The Foundation of the New Economy: Computing
Power Doubles Every Eighteen Months
- The foundation of the new economy is the revolutionary explosion
of computer processing power.
- Back in 1965 Intel Corporation founder Gordon Moore projected
that the density of transistors that could be placed on a silicon
chip would double every twelve months. (He was overoptimistic:
now people say every eighteen months.)
- Information processing power grows along with transistor
density--and the cost to make a chip of given size stays roughly
constant.
- And Moore's Law still has at least another ten years--seven
generations--to run.
- Our computers today have 66,000 times the processing power
at the same cost as the computers of 1975. Our computers in 2010
will have ten million times the processing power of the computers
of 1975.
Source: "Processor Hall of
Fame," Intel Museum; http://www.intel.com/intel/museum/25anniv/hof/moore.htm
The Speed of the Information-Processing Revolution
Dwarfs the Speed of the Electric-Power Revolution
- How does the information-processing revolution compare to
other, previous waves of innovation? Let's compare the past forty
years of progress in information processing with the replacement
of the steam engine by the electric motor.
- In 1869 America's steam engines delivered 1.2 million horsepower
to America's manufacturing firms.
- By 1939 America's electric motors delivered 45 million horsepower
to America's manufacturing firms.
- This was roughly a forty-fold increase in mechanical power
in seventy years--a five percent per year increase in muscle
power.
- At the end of the 1950s, when computers had largely replaced
electromechanical calculators, there were roughly 2000 installed
computers in the world--machines like Remington Rand UNIVACs,
IBM 650s or 702s, or the DEC PDP-1 with processing power that
averaged perhaps 10,000 instructions per second.
- Today--forty years later--there are approximately 200 million
active computers in the world with processing power that averages
approximately 100,000,000 instructions per second.
- This is a million-fold increase in forty years--a thirty-five
percent per year increase in information processing power.
Sources: Warren Devine (1983),
"From Shafts to Wires: Historical Perspectives on Electrification,"
Journal of Economic History (June), pp. 347-372; Martin
Campbell-Kelly and William Aspray (1996), Computer: A History
of the Information Machine (New York: Basic Books).
Productivity in Information-Technology Sectors
Skyrocketed in the 1990s
- The measured productivity performance of America's
whole economy--the rate of increase in labor productivity in
all of nonfarm business--has not been especially impressive in
the 1990s: only some 1.6% per year.
- The measured productivity performance of America's
information technology industries has been much more impressive:
an average annual rate of increase of value added per worker
of nearly 11% per year.
- And the measured productivity performance of those
industries that produce information technology goods--semiconductors,
fiberoptics, and so forth--has been astonishing: an average annual
rate of increase of value added per worker of nearly 25% per
year.
Source: Industry Standard;
http://www.thestandard.com/,
using BEA and BLS data; updated by the authors.
Total Trade in Information Technology Is Doubling
Every Six and a Half Years
- The total volume of American trade--imports and exports--in
information technology is now doubling in less than seven years.
- Trade in information technology goods is still some
twelve times larger than trade in information technology services--but
that won't last long: services trade is doubling every four years
while goods trade is doubling every seven.
- Information technology trade will amount to a quarter of
all U.S. trade by the year 2000.
- America benefits not just from information technology exports
but from information technology imports as well: imports give
downstream manufacturers the power to build better, cheaper products,
and they give users the power to perform their information processing
and data communication tasks.
Source: Department of Commerce,
Bureau of Economic Analysis
The Volume of Semiconductor Production Is Doubling
Every Eight Years
- Worldwide shipments of semiconductors reached 300 billion
this year.
- The total volume of worldwide semiconductor production is
growing at 8.5% per year--fast enough to double every eight years.
- The increase in the unit volume of shipments understates
the increase in total production by an order of magnitude. Today's
semiconductor products are much more sophisticated than those
of fifteen years ago. Back then semiconductor products had only
one-thousandth as many transistors per square centimeter as today's
semiconductor products.
Source: Robert Atkinson and Ranolph
Court (1999), "The New Economy Index" (Washington:
PPI); http://www.neweconomyindex.org/
The Internet Economy Is Now at Least $135 Billion
a Year
- The Progressive Policy Institute has estimated that $135
billion of value added was provided by the "internet economy"
in 1999.
- They project that a year and a half hence--in 2001--that
the internet economy will generate $360 billion of value added.
- Nearly a third of the current internet economy is made up
of business-to-business transactions.
- The Progressive Policy Institute's projections are for that
share to grow: to half of the internet economy over the next
eighteen months.
Source: Robert Atkinson and Ranolph
Court (1999), "The New Economy Index" (Washington:
PPI); http://www.neweconomyindex.org/
The Internet Economy Is Now at Least $135 Billion
a Year
- The University of Texas's Center for Research in Economic
Commerce, in a study funded by Cisco, has estimated the internet
economy at $301 billion of value in 1998.
- They attribute 1.2 million jobs to the internet economy as
well.
- Note that the U.T. estimates are fully three to four times
the size of the PPI's estimates once one takes account of the
different periods covered.
- To our minds the major lesson of the U.T. study is that soon
it will be impossible to talk about an "internet economy."
The internet will be so much a part of daily life that it will
be as impossible to separate out the internet economy as it is
to separate out the electricity economy.
Source: University of Texas Center
for Research in Economic Commerce (1999), "Internet Indicators"
(Austin: U. of Texas); http://www.internetindicators.com/
Total Federal Spending on Research and Development
Has Been Falling as a Share of GDP
- Back in the 1960s and 1970s, federal spending on research
and development averaged one and a half percent of GDP.
- By the mid-1980s the U.S. government had already scaled back
its relative commitment: research and development spending then
was only about 1.15% of GDP.
- The macroeconomic policy mistakes of the early 1980s left
the United States with huge federal budget deficits. As a result
federal spending on research and development has come under further
pressure.
- Today federal spending on research and development is only
0.8% of GDP.
- Only health and medicine have avoided stringent cutbacks.
- The extremely tight "discretionary spending caps"
that will govern the congressional budget debate over the next
five years will place enormous further downward pressure on federal
research and development spending.
- Given the extraordinarily high returns earned by federal
investments in research and development during the Cold War generation,
is this really a sector of federal spending where we want to
economize?
Source: Robert Atkinson and Ranolph
Court (1999), "The New Economy Index" (Washington:
PPI); http://www.neweconomyindex.org/
In the 1980s and 1990s Measured Household Income
Has Stagnated for the Non-Rich
- At the end of the 1990s, the measured household income
of those in the bottom fifth of the American income distribution
averaged less than the household income of their predecessors
at the start of the 1980s.
- At the end of the 1990s, the measured household income
of those in the middle fifth of the American income distribution
averaged only five percent morethan the household income of their
predecessors at the start of the 1980s.
- Yet the measured household income of the highest fifth of
Americans at the end of the 1990s was some 40% higher than that
of their predecessors two decades before.
- Problems in measurement make it very likely that measured
household income growth understates true household income growth:
we have probably seen only real wage stagnation, not real wage
decline, in the past two decades among groups like white blue-collar
workers in America.
- Nevertheless the remarkably increased spread of incomes in
the U.S. over the past two decades is a potential political fault
line. The "new economy" is almost surely not responsible
for it; but it may well be blamed for it.
Source: Robert Atkinson and Ranolph
Court (1999), "The New Economy Index" (Washington:
PPI); http://www.neweconomyindex.org/
The Price of Computers Has Fallen More than Ten
Thousand-Fold in a Single Generation
- The price of computers has fallen more than ten thousand-fold
in a single generation; the price of semiconductors has fallen
even faster.
- Such steep price declines produce enormous problems of measurement
in calculating the rate of economic growth.
- How to resolve this index number problem? If we value computers
at today's (low) price, we grossly underestimate the value and
utility of the first expensive machines. If we value computers
at yesterday's (high) price, we grossly overestimate the value
and utility of machines that today are often used mostly to run
screen saver programs and play solitaire.
- This is just one of the reasons that national income accountants
despair of ever producing a consensus estimate of the impact
of the computer revolution on GDP.
Source: Jack Triplett (1999),
"Computers and the Digital Economy" (Washington, DC:
Brookings Institution); http://www.digitaleconomy.gov/powerpoint/triplett/sld001.htm
Source: Robert Atkinson and Ranolph Court (1999), "The
New Economy Index" (Washington: PPI); http://www.neweconomyindex.org/
Source: Robert Atkinson and Ranolph Court (1999), "The
New Economy Index" (Washington: PPI); http://www.neweconomyindex.org/
More than 60 Million Computers Are Now on the
Internet
- Ever since 1987 the Internet Software Consortium (http://www.isc.org/)
has run a semiannual survey to count the number of "hosts"
on the internet.
- By the end of 1999 their count will hit 60 million: 60 million
computers, all accessible one to another through the global internet.
- In October 1990 there were only 300,000 computers on the
internet.
- In August of 1981 there were only 213.
The U.S. in 1997 Had One Internet Computer for
Every Twenty-Five People
- In 1997 the U.S. had one internet computer for every twenty-thre
people.
- But even then the U.S. was not the most "wired"
nation: Finland had one internet computer for every fifteen people.
- The number of internet "hosts" per capita in the
United States is growing at more than fifty percent per year.
- The number of internet "hosts" per capita in other
major industrialized countries--Britain, Germany, Japan, Canada--is
growing even faster, but from a lower base.
Source: Robert Atkinson and Ranolph
Court (1999), "The New Economy Index" (Washington:
PPI); http://www.neweconomyindex.org/
The Direct Contribution of Computers to
GDP Has Become Large
| Year: |
1990 |
1991 |
1992 |
1993 |
1994 |
1995 |
1996 |
1997 |
1998 |
1999* |
| GDP Growth |
0.7% |
-1.8% |
2.7% |
2.3% |
3.5% |
2.3% |
3.4% |
3.9% |
3.9% |
3.5% |
| Without Computers |
0.6% |
-1.9% |
2.5% |
2.2% |
3.4% |
1.9% |
2.9% |
3.4% |
3.3% |
2.8% |
| Computer Contribution |
0.1% |
0.1% |
0.2% |
0.1% |
0.1% |
0.4% |
0.5% |
0.5% |
0.6% |
0.7% |
*Projected.
- Back in 1987 economist Robert M. Solow wrote in the New
York Review of Books: "How come we see the computer
revolution everywhere except in the [aggregate] productivity
statistics?
- One answer has been that economic growth is underestimated--that
the areas in which computers have greatly multiplied productivity
have been areas in the service sector in which measurements of
output are the worst.
- A second answer is that the U.S. economy is very large, and
that until the 1990s investments in information processing were
not all that large a share of total investment: hence we would
not have expected a large contribution from computers to measured
GDP.
- But in the 1990s--even with potential underestimates, and
even with flaws in the statistical system (like those that count
investments in software as a current cost of doing business rather
than as investment proper)--the contribution of final sales of
computers to GDP growth has become quite large. Without growing
sales of computers, economic growth over the past six years would
have been half a percent per year lower.
Source: Brent Moulton (1999),
"GDP and the Digital Economy" (Washington, DC: Department
of Commerce
Standard Modem Technology Proved Capable of Extraordinary
Improvement
- Back in the early days of networking--in the 1960s and 1970s--it
was thought that high-speed data communications would require
special data-friendly phone lines: ISDN or some similar service.
- It was expected that "ordinary" phone lines used
for POTS would be capable of carrying data transmissions at the
103 standard 300 bits per second, or perhaps at most the V.22bis
standard 2400 bits per second, but no faster.
- Yet over the past two decades we have seen a 22-fold increase
in the speed of data transmission obtained over ordinary
telephone lines.
- This extraordinary 18 percent per year improvement in data-transmission-over-POTS
is not the pace of Moore's Law, but it is very rapid. It allows
everyone with a phone line today the potential to connect at
speeds that 20 years ago it was thought would require expensive,
dedicated equipment.
- This tremendous improvement in standard modems has greatly
fueled the growth of the internet. It has allowed the build-out
of the world wide data network on top of the already-existing
phone network.
- It has thus shaved a telephone-equipment generation off of
the time it would have otherwise taken to wire the United States
for the internet.
- And looking forward, at least half the phone lines in the
U.S. are suitable for high-speed DSL service. And approximately
three-quarters of the households not suitable for DSL service
are potential customers for cable modems.
Source: Kim Maxwell (1999), Residential
Broadband (New York: Wiley).
Source: Robert Atkinson and Ranolph Court (1999), "The
New Economy Index" (Washington: PPI); http://www.neweconomyindex.org/
Source: Robert Atkinson and Ranolph Court (1999), "The
New Economy Index" (Washington: PPI); http://www.neweconomyindex.org/
Source: Robert Atkinson and Ranolph Court (1999), "The
New Economy Index" (Washington: PPI); http://www.neweconomyindex.org/
Source: Robert Atkinson and Ranolph Court (1999), "The
New Economy Index" (Washington: PPI); http://www.neweconomyindex.org/
Source: Robert Atkinson and Ranolph Court (1999), "The
New Economy Index" (Washington: PPI); http://www.neweconomyindex.org/
Source: Industry Standard; http://www.thestandard.com/metrics/display/0,1283,970,00.html
35.3 million U.S. adults claim to surf the web daily...
Source: Industry Standard; http://www.thestandard.com/
Source: Industry Standard; http://www.thestandard.com/
Tracking the Internet Economy:
100 Numbers You Need to Know
By Maryann Jones Thompson
THE STATE OF THE WEB
* Time it took to register the first million domain names: four
years. Time to move from 4 million to 5 million domain names:
three months.1
* Number of pages on the Web: 800 million. Web pages
covered by the best search engine: 16 percent.4
* Yahoo provides 44 percent of all search-engine referrals.
AltaVista ranks second with 10 percent.2
* 94 percent of the top 100 sites post a privacy policy.3
* Browser-war update Microsoft: 73 percent. Netscape:
25 percent.2
* 55 percent of Web servers run Apache server software;
22 percent run Microsoft Internet Information Server.5
* AOL accounts for 21.5 percent of the consumer ISP
market.6
* 70 percent of global Web traffic goes to fewer than
4,500 sites.7
* Ratings firms miss as much as 32 percent of Net traffic
to large sites.8
* Top digital media property: AOL, with 53.4 million
visitors in July.9
* Top Web site: Yahoo, with 32.3 million visitors in
July.9
------------------------------------------------------------------------
THE ONLINE POPULATION
* Global Web population in 1998: 142 million. In 1999:
196 million. In 2003: 502 million.10
* 14 million Americans will access the Net via TV by
2003.12
* Women online: 48 percent of surfers, up from 42
percent in 1996.11
* Browsers for news, entertainment: 52, 72 percent.12
* Net homes watch 10 percent less TV than non-Net homes.15
* Number of Web surfers in Japan: 8 million. In Latin
America: 3 million.10
* Americans are 44 percent of the Web population. 10
* Two fastest-growing segments of Net population: kids
and teens.14
* 50 percent of homes have PCs this year, up from 45
percent in 1998.13
* 177 million Americans will be online by 2003. 63
million surfed in 1998; 81 million will in 1999.10
* Public schools with Net access: 89 percent. Public
schools with classroom access: 51 percent.16
* Web users with household incomes of at least $100,000: 15
percent. Users who did not graduate high school: 3 percent.11
------------------------------------------------------------------------
CONSUMER E-COMMERCE
* Global e-commerce spending 1998: $50 billion. 1999:
$111 billion. 2003: $1.3 trillion.10
* 1.2 million surfers bought via a Web auction in 1998.14
* $51 billion in 1998 offline spending was influenced
by Net shopping.12
* Seven products bought by the most surfers: books,
software, music, travel, hardware, clothing, electronics.12
* 14 percent of music will be sold online by 2003.14
* 24.4 million surfers bought online in Q2 1999, up
10 million from last year.12
* Four times as many holiday shoppers will buy online
this year, ringing up $9.5 billion in 1999 sales.21
* 93 percent of online transactions are paid for by
credit card.22
* Online prescription sales will hit $970 million in
2003.14
* 25 million Web gamblers worldwide will produce $1.2
billion in revenues for online gaming sites.23
* Europe's share of Web commerce in 1998: 11 percent.
In 2003: 33 percent.10
* Online brokerages accounted for 14 percent of equity
trades in Q4 1998.24
------------------------------------------------------------------------
CORPORATE E-COMMERCE
* B-to-b sales of products and services online will grow from
$131 billion this year to $1.5 trillion in 2003.17
* 48 percent of 7.8 million small businesses
have Net access.12
* CEOs worldwide who believe the Internet will have a major
impact on the global marketplace within three years: 92 percent.18
* The average e-commerce site costs $1 million and takes
five months to develop.19
* 32 percent of business travel ($38 billion)
will be booked online by 2003.17
* Insurance firms not selling online: 88 percent. Banks
not offering online banking: 94 percent.20
* IP telephony: from 310 million minutes worldwide in
1998 to 2.7 billion by year-end 1999.10
* Worldwide I-Builder revenues: $8 billion in 1998.
$78 billion in 2003.10
------------------------------------------------------------------------
WEB MARKETING
* Number of sites seeking ads and the average CPM, June 1999:
2,111 and $34.23. In June 1998: 1,175 and
$37.78.33
* 75 percent of online ad revenues flow to the top 10
Web publishers.37
* Portion of the print classified-ad budgets for recruitment
spent online in 2003: 20 percent. 17
* 40 percent of surfers surveyed remembered seeing a
specific banner ad.34
* 1998's top Web ad buyer: Microsoft, at $35 million.
Top nontech Web ad buyer: GM, at $13 million.35
* Average banner-ad click-through rate in July: 0.58 percent.36
* Online ad spending in 1999: $2.8 billion. Online ad
spending in 2004: $22 billion.17
------------------------------------------------------------------------
NET FINANCE
* Median 1998 premoney valuation of Net startups that secured
venture capital: $17.3 million. In 1995: $5.9 million.25
* 1998 Internet Economy revenues: $301 billion. 1998
Internet Economy workers: 1.2 million. 30
* Biggest expense for e-commerce firms and portals: marketing,
at between 60 percent and 65 percent of revenues.26
* 154 Net IPOs have raised $13 billion through
August. And 230 Net IPOs currently are in registration.27
* 1998 U.S. real economic growth attributed to IT and Net industries:
29 percent. GDP attributed to IT and Net industries: 7.8
percent.32
* Jeff Bezos' net worth: $10.1 billion. Jay Walker's:
$10.2 billion.28
* Tax-free online shopping's cost to state and local governments:
$170 million, or only 0.1 percent of the tax base.31
* Value of Net M&As for first-half 1999: $43.4 billion
(up 63 percent over 1998).29
* Net VC for first-half 1999: $6.3 billion (55 percent
of all VC funding).25
------------------------------------------------------------------------
NOTE: All numbers refer to U.S. market unless specified.
SOURCES: 1Network Solutions; 2Web Side Story; 3Georgetown
Internet Privacy Study; 4NEC Research Institute; 5Netcraft; 6Cahners
In-Stat; 7Alexa Internet; 8FAST Data Reconciliation Project; 9Media
Metrix; 10International Data Corp.; 11Mediamark Research; 12Cyber
Dialogue; 13ZD Infobeads; 14Jupiter Communications; 15Nielsen
Media Research; 16U.S. Department of Education; 17Forrester Research;
18Booz-Allen Hamilton and the Economist; 19Gartner Group; 20Forrester
Research and the American Bankers Association; 21Harris Interactive;
22Bizrate.com; 23Christiansen/Cummings Associates; 24Credit Suisse
First Boston; 25VentureOne; 26Legg Mason Precursor Group; 27The
Standard From IPO Monitor; 28Forbes, July 5; 29Thomson
Financial Securities Data; 30Cisco Systems/The University of Texas;
31Ernst & Young; 32U.S. Department of Commerce; 33AdKnowledge;
34AOL/Ipsos-ASI; 35Intermedia Advertising Solutions; 36Nielsen
NetRatings; 37Internet Advertising Bureau