Dot Coms and Productivity in the Internet Economy

In the third wave of the Internet Economy Indicators research (released in June, 2000), we made a distinction between two types of dot com companies - digital and physical. Digital dot coms are Internet based companies such as Yahoo, Ebay and America Online, whose products and services are digital in nature and are delivered directly over the Internet. By contrast, the physical dot coms sell physical products (e.g., books, CDs, toys) that are shipped to consumers. Based on this classification, we found that for 1998, Information Technology (IT) capital (computer hardware, software and networking equipment) contributed significantly to financial performance measures for the digital dot coms. However, the IT contribution for physical dot coms was uniformly insignificant across all financial measures. We attributed the result involving physical dot coms to the fact that beyond the digital customer interface, such companies were not fundamentally different from traditional business operations. In fact, we found that nearly 80 percent of the physical dot coms held and managed inventory, and handled packaging and shipping processes by themselves, citing customer service excellence as the primary reason. By contrast, the digital products companies manage content inventory directly through their Web sites and related applications.

We argued that the physical dot coms need to adopt more digitization in their extended value chain in order to operate as virtual organizations, whose core competency was customer relationship and knowledge. Did the scenario change for 1999 and 2000? Our analysis for 1999 suggests that both publicly traded digital and physical dot coms improved their financial performance significantly over 1998, and are headed in the right direction at a rapid pace. Average annual revenues increased 261 percent and 313 percent for digital and physical dot coms respectively, implying spectacular growth of online commerce activity. Perhaps more impressive was the growth of gross income, which increased 150 percent and 307 percent for the digital and physical dot coms respectively. The number of employees increased by 78 percent and 185 percent for digital and physical dot coms respectively. Sales per employee grew at 65 percent and 21 percent for digital and physical dot coms respectively. These findings are summarized in the tables below:

Publicly traded digital dot coms: 1998 - 1999

Publicly traded physical dot coms: 1998 - 1999

Were the physical dot coms productive in their use of labor, Information Technology and non-IT capital? In contrast to our earlier result that the physical dot coms did not benefit from their investments in IT capital, we find that IT did contribute significantly to revenue and revenue per employee for this group of companies. Our interpretation is that these companies are getting better at leveraging the technology to build customer relationships and in coordinating with fulfillment partners. That is, they are now relying more on others for logistics and fulfillment functions, and are focusing on their core business of creating value for the customer through the Internet.

The analysis also suggested that both digital and physical dot coms are rapidly improving their performance over time. For example, even if the digital dot coms did not increase their number of employees, IT and non-IT capital, they would still enjoy a 21.2 percent increase in sales in one year. They would also experience increases of 24.47 percent, 27.22 percent and 28.4 percent in revenue per employee, gross income and gross income per employee respectively. The physical dot coms are expected to see corresponding improvements of 20.4 percent, 21.28 percent, 29.67 percent and 25.7 percent in their revenue, revenue per employee, gross income and gross income per employee respectively. These numbers suggest that both types of dot coms are getting better at selling, fulfilling and providing customer service without increasing the amount of resources such as people or capital. This is certainly a positive signal amidst pessimism regarding the future of dot coms.

What about dot com performance in 2000?

Given the precarious conditions that exist in the venture capital market today, it is natural to ask how dot coms have performed in 2000. While the above analysis was restricted to publicly traded dot com companies, most dot coms are small, privately held companies. We identified a total of 3125 "dot com" companies in the U.S. Internet economy, defined as layer 3 or 4 companies who do at least 95 percent of their business online. While 100 percent online sales may appear to be a more appropriate criterion for defining a dot com, we note that even pure Internet based companies receive some phone and fax based orders. Accordingly we set the online sales threshold at 95 percent. From the first to the second quarter of 2000, the total revenues associated with these dot coms increased a healthy 18.7 percent, while gross profit margin increased 1.3 percent from 33.1 percent to 34.4 percent. By contrast, a "top-ten" list of traditional companies (chosen from retail, financial services, hardware, software, telecommunications and aerospace sectors) experienced a 5.1 percent reduction in gross margin from 34.5 percent to 29.4 percent from the first to the second quarter of 2000, indicating a possible slowdown in the overall economy. Under these circumstances, the 1.3 percent increase in gross profit margin for all dot coms tells a very different story from the one usually portrayed in the media based on the failure of a few large dot coms. Indeed our analysis for 1999 and 2000 suggest that as a group, the dot coms have performed admirably. While a group of dot coms with bad business models have already gone out of business, it is unreasonable to suggest that all dot coms will shut down in the near future. It is ironic and unfortunate that the capital markets have virtually closed their doors to the entire group in spite of spectacular growth in revenue, revenue per employee, gross income and an overall improvement in the productive use of resources.

The Research Team

Professor Andrew Whinston

Dr. Andrew Whinston is the Hugh Roy Cullen Centennial Chair Professor in Information Systems at the Graduate School of Business in the University of Texas at Austin. He is a Professor in the departments of Economics and Computer Science as well. Dr. Whinston is a Fellow of the IC2 Institute, Austin and is the director of the Center for Research in Electronic Commerce (http://crec.bus.utexas.edu), for several years a pioneering research facility in Electronic Commerce. Under his stewardship, the Center identified the potential of electronic commerce early on, and made significant contributions in theoretical aspects of business and technological practice in this new frontier, and developed cutting edge applications that facilitate and demonstrate strategies for this marketplace. His current research spans various realms of Electronic Commerce, its impact on business protocols and processes, on organizational structure and corporate networks, electronic publishing, electronic education, and business value of IT. He is the author or co-author of over 300 technical papers and 30 books. His recent book titles are "Frontiers of Electronic Commerce," "Readings in Electronic Commerce," "Electronic Commerce: A Manager's Guide," "The Economics of Electronic Commerce," "Handbook on Electronic Commerce," "The Internet Economy: Technology and Practice," and "Electronic Commerce and Revolution in Financial Markets."

Dr. Whinston received his Ph.D. in management from Carnegie Mellon University in 1962. He served as an Assistant Professor at Yale University from 1961 to 1964 in the Department of Economics and the Cowles Foundation for Research in Economics. In 1964 he joined the faculty of the Economics Department at the University of Virginia as an Associate Professor and in 1966 was appointed as Professor in the Business School at Purdue University with a joint appointment in Computer Science.

Dr. Anitesh Barua

Anitesh Barua is an Associate Professor of Information Systems, Spurgeon Bell Fellow, Bureau of Business Research Fellow, Distinguished Teaching Professor and Associate Director of the Center for Research in Electronic Commerce (http://crec.bus.utexas.edu) at the Graduate School of Business, the University of Texas at Austin. He received his Ph.D from Carnegie Mellon University in 1991. His research interests include the business value of Internet related Information Technologies, measuring economic aspects of the Internet Economy, and the efficiency of electronic markets. His research has been sponsored by both government and private organizations including the National Science Foundation, Cisco Systems, Dell Computer, Ernst & Young, IBM Research, and Intel Corporation. 45 of his research articles have appeared in refereed journals, conference proceedings and edited book chapters. Dr. Barua has received several awards for his research and teaching, including the William W. Cooper Doctoral Dissertation Award from Carnegie Mellon University in 1991, National Science Foundation Research Initiation Award in 1992, the University of Texas College of Business Administration (CBA) Foundation Teaching Award in 1994, ANBAR Citation Excellence in 1997, the CBA Teaching Innovation award in 1999, membership in the University of Texas Academy of Distinguished Teachers in 2000, and the El Paso Energy Foundation Faculty Award in 2000.

Dr. Barua has appeared on multiple occasions as an Electronic Commerce expert on major television and radio programs in the U.S. and abroad including ABC, CNN, CNBC, Jim Lehrer NewsHour, Associated Press Radio, CBS Radio and Voice of America. Dr. Barua has also appeared as an expert witness before the House Ways and Means Committee, and has briefed the staff of the Joint Economic Committee on the Internet economy.

Jay Shutter

Jay Shutter is President of the Momentum Research Group (MRG), A Citigate Cunningham Company. The Momentum Research Group specializes in high technology research and has a practice that focuses on brand momentum and the impact of the Internet Economy on business strategy, brand strategy, marketing and communications.

At Citigate Cunningham, Jay is responsible for developing new research products and services that address the impact of technology and the Internet on businesses and consumers. Formerly Director of Research at InformationWeek and prior to that, Director of Research at IntelliQuest, Jay developed the technology industry's first business research panel as well as an industry leading customer registration business. A frequent presenter at research and marketing conferences, Jay is a recognized expert in such areas as panel research, database research, segmentation studies, brand tracking and Internet research.

Jay has degrees from the University of Texas at Austin and Southern Illinois University at Carbondale.

Dr. Brant Wilson

Dr. Brant Wilson, a recognized expert at marketing research and analysis, is Founder and President of Customer Value Systems, Inc. Formerly Director of Business Planning at Compaq Computer Corporation, Dr. Wilson founded Compaq's worldwide marketing research department, expanding it to strategic planning function. In 1988, he developed the computer industry's first electronic customer registration program at Compaq and pioneered a highly successful customer tracking system. More recently his targeting strategies have helped CVS clients achieve more than four times the expected response rate on promotions, leading to dramatic profit improvements.

Dr. Wilson is a frequent speaker at marketing and business conferences, on such topics as product strategy and positioning, brand loyalty, niche marketing, customer segmentation and profitable marketing strategies.

Prior to working at Compaq, Dr. Wilson held senior positions with McCann-Erickson Advertising and Anheuser-Busch, Inc. the world's leading brewer. Dr. Wilson received a B.S. from the University of Richmond, a Masters at Texas A&M University, and a Ph.D. from Washington University in St. Louis.

Jon Pinnell

Jon Pinnell is President and Chief Operating Officer of MarketVision Research where he has primary responsibility for research operations and the firm's Cincinnati offices. MarketVision Research is a full service research supplier who provides innovative design, execution and interpretation to deliver fresh consumer insights and market knowledge to clients in North America and worldwide.

In addition to his corporate responsibilities, Jon leads the firm's Marketing Sciences Group. Jon's areas of expertise and research interest include the application of quantitative techniques to marketing models of decision making, especially those areas relating to brand and category choice decisions.

Jon is actively involved in pioneering new research methods. In 1995 Jon was a co-recipient, with Valentine Appel, of the Richard Lysaker Award, presented by the Advertising Research Foundation for the best new research on media.

Jon has presented papers at leading conferences for practitioners and academics. Before joining MarketVision, Jon was the Director of Marketing Sciences at IntelliQuest, Inc., the leading research supplier for the technology industry in Austin, TX. Jon received a BS from the University of Kansas in Marketing and Statistics and an MBA from the University of Texas at Austin in Marketing Research.

Research in Electronic Commerce has almost exclusively focused on the number of Internet users, demographics, and various aspects of online buying and selling. However, as we looked at how to better understand the impact of the Internet across all business sectors, our focus turned to measuring the size and growth of the Internet Economy. Our first challenge was to determine how to define this emerging economy.

The first step in defining the Internet Economy was to build a conceptual framework and taxonomy. The Internet Economy can be conceptualized as a collection of IP-based networks, software applications and the human capital that makes the networks and applications work together for online businesses, and agents (corporations and individuals) who are involved in buying and selling products and services in direct and indirect ways. There is a natural structure or hierarchy to the Internet Economy that can be directly traced to how businesses generate revenues. Based upon this type of structure, we broadly classify the Internet Economy into infrastructure and economic activity categories.

The infrastructure category is further divided into two distinct but complementary "layers": the Internet infrastructure layer, which provides the physical infrastructure for Electronic Commerce, and the Internet applications infrastructure, which includes software applications, consulting, training and integration services that build on top of the network infrastructure, and which makes it feasible for organizations to engage in online commerce.

The economic activity category is also subdivided into two layers: electronic intermediaries and online transactions. The intermediary layer involves the role of a third party in a variety of capacities: market maker, provider of expertise or certification that makes it easier for buyers to choose sellers and/or products, search and retrieval services that reduce transaction costs in an electronic market, and other services that facilitate the conduct of online commerce. The transactions layer involves direct transactions between buyers and sellers like manufacturers and e-tailers.

While we could take the position that e-tailers are also an intermediary between the consumers and manufacturers, the illustration above highlights the difference between an e-tailer like Amazon.com and an electronic intermediary in the purest sense of the term. An intermediary would also specify where a book or CD could be found at the lowest price or shortest delivery time or some combination of criteria specified by the consumer. By contrast, Amazon.com only displays its own catalog, prices, availability and lead-time. Of course, it is true that for the case of e-tailers the difference between the two topmost layers could be a matter of degree.

Layer One: The Internet Infrastructure Indicator

A physical economy critically depends on an efficient infrastructure involving transportation, energy, raw materials, and skilled workforce. Likewise, the growth of a digital economy depends on the ubiquitous presence of high speed and intelligent electronic networks, and the ability to share any type of content between all agents in the economy. Accordingly, the Internet infrastructure layer includes companies that manufacture or provide products and services that make up the Internet network infrastructure. This layer includes companies that provide telecommunications and fiber backbones, access and end-user networking equipment necessary for the proliferation of Internet-based Electronic Commerce. This layer includes the following types of companies:

		National and regional backbone providers (e.g. Qwest, MCI WorldCom)
		Internet Service Providers (e.g. AOL, Earthlink)
		Network equipment for backbones and service providers (e.g. Cisco, Lucent, 3Com)
		Conduit manufacturers (e.g. Corning)
		Server & client hardware (e.g. Dell, Compaq, HP)

Layer Two: The Internet Applications Infrastructure Layer

Products and services in this layer build upon the above IP network infrastructure and make it technologically feasible to perform business activities online. In addition to software applications, this layer includes the human capital involved in the deployment of Electronic Commerce and E-Business applications. For example, Web design, Web consulting, and Web integration are considered as a part of this layer. This layer includes the following categories:

		Internet consultants (e.g. MarchFIRST, Scient)
		Internet commerce applications (e.g. Microsoft, Sun, IBM)
		Multimedia applications (e.g. RealNetworks, Macromedia)
		Web development software (e.g. Adobe, Allaire, Vignette)
		Search engine software (e.g. Inktomi, Verity)
		Online Training (e.g. Sylvan Prometric, SmartPlanet)
		Web-enabled databases (e.g. Oracle, IBM DB2, MS SQL Server - only Internet/Intranet related revenues are counted here)
		Network operating systems
		Web hosting and support services
		Transaction processing companies

Layer Three: The Internet Intermediary Indicator

Internet intermediaries increase the efficiency of electronic markets by facilitating the meeting and interaction of buyers and sellers over the Internet. They act as catalysts in the process through which investments in the infrastructure and applications layers are transformed into business transactions. While much has been written about a large-scale disintermediation in the transformation of the physical to the digital economy, the Internet necessitates a new breed of intermediaries whose roles are naturally information and knowledge intensive.

In the physical world, intermediaries are distributors and dealers, whose primary role is to increase the efficiency of distribution and to lower buyer transaction costs by locating close to the customer population. By sharp contrast, physical proximity is not an issue on the Internet; online search, evaluation, communication, coordination, assurance of vendor and product/service quality are the important aspects in the Internet Economy. Internet intermediaries play a critical role in filling information and knowledge gaps, which would otherwise impair the functioning of the Internet as a business channel. This layer includes:

		Market makers in vertical industries (e.g. VerticalNet, PCOrder)
		Online travel agencies (e.g. TravelWeb, Travelocity)
		Online brokerages (e.g. E*trade, Schwab.com, DLJ direct)
		Content aggregators (e.g. Cnet, Cdnet)
		Portals/Content providers (e.g. Yahoo, Excite)
		Internet ad brokers (e.g. DoubleClick, 24/7 Media)
		Online advertising (e.g. Yahoo, ESPN Sportszone)
		Web-based virtual malls (e.g. Lycos shopping)

Layer Four: The Internet Commerce Indicator

This layer includes companies that generate product and service sales to consumers or businesses over the Internet. This indicator includes online retailing and other business-to-business and business-to-consumer transactions conducted on the Internet.

		E-tailers selling books, music, apparel, flowers, etc. over the Web (e.g. Amazon.com, 1-800-flowers.com)
		Manufacturers selling products direct such as computer hardware and software (e.g. Cisco, Dell, IBM)
		Transportation service providers selling tickets over the Web (e.g. Delta, United, Southwest)
		Online entertainment and professional services (e.g. ESPN Sportszone, guru.com)
		Shipping services (e.g. UPS, FedEx)

It is important to note that many companies operate at multiple layers. For instance, Microsoft and IBM are important players at the Internet infrastructure, applications, and Internet commerce layers, while AOL/Netscape has businesses that fall into all four layers. Similarly, Cisco and Dell are important players at both the infrastructure and commerce layers. Even though the four-layer Internet Economy framework makes it time-consuming to separate revenues for multi-layer players, the framework presents a more realistic and insightful view of the Internet Economy than a monolithic conceptualization that does not distinguish between different types of activities. Further, the multi-layered approach lets us analyze how companies choose to enter one Internet layer, and later extend their activities to the other layers.

Each layer of the Internet Economy is critically dependent on every other layer. For instance, improvements in layer one can help all other layers in different ways. As the IP network infrastructure turns to broadband technologies, applications vendors at layer two can create multimedia applications that can benefit from the availability of high bandwidth. Companies at layers three and four can benefit from improvements in both layers one and two - providing media-rich content to consumers as well as new digital products and service (information and software delivered online). This interdependence also exhibits itself in the form of alliances where conduit and content providers or applications vendors and e-tailers join hands to create bundled offerings that are valuable to consumers.

To appreciate the unprecedented growth and implications of the Internet economy, we need to address specific issues related to the nature of transformation enabled by the Internet. These are discussed below.

How do we understand a technological breakthrough such as the Internet? What are the essential differences in understanding the Internet economy and the bricks and mortar economy?

As enumerated in our previous research (see http://www.internetindicators.com/), the Internet economy's infrastructure consists of two layers: global high-speed IP-based networks and applications (layer 1), and consulting, training, and integration services (layer 2). Each Internet economy layer has a complementary relationship with every other layer. For example, with advances in layers 1 and 2, firms at layers 3 and 4 can provide media-rich content to consumers as well as offering new digital products and services (information and software goods that are delivered online). This interdependence also exhibits itself in the form of alliances in which conduit and content providers or applications vendors and electronic retailers (e-tailers) join hands to create bundled offerings that are valuable to consumers.

	The key to understanding the Internet therefore lies in analyzing the complementary relationships between various layers of the Internet economy.
	The Internet is an "enabling technology" which has the potential for pervasive use in a variety of business applications.

How do we understand the wide range of consequences that the Internet has across various sections of the economy?

The Internet is not an isolated technology phenomenon; it is a "general purpose technology", at the heart of which are sweeping transformations affecting virtually all forms of economic and societal organization. Many economists point out that a major technological breakthrough such as computing or electricity comes into widespread use only after the emergence of an extended trajectory of incremental innovations. Pervasiveness of a General Purpose Technology (GPT) is its ability to be used in many downstream applications because it provides a generic function, such as the developments in communication technologies that can be used by households, for broadband communication within industries and a variety of online stores.

The technological dynamism of a GPT is its potential to support continuous innovation efforts and learning, which allows for large increases in the efficiency of the GPT over time. As suggested by economic historians such as Rosenberg, inventions such as the railroads had widespread consequences on the organization of the economic systems, bringing non-local markets into the purview of producers and reorganizing trade. What would be considered a perishable commodity could become a non-perishable commodity with the advent of the railroad. Similarly the Internet has created services out of products. The Napster-Bertelsmann agreement, it is pointed out, has far reaching consequences not only on the music industry, but on the entire popular perception of music.

	To understand the developments that constitute the Internet, we must look at the role of secondary innovations by various firms, for example in the role of market intermediaries in layer 3 to take advantage of the tremendous growth of networking speeds and secure electronic commerce offered by layer 1.
	The development of the Internet has profound consequences for the interaction between markets and society.

Let us compare the technological breakthrough of today, the Internet, with the breakthrough of the nineteenth century, the electrical dynamo. Farsighted engineers had envisioned the role of electricity in transforming the organization of home and workplaces at the turn of the century, but it took a long time before electricity came into widespread use.

Historically, factories were reluctant to adopt electricity because of the seemingly unprofitable replacement of still serviceable capital for new production techniques. This accounts for the lags in diffusion. It is not enough if there are a few visionary entrepreneurs who can see the potential of a new technological breakthrough. For all the complementary innovations could be carried out, it required the creation of a new generation of workforce, organizations learn the new technology and this creates valuable human capital. This spills over into other firms as the entire economy can learn from one firm's example. Now in the present, companies may still prevail with pre-Internet era procurement and customer servicing.

The existence of strategic complementarities in the adoption of new GPTs by the various sectors of the economy may generate temporary lock-ins or create implementation cycles (Aghion and Howitt, 1998a). The arrival of the networking infrastructure and software applications will induce firms to engage in risky experimentation on a large scale with start up firms, not all of which will succeed. There is also the phenomenon of 'social learning'. The way a firm typically learns to use Internet technology is not by discovering the merits of the Internet on its own. More often than not, a firm learns from the experience of other firms in a similar situation, other firms who have successfully overcome the glitches of implementing Internet enabled business processes. Preliminary analyses of successful adopters of Internet technology tend to support the notion of there being technology 'leaders' and 'followers' (see http://crec.bus.utexas.edu/ for the study entitled "E-Business Value Assessment").

The evolution of the Internet is not an incremental process due to the complementary organizational and technological changes needed. The Internet ecosystem carries with it radical innovations, and smaller innovations -defying any attempt to understand its evolution in a smooth and gradual way.

Many critics of the new economy interpret the productivity of the Internet in terms of falling prices of computers. Their study concludes that the decline in computer prices triggered a massive substitution of computer services for other inputs. However, we need to go beyond the phenomenon of declining prices. A historical example of this could be found in the consequences of the introduction of electric power in factories, which cannot be modeled as a response to a change in the price of power designed to reflect the technological requirements of steam. Even a zero price of steam could not have led to the radical redesign of the plant, which is the main source of efficiency gain under electricity (David, 1991). With Internet technology there is an apparent productivity gain because the Internet causes businesses to substitute net based transactions for processes that were performed by labor, say in keying in of purchase orders. To the extent that we substitute physical transportation for digitally encrypted transmission of information, there is a productivity gain. The true value of Internet technologies comes from the reorganization of industry to tap the full benefits of the Internet, the manifold consumer benefits to transacting on the Internet, and the way that the Internet can alter coordination and communication within firms.

Major innovations such as the railroad, the dynamo or the steam engine were all technological leaps that profoundly altered the structure of economy and society. A measure of changes brought about by such changes should include the changes in economic structure and rates of growth across structural transformations before one can arrive at a true picture.

	The dramatic ability of the Internet to customize, allow a greater diversity of product offerings, reducing the time spent on search and comparison are not captured in a measurement of total factor productivity.
	Internet triggers organizational innovation to realize increases in product variety to meet diverse consumer tastes is not captured by the traditional measures of productivity.

How is the growth of the Internet different from that predicted by economic growth theories?

Traditional growth theory is based on the factor substitution ideas that we have outlined earlier. Growth theorists argue that the reason for economic growth is learning by firms, capital accumulation in the economy or incremental technological change. Economic growth is only a result of better technology or capital accumulation. While this is certainly true, what these models are missing, in a sense, is the extent to which these processes are interdependent and acting in tandem to influence business processes. In theories of economic growth, markets are not a variable. The tremendous changes in the organization of markets, electronic commerce networks and B2B markets, to name but a few, are not variables that are analyzed by growth theorists. In the more recent theories of endogenous technological change, the process of accumulation of knowledge is assumed to be incremental. Thus, these theories seem to build a picture of an economy where market agents strive to improve what already exists.

On the other hand, we argue that there can be short-term lags and lock-ins before the Internet can fully realize its potential. The long run economic growth in the digital economy is not only driven by information acquisition capabilities enhanced by the Internet, but also by the dynamic interaction between the Internet and market structures. With the reduction in communications cost, there is more coordination - a process facilitated by the trajectory towards open standards. For the individual customer, the greater opportunities for search and customization of product offerings makes for greater convenience and satisfaction. Moreover, the Internet acts as an efficient market infrastructure that reduces asymmetric information and aids in the diffusion of innovation, thus serving to enhance the productive capacity in the economy. Consumers and producers both gain from the enhanced productive capacity in the economy, that manifests itself as greater output and higher consumption rates at the aggregate level.

	An analysis of the changes brought about by the Internet must consider the interaction between markets and technology.
	The self-organizing techno-economic paradigm of the Internet cannot be understood by conventional arguments of economic growth.

Who are the beneficiaries of the Internet economy?

The unique value proposition of the Internet lies in its ability to mitigate uncertainty and asymmetric information. Economic decisions are characterized by time lags and uncertainty about the future. Effective coordination requires aligning the incentives of agents who are separated spatially and temporally. As we argue, the Internet can help improve the productivity of the entire economic system, and not just enhance the internal productivity of the firm.

An analysis of the productivity of the Internet technology must include the consumer benefits of such advances in networking technologies such as the ATM. As we have argued earlier, advances in Internet infrastructure is the engine to the enormous benefits of Internet technology, many of which are yet to be realized. The process of development of complementary innovations, i.e. layers 3 and 4 is still underway. The future will see far more advances in Internet technology enabling smarter appliances, more efficient financial intermediaries, growth of B2B markets and yet to be discovered uses of Internet technology that has altered and will continue the surge in productivity brought about by the Internet.

	The Internet has tremendous value to firms and consumers across all walks of society, and the advantages of the Internet cannot be confined to the dot coms alone.
	The Internet offers tremendous mobility, enhanced coordination, more efficient market forms -all of which can be pervasively used in all types of organizations.

Measuring the Internet Economy requires strong knowledge of traditional market research techniques, expertise in technology markets and a firm understanding of the Internet itself. While this would seem to be relatively straightforward, it was not. The unique challenge of this study lies in the nature of the data to be collected. Since many companies have not even begun to think about tracking their Internet revenues separately, the process for collecting solid estimates requires even more careful preparation than the typical market research project.

The following case study outlines the process used to collect information from some of the larger companies covered in the project. This case study presents the steps taken to prepare for the interview and highlights challenges that may arise in a typical interview.

1. Quarterly revenue is recorded on a calendar basis, in an effort to reflect a fairly consistent time frame (as opposed to fiscal revenues which vary by company)
   
   
2. Quarterly employee data is often unavailable and is very difficult for contacts to provide. In absence of this quarterly data, we have determined that collecting data at the end of the year is the best alternative. FY99 data is collected as is used as a representation of 1Q2000 if data on employees for that quarter is unavailable for that quarter. For 2Q2000, again we attempted to get updated employee information from reports or contacts as of 6/30/2000. However, if no information was available, either the 1Q2000 estimate was used in conjunction with judgment based on respondent feedback, or based on other employee trends stated in the quarterly reports or other company information.
   
   
3. Because it is often difficult to find reliable information for certain data points, we have come up with "rules & formulas" on which to rely as a default. For instance, if we are unable to obtain the "percent of employees that are attributable to the Internet", we use the same percentage as that given to represent "percent of revenue that is attributable to the Internet". Another example is "percent of WW revenue attributable to the US." In the event that we are unable to find the percentage for either 1Q2000 or 2Q2000, and in lieu of any information that tells us that this percentage significantly differed quarter to quarter, the percentage will be assumed to be equal.
   
   
4. In the instances where we cannot make good contact at a company, the researcher will make an evaluation and informed estimate as to percent revenue attributable to the US, percent revenue attributable to the Internet and percent split by layer. Although in a majority of cases, the researchers found that this information is available in press releases and in company information. The exception being the layer splits, as this is an indicator exclusive to this study. In the absence of actually confirming/conversing with a company contact, the layer splits are estimated based on product/divisions by layer and an investigation into revenue by product/division. All researcher-based percents will be documented in the comment section of the database. Compared to the first wave of this study (released in the second quarter of 1999), we now find that a significant number of large public companies now document their internet sales in annual reports, 10K reports, 10Q reports and other published company documents

1. The biggest challenge is identifying a contact in each company that is willing to share the requested data.
   
   
2. Another challenge lies in the analysis of companies that hold multiple subsidiaries at partial rates. We have consulted with an accountant on handling of these situations and have made our best efforts not to double count any companies.
   
   
3. Obviously, data is not always presented in a neat bundle, nor is it presented in a predictable manner. For instance, some companies have fiscal periods that do not coincide with calendar quarters; a company's fiscal quarter might end July 31st, instead of June 30th. In this and similar instances, a judgment is made on how to handle the data. In the case of unaligned quarters, the decision was made to assume that the fiscal quarter equaled the calendar quarter, acknowledging the miscalculation of a month period. The discrepancy is recorded in the database.
   
   

The Internet Economy is made up of companies directly generating all or some part of their revenues from Internet or Internet-related products and services. These companies are the Internet infrastructure and Internet applications players, such as Cisco, Dell, IBM, HP, Oracle, Microsoft and Sun Microsystems, whose products and services make it feasible to use the Internet for electronic commerce. For example, IBM sells servers and PCs that are used to gain access to the Internet. Similarly, 3Com sells modems and Cisco sells routers, all used to gain access to the Internet. The Internet-related revenues from these companies, for example, are included in the estimates for the entire Internet Economy.

Then there are companies selling products and services over the Internet. This includes pure Internet-based sellers like Amazon.com and eToys.com as well as bricks-and mortar and catalog companies, such as LL Bean and Alaska Airlines, who are also conducting a part of their business on the Internet. Further, electronic intermediaries or Internet middlemen (such as eBay) act as catalysts by facilitating the interaction between buyers and sellers. So the overall Internet Economy is made up of the revenues of infrastructure and applications players, electronic intermediaries and online sellers.

It is important to point out that the Internet Economy is not just a collection of "high-tech" companies. It includes any company that generates revenues from the Internet. For example, a part of the revenues generated by traditional telecommunications companies are counted in this economy since they carry IP traffic over their miles and miles of copper, coaxial and fiber lines. We did not, however, count all revenues from all technology companies. Not even 100 percent of Cisco's revenues were considered to be part of the Internet Economy, since all networking devices are not attached to the Internet.

There were two important steps to how we measured the Internet Economy. The first was to develop a conceptual framework and taxonomy for attributing revenues and employees in the Internet Economy. Since the manner in which businesses operate in the Internet Economy can vary substantially, we decided to group companies based upon core business activities.

The Internet can be thought of as a network of networks, made up of many component parts. This may consist of networking hardware, networking software, servers, PCs, Web software, Web designers, Web operators, and the companies that are actually doing business on the Web. There is a natural structure or hierarchy to the Internet that can be directly traced to how businesses generate revenues. Based upon this type of structure, we use the following four-layer architecture to group companies, revenues and employees. We call these four layers the Internet Economy Indicators.

Layer 1: The Internet Infrastructure Indicator - the gross revenues and attributed employees from companies that manufacture or provide products and services that make up the Internet network infrastructure. This layer includes companies that provide telecommunications and fiber backbones, "last mile" access, Internet dial-up access and end-user networking equipment necessary for the proliferation of Internet-based Electronic Commerce. It also includes PC and server manufacturers, modem manufacturers and other manufacturers of hardware necessary for the Internet to function.

Layer 2: The Internet Applications Indicator - the gross revenues and attributed employees from companies that provide electronic commerce applications (e.g. IBM, Microsoft, Sun), Internet consulting services (e.g. MarchFIRST, Scient), multimedia applications (e.g. RealNetworks, Macromedia), Web development software (e.g. Allaire, Vignette), search engine software (e.g. Inktomi, Verity), Web-enabled databases (e.g. Oracle, IBM DB2, Microsoft SQL Server, Sybase, Informix), and online training services (e.g. Sylvan Prometric, Assymetrix). This also includes consultants who define and develop Internet applications for their clients (e.g. Cap Gemini E&Y , EDS) and the integration of Internet applications with other IT/enterprise platforms (e.g., IBM, Compaq, Andersen Consulting). Products and services in this layer build upon the network infrastructure and make it technologically possible to perform business activities online.

Layer 3: The Internet Intermediary Indicator - the gross revenues and attributed employees from companies that increase the efficiency of electronic markets by facilitating the meeting and interaction of buyers and sellers via the World Wide Web. This layer includes online brokerages, Internet ad brokers (e.g. DoubleClick, 24/7 Media), portals/content providers (e.g. Yahoo, Excite), market makers in vertical industries (e.g. VerticalNet, PCOrder), content aggregators (e.g., CNet, ZDNet), and online travel agencies.

Layer 4: The Internet Commerce Indicator - the gross revenues and attributed employees from companies that generate product and service sales to consumers or businesses over the World Wide Web and Internet. This layer includes online retailing, pay-to-use content and other business-to-business and business-to-consumer transactions conducted on the World Wide Web and Internet.

The second step we took to measure the Internet Economy was the actual data collection methodology. In-depth research was conducted on companies that participate in one or more of the four layers of the Internet economy. Phone-based interviews were conducted with 1600 of the smaller Internet players. 370 in-depth interviews were conducted with the largest companies playing in the Internet Economy. For the largest companies, we analyzed company annual reports, product literature and web sites to develop a solid understanding of how they fit into one or more of the four layers. Universe estimates for Internet companies were developed from several Web-based databases and final Internet Economy revenues were estimated using a combination of enumeration and statistical sampling and projection techniques.

Finally, extensive secondary research was used and included reports from IDC, Gartner/Dataquest, Forrester, Dell'Oro and other research vendors. The Internet proved to be the most effective source of information on companies involved in the Internet economy.

Measurement Related Questions

Q. How did you handle researching companies that had mergers and acquisitions between Q4 1999 and Q2 2000?

When this occurred we counted the company information as if the companies had existed in the end state for both periods. This way we could provide a consistent comparison. In some cases, the mergers caused revenue to leave the Internet Economy. For example, when a US-based company was sold to a non-US firm, we did not continue to count the revenue after the sale. On the other hand, when a US-based firm bought a foreign company, we counted the incremental revenue in the Internet Economy only for the period in which the revenue was a holding of a US-based company.

Standard accounting rules and procedures were used to evaluate these revenues. In most cases, this meant that if more than fifty percent of the voting shares of an Internet company is owned by the parent company, that share of revenue and related expenses are included in the consolidated statement of the parent company. This allowed us to discern in many cases how much revenue was relevant for analysis, and to avoid double-counting revenues in both the original company and the parent.

In some cases revenue was not reported according to these rules, so we needed to adjust the revenue accordingly. For example, in some cases one hundred percent of the revenue was reported in both the parent statement and the Internet company. In these instances we assured that it was only counted once.

The estimates are based on the worldwide Internet-related sales of US-based companies. Cisco's foreign Internet sales are included in this number because Cisco is a US-based company. We took a conservative approach to revenue inclusion.

The Internet Economy Indicators do not measure Internet activity by user or volume of traffic, but measure Internet activity from a revenue and employee perspective. It is a supply-side data collection approach rather than a demand-side approach.

Based upon our four-layer taxonomy, we believe that the estimates for each layer are very accurate. To compile our estimates, we completed research on over 1600 US-based companies that currently operate in the Internet Economy. In addition, we estimated revenues and employees from 370 of the largest technology companies by reviewing quarterly and annual reports, researching company web sites and product/service offerings and calling to solicit estimates of Internet revenue from the companies directly. Finally, we leveraged existing market data that included secondary research reports from a wide variety of academic sources and business research firms. Appendix E shows the wide variety of sources utilized.

The four indictors are combined into one number by estimating and eliminating the overlap and double counting of revenues across all four layers.

It is not a straight comparison. The gross domestic product (GDP) or gross national product (GNP) is based on value of goods and services produced in the US, minus any direct or indirect taxes. The Internet Economy Indicators only measure total revenues and jobs.

Yes, but there is a complexity in terms of assigning revenues and employees to each layer, since companies don't report revenues or employees this way. Across the board we were faced with the challenge of identifying what portion of a company's revenues were Internet-related. For some companies, it was simple because they were pure Internet companies. Companies like Amazon.com, Vignette, and eBay can be considered one hundred percent Internet companies. In addition, many of these Internet 'pure-plays' only operate within one of the Internet Economy layers.

For other companies, attributing revenues to the Internet was much more complicated. These companies are not one hundred percent Internet companies, and they generate revenues in more than one of the Internet Economy layers. For example, IBM generates revenues in the infrastructure layer (layer one) from its ISP business as well as from PC, server and networking equipment. In the applications layer, IBM generates revenues from it's E-business software and consulting services. In the Internet commerce layer, IBM generates revenues from its commerce site.

For companies playing in multiple layers, in any layer we only count revenues that are attributable to products and services in that layer. In order to combine the revenues across all layers, we take out the Internet commerce revenues for players whose products/services are counted at infrastructure and/or applications layers and who also sell some or all of these online.

Yes. The research did not focus solely on 100-percent Internet companies, or companies that generated 100 percent of their revenues from the Internet. We looked at all companies that were generating all or some part of their revenues from Internet or Internet-related products or services. Therefore we counted Internet-related employees from traditional bricks-and-mortar companies like Barnes and Noble or Lands End.

Yes. For example, we only counted revenues associated with servers and desktops leaving out operating systems. Similarly we did not count OEM modems as they are a part of the PC, and took care to consider branded modems that are sold separately. In addition, microprocessors, memory, disk drives and other OEM components are counted in the PC or server, but taken out of the revenues of their original manufacturers. An exception to this is the Electronic Commerce revenue of these OEM manufacturers, which are counted in Layer 4, but not in Layer 1.

No. Since we know that not all home PCs are purchased and used for Internet access and because we know that not all corporate PCs have access to the Internet, we adjusted the revenues attributed to the Internet Economy based upon the estimated percent of PCs sold that were purchased for Internet access.

For example, we know from IDC research estimates that approximately 90 percent of all PCs purchased for the home in 1999 are being used for Internet access. In the corporate world, that estimate is approximately 60 percent of all PCs purchased. Therefore, we accounted for PC revenues using the percentage of those PCs that were used for Internet access. These are conservative estimates.

Yes, there are companies that have revenues counted in more than one layer. However, this only occurs between layers one through three and layer four. For example, adjusted revenues from Dell Computer's sales of PCs are included in the infrastructure layer and are also accounted for in the Internet commerce layer due to online PC sales. When we estimate the total revenues from the Internet Economy, we remove from the commerce layer the double counted revenues for any company that also has revenues from the same product or service in the other layers.

It measures the worldwide revenues of U.S.-based companies.

In the current study, however, the data is collected quarterly, so we gathered comparisons of Internet revenue for 1Q '00 vs. 1Q '99 and 2Q '00 vs. 2Q '99, along with Internet employees during this same period. Over time, these estimates can be updated quarterly and annual totals derived, based on subsequent data collection. It is expected that each phase will engender improvements in the availability of Internet revenue information and better information on the companies participating in the Internet economy.

Based on our knowledge of the types and categories of companies that make the Internet possible, we began compiling a list of the companies that we know participate in the Internet Economy. We operated on the following premise: If you are participating in the Internet Economy, you had better be on the World Wide Web.

Using that premise, the Web was the ideal tool for building a database of companies that participate in the Internet Economy. Using the layered conceptual model, we generated extensive lists from Yahoo, Excite, HotBot and other directory services. We searched through the lists to ensure that we did not miss the big players who may account for the larger share of revenues in a subcategory within a layer.

Since most Web directories only provide URL links, we realized that it would be extremely time consuming to link to each company's web site to get their contact information. In order to expedite the development of a contact database, we wrote database code to pull the company name and URL from the search directory listings. We then wrote additional code that matched each URL against the Internet Domain Registry database. What could have taken a potential 1,000 man hours was accomplished in 16 hours using the Web and web-based technology.

Using the same "you've got to be on the Web" premise, we found an extremely valuable database of secure site URLs from a UK-based company called Netcraft. This database was used to create the universe estimate for companies conducting Internet transactions. This was the most appropriate and accurate sampling method to conduct the first large-scale supply-side estimate of Internet commerce revenues.

No. Using available estimates of the percent of corporate PCs that are networked and were purchased for use on the Internet, we adjusted the actual revenues from networking equipment manufacturers attributed to the Internet economy. For example we know that approximately 50 percent of all PCs purchased for businesses in 1998 have Internet connectivity. Using these types of deflators we attributed networking equipment and Internet access device revenues as follows:

		Routers: Consider 100 percent based on the premise that when these are deployed in LAN environments they are primarily being used as edge devices.
		Dial access servers and concentrators: Consider 100 percent
		ATM, Frame Relay switches and access devices: Consider 50 percent. Show that ATM and Frame Relay systems carry significant non-IP traffic like SNA and IPX/SPX.
		Layer 3 switches: Consider 100 percent given that they perform routing functions in a LAN environment.
		Layer 2 switches: Consider 60 percent, based on the premise that 60 percent of the desktops purchased in the corporate environment in 1999 are connected to the Internet or an intranet.
		Shared LAN hubs: Consider 60 percent (same logic as above)
		NICs: Consider 60 percent (same logic)
		Branded modems + modems only PC card: Consider 90 percent. Theoretically it could be 100 percent, but modems could be used to dial up to servers using some proprietary VAN.
		ISDN equipment: Take 75 percent (similar logic as in modems)
		Cable modems: 100 percent
		CSU/DSU: Consider 25 percent, a relatively small percentage of Internet connectivity occurs through T-1s/fractional T-1s. Probably a very conservative estimate though.
		xDSL: Consider 100 percent

Revenues are relatively easy to measure and understand, and is consistent with previous studies. Jobs are an equally important indictor, but are more difficult to measure because of the overlap between Internet and non-Internet jobs. To create an index comparable to GDP, we would have to measure value added within each of the layers. While it is an extremely complex task, it can be done with the help of sufficient resources and extensive data collection effort.

Given the nascent state of the Internet economy, it is not surprising that a few infrastructure players like Cisco, IBM, Sun, Compaq, Dell and Oracle contributed most significantly to the Internet economy. We expect this trend to continue; however, with the proliferation of the infrastructure, bricks-and-mortar companies selling products and services will most likely play an increasingly significant role at the commerce layer. For example, it is clear that the Internet revenue from companies like Wal-Mart, Citigroup, Sears, UPS, General Electric and other corporate giants will start to impact the Internet Economy and some of this impact even begins to show in the current study.

The Internet Economy Indicators focused strictly on U.S. companies and their total worldwide Internet-related revenues. The average breakout of U.S. versus worldwide sales for some of the larger companies in the study is approximately 75 percent U.S. and 25 percent non-U.S. However, since the majority of the Internet Economy is made up of small privately held companies, a much larger portion of the revenue number is U.S. based. We estimate the ratio at 80 percent U.S. and 20 percent non-US.

A large team of research experts from across the United States, using the Internet as a communications and research tool, combined to conduct the research.

The research team consisted of the professors and graduate students from the University of Texas at Austin Business School, research consultants from Citigate Cunningham and outside research experts and analysts, including Dr. Brant Wilson of Customer Value Systems, Inc, a Houston-based marketing research and consulting company. In addition, primary research expertise was brought in from MarketVision Research, which specializes in econometrics-based research. Jon Pinnell, the lead marketing scientist from MarketVision is a recognized expert in research in the technology industry and also in statistical sampling and modeling

Overall Internet Economy Trends

Research Firm Offers Map of Digital Economy.
Lori Enos, E-Commerce Times, June 28, 2000.
IT research firm Meta Group has published a "Global New E-Economy Index." This index is a cyber atlas that maps the technological vitality of 47 nations based on five digital economy factors. These five categories consisted of knowledge jobs, technological innovation, degree of transformation to a digital economy, economic dynamism and globalization. The index ranked the US as top in two categories (globalization and transformation to a digital economy) and no lower than fourth in the other three measurements. The study also measures the "digital divide" the demographic gap between in Internet access between rich and poor.

Internet Enabled Job Creation.
Andersen Consulting with Spectrum Strategy Consultants, August, 2000.
This research examines employment in the Internet Economy across eight countries (Brazil, Spain, Italy, France, Ireland, Germany, UK, and United States). The report not only focuses on jobs created by pure-play Internet businesses, but also highlights the Internet as a driver of job growth across all sectors of the economy. The research examines a number of issues related to employment such as staff shortages, salaries and options, workforce demographics, and government policy.

The UCLA Internet Report: Surveying the Digital Future.
UCLA Center for Communication Policy, October, 2000.
The UCLA research project looks at the social impact of the Internet with an equal focus on Internet users and non-users. This is the first wave of a planned ongoing study and is part of a larger world Internet project. The research provides data on Internet access and use, demographics of Internet users, views about the Internet, barriers to using the Internet, use of e-mail, social and psychological impact of the Internet, privacy, online contacts and friendships, use of the Internet at work, and shopping on the Internet.

The Digital Economy Fact Book, Second Edition.
The Progress & Freedom Foundation, 2000.
A reference guide with statistics on the growth of the Internet, the computer and telecommunications industries, financing of the digital economy, electronic commerce, the IT sector, an Internet timeline, and related facts and figures from the stock market.

None of Your Business.
Marcia Stepanek, Business 2.0, June 26, 2000.
Customer data, once a potential gold mine of information for marketers, are paying for privacy jitters. DoubleClick and 24/7 Media have both seen stock prices plummet as concerns over privacy rock online consumer profiling (DoubleClick fell from $135 in mid-January to $81 in mid-February and 24/7 Media went from a high of $65 on Dec. 21 to a low of nearly $13 on May 24.)

Not everyone's e-namoured with the Net.
Karen Thomas, USA Today, September 25, 2000.
Article cites a study from the Pew Internet & American Life Project that indicates that half of U.S. adults are not online and over half of that group has no interest in accessing the Internet. The study found that age was a significant factor among non-users of the Internet, with 81 percent of those who said they will never go online being older than 50.

Privacy Fears Online.
eMarketer, the Daily eStat, October 2000.
According to a Harris Interactive Survey commissioned by the National Consumers League (NCL), loss of privacy is a top concern to US consumers. Among internet users, the fears have grown more severe over the past two years: 64 percent believe that websites will share personal information, another 59 percent worry that websites will collect information without their knowledge. Online financial information is the main concern of Internet users, with children's privacy as a secondary concern. The NCL sites education as the primary tool to aid consumers in their understanding of online privacy issues.

Guarding Their Privates, See?.
eMarketer, the Daily eStat, November 29, 2000.
A PriceWaterhouseCoopers (PWC) study reports that Americans are still very concerned with online privacy. Close to 60 percent of US Internet users would shop online if they knew retails sites would not do anything with their personal information. The study also lists attitudes Americans have toward supplying personal information online and their top privacy concerns.

I've Got a Secret.
David Kirkpatrick, ecompanynow, November 2000.
Editorial notes increased consumer interest and leverage over the use of personal information on the Internet.

US Firms Invest Heavily in Internet Strategy.
Cahners In-Stat Group, 2000.
US Companies are now serious about using the Web as a business tool, with firms investing as much 20 percent of their total IT expenditure on Internet-enabling services, personnel, and solutions. It is estimated that 70 percent of the US workforce have Internet access at work in 2000, up from 63 percent in 1999.

How the Internet Changes (Almost) Everything

Go figure: Web-influenced offline sales dwarf e-commerce.
Adam Katz-Stone, Revolution, July 2000.
A new study from Jupiter Communication indicates that, by 2005, US online consumers will spend more than $632 billion in offline channels as a direct result of research they conduct on the web - dwarfing the $199 billion that consumers will actually spend online. The report recommends that business integrate their online and offline efforts in order to capture more of the sales that have their genesis online.

Where B2C Will Be, 2002.
eMarketer, the Daily eStat, July 20, 2000. Giga Information Group finds that business-to-consumer (B2C) online spending, though healthy, will hit a stable plateau within the next few years. Giga predicts B2C sales will go from $25 billion in 1995 to $152 billion in 2002, and $233 billion in 2004 - with click-and-mortar sales to equal $92 billion in 2002. These numbers are consistently higher than eMarketer's estimates ($120.8 billion in 2002).

Beyond B-to-C.
Jupiter Concept Report, 2000.
As B-to-B captures media and finances, consumer-focused companies look at abandoning or revising their consumer model to add B-to-B services. They face serious challenges - both of failure in B-to-B and a loss in their consumer market - but the upside of the B-to-B landscape could provide great opportunities for expanded sales.

Net Markets, Positive Net Opportunities.
Jupiter Concept Report, 2000.
Net Markets, online intermediaries that unify fragmented markets - moving from a one-to-one, buyer-to-seller relationship to a many-to-many model, are an opportunity for both buyers and sellers to benefit from compressed cycle time and reduced costs of process and potentially products. Jupiter recommends that companies supplement existing Internet business plans with Net Market participation.

$6.3 Trillion in B2B by 2005.
eMarketer, the Daily eStat, October 4, 2000.
Jupiter Research reports that US B2B e-commerce will grow rapidly over the next five years -- from $336 billion in 2000 to $6.3 trillion in 2005. Online B2B activity currently represents 3 percent of the B2B market, but will represent 42 percent by 2005. Dominating B2B e-commerce during this period will be supply chain trade. Jupiter highlights five industries which will conduct more than half buying and selling online by 2004. The industries are: aerospace and defense, chemicals, computer and telecommunications equipment, electronics, and motor vehicle and parts. Computer and telecommunications equipment will lead with $1 trillion online sales by 2005. The other industries with sales over $500 billion will be food and beverage, motor vehicles, parts, industrial equipment and supplies, and construction and real estate.

Consumer E-Commerce Growth Expectations May Be Unrealistic.
CyberAtlas/Internet.com, Markets retailing, May 31, 2000.
According to a study at New York University's Stern School of Business, online consumer purchasing in the US will grow about 50 percent in 2000, 30 percent over the next year or two, and 20 percent for a year or two after that. Contrasting current predictions that are significantly higher -for example Gartner Group's Dataquest division projects US online shopping revenues will increase more than tenfold by 2003 and eMarketer predicts that US consumer e-commerce sales will reach $37 billion by year-end 2000 and grow by a factor of 12 overall from 1998 to 2003.

Home Office Households Approach 37 Million in 2000 as Internet Turns "Work Anywhere" into "Work Everywhere".
IDC Press Release, September 1, 2000.
IDC argues that the changing use of technology is making it easier to establish and use a home office. Currently (2000) 78 percent of home offices in the United States utilize a computer (compared with 52 percent of U.S. households) and IDC expects the number to rise to 90 percent by 2003. Their report also analyses the extent to which home offices use a ride range of technology, from advanced mobile telecommunications products and LAN's, to PC's and office automation products like printers, computers and multifunctional peripherals.

Enterprises Turn to E-Marketplaces for IT Staff.
Gartner FirstTake, September 13, 2000.
Recent additions of staffing e-marketplaces to the offering of IT service providers suggest that more IT project staffing will be done online, potentially offering enterprises greater efficiency and flexibility.

Layer 1: The Internet Infrastructure Indicator

Networking at the Speed of Light: Optical technology moves data - and attracts money - fast.
Business Week, June 12, 2000.
As demand for communication bandwidth escalates - a potential market of hundreds of billions of dollars - standard electric networks can't keep the pace. Companies specializing in optical networks, that have the ability to carry much more data for lower cost than electric networks, appear to be the choice for acquisition and funding.

XDSL and 1 Million Businesses.
eMarketer, the Daily eStat, September 22, 2000.
More than 1 million U.S. businesses will turn to xDSL technologies for broadband internet access within the next 3 years, according to eMarketer's eCommerce: B2B Report. During the same period, the number of businesses accessing the internet will rise from 4.5 million by year-end 2000 to over 6.7 million by 2003. Currently, less than 10 percent of business users connect to the internet using xDSL, but by 2003, eMarketer expects that business xDSL subscribers will rise to more than 16 percent of the business access market. A study by the Strategis Group found that 57 percent of U.S. firms access the Internet via dial-up connections at speeds of only 56 kilobits per second. The vast majority of these companies are small businesses, with less than 100 employees.

The Consumer PC Market: Downhill from Here.
Eric Schmitt with Christopher Mines, Forrester Briefs, December 1, 2000.
Forrester argues that their prediction of slowed PC growth in 2000 has come to fruition. They cite three reasons: (1) the first-time-buyer well is running dry, (2) PC lifespans are increasing and (3) spending has shifted from computing to bandwidth.

Where Fiber Fits.
Galen Schreck with Carl D. Howe, Christopher Voce, Saira Khawaja, Forrester, November 2000.
Forrester reports that most companies are content with cable wiring (at 10 Mbps) to desktops because it meets user needs. Audio and video are predicted to be the greatest drivers for upgrading to 100 Mbps, while browser-apps and e-mail dominate bandwidth currently. As a result, fiber upgrades are less likely, although Forrester recommends them for some eBusiness needs.

DSL Growth Slows, Cable Modems Get Help from Standards.
CyberAtlas/Internet.com, Markets broadband, December 14, 2000.
Cahner's In-Stat predicts that DSL growth will continue but at a slower-than-initially-predicted rate.

AT&T Makes Major Broadband Deal in China.
eMarketer, the Daily eStat, December 6, 2000.
AT&T will take a 25 percent stake in broadband service provider Shanghai Symphony Telecom Co.

Mobile Internet Platforms Emerge.
Amanda McCarthy with Mark Zohar, Susan Lee, Theo Dolan, Forrester, November 2000.
Mobile Internet platforms will provide the foundation for innovative wireless application development by pre-integrating wireless technologies and capabilities into an end-to-end platform, reports Forrester. The report also indicates that customer's are presently satisfied with initial efforts in the wireless application space because they did not have high expectations and are unsure of what the future may hold.

Streaming Media Use Grows to New High.
CyberAtlas/Internet.com, The Big Picture traffic patterns, December 12, 2000.
Streaming media consumption reached an all-time high in November 2000, with 35 million Web users at home accessing streaming content, a 65 percent increase from 21 million during the same month last year, according to Nielsen-NetRatings. Major news events spurred use, but access to broadband connections also contributed as well as growing popularity across ethnic and age groups.

Layer 2: The Internet Applications Infrastructure Indicator

Sizing Supply Network Apps.
Navi Radjou with Stacie McCullough Kilgore, Laurie M. Orlov, Taichi Nakashima, Eroica Howard, Forrester, November 2000.
Forrester predicts that US license and subscription fees for supply network apps and services will hit $6.2 billion in 2005. Buy and make apps will continue to be the top-sellers through 2003. Vendors will be forced to redefine offerings as Net-resident supply network services eclipse supply chain apps.

Layer 3: The Internet Intermediary Indicator

Dot-Com Sales, Marketing Spending Plunge.
eMarketer, August 8, 2000.
Advertising Age reported that Internet companies targeting the consumer market have slashed their sales and marketing spending by more than 25 percent from the fourth quarter of last year. A study conducted by Pegasus Research International found that dot-com operations cut their sales and marketing outlays in the second quarter to 69 cents for every revenue dollar - down from 94 cents in last years holiday period. The research predicts that spending on marketing, advertising and sales will fall further to the 25 to 40 percent of revenue range, by 2002.

Q2 Online Ads: Another $2 Billion Spent.
eMarketer, the Daily eStat, October 5, 2000.
According to the latest edition of the Internet Ad Revenue Report published quarterly by the Internet Advertising Bureau (IAB), Internet advertising growth remains strong with $2.1 billion in revenue in the second quarter of this year. The report, compiled by PricewaterhouseCoopers, also stated that Q2 revenues were up 8.8 percent over Q1 2000 and 127.3 percent over last year's second quarter. Total ad revenues for the first half of the year stands at $4.1 billion, approaching total 1999 revenues of $4.6 billion. As in the previous quarter, consumer related advertising was the dominant category in online advertising.

American Express' One-Use-Only Web Card Address Online Buying Fears.
Gartner FirstTake, September 8, 2000.
The new American Express Web Card service is a clever marketing ploy to raise consumer confidence in on-line purchases, claims Gartner, because American Express does not meaningfully address online fraud prevention.

Online Investing: It's Not Just Buy and Sell.
eMarketer, the Daily eStat, October 11, 2000.
According to eMarketer's forthcoming eInvesting Report, the asset management industry has done more than any other financial services industry -- including brokerages -- to respond to the changes created by the internet. The report notes that by year-end 2000, 6.5 million households will invest or review their investments through 13 million online brokerage accounts. By 2004, 10.9 million households will join this group, adding another 18.3 million accounts. The report emphasizes the extent to which the internet has made investing possible, if not convenient, for many more households. According to IDC, for example, 13 percent of online brokerage accounts will belong to households with incomes under $35,000 by 2004. This represents a 5-point increase over the current 8 percent share these households possess today.

Web Advertising: Not Just Clickthroughs Anymore.
eMarketer, the Daily eStat, November 17, 2000.
The Q3 2000 Online Advertising Report by AdKnowledge, finds 61 percent of websurefers who click through an advertisement are "converted" into a purchase registration or request for information. As time elapses, the clickthrough-to-conversion rate decreases.

Are E-Payment Methods Ready for Global E-Commerce?
K.Kerr, GartnerGroup, November 1, 2000.
This article identifies the challenges global eCommerce will face in currency conversions and payment methods. Gartner predicts that through 2002 these factors will keep 90 percent of B2C within a country.

Americans - Two-Fisted Media Users.
eMarketer, the Daily eStat, November 28, 2000.
According to a NFO Interactive/Burke Inc. study, wired Americans spend 3.8 hours a week watching television online. The study notes a strong relationship between Internet usage and television viewership.

Layer 4: The Internet Commerce Indicator

Transaction Fees Becoming Important.
IDC, eBusiness Trends, August 17, 2000.
IDC suggests that transaction fees are a rapidly growing component of ecommerce applications license revenues and will nearly equal the amount paid in product licenses worldwide by 2004. Some credit the auction and advertising sites with pioneering this "pay-for-click" mentality.

eCommerce Grows Up.
eMarketer, the Daily eStat, September 1, 2000.
According to ActivMedia report, Real Numbers Behind 'Net Profits 2000, e-commerce for the year 2000 will reach $132 billion worldwide, double the $58 billion reported in 1999. One sign of e-commerce's growth is the shift away from informational websites to transactional websites.

B2B Will Hit $1.26 Trillion in 2003.
eMarketer, the Daily eStat, July 21, 2000.
eMarketer predicts in its eCommerce: B2B Report that the rapid growth of B2B e-commerce will continue as firms take steps to fully engage e-business practices. The report also points out that more B2B marketplaces and exchanges will be established and grow in complexity.

eAuctions Bid Up Online Revenues.
eMarketer, the Daily eStat, October 17, 2000.
According to eMarketer's eCommerce: B2C Report, the consumer online auction market will rise from $650 million in 1998 to $6.5 billion by year-end 2000. By 2004, online auctions will generate over $16.3 billion in revenue. Pioneered by the rampant success of eBay, there are currently more than 1,000 retail auction sites. As a percentage of total B2C e-commerce sales, eMarketer predicts they will peak at 17.6 percent in 2000, falling to 13 percent by 2004.

Less Looking, More Buying.
eMarketer, the Daily eStat, October 13, 2000.
Harris Interactive reports that the number of online buyers reached 30.3 million in Q2 2000, a 56.2 percent jump over Q3 1999. Concurrently, the number of browsers, those who gather information online but buy offline, declined -- although only by 7.5 percent. From Q4 1999 to Q2 2000, Harris also monitored 12 online retail categories. In 10 out of 12, the ratio of dollars spent offline to dollars spent online decreased. In Harris' estimation indicating a move away from browsing.

B-to-B Buying Picks Up.
The Industry Standard October 9, 2000.
Compares statistics on B2B e-commerce from a variety of analysts and sources.

Special Report: Web Smart 50.
Business Week, September 18, 2000.
This special report explores how the web has effected everything from product marketing to supply chain and logistics to marketing and management. In-depth articles provide overviews of industry leaders and case studies of how companies have used the Internet to improve everything from their inventories to their customer service.

Management Update: The Top 50 E-Tailing Sites Provide Surprisingly Disappointing Service.
Inside GartnerGroup This Week, September 13, 2000.
Gartner's review of the top 50 consumer e-retailing sites to evaluate their customer service capabilities resulted in ratings that were surprisingly disappointing with no website rating exceptional, 23 percent rated average, 73 percent rated fair and 4 percent rated poor. The study offers characteristics of exceptional, good, average, fair and poor customer service and points to the need for significant improvements in the area of e-service at e-tailing Web sites.

Pure Plays Face Trouble in E-Commerce Shakeout.
CyberAtlas/Internet.com, The Big Picture Demographics, June 19, 2000.
E-tailers who sell to their customers across multiple channels - stores, catalogs, websites - significantly increase their chances of generating impressive returns, according to a study by McKinsey & Company and SalomonSmithBarney. They further recommend that that online retailers can profit on every sale if they drive up average order size, hold the line on discounting and sell higher-margin products.

Junk That Catalog And Get On The Web: W.W. Grainger's Richard Keyser tells how he sells factory parts in cyberspace.
Michael Arndt, Business 2.0, June 26, 2000.
Grainger, a vendor of factory-floor parts and supplies, has approached online retailing with open arms. As the company doesn't create a lot of primary demand for maintenance supplies, it sees the only real way for growth as taking market share - and the web is it's opportunity to do just that.

Order Disorder.
Electron Economy, Business 2.0, October 10, 2000.
A survey looking at 60 top e-tailers' ability to deliver goods - and why many have a long way to go. Key factors are a top-down mentality that has hindered successful completion of the "last mile" in the consumer purchase story - namely on-time delivery. Suggests that the e-tail industry must deliver on both ecommerce and logistics.

Bricks-and-Mortars Challenge Amazon's Lead.
David M. Cooperstein with Moira Dorsey and Tom Rhinelander, Forrester Briefs, November 28, 2000.
Forrester's most recent PowerRankings show brick-and mortar competitors catching up with Amazon - with Amazon placing second in Books, Movies and Music. Forrester cited slips in customers service, increased competition in offered features and no improvements in transacting as reasons for the decline.

US: Where the Web Shopper Are.
eMarketer, the Daily eStat, November 10, 2000.
According to a report by The Conference Board and NFO worldwide, 34 percent of American households have made an online purchase in the past year - up 24 percent from last year. Young adults (25-34) represent the largest online shopping group. The report also provides statistics on online purchasing by income-level and identifies the three greatest barriers for consumers as: price, security and ease of navigation. eMarketer forecast the average annual online expenditure of adults, ages 18+,l will increase from $705 in 2000 to $1,130 in 2003.

The Great Online Purchasing Migration.
eMarketer, the Daily eStat, December 6, 2000.
According to American Express, 40 percent of mid-sized companies with revenue between $5 and $500 million, have made online purchases. These companies moved 14 percent of their company's total purchases online and expect eProcurement to increase by 21 percent in 2001. Amex cited faster order, convenience and cost savings as the greatest benefits of eProcurement.

Small Business, Big Online Success.
eMarketer, the Daily eStat, December 4, 2000.
According to Verizon, the number of small businesses that created a website for the purpose of establishing and promoting business increased by 123 percent from 1999 to 2000. During the same period, small business going online with the intent to sell products decreased by 48 percent.

High Numbers for the High Holidays.
eMarketer, the Daily eStat, October 3, 2000.
US consumers will spend $12.5 billion online during this year's holiday season, a 71 percent increase from 1999's holiday total of $7.3 billion, according to eMarketer. Total annual US consumer e-commerce revenues are projected to rise to $37 billion by year-end 2000. eMarketer further notes that during the fourth quarter, 5.8 million internet users will make their first purchase over the web -- representing13 percent of the nearly 45 million online buyers in the fourth quarter. On average, e-consumers will spend $280 online, or a little over one-fifth of their total holiday spending. In contrast, the average online expenditure during fourth quarter 1999 was only $215. Experienced buyers will drive the average expenditure up, while "newbies" will push it down.

Have Yourself a Scary Little Christmas: eTailers will have to work like elves to survive the holiday season.
Ian Mount, ecompanynow, November, 2000.
Columnist examines the delivery and fulfillment difficulties of the 1999 holiday season and notes a trend toward customer focus among dot coms.

eHoliday Bells Ring: Cha-Ching.
eMarketer, the Daily eStat, December 1, 2000.
According to Goldman Sachs and PC Data Online, holiday shoppers spent $1.132 billion online during the week of November 19, 2000. Online shoppers are expected to spend 38 percent of their holiday budget online, and increase from last year's 25 percent. eMarketer predicts that holiday shopping will total $12.5 billion in revenue this year.

Websites Dress Up, Holiday-Style.
eMarketer, the Daily eStat, November 30, 2000.
Shop.org and Boston Consulting Group (BCG) state that online media spending was at 64 percent in Q3 2000, up from 59 percent in Q2.Surveying 94 North American retail firms, they found that 89% are launching holiday marketing campaigns.

eHoliday Season Begins.
eMarketer, the Daily eStat, November 22, 2000.
According to the National Retail Federation (NRF) / Forrester Online Retail Index, more than 16 million households shopped online in October 2000, spending an average of $268 per person. The index also compares sales of small-ticket and big-ticket items (both of which saw increases during the same period).

Internet Demographics

The Information Society Index (ISI) - measuring the global impact of information technology and the Internet.
Deep Canyon, Hot Stats, May 1, 2000.
The ISI is an effort to benchmark each nation's ability to access, absorb, and effectively use information and technology and specifically measures information capacity and wealth. Now in its fourth year, the ISI ranks 55 countries on 23 variables in four major categories: Computer, Information, Internet, and Social Infrastructure.

Income Disparity Within Web Population.
Digitrends, August 22, 2000.
The surge in Internet usage in low income households has not corrected the economically-demarcated digital divide. Web usage statistics indicate growth of 50 percent for households with incomes under $25,000. They also point to identifiable differences - as low income groups appear to spend greater time on the net. However this appears to be because higher-income groups are skilled users and more quickly navigate the net resulting in lower online time.

It's a Woman's World Wide Web: Women's Online Behavioral Patterns Across Age Groups and Lifestages.
Media Metrix, Jupiter Communications, August 2000.
The number of women online has passed that of men for the first time in Q1 2000 (Women equaled 50.4 percent). This report details key statistics providing insight on usage patterns within each age group. The most notable increase was among teen girls 12-17, increasing over 125 percent, from 1999 to 2000.

US eMail Usage on the Rise.
eMarketer, The Daily eStat, Quick eStats ,October 24, 2000.
According to eMarketer, there will be 96.6 million e-mail users aged 14 and older in the US by the end of 2000; representing 43.8 percent of the total adult and teen population (14+). By year-end 2003, there will be 140.3 million e-mail users, representing 61.5 percent of the population -- outnumbering web users by 8.4 million in 2003.

US Internet Penetration Reaches High.
eMarketer, The Daily eStat, Quick eStats ,October 17, 2000.
Nielsen/Net Ratings reports that as of September 2000, 21 US markets have achieved "high internet penetration" status. San Francisco leads the pack in September 2000 with 66 percent online - a 7.6 percent increase since March 2000. The greatest increase of users was in New York (up 21.7 percent since March 2000) reaching exactly 50 percent. Markets qualify as "highly penetrated" if 50 percent or more households access the Internet. As of March 2000, only 6 markets met the standard.

Some People Just Don't Like The Net.
eMarketer, the Daily eStat, September 27, 2000.
Half the adults in the US, roughly 94 million people, do not have internet access according to the recent report: Who's not online: 57 percent of those without Internet access say they do not plan to logon, published by The Pew Internet & American Life Project. As the report's title states, over half of non-users plan to stay that way. Among those not online 32 percent are definite about not using the Internet and 25 percent see it as "probable" that they won't. Only 12 percent of this group are definite about eventually getting online, leaving 29 percent who think it is likely. The standard factors frequently said to be underlying the Digital Divide -- race, low income and level of education -- are noted again in the Pew report. It points to two additional determinants of a person's likelihood of being an internet user -- age of the non-user and concerns about the online environment. Age is perhaps the strongest and most direct factor dictating whether an individual wants to use the net as: 85 percent of those over 65 do not have internet access.

The Awkward Age, Online.
eMarketer, the Daily eStat, September 20, 2000.
Jupiter Research reported that teens spend less time online than adults - 303 minutes per month versus 728 for adults, on average. However, this was explained by teen's active schedules and their use of the internet for entertainment and communication and not as a productivity tool - whereas much of the adult online activity occurs at work (whether job-related or not). Using June 2000, Media Metrix data, Jupiter also noted gender differences in teen activity online. Males surfed more freely, accruing on average 301.2 unique page views for the month while visiting 47 domains. Girls averaged 271 page views and 32 domains. Although online less than some other age segments, either in sheer numbers or hours per week, teens are still the most net-centric and net-savvy group among US users.

The Digital Divide

Digital Divide Dissipating?
IDC, eBusiness Trends, August 24, 2000.
The digital divide may not be as dire as some have predicted. IDC claims that by 2004, 68.6 percent of US households will be online, up from 35.5 percent in 1999. The fastest growth is predicted in the sub-$35,000 annual income sector and the 55+ age group, which are not mutually exclusive.

African-Americans Narrow the Digital Divide.
eMarketer, The Daily eStat, October 21, 2000.
According to a Pew Internet & American Life Project report, more than 3.5 million African-Americans have gone online in the past year. The percentage of blacks online has increased by 13 percent since 1998 - a greater increase than whites, they rose by 8 percent. This report also looks at how African-Americans, being new to the internet, are more likely than whites, across the board, to utilize the internet for a variety of activities (job search, finding a place to live, entertainment, life issues, etc.) Further more black females, 1.2 million, have accessed the internet as compared with 750,000 black males.

The Diminishing Digital Divide.
eMarketer, The Daily eStat, October 18, 2000.
The latest edition of the US Dept. of Commerce's Falling Through the Net, indicates that there has been an increase in nationwide digital inclusion over the past 20 months. As of August 2000, 116.5 million Americans were online - a number that has grown from 84.6 million in December 1998. More than 50 percent of all US Households have computers, and more than 50 percent of these homes have internet access. The portion of American using the internet grew from 32.7 percent in 1998 to 44.4 percent in August 2000 - if growth continues in this fashion, 50 percent of all American's will be using the internet by 2001. The report also notes that a large discrepancy still exists between Asian Americans and Pacific Islanders and Hispanics. However, the report also points to education level as the greatest indicator for division of Internet usage.

The Internet Economy Outside the US

Asian Internet Growth - Hyped or Hyper.
September 19, 2000. eMarketer, The Daily eStat.
Deloitte Touche Tohmatsu claims that many Asian countries are in a period of hyper-growth, which will soon result in respectable e-commerce growth - estimating growth from a current $6-8 billion in 1999 to $250 - $300 billion in 2003. eMarketer contests these estimates as bullish, instead arguing for growth from a current $15.4 billion to $88 billion in 2003.

Chilly eCommerce in Canada.
eMarketer, The Daily eStat, August 18, 2000.
A 1999 only survey shows that e-commerce appears to be lagging among many other aspects of Internet development in Canada.

eCommerce Enthusiasm Goes Global.
eMarketer, the Daily eStat, October 31, 2000.
An IDC survey of 30,000 web users, sponsored by eTranslate.com, reports that the US is not the country most responsive to consumer e-commerce and e-finance. For example, 24 percent of US users are willing to buy stocks and investments online compared to 27 percent of Swedish users willing to do the same. US users are not the most willing to buy software online either. While 75 percent of wired Venezuelans would buy software from the web, 69 percent of US users would do the same. The same holds true in paying for online information. In Argentina, 47 percent of users are willing to purchase information from the web whereas in the US, a smaller 37 percent might do so. IDC notes that US companies might want to consider "globalizing" product availability as many countries are already willing to conduct cross-border commerce online, which interests on average 52% of worldwide internet users.

Internet Changing the Way Canadians Bank.
CyberAtlas/Internet.com, The Big Picture geographics, December 14, 2000.
Two in 10 Canadians are signed up for Internet banking, double the number from a year ago according to a study by Canadian Facts, a division of CF Group Inc. Those registered use the services frequently. Canadians not intending to use the service cite lack of computer/Internet as the main reason.

European Users: The More They Surf, The More They'll Shop.
eMarketer, the Daily eStat, November 16, 2000.
According to Jupiter Research, by 2002, 52 percent of online Western Europeans will be Internet veterans. The number of people online in the six strongest markets will double over the next five years to 170.6 million in 2005. Veterans are defined as those who have been online for two years. Jupiter also correlates veteran status with online shopping: 11 percent of newbies and 41 percent of veterans have purchased something online.

Putting Worldwide Back in WWW.
eMarketer, the Daily eStat, November 21, 2000.
An IDC study commissioned by eTranslate.com reports that US shoppers are not necessarily the most interested in purchasing goods online. Columbia, Spain and India all purchase music via the Internet at a greater rate than Americans. Other countries also participate more greatly in cross-border commerce.

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