Internet and the Economy

1. Internet and the Economy

2. 5 Great Inventions during IR • Electricity • Internal Combustion Engine • Petroleum, natural gas, chemicals • Communication • E.g. telegram (1884), photograph (1880s), Radio (1899), TV (1911) • Running water, indoor plumbing, Urban sanitation infrastructure

5. Industrial Revolution • def.: any great acceleration of output and productivity growth, pervasive and economywide • 1st: 1760 in Britain • 2nd: 1860-1900 in Europe and US

6. Living Conditions Before 2nd IR • Housing • 1882, 2% of NY’s houses had water connections • animal wastes on streets • Power • Horse • Working Conditions • Long working hours: 60-hr week • Dirty and dangerous working conditions

7. New Economy • Production growth – centered at the production of computer hardware, telecommunication equipment and durable manufacturing

8. Contemporary impact of computers and the internet • Declining cost of computer power

9. Introduction • Development of Moore’s Law In 1975, he redrew his plot of component densities doubled every 18 months keeping cost constant. Moore’s Law : Every eighteen months, processing power doubles while cost holds constant.

10. Introduction • History of IC industry Vacuum Tube Transistor planar Integrated Circuit ( IC )

11. Competitive force from the semiconductor industry. • Pressure from software company (complementary products) • Consumer expectations.

12. Keeping up with the race “Either you and your 999 colleagues double the performance of our microprocessors in the next 18 months, to keep up with the competition, or you are fired” (Andrew Odlyzko on the Internet, 1995) A forum for semiconductor companies to work collectively to achieve the exponential growth of the Moore’s Law.

13. Microsoft.com Home | Site Map Complementary Software • “Word” first version program has 27,000 lines, the latest version had about two million. • Marginal Cost of additional processing power ~> Zero

14. Economic Impact • The Information Age: • Faster, Better, Cheaper • You get more by less • MOORE (1998): "If the automobile industry advanced as rapidly as the semiconductor industry, a Rolls Royce would get half a million miles per gallon, and it would be cheaper to throw it away than to park it."

15. Transistor Density on Micro Processors and Memory Chips

16. Productivity: Processor performance in millions of instructions per second (MIPS) for Intel processors, 1971-1995

17. Cost

18. Total PC Sales

19. CPU/PC Average Lifespan • By 2005 the average lifespan will level off at 2 years * *based on 1998 National Safety Counsel Report - Electronic Product Recovery and Recycling Baseline Report

20. Limitations and Barriers • When will Moore's Law end? • Is this the right question? • What might slow it or stop it? -Physics limitations? -Design challenges? -Economics?

21. Physics limitations: • The gigabit chip generation may finally force technologists up against the limits of optical lithography. • Think of it as trying to paint a line that is smaller than the width of the paintbrush.

22. Economics: • There are ways around the above obstacles, but the cost may be prohibitive. In fact, economics may constrain Moore’s Law before physics does---an observation that others have called “Moore’s second law.” • The economic law of diminishing marginal returns

23. Another exponential trend in the cost The cost of a new fabrication plant : 1966 $14M 1995 $ 1.5B. Between 1984 and 1990, the cost of a fab doubled, but chip makers were able to triple the performance of a chip. In contrast, the next generation of fabs will see cost double again ,but this is likely to produce only a 50% improvement in performance.

24. Concluding Thought “The wonderful thing about [Moore’s Law] is that it is not a static law, it forces everyone to live in a dynamic, evolving world” Perhaps the very fact that the future of Moore’s law seems unpredictable is what makes hi tech industries exciting and equally part of what drives them on.

25. Solow’s computer paradox(1987) • “ We can see the computer age everywhere except in the productivity statistics”

26. Positive and Negative side of Internet • Benefits: • Email: shortens the communication barrier • E-commerce: provision of vast amounts of free information • *However, no evidence in boosting the productivity growth of economy

28. Computer investment had a near-zero rate of return outside of durable manufacturing • 76.6 percent of all computers are used in industries of wholesale, retail trade, finance, insurance, real estate, and other services. • Only 11.9 % of computers are used within manufacturing.

29. Productivity growth has continue to rise even as investment in information technology has fallen from its late-1990 peak • Confirm new technologies do not automatically lift productivity

30. Negative side: Why Internet can’t improve the productivity growth? • Internet is only substitution of entertainment e.g. download music, play games • Just buying computers was not enough to make businesses smarter • >5% of investment was in computers – too small to accelerate the economy

31. Much investment in Internet web site and infrastructure only represent redistribution of sales rather than creating them • “Dilbert factor” • Dilbert commented, “time lost for loading web pages canceled out all the productivity gains of the Information Age”

32. Since early 1990s, more investment in IT than other kinds of equipment, but often to no effect • 1998, half of IT projects abandoned

33. Just Beginning? • It takes time for information technologies to raise general productivities • Infotech ---just at the beginning • Computer revolution – 40yrs old • World Wide Web – just 5yrs old • E-commerce market spawned : • Fast growing • But too small to speed up a multitrillion-dollar economy

34. Is dotcom shakeout a bad thing? • NO • Because of Darwinian selection in action • The likelihood of firm survival is lower in industries in which the innovative opportunities available to small firms are large. • Internet technologies allows firms to operate on a small scale, and offer many innovation opportunities. This suggests a severe Shakeout.

35. Historical example : car industry • The birth of the car industry in 1890. • In 1908, more than 240 firms • Entry was concentrated in the years preceding the peak, with 490 entrants before 1909, and 233 entrants after 1909. • Only a few left after downturn • Ford & General Motors

36. Shakeout • There are evidence that the prices on the internet are beginning to rise. • In new industries, a build up in the number of firms followed by a shakeout is a well-documented phenomenon.

37. Shakeout • In the case of Internet technologies, parallel to the cycle of Entry and Shakeout, there was also a cycle of Bubble and Burst in the stock market. • That was also the case of railroads in the late 19th, century and the case of electricity in the early 20th century. Are these 2 cycles related?

38. Eletric Dynamo • The classical example of the electric dynamo • It illustrates a parallel process of learning how to use a new technology.

39. The deployment of electricity started by the 1890s, but its impact on productivity was negligible until the 1920s. • The reason was that initially firms replaced the power source, but left the way production was organized unchanged

40. Eletric Dynamo • Initially, firms only replaced steam or water powered motors by electric motors. This allowed fuel savings and improved machine speed control. • However, instead of a primary motor turning separate shafting sections and driving related groups of machines, individual electric motors could be used to run machines of all sizes.

41. Eletric Dynamo • Furthermore, electric wires could replace power transmission through shafts and belts. • The reduction of friction in transmission allowed further fuel savings. • Factories could also be redesigned, with lighter single-story structures replacing costly multistory structures.

42. Single-story, linear factory layouts, allowed a reconfiguration of materials handling, of machine placement, and handling equipment. • These changes in product and process design were the largest source of the productivity gains.

43. Real price of processing power down 99.999%, or 35% per year over the past 30 years. • Electricity prices fell 6% per year between 1890 – 1920. • Real costs of steam power costs dropped by only 50% between 1790 – 1850. • Freight rates only dropped 3% annually between 1870 - 1913 due to rail networks.

44. “The cost of computing has dropped exponentially, but the cost of thinking is what it always was” • – Zvi Griliches, Economist

45. Information Technology • Includes computers, software as well as related digital communication technology

46. IT vs Business Value • Enables complementary investment • Business process • Work practices • Business Model • Innovation

47. Resulted in Reduced cost Improved quality Convenience Timeliness Accuracy Speed Responsive to Customers New Products /Services IT vs Business Value Introduction Historical Context Productivity Paradox Our Viewpoint Conclusion

48. By taking advantage of the new technology’s characteristics, production could be reorganized in more flexible and productive ways. It took several years and experiments to discover this.