Rapid advances in Internet technologies and the subsequent proliferation of economic activity on the Internet have given rise to the Internet Economy. Its rapid growth, size and potential have prompted comparisons between this historic development and the Industrial Revolution.

While the physical aspects of any economy are still based on raw materials like steel, oil and gas, the Internet Economy is fundamentally different. This economy relies on high speed Internet networks and Internet applications - new competitive tools for business and electronic intermediaries to increase the efficiency of Internet-driven markets.

In spite of the excitement and optimism surrounding the Internet Economy, few comprehensive efforts have successfully measured the economic growth and jobs created by this emerging Internet Economy. A foundation for metrics and measurement is the key to understanding and analyzing issues involving this Internet Economy. Fundamental questions need to be answered. For example, what business sectors, products and services should be included in this Internet Economy? What methodologies are appropriate for measuring activities in this Internet world? How large is this Internet Economy? How fast is it growing?

The development of the Internet Economy Indicators™, created by the University of Texas, and sponsored by Cisco Systems, seeks to fill this void by providing a solid foundation for conceptualizing and measuring the various components of the Internet Economy. These indicators—the Internet Economy Revenues Indicator™ and the Internet Economy Jobs Indicator™—are built on a sophisticated analysis of four layers of the Internet Economy.

The Internet Economy Indicators are designed to quantify the sales volume and employment in various groups of Internet-related products and services. They are derived from analysis of four "Layers" of the Internet Economy: Internet Infrastructure, Internet Applications, Internet Intermediary, Internet Commerce.

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

Layer One: The Internet Infrastructure Layer

This layer includes companies with products and services that help create an IP based network infrastructure, a prerequisite for electronic commerce. The categories in this infrastructure layer include:

Internet backbone providers (e.g., Qwest, MCI Worldcom)

Internet service providers (e.g., Mindspring, AOL, Earthlink)

Networking hardware and software companies (e.g., Cisco, Lucent, 3Com)

PC and Server manufacturers (e.g., Dell, Compaq, HP)

Security vendors (e.g., Axent, Checkpoint, Network Associates)

Fiber optics makers (e.g., Corning)

Line acceleration hardware manufacturers (e.g., Ciena, Tellabs, Pairgain)

Products and services in this layer build upon the above IP network infrastructure and make it technologically feasible to perform business activities online. The categories in this applications layer include:

Internet consultants (e.g., USWeb/CKS, Scient, etc)

Internet commerce applications (e.g., Netscape, Microsoft, Sun, IBM)

Multimedia applications (e.g., RealNetworks, Macromedia)

Web development software (e.g., Adobe, NetObjects, Allaire, Vignette)

Search engine software (e.g., Inktomi, Verity)

Online training (e.g., Sylvan Prometric, Assymetrix)

Web-enabled databases (e.g., Oracle, IBM DB2, Microsoft SQL Server, etc; only Internet/intranet related revenues are counted)

Internet intermediaries increase the efficiency of electronic markets by facilitating the meeting and interaction of buyers and sellers over the Internet. They act as catalysts in the process through which investments in the infrastructure and applications layers are transformed into business transactions. The categories in this intermediary layer include:

Market makers in vertical industries (e.g., VerticalNet, PCOrder)

Online travel agents (e.g., TravelWeb.com, 1Travel.com)

Online brokerages (e.g., E*Trade, Schwab.com, DLJDirect)

Content aggregators (e.g., Cnet, ZDnet, Broadcast.com)

Portals/Content providers (e.g., Yahoo, Excite, Geocities)

Internet ad brokers (e.g., Doubleclick, 24/7 Media)

Online advertising (e.g., Yahoo, ESPNSportszone)

Internet commerce involves the sales of products and services to consumers or businesses over the Internet. The categories in this Internet commerce layer include:

E-tailers (e.g., Amazon.com, eToys.com)

Manufacturers selling online (e.g., Cisco, Dell, IBM)

Fee/Subscription-based companies (e.g., thestreet.com, WSJ.com)

Airlines selling online tickets

Online entertainment and professional services

It is important to note that many companies are players at multiple layers. For instance, Microsoft and IBM are important players at the Internet infrastructure, applications, and Internet commerce layers, while AOL (before the acquisition of Netscape) is a key player in the infrastructure, intermediary and commerce layers. Similarly Cisco and Dell are key players at the infrastructure and commerce layers. Even though the four-layer Internet Economy framework makes it difficult to separate revenues for multi-layer players, the framework presents a more real-world view of the Internet Economy landscape versus a single-layered measurement process. Further, the multi-layered approach lets us analyze how companies choose to enter one Internet layer, choosing later to extend their activities to the other Internet layers.

Several methods of data collection were used to compile the estimates of the Internet Economy. In-depth research was conducted on over 3,000 companies that participate in one or more of the four layers of the Internet economy. Phone-based interviews were conducted with 2,830 of the smaller Internet players, and just over 100 in-depth interviews were conducted with the largest companies playing in the Internet Economy. In addition, we analyzed company annual reports, product literature and web sites for about 300 of the largest companies to develop a solid understanding of how they fit into one or more of the four layers. Universe estimates for Internet companies were developed from several web-based databases and final Internet Economy revenues were estimated using a combination of enumeration and statistical sampling and projection techniques.

The following conventions and assumptions were used for compiling the research data:

• Companies studied were U.S.-based and generated all or part of their revenues from Internet or IP products and/or services.

• The scope of the research was limited to companies who had revenues associated directly with the Internet. The study did not include second or higher order impacts of the Internet Economy (e.g., an accounting firm generating revenues from pure Internet based companies).

• Revenues and jobs were based on worldwide estimates of U.S.-based companies.

• Revenues were calculated based upon companies’ estimates of the percentage of their revenues that were Internet-related. For the largest 300 companies, we analyzed products and services and categorized them into one or more of the four layers and estimated revenues for each layer using phone interviews, annual reports, and other secondary research data.

• Since most companies were unable to estimate the percent of their total employees dedicated to Internet-related revenues, jobs’ estimates were attributed using the ratio of Internet revenues to total revenues.