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6.3 “The Birth of E-Commerce”
By Alan F. Kay
Unedited Version of "E-Commerce—Historical Perspective",
Global Focus, International Journal of Business, Economics,
and Social Policy, Bernard Baruch College of Business, CCNY,
published by John Wiley and Sons, Inc., XIII,1, March 21, 2001, pp.
37-48 (Lightly re-edited on 1/27/02, 9/8/05)
© 2000, all rights reserved
The Internet Anomaly
Pre-Arpanet E-Commerce
AutEx, Inc., the Innovator
Emerging from the Slime – 1951-1965
To present the opportunity, reason, plan and goals for AutEx, I need to give a little more of the early history of commercial computing that I both observed and participated in.
As a PhD mathematician and engineer working in the defense industry beginning in ’51, I had limited access to the few “giant” experimental computers then under development in universities and government facilities and, if commercially offered, like the ENIAC, were priced at over a million dollars. By ’54-’55, spec sheets appeared for general-purpose digital computers with prices in the $100,000 per copy range. Four companies offered these new machines with the functionality of the personal computers of the early ’80s, but each would occupy a full-size, air-conditioned room, was much slower, labor-intensive (vacuum tube-based), and had severely limited capacity. The four companies were all out of business within a few years. A NYC based-firm, TRG, where I was working in ’55, bought one such machine, the Alwac computer, and used it effectively for many years for scientific and engineering calculations. International Business Machines (IBM), which was to dominate the business for decades, was not one of the four companies. Trying to protect its punch card handling equipment, IBM was quite slow to become a provider of new types of electronic digital computers.
This was all a decade before Gordon Moore, co-founder of Intel, in 1965 when still at Fairchild Semiconductor Co, wrote a paper predicting a fabulous long-term drop in memory cost, spawning what has come to be called Moore’s Law[v], often phrased as a doubling of performance and/or halving of costs of computers every 18 months. In the dozen years before Moore’s paper, there had already been about six or so doublings of cost/performance, so the concept was recognized by those following such things even during ’51-’65, the early pre-historic era. The publicly available history of computers, as well as the millions of computer professionals now working, seem unaware that even in the early prehistoric age the doubling was apparent. It did not begin in `65.
TRG was sold to Control Data in 1963 and it was time for me to take on a new challenge. My experience in using big computers on engineering problems made it logical for me to believe that computers were going to be very big in business. In the mid ’60s, the only business applications of computers were based on the huge mainframes of large companies, which were slowly putting routine clerical functions like general ledger and inventory into large batch processing operations. But that did not interest me. I was excited by the potential of “real-time, multiterminal systems”, then novel, today ubiquitous.
Marketplace Systems Appear – 1965-1980
I appreciated the possibilities of a business on the forefront of the state-of-the-art, that could be a triple win – (1) a good business, (2) the growth potential of being on the cutting edge of computer applications, and (3) further exploration of a life-long personal interest – how groups of competitive entities or individuals respond when exposed to possibilities for mutual self-interest through cooperation. I spent two years on market research for the business plan that gave the venture the greatest likelihood of success. I envisioned the business, in its full-blown form, as developing and operating marketplace systems. The computer could become the marketplace for each of the potentially thousands of commercial and industrial markets. For example, each industry listed in the Commerce Department’s North American Industry Classification System (NAICS, formerly SIC), generally has its own group of suppliers and customers and could be a prospect for a business-to-business (B2B) marketplace system. Professionals in one of these markets would enter their buying, selling, and other transaction-related interests, (brokering, renting, borrowing, bartering, financing, lending, shipping, insuring, credit-checking and extending, appraising, grading, tracking, receiving and accepting, settling, etc.). The computer would flash key items on screens and otherwise process, store, distribute and make available appropriate portions of the rapidly changing database for retrieval and updating in convenient display and print formats, personalized to suit each user’s needs. In short, the computer would be an obedient servant fulfilling each user’s wishes, an honest custodian of each customer’s transaction records, and, most important of all in my mind, an impartial umpire of all the trading and settlement rules and regulations a market required.That vision was grandiose at the time. For starters, I sought the most promising initial niche. The market for block-trading of stocks was my best shot for overcoming the chief limit of early computer-controlled networks, the high cost per bit of communication. If the four character message “B L GM” (Buy Large block of General Motors) flashed on the screens of 1000 institutions and got a nibble, the transaction could be worth at least a million dollars with then-standard commission or mark-up of about $2000. Block-trading had the greatest potential megabucks per bit, and it became my new venture entry, AutEx, Inc.
High Cost -- Works OK with High Value. Zero Cost -- Watch Out!
The high cost on a per message basis, required AutEx always thereafter to
seek to carry highly valued data. This was in stark contrast to the Internet’s zero message
cost, appropriate for collegial researches but also implying that no message was
too valueless to be carried.
Here we must think about both money and socially
redeeming values. For indeed the
Internet became a live invitation to purveyors of junk messages and pornography.
But also E-businesses inevitably exploited this free message system, using
still-dubious business models based on either giving away access to capture
market share or offering “all you can eat” pricing.
This led to an explosion of the e-commerce sector and until the dot.com collapse
beginning in March 2000, of astronomical stock valuations.
Any particular usage, such as child pornography, may be
curtailed by rules and regulations aimed at that usage, but the open invitation
will remain as long as the business models imply unlimited messages can be sent
at zero per-message cost and that e-commerce remains untaxed and subsidized by
below-full cost access to communications systems.
Since I had little background in computer research, only in using
computers to solve problems of commercial value, I had no thought of seeking
government contracts to develop such a system.
It would be ludicrous to expect the government to fund a
project so obviously commercial.
I put up $150 thousand of my own money and sought venture
capital to complete the $700 thousand needed for an AutEx start-up.
The AT&T Hammerlock
AutEx faced a need to link its central computers to the existing telephone
network by the end of 1968.
It was entirely dependent on the good will of AT&T, which
would not tolerate competition in the point-to-point communications business.
The problem was serious. Until the
early `70s every voice telephone connection from point A to point B and every
“private” line or line leased to a non-Bell user had the full bandwidth of a
voice line.
If such a line carried only occasional short messages, the
cost of the line when allocated on a per message basis became extremely large.
AutEx’s computers, by more fully utilizing the carrying capacity of the still
uncomputerized telephone network, had also made a breakthrough in lowering
intrinsic message delivery costs.
Using conditioned lines leased from the telephone monopoly, AutEx’s service
was based on circuits each linking some ten or twenty customers continuously
on-line to its computer.
The computer initially polled subscribers at 1800bps (and
later at higher data rates) and at each poll accepted incoming messages and
delivered outgoing messages.
The standard was not more than a two-second response delay,
like a fast postman walking all the routes in town, receiving and delivering
messages at each house and covering the whole town every two seconds.
What this implied is that AutEx could in principal offer communications message
services commercially for far less than the phone company itself was then
charging. In some cases, AutEx
estimated a cost per message improvement of over ten to one.
Looking ahead to a much later time when the Internet accommodated commercial
messaging services, the packet-switching concept was used with a
cost-per-message effect similar to the polling method used by AutEx.
As the Internet grew the pricing plans of all communications
carriers had to repeatedly cut per-message charges to compete with the Internet
standard of virtually free messages on a per-message basis.
Polling the slightly smart terminals[vi]
at customers locations which shared a line leased from the
telephone company is a communications technique not originating with
AutEx. It had been used by some
large company in-house networks.
When AutEx introduced it, as a part of its marketplace
systems, no one else was offering a general purpose, electronic messaging
service with intrinsic cost per message greatly reduced by polling technology.
Today only Local Area Networks (LANs) use this method.
The zero per message cost makes anything but the Internet too
expensive now to consider for linking business to any segment of the general
public.
One effect of all this was that AutEx turned away from the
possibility of becoming an alternative long distance carrier, as such entities
began to appear on the scene and prosper despite their questionable legality for
a time that ended even before Judge Green broke up the Bell monopoly.
Even though I knew that it could have been an enormously profitable business, I
was not prepared to fight AT&T, as say MCI chose to do. High legal hurdles kept AutEx out of the telecommunications
business, while the much later Internet e-commerce missed this era entirely.
Its battles had been fought and won by others.
Pre-historic vs. Modern, Odd Similarities in a Field of Differences
Since Arpanet was clearly a research project of a government agency, it did
not run into the difficulty with the monopoly owner of the telephone network,
the still childless MaBell, which constrained the commercial development of
AutEx and pushed it down a different evolutionary path.
By the time the Internet had any commercial communications attributes, MaBell
first had been forced to open its networks to computer-controlled communication
and later to divest the baby Bells.
The story of the development of Arpanet, explained in delightfully
clear, non-expert language by Hafner and Lyon[vii],
was familiar to me from the beginning.
There was little competitiveness or secrecy between AutEx and
Bolt, Beranek, and Newman (BB&N), the initial developers of Arpanet.
The Chief Executive Officer (CEO) of BB&N, Sam Labate, joined the AutEx Board of
Directors after AutEx went public in `72.
When Sam retired, his successor CEO, Steve Levy, was Sam’s
replacement on the AutEx Board.
There was one remarkable similarity between prehistoric and Internet
e-commerce. After the bitter
retreat of the “free Internet” netizens and hobbyists movement, many Internet
e-commerce businesses have found user advertising, the ubiquitous banner ads,
to be the first source of revenue, often still their primary source.
In the case of AutEx, by 1970 ingenious subscribers on their
own had learned to lay out supermessage text, which at the time provided exactly
8 lines of 40 characters each, with low-resolution cartoon figures, logos, etc.,
producing the “joke of the day” and similar advertisements with the often
serious and successful marketing purpose of raising the visibility of their
wares.
Both prehistoric and Internet e-commerce over twenty years
apart– almost from their first days on-line – found users looking for
advertising as a means to distinguish themselves from their competitors.
Scattering E-Commerce Seeds Over the Commercial Landscape
Beyond block
trading, which became a de facto AutEx monopoly, AutEx operated a number
of marketplace systems for the securities industry, including various evolutions
of its government bond trading system.
This system was designed and operated for the leading broker who serviced the
major banks and dealers, those designated by the Federal Reserve System as
“primary government dealers.”
Brokers performed the functions of an exchange for the
primary dealers without the necessity of organizing a formal exchange requiring
industry regulation and government oversight.
AutEx also was responsible for the design, marketing, and
implementation to government specifications of the national system for tracing
lost, stolen, counterfeit, and missing securities, authorized by the ’75 Act of
Congress. To this day AutEx operates this “lost and stolen” system as
the designee of the Securities and Exchange Commission (SEC).
The system is exempt from antitrust statutes, a de jure monopoly that requires the participation of virtually
every financial institution in the US.
AutEx also offered marketplace systems for the lumber, petroleum,
motion picture, and railroad industries; for coin, jewelry, machine tool and
used-computer dealers; and, for a time in the securities industry, a corporate
bond trading system and a stock lending/borrowing system.
For every system we successfully operated, we experienced one that failed
because it could not get enough customers to pay the costs. Since we did not have a multi-billion dollar tax-built
infrastructure on which to platform, in those days, we figured we had to get at
least $700 a month[viii] for each full service
online customer just to break even. Today with the Internet in place that number looks
ludicrously high. For every system
that went into operation, we researched probably twenty.
It was a marvelous opportunity to learn about developing and operating efficient
electronic markets and the social and business systems in which they are
embedded – the third of the triple win’s mentioned above.
Hard Lessons from Investors – `70s Style
One overarching
limitation to pre-historic e-commerce expansion was the attitude of investors of
that era. The AutEx Board of Directors, primarily financial types, held
strong beliefs quite common in the `70s.
We need to go back a bit to understand how the consequences
of this attitude cast a pall on e-commerce growth that finally exploded only
decades later. In February `72
AutEx went public and was listed on NASDAQ.
By `73 its first major system outside the securities
industry was a trading network linking about 250 lumber mills and wholesalers in
the US and Canada, up and running with monthly revenues within the year of
$45,000 and system costs of $110,000, a drain that about wiped out company-wide
profit.
AutEx’s stock price tanked from the IPO offering of
$18 to a low of under $1. With the
platform that Internet offered by 1999, AutEx’s capture of the lumber industry[ix] might have sent the stock
price to $180. But in `73 as soon
as the lumber system was discontinued AutEx earnings
again headed up to $1 per share.
Wall Street was dubious, so for a time AutEx stock was
selling at less than one times its earnings, which were about to be announced.
After this experience, the financial types on the Board, which at
that time was everybody except me, insisted that any needed research or
development funds come out of revenues, not from pursuing new investments, even
though that was the only way I had been able to develop the block-trading system
in the first place.
I was not a typical CEO, certainly not one to put
personal financial success above all else, even though I was the largest single
shareholder. As an entrepreneur
with a heavy background in mathematics, science and engineering, although I was
dubious about the Board’s attitude, it did not occur to me to fight them on this
matter, although today CEOs who relish being “tough” now regularly do so.
That development funds had to come from the industries to
which systems were sold became AutEx policy, which I quickly accepted.
In contrast, the Internet was built and operated with a relatively unlimited
development budget for years.
Other entrepreneurs attempting to start marketplace systems faced
similar problems and lack of pre-existing infrastructure.
Slowly attitudes began to change.
Following Metcalf’s Law[x],
successful Internet investors in the `90s learned that for e-commerce,
market-share is an important parameter, preceding profits or positive cash flow.
No one bought that in the `70s.
As a result, only two AutEx systems: “lost and stolen” and
government bonds, i.e. all those whose development costs were funded by the
industries they served, were able to be operated with all new custom-designed
systems.
All other AutEx systems were hung onto the original block
trading system, modified or adapted.
Their capabilities were severely limited thereby.
The primacy of market-share over profits also gained acceptance
because of a growing belief even by venture capitalists that given good people
to invest in, the likelihood that they will ultimately succeed grows with the
investment resources available to them from the beginning.
New thinking by venture capitalists at the 1999 market peak seemed to be: given
the right leadership, you can indeed buy success.
My view even then was that caution is
warranted, since e-businesses still rest on subsidies and
tax-loopholes that will probably be closed at some point.
Profits and positive cash flows are still important and, as
Korea’s chaebol companies have learned, choosing market-share as the primary
goal can bankrupt companies and even their host countries.
Another dot com concept for speeding growth was outsourcing everything
not central to the core business.
In contrast, AutEx developed in-house all the software needed to
operate its various systems, including a complete real-time operating system[xi].
For hardware it had no choice but to acquire the best
commercially available. It was
clearly not cost-effective to develop central computers from scratch.
Nor was it desirable because of the need for quick maintenance and occasional
upgrades and replacements by established, reliable hardware suppliers.
AutEx never needed more than a few computers with the same specifications so it
could expect no volume discounts for central computers, but it was not without
its vendor problems, which were actually more serious for the slightly-smart
terminals it had to place in customers’ locations and could buy in quantities of
hundreds.
In fact, for remote lumber mills in places like the Yukon,
AutEx did design and build a few small, rugged off-line terminals with
single-number dialers.
E-Commerce – 1970-1990. The Battles of Marketplace Sponsors
What happened to marketplace
systems in the twenty to twenty-five years before Internet-based e-commerce
became dominant? Most early
e-commerce consisted of trading systems for the securities
industry. NASDAQ, the
NYSE Block Automation System (BAS), and Instinet came online shortly after AutEx.
Telerate, Reuters, Bridge and others followed a little later.
Bloomberg later still.
With mutually uncompetitive securities trading systems in the early days, we
were all following an old tradition. The securities industry was the place to
introduce new communication technology.
An early application of Samuel F.B. Morse’s telegraph was the
stock ticker. Early buyers of
telephones were stockbrokers.
Why did entrepreneurial inventors, like Ford, Bell and Edison
all arise almost in unison? Credit
Morse as role model. He was not the
first inventor. Inventions had been
getting more ingenious for thousands of years before Morse.
Some had made money from them too, but Morse was the first in
the world to get rich from commercializing his own invention.
He is the patron saint of e-commerce.
All of us new tradition e-commerce entrepreneurs owe Morse
something I’ll call Morse’s Law – Before you can become filthy rich, first you
have to get rich.
Where AutEx departed from the pack was e-commerce beyond
the securities industry.
Who else then ventured into these uncharted waters?
In a few cases, like FTD’s national flower ordering and fulfillment
system, an industry trade association took the lead.
In one case, the Transamerica Insurance Corp. on or about
1972 offered to the FX market a foreign-exchange currency trading system that
was remarkably good in view of the technology at the time.
In operation for a year or so, it never achieved critical volume and was shut
down.
Vaguely aware of
Transamerica’s goal and lack of success, I became better acquainted with this
system when the enterprising individuals who developed it made AutEx an offer.
Everything needed could be brought out of storage to restart the system if AutEx
wanted to buy it. My response?
No interest. Only with today’s Internet platform and investment concepts
could such an ambitious system make sense.
Such a system is now being seriously considered as mentioned
later.
More common, in many industries the strongest firms made the
rules and ultimately forced either their customers, or their suppliers, or both,
to go on line with them; for example, travel agents make airline reservations
through one of the major carrier's computers linked to other carriers who agree
to take their service.
The services offered by these major carriers are very
similar. One key difference is that
each carrier puts its flights first, ahead of all other carriers in its screen
displays.
Those systems are one of the most valuable assets of the
carriers who have them. A few
book-wholesalers blanketed retail bookstores with availability and order entry
terminals. In a few, like
purchasing event tickets, Ticketron, created a single market out of fragments
and became the preeminent supplier.
Similarly the Polygon Trading Network for over 25 years linked
jewelry manufacturers, wholesalers, and retail stores in a trading market
initially operated by AutEx, later on other networks and finally transferred to
the Internet when that became the network of choice for all e-commerce.
Most market places were not nearly as automated by 1990 as they now are.
And the story is still unfolding.
When I was thinking of starting AutEx, I knew I wanted to run real
time multi-terminal systems in the business world.
Why did marketplace systems seem to me to be such valuable
business applications for computers?
In the mid-sixties when I was sorting out the possibilities, I
believed that the unique new
role for a marketplace system, with the computer as impartial
umpire, would improve the efficiency of the whole market.
I still believe that independence from any market
participation role would prove a critical factor for success for
an organization offering to develop a computerized marketplace for
an industry. I assumed
that this system positioning would be so compelling that independent
system owners would ultimately capture the whole marketplace.
My assumption proved correct in a few cases, most notably in
AutEx's five-year battle with the New York Stock Exchange, which
brought on line in January 1970, its Block Automation System (BAS),
specifically and quite openly to crush AutEx.
It was a great David and Goliath story that AutEx beat out
BAS in the marketplace[xii]
(that is, the marketplace for marketplace systems) when BAS folded
at the end of 1974.
However, I did not see clearly that the independent system
might not always be in the best position to beat out an industry
leader that later tried to run a marketplace system for its own
customers and/or suppliers and not for the whole industry.
Typically the industry leader would be the financially
strongest entity to do just that.
Similarly a trade association might try to run a
system for its members, but trade associations rarely have all
industry practitioners as members.
An example of that was the BAS system of the New York Stock
Exchange (NYSE), which only serviced member firms and was severely
handicapped competing with AutEx open to all broker/dealers and
providing an active role for all financial institutions, who were
then not allowed to be members of the NYSE.
Although industry leaders did not really get started bringing
customers and suppliers into their automated front-end (purchasing,
sales, distribution and fulfillment) systems until the late 80's,
they often did get the upper hand in these marketplaces.
Often they helped fragment the marketplace themselves when
their competitor did the same thing with its customers and
suppliers. The
resulting systems, at considerable expense, could sometimes be
stitched together with linkages that the major firms still manage to
control enough to get considerable benefit for themselves, as in the
airline reservation case. The result is a less competitive market for its customers or
its suppliers and a barrier to entry for de novo competitors
and to growth for existing firms.
This causes the familiar lock-out of equal access to the
total market, unless the courts force the barriers down.
A similar situation arose in the plastic money (aka “credit
card”) business of banks world wide as described in the book
“Birth of the Chaordic Age”, written by Dee Hock, the founder
and CEO emeritus of VISA.[xiii]
This process still continues.
An intranet type system to be operated by central
banks for foreign currency exchange trading, called FXTRS SM (Foreign
Exchange Transaction Reporting System)[xiv]
has been proposed to link the central banks of all countries to the
entire marketplace for currency exchange, currently a two and a half trillion dollar (equivalent) daily
activity. The US
Treasury Department initially misunderstood and opposes such a
collective system[xv],
but several other countries are looking at it with interest.
Indeed, any country can adopt it as its vehicle to exchange
other currencies with its own. Each such system will undoubtedly be tailored to the needs
and interests of the country paying for it.
In time, all major currency countries will need to interface
their individual systems into an overarching system, particularly as
new monetary unions modeled on the euro are under active discussion.
Unless a complete system-of-systems design concept is incorporated
into them, they will face the non-standardization dilemma, still not
understood by most central bankers, which was illustrated above by
the ticketing/reservation systems of the global airline industry.
Marketplace Systems – Natural Monopolies
Until Judge Jackson on November 5, 1999, called Microsoft a
“monopoly”, I have avoided using that word publicly except to
refer to the Parker brothers board game or businesses exempt from
anti-trust by law like the old AT&T and, as mentioned above,
AutEx. I prefer
the word “preeminent”. When
AutEx beat out the New York Stock Exchange’s BAS system, and then
in a few years several other johnny-come-latelies, it managed to
maintain the “preeminence” of its block-trading system
throughout my era. When
I asked the corporate lawyers whether AutEx need fear being attacked
by the Justice Department for being a monopoly, their response
proved correct: “AutEx is far too small to arouse the DOJ.” The network effect[xvi]
implies that the dominant supplier of any marketplace system has
such an advantage that it ought to be able to maintain a near
monopoly indefinitely. The
Justice Department’s view that good public policy requires it to
challenge only Microsoft-sized monopolies can itself be challenged.
A hundred smaller monopolies can be as anti-competitive as one large
one. For example, the
self-styled “keiretsu” and “zaibatsu” stable of companies in
the portfolio of venture capitalist firm Kleiner Perkins Caulfield
and Byers have been known to act in concert through their
interlocking directorships.
Some remaining Silicon Valley Internet billionaires, are puzzled.
Their attitude is that they hope to achieve monopolies some
day too. The view that
it is OK to drive your competitor out of business with
“promotional” prices when you are small, but not when you are
large, does not make sense. Where
is the size line crossed? At
what point in pricing and marketing practices is the word
“predatory” substituted for “promotional”?
How can the judiciary hide behind their concept that it is
not the huge size of Microsoft that attracts the prosecution, when
indeed investigation and prosecution only comes when a company is
really huge? How can
society expect entrepreneurs to be greatly rewarded and lionized by
the media for beating out competition, when later for continuing to
do the exact same things, they become villains?
Can you imagine a Scott McNealy, whose competitive juices
have flowed wildly and unrestrained for years, waking up one
carefully chosen morning experiencing an epiphany and announcing to
employees, shareholders, Wall Street, etc., that the company will
become kinder, gentler, and will happily assist its competitors to
obtain a fair share of the market.
In another culture, perhaps.
But in America? In
Silicon Valley? Yet I
predict that such regulatory issues will not go away, because of the
huge public investment in the Internet and its function as a common
carrier. Anti-trust
lawyers in the Justice Department are examining the unfolding
developments of this issue.[xvii]
The Internet Advantage
The main attribute of modern e-commerce that distinguishes it from
prehistoric e-commerce is the Internet itself, the superb network
for distribution of data in all its forms. The fact that the Internet per-message cost is essentially
zero can be viewed as a great public good that permitted the
evolution of a truly global commons and democratic bonanza, a giant
gift to the world. It
can also be viewed as a giant Ponzi scheme, based on the
zero-message cost subsidy first by government and universities and
now by commercial corporations and tax subsidies.
Both views are correct.
Under conditions likely to prevail for some time, even a
small message charge might not be possible.
Nevertheless, even a very small charge to commercial users
would help discourage spamming and junk mass-mailings.
As with all other communications media, research, education
and other public purposes, can have free or preferential rates.
Resolution of these public policy issues, both nationally and
internationally, is proceeding.[xviii]
The Prehistoric Advantage – To Be Fed into the Internet
The biggest advantage of prehistoric e-commerce was that each system
was based at least initially and usually for some time on a single
computer (or a few in parallel in a single location) that performed
the processing, storing, and retrieving of data, for users who found
the service valuable enough to be continuously on-line.
Dial-up customers were accommodated but the heart of an
industry marketplace system requires most users to be continuously
online. In this case a
message from one node to another, say A to B, did not go directly to
B, of course, but through the central computer.
Ignore for the moment, that concentrators, remote computers
used only for routing messages were often present to facilitate
prehistoric e-commerce distribution to larger numbers of users.
But the arrangement of early e-commerce meant that most data,
say all priority data, would go from a sender at A to a recipient at
B in a fraction of a second.
On the Internet, a particular screen page whether of e-mail or of a
website only gets to the recipient when and if requested.
For average e-mail users, who log on once or twice a day or
less frequently, this delay is typically a day or more – pretty
slow for non-snail mail – and a reality that is just ignored by
Internet enthusiasts. One
could set up a particular screen so that it requested a certain page
automatically once every second, say,
(even assuming the proviso that if the remote user
responsible for the page update had not made any change, the page
would not get transmitted for that second) and so deliver a page of
data within say a second of it being updated. But this was routine with AutEx and many other prehistoric
e-commerce systems.
On the Internet today and for far into the future, a message
initiated at point A and received at point B may go through many,
many nodes and take a route many times longer than the shortest
distance between A and B. This
is the result of the routing algorithms of Internet packets
interacting with (1) the choices that millions of users have made
about where their service providers are located and (2) the
generally unrelated geographical distribution of any specific
website users. Business
users of the Internet attempt to improve this situation for their
customers by finding a good service provider – one that is not
saturated but still seeking business; one that if it specializes at
all, say in websites, specializes in the business’s interest; one
that has tier 1 facilities near the business; one that offers good
back-up, good physical security, useful supplementary performance
data; one that is reasonably flexible for extra services; one that
is open and forthright, provides good, up-to-date information on its
service; and one that has a reasonable history of performance.
All of these considerations are changing rapidly.
Slow service because of bandwidth restrictions or for
whatever reason, is not the killer consideration it might be because
everybody expects that the bandwidth problem, which is very severe
in many cases, is only going to get better in the long run, through
public and private investments.
Ultimately really broad bandwidth will be generally
available. The total length of the links between nodes through which
a typical message is routed is not known and it is hard to know
where the fault is if links causing the problem are too remote, too
overloaded, or too noisy. Internet
decision-makers can control performance factors, at best only on
statistical basis. Some
performance factors are outside of their control.
Decision-makers of independent pre-Internet e-commerce
companies had much more control as well as financial incentives to
exercise their control wisely.
The
Links that Need Rethinking
The service provider ought to know its customers.
A typical tier 3 service provider knows only a name, billing
address and telephone number of an account.
The route of a specific message through a business or
professional site can be traced end to end with a great deal known
about the sender and the recipient for most customers of the site.
But the dog-leg portions of the route traversed by the
message to the sender’s and recipient’s ISPs may only be
traceable to persons about whom little or nothing is known.
It should become possible for a complete audit trail of every
message to be obtainable. Users
cannot continue to be allowed to hide behind anonymity, despite the
howls of cyber-libertarians. Even
“free” speech is not an absolute right.
Within B2B websites, encryption/decryption, security and
privacy needs may be adequately addressed, not necessarily the same
from one website to the next. However,
for the entire Internet, ultimately the service provider must be
responsible for the integrity, ethics, and rules of the system on
the network in spite of US court rulings striking down such rules,
based on the telephone analogy. This will happen in a combination of ways.
Some E-commerce sites will evolve to become service providers
for their own customers, while some ISP’s will evolve to also
offer e-commerce services.
However it is done, the Internet must move in this direction,
if the horrors of the Internet mentioned in the next paragraph and
in Business Week,[xix]
are to get better rather than worse.
That is a key message from the author, a “prehistoric
e-commerce entrepreneur”, to guide the continuing evolution of the
Internet into the dream we hope for it, rather than the nightmare we
should rightly fear.
The
Dark Side – A Long Way to Go to Satisfy Public Needs
Only about half of the American public believes that on
balance computers have made their life better[xx].
The other half is not so sure, and many have good reason.
There is a dark side, which, though recognized by all, still
is irrelevant to most people who are captivated by the financial
potential of the Internet. A
lot of software is badly designed, user unfriendly, and
unusable without beta-testing and debugging by the hapless consumer.
E-commerce leapfrogs ahead colonizing the consumer while
taxpaying bricks and mortar stores lose market-share.
The conservative calculations of mayors and governors show
that unless the Internet is taxed, local and state budgets for
schools and roads – not to mention fire and police – will suffer
deep, intolerable cuts. The
battle is now widely seen as not if – but when and how taxation
will occur. Forces are
arrayed between local and national governments in the USA and the
European Union and the heavy guns of big players from AT&T, AOL
and Microsoft to e-commerce start-ups.
In any case, convergence is now the dominant watchword, as “bricks
and clicks”. Most
e-commerce companies now acknowledge that the other half of their
business is bricks, mortar, warehouses, delivery vans and other
facilities. Most
traditional businesses, with already established global and national
brands now see the advantage of going online.
They can often out-compete e-commerce companies which have to
spend millions on establishing their brands and market share –
while being less able to offer customers the services of chains of
real stores and clerks and where unwanted merchandise can be
returned. As the
Internet becomes just another communications medium and the frenzy
over e-commerce subsides, e-commerce services and software will have
to deliver quality, reliability, and service – just like other
commodities that came before.
The dark side continues in a different vein.
As we have noted, the lawless Internet is a haven for
sociopaths, consumer fraud specialists and organized criminals, who
along with increasing numbers of legitimate users, find cyberspace
congenial. The societal
burden of this freedom or lawlessness (pick your own word) is the
pressure for investigations, arrests and indictments, followed by
legislation, regulation, new law enforcement and taxation, followed
by more investigation, tracking, surveillance, litigation, judicial
review, sanctions, and punishment – and throughout accompanied by
a huge development and marketing effort for technology to address
Internet pathologies, including security, filters, encryption,
decryption, anti-virus software, and the protection of privacy and
transparency. The
world seems to be engaged in an experiment, for which it has little
preparation or experience. We
have never had a vote on how many wanted this experiment.
Driven by the technological imperative, greed, and
entrepreneurial enthusiasm – it just happened.
Are billions of people in a giant bus on a dark rainy night
heading toward a precipice? Light
can be shed on this situation to give us all a much better chance of
averting a disaster. I have put on the table in this article ideas for helping to
avert a disaster that seem to make sense from a historical
perspective. These and
other ideas need to be evaluated by Internet decision-makers, and
not swept under the rug. All
of our future depends on making good decisions.
The attitudes and opinions of the general public need to be
considered too. This
has been a personal interest of mine for a dozen years as explained
in #2 Public Interest Pollling. The Americans Talk Issues Foundation has, over the last
twelve years, applied the art and science of public-interest
polling to many issue areas.
In ’98-’99 the Foundation sponsored a series of in-depth
surveys on attitudes toward software problems, as awareness of the
Y2K bug rose virtually from zero to 100% in the waning years of the
20th century. See www.publicinterestpolling.com Unique
among political issues,
Y2K was tied to a date certain.
It could not be assigned to a study committee and postponed. It was also a software glitch that unlike all others was so
embarrassingly simple that its nature could be explained to a small
child. The potential
for chaotic social and economic disruption was widely recognized.
Remediation cost was expected by some to be enormous.
It was – in the US at least $100 billion and twice that
worldwide.
These surveys repeatedly showed that to the extent that Y2K
threatened serious harm to millions of people, the American public
would be increasingly unforgiving of political and business leaders
and of organizations that contributed to the harm or neglected
obligations for its mitigation.
The evidence is in these survey findings that if computer
glitches continue to be serious, a public consensus will form for
taming both technology and free markets and curbing long cherished
constitutional rights by mandating accompanying responsibilities.
These findings illustrate the stakes that are involved with
the literally millions of much less well-known software bugs which
have caused air and space disasters and collectively produced total
damages well up into the billions.
To protect themselves and the rest of us, political and
business leaders and organizations will have to work diligently to
insure the integrity and usefulness of the Internet so that
e-commerce does not collapse and disappear, as some are now
predicting.[xviii]
E-Commerce Entrepreneurs Noticing Needs Beyond Business
With a few exceptions, entrepreneurs are traditionally uninterested in charitable contributions. They have too many good ways to use their money, particularly in the knowledge/computer industry, where their very products are a boon to the whole world: have-nots and have-lots, healthy and suffering alike. So typically their first charitable expressions involve giving computers, initially perhaps outdated units, to schools, hospitals, libraries, etc. Under the right circumstances, the tax savings alone, can be greater than the market value of the gifts. Such gifts feed entrepreneurial enthusiasm. An Internet search reveals that indeed Bill Gate’s first gifting that made the news was of computers for schools.
When at AutEx, I did the same thing.
AutEx gradually phased out old, valueless terminals.[xxi]
I offered them to Wellesley College, until I realized it was
not a benefit if we did not maintain them and abandoned the idea.
Such charity is only a toe-wetting compared to the distance
swim that successful entrepreneurs need to embark on to help save
the humans – and the
planet. We cannot
survive in a gilded age, if the poverty gap grows and security and
the environment are neglected.
The important point about charitable giving by new millionaire
entrepreneurs who left their companies is this.
Almost invariably they start or join new up-and-coming
companies to repeat their original success.
It is as if they were addicted to making money.
But I did not do that. I
thought like this as I left AutEx at age 54.
I have enough money to buy a lifetime supply for me and my family of
anything that is sold in grocery stores – i.e. no yachts, no
Ferraris. But as I
looked around the supermarkets circa 1980, I noticed that you could
easily and cheaply buy 50 different brands and types of soap or
breakfast cereal. But
public goods were a shambles. Individuals
can finance or give grants, but cannot buy, good public
schools and hospitals. I decided to spend my time and money, above a basic minimum
required for reasonable living, on public policy, charities, and
non-profits. What I do
not understand is why there are so few entrepreneurs who make a
similar choice after one or two successes.
Until very recently I came across few others – and it has
puzzled me. Similarly, the patents I have pending for an e-commerce
system, known as FXTRSSM, will benefit the United
Nations.
It is true that as a practical matter, if you are a billionaire like
Ted Turner or Bill
Gates, you can do both. You
can afford to pay others to organize and oversee the non-profit side
and continue making the next billion. And both Turner and Gates have
gone on to put billions into helping the poor, the downtrodden, and
the afflicted. God
bless them.■
ENDNOTES
[i] Hafner, Katie, and Lyon,
Matthew, “Where Wizards Stay Up Late – the Origins of the
Internet” Simon and Schuster, 1996.
Page 77 explains that the often cited DOD reason for a
redundant network, to survive a nuclear war, was not the “main
or even secondary concern” in the development of Arpanet.
[ii] In 2000 the public
stampede into telephony on the Internet began. How long will the public refrain from switching over to the
Internet and out of their current phone service providers?
Not long, unless telephone service providers too go down
to almost zero message charges and make up the bottom-line
losses by charges for other services or on some other basis, as
indeed they are already well along in doing.
See “the Talking Internet”, Business Week, May 1,
2000, pp. 174-182.
[iii] Business-to-business
(B2B) e-commerce flourished even more.
[iv] Hiltzig, Michael,
“Dealers of Lightning – Xerox Parc and the Dawn of the
Computer Age”, Harper Collins NY, 1999, p. 95
[v]
Ibid.
p. 89.
[vi]
A slightly smart terminal is a dumb terminal (a generator
of text and
controls for character placement on the monitor display by
either an alpha-numeric keyboard or the remote computer) with
exactly one function key, called the “interrupt” key, which
when polled tells the central computer, “I have a request or a
message to send.”
[vii] Hafner and Lyon (loc.cit.)
[viii]
At its start-up in 1969, the break-even cost per average
subscriber per month was $1500.
By 1979 when my AutEx era ended, this figure had dropped
to $500 per month.
[ix] AutEx had 100% market
share of the mill/wholesaler marketplace, including prestigious
firms that represented over 50% of the US/Canadian lumber
industry.
[x] Metcalfe’s Law: [the
value of a network rises as the square of the number of users]
was understood by network designers long before Metcalfe’s
name was attached to it.
More
general than Metcalf’s law is the now-fairly-well-known
network effect. If
most of your potential transaction-counterparties belong to one
network and few to any other, it is imperative that you are on
the former. Indeed
not belonging can put you out of business.
If the best and most important firms in a B2B network are
all on one network, then everybody seriously in that business
must join it, even if they may have to continue belonging to
other networks as well.
The
dominant network can maintain its dominance, even if customers
find its features/prices somewhat less desirable than those of
competitors.
[xi] Pyne, Charles F.,
“Network upgrading broadens trading information services”,
Data Communications Systems, McGraw-Hill, September 1973.
[xii] Welles, Chris, “The
Last Days of the Club”,
E.P.
Dutton & Co.,, NY, 1975, pp. 297-303.
[xiii] Dee Hock, “Birth of
the Chaordic Age,” Berrett-Koehler, 1999, Chapter 14,
pp.231-248.
[xiv] Henderson H, Kay AF, “A
Foreign Exchange Transaction Reporting System (FXTRS SM)
for Central Banks”, FUTURES Journal 31 (1999) pp. 759-777.
[xv] Letter to Henderson, H and
Kay, A, dated Oct. 28, 1999 from the Office of the Secretary of
the Treasury, Lawrence Summers, responding to the FXTRSSM
article of reference 9.
[xvi] See Note 10 for the
“network effect”.
[xvii] “E-Exchanges May Keep Trustbusters Busy”, Dan Carney, Business week, May 1, ‘00, p. 52.
[xviii] Anthony B. Perkins and
Michael C. Perkins, “The Internet Bubble,” Harper Business,
NY, 1999, pp. 92-97.
[xix] Business Week, Frontier.
Fun while it lasted. Dec 6, 1999: F48.
[xx] Reports by the Americans
Talk Issues Foundation: “Survey on Y2K”, ATI #31, April
1999, p. 12, and ATI #32, December 1999, Master Questionnaire,
Q1.
[xxi] AutEx had in 1971 bought 100 custom terminals from Scientific Data Systems (SDS), whose CEO, Max Palevsky had sold his company to Xerox in 1969 for over $920 million – up to that time the largest American corporate takeover. AutEx’s central computers included the Sigma 5 and Sigma 9, also purchased from SDS as a Xerox subsidiary. Upon my departure from AutEx, Xerox, as the top bidder in an auction sale that attracted over twenty other bidders, purchased AutEx too. (There is a pattern there. The whole theme of “Dealers of Lightning – Xerox Parc and the Dawn of the Computer Age”, ref. 7, is whether Xerox had the “whole ball of wax” in its hands and then dropped it.) Much of the blame has been given to both SDS and the Xerox cultures. Here is a historical footnote from my perspective. No terminals AutEx acquired had been as unsatisfactory as the SDS terminals. They required too much desktop space and too much maintenance. They were a disaster.