Old and in the Way

By Nicholas G. Carr

According to the new conventional wisdom, traditional companies are about to exact their revenge on the dot-coms. Using so-called clicks-and-mortar strategies, corporate behemoths like Wal-Mart, Sears, Merrill Lynch and General Motors will leverage their relationships with customers and suppliers to crush the virtual pip-squeaks and take over e-commerce. The Internet, in this view, becomes just another sales channel.

The conventional wisdom may be right this time (miracles do happen) but it begs a bigger question: Will the old-timers be any more successful than the upstarts in actually making money on the Web? To put it more broadly, where will the profits ultimately reside in the Internet Economy, and who will capture them?

To understand the distribution of profits in any economy, you have to look at its underpinnings – at the technological infrastructure that determines the way goods and services move, information is shared and transactions carried out.

The core elements of the industrial infrastructure – physical things like highways, railroads, turbines and telephone lines – are visible, easy to understand and, most important, stable. Because infrastructure is hard to manipulate, the organizations that control it came to have relatively little economic power. Caretakers of a fixed system, they have to content themselves with collecting modest tolls. The real wealth and growth goes to the users of the infrastructure – manufacturers, retailers and financiers.

The Internet infrastructure, in contrast, is constructed not of physical things but of information, in the form of digital code. Code is largely invisible, exceedingly difficult to understand and highly unstable. Any software engineer has the potential to modify the code of the Internet and alter, in a small or a profound way, the entire business infrastructure.

The malleability of the Net infrastructure changes the rules of the game. It opens up unlimited opportunities for companies that neither create nor sell goods but simply manipulate the infrastructure to their own benefit. These intermediaries – the search and shopping engines, the content cachers, the affiliate aggregators – become the innovators and the value creators.

The users of the infrastructure, on the other hand, are forced into a reactive posture, having to constantly adapt their business models to the infrastructural changes. Economic power shifts from manufacturers and retailers to intermediaries.

Consider iChoose.com, a new startup that provides price comparisons for Web shoppers. With iChoose, you download a small piece of code onto your hard drive. Then, whenever you put a product into a virtual shopping cart, the iChoose software shows what other e-retailers are charging for that product. If you see a lower price, the product can be easily transferred to a new cart at the cheaper site.

The iChoose story shows how quickly the Internet infrastructure is evolving. Mediation of the buying process is becoming automatic, and it is shifting closer and closer to the point of purchase. Such mediation will not be limited to virtual shopping. As wireless Internet devices proliferate, consumers will be able to easily tap into shopping engines and other Net services as they walk down the aisles of physical stores. The Internet and the industrial infrastructures will begin to converge.

As control over commerce shifts toward the manipulators of the infrastructure, they will be positioned to skim the lion's share of the profits. Look at iChoose's business model. It gives away its price-comparison software free to consumers in order to quickly embed it in the infrastructure. It then makes money by collecting referral fees from merchants and by selling merchants a complementary piece of software that enables them to automatically match the lowest prices. IChoose, in other words, is charging online retailers for the right to sell their products at cut-rate prices. That's a hard bargain. It's also the harsh reality of e-commerce.

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