More hope than reality in Internet revolution

'That the present holders of commercial wealth and power are just going to roll over and let the new generation of entrepreneurs tickle their tummies is just not credible. They'll fight like alley cats'

Everyone these days seems to have an opinion about the Internet and its potential to transform the world. Like much of what's on it, however, the difficulty is separating the wheat from the chaff, the nonsense and noise from the well-informed and perceptive. One person who ought to fall into the latter category is Andrew Grove, chief executive of Intel. What he says has to be treated a bit carefully because as the world's largest producer of computer micro-chips, his commercial interest is in getting as many people wired as possible, regardless of what use or value it is to them.

Even so, he's got an interesting take on how the Internet is going to change many of our industries. Two of the most obvious examples are media and banking.

What the Internet does is provide an alternative method of distribution for media products. Because relatively few people so far are hitched up, its impact is for the time being limited. But once a certain critical mass is reached, which might be put at 20 to 30 per cent of households, then Dr Grove foresees almost boundless potential for by-passing traditional distributors/packagers of media products.

Take our own industry - newspapers. The Internet already allows you to download most national newspapers each morning, and many foreign ones as well. Furthermore, it will eventually allow you to unbundle established products, selecting and customising your newspaper, perhaps automatically, from a series of different titles. This in itself could transform the economics of newspapers. Add in the fact that a very large proportion of classified advertising is likely to disappear on to the Internet, and newspapers as presently configured could well be in trouble.

If this is true of the media, it is equally so with banking and many other service industries. What this means in economic terms is there is likely to be a quite significant shift of wealth away from established centres of value to new and younger ones. The Internet provides a powerful tool for attacking entrenched and dominant market positions. But before we all get too carried away with Dr Grove's starry-eyed predictions it should be pointed out that there are two rather large constraints on the Internet's power to reconfigure the global economy.

The first is a simple commercial one. Joel de Rosnay, director for development at France's Cite des Sciences et de l'Industrie, reckons that by the turn of the century, some $200bn will have been invested world-wide in Internet infrastructure. But the amount of commercial revenue generated by it will still be stuck at just $5bn. What this tells us is that for the time being, the Internet is more about hope than reality - its real commercial value doesn't justify the amounts being spent on it. If they haven't already, bankers and other financiers are eventually going to cotton onto this and the very optimistic business plans on which many Internet projects are based will be challenged. This is going to put quite a brake on growth.

The second constraint is a more brutal one. That the present holders of commercial wealth and power are just going to roll over and let the new generation of Internet entrepreneurs tickle their tummies is just not credible. They'll fight like alley cats to keep their traditional markets and power bases. In other words, there will be a very sizeable backlash, taking political as well as commercial forms.

So although Dr Grove is undoubtedly right about the transforming powers of the communications revolution, he may well be wrong about the timescale. Progress is unlikely to be as rapid as he and others at the cutting edge of these new technologies hope and believe.

What should we be making of the extraordinary rise and rise of the Microsoft share price, which has doubled in less than a year? In part it reflects a wider phenomenon - America's extraordinary stock market bubble. It's also got something to do with hero-worship of Bill Gates. Feted and sought after where ever he goes as a genius and guru, he's now worth more than $20bn. Trailing some distance in arrears are the real economic fundamentals of Microsoft's business and prospects.

I should be careful not to be churlish here, for these are undoubtedly excellent. There can be few businesses in the world where they are as good. Microsoft still has a virtual monopoly of PC operating system software - and monopoly has always been the touchstone of business success. It is also rolling out some promising new products. But can any of this justify the heady valuation Microsoft now commands? The probable answer is that so long as the present boom in US stock markets continues, the Microsoft share price is safe. But if it should falter, then the price looks highly vulnerable.

The two things are linked in more ways than might be thought, for quite a few of the factors that drive the American stock market boom also drive the Microsoft share price. A recent study suggested that perhaps as much as half of US economic growth is being generated by the new computer and communications technologies. While this may be an exaggeration, the point is well made. The American corporate and entrepreneurial renaissance is a technology-driven phenomenon. The belief - now quite widely held in the US, I kid you not - that the business cycle, and therefore the stock market cycle, is a thing of the past, is fed by companies like Microsoft, demand for whose products just seems to grow exponentially. But as everyone knows sentiment can change very rapidly. Here are some of the factors that might eventually swing it against Mr Gates. No monopoly can go on forever, and there are already signs that the Microsoft one is under threat. Ironically, one of these threats comes from the Internet, where there can be no monopoly. Networking can as easily be accomplished using so called "dumb" terminals as through a PC, for the computer power can be supplied centrally. In other words, there may be no long term need for highly priced PCs, the lynchpin of Microsoft's market.

The other threat comes from Mr Gates himself, who is showing an increasing propensity to use Microsoft as a way of indulging his fancy. Money is being poured into Internet-related projects and the pursuit of artificial intelligence like there's no tomorrow. As Mr Gates himself puts it: "We are in a good position to take a very long-term view and invest properly in these things." Whether this is another way of saying that Microsoft can afford to squander its money remains to be seen.

Not that anyone can object, given that Microsoft has no need of funding from the capital markets and is still 24 per cent-owned by its founder. Nor given his track record can anyone challenge the Gates' vision of the world. But does it add up to good long-term shareholder value?