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Internet Illusions

Vote.com

by Dick Morris
Renaissance Books, 236 pp., $15.95 (paper)

1.

Until March 28 of this year, the investment world acted as if the coming of the Internet really had changed the basic rules of finance. Early that month, the Nasdaq average, which is heavily influenced by technology and Internet stocks, had passed 5,100, double its level of six months earlier. Amazon.com—essentially a discount retailer, which had never made a profit and whose most recently reported yearly losses were more than $700 million—had attained a market capitalization greater than that of Boeing. The 3Com Corporation, which makes communications hardware for computers, had just spun off the subsidiary that manufactures the popular Palm Pilot handheld device. A week after its shares began trading, the new subsidiary was valued by the market at $35 billion. The parent company, 3Com, held 95 percent of Palm’s shares—but 3Com’s total market capitalization was only $24 billion.

Clearly this could not last. But day by day traders and analysts kept bidding up Internet stocks. In reality, many were operating on the “greater fool” theory—the expectation that they would be able to unload the overpriced stocks at an even more inflated value before the mania subsided. For public consumption they rationalized their decisions and the Net valuations as reflecting the “new rules” of the information economy, and the “new business models” that made companies desirable even if they had no obvious way to make money.

Then, in mid-March, the Nasdaq headed down. It had slipped from time to time in the preceding year, only to recover when investors feared they might miss the next inexplicable market high. But on March 28, the consistently bullish analyst Abby Joseph Cohen of Goldman Sachs announced in a newsletter that she considered the technology sector as a whole over-valued. In the next five weeks, the Nasdaq lost 40 percent of its value, going below 3,300. (At this writing, it is below 3,200.) Amazon’s market capitalization fell by 75 percent from its peak. By mid-summer, more than a hundred initial public offerings for Internet companies, with projected total value of more than $8 billion, were canceled or indefinitely postponed. A delightfully malicious website named www.fuckedcompany.com made its debut. It mocked the upbeat business magazine Fast Company in its layout and tone, and it publicized the latest alarming news about which Internet companies were about to lay off employees, announce they were “looking for new revenue models,” or go out of business altogether.

The leading chronicler of the Internet economy, The Industry Standard magazine of San Francisco (for which I write a column1 ), ran a cover story late in 1999 called “Suddenly Rich,” about the way lives were transformed by unimaginable wealth. In September of this year it ran a feature called “The Day the IPO Died,” about entrepreneurs who risked it all on new Internet ideas—and went broke, because venture capitalists had become hyper-selective about Net startups.2 In the spirit of fuckedcompany.com, the magazine also instituted its grimly comic “Dot-Com Layoff Tracker,” “Dot-Com Flop Tracker,” and “Ex-Exec Tracker” features on its website, with real-time updates about which companies were shedding which people.3

No one imagined that the Nasdaq’s retreat meant that the Internet was finished, either as a business opportunity or as a source of long-term economic growth. Indeed, the most enthusiastic proponents of the import-ance of “network economics” are now the “old economy” companies, from Ford to Wal-Mart, who say that new information systems will streamline the way they reach customers, manage inventories, and bid for supplies. As Joseph Romm, a former official in the US Department of Energy, has pointed out, the rise of the Internet has already made the economy as a whole more efficient, by reducing the energy required for each increment of economic expansion. Through the first half of the 1990s, before the Internet had any significant business impact, energy consumption grew about as fast as the overall economy did. From 1992 to 1996, the gross domestic product grew by an average annual rate of 3.2 percent, and electricity use grew by 3.0 percent.

During the last four years, however, as businesses relied more heavily on the Internet, they produced more goods and revenue, with relatively less electric power. From 1996 to 2000, the gross domestic product grew about 4.2 percent a year, but electricity consumption rose by only 2.2 percent a year.4 Since the Internet depends on banks of mighty server computers running around the clock, this pattern is surprising. But Romm says that the energy costs of operating such networks are trivial compared to the energy they save. For instance, computers, networking equipment, and office automation systems together represent about 2 percent of total US energy demand. If the electricity needed to operate the nation’s telephone systems is added, the total rises to about 2.3 percent. Heating and cooling commercial buildings, and refrigerating or freezing commercial supplies, requires roughly six times that much electricity. Therefore, improved stocking information, which allows grocery chains to reduce frozen-food inventory, can mean large energy savings.

The long-term importance of the Internet remains, but for the last six months the financial community has had to act as if traditional rules of price, profit, and valuation apply to this sector, too. Indeed, it’s now hard to find anyone who admits to having ever believed that the web portal Yahoo was “worth” twice as much as the Ford Motor Company.

This year’s election could turn out to be the same watershed for assessments of the Internet’s political impact that March 28 was for the Internet’s economic role. That is, in politics as in business, the spread of high-speed, low-cost networked communications will be a profoundly important long-term source of change. But the most surprising lesson of this election year is how many things the Internet did not affect, and how many old rules still apply.

Starting five years ago, about the time that Bill Gates, the chairman of Microsoft, sent a memo to his lieutenants declaring that the Internet had changed everything about the software industry, people in the technology business began asserting as an obvious truth that the Internet had changed everything about cultural and social life as well. Gates was right about the Internet’s effect on software. His company’s subsequent legal collision with the US government was in a sense inevitable: the company felt that it had to build Internet compatibility into its programs and operating systems, because otherwise they would rapidly become obsolete. To the government, this act looked not like self-defense but like the effort to extend an existing monopoly, in the Windows operating system, to a new area of competition. (The one thing that was not inevitable about the showdown was the tough-guy, “see you in court!” attitude of Microsoft’s lawyers and negotiators. In refusing to admit any fault or misconduct whatsoever, they invited an all-out legal battle, which at least at the trial level they lost.)

But the commentators who emphasized the social and political impact of the Internet were often wrong, or at least premature. At technology conferences and university symposia, a standard list of expected social effects emerged. By allowing people to choose their own sources of information, the Net would simply render unimportant the TV networks and large media companies. By letting oppressed residents of dictatorial nations evade local censorship and learn about the world outside their borders, the Net would undermine tyrants. By letting the citizens of stable democracies learn directly about public issues, it would force political parties and leaders to be more quickly responsive to the public’s enlightened will. By reducing practically to zero the cost of communication, the Internet would liberate politicians from the endless challenge of raising money—no more expensive mailings, no more costly TV time—and introduce a kind of friction-free democracy.

The reader may suspect that I am overstating such predictions. If anything, the reverse is true, since it’s hard now to recapture the “Year Zero” spirit of the early Internet days. John Perry Barlow, for years one of the most celebrated theorists of the Internet’s social impact, famously declared that in the new age, “everything we know is wrong.” In The Social Life of Information, a book published early this year, John Seely Brown, long the director of Xerox’s Palo Alto Research Center, and Paul Duguid, of the University of California at Berkeley, call this style of prediction “endism,” as in “the end of the world as we know it.” They say that “endist” predictions based on advances in computer technology have so far mainly proven to be wrong—for instance, the notion that a computerized, “paperless” office would mean the end of memos, photocopying machines, and printed documents. But discussions of the social and political effect of the Internet have mainly been couched in “endist” terms.

John Chambers, the CEO of Cisco Systems, said in 1998, “What people have not grasped is that the Internet will change everything…. It will have every bit as much impact on society as the Industrial Revolution [but] it will happen over seven years.” Nicholas Negroponte, director of the Media Lab at MIT, maintained that spirit throughout his book Being Digital, published in 1995. Also in 1995, Lawrence Grossman, the former president of NBC News, wrote in The Electronic Republic, “As we approach the twenty-first century, America is turning into an electronic republic, a democratic system that is vastly increasing the people’s day-to-day influence on the decisions of state.”

Darin Barney, of the University of New Brunswick, says in his book Prometheus Wired that in 1995 a Canadian legislator told him, “Most of what you have been taught about traditional politics will be of little value in the years ahead.” Dick Morris, no one’s idea of an understated theorist but still a man who knows about politics, wrote last year in his book Vote.com that the Internet was systematically boiling “intermediaries” out of society—the travel agent was giving way to the on-line travel site, the stockbroker to on-line trading services. The same process was sure to increase the individual citizen’s power relation to large governmental bureaucracies:

Two hundred years ago, Thomas Jefferson had to shelve his vision of a direct democracy in which people made their own decisions at town meetings. The twin challenges of vast distances and limited communications made it necessary for us to select special people among us to go to places like Richmond, Albany, Harrisburg, Atlanta, and Washington, D.C., to make decisions for us. Now we are about the reclaim the power Jefferson would have given us. Through the technology of the Internet, we have overcome the logistics that defeated Jefferson. Again we can move in the direction his vision would have led—toward direct democracy.

A year ago, while getting ready for the presidential campaign, few political analysts challenged the idea that 2000 would be the “Internet’s election,” just as 1960 had been television’s. The prediction seemed to be fulfilled by early February, just after John McCain’s surprise victory in the New Hampshire primary. In every press photo and TV spot in the week after New Hampshire, McCain’s staff made sure that his website’s address www.McCain-2000.com was prominently displayed. Small contributions began pouring in through the website, in a way that temporarily promised to transform the race. One day after the primary election, McCain had raised $300,000 through the site. A day later, he had raised $1 million. A week later, he had more than $3 million. In earlier elections, converting political momentum to cash had been agonizingly slow, because of the wait for people to mail in their pledges and checks. Because George W. Bush’s main advantage was money, if the Internet had allowed McCain to continue to find new money, fast, it would indeed have changed the political situation.

  1. 1

    Including this one, two weeks before the crash, saying that the end was near: “Palm Reading,” The Industry Standard, March 13, 2000, www.thestandard.com/article/display/0,1151,12789,00.html.

  2. 2

    Laura Fraser, “The Experience of Being Suddenly Rich,” The Industry Standard, November 29, 1999, www. thestandard.com/article/display/0,1151, 7812,00.html; Anya Schiffrin, “The Day the IPO Died,” The Industry Standard, September 25, 2000, www.thestandard.com/article/display/0,1151,18697,00. html.

  3. 3

    See Katie Motta, “Dot-Com Flop Tracker,” www.thestandard.com/article/display/1,1151,15970,00.html.

  4. 4

    Energy Information Administration, US Department of Energy, www.eia.doe.gov/emeu/steo/pub/a1tab.html. Year 2000 data is based on government projections.

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