The WAVE Report on Digital Media
3D --- Media Creation --- Shared Space
---Published by 4th Wave, Inc.---
Issue #885------------------10/3/98

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Note to WAVE Readers

We are pleased to provide a complete talk
recently given by Nicholas Negroponte at
the Electronic Commerce World Conference
in Denver. His views place into context
key issues on the impact of the Internet
in Electronic Commerce. Given its length
we must place it in two issues of the WAVE
Report.

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The WAVE Report is Searchable on

http://www.3dlinks.com

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885.1 Story of the Issue

• Part 1 - Nicholas Negroponte talk at the
  Electronic Commerce World 1998 Conference

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  885.1 Story of the Issue
  by Amanda Rogos

  Nicholas Negroponte, director of the Media Laboratory of the
  Massachusetts Institute of Technology, and founder of Wired
  Magazine was the keynote speaker at Electronic Commerce World 1998.

  Negroponte's speech was done extemporaneously, and the Wave
  Report recorded it and transcribed it. When the WAVE Report spoke with Nicholas Negroponte he cautioned us that there may be some errors or changes in grammar and sentence construction. Once transcribed we found any changes required as small and immaterial compared to the value of the views presented.

  Nicholas Negroponte:
  I am going to use the time I have, to try and share a number of
  things with you that I think the press, and in fact the world in
  general, haven't completely understood. I will use my time mostly
  for presentation and at the end I am going to leave a little bit
  for question and answer. But the main point is very simple, and
  that is that, five maybe six years from now, when we look back at
  this period in time, we're going to all be extraordinarily
  embarrassed at how it was possible, that in 1998 people as smart
  as us were able to underestimate what is going on in electronic
  commerce.

  The magnitude and the changes that its going to put into retail
  and manufacturing and so on, is for the first time in my life,
  something where all the hype that I hear and maybe that I am even
  part of, is probably understated. That the things that are going
  on are of that kind of magnitude.

  Now, I am going to start with some basics, and some people in the audience may sort of think I am talking to their feet for the
  first few seconds, but bear with me. When I try, this was about 7
  or 8 years ago, to think of how could I explain what was going
  on, how could I think about or explain the future, to my mother,
  somebody who really wasn't part of the digital world, I came up
  with this sort of, division, dividing the world into two parts.
  One part is made of atoms, the other part is made of bits. Now as
  you will see when I go on, the bits and atoms distinction may not
  be as important in electronic commerce but just in terms of
  understanding, it turns out to be relatively simple.

  It's simple because atoms are things that we understand as true.
  We understand them even if we didn't take or like physics, we
  understand them because they have size and weight, shape. We wear them, we stand on them, we're under them, we eat them etc. But bits, those 1s and 0s, which have really no weight, size, shape, mass, etc. when they travel at the speed of light, are really new
  to use. New to us not because they didn't exist until recently,
  which is sort of true, in fact, most people don't realize the
  word bit didn't even exist until 1949. No, bits are new because
  we don't have any visceral sense of what a bit is.

  And let me give you an example that again is going to sound
  trivial but is in fact very profound. If I design and make a
  toaster, my business is making toasters. In order to make that
  toaster think of all the things that have to happen. Somebody at
  the back-end is digging up earth or iron ore and going through
  the process of turning that into metal, and then all of the steps
  thereafter, and finally I get some pieces of metal and then I
  bend them and shape them and, maybe I start using plastics. Just
  imagine all the things that come together, until I finally have
  my toaster. I package my toaster, and I sell you my toaster. Now
  as soon as you bought my toaster there is something very very
  simple that happens. Mainly, you have my toaster, I don't have it
  anymore, you have it.

  When you have my toaster, lets pretend for some reason it becomes wildly popular, that there is now a run on these toasters. I have to move more earth, I have got to get more plastics, I have to do all of these things and the economy of scale may set in. I may be able to do it less expensively. I may be able to benefit from
  scale one way or another. And finally when I get lots of my
  toasters and I package these toasters, and start selling them,
  the marginal cost of delivering more toasters under these
  conditions may indeed go down. But it is real. And by that I
  mean, every time I sell another toaster I have got to move a
  certain amount of earth, I have got to do more in inventory, and
  so on.

  In the world of bits, it's very different. In the world of bits,
  when I sell you a bit, you have it, but so do I. A bit is much
  more like an idea. When I give you an idea, you have it indeed,
  but so do I. That we can come to an agreement that I am not going to use it once I have given it to you, and do all sorts of things
  still in a very profound way we both have it. We both have that
  bit. And so suddenly, if the bit that I sold you, becomes wildly
  popular, and I need millions more of them now because many people are asking for those bits, guess what? My marginal cost to make more of those bits isn't close to zero, it is zero. There is no
  inventory, the shipping if I'm doing it electronically is more or
  less cost free and instantaneous. None of the old problems, none
  of the old sort of, what we had to do before in the world of
  atoms exists in the world of bits.

  And so, electronic commerce, as I will talk about afterwards is
  not just about selling bits, but when you think of it from the
  point of view of making, selling, marketing, etc. of bits it's a
  very very different world. Profoundly different. Now, keeping
  that in mind for a second let me sort of re-introduce the topic
  in a different way, and that is to look at the world in terms of
  its demographics.

  Allow me sort of five minutes to do this because the one thing we
  know about electronic commerce is that, the very reason that bits
  move at the speed of light etc. etc. is that its global. And the
  global landscape right now is very interesting. So I will talk
  about the demographics in terms of people, countries, and things,
  very very briefly.

  In terms of people, we can look at the United States as a
  bellweather, and its extraordinary. Right now we have in this
  country, a situation where roughly 50% of the households,
  certainly 50% or more, of the households with children in them,
  have access to this digital world. That number is very important
  to our future, and in fact when the president or vice president,
  other people talk about competitiveness, I am always surprised
  that the digital nature of our children is never really pointed
  out as much as it should be. It's an extraordinary advantage. Ten
  years, fifteen, twenty years from now, that could be an important
  distinction that we will have at that time.

  There is another phenomenon, and this is beginning to be
  understood or at least talked about, it was totally unknown about
  a year ago. That is, that the second largest group in the United
  States becoming digital as a percentage of their age group per
  capita are 60 years old and up. We have this extraordinary
  phenomenon that senior citizens in the United States more and
  more are getting online because like children, they have
  something which nobody in this room really has, and that is time.
  So you have this extraordinary, sort of almost bimodal
  distribution where you have a giant wave of young people, and you have a growing wave of senior citizens, and in the middle you
  have the group which interests me the most that I've called for a
  long time, the digital homeless.

  The digital homeless are in that state for a total reason that
  doesn't have to do with education or income. It has to do with,
  sort of, when you arrived on the platform, and if you arrived too
  soon or not soon enough, depending on which group you want to be in. You are in a situation where many people just aren't part of
  the digital world and yet they're the people who run our
  companies, run our countries, run our schools and they are
  basically in the drivers seat of life.

  Now, in the United States that's changing dramatically. In fact,
  the digital homeless, as a group, is shrinking very very rapidly,
  more so than in any other part of the world. But it still is
  there. If you move around to Europe, now switching from people to countries, you can look at Europe which is an extraordinary
  situation because, I'll go from North to South, it really has
  enormous contrasts. The northern part of Europe, the Scandinavian countries, are by any measure more digital than the United States. One measure which is commonly used is teledensity, the number of phone lines per hundred people. Theirs is higher, all Scandinavian countries have a higher teledensity than the United States.

  Another measure is the percentage of people, the number of people in the country that are on the Internet one way or another. In the case of Finland, its 60%. We don't even come close to this
  number. In Denmark 51% of the homes have a personal computer. So you get, in that part of Europe, an extraordinary potential that comes for all sorts of reasons that I don't have time to explain, but its very very real.

  You drop down to what I will call the sort of G7 countries of
  Europe and I will pick on Germany and France, particularly
  because they are enormous economic powers. France is perhaps the extreme case, where you have economic power and basically no digital presence whatsoever. The penetration of personal
  computers in the French home is less than 5%. Almost no school
  has personal computers. What's going on? How do you have this
  juxtaposition with a country a few miles north that is so digital
  and then you get to the central part of Europe, and suddenly
  there is this void. I am being a little extreme, and I am
  purposely not talking about England, which is in fact very
  digital.

  The answer is, that the forces in electronic commerce are going
  to be more cultural than technological. The teledensities in
  Germany and France are not that much lower, in fact they are not
  that much different than Scandinavia. But the cultural forces in
  those countries, the centralism, the top down nature of
  management and government is such that it mitigates against a
  bottom up decentralized distributed world, which is what the
  Internet is all about. And they actually clash. Now, if you go
  and look at the Mediterranean countries of Europe, you find low
  teledensities. Just to give you a comparison, go to Italy and the
  numbers are in 35 or 40 at the most. You get relatively low
  numbers but you have a society which is much more digital, much
  more in its culture when the infrastructure exists, and when the
  infrastructure both in terms of intelligent communications as
  well as the digital resources in computers and etc. to do it. You
  are going to find a huge move.

  Moving to the Far East you have a very bizarre situation. You
  have countries like Japan, Korea, Taiwan who are major
  contributors to the digital world, whether its components,
  systems, whether its materials, whether its research. And yet as
  cultures they are fundamentally non-digital. And they're non-
  digital partly because of the way of writing and the character
  sense and so on. But they are also non-digital because of the
  culture again. Very top down, society of formalism that just
  doesn't lend themselves as easily to the Internet world as Italy
  and other places.

  Now, that's relatively important because in spite of the
  recession and the issues that are in the Far East, that's an
  enormous market and that will change, but it will change slowly.
  It will change slowly in comparison, to move swiftly along, to
  Latin America. If you are doing electronic commerce of any sort,
  pay attention to Scandinavia, and Latin America.

  Latin America, for a couple of reasons, one of them is, that from
  Northern Mexico to Southern Argentina and Chile, that entire part
  of the world speaks two languages, not twenty-two languages or
  one hundred languages, they speak two. You have teledensities
  which are low, they're as low as ten and as high as twenty, but
  they're moving very quickly. In fact, if you want a cocktail
  party question that I guarantee that nobody will ever be able to
  answer, except the about one thousand people in this room, is
  which country in the Americas is the only country to have a fully
  digital telephone network? And the answer is Uruguay. And the
  reason its Uruguay is that Uruguay had almost no telephone
  network until a few years ago and so they didn't have the baggage
  of history. We'll probably have non-digital elements in our
  telephone network for the next ten years because there will be
  one or two little systems in sort of rural places that had
  telephones thirty, forty years before other parts of the world.
  We're just not getting around to updating.

  If you look at Latin America you are going to find electronic
  commerce will start booming for three reasons. These relate very
  much to the Mediterranean parts of Europe as well. The first
  reason is that you have in that part of the world, an
  extraordinary respect for the small guy. Take the number of small
  companies per nation, or the average number of employees and so on. You get, in that part of the world, lots of small little mom
  and pop companies. The second reason is that not only in Italy
  and Spain, but throughout all of Latin American you have an
  underground economy. Usually that underground economy is
  discussed with some disdain or even some undercurrents of how its illegal with avoiding taxes and it's a cash based society, fine,
  that's not my point. My point is you have this underground
  economy which is quite thriving and in fact buoyant, so even
  though the governments may change as fast as they do in Italy and
  some other countries, you still have this other support which is
  very digital. Its very much like Internet commerce. Cash based
  underground economies or countries today, are similar to what
  electronic commerce is going to look like in some regard.

  And the third reason, which is always difficult to say, because I
  get myself in a little trouble when I say it, is that a lot of
  nations, particularly Latin American countries, have, what I call
  a healthy disrespect for authority. This is very important and I
  don't mean it in terms of anarchism, people breaking the law and
  criminals, I just mean it in terms of a national characteristic
  where people will argue with each other. They will discuss, they
  will debate. If you meet with a head of state or minister or
  senior executive in Japan and Germany it's a different event than
  if you meet with a similar person in Italy or Argentina. I
  promise you, from first hand experience with these sorts of
  things, for hours and years, the difference is extraordinary. The
  rigid society that creates a much more formal structure is one
  that is not going to do as well in electronic commerce. It's the
  other one where you have a dinner with the president of
  Argentina, and a person who is not even necessarily a government
  official, might be thirty years younger and they actually
  converse, argue, and have an open discussion. It's a different
  society, it's a different mentality. One that is so much more
  compatible with this new digital world. A world of Electronic
  Commerce. You are going to see a big movement.

  I won't even really talk about Africa except to say that the
  teledensity for Africa is 2. If you subtract Egypt and South
  Africa its 1. If you subtract urban and just look at the rural
  parts of Africa you have something like .001. We have a real
  problem, that as a planet we have to address.

  The landscape is uneven, but the surprise will be five, six years
  from now, not only the scale, but where the scale is coming from.
  Because countries, maybe its Uruguay, will start leapfrogging
  some other countries in electronic commerce. Those are the
  countries maybe France or Germany. The point is that we are going to see some big changes because of electronic commerce.

  Now, given that, what is going to effect the scale? The scale of
  electronic commerce today, is first of all misrepresented, and I
  get myself into trouble with all of the organizations whose
  business, and it's become big business, to estimate market size.
  Well, one of the trendier organizations of that sort, estimated,
  and I admit this was back in January, these things change very
  rapidly, but estimated that the market size for electronic
  commerce, in the year 2002 would be $327 billion. I am sure you
  have heard that number, the President of the United States quoted
  it, a few weeks later.

  So here we have the President of the United States saying that we
  will have $327 billion in electronic commerce in the year 2002.
  That is nuts! That's crazy. First of all, I don't know about your
  sense of numbers, but the 27 really irritates me. Where they hell
  did the 27 come from? $327?

  Let me give you three data points, of which you certainly know,
  and I even saw one that was printed in literature for this
  particular review. First data point is that Cisco today is doing
  $6 billion of electronic commerce per year. That is a forward
  number, they take how much electronic commerce they have done in the past couple months, they multiply forward by six or taken by month and multiply by 12. By now it may even by $7 billion, the
  point is, how can one company, as much as I love Cisco, represent a major percentage of electronic commerce in 1998 of the estimate for the year 2002. It doesn't make sense.

  Dell is doing $6-7 million a day including Saturday and Sunday.
  What's interesting about that is that the time between receipt of
  order and receipt of payment is said to be 24 hours. That's
  extraordinary! And by the way that has a footnote. That means the people that are going to push electronic commerce are not
  professors like me, its not the people that invented the Internet
  and technologies, its not the various spokespeople for the
  digital world, and its certainly not going to be Wired Magazine.
  It's going to be the chief financial officer of every company.
  Any company that puts a postage stamp on an envelope to mail out an invoice is destined to bankruptcy. The chief financial officer
  won't allow that to happen. And many of you who come from EDI backgrounds and so on, know very well that what's going to make this go are the people who look at a company from a totally
  different point of view than I would ever look at if from. But
  from a much more powerful point of view as far as the
  shareholders and the wellbeing of the company's concerned, and
  they're going to push it.

  As a third data point, which is again a little misleading but
  still keep it in mind, today $3.5 trillion circulates around the
  planet everyday. Now, that's money movement, and that money
  movement does not relate directly to goods and services. But
  nonetheless that money movement is still a measure that we can
  think about and say how can it be that in the year 2002
  electronic commerce will be a few hours from 1998 money movement?
  Doesn't make sense.

  It is unequivocally going to be a trillion dollar business in the
  year 2000 sometime. Whether its February or March or December, it's going to be very big. But the challenge isn't predicting the number, the challenge is figuring what is in it. I mean do I count all the stock trades, do you count this, do you count that, and eventually the energy will be devoted to figuring what's in
  and what not in that number will be much larger than predicting
  the number itself. Nobody will really care about that number.

  But the size is quite important because that size will be
  dominantly business to business, and nobody is disputing that.
  The business to business use of electronic commerce in the year
  2000 will be 600, 800, 900 billion dollars, who knows, but it
  will be in that kind of range. The consumer is the one that
  interests all of us. And it interests us because we're consumers
  and it interests because that is what can be so contagious.
  That's what made the Internet, the consumer use of it. That's
  what starts pushing these things into really really interesting
  changes in lifestyle and not just economics. And the consumer use
  of electronic commerce will be driven by three factors.

  The first of course is penetration, how will penetration change?
  Penetration will change in two ways. In this country we are so
  lucky, we don't know it. We complain about our telecommunications infrastructure. Belly ache all you want but we're so damn lucky, you should remember that very often. The cost of communications in this country is so low compared to the rest of the world its phenomenal. The CEO of Reuters has this wonderful chart that he likes to show, he picks a point in the United States and then picks a number like, $1 or something. And shows red lines radiating out of, lets say he puts the dot on Denver, in fact I have seen one where he did that, and he shows the lines radiating out to the various cities showing how far you can reach for a certain given amount of money in the telecommunications/cost of a phone call. Its just circuit switching, I'm not even talking about packaging. He takes the same amount and puts the little red dot in the center of Europe and you see these tiny little stubby lines that barely, if you put it on top of Zurich, don't even get out of Switzerland.

  The cost of telecommunications in this country is wonderful. It
  can go down further, but it's really a very wonderful privilege.
  The cost of personal computing has to also go down. Today its far too high, it's a conspiracy in my point of view in that you have
  Intel making faster machines and you have Microsoft using more of it, and so you get this process of faster processor, more bloat.
  And the fact of it is, that you and I basically haven't seen a
  change in performance in our computers, in fact they have gone
  slower in many cases and been harder to use in all cases.

  So this is a consequence of a form of cartel that says we've got
  to keep the price pretty high, in the thousands or two thousands
  range, instead of letting it drop the way it should. Using
  Moore's law in reverse, you can build the equivalent of a Mac 512 for about $30 today and there are many situations under which
  that would work just fine. So you have that kind of change,
  telecommunications, cost of personal computers which have a huge effect on the rest of the world, and some effect in this country.

  --------------------------------------

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