How is networked digital technology changing the economy?

Your Name:

Your e-mail address:

Subject: Bill's Tribute Band Quiz

Please enter your message below:
Sukie Jones.......... Sabbra Cadabra....... Soft Parade.......... Voodoo Child......... Dressed to Kill...... Time of Dying........ Theatre of Pain...... Power Windows........ Tramps Like Us....... Unforgettable Fire... --------------------------------- Don't forget your postal address:

I will post the winner's name and the correct answers in this column after I've received the winning entry. Employees of Web Publishing Inc., other contributors to this magazine (that means you, Hal Stern), and New York City residents, are disqualified.

The Digital Economy: shifting from atoms to bits
I came into The Digital Economy expecting some sort of definition of a digital economy. I would not say that the book provides one, but it does map out a series of levels that companies and (slowly, painfully) government are climbing to achieve benefits made possible by internetworked digital information. One succinct definition of a digital economy is the economy that occurs when an industry's products change, as Nicholas Negroponte would put it, from atoms to bits.

This shift from atoms to bits is already happening in a few industries, like media and publishing. The magnitude of this change is immense, especially for traditional industries. And yet these same industries underestimate it constantly. Most of them think of "digital" as simply another output format or product delivery mechanism: e.g., they can "repurpose" a series of newspaper articles as a book, or a book as a "shovelware" CD-ROM. Or, they think of digital technology as something for automating back-office functions like payroll and accounts receivable.

Such thinking is short-sighted; it is like implementing digital cash in retail stores, but not on the Internet. Atom-based products, like books and newspapers, are not going away, but their production is being pushed out to the fringes, so that it can be done at the last possible minute and only in the exact quantities required.

There are many reasons why it's preferable to work with bits instead of atoms.

Klingon stew and business suits
I'd like to use a hokey Star Trek analogy to suggest the magnitude of this change. On Star Trek, when you want to eat, you walk over to the food replicator, tell it what you would like, and it produces the food for you instantly. In other words, Star Trek envisions a world where food is digital. Think about the implications for the food industry: no inventory, no grocery stores, no refrigerators or freezers; half of the world's trucks, trains, and planes would not be needed; neither would agriculture, livestock, nor the chemical factories that produce some of the sludge that passes for food nowadays. It would all be done with networks and mass storage. Instead of farmers, truckers, fishermen, butchers, and chemists, you would need IT specialists to run your food business.

A less extreme example is the apparel business. During the 1980s, when investment bankers were admired as role models, the price of tailored business clothing rose to ridiculous levels. It became impossible to get a decent men's wool suit for under $500. Then came the stock market crash and the advent of "Casual Fridays." The president of Paul Stuart, that highest-of-high-end men's stores in Manhattan, made some sniffy remarks in public about the end of civilization, as he carried on selling suits for four-figure prices to a dwindling crowd. Meanwhile his competitors either lowered prices (as was the case with Brooks Brothers and Jos. A. Bank) or went out of business (Wallachs).

All of these stores missed an important point. In today's world, the problem with buying a suit is not just the price, but the calendar on the wall of the dressing room that gives a date three weeks into the future when alterations will be ready.

As Tapscott points out in The Digital Economy, a Korean businessman named Sung Park figured this one out on a business trip to Hong Kong, when a custom tailor made a complete suit for him within one day. (Tapscott does not comment on the fit or quality of the suit, which are widely variable in Hong Kong, but leave that aside.) Sung Park started a company called Custom Clothing Technology, which works with Levi's to provide mass-customized jeans for women, who have a hard time finding jeans that fit well. Salespeople in Levi's stores take measurements on computers, which send the data to a factory. The factory makes the jeans to specification and sends them to you within that same three weeks -- and Custom Clothing plans to make this turn around even faster. Another company, InterActive Custom Clothes Company in New York City, does this on the Web (see Resources for the URL).

The shoe industry is also seeing this kind of change. The Custom Foot, a small chain of shoe stores in the New York metropolitan area, can deliver a wide variety of stylish, quality Italian shoes to your house in less than a month. It is a Godsend for people with odd-sized feet, like my wife with her ultra narrow quadruple-A's.

Consumers pay for these early efforts -- $10 extra for Levi's custom jeans; a modest surcharge at Custom Foot compared to 9 West or Kenneth Cole. But there's no doubt that three years from now, all major clothing stores will offer mass-custom articles at no extra charge, or at least, with the customization charge built in to the price. These stores will have built up the technology infrastructure necessary to order, manufacture, bill for, and ship custom clothing on a large scale.

Every industry with information-based products can benefit from a networked digital infrastructure. The major media companies should be at the forefront of this movement, because 100 percent of their products' value is bound up in atoms that are turning into bits. But many of them are not adopting new technologies because the processes they use to create the atoms are so deeply engrained into their organizations. Ironically, the newer companies -- the ones like C/Net, without traditions of manipulating atoms to produce atom-based information products -- are moving the most quickly; it is easier for them to adopt the required processes, skills, and organizations.

The Book of Leviticus
Tapscott's book shows what effect these changes have on individuals, companies, industries, governments, and the economy itself. The book is a massive, open-ended combination of knowledge and speculation, inferences and predictions, but Tapscott tames the beast by breaking it down into various categories and lists of phenomena, all united under a scheme of five levels of transformation (an expansion of the three levels he used in Paradigm Shift). Each of these levels requires tools and technologies, as follows:

1. The Effective Individual: tools and technologies that empower single people to learn and get quality work done efficiently. In other words: personal productivity tools, including applications like Microsoft Office as well as information sources such as the Web and CD-ROMs.

2. The High-Performance Team: bringing groups of people from different disciplines together to get a specific project done. This implies workgroup computing, as exemplified by Lotus Notes.

3. The Integrated Organization: uniting the oft-derided "islands of information" to make information seamlessly available throughout an enterprise. I.E, enterprise IT architecture, as attempted by IBM and DEC during the mainframe and minicomputer days (SNA, DECNET), and as implemented by virtually nobody nowadays, except maybe new, small companies, Wal-Mart, and FedEx. Most CIOs' dreams of power and glory stop here.

4. The Extended Enterprise: reaching out to customers, suppliers, and other business partners in what Bill Davidow and Michael Malone have called the virtual corporation. This kind of arrangement has existed for a while through proprietary value-added networks (VANs), as epitomized by the one used by Wal-Mart with its suppliers, and as radically enabled by the Internet.

5. The Internetworked Business: this is Tapscott's term for companies in a bits-based industry.

This list of levels permeates Tapscott's analysis of several companies, industries, and government. He uses it to evaluate trends in industries as diverse as aerospace (Boeing's revolutionary 777 aircraft design), shipping (FedEx's package tracking), retail (Wal-Mart, of course), and even wine (Clos LaChance Vineyards). He devotes special attention to two favorite whipping boys of modern life: health care and government. Like various other evangelistic techno-zealots, he paints a picture of a rosy future in which -- despite privacy concerns, which he raises separately -- health care is universally available and of consistently high quality, thanks to networked digital information. Same for government services. Yeah, yeah, we know, we know. One difference with Tapscott's book is that, instead of merely calling for a revolution in health care and government, he cites several specific examples of technology that is being used to improve matters in local communities.

In addition to the five levels of transformation, Tapscott identifies 10 technology shifts and 12 "themes of the new economy." The technology shifts start in familiar territory but get further and further out:

1. Analog to digital.

2. Semiconductor to microprocessors.

3. Mainframe/minicomputer to client/server.

4. Thin to wide bandwidth.

5. Dumb to intelligent clients.

6. Forms of data separated to integrated multimedia.

7. Proprietary to open systems.

8. Dumb to intelligent networking (e.g., agents).

9. Ad-hoc to object-oriented software development.

10. GUIs to advanced 3D user interfaces.

It's clear from the discussion of these 10 technology shifts that Tapscott is an idealist. Will agents ever do anything useful? Do avatars in 3D environments really add any value? Is Unix really an open system? Those points and others are not axiomatic; they are matters for debate.

Justifying the cost
A much more interesting point Tapscott raises is about companies' adoption of new technologies, or as he calls it, "the Investment Dichotomy." You try to sell a major IT project on the basis of strategic benefits -- new ways of working, new types of products, better customer service, etc. -- but the senior executives don't believe you, because your arguments seem too far-fetched. Instead, you are hobbled with having to sell the project based on mundane, tactical, incremental benefits, like reduction in the time it takes to perform a given task.

Many of you undoubtedly know this from personal experience. Who wants to spend precious time deploying a whole new system merely for incremental benefits anyway? The dichotomy is preposterous by definition, yet we all must live with it.

A colleague of mine manages the editorial library of a large metropolitan newspaper, which had a minicomputer-based archive of text, a large collection of images in hardcopy and negative form, and a small, standalone, "toy" digital image archive system. She wanted to replace all of these with a single digital archive for all media types that could be searched from anyone's desktop -- technology shifts number one, three, five, and six above. Primarily, she had to justify the investment on the grounds that it would reduce the time it took to find images during the nightly page-layout process. Shorter layout time means that later news stories or sports scores can be incorporated into the paper, which leads to more "scoops," which in turn means more readers and, thus, more revenue.

My colleague did manage to get her investment approved, and the system was successfully deployed. Now the newspaper is finding many additional benefits that they had not considered in the cost justification. For example, newspaper readers often request copies of memorable photographs. If you call a paper and ask for a photo, they will probably accommodate you, but it's a non-scalable manual process -- involving negatives and darkrooms -- that makes little profit and draws photo people away from more time-critical work on the daily paper. However, with a digital image archive on the network, and a good-quality color laser printer, a reprint can be made in very little time, for the price of a sheet of glossy paper. When a local sports team won the championship, my colleague's paper was deluged with requests for photos -- which they were able to handle easily, for a virtually effortless and sizeable profit. Now the paper is able to advertize reprint services and realize that extra revenue on a regular basis. That's a strategic benefit that fell outside of traditional cost justification.

Tapscott's third important list is the Twelve Themes of the New Economy:

1. Knowledge: a thing whose value is of critical importance but difficult to quantify.

2. Digitization: bits have more value than atoms.

3. Virtualization: virtual is sometimes as good as, or better than, real. See the tribute band contest above.

4. Molecular: organizations can exist in disembodied, "molecular" form.

5. Integration/Internetworking: self-explanatory.

6. Disintermediation: networked information availability renders middle-entities, like middle management and brokers of various sorts, redundant.

7. Convergence -- of computers, communications, and content.

8. Innovation: empowering workers for leadership and creativity, not shackling them with hierarchies and bureaucracy.

9. Prosumption: consumers collaborating with producers on products, like the Levi's jeans or Custom Foot shoes mentioned above.

10. Immediacy: see the men's tailored clothing example above.

11. Globalization: rendering local political boundaries irrelevant.

12. Discordance: lack of stability in the world.

By enumerating this list, Tapscott covers the ground occupied by the majority of recently-published books on business and technology trends, including his own earlier work. As I said, this is a complex work. Tapscott is clearly a brilliant man, one who appears capable of holding several times as many ideas in his head as the average person. He spends about 90 percent of the book organizing these ideas, and supporting them admirably with all sorts of facts and statistics. In the last chapter, entitled The New Responsibilities of Business, he attempts to bring them all together.

That book's final chapter raises many difficult issues. For example: we are heading towards a world with a global digital internetworked infrastructure that can support the majority of business and leisure activities. In this age, there will be little need for corporations to have physical manifestations; in place of the large corporate campus will be a network of "molecules" that perform functions as cheaply and efficiently as possible. People will be knowledge workers who can deploy their knowledge for anyone, anywhere.

What is the role of government in this scenario? Who can or should provide services, especially for the disadvantaged, when government is hopelessly ineffective and corporations claim responsibility only to their shareholders and customers? Is the nation-state doomed when geographic boundaries cease to be meaningful, or is the corporation some form of new virtual nation-state? Is the notion of nationhood even meaningful anymore? What should the relationship be -- if any -- between employment, citizenship, and one's personal life?

The last chapter is thick reading, not because of dense jargon -- on the contrary, the writing is clear -- but because of the deepness of the ideas Tapscott tosses around. After a book full of ideas neatly categorized, listed, sliced, and diced, Tapscott throws everything together into a daunting yet heady stew. The abrupt change in style between the body of the book and its final chapter might have helped, but in any case, the effort required to leap into Tapscott's thought-provoking world is worthwhile.