Digital Matters - Issue 47

It's over and it's just begun. Those are the competing ideas that the modern economy requires you to balance simultaneously. It ended on April 14, 2000, when the dotcom stocks began their crash and burn. It began every day before that, continues every day since, and begins anew today: disruptive advanced information technology embedding itself ever deeper into the DNA of our economic, cultural, and personal lives.

The truth is in the contradiction, the paradox of an imploding and exploding transformation. Kurt Andersen wrote a great column in the December 2000 issue of Inside Magazine that captured this paradox with an almost exact metaphor. Christopher Columbus's business model, said Andersen, didn't really work out -- no direct route to Asia, bad ROI on the venture when you do the math. But, as Andersen wrote, "He fucking discovered America." And that's what the techies did. They discovered a new world, and, in doing so, created what has come to be called the new economy.

We now find ourselves in a kind of suspended animation, unsure of what comes next. Our media -- never keen on contradiction or paradox -- is headlining doom and gloom with every turn of the page. Having ridden the wave of dotcom advertising dollars, they are now trash-talking all things Internet. If the conventional wisdom were a song, it would be the old Rolling Stones hit "Paint It Black." The media seems to be fueled by an almost manic-depressive rage.

The coverage matters because it affects the financial markets. Negative coverage begets negative news. Irrational despair replaces irrational exuberance. As Andersen pointed out, Wall Street analysts, journalists, and Internet entrepreneurs share the same adrenaline-addiction disorder, which fueled new-economy hype. When the economy crashed, they crashed, and a vicious down cycle began.

Meanwhile, digital technology keeps marching along, fueling discovery and invention. Global Crossing keeps laying fiber under the sea. Optical-networking companies keep riding the speed of light. Wireless technology advances by leaps and bounds. Astrophysics unveils new moons and planets in the universe. Celera Genomics helps to publish the first complete map of the human genome and begins the most important scientific project -- proteomics -- in history. The pace of change, lashed by supercomputers running at exabit speed, increases exponentially at each inflection point.

The problem, of course, is that there are no earnings yet. You can see the value creation's potential as it unfolds, but you can't count it. You look at the charts on these digital-technology and genomics companies, and the first thing you notice is the absence of a number in the price-earnings-ratio box. Celera Genomics, Global Crossing, company after company with no net -- figuratively and financially.

And so, for the moment, the paradox begs the question: What matters in an imploding and exploding transformation? One answer is to listen to what the technology tells you. Another answer is that many things matter, and here's what matters most.

Understanding what doesn't matter matters. It doesn't matter that the dotcom frenzy was crazy and speculative. It doesn't matter that the techies were arrogant and smug. It doesn't matter that wireless doesn't really work yet. That broadband won't be in every home next year. Or that eToys is out of business. It doesn't matter what the chattering classes say. What matters is that advanced information technologies are the central concern of modern business.

Money matters. Venture-capital investment in the first three quarters of 2000 more than doubled the amount that was invested in all of 1999. As George Gilder wrote recently, "The huge surge of venture investments of the late 1990s and early 2000s ... will yield a steady flow of innovations reaching the market over the rest of the decade." Press coverage focuses on the NASDAQ: Yahoo! down 85%, Amazon on the ropes, biotech in the dumpster. But the money that matters is not the paper profit or loss. It's the money that's already at work. There's a ton of it, and there will be a ton more of it.

Strategy matters. Michael Porter, the Harvard Business School strategy guru, argues that business strategy is made more important by Internet technologies. He's right. What the Internet does is make every link in a company's value chain transparent (and therefore vulnerable). It shifts power to customers, who use Internet-enabled reverse auctions and aggregation to negotiate prices down. The net effect is that "price discipline" (a company's ability to maintain value-creating prices) becomes difficult, if not impossible. That's why it's so important to have a strategy that anticipates the impact of these technologies on the marketplace and on the competition.