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World War Internet: an Optimistic Assessment

"Arguing in My Spare Time," No. 3.19

by Arnold Kling

August 3, 2000

Recently, some major icons of the Internet have suffered setbacks. Earlier this year, the euphoria in the stock market broke. was savaged in a Lehman Brothers analysis of its convertible debt, and eventually the message got through to thickheaded investors. was hit by the announcement that six airlines plan to disintermediate its service for selling last-minute seat inventory.

Is this the start of a trend? To adopt a war metaphor, are the forces of the Old Economy counter-attacking? Are the Internet troops retreating, and will the retreat turn into a rout?

Analysis of World War Internet tends to be short-sighted. Close-up, an army in battle tends to look like a disorganized rabble. From that vantage point, all that one can see are forces that are either surging or falling back. "We're surging forward in B2B! We're getting thrown back in B2C!"

This essay steps back and takes a more long-term, strategically-oriented perspective. In this assessment, we clearly are winning.

By "we," I mean those of us who are rooting for small, entrepreneurial, Internet-based companies. Our enemies are Dilbert sector Managers, Bureaucrats, and, er, Analyst-Kissers: MBA's.

Let us examine several major battle fronts in the area of both information goods and physical goods. Relative to what our expectations might have been five years ago, where do we stand? What might we expect to achieve in the next few years?

Fighting Over Atoms

Five years ago, an assault on the hard goods industries would have been considered foolhardy. As Nicholas Negroponte could have told us, the Internet facilitates the delivery of bits, but it has no capability for delivering atoms.

Nonetheless, we find ourselves engaged in a fierce battle over books, groceries, and other hard goods. I think of this as having started with the daring paratroop raid of Commander Bezos.

Paratroop raids take you behind enemy lines. This means that by definition you are fighting on the opponent's home ground. You are at a logistical disadvantage. Your opponent has an established transportation system and you do not.

However daring, dashing, and romantic Commander Bezos may be, the casualties among the paratroop raiders have been quite high. The frightful losses in this sector have been well publicized.

In the hard goods sector, the Internet success stories tend to consist of companies that began with a direct selling model and then adapted that model to the Internet. Dell Computer would be a prime example. Many catalog retailers also have enjoyed success.

In my view, we are doing better in the fight over atoms than could have been expected. My opinion is that we should try to avoid getting involved in the inventory and shipping process, as Amazon has.

There are plenty of opportunities for us to provide online product comparison, to improve corporate communication internally and with suppliers, and to provide corporate information infrastructure using the "application service provider" model. In other words, we can provide valuable services to the hardgoods industry, without trying to take over the distribution system.


Another battleground about which I have been suspicious is that of entertainment. Currently, the Internet does not have the bandwidth of television or CD-ROMs. It may take ten years to build out that bandwidth. To me, this lack of bandwidth puts the Internet at a fundamental disadvantage in the field of entertainment.

I tend to think that Microsoft nearly missed out on the Internet because they were focused on the bandwidth issue. In 1994, having seen and exploited the opportunity provided by CD-ROM technology, Microsoft must have viewed the Internet through 28.8 baud modem as a step backward.

But the Internet delivers utility in spite of low bandwidth. The value of the Internet is in its ease of interconnection. It seems to me that no school of thought has been more consistently wrong than the "convergence" theorists, who prophesied that the killer applications on the Internet would be things like interactive television and video on demand.

The only fields of entertainment where the Internet is making a difference are gambling and pornography. In those cases, it has not been the quality of the Internet experience that is the source of success. It is the anonymity that the Internet provides, so that people do not have to worry about others in their community observing them as they engage in these vices.

I suppose that one could argue that the Internet has begun to affect the distribution system for music. I would be careful, however, not to overrate the impact thus far. As a parent of teenagers, I can say that the recording industry and MTV are not in any danger in the near term.

Because many forms of entertainment can be delivered as bits, one can argue that the entertainment battleground is not as unfavorable as the hard-goods battleground. However, bandwidth and ergonomics are serious issues. I believe that those who are waiting with baited breath for the Internet to morph into television will continue to be wrong.


In the area of news, we are winning. I get all of my news on line. I have stopped watching television news altogether. I only read the newspaper because I cannot sit still and do nothing while I eat breakfast.

When a story breaks that is important to you, do you rely on the evening news to satisfy your thirst for information? Do people follow their stock portfolios in the newspaper? Do serious sports fans wait for the paper to get the score?

The traditional news media are finished. All that remains is to see how the implications of that fact play out.

Information-intensive Services

The Internet also is winning in the area of what we could call information-intensive services. These are services where a large component of the value to consumers consists of information.

A clear example is airline reservations. Compared with waiting on hold for someone on the phone or with visiting a travel agent, the Web clearly has a convenience edge for consumers.

Another example is stock trading. Traditional retail stock brokerage is being routed.

Many information-based industries are going to have to redefine the boundaries between professionals and consumers. With the Net, a consumer can obtain a great deal of the information that previously was held exclusively by real estate agents, physicians, and attorneys. While change will be slow, the end result is that the traditional professionals will have to cede large amounts of territory.

No Alternative Monetary System

However, the fighting on the information-intensive front has not gone well everywhere. In particular, we still rely on old-economy banks and credit cards to provide the media of exchange.

In 1994, my expectation was that the demand for micro-payments would emerge quickly relative to the reaction time of traditional banks. I thought that this would create an opening for Internet companies to create an alternative monetary system. In fact, the only individual stock I ever purchased was a company called Verifone, which had ambitions to participate in the Internet transactions space. (Although nothing came of this, Verifone was purchased by Hewlett-Packard. I then went back to just buying mutual funds.)

I still believe that the Internet ought to give rise to a new monetary system. If the airline industry can create a pseudo-currency out of frequent flyer miles, then surely the Internet economy can come up with a viable entry.

A widely-accepted Internet currency could make it easier to develop innovative ways to pay for information goods, including micro-payments. It would reduce the Internet transaction "taxes" that are paid to credit card companies. In spite of all of the failures in this area, I would hate to see us break off the fight.


Unless we confuse the state of World War Internet with the behavior of Internet stock prices, there is good reason for optimism about how the war is proceeding. For the most part, we are winning in the battle zones that one would have considered most promising. Many of the victories have been spectacular. There is no reason for despair.