Commerce: The Internet

Chapter two

Commerce: The Internet

Changes Everything

Ride the rocket of change

Not long ago I gave a talk to the board of directors of a German financial institution. These were experienced businesspeople. The youngest person there was probably fifty-five, and many of them were in their sixties. They’d seen a lot of changes in banking and they’d lived through a lot of technology changes, too. The bank had not yet, though, begun to use the new Internet technologies.

On the day of my visit they’d heard a series of talks from Microsoft employees about the company. When I walked into the room, they were all sitting there with their arms folded across their chests, looking unhappy.

“OK,” I said.” What’s the problem?”

One of them replied, “We think that banking is in the process of changing completely, and we’re getting technical talks from people here at Microsoft - more technical than we’re used to.” He took his glasses off and rubbed his eyes and said, “This is probably good, although it’s making us tired.” After a pause he continued. “It’s good that you’re just going to make all of your products better, but what is the overall plan? To view you as a long-term supplier, we need you to give us a vision of the future. What are your organizing principles for development?”

The senior Microsoft executive who ends a meeting with customers doesn’t usually bring a prepared talk. Instead, the person answers questions and makes a summary of what we’ll do in response to any important issues that have come up. So as I stood in front of the German bankers I was thinking, “Oh boy. We’ve spent eight hours talking to this bank and we haven’t answered the customer’s central concerns. Now I’ve got to do it without notes…”

But by that time I’d given my talk on the digital nervous system a couple of dozen times, and I’d been working on this book for almost a year. So I began to write down the major changes that I thought were going to happen with technology in the near future. I was writing down ten changes that I thought would have a significant effect on industries, I told the bankers. These were important changes in customer behavior that were all related to digital technology and were all happening now.

“I’m going to ask you whether you believe each of them will happen. Don’t worry now about how quickly, just tell me whether you believe they’re ever going to occur. If you don’t believe they will, then you shouldn’t change what you’re doing with technology. But if you believe they’re going to happen, and it’s only a matter of time, then you should start to prepare for that change today.”

“Do you believe that in the future people at work will use computers every day for most of their jobs?” I asked. “Today a lot of people use computers occasionally, but many knowledge workers may use their PCs only a few times a day. They may even go a couple of days without using PCs. Do you believe that today’s paperwork will be replaced by more efficient digital processes?” They did.

“Do you believe that one day most homes will have computers? In the United States today, about half of all homes have PCs. The percentage is a bit higher in some countries but much lower in most others. Do you believe,” I asked, “that one day computers will be as common in homes as telephones or TVs?” They did.

“Do you believe that one day most businesses and most homes will have high-speed connections to the World Wide Web?” I asked. They nodded agreement.

“Do you believe e-mail will become as common a method of communication among people in business and homes as the telephone or paper mail is today? Today not everybody uses e-mail even if they have a computer. Will that situation change?” They agreed that it would.

“Now, if most people have computers and use them every day,” I asked, “do you believe that most information will start arriving in digital form? Do you think your bills will arrive electronically? Do you think you’ll be booking your travel arrangements over the Internet?” They agreed that these changes were coming.

“Do you think digital equipment will become common?” I asked. “Do you think that all phones, cameras, videos, and TVs will soon be digital? Do you think that other new machines will appear in the home and be connected to the Web?” It was only a matter of time, they agreed.

“Do you see a time coming when notebook computers become computer notebooks?” I described what I meant: a computer notebook is a new machine that enables you to take notes as you do today on paper and lets you carry with you all the personal and professional data you need. This will probably be the last change to occur. “The great thing about a computer notebook,” I said, “is that however much you put into it, it doesn’t get bigger or heavier.” They laughed. There was a thirty-second conversation in German before one of them said, “We thought you said something funny, and then we realized you said something important.”

“Am I wasting your time?” I asked. “Do you believe these changes are ever going to happen?” By now we were beginning to have a conversation. They had a short talk among themselves in German. The banker who had spoken before said, “We’ve been talking about the same things at home and, yes, we believe it’s going to happen. When it does, it’s going to completely change the nature of banking.”

“When do you think it is going to happen?” I asked. They had another, longer conversation in German. Then they said, “We didn’t expect to make this decision here, but we have. We were going to tell you twenty years, but then we decided that within ten years these changes will either have arrived or becoming very soon. Banking will be completely different.”

“To prepare for that change,” I told them, “you need to make digital information flow everywhere in your organization.” I talked briefly about the need to use the digital tools that they already had for their knowledge workers. I talked about digitally linking their knowledge systems with business information systems to create a new infrastructure around the PC and Internet technologies. If they did these things, I told them, they would be prepared for the three basic business changes that will occur as the result of all the technological advances:

1. Most of the contact between business and customers, business and business, and people and government will become digital and self-service.

2. Customer service will become the primary way of adding value in every business. Human involvement in service will shift from routine, low-value tasks to high-value personal service to the customer.

3. The speed of digital operations and the need for more personal attention to customers will encourage companies to adopt digital processes internally if they have not yet adopted them for efficiency reasons. Companies will use a digital nervous system to regularly adapt their internal business processes to an environment that constantly changes because of customer needs and competition.

Complex customer-service and business problems would require powerful computers on both sides of the relationship - customer and employee-I said. The new relationships would be helped by various electronic aids such as voice, video, and interactive use of the same computer screen. We’d see a world in which fairly simple personal-companion computers became common alongside extremely powerful general-purpose PCs that support knowledge work at home or the office.

“Microsoft’s vision,” I ended by saying, “is to provide software that links all these digital machines together and enables people to create digital solutions based on the Web lifestyle. It’s as simple as that.”

The German bank board had a final question for me, which is the question on everyone’s mind: what should they do personally to get ready for this new digital world? My answer was: use the tools yourselves. Senior executives should use e-mail and other electronic tools to get familiar with the new way of doing things.

They should see what their competitors’ Internet sites look like. They should become Internet users. Buy some books and arrange some travel over the Internet, I told them, and see what it’s like. If you’re going to lead the digital age, you need to become familiar enough with the Internet to be able to imagine what the Web lifestyle will mean for your industry-even if the change is going to take years.

For years and years enthusiasts have been saying that the Internet will happen “tomorrow.” You’re going to keep reading predictions that the big change will happen in the next twelve months. This is just garbage. The social changes that have to occur take years, and the infrastructure has to be extended. But when the social and technical changes reach a certain point, the change will be quick and permanent. The point will come where the Web lifestyle really will take off, and I believe that’s some time in the next five years. As I said in The Road Ahead, we always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten. Don’t let yourself be fooled into doing nothing.

It’s hard to think of a business category in which the Internet won’t have an effect or in which there aren’t already new Internet companies. Lots of firms now wish they were the first Internet book store or travel agency, winning the first customers, the public enthusiasm, the famous name.

Internet companies are not just learning new ways to do business. They are also rushing to break down the barriers between different areas of business. Amazon.com, which began as an Internet bookseller, has begun to sell CDs. There’s no reason for Amazon not to sell other products as well. The initial reason for your company to go onto the Web might be to obtain cost savings and attract new customers. When you have customers interacting with you, you have an amazing ability to build on that relationship to offer a broader set of products.

An Internet business is not like a bank branch where you can train employees on only a small number of products. The virtual nature of the Internet enables whatever shopping your customers want to do. You’ll see more companies like Amazon, that are strong in one online area and then expand their product offerings. The warning to every business is that even if no one in your industry jumps in early, big online companies, trying to cover every commercial area, will move into yours.

Learn about the Internet today. Find some of your customers who are already adopting the Web lifestyle. Use this group to develop models for how you might do business overall. Within a decade most of your other customers will have made the shift, and you’ll be prepared.

The middleman must add value

Here at the start of the twenty-first century, a basic new rule of business is that the Internet changes everything. Internet technologies are altering the way every company, even a small one, deals with its employees, partners, and suppliers.

Not every company needs to use the Internet to interact with its customers right now, but soon a company website where customers can do business with the firm will be as essential as the telephone and a mailing address have been. Already the great majority of Fortune 500 companies have websites. The Internet is reducing costs and changing the relationships of companies with their customers. The Internet produces more competition among sellers and helps sellers to find possible customers.

In pre-Internet days, the only way customers could get goods from most manufacturers was through layers of middlemen.

Today customers can do business directly with manufacturers eager to offer Internet service. Today any manufacturer can provide the Internet version of a factory store.

Before the Internet, gathering all the information for financial services, travel options, and other products required lots of time. Huge numbers of service companies made their money by collecting and organizing that kind of information for customers. Today, despite search tools that aren’t perfect, customers can go to the Internet to find much more of the information they need. And any company can provide valuable information cheaply on the Internet, without branch offices.

In 1995, in The Road Ahead, I described how the Internet is helping to create Adam Smith’s ideal market, in which buyers and sellers can easily find one another without taking much time or spending much money. The first problem in most markets is finding someone to do business with. The second problem is understanding the nature and quality of the goods and services that are being offered. The Internet makes it easy for a buyer to get background information about a product and to compare prices easily. Buyers can also tell sellers more about what they require, and sellers will be able to target their goods at the people who are most interested in them and sell related products.

The Internet is a great tool for helping customers to find the best deal they can. It is quite easy for buyers to jump from one website to another to find the best prices on some goods. At least two different services provide price comparisons for customers shopping for goods such as books and CDs. Some travel sites feature automated bargain finders that can find low air fares. At least one company, Priceline.com, reverses the buyer-seller relationship by having buyers bid the price they’re willing to pay for a car or a plane ticket and offering that price to various sellers. It is unclear yet how broadly this approach will be used, but it is possible only through the Internet.

Over time, software will automate price comparisons even more, until they become effortlessly electronic. At least one online store already checks other major sites for the prices of commonly purchased items and automatically reduces its prices to make sure that they’re always slightly lower. Without stores to pay for, the seller may still make a profit. Customers will be able to join together electronically to get lower prices in ways that have not been easy before. There will even be cases in which software representing the seller negotiates with software representing hundreds or thousands of customers.

For the majority of products which are available through many stores, customers will benefit most. For unique products and services, sellers will find more possible customers and may charge higher prices. The more customers adopt the Web lifestyle, the closer the economy will move toward Adam Smith’s perfect market in all areas of commerce.

Customers can now deal directly with manufacturers and service providers, so there is little value added in simply transferring goods or information. Various people have predicted “the death of the middleman.” Certainly the value of some kinds of middleman is quickly falling to zero. Travel agents who simply book air fares will disappear. This kind of high-volume, low-value dealing is perfect for a self-service Internet travel site. In the future travel agents will need to do more than book tickets; they will need to create a total travel adventure. A travel agent who provides highly personalized tours of Italy or the California wine country will still be in great demand.

If you’re a middleman, the Internet’s promise of cheaper prices and faster service can end your role of assisting the contact between the producer and the customer. If this is happening to you, one option is to use the Internet to get back into the action. That’s what Egghead, a major chain of software stores, did after struggling for several years. Egghead closed all of its physical stores in 1998 and began selling just on the Internet. Egghead now offers a number of new online programs that take advantage of the Internet, such as electronic sales for about fifty different categories of hardware and software, and for used computers. It’s not yet clear whether Egghead will succeed and meet the test described in this chapter, which is that the middleman must add value, but the company certainly understands the principle.

Every store needs to take the Internet into account. The success of the Amazon.com bookstore, which exists only on the Internet, caused Barnes & Noble to combine its successful physical bookstores with a strong online presence, and to start working with Bertelsmann, a leading international media company.

For service industries, the Internet requires you to be either a high-volume, low-cost provider, or a provider of highly personalized services. For the high-volume, low-cost model, you use Internet technology to create a self-service approach. You make a lot of information available to customers and you drive a lot of traffic through your Internet site by offering the best price. Because only a few companies in any market will be the high-volume players, most companies will have to find ways to use the Internet not just to reduce costs, but also to deliver new services.

E-Trade Securities started low-cost finance services on the Internet in 1992. By 1998 at least seventy companies bought and sold shares for their customers online, and the number was going up. Finance firms that still offer a service face-to-face or over the phone have a problem: most of the data about shares that these companies provide for their customers is available free on the Internet. But if the companies that do not offer an Internet service become electronic traders (e-traders), what can they do that is different to what customers are already offered?

Merrill Lynch, the market-leading finance company, asked itself exactly that question when it looked at the way it did business in 1997. Customers have invested with Merrill Lynch for more than a century. The company has managed their shares by getting large amounts of financial data, analyzing it, and making long-term financial plans. By 1997 customers had more than one trillion dollars invested with Merrill Lynch. But the growth of low-cost trading and then Internet-based trading between 1992 and 1997 showed managers that the company would have to change. As Howard Sorgen of Merrill Lynch said, “Our customers were changing. The way people got information and made decisions was changing. We would have been foolish to think we didn’t have to change, too.”

Merrill Lynch’s main assets are its financial consultants, the people who advise clients about their investments. But in 1997 they were spending a lot of their time finding data and not enough time advising clients about their investments. The information systems at that time were expensive and hard to use. All the different categories of data-share prices, product information, the customer database, pricing - were on different systems, and all of them were incompatible and difficult to use. The new information system was built round the financial consultants. It helped them get data and develop the best financial plan for the client as quickly as possible. To save money and development time the company also wanted to use existing products when possible.

Merrill Lynch managers asked their board for a billion dollars to invest in new technology. The board agreed that the best way to compete was to give the company’s knowledge workers - the financial consultants-the best knowledge tools. So the managers got permission for what became a five year, $825 million project. This was completed on time in October 1998 for close to the $825 million estimate. Of that cost, about $250 million went on software development. Much of the remaining expense - a system for getting share prices and market news, for example - would have been required whatever software Merrill Lynch used. The actual difference in cost was about $250 million over four years. For slightly more than $60 million a year, approximately $3,500 per financial consultant, Merrill Lynch improved the information system for the 14,700 financial consultants in its 700 US offices and for another 2,000 consultants internationally.

Chief Technical Officer Howard Sorgen showed me the Merrill Lynch solution. All systems are now fully compatible. All financial information, from any source, is organized into “pages” and then “books.” The financial consultant can look anywhere in these books - at share prices on NASDAQ, New York, and Tokyo, for example. The financial consultant can see immediately if all the client’s shares are doing well or badly and why. Before, this took a lot of time as shares in each company were looked at individually. Now, the financial consultant can even see immediately what would happen if one lot of shares was bought and another sold. Soon clients will be able to see these calculations on their own PC screens. Also, the system behaves like a well-trained assistant to the financial controller. If the controller’s client has shares in a company, the system will put background data about the company on the screen without being asked, whenever the controller asks for the share price.

Since the changes in the system at Merrill Lynch, financial consultants have more time to build stronger relationships with clients. Merrill Lynch then decided that giving more information to clients would make the relationship with them stronger, not weaker.

Merrill Lynch Online is a version of the Merrill Lynch system for customers. It gives the customer some background data on which decisions are based, and it also has basic information about the client’s account with Merrill Lynch. The company hoped to get 200,000 customers in the first year, an average of about 550 people a day. Instead, 700 to 800 people a day went online with the system. One surprise was the age of the customers who took the system first. Merrill Lynch thought that the younger customers who had grown up with the Internet would try the system first, but the older, wealthier clients were the first customers.

After the first success, Merrill Lynch added more to the online service. Today, customers can e-mail their financial consultants, look at the latest share prices, and buy and sell shares. Merrill Lynch now see the Internet as an opportunity, not a threat. It gives the client information, but financial information is not financial knowledge. That is still provided by the financial consultants, who now have more time to concentrate on it. And they provide it to well-informed clients, who ask better questions than badly-informed clients. The aim now is to have the client and the financial consultant looking at the same data on screen at the same time. Then, as Merrill Lynch people like to say, “the real magic starts.”

Touch your customers.

As electronic commerce grows, not only middlemen will find creative ways to use the Internet to strengthen their relationships with customers. The businesses that treat e-commerce as more than a way to easy money will do the best. Sales are the final goal, of course, but the sale itself is only one part of the online customer experience. Some companies will use the Internet to interact with their customers in ways that haven’t been possible before. They will make the sale part of a series of customer services for which the Internet has unique strengths.

It’s important that customers come away from electronic interactions pleased enough to tell their friends. This is the most powerful means by which any product or company builds a reputation, and the Internet is a medium made for easy communication. If a customer doesn’t like a product or the way a trader has treated him, he’s likely to e-mail all of his friends. An Internet car site called Autoweb.com asks customers about dealer service by e-mail, and removes dealers from its lists if they fail to improve their service as a result of complaints.

Today, the main competition for online stores is physical stores. Physical stores have much higher sales volumes than online stores. Online sales in 1998 were only 0.5 percent of the total sales in the world’s seven largest economies. But that percentage will grow enormously in the next decade. As e-commerce takes off, the main competition for Internet sites will no longer be physical stores but other online stores.

Rapidly growing categories for online commerce include finance and insurance, travel, and computer sales. Companies such as Cisco Systems, Dell Computer, and Microsoft are now doing billions of dollars each in business over the Internet every year. Chrysler expects its 1.5 percent online sales volume to jump to 25 percent in four years. Even the most cautious estimates project an annual growth rate of about 45 percent for online sales. The highest estimates were for more than $1.6 trillion in business by the year 2000. I think this is too low.

Dell was one of the first big companies to move into e-commerce. The company supplies computers worldwide, selling more than $18 billion worth of products. It began selling its products online in mid-1996. Its online business quickly rose from $1 million a week to $1 million a day. Soon it jumped to $3 million a day and then $5 million. It is still rising. Computer buyers clearly like and find it easy to buy their computers on the Web. At the time of writing, Dell has more than 1.5 million visits a week to its website, and 11 percent of its business is online. Dell hoped that this would grow to 50 percent, maybe as early as 2000.

Michael Dell, who started the company, believes in direct selling and computer-aided commerce. But he knows that the Internet has to be a basic part of the overall business strategy. Dell’s entire business is based on online commerce and support. Dell’s first site provided product information, let customers buy online, and asked for customer ideas. Dell learned a lot from the suggestions that came in, mainly online. Over time Dell has made hundreds of changes to its website. Customers can do more and more online. They can now see online the progress of the product they have ordered.

“The Internet doesn’t replace people. It makes them more efficient,” says Michael Dell. “We had to build an Internet system that was so convenient, customers got more value for their time than they did on the phone.”

Having more information online for customers didn’t reduce the value of Dell’s sales team. Like Merrill Lynch, Dell found out that an educated customer is a better customer. Dell’s sales team became more like consultants to the customer. And they have more time for consulting because buying and selling online is so much quicker.

One of Dell’s unique approaches to customer support was to create more than 5,000 individually designed pages for its big customers. About 65 percent of Dell’s online business is from individuals and small businesses, and the Premier pages are one way that Dell is growing its corporate business. They make large purchases online easier and quicker.

Only Information Technology (IT) can balance the need to keep enough stock to supply customers quickly with the cost of keeping too much stock. Perfect information about what the customer needs is the answer to the need for zero stock waiting for an order.

Marriott International, the world’s largest hotel company, earns more than $10 billion from its 1,500 hotels around the world under ten different brands. The hotels have had an online booking system since 1996, and although Marriott says the system was simple and just an experiment, it did $1 million in business by the end of the year.

Marriott saw that the Internet could do even more, and in early 1997 they created a special Internet team. From the start, the technology team worked closely with the business team. Studies showed that one of the subjects people wanted information about most was travel. “The Internet is all about service,” says Marriott’s Mike Pusateri, “providing service to customers in a way that is faster, friendlier, and more personal than they or the company has ever experienced before. And service is Marriott’s business.”

Marriott was one of the first companies to build an interactive home page on its website. You can search online for a Marriott hotel by asking for hotels in a certain city, for hotels with certain facilities, and for hotels that have certain features in their rooms. Linked pages show attractions close to the hotel, for example a golf course. Or, if you want to go to a Chinese restaurant, the system will list the six nearest. When you have chosen your hotel, you can find out about prices and book a room. There are also links to other sites that book rooms, like TravelWeb.com and Microsoft Expedia.com. Marriott’s site has links to 1,000 other webpages.

Because each visitor searches for exactly what he or she wants on the Marriott website, each visitor has a different experience. The website is visited by 15,000 people a day, which brought in more than $2 million a month in money from Internet sources in 1997. It’s hard for Marriott to know what percentage of this return would have come in anyway, by traditional methods, but it is clear that the Internet is attracting wealthier customers who prefer its more expensive hotels. On average, an online customer spends more with Marriott than the average customer.

Marriott has found, as others have found, that the more interactive a site is, the more business activity it gets from its visitors. For example, instead of floor plans future customers see virtual pictures of the hotel. Soon customers will be able to enter the place they want to stay and the names of other Marriott hotels they have stayed in. The site will then give them the nearest Marriott hotel that is like the hotel they enjoyed before.

Marriott does not cut out middlemen, it makes them part of its customer service. The company provides special places on its website for travel agents and meeting planners. Thousands of meeting planners view the Marriott site because they don’t have to visit the hotel before they make a decision on where to have their meeting.

Adopt the Web lifestyle.

If you asked your friends why they use the phone to communicate with their friends, or why they turn to the television for entertainment or breaking news, they’d look at you in a strange way. If you asked your friends whether they’d adopted “the electricity lifestyle,” they’d think you were crazy.

People in developed countries don’t think much about their electrical products; we just use them. But people who are now in their fifties can remember when just a few families had TVs. Our grandparents can remember when much of rural America was without electricity. It’s taken more than a hundred years for the electricity lifestyle to revolutionize civilization.

When streets and houses were first wired, the only use for electricity was for lighting. Electricity’s capacity to change everyone’s lifestyle was hidden. Electric light was cleaner, safer, brighter, and more convenient than natural gas, oil, or candles. When the infrastructure was in place, though, new products were created that took advantage of electricity. Electric refrigerators, record players, and air conditioners applied the new technology to existing needs. The most revolutionary uses of electricity were the phone, the radio, and the TV. These new machines changed our economies and our lifestyles. People hadn’t dreamed of these products before the infrastructure was available.

Because the Internet is a communications infrastructure that depends on electricity, you could say that its popular acceptance is an extension of the electricity lifestyle. But the Internet is enabling a new way of life that I call “the Web lifestyle.” The Web lifestyle, like the electricity lifestyle, will be characterized by new things happening quickly. The infrastructure for high-speed communications is producing new software and hardware that will change people’s lives.

Intelligent machines such as the PC are becoming more powerful and less expensive. Since they are programmable, they can be used for many different tasks. Within a decade most Americans and many other people around the world will be living the Web lifestyle. It will be natural for these people to turn to the Web to get news, to learn, to be entertained, and to communicate. It will be just as normal as picking up the phone to talk to somebody or to order something. The Web will be used to pay your bills, manage your finances, communicate with your doctor, and do any business. Just as naturally, you’ll carry one or more small machines using a radio connection to stay constantly in touch and do electronic business wherever you are.

For a lot of people the Web lifestyle is very close today. By 1998 more than sixty million Americans were using the Web regularly, up from twenty-two million the year before. By 1998 the average user went on the Web eight to nine separate times a month, spending a total of about three and a half hours a month online. It’s exciting to see that people living the Web lifestyle are using the Internet to learn and buy in new ways. When the Sojourner landed on Mars in the summer of 1997, NASA’s website had forty-seven million hits in four days from people seeking more detail than they could get from the traditional news media.

Businesses are providing a wide variety of information and services, like real-time stock quotes, sports scores, and city guides. You can buy almost anything on the Web, from paintings to old toys. The Web is an ideal vehicle for helping to build a community, too. There are sites for tracking missing children, for helping people adopt pets, and for every pastime that you can imagine. Sites that involve citizens are getting excellent traffic flow.

A cultural change as significant as a move to the Web lifestyle will depend on the age of users to some degree. The kids growing up with the new technology will show us the full possibilities. Personal computer use, high-speed networks, and online communication are widespread. Universities are getting rid of paper forms and registering students for classes over the Web. Students can look at their grades and even send in work over the Web. Teachers hold online discussion groups. Students e-mail friends and family as naturally as they call them on the phone.

The adoption of technology for the Web lifestyle is happening faster than the adoption of electricity, cars, TV, and radio. Many people who use PCs at the office install them at home for work, and then use them for much more. A lot of people over fifty-five years old, who wouldn’t usually add new technology to their lifestyle, want to use the Internet as a way to stay in touch with their friends and families. Revolutionary new uses of the Internet that none of us can accurately predict today will change the world as completely in the twenty-first century as the unexpected uses of electricity did in the twentieth-and faster.

As people move rapidly online, one of the most basic changes will be the degree to which customers will manage their finances online. In 1998 only about one million of the fifteen billion total bills in the United States were paid electronically. Little online customer service was available. In fact, though customers can pay some bills online, in almost every case they still receive them on paper. When customers are able to pay online, the US Commerce Department estimates, processing costs will drop more than $20 billion annually. Today you have to calculate on paper what bills you want to pay and how much you want to pay on each. In the future, software will enable you to calculate online the effect of various payments on your bank balance. You’ll make your payment exactly when it’s due. And bill payment software will communicate with financial management software.

By late 1998 about half of all American homes had PCs, and about half of those PCs were connected to the Web. The percentages are lower in most other countries. Reducing the cost of high-speed communications so people can remain constantly connected, and making the software easier to use, are essential to making the Web lifestyle common. I believe that by the year 2001 more than 60 percent of US homes will have PCs and that 85 percent of those homes will be online. For other countries to reach these levels of use they will have to invest heavily in communications infrastructure.

People don’t realize how much the hardware and software will improve. Take just one example: screen technology. I do my electronic mail on a fifty-centimeter flat screen. It’s not available at a reasonable price yet, but in two or three years it will be. In five years a hundred-centimeter flat screen will be affordable. Screen quality will have a big effect on how much people will read on the screen instead of on paper.

The cost of a personal computer is also coming down. Historically, the PC industry has concentrated on creating a more powerful PC at a particular price. Now advances are reducing prices as well. Capable PCs cost much less than $1,000 today, and lower prices are expanding the market. Looking at a ten-year time frame, you’re going to have PCs that cost the same as a typical TV. In fact, the difference between a TV and a PC will be small because even the boxes that connect TVs to the cable system will have a processor more powerful than the one we have today in the most expensive PC.

Smaller personal companions will become common. These will include the small PCs on the market today, and new PCs that are the size of a wallet, which will enable electronic operations. The phone, radio, and TV will pick up new capabilities as they go digital. Some machines will be carried with you. Some will be in different rooms in your house. Others will become standard in vehicles.

Any of them will enable you to use e-mail and voice mail, get information from stock reports or other news, and find out the latest weather and news of your flight. These machines will connect through wires or through technologies that don’t use wires, such as radio. Though the machines will operate independently, they will exchange data among themselves automatically.

These machines will become part of ordinary life. When you leave the office for the day, your personal digital companion will download your e-mail, which might include a grocery list from your husband or wife. At the store, you can download a new recipe, and all of the items for the meal will be added to your list. Your digital companion is smart enough to speak to all the machines that need to know your home or work schedule, but only tells the kitchen machines about the recipe. From a computer in the kitchen, you check the house. A video of the front door area shows who called when no one was home.

Digital security cameras connected to a network are becoming cheaper and will be common to reduce theft. Some schools are providing cameras to enable parents to check on their kids while they’re at school.

While dinner is cooking, you go to a private website for your extended family, and find out that everyone has been in the chat room discussing what to do when the family meets. They used electronic voting to choose half a dozen possible events, and they’ve asked you to book as many of them as you can. A software agent, which knows you have already booked travel for the trip, suggests several things to do locally, including sailing, which was on your family’s list. The agent also tells you about a new, lower air fare to your destination. You digitally book the sailing and the lower fares.

When you’re ready to watch TV, you might look at the electronic programming guide on screen or use another software agent to see what’s on. You’ve told the agent your viewing tastes and it’s tracked your actual viewing patterns, so it recommends several shows among the hundreds available on digital TV. You choose to see a football game. While watching, you use the interactive menu to enter a contest and to vote for the most valuable player. Viewer scores will count for half the final result. You watch a commercial advertising a car. Most viewers see a commercial for a truck, but data that you have volunteered through your TV indicates that you’re a better candidate for a family vehicle.

Development of intelligent, interactive TV will come as television moves to digital technology. Digital broadcasts are easy to correct for errors, and allow high-quality video and sound. Digital TV can do a lot more than improve broadcast quality, though. Satellite and cable companies are already using digital TV to deliver more channels. Over time, the biggest effect of digital TV will come from the ability to include other digital data, providing interactivity, intelligent software, targeted advertising and sales offers, and the Web.

Broadcasters will provide greater content such as links to relevant websites or entirely new Web content that adds to the broadcast, or music, or software that can be downloaded for a fee. Many of the new features require a two-way link, which is easy for the new cable TV systems. New technology will make the TV interface easier. Trying to record one or more programs at certain times and days remains annoyingly complex. In the future, taping a show will be as simple as telling the TV exactly what you want to tape. Using speech to interact with the TV, PC, or other personal companions will be common within ten years.

Bandwidth, the information-carrying capacity of a digital communications system, remains the biggest barrier to the widespread adoption of the Web lifestyle in all countries. Bandwidth is also the biggest cost. In developed nations businesses can generally afford the bandwidth they need to work digitally because lots of communications companies are wiring business districts. But it will take much longer to get affordable wiring into homes, schools, and libraries, which is critical to achieving a fully connected society. We will only see the benefits of a Web lifestyle when high-bandwidth systems are in place. The most important step for a country to achieve a high-bandwidth infrastructure is to encourage competition in the communications industry.

Scientists all over the world are exploring new communications technologies - and old ones. Recently a British engineer developed a way to send high-speed voice and data signals on ordinary electrical current, raising the possibility that Internet service could one day ride into your home over our existing infrastructure of electrical wires. This and other technologies such as satellite broadcasting are exciting because they don’t require us to replace the existing wiring that already connects most homes in the developed world. It’s a huge task to get the Web infrastructure in place all over the world, but the advances in many areas make it likely that the speed of improvement will surprise everyone in the next decade.

The social effects of the Web lifestyle will be enormous. A lot of people fear that computers and the Internet will make life less personal, creating a world that’s less warm and friendly. Some people were afraid, at first, that the telephone would reduce face-to-face contact, too. Two people might call each other when they would have talked face-to-face without the phone, and two people might e-mail each other when they would have met face- to-face without e-mail.

Any medium can be misused. The development of personal and professional manners for the Web will continue. It’s easy enough to say that the Web lifestyle, with everyone in his or her little world, will cause society to fly apart. I believe the opposite is actually true. Just as the phone and e-mail have increased contact between people living in different communities, the PC and the Internet give us another way to communicate. They don’t take any away.

In reality, the ability to use the Internet to move or change the boundaries of our communities is strengthening personal and cultural connections. The city of Amsterdam, in the Netherlands, has Internet discussions about issues like city planning, safety, and drugs. Citizens can connect to the police by e-mail. An Egyptian site for children called the Little Horus website contains more than 300 pages of information and pictures covering Egypt’s 7,000 years of civilization. It also has information about Egypt today, including its economic, cultural, and social life. The “Tour” section includes tips on popular destinations for children.

The Web lifestyle is about broadening horizons, not narrowing them. Building communities is going to be one of the biggest growth areas in the next few years on the Web. The Web dramatically increases the number of communities you can join.

In the past you might have had time to be a part of your neighborhood community and one or two social organizations. In the Web lifestyle you are limited only by your interests.

One of the most powerful effects of the Web is the way it can connect groups of people independent of geography or time zones. If you want to get together a group of enthusiastic card players or talk about issues with people who share your political views, the Web makes it easy to do. If you want to follow what’s happening in your hometown, the Web can help.

How are we going to find the time to live a Web lifestyle and join more communities? The Web will make things more efficient than they used to be. You can quickly find out how much your used car is worth, plan a trip, or find out anything you need to know when you want to make a major purchase. These things are easy on the Web today. And people will probably trade some of the time they now spend reading the paper or watching TV for the information or entertainment they’ll find on the Web. A British study in 1998 showed that about 25 percent of the British adults who used the Internet watched less television than they did before.

Much of this book is about having all the information we want at the tips of our fingers. Most people want to find the best price for a product or to be up-to-date on the important issues affecting their local or national communities. We have managed without this information because obtaining it has simply been too difficult. The Web lifestyle isn’t about changing human nature or the basics of how people live. Instead the Web lifestyle gives more people a chance to pursue their interests in a better way.

The Web lifestyle will change the way people shop. With the Web as the world’s biggest collection of shopping malls, customers will have choices they didn’t have before. They’ll be able to find all the choices for goods they want and, in many cases, have them specially made. They can have the final product delivered directly to their doors. Because customers are demanding faster and more personal service, and stronger relationships, the Web lifestyle will drive companies to develop a digital nervous system in order to stay with their competitors.

The Web connects workers, friends, and families in new ways. Communities based on shared interests are forming with members from all over the world. Governments have the chance to involve citizens more than ever before. By enabling people to shop, get news, meet one another, be entertained, and gossip in ways we’re only now beginning to understand, the Internet is becoming the town square for the village that the world will be tomorrow.

With a Web lifestyle, people can overcome many of the barriers that have existed for so long that we almost take them for granted. The Web lifestyle is not about adding complexity to already busy lives. As people become accustomed to the Web lifestyle, they’ll eventually accept it unthinkingly, just as they do the electricity lifestyle they live today.

Change the boundaries of business

A flow of digital information changes the way people, organizations, and businesses work. Internet technologies will also change the boundaries of organizations of all sizes. In changing the boundaries, the “Web workstyle” of using digital tools and processes enables both organizations and individuals to change their roles. A corporation can use the Internet to work smoothly with professionals such as lawyers and accountants who remain “outside” the company walls. An important reengineering principle is that companies should concentrate on their basic skills and outsource everything else. The Internet allows a company to do this to a greater extent than ever before by changing which employees work within the walls and which work outside in a different role.

Our basic skills at Microsoft are creating high-volume software products, working with other software companies, and providing customer service and support. We outsource a number of functions that don’t fall into those categories, from help-desk technical support for our employees to the physical production of our software packages. The Web workstyle makes it possible to deal better with unpredictable demand. Because you have a great need for a skill, and then you don’t, for some areas you want to be able to hire staff for a short time to deal with peaks and valleys. The Internet means that more companies can take a “studio” approach to running major parts of their businesses. Big Hollywood studios have full-time employees to handle finance, marketing, and other continuous projects, but the creative side of the business, the full-time movie-making staff, isn’t very big at all. When a movie concept is agreed upon, a director brings together a large group of people to create the film. When they’re finished, they move on to other projects.

Web technology makes it possible for many different kinds of projects to be structured as studio-type work. A project owner who wants to hire a team can go online, describe the project, and find out who’s available. People and organizations with the right skills can declare their interest, and the project owner can build a team quickly. People looking for work will find more opportunities for employment that meets their particular interests and needs-if they have highly specialized skills, for example, or if they want to work only certain hours.

Despite these changes, big firms won’t break themselves down into project-by-project production companies. Big companies will continue to balance the load of their work as they always have - they’ll just use technology to do it more efficiently. Every company will experiment to find its most efficient size and organizational structure, though the trend will be toward smaller companies. Medium-size and small companies can take advantage of the boundary-changing possibilities of the Web to act much bigger than they are, without adding employees or offices. A small company with the right skills can bid on and lead a movie production, a construction job, or an advertising project. By joining with other companies and professionals quickly, it can act as a virtual large company to work on the project until its profitable end. Because the team can be broken up at the end of the project, the company can manage labor resources without the administrative burden of a large full-time staff.

Some employees in companies of any size are naturally nervous about the effects of the Web workstyle. They assume that if their company chooses to build itself around Web technologies, their jobs may disappear. They won’t - unless “restructuring” is just a fancy term to hide sackings. When a company downsizes, jobs are lost. When a company outsources, jobs move. The goal is not to get rid of work, but to move the responsibility to specialists outside. It’s much more efficient for many companies, including Microsoft, to have an outside company handle installation and support for small computers, for example, because companies that specialize in such work can develop world-best skills and because we can ask for competitive bids for the job.

Employees who react to the possibility of outsourcing with fear are assuming that work belongs “in” the company and not “out.” As companies change, some people will have difficulties. Despite the understandable anxiety, employees should also look at the changes as opportunities to define their jobs the way they want them, and to work for an organization of the size and personality they prefer. They can even use this revolution as a chance to start their own business. Not long ago, one person who had been a writer watched Microsoft outsource writing work and recognized an opportunity. Today this person has a fine business managing a dozen or more writers, and Microsoft staff spend their time defining the work to be done instead of trying to manage the writing process for a bunch of different people. Overall the changes in organizational structure will be good for good employees.

The Web workstyle is particularly well-suited to lawyers, doctors, accountants, and engineers, who usually work independently or in small teams. One of the reasons professionals have traditionally organized themselves into firms is to deal with the rises and falls of customer demand. Now, instead of joining together to make sure the workload is shared, they’ll also have the choice of working on their own and using the Internet to find customers.

Not everyone will choose this approach. A lot of people want to work for bigger firms. They like the idea of belonging to one company, working on long-term projects, and being part of the community and culture of a particular workplace. They invest in their career, and the company invests in them. A lot of the most interesting jobs, such as software design at my company, are central areas that won’t be outsourced. Most companies, including Microsoft, work hard to make it attractive for good employees to stay long-term. Developers join Microsoft because they see the chance to design software or develop technologies that will be used by millions of people. Like many artists, they want their work to reach the largest possible audience.

People who want to work for a big company will work for one, and people who don’t want to will have interesting alternatives. A Web workstyle also makes it easier for people who have good skills but who can’t, or choose not to, work full time. Because they can find more work over the Internet, and do more work from home, those people will have new opportunities. Society will benefit by making better use of this huge pool of talent.

As a business manager, you need to take a hard look at your basic skills. Look again at the areas of your company that aren’t directly involved in that work, and consider whether Web technologies can enable you to outsource those tasks. Let another company take over the management responsibilities for that work and use modern communications technology to work closely with the people - now partners instead of employees-doing the work. Also, consider the employees who have good skills and experience, but decide they don’t want to work full time. Better communication tools may allow you to continue using these people. The competition to hire the best people will increase in the years ahead. Companies that give extra freedom to their employees will have the advantage in this key area.

Get to market first

Customers want high-quality products at low prices, and they want them now. Every business, whether it’s a producer of products and services or a supplier to that producer, has to react quickly while keeping quality high and price low. Information technology has become a major contributor to the faster responses, the higher quality, and the lower price rises that have defined business in the last decade.

Few industries illustrate the two main pressures of shrinking time and improving quality better than the car industry. Japanese car designs in the 1980s appeared fresher and their quality improvements more frequent than in American cars because Japanese car makers could take a car from concept to mass production in three years. American car makers typically took four to six years, and their costs were higher.

American companies responded by breaking down the organizational barriers that had divided design, manufacturing, and sales divisions from one another. They also improved communications with their external partners. Designers, engineers, suppliers, and manufacturing personnel began to work in tight teams that communicated electronically, cutting the time from product design to salesroom floor by half.

Other process improvements in the car industry have been significantly helped by technology, including the computer-aided design (CAD) of cars. The 3-D modeling capacities of CAD programs enable engineers to design a vehicle without having to build a model by hand first. The designers can see whether parts will fit together and can change part designs without building special tools. Electronic links between car manufacturers and suppliers have already reduced the error rate in parts delivered by 72 percent, and saved up to eight hours per week per car in labor costs.

Customers have benefited from better cars, produced more quickly. Ford’s achievements in production are representative of the entire car industry. In 1990 the company took five or more years to take a car from concept to customer, and it experienced 150 faults for every 100 cars, or 1.5 faults per car. By 1998 Ford had cut its cycle time by more than half, to less than twenty-four months. Its fault rate had gone down from 150 to 81 faults per 100 cars.

In some industries the issue is getting to market fast when change is more and more complex. Intel, for example, has always had a ninety-day production cycle for its chips, which power most PCs. Intel expects to maintain this ninety-day production rate, although the processor is getting more and more complex. The number of transistors in the chip increased from 29,000 in the 8086 chip to 7.5 million in the Pentium in 1998, and what the processor is capable of grew by 10,000 in the same twenty years. By 2011 Intel expects to deliver chips that have one billion transistors. Moore’s law says that the power of the chips doubles every eighteen to twenty-four months. If cars and cereal went the same way, then by Moore’s law a car would cost twenty-seven dollars and a box of cereal would cost a penny.

Intel uses a variety of management, production, and digital methods to maintain efficiency while putting more and more transistors onto a chip the size of a thumbnail. Each time the production process changes, new factories are built that cost more than a billion dollars each.

In 1998 Intel introduced a “copy exactly” strategy to maintain the same level of efficiency and quality across all its chip factories. A program called D2000 made sure that every design engineer got the benefit of best practice across the organization. Intel discovered that more than 60 percent of the problems the designers faced had already been solved by another design team. It’s very likely that any large company using manual processes would find a similar amount of repeated work. D2000 has helped Intel to almost double the speed of new product production since 1994, and it has helped Intel toward its goal of volume production from the first design of a chip, without having to go through several versions of a design to get it right.

Although banks have always been big users of information technology, they have not had a reputation for fast time to market with new products or services, except for Banco Bradesco, the largest bank in Brazil. With nearly 2,200 branches and twenty million customers, Banco Bradesco has $68.7 billion in assets and serves three million people a day. It was the first Brazilian bank to use computers in 1962, and it was the first bank to offer automated cash machines, in 1982. Banco Bradesco uses technology to stay ahead of the competition. Even six months is too long to bring an idea to the market; the usual development cycle is weeks or, at most, a few months. The bank also aims to bring a new product or service to its entire customer base at the same time.

For one small-business customer, Bradesco developed software to assist with money going into and out of the business. Now about 4,100 businesses are using this program. For another customer, Bradesco developed a salary card that employees could use in a Bradesco cash machine, even if they did not have an account with the bank. The card is now in use at about 1,300 companies and will soon be in use at 2,000 companies with one million employees. In each case, Bradesco was the first bank to offer the service.

In 1996, Banco Bradesco became the first bank in Brazil, and only the fifth in the world, to use the Internet to offer banking services. By 1998 the number of online customers was growing at 12 percent per month. Online banking is more popular in Brazil than in any other country. The bank’s website, BradescoNet, offers a full range of financial services. By being the first important commercial Internet site in Brazil, the bank has the opportunity to become the site that Brazilians go through to get to other sites. What better way to keep customers loyal to your company?

But the bank recognizes that it needs to use its digital nervous system even better in the future. The bank wants to collect more information about each customer so that it can sell new financial products targeted at the right people. For example, if a program finds a customer paying car insurance, the bank could offer a loan to buy a new car, even if the customer financed his present car at another bank. Customer data is one of the bank’s best assets. It will take Bradesco several years to put together all the information they have, but when they do they can offer many more financial services targeted at the right people.

Time to market has got faster in the PC industry than anywhere else. In this situation a better flow of digital information does not just improve the company, it is essential for the company’s success.

In just a few years the product cycle for Compaq computers dropped from eighteen months to twelve months. By late 1998 it dropped to six to nine months for business products and to four months for consumer products. But with its older information systems, Compaq needed forty-five days to collect its worldwide sales information and reduce it to the single set of numbers needed for product planning. By the time it could communicate its manufacturing needs to its suppliers, the company would be halfway through the four-month product lifecycle for important products.

Compaq started an Enterprise Resource Planning (ERP) system. All its factories now use the same software, so all the data that goes into ERP is compatible. The forty-five day planning cycle has now come down to a week. Although a week’s sales are necessary to see long-term sales trends, in the future it will have data on sales per day.

Compaq is also using real-time systems which help it to react to unplanned changes in demand. Using the same data that goes into ERP, Compaq wants to look at its supply and order position three times a night, eight hours apart in the United States, Europe, and Asia. With real-time data instead of data that is a week or even a day old, Compaq wants to be able to see and react to, for example, an unplanned order for 7,000 PCs, and work with suppliers to see immediately if the company can deliver the order in time.

To be able to move as quickly as possible as a company, Compaq has moved all its data systems onto the Internet. An e-commerce system means that when an order comes in, the supplier sees this at the same time as the Compaq planner. But all this has to be done while production is still going on. John White, Chief Information Officer of Compaq in 1998, said it was like changing the wings and engine of a jet while it was still flying.

Another software decision is: do you get all the ERP software from one company or do you get the best from a lot of different companies? Because compatibility is so important, most companies are going to a single company for all their ERP needs. But Microsoft is interested in making ERP work either across versions or with one set of software. Compaq’s solutions are a good example of how technology and business depend on each other, and help each other.

Digital processes make it possible for every company to dramatically shorten its time to market, although some amount of time and energy will always be required to deliver physical goods. MIT’s Nicholas Negroponte describes the difference between physical products and information products in the digital age as the difference between moving atoms around (physical products such as cars and computers) and moving bits around (electronic products such as financial analyses and news broadcasts). Producers of bits can use the Internet to reduce their delivery times to almost zero. Producers of atoms still can’t do this, but they can use bit-speed-digital organization of all kinds-to bring reaction time down dramatically. Almost all the time involved in producing an item is in the organization of the work, not in the actual production.

Good information systems can remove most of that waiting time. And makers of physical products will find that online service will become as much a part of their “product” and customer experience as the physical goods they deliver. The speed of delivery and the interaction with the customer made possible by the Internet effectively shifts products into services. Product companies today need to compare themselves not with the best of their competitors, but with the best of all service companies.

In the end, the most important speed issue for companies is cultural. It’s changing what everybody assumes about how rapidly they must move. Everybody must realize that if you don’t satisfy customer demand quickly enough, without lowering quality, a competitor will. When people accept the need for action, digital technology enables a fast response.