Meet the New Economy. Same as the Old Economy

Wednesday

Adam Lashinsky on the State of the Internet

Dan Colarusso on Internet Growth Projections

Katherine Hobson on E-tailers' Push for Profitability

Catherine Valenti on Ailing Internet Funds

Jamie Heller on Using the Net to Track Net Stocks

Thursday

Tracy Byrnes on the Frenzy Next Time

George Mannes on Self-Hating Dot-Coms

K.C. Swanson on Old Economy Winners

David Gaffen on Measuring the Internet Economy

Friday

Ian McDonald on 'Butterfly' Companies

Justin Lahart on Real Net Valuations

Joe Bousquin on Building the Perfect Net Company

A Dan Gross Opinion Piece: Were the Old Guys Right?

TSC Roundtable on Predicting Six-Month Winners

Roland Jones on The Last Days of Daytrading

Eric Gillin on Working for a Dot-Com

In the early 1990s, when rotisserie chicken outlets Boston Market and Kenny Rogers Roasters were sprouting up all over, KFC installed ovens in its franchises nationwide, immediately becoming the largest seller of rotisserie chicken in the country.

McDonald's (MCD Quote) owns Boston Market these days, and Nathan's purchased Kenny Rogers' a few years back.

The Internet is hardly the passing fad rotisserie chicken was, but it's an apt parallel that illustrates how established companies can benefit from a new technology in ways many companies based off the new technology cannot. Despite the public deflation of the Internet bubble, the overall economy isn't overly tarnished by their decline. It seems as if the rest of the country has simply caught up to the Internet.

What is, then, the Internet's effect on the economy? The evidence right now is mostly anecdotal: continued surge in business productivity due to the expansion of intranet and business-to-business networks, unending need for information technology workers, and steady investment in Internet infrastructure technology. But, the changes wrought by the Internet within both New Economy and Old Economy companies have rendered it difficult for industry and market watchers to answer the question, "How big a slice is the Internet economy in the U.S. economy?" The outside-of-the-box answer is: The Internet economy is the economy. Or, at least, they're so intertwined that they are now indistinct.

The Greatest Growth

The perception of the Internet is based somewhat on visible failures of ill-conceived business models such as theglobe.com (TGLO Quote), DrKoop.com (KOOP Quote) and other high-profile content and retailing failures. But while those companies are receding from the landscape, the efforts made by industrial companies in integrating the Internet into their practices is expanding.

Perhaps one of the oldest, dustiest companies around is Alcoa (AA Quote), the aluminum company that features pictures of perspiring men and women in hardhats (smiling nonetheless) on the company Web site. But Alcoa is a member of MetalSpectrum, a neutral metals marketplace designed to make distribution of various components and supplies among metal companies easier.

"I would characterize it as being in its early stages," said Vaughn Frick, group vice president in the e-metrix group at Gartner Group. "As we refine B2B relationships, they will become much more dynamic."

Currently, there's concern that slowing technology spending augurs a significant slowing in the economy in coming months. Many technology companies have watched their stock prices fall sharply based on these assumptions.

But the slowing is minor so far, and it may be short-lived. Technology spending on a year-over-year basis fell to a 24.7% rate in the third quarter from 27% in the second quarter, but spending on computers and peripheral equipment increased to 44% from 42.6%.

"According to some surveys, 90% of the technology investment is to enhance [a]company's own intra- and Internet abilities," said Diane Swonk, deputy chief economist at Bank One. "The solid firms are still spending, in old-line industries that can apply the technology."

The economists still aren't sure how to measure that spending. The gross domestic product release breaks down into "software" and "computers and peripheral equipment," but no further. The Commerce Department is trying -- it currently got out its first survey of manufacturers on their use of computer networks, which contains queries such as "Does this plant accept orders online?" and "Which computer network is used most frequently to place online orders for materials or parts?" The results are expected next spring.

Warm Bodies

A fixture in Manhattan's social scene now are "Pink Slip" parties, at which recently axed dot-com employees gather to ruminate, plan their next moves and put their mouths around a few cold ones. Anecdotal surveys by executive placement firms Manpower (MAN Quote) and Challenger, Gray & Christmas have tracked the growing layoffs in Internet firms and found interesting conclusions. The layoffs have been concentrated in content-oriented positions and not in technical expertise. The data are mostly anecdotal, but it's constructive to remember that despite the high-profile layoffs, the unemployment rate in September was 3.9%, the lowest rate in 30 years.

"From an IT standpoint, there's continued demand out there, and obviously much of it is Internet related," said Mike Houlihan, who heads business development for Manpower's professional group. "There's demand for Web developers, Internet security, e-commerce, and obviously any tools and skills to support those technologies. The tools are a big piece of what's in demand."

While wage pressures have remained pretty subdued due to improvements in productivity and technology, they are increasing in information technology, according to Norbert Ore, chairman of the National Association of Purchasing Management's purchasing managers' index, an important anecdotal survey of the manufacturing economy. Technology-related support has grown more important with the linking of networks and increased use of the Internet, and "companies are certainly doing what they can do to retain their IT resources," Ore said.

Where's the Beef?

Not surprisingly, the most readily available information about the Internet's impact on the economy is in retail sales. For the second quarter of 2000, total online sales were $5.5 billion, up from $5.24 billion in the first quarter. Impressive, right?

Home Depot's (HD Quote) total sales for the second quarter was $12.6 billion alone.

Total retail sales for the second quarter amounted to $815.7 billion, according to the Department of Commerce. Internet sales, then, account for 0.68% of all online sales.

It's a growing industry, but right now that's nowhere near Jupiter Research's prediction for $41 billion in sales in 2002. The average person could probably name a handful of struggling Internet retailers off the top of his or her head, even if one generously excludes Amazon.

Let's take five: PlanetRX.com (PLRX Quote), priceline.com (PCLN Quote), eToys (ETYS Quote), Garden.com (GDEN Quote) and barnesandnoble.com (BNBN Quote).

At this time last year, those companies had a combined market capitalization of $19.3 billion. Now, they've got a combined market cap of $2.08 billion. The frenzy didn't happen in a vacuum -- it was created through favorable market conditions. The combination of several Federal Reserve interest-rate decreases in 1998 and available liquidity in the capital markets as Y2K approached allowed for speculation that otherwise might not have been unleashed to such a degree had money not been so easy to come by. The true measure of investment in the Internet isn't known yet; its uses will grow as broadband, optical fiber and networking continue to expand.

"Old-line firms far outnumber the dot-coms," said Swonk. The economy is losing "the frenzied, stupid spending."

The economy giveth, and the economy taketh away.