BOOM TIME ON THE NEW FRONTIER As computer networks grow, they will become electronic marketplaces -- and bring on the greatest transformation of commerce since the automobile.
By Thomas A. Stewart REPORTER ASSOCIATE Patty de Llosa

(FORTUNE Magazine) – THE FUTURE of information technology descends upon us in a swarm of buzzwords: global village, electronic superhighway, information age, electronic frontier. Someday soon, cyberspace -- the vast, intangible territory where computers meet and exchange information -- will be populated with electronic communities and businesses. In your home, a protean box will hook you into a wealth of goods and services. It will receive and send mail, let you make a phone or video call or send a fax or watch a movie or buy shoes or diagnose a rash or pay bills or get cash (a new digital kind) or write your mother. That will be just the living-room manifestation of what promises to be a radical -- and rapid -- transformation of commerce and society, the greatest since the invention of the automobile. The process has already begun. In Japan, used-car dealers gather via their computers on Saturday mornings to take part in an electronic auction, buying and selling cars by pressing the button on a joystick. In New York City, a seller of surgical gauze and other medical disposables recently logged on to a global electronic bulletin board operated by the World Trade Center and found a supplier in China. Now, instead of buying from U.S. wholesalers, he sells to them. The largest market in the world -- the trillion or so dollars a day in international currency transactions -- runs almost entirely over networks. During the next few years, electronic markets will grow and begin operating over cheap, accessible public networks -- the so-called electronic highway. Just as railroads opened the West, the highway will open wide the electronic frontier. Whole industries will be destroyed and new ones born; productivity will leap and competitive advantage shift in the direction of small business. The pioneers -- miners and ranchers, railroaders and traders, capitalists and outlaws -- have found that the electronic frontier, like frontiers that preceded it, is at once a realm of boundless opportunity and a harsh, brutal place. The technological basis of electronic commerce is both simple and dauntingly complex. The simple part is that all images and sounds -- a voice, a movie, a document, a tune -- can be expressed in digital code, in streams of ones and zeros. Once digitized, they can be shipped electronically or stored on an electronic shelf and pulled down later. Thus the convergence between computers, which generate, read, and store digital code, and communications networks, which move it around. Once the networks are fully digital and sufficiently capacious, anybody can send anything to anyone else -- a note to a neighbor, a World Series game to millions -- choosing any form, whether video, voice, text, or a combination. The complexity -- and opportunity -- is in making the network easy to use (with electronic directories, for example) and developing the services it will make possible (electronic shopping malls, say). A simple transaction, < like buying a security analyst's report or dialing up a movie, might involve several ancillary services -- Yellow Pages that locate the seller, electronic Better Business Bureaus that vouch for his integrity, and on-line banks that approve credit and transfer funds. The rise of electronic networks is nothing short of staggering. Of the 100 corporations on FORTUNE's 1993 list of America's fastest-growing companies, 15 either operate or supply networking equipment. The market for networking between companies barely existed half a dozen years ago; today it stands at $1.5 billion a year, and it will mount to anywhere from $10 billion to $40 billion annually by the turn of the century. Telephone and cable companies are spending billions each year to upgrade their circuits -- laying fiber-optic cable to widen data pipes and installing fancy routers and switches to direct the flood of electronic commerce. Most stunning of all has been the growth of the Internet, a loosely confederated network of networks, public and private. They are linked through an array of data communications circuits and use a standard way of addressing and sending data so that a computer with an Internet connection can relay information to any of the others. Anyone who installs the necessary software can set up his computer as a ''host'' that other users can connect to and get access to the net.

The Internet evolved from a Pentagon network for academic and defense researchers. The National Science Foundation took over management of the Internet ten years ago and in 1988 increased the capacity of its circuits. The number of users exploded. Says Vinton Cerf, president of the Internet Society, an advisory group: ''Internet is growing faster than any other telecommunications systems ever built, including the telephone network.'' Any estimate of its size is obsolete in hours. In March some 10,000 networks were part of the system. By July there were over 14,000 -- the number doubles every year. The Internet reaches from Greenland to Antarctica, connecting more than 50 countries. In the six months that it has been available in Russia, more than 6,000 host computers have joined, says John Quarterman, editor of Matrix News, a newsletter that tracks the network's growth. In New York City, Stacy Horn, 37, owns a small Internet service called ECHO (for East Coast Hang-Out). She calls it ''an electronic cultural salon, like Gertrude Stein's living room in Paris.'' ECHO is expanding so fast -- membership doubled to nearly 3,000 between late June and mid-August -- that it took over every free phone line in her Greenwich Village neighborhood. New York Telephone had to run a separate cable to Horn's apartment. The Internet's growth will inevitably slow -- at current rates, everyone on earth would be connected by 2002 -- but Cerf says a reasonable estimate is that 100 million people will be using the system in five years. The Internet has become the de facto electronic highway. Not the six-lane interstate of the near future, but something akin to the old U.S. highway system. It has its U.S. 1 and Route 66 -- the original National Science Foundation network, plus others built by companies like Sprint and UUNet Technologies of Falls Church, Virginia. Connected to them is a filigree of smaller roads: corporate networks, regional and local access providers like Stacy Horn, and so on. The Internet already serves as a way to send mail and documents, supports a radio station and several publishers, and transmits faxes for one-fiftieth of what faxing usually costs. It has transmitted TV and a movie, and this fall may broadcast a congressional hearing live. Because of customer demand, access to Internet E-mail has become de rigueur for on-line services like CompuServe and America Online; Prodigy, the last holdout, will begin offering members Internet mail soon. Businesses have flocked to the Internet as excitedly as sea gulls to a clambake. Nothing is supposed to traverse the NSF lines that isn't scientific or educational, but that rule, never strictly enforced, has become irrelevant as alternate routes proliferate. NSF official Stephen Wolff says 58% of U.S. Internet addresses belong to people who got them through a private employer or one of the 60-odd commercial access providers. The other addresses belong to educational institutions, governments, and nonprofit organizations. The U.S. government pays less than 3% of the Internet's operating cost, Wolff estimates. The rest is borne by users: Each pays the cost of operating his own host computer, out of university budgets, subscriber fees, or other sources. There is no charge for sending data via someone else's computer or network lines, just as Nebraska doesn't make Kansans pay for using its highways. This do-it-yourself approach to funding is why the Internet is so inexpensive to use. More and more the network is open to newcomers. And coming they are. Says $ Paul E. Peters, executive director of the Coalition for Networked Information, a Washington, D.C., group that represents primarily research libraries: ''People on the Internet are talking as if they are Native Americans, and the Pilgrims are on the shore. They think of this as an Edenic environment, a garden, and hear over the horizon the combines coming to harvest its fruits for commercial purposes.'' The network of the future, evolving out of the Internet, will have two characteristics that make it ideal for business: universality and low cost. Every network will be able to communicate with all others. As companies open gateways to the Internet from their networks, and as telephone, cable TV, satellite, and other networks convert to digital transmission, the great electronic frontier will lock into a compatible handful of switching standards. A user might spend most of her time inside one fenced-off private network (handling internal company data, say) but will be able to swing out onto the highway to reach another network (a customer's, for example) as seamlessly as making a phone call. Moving around on the Internet now involves arcane commands that can befuddle even experts. That will change soon: Companies that provide network services will compete partly on ease of use. Says Carl Malamud, founder of Internet Multicasting Service in Washington, D.C.: ''A lot of this 'too hard to use' stuff will go away. Radio was so messy for the first 20 years, it wasn't funny. Cars ditto -- you had to be a mechanic to drive one.'' As to cost: Already computers aren't a lot more expensive than TV sets. As the price of computing power continues its endless skydive, it is reasonable to expect that a full-featured information appliance -- combining the functions of computer, phone, TV, and so on -- will soon cost about what a TV does today. It will deliver basic digital services, including video phone calls, movies on demand, E-mail, banking, and shopping. Moreover, it will replace add-on gadgets that drive up the cost of furnishing a middle-class electronic cottage, such as VCRs and answering machines. The price of equipment is the least of it. A bigger saving is the cost of transmission. Jordan Becker, a vice president of Advanced Network & Services, which built the NSF network, estimates sending an ordinary one-page E-mail message from New York to California via a commercial on-line service and the Internet costs about a penny and a half, vs. 29 cents for a letter and $2 for ! a fax. As the network expands to handle data-intensive traffic such as video, the cost per bit will fall faster than Custer's cavalry. Says Mitchell Kapor, founder of Lotus Development and now chairman of the Electronic Frontier Foundation, a public-interest group: ''If video is affordable, then the cost of plain old text messages has to be near zero.'' The biggest boon might be the cost of cybernetic ''land.'' In The Frontier in American History, Frederick Jackson Turner called free Western land ''the most significant thing about the American frontier'' -- a gift of capital that enabled pioneers to set themselves up as farmers, gold miners, and merchants at a fraction of the cost back East or in Europe. On the electronic frontier, the capital you need to stake your claim is trivial. And the free land never ends. Inside your gateway you can create as big a spread -- as vast a business -- as you please. These electronic freeholds will alter every business. Says Benn Konsynski, who is establishing a center for electronic commerce at Emory University in Atlanta: ''No markets are immune from networking technologies. They will change how buyers buy and sellers sell.'' Working with Sprint's high-speed data network, Microelectronics and Computer Technology Corp. (MCC), the Austin, Texas, consortium of 80 major U.S. high-tech companies, has introduced a service that shows how an electronic marketplace works. When EINet (for Enterprise Integration Network; pronounced Eee-eye-net) becomes widely available this fall, anyone with an Internet link will be able to do business electronically. EINet is for business-to-business transactions, though it could offer consumer services too. On EINet, someone looking for, say, office products will find potential sellers in a Yellow Pages-like directory. From his computer, he can thumb through a catalogue and even call up a video demo. He can talk or exchange E- mail with the seller, enter a purchase order, and pay. If the parties want a long-term partnership, they can set up full electronic data interchange (EDI) to permit just-in-time delivery and automatic inventory replenishment. The only piece missing at the moment is the payment mechanism -- banks on the network to provide electronic funds transfer and credit services. MCC expects to make those arrangements with Citibank and Visa. Passwords and more sophisticated security systems are built into EINet, including the option of sending encrypted data. Therefore users can do business in public on the Internet with little fear of eavesdropping or intrusion, and at a fraction of the cost of having a closed, bilateral link. Such private links, typically over leased phone lines, are familiar in a variety of industries. Wal-Mart's electronic ties to major suppliers like Procter & Gamble, for example, have allowed both companies to slash administrative and inventory costs, giving the big retailer one of its most powerful weapons against Main Street. More than 40,000 U.S. companies use some form of EDI. Still, says Gregory B. Hartner, CEO of the EDI Association in Alexandria, Virginia, ''we're to the right of the decimal point in terms of the number of potential users.'' That's because leased lines, which cost between $60,000 and $100,000 each to set up and thousands more per year to operate, are a major expense for big companies and effectively beyond the reach of small companies with many customers.

EINet could open the floodgates. MCC vice president Roy Smith estimates that a comparable link over EINet could be established for less than $20,000, plus operating expenses. One giant American retailer, experienced at using EDI with big suppliers, is having serious discussions with MCC about using EINet to extend electronic partnering to all its vendors, no matter how small. While EINet could become the first universal electronic marketplace in the U.S., specialty markets are already as common as flies on cows. There are electronic markets for aircraft parts and used textbooks. Database services like Mead Data Central's Nexis and Lexis are old-timers on the electronic frontier, eagerly awaiting the day when a secure, cheap, public network will let them cut back their use of leased lines (and possibly lower their prices). In California the American Information Exchange allows consultants, software companies, and others to find one another on-line, negotiate deals, and ship reports and computer code. These markets need two ingredients to reach their full potential. First is easy access to and from a universal utility -- the electronic highway that's abuilding. Second is a package of core services, chief among them security. The public network must be at least as safe as any bank network, so no one can peek at your transactions or muck around in your records. On-line commerce also needs authentication services, so you know the person on the other end is not an impostor. And it must have financial services, including not only credit but electronic cash as well. These services either exist already or soon will. As on-line trade booms, the effect on business will be profound. Electronic commerce dramatically lowers transaction costs, an enormous expense. According to D.J. Crane, a vice president of GE Information Services, the administrative cost of trade between companies in the U.S. -- selling and purchasing, billing and paying handling logistics -- amounts to $250 billion a year. The high cost of dealing across company boundaries has been a powerful spur to vertical integration. As transaction costs fall, says John Hagel III, a partner at McKinsey & Co., ''we're going to see a widespread disintegration of U.S. business and the emergence of very different corporate entities.'' Companies will focus on a few core activities and unbundle the rest. In a fully electronic environment, the entire value chain might be dismantled and reformed. Take distribution. A manufacturer, focusing on his factories, could turn over logistics to what used to be a freight forwarder. That company, rather than own and manage a fleet of trucks and ships, might rent the vehicles it needs, as it needs them, from a sophisticated leasing company that knows what's where, what's full, what's empty. Each party -- manufacturer, logistician, lessor -- manages its assets more efficiently than before. Says Crane, who works with GE Capital, a major lessor of transportation equipment, and its customers on just such reconfigurings: ''This is changing the business of being a middleman. Forward-thinking companies are taking up positions as middlemen for information, not goods.'' The remaking of the value chain means a shift in power to small business. Says Michael Strangelove, publisher of the monthly Internet Business Journal: ''Entrepreneurs will be less isolated. They can very quickly get in touch with a host of suppliers or customers.'' When a digital highway circles the globe, the fellow who builds a better mousetrap will find that the path to his door already exists. Malamud of Internet Multicasting Service is one such electronic entrepreneur. He produces a weekly radio program distributed over the Internet, sponsored by Sun Microsystems and O'Reilly & Associates, a publisher. Internet Talk Radio began broadcasting in March; users whose computers have speakers can download Geek of the Week and other features onto disks and listen whenever they want. Says Malamud: ''In three months and for ^ less than $100,000, I got a radio station that reached 30 countries the first day.'' Small businesses will also gain electronic access to capital assets they couldn't afford before. In South Carolina, the Southeast Manufacturing Technology Center is developing a ''virtual factory'' whose computer- controlled machine tools small manufacturers can use by sending instructions over the network. The implications of such asset sharing are heartening. By enhancing the productivity of capital, it can strengthen U.S. competitiveness. Says Stanford economist Brian Arthur: ''The U.S. is perfectly suited for this kind of economy. It calls for a lone-cowboy type -- Steve McQueen and James Coburn.'' It is a commonplace that the big winners on the electronic frontier will be ''content providers'' -- those who make the movies, write the books, and build the databases. But saying content is king is too simple. When anything can be put on the market with a couple of clicks of a mouse, there will be even more stupid movies, dull books, sloppy data, and bad analyses -- ''infoglut,'' in the aptly ugly term of Christopher Locke, editor of Internet Business Report, which made its debut in August. The Paleys and Sarnoffs of the information age will be those with the taste, judgment, and elan to offer the right mix of content, one that attracts a like-minded community of users who then meet and mingle with one another. Those people in turn will enrich the community by adding services of their own. In a business network they might be bankers, consultants, or engineers for hire. A town's network might attract local newspapers, civic groups, or teenagers advertising to mow lawns. The enormous market for entertainment, whether it's movies or interactive games, will pay for much of the construction of a high-capacity highway to the home. The existing highway -- the Internet in particular -- will connect with it, widening its circuits and its reach, driven especially by burgeoning business-to-business markets. And off all these arteries, enjoying full access to them, will be hundreds, thousands, tens of thousands of smaller communities, linked by geography, line of business, or special interest. ECHO's Stacy Horn talks about what she should earn when her electronic salon fills up with the 6,000 to 10,000 people that she figures is its ideal size. Income she calculates at $19.95 a month per person; expenses consist mainly of phone charges and administration, ''but I can automate most of that, like billing.'' Then she says, ''I expect to become very rich.''