Internet technologies and applications have grown more rapidly than anyone could have envisioned even five years ago, opening up brand new frontiers of communication, collaboration and coordination between consumers, businesses and trading partners. What started out as static personal Web pages with photographs to be shared with friends and family or hastily compiled company “brochureware” has quickly culminated into a myriad of highly sophisticated hardware and software applications that are enabling forward thinking companies to leverage the massive and ubiquitous public technology infrastructure of the Internet to create new value for their stakeholders.

The New Industrial Revolution

While still small relative to its physical counterpart, the emerging Internet Economy is similar to the Industrial Revolution that began in the 18th century in potential scope, size and overall economic impact. The Internet Economy is fundamentally different from the physical economy in terms of three key parameters: information, knowledge and speed. These Internet-enabled factors are driving new ways of doing business through “advantaged relationships” with trading partners, knowing and fulfilling customer needs, anticipating future requirements, using online customer knowledge to create new products and services, designing pricing and promotion schemes that match customers’ willingness to pay, and building network-based alliances and partnerships. Smart organizations are dismantling their Industrial Era value chains, and are focusing primarily on information and knowledge intensive components of the value chain. Using the Net to manage relationships with customers and trading partners has become the new secret weapon in the Internet Economy.

The Growth of the Internet Economy: Why should we care?

The growth of the Internet Economy is important not only for analyzing what new business opportunities are created by the Internet, but also for understanding what corresponding changes we are likely to witness in the physical economy. One of the most important aspects of any economy is its growth rate. This relates to the total output produced within the economy. For instance, the change in the Gross Domestic Product (GDP) is an important measure of growth in the total economy. Further, the per capita GDP provides a measure of the overall labor productivity of an economy.

It should be evident that a large part of the growth in the emerging Internet economy will come at the expense of the physical economy through a substitution effect. For example, as busy professionals or individuals, who do not enjoy visits to the grocery store, start buying groceries and prescription medication online, there may be a negative impact on the growth of physical grocery and drug stores and as well as significant changes in inventory and distribution systems in these industries. While there is no reason to believe that consumers will buy more groceries or prescription drugs because of the Internet, the convenience and efficiency gained through the Net are remarkable, which should ultimately reflect in the value added in the new economy.

Even though it has become customary to talk about Electronic Commerce in terms of the dollar volume of online transactions, it is important to consider Electronic Commerce in a more comprehensive manner, as a complete economy with characteristics such as inputs, outputs, size, value added, efficiency and labor productivity. It is imperative that we have a solid conceptual foundation to define various components of this new economy, enumerate the universe of players within each component, measure and track the growth of various components over time, and tie in the results with policy implications. In a study released on June 10, 1999, we presented a model of the “Internet Economy Indicators” along with 1998 size estimates.

Given the nascent nature of this fledgling economy, it is of great interest and importance to assess new developments since 1998, and this report provides the results and implications of our sequel study focusing on the Internet Economy during the first quarter of 1999. Welcome to the second wave of the Internet Economy Indicators research.

Dr. Anitesh Barua
Associate Professor of Information Systems
Associate Director, Center for Research on Electronic Commerce Graduate School of Business
University of Texas at Austin

Dr. Andrew B. Whinston
Professor & Director
Center for Research on Electronic Commerce
Graduate School of Business
University of Texas at Austin