The New Economy is Dead; Long Live the New Economy

Here's why IBM's boss says the dot com disaster on Wall Street was nothing more than a reality check.
Joseph RadiganDecember 13, 2000

IBM Corp. chairman and chief executive Louis Gerstner revisited the scene of the crime and offered a mea culpa of sorts.

Tuesday morning, Gerstner gave the opening keynote address at the E-business Conference at New York’s Jacob Javits Convention Center, the same stage where four years earlier, in a speech to another trade show, he gave a boosterish talk about the limitless possibility of the Internet and E-commerce. What a difference four years makes.

Since his speech four years ago, each wave of the Internet revolution has burst upon the scene only to be found wanting. First content was king, then it was consumer E-commerce, and last year it was B2B.

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Gerstner acknowledged as much, and said, “I feel I owe you, if not an explanation, then at least, a perspective. After all, I was one of those who said that the Net was going to take its place alongside all the other great transformational technologies like electricity and manned flight.”

But no one is buying that sales pitch this year. As Gerstner told a well-attended auditorium, the year “2000 will be remembered for the dot com shakeout and the passing of the belief that if you weren’t dot com, you were dot toast.”

But does that mean that the chief of the largest computer company on the planet feels guilty about misleading us four years ago? Is he ready to give up on the Internet?

Hardly. If anything, Gerstner is as big a believer as before in the Internet’s potential: He’s just a little more cautious about the hyperbole.

But if Net naysayers were seeking total capitulation, they went home disappointed. Gerstner was willing to only cede only so many points regarding the failures of the New Economy. Instead, after surveying the wreckage of the past year, he boldly predicted that the next step for the Internet age will be a near total integration of the Web into the fabric of society and business.

“Too many people failed to remember that the Internet is a technology, it is a tool,” Gerstner explained. “It’s a very powerful tool, but it doesn’t change the fundamental behavior of consumers, like their desire for choice.”

Gerstner continued, “After the hype, after the IPO alchemists have had their 15 minutes, it’s time to understand that we’ve come to the hard part. The winners are going to be the people who stick with it. The people who understand that this next phase is going to be about two things, integration and infrastructure.”

Gerstner observed that in terms of systems integration, retail E-commerce ignites a chain reaction across a corporate enterprise. For example, every time a customer orders a book from an or a sweater from Land’s End’s home page, the retailer’s inventory, credit, billing, and supply-chain management programs all have to swing into action. With every type of business application migrating to a Web platform, each of these transactions will have to share data using Web technology and operating systems like Linux.

But will it work? Gerstner cited market research that said Linux, the open-source operating system that has emerged in the last 18 months as a rival to Microsoft Corp.’s Windows NT, is now growing more rapidly than NT and in a few years time could have a larger market share than Microsoft’s flagship product.

To that end, IBM is investing $1 billion in Linux over the next several years. But considering that IBM is poised to register some $90 billion in sales in 2000, any investment smaller than $1 billion would be a drop in the bucket.

Gerstner also envisions a huge take-off in the market for Internet infrastructure services. He believes that in a few years IT will be viewed as a utility and contracted out in the same fashion that businesses now get heat, electrical power or phone services.

The demand for Internet utilities is going to be driven by the virtually ubiquitous presence of wireless Web devices and the conversion of almost every electrical appliance to a computerized platform with Web access.

This year, the market for these services has been estimated at $6 billion, Gerstner said. But in three years, it will soar to $55 billion.

As is the case with Linux, Gerstner also envisions IBM gaining a foothold in this market with a huge investment. For this market, Big Blue will shell out $4 billion over the next three years.

But now that IBM is prepared to spend all of this money on the next wave of the Internet, what are corporate users supposed to do? In a word, change. Change everything they do.

Gerstner said, in almost apocalyptic tones, “The fundamental organization and governance models of corporations are being challenged.” Historically, every business function, such as procurement, customer service, and supply chain management were different divisions and ran on different systems.

But in order to fully exploit the Web, businesses will not only have to integrate these systems technologically – – a task that Gerstner said was the easy part – – but they will also have to overhaul their management approach to streamline, something that he said is much harder to do.

“The next phase of E-business is to go beyond E-commerce and build a fully integrated enterprise,” Gerstner said.

Perhaps Gerstner knows from first hand experience just how difficult it is to bring about such a transformation. After all, he was hired seven years ago to revive the then ailing computer giant after a series of management mis-steps by his predecessor, John Akers. The turnaround Gerstner engineered at Big Blue is one of the great corporate success stories of recent years.

But for all that Gerstner has accomplished, his record is far from letter perfect. Several years before he was forced out, Akers had boldly predicted that IBM would achieve $100 billion in annual sales long before the Twentieth Century came to a close. In all the years that Gerstner has been at the helm, the company has never even come close.

What’s more, IBM’s market share of the PC market it created in the early 1980s has shrunk so much that some analysts who follow the company would prefer that the firm exit the PC hardware business entirely.

It hasn’t been a good year for IBM’s stock either. While the company’s share price hasn’t fallen as much as that of some of the dot com fly-by-nights of recent vintage, it is still 30 percent down from its 52-week high. Finally, all year long, the company has been plagued by sluggish revenue growth, and while Gerstner has been reassuring Wall Street that he’s optimistic about the firm’s prospects, there’s little public indication that IBM’s sales are about to take off.

After all that, Gerstner is as optimistic as ever. By the end of his speech, he declared, “I’ve never been more excited or optimistic about E-business. The opportunity is still there.”

If he’s right, then we’ll be able to look back at the dot com disaster of 2000 and have a good laugh. If not, Gerstner may not get a chance to explain his miscalculation at another trade show four years from now.

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