Episode 15 – The Future: How will the internet develop in the next decade?

In earlier essays we followed the development of media technology in the United States, beginning with 19th century wireless telegraphy to the modern day internet. Against this backdrop, we compared recent developments by internet companies, pointing out historical similarities and noting significant points of departure.

Let’s now discuss the impacts these developments may have on the global economy. Our principal questions will be: How will the Internet develop in the next ten years? Where will it grow the fastest, and what effects will the internet’s growth have on business and employment?

The Internet as a Catalyst of Change

To answer these questions, we should first summarize what is different about media since the internet was introduced. We noted that a fundamental change has been in the character of media technology. That is, there has been a shift from the past dominance of media distribution companies in industries such as telephony, radio, and television, over content producing companies focusing on print, data, film, and video. It is now apparent that the current masters of content and information production, including Google, Apple, and Microsoft, have significant influence over how the internet will develop.

Several factors may account for this shift. Marketing to more segmented audiences, beginning with cable “narrowcasting” in the 1970s, the conversion of media from analog signals to binary code in the late 80’s, and the growth of high speed broadband networks in the 90s are certainly important milestones. Another reason is the expansion of the internet around the world. This greatly increased the number of users, attracted investment dollars, provided tools for commercial development, and extended markets across national borders. Global expansion made the internet more difficult for governments to control, but also pushed the substitution of older technologies, such as VOIP in place of land line telephones, and the development of new ones, such as social media and cloud computing.

Another important development is the internet’s interactive capabilities, a departure from one-way “broadcast” technologies. Faster network speeds and two-way communications, for example, allow many people to conduct video chats through Skype’s service. Speed and interactivity also increased the popularity of real-time gaming, instant messaging, mobile text, and streaming video, and has inspired applications in many other industries, including transportation, entertainment, healthcare, energy, and agriculture.

These advances allow internet based companies to offer many new forms of information, while encouraging users to create content of their own on numerous commercial sites. These recent developments have elevated content production to a level of importance virtually equal to network distribution.

Areas of Internet Development

Given this context, where will capital investment and job growth be most active in an internet economy?

Let’s focus on six categories:

• Geographic Regions

• Industry Sectors

• Venture Capital Investment

• Technical Platforms

• Employment

• Wild Cards – Unresolved Issues


Geographic Regions

Several factors will likely influence internet growth in certain regions. Among them is government investment in network infrastructure, the growth of a middle class, and better education. Current research suggests that these factors are expected to boost internet usage in more developed countries, and less in underdeveloped countries.

For example, in 2006 the Rand Corporation published year 2020 projections for the Pentagon’s “National Intelligence Council”. (1) The purpose was to identify “possible future developments” in regions that are most likely to take advantage of information based technology. Among the 16 applications highlighted in the report, “wireless communications” and “communication devices for information access” are listed second and third on the list.

While the Rand study was intended for intelligence agencies, its conclusions corroborate data used by American companies seeking to expand their businesses in an internet based economy. As a result, the combined research identifies six regions where investment and jobs will likely increase in the coming decade:

• North America: United States, Canada, Mexico

• Asia: China, South Korea, India, Japan

• Latin America: Brazil, Columbia, Argentina

• Middle East: Israel, Jordan, Arab Emirates

• Eastern Europe: Russia, Turkey, Germany, Turkey

• Oceania: Australia

All of the regions outside the United States are familiar to international corporations. Many companies already target the “emerging markets” of Asia, Latin America, the Middle East, and Eastern Europe for new business growth, specifically because they have higher internet adoption rates, well developed infrastructures, a growing and educated middle class, and relative degrees of political stability.

Despite being listed among the most advanced nations, the United States lags behind in two important areas: internet adoption and network speeds. These deficits result in less capital investment in American companies that do not have an international presence. Small companies and start-ups that want to grow their businesses, especially those in disadvantaged communities, are negatively affected because the fastest ISP services, the latest hardware, and proprietary software may be too expensive or not available at all. (2)

Industry Sectors

Which industry sectors are most likely to grow in this environment? The recent surge in stock indexes in the United States and the emerging markets, perhaps signaling the beginnings of a recover, highlight certain industries that are well positioned in an internet economy.

• Transportation – High Speed Trains, Hybrid vehicles, cars, trucks,

• Energy – Oil exploration and refining, Natural Gas, Solar, Wind, and Electric power

• Information Technology – Hardware, Software, Communication devices, Design

• Entertainment – Video, Gaming, Movies, Short Subjects, Life-Style mobile apps.

• Agriculture – Urban farming, Sustainable resources, Recycling, BioFuels

• Consumer Goods – Food, Beverages, Health foods, Supplements, Dietary products

• Healthcare – Drugs, Preventative medicine, Virtual diagnostics, Imaging

The diversity of these industries suggests the range of applications that now service each sector. Individual industries will rely on a combination of technologies that are tied together by the ability to communicate and gather information in real time.

For example, land based industries, such as transportation, energy, and agriculture, will take advantage of developments in Geo Positioning Satellite mapping to identify the best transit routes, new energy deposits, sites for wind, solar, and hydro-electric facilities, and optimal soil and climate conditions. GPS technology can also be used for monitoring the performance of hybrid vehicles. The same satellites provide critical links to microwave and fiber optic systems that feed data to corporate headquarters, subsidiaries, and field sites.

Consumer goods companies will be the beneficiaries of products and services transported and grown by these other industries, while using the global network to market, display, and ultimately sell on-line to the consumer. As the engine of the American economy, the consumption of goods and services will be enhanced by technical tools that should cut costs, increase employment opportunities, and eventually speed the recovery.

Healthcare, information technology, and entertainment companies have the advantage of using three different features on the network: communications, visuals, and cloud data storage, These uses are particularly relevant to healthcare providers, which will administer patient records, coordinate hospital visits, conduct doctor-patient conferences via webcast, and assist physicians with virtual diagnostic and imaging tools.

Venture Capital Investment

Where will venture capital invest in an internet economy? What types of services and revenue streams are likely to survive in this new environment? In the internet’s next decade (web 2.0), many Silicon Valley venture capitalists will be more focused on innovation rather than quick returns. This “downsized” strategy is a result of the failure of large venture funds that attempted to blend old business practices with on-line processes in the aftermath of the dot.com meltdown.

A new group of “Angel” and “Early Stage” investors, (3) all of whom are former principals of companies that survived the first decade, are now formulating an approach that builds upon high speed networks and new technology platforms. Dave McClure, (4) head of a Silicon Valley investment group called “500 Startups”, writes that the focus is now on innovative consumer products and web services by entrepreneurs who can streamline development, marketing, and revenue generation.

Typical products are web sites, mobile apps and on-line services that are hosted on low-cost cloud servers, and developed over a few months by a small number of programmers, who test the sites and services in real time with on-line customers. Marketing is on selected distribution channels, such as paid and organic search (Google, Yahoo, Bing) and social media (Facebook, Twitter, YouTube). The advantages are low-cost or free promotion, development and measurement tools, and low overhead that can reach billions of people. Revenue from these new services is collected by on-line payment through e-commerce transactions, the purchase of digital goods, such as music, mobile applications, or other virtual products, subscriptions, and advertising by “CPC” (cost per click), or “CPM” (cost per mile, e.g. per 1000 clicks) payments.

The new strategy results in lower initial investments and more funding rounds over a shorter period, provided the numbers indicate sustained market acceptance by a broad customer base. The expectation is that new entrepreneurs will understand their customers enough to build a functional prototype in less than six months for under $100,000. If successful, McClure and others offer initial funding between $1million and $5 million, with most of the funding going to market the new services, usually directed by the investment group itself. Next stage funding between $10 million and $100 million, referred to as “doubling down”, can be expected if the metrics improve after one year and the value of the business increases.

Technology Platforms

Which internet platforms will likely be successful? The trends indicated by current venture groups suggest the following areas, with the most prominent companies listed:

• Search and Advertising – Google, Yahoo, Bing, Yelp

• Social Media – Facebook, Twitter, LinkedIn

• Mobile web – iPhone/Touch/iPad, Google Android products, Cellular, otherTouch Pads

• Visual Media – YouTube, Hulu, NetFlix

As smart money investors point out, these new platforms offer several advantages. New services can be built upon the success of older, more established services in each group. Materials and resources costs are kept to a minimum since many older services offer development tools. New features and services can be added easily because of inexpensive hosting and cloud services. Marketing costs are also much lower on each platform, unlike older technologies like print and television, with the added bonus of on-line metrics available for each service.

Finally, revenue generation can be continuous and consistent with on-line payments and subscriptions. Steady revenue streams will increase the long term profitability of the new business, as well as the opportunities for more innovation as the business matures, acquires other start-ups, or is merged with a larger company.

Employment

As more internet businesses emerge, what employment categories are likely to benefit from these new platforms? We project five key areas, although there are many other jobs that will become associated with these categories, such as legal work, research, and teaching.

• Digital media production, including visual and web development

• Virtual environment design and programming

• Social media site and application development

• On-line marketing, business development, finance, administration

• Creative arts: graphics, writing, animation, sound design

By now it should be evident that if investment dollars and entrepreneurial efforts are being directed toward on-line and digital development, jobs in those areas will probably follow. The key is to understand which areas of employment will be most in demand. Three words come to mind: Social. Mobile. Visual.

One of the lasting impressions of the internet’s first decade is the sheer volume of web sites. In March 2003 it was estimated there were 39 million sites. By August 2010 there were over 227 million (5) web destinations, or more than 27 million created each year since. If each web site averages 273 pages, (6) the number of web pages is almost 62 billion. The growing number of web sites was the principal reason search engines first became popular. The vast and impersonal nature of the web, we will guess, was the reason social media sites have become destinations of choice in the second decade.

Given this scenario, principal areas of growth for social media will likely be related to mobility, that is, accessible to the large numbers of cellular and other connected handheld devices that will soon reach the market. Additionally, social media development will incorporate enhanced visual capabilities that will have to conform to standards on high definition handsets, laptops and desk top computers.

Visual elements in both social media and mobile environments are related to traditional film and television in both form and content, but will be unique to audiences and new applications that have yet to emerge. The impact of visual storytelling on large and small screens cannot be underestimated, however.

Messages, information, and virtual environments (web, social, and gaming) can be conveyed in a variety of colorful and navigable settings. They can be designed, for example, with still or animated backgrounds, incorporating long or short subject video, which can be tightly scripted or shot as reality on low budgets. Dialogue and text can be written, animations and graphics rendered, and sound effects added, all following a designer’s rendition of any web or social media site selected. The imagination is literally the only limit as platforms proliferate and specific audiences are identified.

Wild Cards – Unresolved Issues and Unintended Consequences

Despite our projections, there are always “wild cards”, that is, issues and consequences that are difficult to anticipate. Some issues, such as an unstable economy, high unemployment, and a depressed housing market, while prominently discussed in news reports and across the web, are ultimately cyclical and likely to be resolved within the next five years.

Other wild cards, which could have long term effects on an internet dependent economy, are more pertinent to our discussion and should be outlined in detail. Let’s place them into three categories:

• Internet “Openness”

• Infrastructure Development

• Innovation

The open or closed nature of the internet refers to the current debate over regulation of the network in the United States, and the related competition between established companies and rising industry groups over future markets. Mirroring past regulation and competitive struggles between television broadcasters and cable operators in the 60’s and 70’s, the new round of conflicts could have long term effects if portions of the global network are closed off into “proprietary” sections, or if access to wireless services is not regulated, as has been proposed. The consequences for infrastructure and innovation are also important considerations.

As we noted earlier, the proposal by content providers and telecommunication companies for regulation of the internet, a rare instance of business calling on government to intervene in the marketplace, is rooted in the high costs expected to build more robust networks to handle heavy bandwidth users in the future.(7) Unlike other countries where infrastructure development is funded by government, in the United States that burden falls to telecom and cable operators. As long as the “right” to pass through higher access fees by providers to offset those costs remains intact, regulatory conflicts and user revolts will continue to stall network improvements. Should public and private infrastructure funding ever be worked out, pressure could be relieved on both corporate investors and individual users.

The lack of resolution on regulatory and infrastructure issues will also have effects on innovation. Uneven access to all platforms and weak infrastructure could well segregate software and hardware development, as well as investments in new businesses, along geographic, ethnic, and economic lines. In other words, those entrepreneurs who live in areas with faster networks, are educated in schools with access to the best technology, or can afford to pay higher access fees, will be better positioned to start a new business or get a better job than those who do not have such advantages.

In light of the current state of the economy and global competition dependent on trained workers, can the United States afford to effectively deny those without such benefits from creating the next great mobile app or to discover other technical breakthroughs?

Conclusion

It may not be difficult to imagine the ripple effects from decisions made by industry, government, and users as the internet continues to encompass different areas of our lives. Clearly, the consequences for economic development and employment may be far reaching.

But in the end, we can only use the current analysis to extrapolate what we think is likely to occur. The reality will undoubtedly surprise us. That is after all, the beauty and the tragedy of prediction. As economist Milton Friedman once wrote: “The only relevant test of the validity of a hypothesis is comparison of prediction with experience.” (8) In other words, we’ll only know how accurate we are when the future arrives.


Notes

1 “The Global Technology Revolution 2020", Silberglitt, et. al. Rand Corporation, Santa Monica, 2006.

2 GAO report on obstacles to internet adoption in the U.S.: http://www.dslreports.com/shownews/GAO-High-US-Broadband-Prices-Hindering-Adoption-110849 . See also http://www.csmonitor.com/Business/Latest-News-Wires/2010/1108/Broadband-service-blacks-Hispanics-still-lag

3 These companies include SoftTechVC, First Round Capital, Y-Combinator, TechStarts, Betaworks, Founder Collective, and 500 Startups.

4 Dave McClure, Money Ball for Start-ups, http://500hats.typepad.com/500blogs/2010/07/moneyball-for-startups.html

5 How Many Web Sites…, http://www.conceivablytech.com/2935/products/how-many-websites-has-the-internet-227225642/

6 How Many Web Pages…, http://www.boutell.com/newfaq/misc/sizeofweb.html

7 New York Times, "Wider Streets for Internet Traffic" , Anne Eisenberg,  http://www.nytimes.com/2010/10/10/business/10novel.html?_r=1

8 From "The Methodology of Positive Economics," by Milton Friedman, in Essays In Positive Economics, (Chicago: Univ. of Chicago Press), 1953