02/19/2002

By DOUG BEDELL and ALAN GOLDSTEIN / The Dallas Morning News

Dogs roamed the cubicles. Workers demanded regular doses of cafe macchiato. Entrepreneurs fresh out of school bowled over venture capitalists with oh-so-clever business models described in a few PowerPoint slides.

Nearly two years after the bubble burst, relics of the Internet boom seem like part of a distant past. Since early 2000, investors have lost billions of dollars, thousands of workers have been booted from their jobs and much of the excitement about the promise of technology has faded.

But amid the pessimism, a growing chorus insists that the technology industry's steep downturn isn't the end. Rather, it may be merely the end of the beginning. The failure of all those business ideas, many say, doesn't make the Internet's impact less profound.

"It's not a bust," said Robert J. Potter, a Las Colinas technology consultant, because Internet use continues unabated by almost every measure.

More people get in the habit of firing up Web browsers all the time. About 54 percent of Americans, or 143 million people, regularly used the Internet by late 2001, an increase of 26 million people over 13 months, according to Commerce Department data.

Those who are online continue to integrate the Web more deeply into their routines, picking through ever more material. The number of documents accessible over the Web doubled in the past 18 months, surpassing 3 billion.

Why did so many businesses fail in a rapidly growing market?

The "irrational exuberance" famously cited by Alan Greenspan notwithstanding, the Internet boom suffered from several key miscalculations. Many of the forecasts for use of broadband technology were wildly inflated. The case that high-speed access could be free – like broadcast television – was also flawed because telecommunications carriers need to recoup huge investments in equipment.

And some of the Internet's greatest attractions, such as the Napster service for sharing music online, have wilted under heavy legal assaults over intellectual property rights.

Other technologies – including the telegraph and the telephone – were met with euphoric reactions, and their true significance only became clear later. As the Internet becomes more ingrained in society, it may become as mundane as plugging a lamp into a wall socket and using electricity to make light.

Business experts, many of whom had chucked conventional thinking for a new Internet age, have been getting back to basics.

Too good to be true?

Mr. Bustin recalled hearing presentations a few years ago from start-ups that he considered deeply flawed. He said he avoided them. "Entrepreneurs would say, 'How could our plan be bad when we just got $5 million' " from a venture capital firm, he said. "There was very much a feeling we had that we were missing out on something. Probably, we're lucky we didn't get brought in."

In tough economic times, businesses have become humbler. "People got very arrogant," said Abid H. Abedi, chief executive of the Adea Group, a technology consultancy in Dallas that has survived a brutal shakeout in its field. "They wouldn't work at a customer's site. They wanted to be at their own office because it had a foosball table."

Many business models were inherently flawed because they were based on delivering content for free, hoping to make a profit through advertising or by charging money later.

But advertising didn't deliver sufficiently because consumer habits proved fickle. Researchers found, for example, that the average user remained on a Web page for an average of two seconds or less. Banner ads urged users to click on their messages, but less than 10 percent did, according to most studies.

The global advertising spending recession that arrived last year didn't help. Big Internet players – including popular websites such as Salon.com and TheStreet.com – moved to shore up their finances by adopting subscription models.

But many sites that tried to charge for content that used to be free simply lost their audiences to rival sites.

"Once you establish a habit that everything is free, it creates the expectation it will continue to be free," said David Goldstein, president of Channel Marketing Corp., a market research firm in Dallas.

In the early stages of the dot-com bust, many experts predicted that the real Internet revolution would occur in business-to-business, or B2B, transactions.

But business for providers of corporate software, such as Farmers Branch-based i2 Technologies, has slowed in the global economic slide.

Because many business software projects failed to meet expectations, corporate customers increasingly insist on tangible evidence that they will receive a sufficient return on their investments in technology. "The focus now is more on what needs to be tweaked, rather than on buying more software," Mr. Abedi said.

Throughout history, other innovative technologies have spawned similar distorted predictions to those that presaged "The Internet Bubble."

For example, the telegraph, it was thought, would create stronger communities, but instead allowed greater dispersion. Thomas A. Edison envisioned using the phonograph primarily for transcribing business transactions.

Many pioneers of the modern graphical Web believed its power would supersede governments and corporations.

The pervasive thought was reflected in John Perry Barlow's Cyberspace Independence Declaration: "We are creating a world that all may enter without privilege or prejudice accorded by race, economic power, military force or station of birth."

Barriers to the Internet

The Chinese government, for one, has erected what amounts to a countrywide electronic border that filters out many of the cultural and political ideas it considers threats.

If any one set of predictions about Internet commerce has failed at projecting today's reality, it was the lofty expectations for fast connections known as broadband.

Adoption of broadband is growing, though not nearly as quickly as had been predicted. As little as three years ago, hyper-enthusiastic analysts were predicting that digital subscriber line, cable and wireless Internet connectivity would be installed in more than half of American homes by 2001.

As it stands, the Consumer Electronics Association, a trade group, estimates that 14.1 million North American homes are equipped with such connections today. Beset with installation and pricing problems, and a host of unanticipated economic and technical difficulties, the anticipated massive broadband roll-out has slowed to a crawl.

In a recent speech, Microsoft Corp. chairman Bill Gates said broadband growth in the U.S. would lag behind that in other countries because it's more expensive here. After a wave of price increases, many Americans' broadband bills rose $10 a month, to $50 to $60 in most places. That's more than double the average in South Korea, for example, Mr. Gates said.

Many Americans have decided to stick with dial-up. A recent survey showed that more than 54 percent of home users currently using dial-up, 56 kilobit-per-second modems have no plans to upgrade to the more expensive, faster connections – even when they're available in their neighborhoods.

Last year at the SXSW Interactive Festival in Austin, Sean Parker – co-founder of the widely popular Napster service – recalled a conversation that crystallized the service dilemma faced by broadband providers.

Mr. Parker, whose service counted 50 million users before it was shut down and revamped late last year for aiding copyright violations, said he was talking with a representative of a cable broadband company before a panel discussion on the Internet's future.

"He said, 'Frankly, we just don't know what to do with you guys,' " Mr. Parker said. " 'The Number 1 reason our customers tell us they want our service is Napster. On the other hand, we can't advertise that because you're facing such legal trouble.' "

As large and powerful music companies began attacking Napster and other peer-to-peer file-sharing innovations in the legal arena, consumer demand began to dwindle. And with it went some of the Internet's early broadband momentum.

The Consumer Electronics Association projects that more than half of North American homes will be broadband-equipped by 2005. However, it looks back on the legal gyrations over Napster and other peer-to-peer systems with regret.

If another "killer application" for broadband is waiting in the wings, ready to spring upon the Internet in another wave of innovation and consumer utility, no one is sure what it is.

Various service providers see a benefit not only in the faster speed, but in always-on connections. E*Trade Group, for example, is developing a variety of services that would deliver a steady stream of personal-finance information, said Joshua S. Levine, chief technology officer. Among the offerings would be business news headlines, stock prices and account activity such as clearing checks.

As corporations and individuals attempt to assert rights to ideas that can be distributed freely on the Internet, experiments such as Napster and MP3.com are increasingly faltering under the weight of new legal opinions upholding the intellectual property rights of content providers, says Lawrence Lessig, a Stanford University law professor.

Dr. Lessig has been joined by other legal scholars in calling for a radical overhaul of America's copyright laws to face the realities of a digital world.

Without an adjustment to the legal climate, he warns, the Internet will never reach its potential.