Is Booming Internet Economy a Double-Edged Sword?

The Internet economy is growing faster than anyone predicted, generating about $301 billion (US$) last year, according to a study done by the University of Texas. But some — such as Commerce Secretary William Daley — seem concerned it could leave some behind.

“This wave of technological innovation is more than just a ripple in the sea of society,” Daley told Bloomberg. “The Department of Commerce is committed to ensuring that this rising tide of innovation lifts all boats.”

According to the study released last week and financed by Cisco Systems Inc., nearly half the total, or about $171 billion, came from the sale of hardware and software used to build the infrastructure of the Internet and e-commerce.

E-commerce accounted for about $102 billion, of which $58 billion was spent on intermediaries like stock trades or online travel agents. The results “seem to exceed all prior estimates,” said University of Texas Associate Professor Anitesh Barua, who co-authored the study. Starting from almost no online commerce three years ago, “the growth rate is nothing short of astounding,” he added.

This surprising acceleration of the online and the e-commerce economy is what seems to worry some top government and industry experts who say the whole economy could be flattened within a twinkling of an eye — making many companies obsolete and causing a massive loss of jobs.

For instance, Clayton M. Christensen, a Harvard business school professor, in his best-selling 1997 book “The Innovator’s Dilemma,” outlines the challenges huge companies face in light of the new Internet economy.

Merrill Lynch’s recent foray into e-commerce is a perfect example of the scenario Christensen outlines in his book. He says when established companies (like Merrill Lynch) are faced with a radically changing technology landscape, all the choices facing them are difficult. If it takes the middle path — which Merrill seems to have done — it means it’s really getting the worst of both worlds. By offering low-cost online trading and keeping its brokers, it keeps the high cost structure of an established company while also taking on enormous new costs of setting up large-volume online trading operation.

Christensen’s conclusion is that huge companies will not be able to compete with fledgling startups in the e-commerce arena, unless they spin off a separate company and let it operate like a startup.

Another worry some have about the current avalanche of e-commerce is how it will affect already successful Internet companies. Some experts say you have to look no further than AOL to see how its business model has evolved and morphs into something new and different every six to nine months. They fear many e-commerce companies won’t be as adaptable to the speed-of-light changes that seem to permeate the “new economy.”

Meanwhile, some analysts say its natural for innovation to sweep away the old and replace it with the new. After all, they say, that’s what Charles Darwin was writing about in the last century when he too realized that only the strong survive.

What do you think? Let’s talk about it.