Tuesday 17 November 2009

How racism burst the dotcom bubble

In the pre-Internet era, ‘market’ meant ‘The West’. The S-curve counted only Westerners when calculating market penetration.

Somewhere the percentages became absolute numbers in analysts’ minds. Instead of asking ‘How long did it take this technology to reach x% of its potential market?’ they started to ask, ‘How long has it taken this technology to reach 50 million users?’

On that count, the Internet went mass with unprecedented rapidity. Unfortunately, in terms of the global population the penetration was – and continues to be - pathetically low.

And therein lay – and continues to lie - the problem.

As long as industry (and Net, but industry first) don’t reach the interiors of Africa and Asia, the Net does no more than tell people what they already knew. That wasn’t enough to justify the money that poured into it. And it isn’t enough to justify the hopes people have from it.

(My course textbook probably means exactly the same thing when it says that for most users the Net was a sustaining innovation, not a disruptive one.)

Let’s say an American business wants to know where he can buy widget XYZ. His Internet search leads him to 20 companies. Of these, two are already major suppliers of his; he has had some dealings with another two; another half dozen he’s heard of, but never bought from; and the rest are new names to him.

So, thanks to the Net, he knows something more than he did before he hit the ‘Search’ button.

Not quite.

The 10 companies he just found out about are probably very similar to the 10 he already knew. That is, they are Western companies selling the same thing at the same price.

In one or two cases, he may have got names and addresses of Chinese or Korean companies: The Net merely added specificity to what has long been common knowledge.

In short, he has some new (mostly useless) data but no new (useful) information.

Had the Net introduced him to a factory in Madhya Pradesh that supplied widgets at 50% of the others’ price, he’d have learnt something new. But he didn’t, because there aren’t any factories in MP.

But where does racism come into this?

Well, that’s a little complicated. “Your competitor is only a click away,” was a cliché from the early days of the Net. What this cliché did not say was, “…and he, and by extension the Net, won’t make any difference unless he’s also a continent away, trapped in poverty and, hence, able to offer a rock bottom price.”

For the analysts such people – we – did not exist. Consequently, we never entered the denominator when he calculated penetration. By underestimating the market the Net needed to reach, they (analysts) hugely overestimated the Net’s penetration, led investors awry, and burnt billions of dollars.

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