Dotcoms will rise again

If you now find the internet boring and clunky, wait for the next one, due in 2003

How could it have gone quite so wrong, quite so spectacularly? A year ago, the internet seemed to have magical properties, conjuring wealth from thin air and threatening every aspect of established organisations. Bricks-and-mortar businesses quaked in terror at the dotcom spectre haunting them.

The internet dream began to unravel in April, with the collapse in the US of the Nasdaq hi-tech stock market as investors awoke from their collective dream. Now, the profligate clothes retailer has gone, the European arm of eToys is closing and, the online buying club, is in deep trouble. Even companies that focused on more down-to-earth things, such as company procurement, are in trouble. Ventro, which created exchanges for industry to trade goods and services, was worth $8bn at its peak, but is now down to barely $100m. Companies that designed and maintained websites - the likes of Razorfish in the US and the Swedish-based Future Factory - have made painful cuts. First Tuesday, the networking club for entrepreneurs and investors, which a year ago was the hippest of ventures, is rumoured to be retrenching.

The malaise is not just financial. Last month's "Virtual Society" survey for the Economic and Social Research Council reported that 28 million Americans had stopped using the net. British teenagers are deserting the internet partly because they find it too dull. What was fashionable a year ago has become embarrassingly empty.

Yet the internet is not finished. We are merely seeing the end of the growth of the first internet. It is largely accessed through cumbersome personal computers and narrowband telephone lines that allow you to download limited amounts of data. Its basic currency is information, mainly in text form, and searching for it is frustratingly slow and chaotic. The web pages on which the text is displayed are dense and dull; they deliver none of the excitement of a good television advertisement. They rarely make you laugh, intentionally. The internet was supposed to be immediate, personalised, interactive and rich in content. It has turned out to be slow, dense, clunky and boring.

But the first internet (1996-2000) will leave behind some significant businesses: Amazon, Akamai, Yahoo! and Cisco Systems in the US; Autonomy, ARM and Orchestream in the UK. Tesco and EasyJet have learnt how to blend traditional and e-retailing. The entire media industry - not just music, but films and books - may have been upended by Napster, the creation of a twentysomething college drop-out. Many of our household and business habits have changed for good, thanks to e-mail and text messaging on mobile phones.

Now a new generation of entrepreneurs and companies is putting together the ingredients of the second internet. The next internet will be accessed anywhere, any time, not just through hefty computers, but through the remote control for digital TV, video game consoles such as Microsoft's Xbox or Sony's PlayStation 2, the next generations of mobile phones and Palm Pilots. Telecommunications links will be wireless as well as landlines, and they will be broadband: much larger pipes that can carry the larger quantities of data needed to transmit video and film. The second internet will be more interactive; games and animation will become commonplace. The first internet is like the film business in the silent-movie era, awaiting colour, sound and special effects.

The components of the next internet will not come together for perhaps three years. Until then, we will be living with the interim internet, and we shall find the shortcomings of the steam-powered internet increasingly irksome. The leaders of the next wave may well plunge, like techno-lemmings, into the gap between promise and delivery that is devouring the dotcoms. They need to learn some hard lessons:

1. First movers do not always have the advantage. Pathfinder entrepreneurs often prove a concept can work, only to see large companies come into the market after them to pick up the profits. E-commerce is a middle-distance race in which stamina and patience count, not a sprint in which being first to market is everything. Success will go to companies that work with large incumbents, helping to leverage them into the new economy, rather than attempting to displace them altogether. That is one reason why Napster, the renegade digital music company, has done a deal with Bertelsmann, the German giant.

2. Venture capitalists with a track record for investing in pure technology businesses may lack the expertise and money to build retail brands. Venture capitalists have helped to build successful retail businesses: Carphone Warehouse is an example. But many investors thought brands would spread at the speed of the technology. Brands are complex, and consumer habits change more slowly than technology. The first internet left behind a trail of dreadful offline advertising. The second internet will succeed with more viral, word-of-mouth, less expensive, electronic marketing campaigns.

3. The first internet succeeded when it delivered traditional, "offline" business models - publishing, retailing, market-making - more efficiently online. It has been less successful at creating entirely new models for business. is mainly an online version of a cheap-fares bucket shop. Tesco's online business is just another way to order groceries.

The internet has not created a swathe of new business models that have revolutionised industries. Priceline in the US is one of the few that has: it allows consumers to state the price they are prepared to pay for an item and invites suppliers to meet it. But the model is yet to spread. The internet may become more than a tool to boost efficiency, but, as yet, it is just that.

4. The page-based internet is boring. People want genuinely interactive experience, with drama, excitement, games and jokes. The first internet spent little on content and charged nothing for it. The result: hosts of bored consumers using a medium designed for geeks and nerds.

5. Too many e-commerce companies offered to solve non-existent problems. For example, Urban Fetch, a US company that arrived in London last year, only to retreat within months, offered to deliver virtually any product to a central London address within an hour; it mainly shipped popcorn, videos and beer. But how many people really need anything that quickly?

6. Entrepreneurship is not simply about speed: getting first to a market that everyone else can see, in a "land grab". It is about spotting opportunities that others cannot see. The best entrepreneurs thrive amid doubt, not hype. Steve Jobs created the personal computer when virtually everyone around him doubted it would work. Chester Carlsson created Xerox and the photocopier industry after his employers at Kodak rejected the idea.

7. Barriers to entry into established retail businesses are falling. It is easier to create an online bank with a computer system and a call-centre than a traditional bank with expensive high-street outlets. But barriers to entry into the dotcom business are even lower. As the dotcoms created competition for established incumbents, they attracted a flood of competition themselves. That is why the UK has ten online jobs and careers sites, all jostling for very limited attention. Too few dotcoms had really distinctive technology that was difficult for competitors to imitate.

8. Success will go to those retailers who provide online and offline ways to buy products as complements to one another. Just as air travel and international telephone calls have grown together, so will online and offline shopping. People want an "offline" experience to give them a sense that what they are doing is "real". Many people research a product on the internet, but buy it face to face.

The internet's potential will be realised only when it has penetrated our lives far more deeply. That will happen. But, as with the telephone and typewriter, it will take longer than the super-enthusiasts thought, and social innovation will be as critical as technological pro-gress. The internet will prosper when it is no longer the preserve of geeks, and when the speed of connections and size of bandwidth are secondary to the quality of the experience it delivers.

The second internet - wireless, ubiquitous, fast, rich in quality entertainment, drama and comedy - will transform how we live, vote, shop, save, communicate and learn. Just last month, Channel 4's hugely popular web-based homework advice service used a team of maths graduates based in India to answer British children's queries. More people voted in the online Big Brother polls than in the Welsh and Scots elections.

When the second internet arrives, it should make our lives more efficient, informed and enjoyable, but at the cost of more cacophony, intrusion, trivia, pap and confusion. The always-on, any-time, anywhere, any-device internet may appear to its proponents as a liberation from time and geography, but it could just as easily be regarded as an electronic straitjacket. People will pay to escape from the second internet, as well as signing up to it. As long as the internet is with us, it will have this double-edged character: at once digitopia and dystopia.

Charles Leadbeater is the author of The Weightless Society (Texere) and adviser to Atlas Venture, the technology venture fund.

This article first appeared in the 15 January 2001 issue of the New Statesman, Dotcoms will rise again