SchumpeterPointers to the future

Forecasting the internet’s impact on business is proving hard

PROGNOSTICATORS have a bad record when it comes to new technologies. Safety razors were supposed to produce a clean-shaven future. Cars were expected to take off and fly. Automation was meant to deliver a life of leisure. Yet beards flourish, cars remain earthbound and work yaps at our heels.

The internet is no exception. Anyone looking for mis-prognostications about it will find an embarrassment of riches. The internet was supposed to destroy big companies; now big companies rule the internet. It was supposed to give everyone a cloak of anonymity: “On the internet nobody knows you’re a dog.” Now Google and its like are surveillance machines that know not only that you’re a dog but whether you have fleas and which brand of meaty chunks you prefer. We can now add two more entries to the list of unreliable forecasts about the internet: that it would make location irrelevant and eliminate middlemen.

A decade or so ago pundits (ourselves included) said the internet would mean the “death of distance” and make the world “flat”, ie, eliminate geographical differences. Amazon and Infosys built global empires in bookselling and IT services respectively. But now it is harder to agree with Marc Andreessen, a venture capitalist, who once said that by 2020, “retail guys are going to go out of business and e-commerce will become the place everyone buys.” The list of e-commerce firms turning Mr Andreessen on his head and opening shops is getting longer by the day: it ranges from Bonobos, a clothing retailer, to Screwfix, a builders’ merchant. Even Amazon’s boss, Jeff Bezos, says it could follow suit.

Academics have discovered that distance is surprisingly undead in the virtual world. One research paper shows that for every 1% increase in the distance between the country that you live in and a foreign country there is a 2% decrease in the chance that you will visit a website based in that country. Americans are more likely to visit Canadian porn sites than British ones.

David Bell, of the University of Pennsylvania’s Wharton Business School, tries to make sense of all this in a new book, “Location is (Still) Everything”. Mr Bell notes, for example, that almost half of Bonobos’s first-time customers heard about the company from neighbours. He maps the sales of online products, demonstrating that their popularity first spreads by physical proximity, from one zip-code area to next-door ones, and then by cultural proximity, from one zip-code area to another that shares social characteristics. The proliferation of mobile devices will further increase the importance of location: people will use their smartphones to look for local bargains and to show friends the latest products they have found online.

Companies are increasingly treating the physical and virtual worlds as complements rather than alternatives. The virtual world is better at some things—comparing prices, say, or giving consumers in the wilds of Kansas the same choice as ones in Manhattan. But the physical world is better at others: as Bonobos’s boss, Andy Dunn, points out, many customers still insist on examining clothes before buying. Retailers increasingly offer the best of both worlds with click-and-collect, also known as BOPS (buy online, pick up in-store). Macy’s is spending $400m remodelling its flagship New York store, in part to bring it into the digital age: there will be a mobile app to guide customers around and provide information on any product that catches their eye., an online seller of toiletries, dispatches them in distinctive, brightly coloured boxes, hoping for a physical-contagion effect: as people see neighbours receiving them, it sparks their curiosity and prompts them to visit its website.

As for the internet being the great “disintermediation machine”, putting swathes of agents, distributors and other middlemen out of work, that has proved only half-true. Many people now buy insurance direct from the insurer and subscribe to newspapers, in digital form, direct from the publisher. But estate agents, record labels and a whole host of other intermediaries are still around. Mukti Khaire of Harvard Business School argues that in many other areas middlemen are more important than ever: people are so confused by the overwhelming choice the internet brings, and the cacophony of user reviews, that the need for trustworthy guides and other sorts of intermediary is increasing.

Doubting the wisdom of crowds

This is particularly true of two of the most important areas of the modern economy: startups and the culture industry. Kickstarter, a crowdfunding website, has “curated pages” where potential backers can find projects endorsed by somebody they trust, rather than just following the wisdom of crowds. Expert reviews are still among the most popular features in brand-name newspapers and magazines: consumers apparently find these more credible than comments left by shoppers on Amazon or the opinions of self-appointed bloggers, who can sometimes be paid shills in disguise. One unscrupulous scribe was found to be earning nearly $30,000 a month churning out fake reviews.

The conventional starmaking apparatus is proving strikingly resilient. Hollywood has a new generation of agents who trawl YouTube for people making a name for themselves there. Amanda Hocking made a fortune by self-publishing her “Trylle” vampire-romance trilogy. But she sold her next book series, “Watersong”, to an old-fashioned publisher turning down an ostensibly higher offer from Amazon in the belief that she would be better off with a distributor who could get her books into Walmart.

The internet is now starting to transform education and health care. Given the technology’s capacity to cut costs and increase access, it would be wrong to give in to incumbents in those businesses who are dead set against reform. But it would also be unwise to trust in digital revolutionaries who insist those incumbents will inevitably be swept away by a wave of startups. There is a world of difference between disruption and destruction.

Reuse this content
When it's a matter of opinion, make your opinion matter
Each week, over one million subscribers
trust us to help them make sense of the world.

Join them. to The Economist today

Classified ads