No one doubts the extraordinary growth potential of e-commerce, but the truth is gradually dawning that only a tiny fraction of the players will make it. This raises two questions - what are the direct effects on the high-tech industries of such a shake-out, and are there wider macro-economic implications for the world economy?
The first is easier to answer because we have a lot of experience of the sort of cycle new industries inevitably seem to follow. First they attract hundreds or thousands of new entrants; then though demand grows it cannot sustain all of these, the bubble pops and most of the companies go under; then the industry gradually consolidates into a few giants and a larger number of specialists. Almost every new industry from the railways to the computer manufacturers has gone through this process. These swings in the actual industries were reflected and amplified by swings in the financial markets: just as there was a railway boom, there was a railway crash. The only difference with the Internet is that everything is happening particularly quickly.
So we can say with a high degree of confidence that when the financial shake-out in Internet stocks comes, it will be followed by a parallel shake-out in Internet companies. The firms simply will not be able to sustain continuing losses because the fall in their share prices will make it impossible for them to raise enough new capital to fund those losses. The game will accordingly change from "how do we attract more customers?" to "how do we make money out of the customers we've got?".
If the rumbles of the last couple of weeks do develop into a real shake- out, what changes should we expect to see in the structure of the industry? My guess would be that over the next couple of years the following things will happen.
First, it will become a "normal" business. Of course, it will not be mature - there is a still a decade of very rapid growth - but people will stop thinking of it as qualitatively different from other businesses. Conventional companies will tend to absorb the specialists. For example, Internet banks will disappear as all banks improve their Internet access and services. All retailers will add an Internet sales arm to their existing network, using the fact that they also have high street presence as a lever to boost confidence in their on-line sales. And so on.
Second, the high-tech industry will focus on people who hate high technology. Most new mass consumer technologies are easy to use: the only significant exception, requiring special training, is the car. The computer is relatively difficult - more difficult than, say, a television or a telephone - so is an inherently unsatisfactory access point to the Net. We don't yet know the extent to which mobile phones and televisions will supplant the computer as an access point to the Internet, but we do know the access via the computer will have to be made much easier. So expect a surge in efforts to "denerdify" the technology. Making money out of the technology will turn, in fair measure, on the ability of service providers to make it more friendly.
Third, expect business-to-business use to surge. Because most of us encounter the Net as private individuals, we tend not to spot its potential for streamlining relations between businesses. The ability of producers to integrate their commercial customers into their systems is an enormously important way of making the production and delivery of goods and service more efficient. The more a producer can share information with a customer and vice versa, the more each can tune needs to each other. This will not be affected by the market for Internet stocks, or even by what happens to e-commerce in general. If the probable micro-economic impact of a fall- out in technology shares on the industry seems in many ways to be helpful, what of the macro-economic impact on the world economy?
Here too there are precedents, examples of the extent to which a financial shock is transmitted through into an economic one. The analytical problem is that every shock is different. As a result we have really no idea of the extent to which a fall-out in technology share prices becomes a more general fall-out in all share prices.
In any case this is really only a US phenomenon. You would not expect a re-rating of one sector, albeit an extremely important one, in one country to have an enormous impact on the world economy. One of the big lessons of the most recent regional financial crisis, that of east Asia two years ago, was that the impact on the regional economies was bigger than most people expected, but the impact on the world economy was smaller.
That may happen again. If the collapse of technology stocks gathers pace there may be quite a big impact on the US, enough to slow growth to a crawl if not to push it into recession. But the rest of the world may manage to escape more lightly. Open a newspaper on either side of the Atlantic and the business stories are very largely related to the new high-tech industries. But while they are generating most of the growth in the US at least, they are still a small proportion of the total economy, in most countries less than 5 per cent. So, rationally, the impact ought to be limited. The problem is that reason does not always dictate human behaviour.
So there is a danger of contagion. Just as the east Asian collapse in emerging markets threatened the stability of all emerging markets, so there are the twin dangers that, first, a severe reverse in technology stocks could affect other stocks, and, second, a reverse in the US could lead to reverses elsewhere. We don't know whether this means trouble, we can't know how serious that trouble might be, but we do know where to look for it.Reuse content