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by: Christine Swartzendruber, Chief Technology Officer
Since this is the age of the internet, we would expect that our economy has seen increased growth and stimulation due to the high number of users and the revenue generated by online advertising, memberships and sales, but is it accurate to say that the U. S. economy has improved as a result of internet popularity?

If you look at the internet as a source of data flowing in easily digestible packets, knowledge in the broadest sense, can now be easily tapped and exchanged by people in every corner of the earth and the result is an explosion of economic and productivity growth. A major benefit of this is opening many more industries to globalization.  Traditionally international trade flows have consisted mainly of goods. Whether it was spices or airplanes, it was far easier to ship goods than services overseas. But with the Internet, it becomes much easier to provide services of all types--banking, education, consulting, retailing, gambling--through a Web site that is globally accessible.

The Internet makes innovation even more important. With new ideas diffusing quickly, there is little chance of protecting a monopoly. Nor are small differences in production cost as important when the technology is quickly evolving. Instead, whichever country is able to generate and make use of innovations the fastest will come out ahead. In addition to spreading innovations and cutting costs, the Internet may also boost world trade. One reason is better information. Despite the global nature of the economy, most consumers and businesses still are much better informed on the products available in their own country. As a result, many potentially useful trades go unmade.

Industries like music and movies have adapted their business model to accommodate the shift, but they consistently see the internet as a hindrance to their business. One reason for this is that in the past they had retained almost total control over their respective markets, including production, promotion and distribution. The internet is a way for artists, directors and other players to break out on their own. Now, anyone can produce a short film or write a song then quickly and inexpensively distribute it to a global audience.

Another reason for the decline in revenue for the music and movie industries was the distribution of “free product”. Until, the RIAA started to police the internet and impose heavy penalties on pirating, internet users could simply find a movie or song they liked and within minutes, it was theirs at no cost and with no consequence. Although the pirating of movies and music has been virtually eliminated, this doesn’t leave the music and movie companies without a problem. Companies like Apple and Amazon, have started distribution for a small fee per song. This is in contrast to a time when one song was part of a CD with about 12 other unwanted songs costing about double what you would pay now to download each one individually. They have lost not gained revenue due to the internet’s popularity.

Journalism is another example of an industry that has changed dramatically since the increase in popularity of online news and blogging. Readers view articles for free on a web site supported primarily by advertising. There is a decline in subscription based content, because so much is offered for free. As a result journalism profits and employment have dwindled in the past decade. Newspapers all over the country are having to completely reorganize their revenue structure. Their web sites have seen an inability to produce economically sustainable advertising revenue, despite their highest audience reach in the history of their industry. They must increase the effectiveness of their online advertising if this is to be their main revenue stream. As an example, despite the highest readership of any newspaper in the United States, the New York Times only generated $330 million in online advertising in 2007. Total operating costs for that same year totaled $2.928 billion.

It may be hard to measure the exact impact the internet has on economic growth due to a lack of ability to determine  whether or not the productivity is a direct result of factors like online sales. Retailing over the internet may offer many benefits to consumers, such as easier comparison shopping, removal of travel costs and 24-hour availability. But such gains will never be counted in GDP, and so will never appear in the productivity statistics. Gains are recorded only to the extent that Internet sales reduce firms’ costs. Given the heavy start-up costs, advertising budgets, and well-publicized losses of online retailers, it is not clear that such savings have, in fact, been realized. 

The overall conclusion seems to be that we saw economic productivity accelerate at just about the time the internet burst on the scene. Whether or not the internet was the cause of the speedup in growth will be a matter for economic historians to sort out some years from now; there are competing explanations and opinions. For now, however, it appears that the economy can sustain a higher growth rate than most people thought plausible just a year or two ago. In that limited respect, at least, we appear to be in a “New Economy”.