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Last Updated: Thursday, 3 August 2006, 22:53 GMT 23:53 UK
How the internet transformed business
By Steve Schifferes
Business editor, BBC News website

Fifteen years ago, the early pioneers who launched the world wide web were not aiming to make money.

Internet cafe in Beijing
The internet is a global phenomena

But within a few years, the streets around Palo Alto, California, the home of Stanford University, were buzzing with venture capitalists and dot.com entrepreneurs.

The rents of the low rise offices in Sand Hill Road, the home of the venture capital industry, soared to levels higher than those in London or New York.

Meanwhile, the waiting list for BMWs rose to 5 years, and more and more fancy restaurants were opening in San Francisco's newly trendy SoMa district.

And an extraordinary group of entrepreneurs emerged who convinced US investors that the pot of internet gold was just around the corner.

The first internet company to attract widespread stock market attention was Netscape, led by Jim Clark and Marc Andreessen, who had originally developed the Mosaic browser.

When its shares were offered for sale to the public on 9 August 1995, they tripled in value on the first day of trading.

Boom Times

AOL offices
AOL was a symbol of the might of the new internet businesses

Netscape soon fell victim to Microsoft's rival Internet Explorer browser (precipitating a long-running anti-trust case), but other companies in turn attracted investor attention.

Portals like Yahoo, Lycos, and AltaVista, were the next big thing.

Then there were the companies that provided the internet's backbone, like MCI and WorldCom.

The company that made the switching gear for the internet, Cisco Systems, briefly overtook Microsoft to become the world's largest company by market capitalisation, worth over $400bn in March 2000. (It is now worth around $100bn).

At its peak, one billion dollars a week was flowing into Silicon Valley and its venture capital firms were desperately searching for dot.com investments with viable business plans.

Retailers found backing to launch websites to sell everything from toys (eToys) to pet food (pets.com) to medical advice (webMD.com).

The culmination of the dot.com boom was the takeover by AOL, the biggest internet service provider in the US, of Time Warner, the biggest media company, for more than $200bn in January 2000.

In the five years from 1995 to 2000, the main US tech stock index, the Nasdaq, rose five-fold.

And the boom crossed the Atlantic, with UK travel company Lastminute.com, lead by Brent Hoberman and Martha Lane Fox, floating on the London stock market.

A clothing start-up company - Boo.com - also raised millions before it had even made a sale.

The crash - and its effects

The speed of the boom - which soon led to excesses among advisers and those hyping internet shares - made some sort of correction inevitable.

Boo.com screenshot
Many e-commerce ideas quickly went from boom to bust

And in the spring of 2000 the stock prices of many internet firms - and other high-tech companies - plunged.

Many firms with weak cash flow went bust or were forced into mergers.

The stronger who survived generally consolidated their position -with companies like Amazon, Yahoo, eBay and Google emerging as the dominant players in their class.

It soon became clear that the "network effects" of the internet led to a greater, rather than a lesser degree of concentration online, despite the openness of the internet's formal structure.

From the point of view of the economy as a whole, the internet was dramatically lowering the cost of transactions, especially in the services sector.

And many commentators, not least the then chairman of the Federal Reserve Alan Greenspan, saw these "new economy" effects as a key part of keeping the lid on consumer prices despite the rapidly growing economy.

In many ways, the internet boom resembled the "railway mania" of the 19th century.

Although prices were inflated, and over-investment occurred, the new means of communication, just like the new means of transportation in the 19th century, soon revolutionised many business functions by lowering transaction costs.

And even the over-investment in networks laid the basis for the broadband revolution, which made the internet faster and prepared the ground for the next round of internet expansion.

The quiet revolution

Much of the cost-saving effect of the internet was happening behind the scenes, in the internal functioning of large companies.

Martha Lane Fox
Martha Lane Fox was a poster child for the dotcom boom

This quiet revolution was gathering pace even as the internet bubble burst.

The growth of outsourcing, which led to manufacturing companies moving much of their production to cheaper, overseas locations, could not have happened without the internet.

Indeed, almost every Silicon Valley firm - from Apple to Cisco - outsourced their production to locations abroad, mainly in Asia.

And many back-office service functions, from data processing to personnel, were also moving offshore, particularly to India, where new offshore business services centres were emerging in Bangalore and Hyderabad.

Global - and local

Six years into the new century, it is clear that the internet has become mainstream.

Today few big businesses can afford not to have an internet site to advertise and sell their wares.

And it has become second nature for many people to check out products, prices and availability online before buying.

In the US, retail sales on the internet are expected to reach $170bn in 2006, while forecasters suggest that Europe's online market will overtake the US by 2010.

China is growing even faster, and may have more internet users than the US by the end of the decade.

The UK's largest supermarket, Tesco, is also the country's largest online retailer, and the largest store in the US, Wal-Mart, now has one of the largest websites.

While the internet may still seem revolutionary in increasing the range of available services, such as digital music downloads and voice over internet phone calls, it is also part of our daily routine.

So how much does the internet benefit consumers as well as businesses?

One effect is increased competition, due to more effective price comparison.

Long Tail

This makes markets more efficient, and in the case of online auction house eBay, creates a marketplace for some goods where none existed before.

But the internet has another effect - increasing the range of goods available to consumers.

This is the "long tail" theory, which suggests that as the internet lowers the cost of keeping inventory and storage, it allows firms to keep in stock items that would not be available offline (for example, the range of books available from Amazon.com).

This also benefits consumers who have access to niche products that would not otherwise be easily available.

Finally, the internet is also about time-saving for consumers, where purchase and delivery - as well as information, is more quickly available than ever before.

The internet has been a revolutionary technology, and the speed by which it has transformed business has no real precedent in history.

But after just a single decade of commercialisation, it is unlikely yet to have fully realised its full potential.

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