INTERNET BUSINESS MODELS: CREATIVE DESTRUCTION AS USUAL Professor Lee W. McKnight Fletcher School of Law and Diplomacy Tufts University Medford, Masssachusetts, USA Internet Economics and the Creative Destruction of Telecommunications Instituto Superior Tecnico Lisbon, Portugal, October 25-26, 2000

McKnight 2000 Outline From Tulips to Virtual Tulip Communities: If There Really Is So Much Internet Innovation, Why Can’t You Show Me the Money? Internet Business Models: Business as Usual Implications for Technology Policy and Innovation

McKnight 2000 A Preview of: Lee W. McKnight, “Internet Business Models: Business as Usual,” in INFO, 2001; and in Lee W. McKnight, Paul Vaaler, Raul Katz, eds., Creative Destruction or Just Destruction? Business Survival Strategies In The Global Internet Economy, MIT Press, 2001

McKnight 2000 Internet Businesses: A Tulip Craze by Another Name? The Frugal Dutch Were Once Maniacally Obsessed with ‘Investing’ in Tulips - Until the Last Fool Came to His Senses Many Markets, e.g., Tokyo and Texas Real Estate, Have Suffered Through Similar Manias, Panics, and Crashes Look Around the Room- Who Will be the Last Internet Fool?

McKnight 2000 Internet Marketing 101 Baby, We Love You! We Are Your Friend! And Have We Got a Deal for You! It’s Free! Then,Add New Age Nonsense About a New Cyber Borderless Virtual Community To qualify for the free offer you must sign a three year service contract, endure an incessant stream of obnoxious advertisements, tell us everything about you and your family, let us follow you around the Net without your knowledge, and browse your hard drive.

McKnight 2000 The Internet Economy Needs Internet Business Models E-Commerce B2C B2B Vertical Portals (Vertals) Access Services Software Equipment Source: McKnight, Lehr, and Stiller, The Internet Economy, MIT Press, forthcoming

McKnight 2000 Internet Characteristics and Business Innovation Needs Openness, Interoperability, Scalability, Extensibility: IP Rules Perpetual Security, Privacy, and Customer Service: ‘24X7’ Aggregation & Integration for Disintermediation:‘Frictionless Commerce’

McKnight 2000 E-Commerce: Show Me the Profits

McKnight 2000 Internet Access: The High-Speed Future Has a Price

McKnight 2000 Internet Services Application Service Providers Content Delivery Networks Web Hosting Advertising/Marketing Music Entertainment Information Communication

McKnight 2000 Internet Equipment: Arms Merchants Innovating in Internet Time

McKnight 2000 And the Winners Are the Usual Suspects: Bankers, Consultants, Lawyers VENTURE CAPITAL (Hambrecht & Quist, Kleiner Perkins); SYSTEMS INTEGRATION (IBM, Lucent, Cisco, KPMG, Ernst & Young, Arthur Andersen I & II, PriceWaterhouseCoopers Cambridge Technology Partners, CSC, USWeb); STRATEGY (McKinsey, Yankee Group, BCG, Booz-Allen & Hamilton, LECG, Charles River Associates, Forester, Gartner, IDG, Renaissance, Monitor, Mercer - even Marengo Research); & TOO MANY LAWYERS TO NAME

McKnight 2000 IMPLICATIONS FOR TECHNOLOGY POLICY AND INNOVATION I Government CAN Make a Huge Difference 40 years of US funding computer science educators, education, and R&D created the Internet at substantial cost to taxpayers Thanks for helping spend our $$ wisely, Al AND George Sr. But Vision is Not Enough Japan since 50s and Europe since 70s foresaw the Information Society But their Governments Opposed the Internet Until

McKnight 2000 IMPLICATIONS FOR TECHNOLOGY POLICY AND INNOVATION II What Worked: Patient Support for Generic, Pre-Competitive, Research and Development, in a Targeted Area of Strategic Interest, with industry and academic interest and participation in design and use of: Robust High Performance Communications Systems and Self-Healing Networks. What Did Not Work (Usually): Hands-On Government Involvement in Standards.

McKnight 2000 IMPLICATIONS FOR TECHNOLOGY POLICY AND INNOVATION III Innovation Is a Process, Not an Event Internet and Web standards, and Linux/GNU/Free Software are examples of a public, open, and Jeffersonian technology and business and policy innovation process Businesses must either learn to coopt or cooperate

McKnight 2000 CONCLUSION THE INTERNET: CREATIVE DESTRUCTION AS USUAL, BABY!!! WATCH OUT FOR TULIPS AND OTHER SIGNS OF MANIA, PANICS, AND CRASHES BUT DO NOT OVERLOOK THE NEW OPPORTUNITIES CREATED BY INTERNET INNOVATIONS

McKnight 2000 References Lee W. McKnight, “Internet Business Models: Business as Usual,” in INFO, Special Issue on Internet and Communications Business Models, Joseph P. Bailey and Lee W. McKnight, “Internet Economics: When Constituencies Collide in Cyberspace,” IEEE Internet Computing, December William Lehr and Lee McKnight, “Next Generation Internet Bandwidth Markets,” in Communications and Strategies, Special Issue on Internet Economics, No. 32, 4 TH Quarter Lee McKnight & Joseph Bailey, eds.., Internet Economics, MIT Press, Lee W. McKnight, William Lehr, David D. Clark, Internet Telephony, MIT Press, W. Russell Neuman, Lee W. McKnight, Richard Jay Solomon, The Gordian Knot: Political Gridlock on the Information Highway, MIT Press, 1997.