1. What this class will do

A study of the economic issues surrounding the internet;

how it affects individual firms in the market-place, both IT intensive as well as those in traditional industries;

how it affects competition amongst firms;

what is the nature of such competition;

how does it affect the entry of new firms and new technologies;

what effect does it have on intermediaries and retailers;

how global does the market place become;

what factors make success more likely in the global market place, etc.

In parallel – look at a variety of case studies of internet firms to illustrate the economic issues. Some well-known firms, some sectors.

2. What this class will not do

Will not discuss - technology of the internet in any detail nor technological changes; a marketing approach to e-commerce (will not help you start an e-commerce firm); the sociology of the internet (newsgroups, chat-groups, etc.). Approach will be that of (intermediate) microeconomic analysis, rather than a sloganeering or journalistic one.

3. Caveats

Virgin territory – internet is barely 25 years old, the WWW is 4 years old (for all practical purposes), the economics of the internet is still in neo-natal ICU. Course is taught at less than half-dozen univs. (?) (e.g., a Yahoo search does not bring up any class listing or syllabus). So there is no textbook, nor accepted body of thought. But given the importance of the sector (in 4 years as big as automobiles?) and the excitement of participating in the emergence of the next big technology of mankind, what is a little improvisation?!

4. Logistics

Teaching plan: Lectures ++ - bulk of class will be lectures (discussion of syllabus momentarily). In addition,

+ - case studies: number will depend on class-size and presentation; tentative plan is 2/3 weeks worth (3 case studies?); half from students-groups?

+ - practitioner presentations: econ. Dept. sponsorship for the Kelvin Lancaster Practitioner Series; tentative plan for 2 to 3 presentations.

Mid-term exam plus final for sure; in addition, group case studies.

Review syllabus. Two parts TO Reading List – topic outline (with some text-based references) and hyperlinks. Both syllabus as well as hyperlinks page on my "Courses" web-page (under W4490)

5. Internet – structure

Network of computers joined together by a common set of standards and interface compatibility. Two primary parts – email and world wide web. Two principal sets of structural issues – technological and economic/business.

Technological structure of internet (my understanding!): set of computers in a hierarchy linked via phone lines and switches (aka routers). For example, when message sent out from my machine it goes to Columbia server. Latter knows from header address which "pipeline" to send message down. Message may travel down a few more (?) cable or phone links before it arrives at destination server. At each level, header tells routers where to direct message.

Messages sent in packets. Analogy with postal service (and different from telephone call where there is a dedicated line for every person to person connection). Each router can be thought of as a post office; local to regional to national to regional to local , etc. Huge volume means that packets can be aggregated quickly in a matter of seconds (but recall vsnl in India).

World Wide Web adds referencing capability – any file on any computer anywhere in the world can point unidirectionally to any other file on any other computer in the world (provided it is written in HTML). Again, there is a description ("header" – aka URL) that pinpoints the location of the referred file.

Compatibility – for system to function there needs to be a uniform set of rules, terminology, programming language within the network. This uniform set of rules called a protocol – TCP/IP for internet as a whole and specifically, HTTP for WWW. The power of internet stems in large part from the flexibility and Catholicism of the protocols; only the network protocol is uniform, but each node of the network left free to design its own specifications, own platform (IBM, Apple), own programming language, own intranet structure, etc. Similarly it has been possible to add new developments such as LAN, wireless, etc to the network.

Hardware of internet – computers and servers (IBM, Dell, Compaq), modems - or ethernet cards for LAN- (3Com, Xircon), routers (Cisco), fiber-optic cables – or DSL lines or cable lines (MCI, AT&T). Software of internet – email software such as Eudora (Qualcomm), HTML programming language (text-editor such Microsoft’s Notepad), web browsers (Netscape and Microsoft), e-commerce software (Oracle), etc.

7. Economic Structure

Four components to the internet economy: two technology driven and two in e-commerce; hardware providers (IBM, Cisco etc.), software providers (including other applications intended for e-commerce such as web design), e-commerce producers (Gap, United Airlines, internet consultants), and e-commerce intermediaries (Ebay, Amazon.com). Of course, as in traditional business, last two categories blur sometimes.

8. Current status

Usage side – 64 million users in US, 1 in 6 in US and Europe, 364 million PCs in use worldwide; growth phenomenal.

Economic side – US industrial sector revenues attributable to the I economy - $301 billion, and 1.2 million jobs (Center for Study of the Information Economy, University of Texas, Austin); compares incredibly favorably on revenues with many powerhouse traditional sectors such as automobiles ($330 billion). Labor usage much smaller in this sector compared to traditional sectors making for high AR/worker. (Caveat: study sponsored by Cisco; revenues, rather than GDP – e.g., counts servers as final goods rather than intermediaries; computer sector has been around longer than internet and some of this growth is fueled by pure computing needs rather than networking needs.) Growth even more remarkable since e-commerce essentially did not exist before 1995 (estimate $5 bn).

9. History of the Internet (Technology)

Early Ages (1960s;1961-67) – Parallel developments at MIT (Kleinrock, Roberts), RAND and UCL connecting pairs of computers via phone lines (using conventional person to person links via switches); theoretical development of packet switching idea; primary interest – time-sharing among computers (and some data-sharing).

Early Middle Ages (1970s; 1969-76) – First network of computers built (Stanford, SRI Berkeley, UCLA and Utah) facilitated by the first building of packet switches (early routers); early network evolves into ARPANet funded by the Defense Dept.;

evolution of open architecture idea and TCP/IP protocol (Cerf, Kahn); - that each computer has a distinct IP (Internet Protocol) address, there is a compatible set of standards and rules, TCP (Transfer Control Protocol) that every node in the network follows in exporting to and importing from the network , and these common standards are only enforced for network interaction.

first software written for email to facilitate collaboration between researchers; primarily used by computer science academics and some high-tech defense personnel and concentrated on mainframes.

Late Middle Ages (1980s; 1977-89) – growth of LANs (facilitated by the invention of ethernet linkages) and work-stations; further refinement of protocols; simultaneous growth of several incompatible networks including some private ones; intervention of the NSF in preserving a unique compatible network (NSFNet) by a combination of cajoling and coercion (any research allocation required signing on to compatible network). Primary usage – email (now used by a larger community of academics and some private users) and FTP.

Renaissance (1990s; 1990-99) technologically, easily the biggest development (Fall 1990) is the invention of the WWW by Tim Berners-Lee at CERN, a truly momentous achievement. Assigns sites according to URL, writes HTML code to cross-reference files and formulates HTTP as the transfer protocol. Prior work existed (including his own program Enquire Within Enquire Upon ?) but they could cross-reference within a node not across the entire network. Suddenly all information was available to everyone.

First few years saw growth of sites containing HTML files and the writing of browser programs (that fetch and read HTML files the most famous of which was Mosaic that since became Netscape) and the growth of search engine programs (Yahoo e.g.).

Since 1995 there has been a big growth in the buying and selling of goods and services online, the advent of e-commerce. (To be contd. In Lecture 2)