Online Extra: Trading In A Cloud Of Electrons

Futurist Paul Saffo talks about fundamental changes the Web has wrought in business and culture -- and what's next

More than most Silicon Valley technology forecasters, Paul Saffo likes to squint. His job as a director at think tank the Institute for the Future in Menlo Park, Calif., is to look a full 10 years over the horizon. In 1997, he predicted sensors would become the next wave of information-technology innovation. Only today is the rest of the world talking about radio-frequency identification chips and other sensors heading into the mainstream.

Six years ago, Saffo wrote that the accepted notion that the Internet would "disintermediate" industries, or eliminate middlemen, was flawed. Instead, he says, the lower cost of selling over the Net actually produces even more middlemen -- which helps explain the rise of phenoms such as search giant Google and online marketplace eBay (EBAY ) as new marketing conduits to online customers.

In a recent conversation with BusinessWeek Silicon Valley Bureau Chief Robert D. Hof, Saffo talked about the latest wave of Net-driven disruptions, as well as what's coming even further down the road. Edited excerpts follow:

Q: You make the case that new information technologies have always created more new players in various industries than they've eliminated. Can you give us an example before the Internet?


Take the case of Sabre [the ticket reservation system]. It was built in 1959 by American Airlines (AMR ) as a more efficient tool for its ticket takers. But they still couldn't hire people fast enough to take tickets, so then they said, "We would like to give this to our travel agents."

So the technology firmly intermediated the travel agents into the system. All the other airlines went to the Justice Dept. and said, "You have to open this up for us." So then, you had an even more complex situation.

So American comes up with the AAdvantage system, the loyalty program, creating yet another link to the traveler. Then everybody else said, "Uh-oh, we better do it too." So it's a field that's much more complex yet. Now computers are so cheap that we can track miles. So United Airlines comes up with an idea: Intermediate Visa with us, so people accrue miles with us even when they don't fly.

Each time it gets cheaper to do something, you get more players. It's irreversibly more complex. You get more than a value chain. You get a value web.

Q: Yet we're still seeing traditional intermediaries come under pressure, such as travel agents.


Maybe, but you do have Travelocity, Expedia, and the like, which are new kinds of agents. Oftentimes, you get completely new entrants. But other times, older players can reinvent themselves, like American did twice. Only the dumbest players die in this process. It's a dynamic, constantly shifting thing, where players are coming in and players are coming out.

It's very ecological. Pierre Omidyar [founder and chairman of eBay] was the first squirrel to notice that the auction niche had opened up. He got in and flourished like crazy. Jeff Bezos [founder and CEO of (AMZN )] was the first one to figure out what the power of the Internet was for selling.

Q: Is there anything fundamentally different about the new industries, such as jewelry and real estate? Will they play out differently on the Web than more commodity products, like books and CDs?


New technologies lead to new products. What new things came after the invention of television? TV dinners, TV trays, and the Veg-O-Matic. Why the Veg-O-Matic? If you saw a Veg-O-Matic on the shelf, you would think it's a medieval torture device. You could not create demand without the constant repetition of ads on television. It's a classic example of new technology turning into a medium that creates entirely new products.

The Web has essentially created massive new demand for used books. eBay quite literally turned junk into treasure. Then there's the iPod. You haven't been able to sell [many] music singles since the 45 RPM record. Now, they're back -- taking something that wasn't a product and making it the main product people want.

Q: How far along is the evolution of the Web?


Ultimately, successful technologies have media expressions, but there's a time lag. TV was invented in the '30s, but its media expression was broadcast networks in the '50s.

The media expression of the mainframe in the '60s was e-mail in 1969, but it didn't mature until it migrated to client-server computing in the '80s, which made it much cheaper to provide. The media expression of client-server was the Web in the 1990s. The Web will mature when we can take it everywhere with us and when we have peer-to-peer systems to manage all the connections [more cheaply and efficiently].

And it isn't about the same old Web stuff. The moment the Web fits into your pocket, you have a whole new set of applications and business opportunities that never existed before, such as location-based marketing: It's 4:30 p.m., you're walking down the street in San Francisco, your [personal data assistant] Hiptop chirps at you, you open it up, and it's an e-mail message. It's actually an electronic coupon for a Chinese restaurant a block-and-a-half away in your direction that says if you come in 15 minutes, you get half-off a Tsingtao beer and free appetizers.

Q: What will be the media manifestation of the next tech wave, peer-to-peer technologies?


It's not here yet, but Napster was a hint. Music is fine, but it really takes off with video. We could see the ultimate in new intermediaries -- the dominance of the amateur. People with passion, armed with tools, doing amazing things: short videos, really compelling stuff. I always liked the Grateful Dead bootleg concert tapes better than the albums. The lightning rod will be putting video onto small screens.

Q: What will be the business upshot of that?


You can monetize all sorts of things that you couldn't monetize before. I've been to places in Shanghai where people are laboring away at online-game personas that they're selling on eBay. If I had told you 10 years ago that someone would be selling an EverQuest character for $12,000 on an online auction system, you would have looked at me like I'm crazy. But it's real enough to be supporting businesses. We've reached the point where we're trading in clouds of electrons.

Q: So in a sense, services are replacing physical products as the actual business opportunity?


The service economy that we all talked about in 1980s has arrived in a very unexpected way. It's congealed in the physical products we buy. This cell phone is a product, but I only pay for it because the phone company is too stupid to give it to me so I'll buy their service. This is really a congealed service. Without the service, it becomes a paperweight. We're going to see a wholesale shift of physical objects ceasing to be products and becoming services.

Q: How far will that go?


This is happening with automobiles. My wife's C-class Mercedes (DCX ) has 153 processors on board. It's already not quite a pure product. You get free service for 50,000 miles, but it's not free -- it's in the price of the car. So it really is a service. But there are other services that follow on, like on-road repair service.

The next phase is, they'll give me the car for free, because they'll make it up off of service. I'll be driving up Highway 101, and a screen lights up and a voice says, "Paul, you're 2,000 miles past your oil change. We've already notified Autobahn Motors, and we have two mechanics ready to change your oil. And there's a Starbucks eggnog latte waiting for you."

Or you have a sports car and you want to change the performance of your car. It used to be they would [modify the engine]. Now, they just put a different chip in. For $30, you'll be able to download a Ferrari performance suspension package into your car when you're driving.

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