Is it Safe up There?
The North Wind Doth Blow
All that is New is Old Again
Once upon a time, probably in the beginning of human existence, some people discovered business. They realized people want things, and are willing to pay using something valuable. Soon there was the need for something intermediate to trade with. Cattle, was the first form of currency (around 7000BC). Later people used a multitude of things, such as Cowrie Shells, beads and stones, leading to metal coins (China, 500BC). Even paper currency has been used in China around 800BC, but the widespread use of paper is quite recent (around 1700AD).
Business has a long turbid history. It has always centered around the exchange of goods (and later services). The history of business is a fascinating saga of traders, nomads, seafarers, barterers and cheats. Eventually the role of business in society became well recognized and business became the infrastructure of economies.
Along with the advent of business came the concept of an economy. An economy is a system where some people create wealth by producing things that are needed, while more people create more wealth by trading in these manufactured (or cultivated) goods. Buy low, sell high and have a martini after the deal.
The underlying principle of an economy is a simple idea—make money. Money is good and earning it legally, is better. Since the urge to attain wealth and owning things are wired into the primordial neurons of humans, the money-based economy works quite well. In the beginning, a few people make money. Then these people either spend the money or invest it. Whatever they do, the money ends up somewhere else and other people make money. They in turn, spend or invest it. Soon the cycle of money transfers actually ends up multiplying the money many fold. Subsequently a large number of people become endowed with substantial amounts of money.
The cascading effect of wealth creation at first glance does not seem to be sustainable or effective, but it is. Money and greed as a basis for the economy has worked very well for the western democracies for a long time and has been embraced around the world today. The tenet is that hard work pays off and the pay off is in terms of money or power or both.
The barometer of the modern economy is the stock market. The stock markets were primarily created to “raise capital” and provide a market-based valuation for business enterprises. The value of an enterprise according to this model is the amount of money a large number of non-involved individuals are willing to pay for a small share of the venture.
While the underlying principles of the stock markets are quite simple, how it works is quite baffling. Any person or entity does not control the stock markets but is the result of collective thinking of diverse people. Mob mentality sometimes influences the gyrations of stock valuations, but overall the market is a remarkable predictor of the health and prospects of businesses. Rarely is the stock market wrong, and predicting how it will behave has been shown to be quite impossible.
The capitalistic economic system is quite well entrenched and was never expected to be overturned by an alternative, till recently. Suddenly, around 1996, people started talking about a “new” economy. Till this point, no one had recognized that the centuries old system of business could be relegated to the second-hand status of the “old economy”. The old economy had served mankind quite well, even through its ups and downs for as long as recorded history.
The new economy suddenly upstaged the old economy. While the basic foundations of the old economy were to make money, and profit was the only consideration, the new economy was different. The new economy turned conventional thinking on its head. Making a profit, we were told, was irrelevant. What took its place was not clear, but making money was not the key to success.
Starting in 1996 Internet commerce boomed. New companies started up overnight selling all kinds of goods, services, software and many a strange gimmick. “Selling” is the wrong word, as most of them did not charge for their services. For example, Yahoo offered web searches, news, information, email and a plethora of electronic information services for free. Web portals such as Lycos, Excite, Alta Vista and so on provided a dizzying array of services for no price. Many a company became household names and provided services for free. There were even real goods, like computers offered for free. Some ventures charged money, but they were few and far between. Amazon became the “world’s largest bookstore” and Ebay became the largest flea market in history. While the companies in the new economy were quite diverse, they all shared one attribute—they lost enormous amounts of money.
Of course, the stalwarts of business found the whole idea quite laughable. “How can you make money, without making a profit?” they asked. “Just watch us”, was the response.
Soon the stock market, the trusty indicator of the old economy turned tail and gave a new economy a resounding thumbs-up. The stock values of Internet ventures went above the stratosphere. The more money a company lost, the higher the stock price flew. The best way to make money was to loose it. Along with the flare up of the new economy came the Internet billionaires. These were founders or even employees of the Internet companies, who made money by owning stocks in the company.
Jeff Bezos, the founder of Amazon became the poster boy of the new economy. Not only was his wealth (due to stock ownership) stratospheric but his business prowess was hailed by all. Time magazine gave him the coveted “person of the year” in 1999. Time called him “unquestionably, king of cyber-commerce” and stated he was in the same class as “Charles Lindberg, Queen Elizabeth II and Martin Luther King”. Notwithstanding that under his stewardship, his company lost $350 million that year (that is a million dollars a day). Notwithstanding that even today, Amazon has never made a penny in profit, in a business (bookselling) where torrents of companies do.
No one had ever seen a phenomenon like this. The pundits and the scholars and the soothsayers all had a collective fit. Nothing made sense, yet no one was quite willing to say openly that the stock market was wrong. Everyone was so enamored by the reputed splendor of the Emperors new clothes that they did not quite see the absence of any shred of clothing. Some of those ignorant skeptics who whispered, “It is too good to be true” were driven out of town in howls of “stupid”.
The higher the stock market flew, the more money investors pumped into money loosing enterprises. No one wanted to get caught not owning a piece of the Internet boom. It was the finest moment of mob mentality, the epitome of stock market ignorance and yet everyone was convinced it was the right way to go.
Just as sudden the new economy rode into town, was the news of its demise. In early 2001 the investor driven money stopped pouring in. “Show us some profits”, said the investors. Somehow the dumb investors seemed to forget that the new economy was not about profits. As the “profit” word reared its ugly head, the party got over, rather quick.
The new economy had no answer to the profit problem. When pressed, they always said there are two ways of making a profit—if there was any need to make such a thing. They were: (1) start charging for the services after people got hooked on them and (2) sell advertising on the web sites.
Strategy 1 failed miserably. Whenever a web site wanted to charge, the customers disappeared. People balked at the idea for paying for something they had come to assume was free. Strategy 2 also had a miserable showing. Unlike radio and TV and magazines, advertisements on the Internet have no redeeming features, other than annoying the user. They get ignored, and as advertisers realized how ineffective Internet advertising is, they pulled the accounts.
Soon came the crash. Highflying Amazon went from over $100 a share to $8 today. Yahoo traded well over $200 in boom times, can be had for under $10. Probably around 90% of Internet companies have closed, or are about to close. Only those who can charge money are the Internet Service Providers—and they too charge lower than they should and are in financial distress.
Stock markets aside, the basic question is, how are these folks going to make money? The new economy is alive but bleeding. While there is indeed such a thing as a new economy, the reality is that the bottom line is cash.
Unfortunately there seems to be no answer. Does that mean all the web sites, the information the convenience and the glory of the World Wide Web is going to disappear? Everyone hates that idea of this wonderful tool going dark, yet no one till today has managed to put forth a viable and sensible proposal to keep it alive.
Partha Dasgupta is on the faculty of the Computer Science and Engineering Department at Arizona State University in Tempe. His specializations are in the areas of Operating Systems, Cryptography and Networking. His homepage is at http://cactus.eas.asu.edu/partha