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Digital economy an 'illusion'? Facebook fallout debated

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In the aftermath of the less-than-stellar Facebook IPO, the digital economy is declared 'dead.' Is that a fair call?

Was the Facebook IPO debacle symptomatic of illusions of an Internet economy built on hyped-up promises?  Or was it simply a sub-chapter in the continuing story of our evolution to a digital economy?

In his latest column, New York Times columnist Ross Douthat argues that the dashed hopes of the Facebook stock offering represent a broader issue with the Internet economy itself. That technology is not delivering a new economy, but rather, a "hobbyist's paradise," quoting Slate’s Matthew Yglesias -- "subsidized by surpluses from the old economy it was supposed to gradually replace."

Douthat also cites statistics that show the technology sector is still but a small portion of the economy, and is suffering higher rates of unemployment than more traditional areas. Douthat says the digital economy simply isn't a growth engine for the mainstream economy:

"The Internet is a wonder when it comes to generating 'cheap fun.' But because 'so many of its products are free,' and because so much of a typical Web company’s work is “performed more or less automatically by the software and the servers,” the online world is rather less impressive when it comes to generating job growth.

"It’s telling, in this regard, that the companies most often cited as digital-era successes, Apple and Amazon, both have business models that are firmly rooted in the production and delivery of nonvirtual goods. Apple’s core competency is building better and more beautiful appliances; Amazon’s is delivering everything from appliances to DVDs to diapers more swiftly and cheaply to your door. By contrast, the more purely digital a company’s product, the fewer jobs it tends to create and the fewer dollars it can earn per user."

A few thoughts on Douthat's doubting:

First of all, the Internet is not "free." An individual or company must purchase computers, and purchase connectivity and bandwidth from a provider for access.  As any telecom will tell you, the Internet is a big, big business. In fact, there are some estimates that households spend more money per month on network access than on food.

Technology encourages innovative new startups, or innovative new projects within established companies. True, digital companies do not hire any where near the amount of employees than traditional companies do. But, many of these startups and digital enterprises would not even exist if they had to hire workforces, with accompanying benefits and taxes. And these startups do fuel job growth indirectly -- to contractors providing Website development, to the telecoms, of course, and to surrounding local economies.

With the rise of cloud computing and IT, we’re seeing more of a new breed of extremely lightweight company, unencumbered by capital investments, acting as a broker of services assembled from offerings drawn from or supported by third-party providers. Imagine the possibilities when this is combined with the emerging mobile “App Economy,” in which budding enterprises can be supported by micro-revenues streaming in from online app sales.

Cloud computing ultimately may be creating more jobs than it eliminates. Research conducted by IDC and sponsored by Microsoft Corp. concludes that cloud computing will potentially generate at least 14 million new jobs across the globe within the next three years. Moreover, these new jobs may likely be in many areas outside of IT. IDC points out that since jobs are being created as a result of increased business revenue from cloud, the jobs will be across the breadth of enterprises, in areas such as marketing, sales, finance and administration, production, and service. We may not have even imagined yet what job titles may emerge.

Cloud computing and IT are resulting in real, quantifiable savings. Consider the findings of a study from MeriTalk Cloud Computing Exchange (CCX), a community of Federal cloud leaders, on the potential savings the federal government could see. Federal agencies are now already saving about $5.5 billion annually with their cloud implementations, and it’s likely that this savings will rise to $12 billion as cloud efforts move forward. On average, the IT executives report a savings so far of at least 7% off their IT budgets for the next fiscal year.  Based on the 2013 IT budget of $78.9 billion, that’s about $5.5 billion in annual Federal savings, the study concludes.

The pure Internet companies may be over-valued and over-hyped, but information technology is changing the landscape of most non-IT companies. The Facebook IPO may have caused people to lose a lot of money, but the digital economy is much, much more than just Facebook and Twitter. It's not just social media. It's predictive analytics. It's robotics. It's 3D printing. And, as Nobel prize-winning economist Robert Solow once put it: "it has been the norm throughout the course of history for technology to throw people  out of work. But in the long run, employment keeps growing, and wages keep rising." And, at a recent IBM-MIT confab, MIT's Rodney Brooks made the observation that the rapid development of IT in North America is providing a competitive edge in the global economy: " If we can build robotic tools that help people, we can get incredible productivity. The PC didn’t get rid of office workers; it made them do things differently. We have to do that with robots. We can take jobs back from China but they won’t be the same jobs. That doesn’t mean people have to be engineers to work. Instead of a factory worker doing a repetitive task, he can supervise a team of robots doing repetitive tasks."

Finally, looking at it from a longer-term perspective, maybe the Facebook IPO wasn't really so much of a debacle after all. It accomplished what it was supposed to do: raise capital for the company.

All in all, not too shabby for a hobbyist's paradise.

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Joe McKendrick

Contributing Editor

Joe McKendrick is an independent analyst who tracks the impact of information technology on management and markets. He is a co-author of the SOA Manifesto and has written for Forbes, ZDNet and Database Trends & Applications. He holds a degree from Temple University. He is based in Pennsylvania. Follow him on Twitter. Disclosure