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 #224  

 December 1998




A Virtual Revolution: Government Permitting, Online Shopping May Become a $300 Billion Industry

by Amy Ridenour



Holiday shopping will never be the same.

Shoppers are spending $2.3 billion online this holiday season, more than double what they spent in 1997.1 And if the federal government doesn't intervene, new developments combined with Americans' passion for the Internet could raise the volume of Internet commerce to $300 billion in 2002: a virtual shopping revolution.2

Shoppers like Internet buying: it's convenient, it's fast and it offers a greater variety of gifts for people - and we all seem to know at least one -- who already seem to have everything.

Internet shopping has been so popular this year, in fact, that some online stores haven't been able to handle it. Toys "R" Us was forced to close its web site for several hours. Macy's had to upgrade its site to handle unanticipated volume.3

Fortunately, the technology and communications industry is riding to the rescue, promising to improve the speed, convenience and quality of Internet shopping.

One such development is the merger between AT&T and the cable company TCI. This merger of telephone and cable will offer the typical family Internet access hundreds of times faster than it is today.4

That means that a file that now takes 10 minutes to download will take 6 seconds. Web pages will appear instantly. And the quality of the pictures will be better, too, which is a valued advantage for anyone who has ever looked at a fuzzy computer picture and tried to decide if a certain sweater will look good on Aunt Minnie.

The new technology that makes this advancement possible is called Internet Protocol, or IP. IP is a standard that permits TV, telephone and Internet digital signals to be transmitted by cable without compatibility problems.

This means that Americans can look forward to more than just vastly improved Internet service. It also means new television and telephone services. Families, for instance, will be able to get multiple voice telephone lines into their home for a price comparable to (and maybe even cheaper than) what they pay now for one. Adding or subtracting telephone lines will become so simple, in fact, that families will be able to add a new telephone line to the house - complete with voice mail - for Grandma's exclusive use whenever she visits.

Another new development is Microsoft's December announcement of a deal with Scientific-Atlanta, a major manufacturer of cable boxes, to provide cable customers with video-on-demand and Internet access, including shopping services, through cable boxes using the Windows CE operating system. In preparation for this move, last year Microsoft paid about $425 million for WebTV, which has a half million subscribers who are already used to getting e-mail through their television set.5

Technological advancements occur not only when new technology is invented, but when technology that already exists - like cable - is used in new ways. There are obstacles to such progress, however. People need to learn about change and accept it. And government regulators must agree to it.

The notion of acquiring local telephone service from a cable company will require a change in thinking for consumers. The 79 million Americans and Canadians6 who already use the Internet, and who want the vast increase in speeds offered by cable access, will likely be enthusiastic converts. Americans who have yet to go near a computer may be more reluctant to change, but even they are likely to benefit from reduced prices as competition for local phone services heats up.

Government regulators may be a harder sell, but there is reason for optimism. The Federal Communications Commission, which this month is holding an information hearing into the proposed AT&T/TCI merger (along with the proposed telephone mergers of SBC/Ameritech and Bell Atlantic/GTE), has traditionally taken a hands-off approach to the cable business.

Government regulators and Congress tend to be concerned about two things: avoiding monopolies and avoiding job cuts. Happily, the rapid pace of innovation makes it difficult to build or maintain a monopoly in the communications technology business. And the explosion of demand for communications services means that even companies whose market share is reduced can enjoy greater revenues and profits.

A case in point is AT&T itself, which had 90% of the U.S. long distance market in 1984, handling 25 million calls daily. In 1998, AT&T has just 50% of the long distance market - yet it handles 250 million calls a day.7

Internet commerce is booming. In the first nine months of 1997, the number of people buying products via the Internet rose by 3% each month. In September 1997 that figure jumped to 8% per month and remained there.8 With faster, cheaper and higher quality Internet access coming soon, that number is likely to grow even higher.

Soon, shopping on the Internet will be one more cherished holiday tradition.



Footnotes:

1 Jupiter Communications, as cited in "Shopping Sites Via for Attention," by Reshma Kapadia, Reuters, December 4, 1998

2 Armstrong, C. Michael, Chairman and CEO, AT&T, Speech at Economic Club of Detroit, September 29, 1998

3 Kane, Margaret, "Online Shopping's Dark Side," ZDNN, ZDNet (Ziff-Davis, Inc.), December 4, 1998

4 C. Michael Armstrong, Chairman and CEO, AT&T, Speech at Economic Club of Detroit, September 29, 1998

5 Zeidler, Sue, "Microsoft Eyes Top of TV Set for Growth," Reuters, December 14, 1998

6 Broersma, Matthew, "Cha-ching! Suddenly Web Shopping is a Growth Business," ZDNN, ZDNET (Ziff-Davis, Inc.), August 24, 1998

7 Zeglis, John, President, AT&T, Remarks to the Edison Electric Institute, Chicago, Illinois, June 1, 1998

8 Broersma, Matthew, "Cha-ching! Suddenly Web Shopping is a Growth Business," ZDNN, ZDNET (Ziff-Davis, Inc.), August 24, 1998


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Amy Ridenour is president of The National Center for Public Policy Research. She can be reached via e-mail at: [email protected]




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