Today's date:
Winter 2001

The Digital Age After the First Wave

Rodrigo Lara Mesquita is a director of Agência Estado in Sao Paulo, which publishes O Estado de Sao Paulo, Brazil's leading newspaper.

"I am that mighty hidden cape, called by you Portuguese the Cape of Storms, that neither Ptolemy, Pomponius, Strabo, Pliny nor any other of past times ever had knowledge of. This promontory of mine, jutting out toward the South Pole, marks the southern extremity of Africa. Until now it has remained unknown: Your daring offends it deeply."

Chant V, verse L, of "Os Lusiadas," by Luís de Camões
Sao Paulo-Do not be frightened by the doomsayers: The ups and downs of Wall Street will not threaten the current wave of prosperity of the American economy and, consequently, the global economy. So there are no reasons to be afraid here below the equator, especially among us Brazilians.

What we see is a change in course, expected from the earliest days of this process by all those who have the slightest knowledge of the factors driving the mislabeled "New Economy." This economy, incidentally, is not new at all. And it does not have any of the shallow, speculative and at times irresponsible spirit assigned to it by the so-called financial analysts.

The process of globalization brings and will bring more turbulence. We have to look closer at the United States, which is the center of this process, but more than this we have to look at history.

As it is well known, the current American growth cycle has been in place for more than 10 years. Many factors are behind this phenomenon, but only one, the key one, is of interest: the fast-paced growth of the communication networks, whose synthesis, but not the core, is the Internet. Since the late 1970s, communication networks have enjoyed a technological leap comparable only to that of harnessing energy during the Industrial Revolution. We have moved from fixed analog circuits to technology that moves digital information packets.

In the American economy, the most deregulated and consequently the most organized in the world, this move was first felt through the introduction of communication networks within organizations. It started with the financial markets and other highly organized and sophisticated industries and had the initial aim of reducing human costs and speeding up existing operational processes. As soon as this phase began to consolidate, the effects were also felt in other areas, as communication networks inside organizations produced operational revolutions and, at the same time, enabled previously unthinkable inventory control as well as supplier and key-client relationships in some industries. Moreover, these networks permanently leveraged the use of information as a basic input in wealth production.

Cape of Torments | As a consequence, some paradigms changed drastically. One possible comparison is with the global economic expansion in the 15th century. In the view of historian Fernand Braudel's extraordinary analysis of the history of capitalism, bartering had saturated the world of that time, which comprised chiefly the Mediterranean rim. Portugal, at the gateway to the Atlantic Ocean, naturally invested in the unavoidable expansion, using this hitherto little used space. For centuries it had advanced the known coasts. From the port side of the ship Africa could be seen. The aim was to sail round the Cape of Torments and open the way for a new period of growth, to expand the barter game. Under the patronage of Infante Dom Henrique, Bartolomeu Dias achieved this heroic deed of opening the gates to a new time of hope, and the Cape was renamed Cape of Good Hope.

Virtual Frontier |
Once again, we are in one of those phases of history in which new frontiers in economic growth and overall progress are opened. The big difference today is that expansion no longer takes place in physical space, but in virtual space. This fact is already mirrored by the speed with which assets go around the globe, from hand to hand, that is also a wealth-creating factor. We are still in a phase of trying to establish the definite course for this lunge. And times are ripe for opportunists and speculators. In spite of the spectacular advance of digital technology in the last few years, the road is not paved yet.

Today, in a situation not unlike that seen before the rounding of the Cape of Good Hope in the 15th century, when the Portuguese government had to invest in knowledge and technology for more than a century, we too have to invest in acquiring the necessary knowledge and technology.

We will not need a hundred years of investment, but the shorter stretch of time to be covered is just as important as it was 500 years ago. The speed of the contemporary world has changed, as has the volume of investments and the impact of new processes. And this change is occurring right now. The exuberant American economy and its main element, the wealth of its citizens, are finding out that the road is not yet paved. The valuation of dot-com companies promises dizzying returns that will happen, but not for a while. While theirs is the future, the present belongs to infrastructure companies: The companies that will provide the compasses, the sextants, the sails and all other technical requirements to make this future world come to life. It is not yet the time of the dot-coms, the caravels of our times.
Valued Tools | In the short term, companies enjoying the largest growth will be the builders of the tools, the road structure, the Internet and its substitutes: makers of routers, switchers, servers, support and application software as well as the physical structure itself-fiber optics.

The growth of communications capacity (bandwidth) can only be compared to spectacularly plummeting prices, an increasingly visible fact. Pricing standards used today, such as length of time and distance of the connection, will play a smaller part in defining the total cost of transmitting information. This means of communication will be the equivalent of the sea to the caravels and available to all those who know how to handle and use it to their benefit.

All these spectacular advances would mean little without the personal computer, another basic achievement. The PC will also be the focus of considerable investments in knowledge acquisition and technology development. The gains brought by the organizational and information-handling capacity of the PC to the individual are priceless. They have enabled a large share of society to play an active role in this process through communication networks. It is expected that the PC will aggregate more and more domestic chores, and in the end it will have incorporated our telephone, fax, organization, agenda, the carrying out of tasks and even leisure-which includes music, image and interactivity. Clearly, this industry will go on appreciating. The frantic development we will witness in the coming decades will result in plummeting prices for the PC and make it user-friendly even to the illiterate.
Meanwhile, the market is still in the first phases of development. This is precisely what the "suckers," manipulated by shrewd market analysts are quickly finding out. It is also the reason why we are experiencing drastic changes en route to new paradigms, illustrated by wild Nasdaq fluctuations. It is no longer possible to value dot-com organizations by multiples of revenues. Analysts and investment banks, which make their profit in sales operations involving future earnings, now cannot convince the investors, travel mates of the builders of the companies of the future, that the preposterous earnings projections will come true in the short term.

Another historical parallel can be drawn. We are now at the same point as the Portuguese were when, in 1500, they arrived at the land they called Vera Cruz. Their focus remained in Asia and they lacked the human capital and political will to colonize the newly found land. The expansion of the Spanish Empire and news of gold and silver found in the west of the new continent suddenly awoke the interest of the Portuguese state. For the next 30 years, thanks to their genius for geographical expansion, they mapped the Peabiru, a set of native paths that spread from the Atlantic to the Andes to the Pacific to the Amazon region. It was this extraordinary network that enabled the expansion of Portuguese dominance across Brazil in the 300 years that followed, first through the "bandeirantes" and later through the Brazilian government.

The barriers the new pioneers have to overcome are not unlike those faced by the trailblazers of that time. Just as now, a new mentality was shaped, based on the dominant economy, on the conquests of the Portuguese state. And power is not willingly handed over, which explains conflicts between the conquerors and those in power, then and now. Today, the battle will take place between those in control of the physical economy-who fear the future even if such fear causes missed opportunities to advance-and those agents who have intuited the change process
All these revolutionary technological advances have led to a business environment characterized by the "movement of the great convergences," in the opinion of MIT's Media Lab, which in today's world plays a role quite similar to that of the Sagres School in the European 15th-century economy. These are the following: the convergence between research and development, convergence between communication networks and the market (increasingly difficult to separate), convergence between pricing and trade-relations mechanisms, convergence between design and engineering, convergence between product and service, convergence between content and transaction, and convergence between front and back offices. Those working in virtual information organizations since the 1980s have lived with this convergence, as have some people in those companies building the infrastructure.

All these movements result in impacts whose magnitude in the known economic framework are still quite impossible to measure. This is aggravated because there are two classic types of professionals: those who have focused on attaining new tools that would allow them to dominate known and mature structures, and those who focused their development in acquiring knowledge that would help them develop new processes. Naturally, the first have greater difficulty grasping what Walter Bender, Media Lab's director, explains to us: "There are two revolutions in the making. The first is an interpersonal communication revolution. The second is not a technological revolution, but one of epistemology and learning. Constructionism, to learn by doing, is the revolution of Dewey, Piaget and Papert. Learning happens best not in the formal classroom. It happens in concrete applications. And that is why we must try to create environments designed for doing."

This, however, is not the logic of the traditional business world, one used for ventures with break-even points and predictable paybacks. The frst category of professional was educated with the old concept in mind. It was this evolving scenario that allowed multimillion-dollar deals in the frst years of communication networks. These deals were based on the lack of knowledge of the public and on a natural curiosity for the new, which, due to circumstances, allowed highly leveraged transactions. But they also created hollow businesses, which do not stand deeper scrutiny. Nonetheless, they will also contribute to the process. They have provided applications and new ideas that will be incorporated in the caravels of the future, when the road is paved and able to support large-scale e-commerce initiatives, as well as other forms of economic relations that will appear in the next 15 years, the time necessary for the networks to grow out of their infancy, go through their adolescence and finally reach their maturity.

But the pathfinders will create the future. Those companies that have traveled the difficult road of the early years, organizing content with the whole range of technologies available for today's computers and the Internet, have gained crucial experience for speeding up the whole process that will be used by more structured and sophisticated industries. These organizations will offer more and more interactive applications to create interest communities that will aggregate value to e-commerce. This is the business model possible for the dot-coms, the caravels of the future, equipped with Latin sails, ready for any wind, and with the sextant and compass to keep them firmly pointed to the future. Good sailing!

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