What we learned in the new economy

Jennifer Reingold. Fast Company. Boston: Mar 2004. , Iss. 80; pg. 56, 9 pgs Abstract

(Summary)

The New Economy isn't dead. It just didn't happen in the way imagined. The Internet seems to work best alongside existing systems rather than, as the dotcommers believed, undercutting them entirely. Some who left secure, if staid, jobs for the freedom of free agency now find themselves struggling to pay the rent or offering to do the same work for the same companies they left - for less money and fewer benefits. While it's true that IT spending went up dramatically in the late 1990s, its link to productivity is not nearly so neat as the New Economists proclaimed. University of Michigan professor C.K. Pralahad believes the economy is entering an era in which consumers and companies must create value jointly. Successful companies, recognizing consumers' power, will abandon adversarial relationships and embrace cooperation. Incumbent businesses aren't so easily destroyed.

It's a foggy, rainy December afternoon at the port of Redwood City, California-the kind of day that makes reality hard to discern, even at a distance of five feet or so. But suddenly, there it is: Right on the shore, water lapping the marshy ground, are two competing business models. One is a creaky, ugly group of towers crushing sand and gravel next to another industrial site where cars are pulverized into smithereens. It's a noisy eyesore-and a fully functional one. * just on the other side of the shoreline, a glistening mass of blue and green glass rises from the water's edge. The office park, Pacific Shores Center, is one of the most ambitious real-estate development projects ever undertaken in the area. With 1.7 million square feet in 10 different buildings, the $500 million center, opened in 2001, was set to transform this lonely lick of land into a glamorous technology hub. Featuring baseball diamonds and a 38,000-square-foot fitness center, it is, as the Web site proclaims, "a next-generation work environment designed to facilitate productivity, satisfaction, and balance for forward-thinking companies and their employees."

Yet Pacific Shores' gleaming glass windows hide something: "They built a city and no one came," says Jamis MacNiven, proprietor of nearby Buck's of Woodside, the funky diner best known as the favorite haunt of Silicon Valley venture capitalists. MacNiven is overstating the case a bit. The park has finally reached 70% occupancy. But at least two of its buildings stand empty. The original tenant for two structures, Excite@Home, never made it here, going bust in 2001 and leaving its own abandoned site off Highway 101. And lease prices are a fraction of what they once were- $1.85 per square foot, down from more than $6 during the boom. So much for the promise of the New Economy. Like Pacific Shores, it hasn't been a total bust. But side by side, it looks as if pounding sand may have been the better bet.

It's quite a comedown from the shiny new world we saw at the end of the 20th century, when the business cycle as we knew it was declared DOA. The Internet was the chief herald of this new and unprecedented age, of course, but many other forces combined to propel us into what seemed a radically different state: the technology-fueled productivity boom, the soaring stock market, globalization, the replacement of budget deficits with surpluses, the apparent outbreak of world peace. We all bought in in some way, awed and inspired by a world where workers were treated justly and rewarded bountifully, where you could make critical consumer and business decisions from your desktop, and where the business status quo was to be discarded like a stale slice of bread. With such logic, it made perfect sense that Yahoo had twice the market cap of General Motors even though the car company had nearly 300 times its revenue; that UPS delivery guys steered their brown trucks with one hand and day-traded Nasdaq stocks on their Palms with the other; or that AOL had more than 2,000 millionaires in its employee ranks. As the glow of the New Economy shone well beyond economics, that boring cynicism we all know so well vanished. For abrief, halcyon moment, all the rules were toast, and anything-anything- seemed possible.

Then, four years ago, it all came tumbling down. The stock market crashed; surpluses became deficits; world peace became endless, ephemeral war; and vaunted CEOs became convicted felons. Instead of Utopia, we got bankruptcies, backbiting, bitterness, and a wholesale rejection of everything the New Economy stood for. Zany optimism and creative juices were replaced by the sour feeling that we'd been had. This magazine itself paid the price for being identified by some as the pied piper of this new world.

And yet the business cycle-and yes, it is a cycle-gives us hope once again. Today, with the Nasdaq up a remarkable 91% since its October 2002 low, and with GDP growing at a steroidal 8.2% rate in the third quarter of 2003, a new enthusiasm is sprouting once again. Venture guru Steve jurvetson was recently spotted in Buck's, i his pen outlining a business plan on-yes! -a napkin. Add to that the much-anticipated IPO of Google (expected sometime this spring), our ever-growing dependence on the Internet, and the healthy sums of capital piling into such sectors as social networking and nanotechnologies, and you've got some serious mojo rising.

But have we learned anything at all? Are we doomed to live through another season of high hopes and dashed expectations? We are all older-like the grizzled sock puppet on our cover, who once starred in e-tailer Pets.corn's $20 million ad campaign and who now toils as a pitchman for auto loans for people with bad credit (hey, at least he has a job). But are we any wiser?

Like Pacific Shores, the New Economy isn't dead. It just didn't happen in the way we all imagined. And now it's been long enough that we can think more analytically about which of the shiny and alluring ideas of the New Economy were lasting and real, and which were just the iridescent glint of a bubble.

The Internet changes absolutely everything.

Cold Reality: Absolutist statements are absolutely a bad idea.

Finding a job was once an inky slog through the Sunday paper, a groveling call to those college acquintances whom you never really liked, a random letter hoping for an interview. Then came Monster.com. Quickly, it became a symbol of how the easy access, low cost, and ubiquity of the Internet was utterly transformational. Why would anyone go back to the old way when the new way was so efficient, cheap, and easy?

That, in a nutshell, was the religion of the Internet, practiced in the church oi the New Economy. You could get anything, anywhere, at any time. The cost of information was no more than that of bringing the pipe into your home or office; the tiniest storefront could compete with the biggest; the middleman was toast.

There is no question that the Internet has been a technological earthquake, transforming the way individuals and businesses use information. When was the last time you visited a library to look something up? Went to a travel agent's office? Bought anything without doing research? "The first wave of e-commerce was about things that hadn't seen any innovation for 100 years," says Jeff Taylor, Monster's founder and chairman. Internet retailing continues to boom, with 2003 sales (excluding auctions and travel) expected to hit $52 billion, up 22% over 2002, according to comScore Networks.

But with the benefit of hindsight-and looking over the scattered graves of thousands of Net companies-the original exuberance seems rather naive. Existing as a stand-alone Internet business has proved to be much tougher than any of the pur-j veyors of dog food or toilet paper ever anticipated. At General Electric, says formeij CEO Jack Welch, "[the Internet] created new distribution models. But that's all that came out of the Internet. I don't see any new inventions."

Some of the most successful Internet businesses, as it turned out, were embraced by seasoned brick-and-mortar companies, as when TMP Worldwide scooped up Monster.com, or when Toys "R" Us partnered with Amazon.com. A big reason they work is that they're parts of larger, traditional businesses. In other cases, such as Dell's reconfiguring of the online process for buying a computer, or GE's efforts to revamp its supply chain, the potential of the Internet to transform existing businesses became apparent only as other models collapsed.

And then there are the clear exceptions-the Amazon.corns, Expedia.corns, and eBays. What separates the winners from the dot-gones? Start with what you sell. The Internet gives an edge to products with unpredictable or fragmented demand, because it reduces risk by not forcing you to carry, say, an obscure book in every one of your stores. Yet it may also increase other costs, such as transportation (which isn't an issue for travel services or an online auction business in which third parties pay the freight). "The Internet facilitated certain business models and didn't facilitate others," says Sunil Chopra, an operations management expert at Northwestern's Kellogg School of Management. "Why doesn't P&G sell detergent direct to customers? Even if the Internet does let you, sending it to each individual customer's home is not an efficient way." The choice, he says, is stark: Either dramatically increase the efficiency of getting a product to market or offer something that others don't.

The Internet seems to work best alongside existing systems rather than, as the dotcommers believed, undercutting them entirely. That's the rationale for Connection to eBay, a new Web-based company that sets up a virtual storefront for larger companies that want to get rid of excess inventory on the auction site. Here, the Internet is not the sole distribution system but rather an alternative to liquidators and others. "I've never seen a business that can use one channel," says CEO Robin Abrams. "This is absolutely complementary." Now there's an absolutist statement.