A.P. Lawrence

I Am Not A Rail Road

A recent (February 2000) article by Forbes Magazine compares the Internet "revolution" to technology revolutions of the past: railroads, telephones, radio. All of these innovations followed the same general path of great excitement, great fortunes, dozens or even hundreds of small companies springing up with soaring stock prices, and always the great shakeout came where the big companies took over, consolidating smaller companies markets and settling down to stability. Along the way, of course, fortunes were made and lost, companies melded into larger corporations or just withered away and died. Traditional "big business" always wins eventually, sanity is restored to the stock market, and we all stand around like good little drones waiting for the next 7 day wonder.

I'm not sure about that. I'm not going to argue that stock prices aren't over-inflated, or that a lot of "Internet" companies won't disappear like the cotton candy they are made of. I also recognize that the phrase "but this time it's different!" is always a source of great amusement for those who get to read it with hindsight. But there is something different here, something that Forbes overlooked.

Web business are different. Part of my business is web based and like Amazon and a lot of other folks, that part of my business isn't profitable. The cost of operating this site is far higher than its direct revenues, and that is likely to remain true for a few more years. That's the case for a lot of web based businesses right now- the few and the fortunate are making money, but most are just burning it- their own or someone else's. But let's pretend that isn't important.

Update 2007: this site is profitable from web advertising alone.

Let's go back a century and some and pretend I'm a small railroad company. There's lots of us around, we have short lines that run from here to there; our track sizes aren't even necessarily compatible with the guy in the next town. We're sometimes competing for the same business and it's very messy- when somebody wants to ship from Florida to Maine they might go through several of us little guys. Does this sound anything like the web? Nope, sure doesn't. None of us are incompatible with each other, and while traffic sometimes does "pass through" us, it's not at all like shipping. There were and are obvious reasons to consolidate railroads.

How about a small telephone company instead?. OK, this gets a little better. In fact, since the breakup of AT&T, the model isn't conceptually different from where it started (franchises), except the players are bigger- but we do have independent companies. It's not quite like the web, though, because while it might be possible to have independent telephone companies in two different towns, it makes no sense to have two such companies in one town- at least with regard to physical equipment. But Sprint, MCI, and dozens of other carriers can compete in the same town, and the number of pre-paid calling card companies is obviously unlimited. Is that more like the web? Not really, because consumers of telephone service are looking to buy one thing: telephone service. You can have different rate plans that might appeal to different segments of the market, but there's a limit to how differentiated you can be, and therefor there is a limit to how many providers you can have in that market.

But maybe it's not that much different. Yes, the web has more to sell, but Forbes asks how many on-line auction sites can survive, how many shoe stores, how many vitamin stores? Well, if on-line stores are like home town stores, watch out- Walmart is coming. Yet there's still something Forbes misses there. Walmart drives out the small stores in our home towns because of selection, convenience, and price. Primarily, we go to Walmart because we know we'll probably find what we need. Driving around to a dozen small stores eats up too much time, so we go to the super stores. But the web isn't like that. Sure, we'd check Walmart's site for whatever we're looking for, but we'd also have the search engines find the mom and pop stores. Those stores might have a slightly different brand, maybe their own brand, and it might be just what we want. We don't have to drive around, it's almost as easy as switching a radio dial..

A radio dial? Maybe the web is more like radio- able to cater to specific audiences. My car radio is always set to WBUR (the NPR station in Boston) while my wife usually listens to either Classical 102.5 or a 70's rock station. But there are only a few dozen radio stations I can get at all, and most of them don't come in very clearly. That's not like the web- millions of stations, all just as clear, and much more choice.

But maybe not all just as fast. So far it looks like the small operator has a chance against consolidation. The little guy is just as easy to get to as the big guys (or is he?- more on that latter) and he can cater to demographics that the big conglomerates either aren't interested in or can't do well. You can sell hand-made ties on the web if your designs are interesting and attractive enough. You can publish original content and do it far less expensively than traditional magazines can. And, if web-served apps really are the future that so many say is coming, a small, clever programming shop actually has advantages over giant firms like Microsoft.

But as the demands of that content become greater, as you have to deliver more video, more audio, as your customers get high speed connections at home, can you deliver that content fast enough? Maybe you can't from a home based PC on the other side of a relatively low speed connection. Maybe you can't from an inexpensive web host with fractional T1 connectivity. And there's something more ominous looming on the horizon for the little guy: QOS (Quality of Service) traffic- people who are willing to pay more will have more priority for their packets.

An interesting service offered by Akamai lets web sites cache graphics and other high-bandwidth data on servers around the world. That's more of interest to the big dogs right now, but this type of distributed data may well be something that smaller web businesses will make use of in the future.

Let's go back to those search engines for a minute, because that's a very important part of how the little guy gets noticed on the web. Until recently, the small site could compete for position with larger companies. But now the search engines, recognizing the value of position (how early your site appears), are selling position to the highest bidders. Doesn't this squeeze the little guy, particular the new entrant, down to the bottom of the pile?

Maybe. I think the speed issues aren't all that important- technology keeps giving us faster and faster for less and less, and while QOS billing may have some effect, as long as the bandwidth can keep growing that's not going to be a problem. QOS only matters as bandwidth gets choked by content- certainly that may be a problem now and then, but I think the networks will just keep outgrowing the demands. I just saw an announcement for 10Gb Ethernet (over fiber, of course) and on the backbone, light switching using WDM (wave division multiplexing) promises to be able to travel 3200 kilometers without regeneration. What does QOS matter with this sort of stuff on the horizon?

If anything, I think the search engine issue is the biggest threat to the little guy. But maybe that isn't such a problem either: How many Walmart's can there be? Each one takes up a slot in the search engine results, but how many can that be? If I search for Toaster Ovens, how many giant companies can possibly be listed before the little guy has a chance? Maybe the little guy actually has a better chance to sell to me, because he can afford to specialize: to really know, top to bottom, what the best brand and model is for what your desires are. Can Walmart do that? Maybe, but I think the little guy can probably always do it better, and there's a new kind kind of business that's trying to help them do that. A good example of that is United Stationers: they are a stationery supply firm, but they aren't Staples or Office Max. Instead, they serve small mom and pop office supply stores who have been hurt by the giant stores, and with the advantages of the web, they claim to have actually stopped the decline of that type of business.

Maybe what Forbes isn't seeing is that the so-called "traditional" business model of large corporations squelching individuals at all levels is actually a fairly recent development. Until the industrial revolution and the improvements in transportation (shipping) that came with it, big business couldn't really compete with individuals. While it's certainly true that the mega-corporations retain not inconsiderable advantages (economies of scale, ability to advertise more heavily, etc.), the web gives some power back to individuals and small businesses.

It will be interesting to see what the next decade brings. I suspect that we'll definitely see the role of the middle-men shrinking. That's already scaring some large corporations who see their profits eroding as consumers bypass the traditional supply channels, and I'm sure it will only get worse. Of course, "worse" for one group almost always means "better" for someone else. There's no doubt that markets will be changing, but we'll have to wait and see what the real effects will be.

Enter your email address for automatic notification of new posts here
(be sure to whitelist 'feedburner.com' if you use spam filtering)

Lone-Tar Backup and Disaster Recovery
for Linux and Unix

Have you tried Searching this site?

Unix/Linux/Mac OS X support by phone, email or on-site: Support Rates

This is a Unix/Linux resource website. It contains technical articles about Unix, Linux and general computing related subjects, opinion, news, help files, how-to's, tutorials and more. We appreciate comments and article submissions.

Publishing your articles here