The Internet Economy generated an estimated $301.4 billion in U.S. revenue and was responsible for 1.2 million jobs in 1998, according to a study by the University of Texas’ Center for Research in Electronic Commerce.

These two numbers—the Internet Economy Revenues Indicator™ (IERI) and the Internet Economy Jobs Indicator™ (IEJI)—are the principal findings of this first ever study which was commissioned by Cisco Systems.

Revenues and jobs were measured using a four-layer structure developed by the researchers and shown in the table below. The component indicators in each level were added, with some adjustment, to make up the larger Revenues Indicator and Jobs Indicator.

The way in which Internet revenues and jobs are reported and how companies estimate them complicates the task of adding up the four layers. Simple aggregation of the four layers yields $331.39 billion and 1,337,554 jobs. Because we currently estimate the overlap of revenues between the commerce layer and other layers to be $23.3 billion to $31 billion, we estimate the total Internet Economy at around $300 billion. Similarly, we have revised downward the jobs numbers to reflect the subtraction of overlap.

Although overlap makes it more difficult to obtain accurate estimates, they point to the existence of an Internet Ecosystem, which is critical to understanding the explosion of the Internet Economy. The $23-31 billion revenue overlap shows the inter-connected nature of the various layers of this new economy. It also highlights new business and revenue models spawned by the Internet.

It should be noted that the infrastructure and application layers reflect combined investments in the Internet, intranets and extranets. In other words, these two layers represent the revenues associated with the IP infrastructure and applications. The intermediary and commerce layers only capture Internet-based activities. Extranet based business-to-business transactions are likely to become significant in the near future as more of the traditional EDI based transactions are moved over to extranets. However, given that less than 10% of companies were estimated to have intranets in 1998, the volume of extranet based business was likely to be relatively small.

From a conceptual standpoint, the Internet Economy can be divided into four layers. Each Layer is defined with descriptions of the types of companies and names of some of the actual companies in each category.

Key Findings from the Internet Economy Indicators Study

The Internet commerce layer revenue of $101.89 billion is much larger than previously reported figures. This larger revenue estimate is attributable to the comprehensive nature of the universe of companies identified for this layer. For example, the universe of U.S. companies in this layer consisted of close to 11,000 players, which is in sharp contrast to the top 50 or 100 companies often considered in Web-revenue measurement studies. In fact, our study suggests that the top 80 players at the Internet commerce layer contributed only a third of the layer’s revenues.

Sampling from a comprehensive database enabled us to discover significant online activity in business sectors that have not received much attention in prior studies. For example, with the exception of online grocer Peapod, online grocery sales do not make the top-100 Internet sales list. Nonetheless, we found that online grocery sales already constitute a significant volume of business.

The U.S. Internet Economy grew at an estimated CAGR of 174.5% from 1995 to 1998, compared to the overall world-wide average economic growth rate (which includes the U.S. Internet Economy) of 3.8% in the same period (see table below). While a direct comparison between worldwide GDP and the Internet Economy Revenue Indicators is unwarranted due to differences in what the measures stand for, it is evident that the Internet Economy is growing at an astounding rate.

A more convincing comparison underscoring the rapid growth in the Internet Economy involves a comparison with GDP growth in the U.S. economy. The U.S. GDP grew at a CAGR of 2.8% from $6762 billion in 1995 to $7552 in 1998. Admittedly much of this unparalleled initial growth in the Internet Economy could be attributed to a large substitution effect whereby economic activities conducted in the physical or non-Internet world are now being transferred to the Internet and IP-based networks.

In just five years (since the introduction of the World Wide Web), the Internet Economy already rivals century-old sectors like energy ($223 billion), automobiles ($350 billion), and telecommunications ($270 billion) in size. Also, the average revenue per Internet Economy worker is about $250,000, or about 65 percent higher than their Industrial Economy counterparts. For example, there are 1.5 million workers in the manufacturing component of the auto industry generating $240 billion – or $160,000 per employee.

With more than $300 billion in Internet-based revenues in 1998, the total value of the U.S.-based Internet Economy is by itself one of the top 20 economies in the world. With the caveat that total revenues are not directly comparable to GDP, and for the sake of illustration, if the U.S.-based Internet Economy (as measured in terms of total revenues) were a nation by itself, it would rank 18^th worldwide behind Switzerland and ahead of Argentina in terms of GDP. If the U.S. based Internet Economy grows at its four-year average rate of 174.5%, it will rapidly climb the ranking chart. (Source: The Economist: 1999 World in Figures, UT-Cisco Study).

With 1.203 million Internet/IP-based jobs, the Internet Economy is reshaping the job market. Many of these jobs (e.g., Web design and development, Internet consulting) did not exist prior to 1994/1995, and companies have also re-designed existing jobs to meet the challenges and opportunities of the Internet Economy. An estimated 5.9 million Americans work in the broadly defined high-tech field, of which 20% were associated with the Internet Economy as of 1998. As pure Internet players flourish and as traditional businesses become more dependent on Internet related technologies for their daily business operations, new jobs will continue to be created and existing jobs will continue to be reshaped in the new economy.

Revenues of the Internet infrastructure and applications layers totaled $171 billion, while the intermediary and Internet commerce layers contributed $160 billion. This shows the nascent state of the Internet Economy, and suggests the need to foster rapid growth at the intermediary and commerce layers. As economic activity in virtually every business sector shifts to the Internet or IP based networks, the intermediary and commerce layers should ultimately turn out to be much larger than the infrastructure and applications layers. Of course, the infrastructure and applications layers are also likely to experience dramatic growth as the Internet keeps expanding globally and as companies commit themselves to building intranets and extranets. Given that less than 10% of companies had an intranet in 1998, there is ample room for sustained growth in the infrastructure and applications layers.

Reaping average revenues of $308,708 per employee, the Internet Infrastructure is the most productive layer of the Internet Economy. The Applications layer averages $244,015; the Internet Intermediary layer $230,678 and the Internet Commerce layer averages $211,401. Overall, the average revenue per employee is $250,534.

Many of the companies at the infrastructure layer are highly established companies that are most likely enjoying significant economies of scale and scope. While it could be argued that players in the applications layer should have the highest economies of scale and scope, it should be noted that the application layer not only consists of large software vendors, but also includes many Internet consulting and Web design firms who have to customize their offerings for each customer. Further, this layer has players who customize software applications for Internet commerce. Players at the intermediary and commerce layers are relatively new to this electronic medium, and traditional bricks-and-mortar companies going online are unlikely to be able to operate in the same lean-and-mean fashion as the pure Internet companies, at least in the initial stages.

While the Internet Economy has spawned thousands of startups, major companies still play a significant role. For example, the top 15 companies account for nearly one-third of the estimated 1.203 million Internet-based jobs.

• The market value of U.S. companies with substantial Internet revenue exceeds $3 trillion

Of the 3,000 companies measured, the 20 of the largest companies with significant Internet-based revenues alone have a combined market value of $2.4 trillion. When added to the other companies, this number exceeds $3 trillion. The Internet has played a key role in raising market values as investors flock to companies that are leveraging the Internet for business opportunities. (Microsoft, Intel, AT&T, Cisco, IBM, MCI/WorldCom, Lucent, Dell, SBC, AOL, BellSouth, Time-Warner, Bell Atlantic, Ameritech, HP, GTE, Sprint, Compaq, AirTouch, Oracle).

While it is intuitive to think of "disintermediation" in an electronic world, this study provides evidence that Internet intermediaries are already playing an important role in shaping the Internet Economy. These intermediaries generated and estimated $58 billion in 1998, nearly a third of the total revenues for Internet Commerce and intermediary based transactions. It is also important to note that only commissions (which typically account for less than 10% of the value of a transaction) were counted as revenues for intermediaries like online travel agents and auction houses. In other words, the total business associated with intermediaries were much bigger than the $58 billion figure.

Based on the companies that make up the Internet Economy, our research has yielded figures that exceed all prior estimates. Perhaps more importantly, this study clearly designates the roles and the relative magnitudes of four distinct but related layers of this Internet economy.

The first two layers (infrastructure and applications) provide the foundation for the conduct of Internet commerce, and accounted for more than half of the total revenues associated with the digital economy. Estimated at $58 billion, the third intermediary layer also is a significant contributor to the Internet economy, lending empirical support to the widely held academic notion that electronic intermediaries or Internet middlemen will be crucial to the success of electronic commerce.

The fourth Internet commerce layer turned out to be much larger than previously reported estimates. The relatively large figure ($101.89 billion) is attributable to the comprehensive nature of the universe we described at this layer. For instance, with the exception of online grocer Peapod, online grocery sales do not make the top-100 Internet sales list. Nonetheless, we found that online grocery sales already constitute a large volume of business, a fact that has been ignored in previous studies.

While any study of this complexity will rely on assumptions and responses from companies participating in the study, the above figures are based on in-depth research and interviews with more than 3,000 organizations, extensive analyses of financial statements, products and service descriptions as well as multiple secondary sources. This is the most comprehensive study to date, measuring the size of the emerging Internet Economy, and should serve as a promising starting point for more comprehensive and detailed measurements.