Examined coldly, the Internet represents an investment of countless billions of dollars that, as yet, isn’t paying its way. It has been lavishly subsidized by venture capitalists, investors and major corporations that have poured immense amounts into building Web sites and communications networks. What customers pay for the Internet’s services–often little or nothing–doesn’t cover the full costs. When customers ultimately do pay these costs (as they someday will), it’s not clear precisely what they will want.
Until that happens, major corporations are losing their desire–or ability–to increase their massive Internet investments. Just recently the Walt Disney Co. announced that it would shut its GO.com portal and that it had a cash loss of about $250 million on its Internet operations in 2000. Aside from depressing the economy, this slowing of spending will cast the Internet in a harsher light. Dazzled by the technology, we automatically assume that the Net must represent a huge advance in economic efficiency and social well-being–and someday it may. But for now, the Internet is unproductive, costly and wasteful.
Consider some indicators of the Internet economy:
The Internet simply isn’t yet the most efficient, convenient or appealing way of delivering most goods and services. No doubt there are many genuine efficiencies. Corporations can tie together suppliers quickly and cheaply. Online airline bookings may be less expensive, but some of the savings (for airlines) flow from having customers do for themselves what travel agents do for a 5 percent commission. Elsewhere, the Internet’s efficiency–the cheapness of its information–is a mirage. What seems wonderfully inexpensive for the user can be frightfully expensive for the producer.
On the Internet, average costs are high and marginal costs are low, nearly zero. The marginal cost of any good or service is the expense of producing (or selling) one more item. For the Internet, this is negligible. Once a data file is stored–and a communications network built–the cost of zapping the file to one more user is trivial. Many Internet services are priced at marginal cost: little or nothing. However, companies can survive only if they recover their average costs (i.e., the expense of providing the service). The gap between average and marginal costs is bridged by today’s subsidies, which, for businesses, mean losses.
The paradox is that the Internet seems to deliver so much information to users at so little cost that much of it doesn’t have much value. It is read casually or not at all. I see (and participate in) conspicuous waste all the time at NEWSWEEK. We reporters constantly surf the Web and download reports and documents. Some of them we read; some of them we save but don’t read; some of them, once printed, simply sit next to the printer until they’re tossed. But why not? It’s all “free.”
The genius of Napster is that it creates its entire music inventory free, through software that permitted the swapping of song files. That’s what the court–responding to howls from the recording industry–branded a copyright infringement. Now, say the commentators, the recording industry should create, with or without Napster, online services that allow songs to be downloaded for modest fees. Business (it’s said) would boom. Fabulous. But no one has yet figured out how to do it. This is the predicament of the entire Internet: finding workable “business models” (in the jargon) to provide a return on investment.
The Internet is essentially a communications network. It isn’t going away, and someday it will merge voice, video and data traffic. But the frenzied Internet spending, a prop of the economic boom, won’t continue to propel the economy forward. The dot-com debacle started a period of retrenchment. Capital markets–for stocks and bonds–have turned more hostile toward telecommunications and Internet companies. And now some old-line corporations are trying to cut their Web losses. The Internet is a great giveaway, but it won’t drive the economy unless it becomes a great business.
