development of de facto standards = for=20 digital networks, such as the Internet's technical specifications, the = expansion=20 and commercialization of the Internet made connecting computers and=20 communications devices easier and cheaper. Commercial opportunities on = the=20 Internet and the falling costs of computer and communications hardware = created=20 an extraordinarily fertile environment for innovations that are creating = new=20 value and new efficiencies for businesses of all sizes.

The Internet is both an = effect and a=20 cause of the new economy. It is, in part, a product of the powerful=20 technological and economic changes that are shaping a new epoch of = economic=20 experience. However, as this report shows, the Internet and related = networking=20 technologies are also increasingly the new economy's medium.

Networks, like telephone = networks or=20 the Internet, are subject to a phenomenon called "network effects" or = "network=20 externalities." Establishing a network involves large, up-front fixed = costs=20 (e.g., for purchasing equipment, laying new cable, or developing = new=20 software), but adding an additional user to an existing network costs = very=20 little. Conversely, the value of a network to participants is low when = the=20 number of participants on the network is low, but rises rapidly as = network=20 participation expands. For example, a network of a single telephone is = of no=20 use. Adding another telephone increases the value of the network because = now=20 calls can be made between the two phones. As phones are added, the = number of=20 possible connections rises almost as fast as the number of phones=20 squared.^=
(6) Any=20 person with a phone can reach more people, so the network's value to = them=20 increases.=20

Similarly, as the number = of people=20 online has grown, so has the value of being online to each Internet = user.=20 Moreover, as the Internet gains popularity, its technological = specifications=20 have become a default standard, encouraging new hardware and software=20 innovations that use Internet technology as a platform.

Fundamental engineering=20 breakthroughs alone do not have important economic effects until their = costs and=20 applications become favorable. For example, by the mid-1970s, Xerox PARC = had=20 already made several breakthroughs underpinning today's IT revolution: a = microcomputer with a mouse, graphical user interface, and Ethernet=20 communications capabilities. But there was no mass market for their = machine,=20 which at the time cost about $25,000 each to produce,⁽⁷⁾ especially = given its=20 slower processing speed and the absence of applications software that = drives=20 computer use today. In contrast, technological advances in recent years = have=20 brought IT costs down to a far more commercially attractive range, and = new=20 software applications for networked systems have been=20 developed.

Nothing approaching the = activities=20 now conducted over the Internet was possible a few years ago. Push back = the=20 technology or cost declines in any one of the four elements--computer=20 processing, data storage, software, or communications--just a few years = and the=20 Internet activities we now view as commonplace would be too frustrating = or too=20 costly for a mass market. Likewise, roll back any one of those elements = and=20 business would have found IT investment to be far less productive. As=20 applications software is developed to exploit the continuing plunge in = hardware=20 prices in coming years, businesses and consumers will find new ways to = create=20 value and increase efficiency.=20

=
=20

Chapter=20 II

ELECTRONIC COMMERCE:

THE LEADING EDGE OF THE DIGITAL ECONOMY⁽⁸⁾

The resurgence of the U.S. economy = coincides=20 with the growing use of the Internet, including the rapid growth of = electronic=20 commerce (e-commerce). In ever greater numbers, people are shopping, = looking for=20 jobs, and researching medical problems online. Businesses are moving = their=20 supply networks online, participating in and developing online = marketplaces, and=20 expanding their use of networked systems to improve a host of business=20 processes. And new products and services are being created and = integrated into=20 the networked world. This chapter explores activities at the leading = edge of the=20 digital economy.

We live in an increasingly = wired=20 world. The remarkable growth of the Internet in recent years shows no = signs of=20 abating. According to Nua Internet Surveys, during the past year = Internet=20 access has grown significantly in all regions of the world, rising from = 171=20 million people in March 1999 to 304 million in March 2000, an increase = of 78=20 percent (Figure 2.1).^=20
(9)

The United States and = Canada still=20 account for a large proportion of worldwide online users; but for the = first=20 time, they now account for less than 50 percent of the total (Table = 2.1). Over=20 the past year, Internet access in the United States and Canada grew by = more than=20 40 percent; over the same period, Internet access in all other parts of = the=20 world more than doubled.

=

Table 2.1

Number of=20 People Online

(in = Millions)

Mar-99

Mar-00

level

increase

percent

increase

Africa

1.1

2.6

1.5

136

Asia/Pacific

27.0

68.9

41.9

155

Europe

40.1

83.4

43.3

108

Middle=20 East

0.9

1.9

1.0

111

Canada &=20 US

97.0

136.9

39.9

South=20 America

5.3

10.7

5.4

102

Source: Nua = Internet=20 Surveys

The = amount of=20 information available online to people with Internet access has also = grown very=20 rapidly. A recent study by Inktomi and the NEC Research Institute, Inc., = for=20 example, indicates that in January 2000 the World Wide Web contained = more than=20 one billion unique pages,^=20
(10) compared to 100 million in October 1997.⁽¹¹⁾

CONSUMERS IN THE NEW = ECONOMY
=20

Consumers today--wherever they are in the world--go online to shop, = learn=20 about different products and providers, search for jobs, manage their = finances,=20 obtain health information and scan their hometown newspapers. While many = of=20 these activities are not captured by official output and productivity = measures,=20 a growing body of anecdotal evidence suggests that the digital = revolution is=20 improving many people's lives.

Business-to-Consumer Electronic=20 Commerce=20

Individuals with Internet access increasingly approach the Web as a = market=20 space.^=
(12) People online do research before = they buy,=20 make purchase commitments, arrange financing, take delivery of = digital=20

products, and obtain = followup=20 service. The "commerce" in e-commerce encompasses all of these = activities.=20 However, when measuring business-to-consumer (B2C) e-commerce in = particular, it=20 is the commitment to purchase--the transactional component--that both = buyers and=20 sellers can easily identify and quantify. This transactional component = is the=20 focus of most current e-commerce measurements.

In March 2000, the U.S. = Bureau of=20 the Census released the first official measure of e-retail, an important = subset=20 of business-to-consumer e-commerce. Census found that during the fourth = quarter=20 of 1999, online sales by retail establishments totaled $5.3 billion, or = 0.64=20 percent of all retail sales.⁽¹³⁾ =
=20

By contrast, private = estimates for=20 consumer e-commerce in the fourth quarter of 1999 ranged from = approximately $4=20 billion to $14 billion. However, many private estimates of B2C = e-commerce=20 include the value of a wide range of consumer online purchases such as = airline=20 tickets, hotel rooms, and shares of stocks that are not captured in The = Census=20 Bureau's survey of retail establishments. When these private estimates = are=20 adjusted to cover only those purchases included in the retail measure, = the=20 Census Bureau estimate of $5.3 billion appears to fall in the midrange. = For=20 example, Forrester Research estimated fourth-quarter online sales at $9 = billion,=20 but when travel and event tickets are subtracted--both categories that = are not=20 part of the official definition of retail sales--the Forrester estimate = falls to=20 a comparable $5.5 billion.^=20
(14)

Prior to the 1999 holiday = shopping=20 season, some analysts expressed concern that if online retailers = experienced the=20 problems filling orders that had plagued many of them in the 1998 online = holiday=20 season, consumers might turn away from online shopping. Private surveys=20 conducted shortly after the holiday season indicated that such problems = were=20 minimal and that online customer satisfaction was high.⁽¹⁵⁾ = Nonetheless, some=20 analysts believe that delivering goods ordered by consumers from = e-retailers=20 will prove to be more costly and complex than currently = appreciated.⁽¹⁶⁾ The = ultimate size=20 of online consumer sales will depend on resolving these fulfillment = issues,=20 along with other important matters such as taxation, consumer = protection,=20 privacy, intellectual property rights, security, and network = reliability.=20

Online Pricing =

In the consumer realm, the most significant impact of e-commerce may = be on=20 the pricing of goods and services. Potential buyers can check the price = and=20 availability of products from a variety of sites in far less time than = it would=20 take to conduct store-to-store comparisons in the world of bricks and = mortar.=20 Furthermore, online digital shopping spaces can be perused for consumers = by=20 software specialized to operate as digital shoppers. Such digital = agents, known=20 as "bots," cruise through numbers of Internet sites almost = instantaneously,=20 searching for the most favorable price and feature combinations. =20

One would expect that this ability to easily and cheaply gather = information=20 on prices and product characteristics would force Internet retailers to = charge=20 the same low price--one that would approach their cost--on the same or=20 comparable products. One might also expect these online prices to = influence=20 prices charged in physical stores. Thus far, however, the data on these = matters=20 are mixed. For example, a study of 20 book titles and 20 CD titles sold = by 41=20 Internet and conventional retail outlets between February 1998 and May = 1999=20 found that Internet prices were between 9 and 16 percent lower than = prices in=20 conventional outlets, depending on whether taxes, shipping, and shopping = costs=20 were included in the price.⁽¹⁷⁾ However, = another=20 study of book prices covering 107 titles sold by 13 online and two = physical=20 bookstores during the week of April 19, 1999, found that prices online = and in=20 physical bookstores were the same. This suggests that certain Web sites = have=20 sufficiently differentiated themselves through factors other than price = (e.g.,=20 convenience, product reviews) that they can attract sales even when they = are not=20 the lowest-price seller.^=20
(18)

Even if the jury is out on the price sensitivity of online shoppers, = online=20 commerce has fostered a variety of pricing schemes. One of these is = online=20 auctions. Live auctions have existed for a long time, but their = practical uses=20 have been limited by the expense and difficulty of getting prospective = buyers to=20 a single location at the same time. Sealed bid auctions are less = expensive, but=20 they often do not produce the highest possible return to the seller. By=20 contrast, the Internet provides a relatively low-cost and convenient way = of=20 bringing buyers and sellers together, and the use of auction sites such = as eBay=20 has grown rapidly. Variations on the standard auctions are also gaining=20 popularity. In the reverse auction format of PriceLine.com, the consumer = names=20 the price and the seller decides whether or not to accept it. In the = Mercata.com=20 format, price is determined by the number of people that want to buy a=20 product--the greater the number of buyers, the lower the price. =
=20

A "single price" model holds for most offline goods and services = since most=20 offline sellers do not have sufficient information to vary their prices = from=20 customer-to-customer and because changing the price of individually = tagged items=20 may involve considerable cost. Where providers do have sufficient = customer=20 information and price adjustments are relatively easy to make, however, = variable=20 pricing can produce benefits to both seller and consumer. For example, = airlines=20 have long set lower fares for tickets issued 21 days in advance that = include a=20 Saturday night stay (that is, tickets sold to more price-sensitive and=20 time-flexible travelers who can plan ahead) and much higher fares for = next-day=20 tickets (tickets sold to less price- and more time-sensitive business=20 travelers). More recently, airlines have developed an e-mail strategy to = attract=20 "spur of the moment" travelers with last minute travel deals. As a = result, while=20 vacation travelers obtain fares at a lower cost than if the airline = charged a=20 single price for all seats on the plane, business travelers can be = confident=20 that they can secure seats with little advanced notice, and airlines = operate=20 with a higher proportion of their seats filled.

The Internet opens up this airline-type variable pricing to many = other types=20 of goods and services, creating the potential for greater specificity in = variable pricing. By gauging the price sensitivity of particular = consumers=20 relative to the marginal cost of the good and its availability, online = sellers=20 can fine tune prices for individual customers to maximize profits. The = study of=20 20 book titles and 20 CD titles cited above (Brynjolfsson and Smith) = found that=20 Internet retailers regularly make price adjustments that are smaller = than the=20 smallest price changes observed in conventional stores.
=

Electronic = Information =

Product and Service Information. Regardless of = where=20 people are, those with Internet access have at their finger tips a = repository of=20 information on product and service prices, quality, and availability = that would=20 have been unimaginable before the Web. Manufacturers, retailers, and = online=20 magazines now offer detailed product, warranty, and repair information, = along=20 with comparisons of competitive products. Rather than comparison = shopping at=20 brick-and-mortar stores, consumers can now get reliable information = conveniently=20 on the Web.

Consider the information about automobiles now available online, from = dealer=20 costs and expert reviews to the availability of options and detailed = product=20 specifications. Consumers cannot test drive an automobile on the Web, so = auto=20 buyers still want to visit car dealerships. (Consumers are also = constrained by=20 laws in most states that restrict the sale of new cars to licensed auto = dealers=20 who cannot also be car manufacturers.) However, consumers who do their = homework=20 online can approach dealers with a wealth of information that can = strengthen=20 their bargaining position and reduce some of the stress of car buying. = According=20 to J.D. Powers and Associates, while only 2.7 percent of the people who=20 purchased a new vehicle during the first quarter of 1999 purchased their = car=20 through an online buying service, the percentage of new-vehicle shoppers = using=20 the Internet to help them shop increased from 25 percent in 1998 to 40 = percent=20 in the first quarter of 1999, and it is projected to reach more than 65 = percent=20 by the end of 2000.^=20
(19) After purchasing a car, consumers can find other valuable = information online, including authorized repair locations, warranty = information,=20 recalls, and information to troubleshoot problems.

Health Care. The Internet increases the ability of = patients to=20 participate more actively in matters related to their own health. A = recent study=20 by the California HealthCare Foundation cites estimates that the = Internet offers=20 at least 17,000 different health care sites and that some 24.8 million = U.S.=20 adults have searched for health information. This number is projected to = grow to=20 over 30 million during 2000.⁽²⁰⁾ Jupiter=20 Communications has estimated that 45 percent of online consumers access = the=20 Internet for health information.⁽²¹⁾ Today, = some=20 patients arrive at their doctors' offices carrying possible diagnoses = downloaded=20 from sites such as Healtheon/WebMD or America Online Health Channel. In=20 addition, people with Internet access can obtain information about their = healthcare plans, find doctors, and in some cases submit claims for fee=20 reimbursement. Doctors, too, are increasing their use of the Internet as = a=20 source of information on the latest news in medical research. Other = aspects of=20 health care delivery, including laboratory results reporting, = prescriptions,=20 office visit scheduling, and records transmittal may move online once = issues=20 such as privacy and authentication are resolved.

Employment. Many private companies now post job = openings on=20 their company's Web site, and in some cases these sites can accept = online=20 applications. In their 2000 survey, recruitsoft.com and iLogos Research = found=20 that 79 percent of the Global 500 used their Web sites for recruitment = compared=20 with 29 percent in 1998. Approximately one-half (46 percent) of the = Global 500=20 both posted openings and accepted applications online, while one-third = listed=20 openings online, but encouraged application by mail or fax. Web site = recruiting=20 among the North American-based Global 500 was even more prevalent, with = over 90=20 percent of such firms participating and 71 percent accepting = applications=20 online.^=
(22)=20

In addition to firm-specific online recruiting, a growing number of = Web sites=20 offer online employment classifieds, grouping together requests from = multiple=20 employers. Some of these sites are maintained by newspaper companies,=20 traditional providers of employment classifieds. Others have been = established to=20 specialize in specific employment areas. For example, the U.S. = Government=20 maintains www.usajobs.opm.gov, a site containing a listing of current = Federal=20 job openings, as well as general employment information. =

Some observers believe that effective online recruiting faces = substantial=20 barriers. A recent Forrester Research study, for example, noted that = "[t]o reach=20 a critical mass of Web users, recruiters must manage multiple job = postings,=20 multiple site relationships, and a flood of resumes. Meanwhile, job = seekers must=20 explore listings from both companies and recruitment agencies and submit = multiple resumes."^=20
(23) As a result, Forrester and other analysts believe that = these=20 job-classified sites will be superceded by consolidated online career = networks=20 that aggregate training, assessment, and placement services. =
=20

Research. The Internet's original purpose was to=20 disseminate research and information, and this use continues to be = important=20 today. Educational research and technical materials are available online = to=20 students, researchers, scientists, and engineers anywhere in the world. = Many=20 universities make their research papers available on the Internet, and = most=20 academic and professional journals are available online (though often on = a cost=20 basis). In addition, previously unpublished information is increasingly=20 available on the Internet. For example, students can download lectures = at their=20 convenience, and live classroom presentations are broadcast on the = Internet with=20 students submitting questions via e-mail.

The Internet also provides access to research of a more general or=20 recreational nature. News with frequent updates is available from local, = national, and foreign sources, as are weather and traffic information. = Numerous=20 online services also provide information covering everything from the = floor=20 plans of museums and restaurant reviews, to local television and radio = listings.=20 During several recent foreign conflicts and natural disasters, the = Internet=20 played a role in providing news and information when traditional media = outlets=20 were closed. For example, in 1999 the independent Belgrade radio = station, B-92,=20 continued to broadcast over the Internet even after its radio broadcasts = had=20 been shut-down.
=

Digital Government. Federal, state and local = governments also=20 are rapidly developing new ways of using the Internet to communicate = with=20 clients and to provide public services to businesses and individuals. = Activities=20 at the Federal level include:

The=20 Patent and Trademark Office X-Search system, available at = www.uspto.gov,=20 enables anyone to use an Internet browser to search and retrieve more = than 2.6=20 million pending, registered, abandoned, cancelled or expired trademark = records. This is the same database and search system used by PTO's = examining=20 attorneys.=20
The=20 National Institutes of Health offers an online service,=20 www.ClinicalTrials.gov, that provides information about the latest = clinical=20 research into cancer, heart disease, and other life-threatening = illnesses.=20
At=20 the Internal Revenue Service site, www.irs.gov, taxpayers can download = any tax=20 forms and instructions they need.

Many state and local governments are also moving = services=20 online. Interested individuals and businesses can find information on a = wide=20 variety of topics such as registration (voter, business, property, = pets), parks,=20 and trash removal. In addition, people can pay their local property = taxes and=20 parking tickets on commercial sites such as www.govworks.com or=20 www.ezgov.com.^=20
(24)

Online Communities

The spread of Internet access is being accompanied by a proliferation = of new=20 community spaces online. Some of these are commercial spaces such as = online=20 auctions that allow consumers to sell or trade goods and services. = Others are=20 meeting spaces where individuals interact around a particular interest = or=20 topic--from chat rooms for hobbyists, and online current events = discussions, to=20 support groups for people facing similar challenges. In the process of = providing=20 places for individuals to interact, these online spaces create virtual=20 communities.

We=20 Media, Inc, a multimedia company providing services for people with=20 disabilities, includes on their www.wemedia.com site a WeHomePlace for = members=20 to meet and interact with people of similar interests and backgrounds. =
A=20 community center in Arlington, Virginia provides Internet access to = immigrants=20 from many parts of the world--including South and Central America, = Morocco,=20 Bangladesh, and Albania--so they can e-mail friends abroad, use chat = rooms=20 where discussion is conducted in their native language, and read = online=20 versions of newspapers from their home countries.⁽²⁵⁾=20
At=20 www.geneticalliance.org individuals can search for support groups and = resource=20 information for almost any genetic condition.

The Internet has also become a popular sharing = tool for=20 people to research their family trees, organize family reunions, and = share news=20 and photographs--all without long-distance charges.
=
=20

THE RISE OF THE DIGITAL = BUSINESS=20

While business-to-consumer e-commerce is the most visible aspect of=20 e-commerce, it is only a small part of what is now possible due to = recent=20 technological advances. Increasingly, business-to-business (B2B) = e-commerce is=20 emerging as an area of critical importance for businesses faced with = rapidly=20 changing markets and opportunities. Transactions between businesses = account for=20 the lion's share of commercial activity, and e-commerce technologies = appear to=20 have an enormous potential to make these transactions more efficient. = Companies=20 are also using these technologies to increase the efficiency of their = internal=20 operations.

Business-to-Business=20 E-Commerce

Estimates of the dollar value of B2B e-commerce transactions vary=20 widely.^=
(26)=20 According to a summary prepared by The Industry Standard, = forecasts for=20 2003 of the dollar value of transactions between U.S. businesses that = are=20 conducted electronically range from $634 billion to $2.8 trillion. This = wide=20 disparity is due to a combination of methodological and definitional=20 differences.^=20
(27) One important difference is the degree to which = non-Internet=20 network transactions, such as those conducted over electronic data = interchange=20 (EDI) systems, are included in the estimates of B2B e-commerce. = Irrespective of=20 the dollar amounts, the market researchers all expect strong growth as = companies=20 seek to cut costs and increase efficiency by streamlining their = purchasing,=20 sales, and other business processes. =20

At present, many firms are at the beginning stages of implementing = e-commerce=20 technologies in their business processes. A recent National Association = of=20 Manufacturers survey found that 68 percent of manufacturers are not yet = using=20 electronic commerce to conduct business transactions. While 80 percent = of the=20 surveyed firms reported having a Web site, far fewer firms reported = using the=20 Internet for business processes such as requests for proposals, = purchasing,=20 etc.^=
(28)

In contrast, a recent = Purchasing=20 Magazine survey shows that 38 percent of buyers currently use the = Web to=20 conduct at least some of their company's transactions. The survey also = finds=20 that of those who do not currently conduct transactions over the = Internet,=20 approximately 35 percent say they will begin to conduct transactions=20 electronically within the next year and 54 percent say they will do so = within=20 the next three years. Only 11 percent of those not currently online have = no=20 expectation of using the Internet for procurement.⁽²⁹⁾ =
=20

Transforming the Market = Place=20

The potential of e-commerce technologies to transform business = practices is=20 evident in the new marketplaces that are developing online. These = important=20 intermediaries have emerged rapidly in virtually all industries, = providing new=20 places for buyers and sellers to meet, allowing a variety of pricing = schemes to=20 flourish, altering the roles of traditional intermediaries, enabling = complex=20 transactions, and, by making vast amounts of information available at = very low=20 costs, shifting the balance of power among market participants. The = expanded=20 reach of these online market spaces enables buyers to solicit bids from = a=20 broader range of suppliers and, in turn, allows suppliers to develop=20 relationships with additional buyers.

According to a recent estimate by the Economist, over 750 = networked=20 marketplaces have been developed worldwide.⁽³⁰⁾ Some of = these=20 cover a wide variety of products and a diffuse group of buyers and = sellers.=20 E-Bay, for example, which started out providing a marketplace for = consumers=20 selling to other consumers (C2C) in online auctions, has expanded to = include B2C=20 and B2B transactions.

Some sites offer broader functions for more targeted client groups. = Onvia,=20 for example, is one of the many sites seeking to be the small business = portal=20 for goods and services. Other sites leverage existing relationships = within=20 specific industries on a global basis. One prominent example is the = new=20 online marketplace under development in the automotive industry. In = November=20 1999, both General Motors Corporation and Ford Motor Company = independently=20 announced plans to move their purchasing operations online. Then, in = late=20 February 2000, these two companies announced that together with = DaimlerChrysler=20 AG, they would work to form the world's largest online = marketplace.⁽³¹⁾ = According to press=20 reports, if completed, this exchange is expected to handle the nearly = $250=20 billion worth of parts and other items that these companies purchase = each year.=20 Auto executives estimate that they will be able to reduce purchasing = costs by up=20 to 10 percent over several years with the new system. These savings are = expected=20 to arise from increased competition, as the number of bidders for each = contract=20 increases, and by eliminating many of the meetings now required before a = parts=20 order is placed. "Since half of the cost of a $20,000 car lies in = purchased=20 parts, the new system could reduce the cost of producing a typical = automobile by=20 $1,000."^=
(32)=20

Similarly, Sears, Roebuck = and=20 Company, the second largest U.S. retailer, is joining with Carrefour SA, = a=20 Paris-based retailer, to create GlobalNetXchange, an online marketplace = for the=20 retail industry. These two companies buy a combined $80 billion in goods = and=20 services a year from 50,000 suppliers, and they are seeking other = retailers to=20 join with them.^=20
(33) While Sears's current EDI system costs the company = approximately=20 $150 per hour; their new Internet-based exchange could reduce these = costs to $1=20 per hour.^=
(34)=20 In addition, on March 28, 2000, Boeing, Lockheed Martin, BAE Systems, = and=20 Raytheon Company unveiled plans to develop an Internet trading exchange = for the=20 global aerospace and defense industry. Together these companies have = procurement=20 outlays of $71 billion.^=20
(35)

While the large buyers = organizing=20 these online marketplaces hope to achieve significant cost savings, it = is=20 difficult to gauge a priori the impact these new arrangements may = have on=20 their supply communities. Some suppliers and potential suppliers that = had been=20 unable to justify the cost of EDI connections may be much more willing = to use=20 the Internet to bid on work that they would otherwise have missed. = Concerns have=20 been raised, however, about the potential for these large players to use = these=20 markets to reduce competition. The overall impact will depend on the = extent to=20 which actual efficiencies can be achieved as opposed to squeezing = supplier=20 margins. One probable side effect of moving these supply networks to the = Internet will be to increase the level of investment in Internet=20 technologies.

E-commerce technologies = also appear=20 to be driving changes among traditional intermediaries--i.e., firms such = as=20 wholesalers, travel agents, or shippers, that add value between the = production=20 of a good or service and its sale to the final consumer. Early = predictions were=20 that the Internet and e-commerce would create efficiencies by = eliminating the=20 need for intermediaries. Manufacturers and service providers would begin = selling=20 directly to the customer and "middlemen" would disappear. However, the = early=20 speculation failed to appreciate the important role that intermediaries = play or=20 the resourcefulness some intermediaries would exhibit in finding new = ways to add=20 value in an online world.

Instead of vanishing, = traditional=20 intermediaries are adapting to exploit new possibilities as providers of = logistical, financial, and information services. Take the case of = ChemConnect,=20 an online suppliers directory that has evolved into a global Internet = exchange.=20 ChemConnect brings suppliers and buyers of chemicals and plastics into=20 negotiations where the providers of intermediary functions offer their = services=20 for bid. As buyer and seller work to reach agreement on a purchase,=20 intermediaries provide estimates of costs, including carriers (ocean, = inland=20 marine, and truck), documentation (customs clearing, regulatory/tax, = insurance,=20 cargo surveying), and warehousing (terminal operations,=20 consolidation).

Internet-based market = spaces also=20 broaden market participation by decreasing the costs of participating in = B2B=20 markets. For decades, large companies have used EDI to automate routine=20 paperwork surrounding business transactions, to manage arrangements such = as=20 automatic inventory replenishment, and to make purchases according to=20 pre-established terms. Until recently, the use of this e-business = activity was=20 limited to large volume supplier/customer relationships because EDI = required a=20 fairly sizable investment in dedicated hardware and proprietary software = and use=20 of expensive leased telecommunications lines. As costs of computing = power,=20 memory, and storage declined throughout the 1990s, the size threshold at = which=20 EDI became cost-effective also declined, but still remained too high for = many=20 trading applications. Now, however, the Internet with its open = nonproprietary=20 protocols and global reach has emerged as a platform for spreading the=20 efficiencies achievable through the automation of business processes to = firms of=20 all sizes.

The bulk of B2B e-commerce = remains=20 EDI-based, although analysts are predicting that most of the future = growth of=20 B2B e-commerce will be Internet-based. The National Association of = Manufacturers=20 estimates that among businesses that currently use the Web for business, = 17=20 percent are using it in place of EDI.⁽³⁶⁾ The = Boston=20 Consulting Group estimates that 86 percent of the $671 billion in B2B = e-commerce=20 in 1998 was EDI conducted over private networks. However, they estimate = that the=20 EDI component will fall to 28 percent by 2003.⁽³⁷⁾ =

In addition, businesses = and even=20 governments have discovered the potential of the Internet as an auction = space.=20 Businesses are using auctions to sell off surplus goods, dispose of used = equipment, and post requests for purchase. More than 10,000 companies = have=20 posted, sold, or bought goods on the Tradeout.com site, which focuses = solely on=20 auctioning surplus goods.^=20
(38) Dovebid, an established used-capital asset disposition=20 auctioneer, has set up an online auction site with more that 200,000 = items and=20 is reaching out to a global market.⁽³⁹⁾ =

Business purchasers are = also using=20 online auctions to request bids. Owens Corning used an online reverse = auction=20 run by Freemarkets, an online auction company, to put bids out for = corrugated=20 packaging materials for its 21 U.S. plants. At the end of the day the = company=20 had 17 two-year contracts with corrugated packaging material suppliers = and had=20 saved an estimated 10 percent.⁽⁴⁰⁾ =
=20

E-Business=20 Processes

E-commerce transactions represent only one way in which innovations = in=20 computers and communications can add value and make business processes = more=20 productive. All business processes have some information component.=20 Specifications for a design must be shared between architects and = engineers. The=20 latest maintenance information must be delivered to the mechanic working = on the=20 airplane. The manufacturer of auto interiors needs to know how many blue = interiors must be delivered for a manufacturing run at the auto plant. = All of=20 these processes benefit when information flows faster, more accurately, = and in=20 greater detail to the people who need it.

Many companies are experimenting with processes that enable them to = share=20 information over a network or the Internet. For example, BOC Gases = replaced a=20 slower, more costly certification procedure with a process that sends = product=20 certification results over the Internet for customers that need = specialized gas=20 products.^=
(41)=20 Similarly, John Deere Construction Equipment Company uses the Internet = to=20 improve customer service by creating a portal providing component life = cycle=20 data to enable customers to manage component replacement before = failure.⁽⁴²⁾

Businesses are also using = networking=20 technologies to improve processes, such as design and engineering, = reducing=20 development time, simplifying manufacturing processes, and integrating = design=20 processes. Examples include:

Using Internet technologies to = coordinate=20 product design. = Conexant,=20 a semiconductor producer, has created Web-enabled tools for its new = product=20 development process. The company's 2,000 engineers use a standard Web = browser=20 to access the company's portfolio of projects and obtain information = on phase=20 of development, team composition, deliverables, and time frame.^=
(43) =20

Using communications networks to = improve=20 human resource functions.=20 Shaw Industries, a manufacturer of floor coverings, uses an internal = network=20 to support compensation planning and retention initiatives for the = company's=20 36,000 worldwide employees.⁽⁴⁴⁾ =

Using wireless networks to manage = inventory=20 more efficiently.=20 Cablevision, a telecommunications and entertainment company, uses = wireless=20 mobile computer appliances over a local area network to process = inventory=20 transactions in real time, at the point of activity. Previously, = Cablevision=20 workers made inventory transactions, such as transferring inventory = between=20 warehouses or scanning new shipments, by filling out forms by hand for = later=20 entry into a central computer. The new system eliminates the daylong = wait to=20 update the main database, so that inventory, such as cable boxes, can = be=20 located instantly. When the installation is complete, the project will = cover=20 43 warehouses across four states.^=
(45)
Using extranets to provide=20 training. = Service Experts,=20 a company specializing in the installation and maintenance of heating = and=20 cooling systems with 150 locations in 34 states, established an = extranet to=20 serve as an online resource library that includes "3-D diagrams with = training=20 manuals and step-by-step instructions for solving problems."^=
(46) =20

Using the Internet to provide = customer=20 services and answer frequently asked questions. Many companies are using their = company Web=20 site to offer customer services and product information. Ford offers = product=20 information and links to dealers, and their "Owner Connection" Web = page=20 provides Ford car owners with maintenance information, safety tips, = service=20 reminders, do-it-yourself pointers, and online manuals.^=
(47) =20

Using the Internet to reduce = project=20 administration and management costs. Over the year-long process of = building a=20 hotel in San Francisco, contractor Swinerton & Walberg estimates = that by=20 using an Internet-based project management system they will squeeze = about=20 $110,000 out of the project's $11 million budget.^=
(48) =20

AN INCREASINGLY WIRED = WORLD

Not only are individuals, businesses, and other organizations going = online in=20 increasing numbers, but the products and services used in everyday life = are=20 becoming increasingly integrated into the networked economy. Certain = goods and=20 services can now be delivered directly to the buyer over the Internet. = And=20 Internet connectivity is no longer tied to the desktop = computer. =20

The Internet provides a new way to have goods and services delivered. = Music,=20 legal advice, software, opera tickets, news reports, books, photographs, = movies,=20 and product designs--can all be downloaded directly into a computer. = According=20 to Forrester Research, while only 3 percent of all current online B2C = sales=20 consist of digitally-downloaded products, this level could reach 22 = percent of=20 all online sales by 2004. The most dramatic growth in direct, digital = download=20 sales will probably be in the music sector, where such sales could rise = from 0.1=20 percent of online sales in 1999 to 25 percent in 2004, followed by = software=20 (rising from 7 percent of online sales in 1999 to 40 percent in 2004) = and books=20 (rising from 1 percent of book sales online in 1999 to 13 percent in=20 2004).^=
(49)=20

Digitalization is also changing the design of products, so these = products can=20 be networked. For example, home-electronics producers have joined = together to=20 develop Home Audio Video Interoperability (HAVi), an open,=20 consumer-electronics-industry standard that will allow digital audio and = video=20 devices from different vendors to work together when connected to a = network in=20 the consumer's home.^=20
(50) Appliances that can be networked are beginning to emerge = in other=20 areas as well.

New home electronics and appliances will not only be networkable, = many of=20 them also will be "network appliances"--that is, appliances that can = access the=20 Internet. The television has long been viewed as a potential portal for = Internet=20 access. More recently, simple, low cost dedicated Internet access = devices have=20 been introduced. In addition, connectivity is increasingly being viewed = as an=20 important feature to add to existing products. At recent trade shows, = for=20 example, home appliance manufacturers have unveiled prototype = Internet-enabled=20 refrigerators and ovens that offer features such as e-mail, calendar = management,=20 automated grocery ordering, and tracking of the service requirements of = the=20 appliance.

We are only in the early stages of designing and developing new = products that=20 take advantage of open networks. This development is still limited by = slow=20 connection and transmission speeds and the lack of standards to = facilitate=20 individual appliances communicating with one another. As these = limitations are=20 addressed, however, the developmental pace of digital products is likely = to=20 increase. New technologies that exploit the potential of wireless = connections=20 are already creating new ways of communicating and conducting business,=20 reconfiguring many traditional industry and product definitions. As = Internet=20 access migrates from the desktop computer to a range of products, the = lines that=20 now separate the transmission of voice, data, and pictures will = disappear. New=20 devices under development today will combine cellular telephone, = geopositioning,=20 and Internet access in a handheld or automobile device. The major = automakers,=20 for example, have already announced plans to equip some of their = automobiles=20 with voice activated Internet access and handheld and automobile = Internet access=20 is already available in Japan.⁽⁵¹⁾

The technologies that make the digital economy possible are still = evolving,=20 as is the environment in which these technologies are being used. Many=20 businesses