The Road Ahead

8 FRICTION-FREE CAPITALISM

When Adam Smith described the concept of markets in The Wealth of Nations in 1776, he theorized that if every buyer knew every seller’s price, and every seller knew what every buyer was willing to pay, everyone in the “market” would be able to make fully informed decisions and society’s resources would be distributed efficiently. To date we haven’t achieved Smith’s ideal because would-be buyers and would-be sellers seldom have complete information about one another.

Not many consumers looking to buy a car stereo have the time or patience to canvass every dealer and thus are acting on imperfect and limited information. If you’ve bought a product for $500 and see it advertised in the paper for $300 a week or two later, you feel foolish for overpaying. But you feel a lot worse if you end up in the wrong job because you haven’t done thorough enough research.

A few markets are already working fairly close to Smith’s ideal. Investors buying and selling currency and certain other commodities participate in efficient electronic markets that provide nearly complete instantaneous information about worldwide supply, demand, and prices. Everyone gets pretty much the same deal because news about all offers, bids, and transactions speeds across wires to trading desks everywhere. However, most marketplaces are very inefficient. For instance, if you are trying to find a doctor, lawyer, accountant, or similar professional, or are buying a house, information is incomplete and comparisons are difficult to make.

The information highway will extend the electronic marketplace and make it the ultimate go-between, the universal middleman. Often the only humans involved in a transaction will be the actual buyer and seller. All the goods for sale in the world will be available for you to examine, compare, and, often, customize. When you want to buy something you’ll be able to tell your computer to find it for you at the best price offered by any acceptable source or ask your computer to “haggle” with the computers of various sellers. Information about vendors and their products and services will be available to any computer connected to the highway. Servers distributed worldwide will accept bids, resolve offers into completed transactions, control authentication and security, and handle all other aspects of the marketplace, including the transfer of funds. This will carry us into a new world of low-friction, low-overhead capitalism, in which market information will be plentiful and transaction costs low. It will be a shopper’s heaven.

Every market, from a bazaar to the highway, facilitates competitive pricing and allows goods to move from seller to buyer efficiently with modest friction. This is thanks to the market makers—those whose job it is to bring buyers and sellers together. As the information highway assumes the role of market maker in realm after realm, traditional middlemen will have to contribute real value to a transaction to justify a commission. For example, stores and services that until now have profited just because they are “there"—in a particular geographic location may find they have lost that advantage. But those who provide added value will not only survive, they will thrive, because the information highway will let them make their services available to customers everywhere.

This idea will scare a lot of people. Most change feels a bit threatening, and I expect dramatic changes in the business of retailing as commerce flows across the highway. But, as with so many changes, I think once we get used to it we’ll wonder how we did without it. The consumer will get not only competitive cost savings, but also a much wider variety of products and services to choose from. Although there may be fewer stores, if people continue to enjoy shopping in today’s outlets, as many stores as their demand justifies will remain available. And because the highway will simplify and standardize shopping, it will also save time. If you are buying a gift for a loved one, you will be able to consider more choices and often you will find something more imaginative. You could use the time saved from shopping to think up a fun clue to put on the package, or create a personalized card. Or you could spend the time you save with the recipient.

We all recognize the value of a knowledgeable salesperson when we are shopping for insurance, clothes, investments, jewelry, a camera, a home appliance, or a home. We also know the salesperson’s advice is sometimes biased because he or she is ultimately hoping to make a sale from a particular inventory.

On the information highway lots of product information will be available directly from manufacturers. As they do today, vendors will use a variety of entertaining and provocative techniques to attract us. Advertising will evolve into a hybrid, combining today’s television commercials, magazine ads, and a detailed sales brochure. If an ad catches your attention, you’ll be able to request additional information directly and very easily. Links will let you navigate through whatever information the advertiser has made available, which might be product manuals consisting of video, audio, and text. Vendors will make getting information about their products as simple as possible.

At Microsoft, we’re looking forward to using the highway to get information out about our products. Today we print millions of pages of product brochures and data sheets, and mail them out to people who ask for them. But we never know how much information to put onto a data sheet; we don’t want to intimidate casual inquirers, and yet there are people out there who want to know all the detailed product specifications. Also, since the information changes fairly rapidly, we are often in the position of having just printed tens of thousands of copies of some brochure, and then having to throw them out because they describe a version of a product we’re replacing. We expect a high percentage of our information dissemination will shift to electronic inquiry, particularly because we serve computer users. We have already eliminated the printing of millions of pages of paper by sending quarterly CD-ROMs and using on-line services to reach professional software developers, some of Microsoft’s most sophisticated customers.

But you won’t have to depend only on what we or any other manufacturer tells you. You’ll be able to examine product reviews in search of less biased information. After you’ve seen the advertising, reviews, and multi-media manuals, you might ask for relevant government regulatory data. You’ll check to see if the vendor has surveyed owners. Then you might dig deeper into one area of particular interest to you—for instance, durability. Or you could seek the advice of sales consultants, human or electronic, who will create and publish specialized reviews for all kinds of products, from drill bits to ballet slippers. Of course you will still ask people you know for recommendations, but efficiently, by electronic mail.

If you’re thinking of doing business with a company or buying a product, you’ll be able to check what others say about it. If you want to buy a refrigerator, you will look for the electronic bulletin boards containing formal and informal reviews of refrigerators and their manufacturers and retailers. You’ll get into the habit of checking these bulletin boards before you make any significant purchase. When you have a compliment or complaint about a record club, a doctor, or even a computer chip, it will be easy to find the place on the network where that company or product is discussed and add your opinion. Ultimately, companies that don’t serve their customers well will see their reputations and their sales decline, while those that do a great job will attract sizable followings through this new form of word of “mouth.”

But the various endorsements and especially the negative comments will have to be examined carefully. They may be motivated more by fanaticism than a genuine desire to share pertinent information.

Let’s say a company is selling an air conditioner that 99.9 percent of its customers are very happy with. One angry consumer in the remaining 0.1 percent can post horrible insults about a brand of air conditioner, the company that manufactures it, and individuals in the company, and keep sending the messages over and over and over. The effect could be compared to sitting in a meeting where everyone has a volume control that could be set from 0 to 1,000, and the normal level of conversation is, say, 3. Then a few people decide to crank their volume up to 1,000 and start shouting. This means that if I happen to look in on the bulletin board because I’m buying an air conditioner, my visit may be a waste of time because all I find there is the shouting. It is unfair to me and to the company selling the air conditioners.

Already, a network etiquette, or “netiquette,” is evolving. As the information highway becomes society’s town square, we will come to expect it to conform to our culture’s mores. There are vast cultural differences around the world, so the highway will be divided into different parts, some dedicated to various cultures, and some specified for global usage. So far, a frontier mentality has prevailed, and participants in electronic forums have been known to lapse into behavior that is antisocial and even illegal. Illegal copies of copyrighted intellectual property, including articles, books, and software applications, are distributed freely. Get-rich-quick scams pop up here and there. Pornography flourishes within the easy reach of children. Single-minded voices rant, sometimes almost incessantly, about products, companies, and people they have come to dislike. Forum participants get horrible insults hurled at them because of some comment they have made. The ease with which an individual, any individual, can share his opinions with the members of a huge electronic community is unprecedented. And the ones who are yelling are able, because the electronic community is so efficient, to take a piece of hate mail and post it on twenty bulletin boards. I’ve seen bulletin boards collapse into foolishness after people start getting shrill. Other participants in the discussion don’t know what to do. Some people yell back; a few try to say rational things. But the shrill comments continue, and that destroys the sense of community.

The Internet, true to its roots as an academic cooperative, has relied on peer pressure for regulation. For example, if someone in a discussion group posts an extraneous comment or, worse, tries to sell something in an electronic forum that is seen by others as a noncommercial setting, the would-be diverger or merchant may get a withering barrage of insults. The enforcement so far has been mostly by self-appointed censors

who “flame” those they believe have crossed the line into antisocial behavior.

The commercial on-line services employ volunteers and professional moderators to monitor conduct on their bulletin boards. Forums that have moderators can filter out some antisocial behavior by refusing to allow insults or copyrighted information to remain on a system’s servers. Most Internet forums remain unmoderated, however. Anything goes, and because people can post messages and information anonymously, little accountability exists. We need a more sophisticated process to gather consensus opinions without depending on the Attorney General’s Consumer Complaints Division to act as a filter. We will have to find some way to force people to turn their volume down so the highway doesn’t become an amplifier for libel or slander or an outlet for venting irritation.

Many providers of Internet access are beginning to restrict entry to forums containing sexually explicit material, and there has been a crackdown on the illegal traffic of copyrighted materials. Some universities are getting students and staff to remove objectionable postings. This rubs some the wrong way, because they see cyberspace as a place where anything goes. The commercial services have had similar problems. There have been complaints about restriction of free speech. And parents were outraged when their family account was closed after their eleven-year-old made an objectionable comment to a moderator. Companies will create special communities on the Internet and will “compete” by having rules about how they are going to deal with these issues.

Politicians are already wrestling with the question of when an on-line service should be treated as a common carrier and when it should be treated as a publisher. Telephone companies are legally considered common carriers. They transport messages without assuming any responsibility for them. If an obscene caller bothers you, the telephone company will cooperate with the police, but nobody thinks it is the phone company’s fault that some creep is calling you and talking dirty. Magazines and newspapers, on the other hand, are publishers. They are legally responsible for their content and can be sued for libel. They also have a strong interest in maintaining their reputation and editorial integrity because that is an important part of their business. Any responsible newspaper checks very carefully before making a previously unpublished allegation about someone—in part because it doesn’t want a libel suit, but also because inaccuracy would hurt its reputation.

On-line services function simultaneously as common carriers and publishers, which is where the problem lies. When they act as publishers, and offer content they have acquired, authored, or edited, it makes sense that the rules of libel and the self-governing incentive of editorial reputation would apply. But we also expect them to deliver our e-mail like a common carrier without examining or taking responsibility for its contents. Likewise, chat lines, bulletin boards, and forums that encourage users to interact without editorial supervision are a new means of communication, and shouldn’t be treated the same way as material published on the service. A New York judge, however, recently cleared the way for a libel lawsuit by ruling that the on-line service involved was a publisher of information, not just a distributor. Perhaps by the time you read this things will have been clarified. The stakes in the resolution of this issue are high. If network providers are treated entirely as publishers, they will have to monitor and preapprove the content of all information they transmit. This could create an unwelcome atmosphere of censorship and curtail spontaneous exchange, so important in the electronic world.

Ideally, the industry will develop some standards so that when you go into a bulletin board or article, you get an indication of whether or not some “publisher” has looked it over, edited it, and stands behind its content. The question will be what standards and who will oversee them? A bulletin board for lesbians should not be forced to accept antilesbian comments, nor should a bulletin board about some product be overwhelmed by messages from a competitor. It would be a shame to have to keep children away from all bulletin boards, but it would also be unrealistic, and possibly an abridgment of free expression, to force all bulletin boards to undergo review by someone willing to accept liability for everything they contain. What we will most likely end up with is a series of categories, like the ratings given movies, that will indicate whether shrill voices have been controlled and whether an “editor” has deleted messages he thought were out of line with the policies of the group involved.

The bulletin boards I’ve been discussing are the free, public ones, but there will also be places where professional information and advice will be offered for a fee. You might wonder why you would need an expert when so much information will be available. For the same reasons you might need one now. All sorts of consumer data can be had now. Consumer Reports offers objective evaluations of a lot of products, but the reviews are aimed at a broad audience—they don’t necessarily discuss your particular requirements. If you can’t find exactly the advice you need on the highway, you will be able to hire a knowledgeable sales consultant, for five minutes or an afternoon, via videoconference. She will help you choose products, which your computer will then buy for you from the cheapest reliable source.

I expect the traditional binding together of advice and sales to be much less prevalent, because although the advice appears free to the customer, it is paid for by the stores and services that offer it. This cost then gets added on to the price of the goods. Stores that are charging more because they offer advice will have increasing difficulty competing with the discounters who will operate on the information highway. There will continue to be some modest price variations in products from one outlet to another. These will reflect differences in return policies, delivery times, and whatever limited customer assistance is available.

Some merchants will offer “consultants” as part of the sales price, but for important purchases you are likely to welcome a truly independent guide. The cost of the consultation will be offset to an extent by the lower price you’ll end up paying at the outlet the consultant will guide you to. The prices consultants charge will also be very competitive. Suppose you use a service on the highway to obtain information about where to buy an expensive car at the best price, and then you buy it. The price for using the service—which has acted as the middleman in the transaction—might be charged at a low hourly rate, or it could be a small percentage of the purchase price. It will depend on the uniqueness of the service. Electronic competition will determine the fee.

Over time, more advice will be offered by software applications that have been programmed to analyze your requirements and make appropriate suggestions. A number of large banks have already developed “expert” computer systems to analyze routine loan and credit applications, with great success. As software agents become common, and voice-simulation-and-recognition software improves, it will begin to feel as though you’re talking to a real person when you consult a multi-media document with a personality. You’ll be able to interrupt, request more detail, or ask to have an explanation repeated. The experience will be like chatting with a personable expert. Eventually it won’t matter much whether you are talking to a human being or a very good simulation, as long as you get the answers you need to make an appropriate purchase.

A step toward the discount electronic commerce of the highway is today’s home-shopping television networks. In 1994 they sold nearly $3 billion worth of goods despite the fact that they are synchronous, which means you may have to sit through pitches for countless other items until they offer one you’re interested in. On the information highway you’ll be able to amble globally at your own pace among goods and services. If you’re looking for sweaters, you’ll choose a basic style and see as many variations as you like, in every price range. Perhaps you’ll watch a fashion show or a product demonstration. Interactivity will marry convenience with entertainment.

Today, branded products often appear in feature films and television programs. A character who once would have ordered a beer now asks for a Budweiser. In the 1993 movie Demolition Man, Taco Bell restaurants seem to be the only fast-food survivors. Taco Bell’s corporate parent, PepsiCo, paid for the privilege. Microsoft paid a fee to have Arnold Schwarzenegger discover the Arabic version of Windows running on a computer screen during True Lies. In the future, companies may pay not only to have their products on-screen, but also to make them available for you to buy. You will have the option of inquiring about any image you see. This will be another choice the highway will make available unobtrusively. If you are watching the movie Top Gun and think Tom Cruise’s aviator sunglasses look really cool, you’ll be able to pause the movie and learn about the glasses or even buy them on the spot—if the film has been tagged with commercial information. Or you could mark the scene and return to it later. If a movie has a scene filmed in a resort hotel, you’ll be able to find out where it’s located, check room rates, and make reservations. If the movie’s star carries a handsome leather briefcase or handbag, the highway will let you browse the manufacturer’s entire line of leather goods and either order one or be directed to a convenient retailer.

Because the information highway will carry video, you’ll often be able to see exactly what you’ve ordered. This will help prevent the sort of mistake my grandmother once made. I was at summer camp and she ordered lemon drops to be sent to me. She ordered one hundred, thinking I would get one hundred pieces of candy. Instead I got one hundred bags. I gave them out to everyone and was especially popular until we all began to have canker sores. On the highway you will be able to take a video tour of that hotel before you make your reservation. You won’t have to wonder whether the flowers you ordered for your mother by telephone really were as stunning as you’d hoped. You’ll be able to watch the florist arrange the bouquet, change your mind if you want, and replace wilting roses with fresh anemones. When you’re shopping for clothing, it will be displayed in your size. In fact, you’ll be able to see it paired with other items you have purchased or are considering.

Once you know exactly what you want, you’ll be able to get it just that way. Computers will enable goods that today are mass-produced to be both mass-produced and custom made for particular customers. Customization will become an important way for a manufacturer to add value. Increasing numbers of products—from shoes to chairs, from newspapers and magazines to music albums—will be created on the spot to match the exact desires of a particular person. And often the item will cost no more than a mass-produced one would. In many product categories mass customization will replace mass production, just as a few generations ago mass production largely replaced made-to-order.

Before mass production, everything was made one piece at a time, using labor-intensive methods that hampered productivity and the standard of living. Until the first practical sewing machine was built, every shirt was handmade with needle and thread. The average person didn’t have many shirts, because they were expensive. In the 1860s, when mass-production techniques began to be used to make clothing, machines turned out large quantities of identical shirts, the prices dropped, and even laborers could afford to own a number of them.

Soon there will be computerized shirt-making machines that will obey a different set of instructions for every shirt. When you order you’ll indicate your measurements as well as your choices for fabric, fit, collar, and every other variable. The information will be communicated across the information highway to a manufacturing plant that will produce the garment for prompt delivery. Delivering goods ordered over the highway will become a big business. There will be amazing competition, and as volume becomes enormous, delivery will get very inexpensive and fast.

Levi Strauss & Co. is already experimenting with custom-made jeans for women. At a growing number of their outlets, customers pay about $10 extra to have jeans made to their exact specifications—any of 8,448 different combinations of hip, waist, inseam, and rise measurements and styles. The information is relayed from a PC in the store to a Levi’s factory in Tennessee, where the denim is cut by computer-driven machines, tagged with bar codes, and then washed and sewn. The completed jeans are sent back to the store where the order was placed, or shipped overnight directly to the customer.

It is conceivable that within a few years everyone will have measurements registered electronically so it will be easy to find out how well a ready-made item will fit, or to place a custom order. If you give friends and relatives access to this information, they will find it a lot easier to buy for you.

Customized information is a natural extension of the tailored consultation capabilities of the highway. Individuals who have achieved eminence in some field may publish their opinions, recommendations, or even worldview, in much the same way that successful investors publish newsletters. Arnold Palmer or Nancy Lopez might offer golfers the chance to read or look at whatever golf material they have found helpful. An editor who today works at The Economist might start his or her own service, and offer a digest of the news with links to text and video news accounts from a variety of sources. Someone using this review service, instead of paying 60 cents for a newspaper, might pay the expert a few cents a day for performing the middleman function of assembling the day’s news, and pay the publisher of each story selected a little bit too. The customer would decide how many articles he wanted to read and how much to spend. For your own daily dose of news, you might subscribe to several review services and let a software agent or a human one pick and choose from them to compile your completely customized

“newspaper.”

These subscription services, whether human or electronic, will gather information that conforms to a particular philosophy and set of interests. They will compete on the basis of their talents and reputations. Magazines fill a similar role today. Many are narrowly focused and serve as customized realities of a sort. A reader who is politically engaged knows that what he or she is reading in National Review is not “the news.” It is a bulletin from the world of conservative politics where little of what the reader believes is challenged. At the other end of the political scale, The Nation is a magazine that knows its readers’ liberal views and biases and sets out to confirm and massage them.

In the same ways that movie studios try to sell you their newest release by showing previews in theaters, print advertising, and various kinds of promotional activities, the providers of information will use all sorts of techniques to convince you to sample their wares. A lot of information will be local—from neighborhood schools, hospitals, merchants, and even pizza joints. Connecting a business to the highway won’t be expensive. Once the infrastructure is in place and a critical number of users adopt it, every business will want to reach out to its customers over the highway.

The potential for electronic efficiency is causing some people to worry that if they use the information highway to shop or get their news, they will miss out on the serendipity of running into a surprisingly interesting article in the newspapers or finding an unexpected treat at the mall. Of course, these “surprises” are hardly random. Newspapers are constructed by editors who know from experience a lot about their readers’ interests. Once in a while The New York Times publishes a front-page article about an advance in mathematics. The somewhat specialized information is presented with an angle that makes it interesting to a good number of readers, including some who didn’t think they cared about math. In the same way, buyers for stores think about what is new and might intrigue their type of customer. Stores fill their window displays with products they hope will catch those customers’ eyes and lure them inside.

There will be plenty of opportunities for calculated surprise on the information highway. From time to time your software agent will try to entice you to fill out a questionnaire indicating your tastes. The questionnaire will incorporate all sorts of images in an effort to draw subtle reactions out of you. Your agent will be able to make the process fun by giving you feedback on how you compare with the norm. That information will be used to create a profile of your tastes, which will guide the agent. As you use the system for reading news or shopping, an agent will also be able to add information to your profile. It will keep track of what you have indicated interest in, as well as what you “happened upon” and then pursued. The agent will use this information to help prepare various surprises to attract and hold your attention. Whenever you want something offbeat and appealing, it will be waiting for you. Needless to say, there will be lots of controversy and negotiation about who can get access to your profile information. It will be crucial that you have such access.

Why would you want to create such a profile? I certainly don’t want to reveal everything about myself, but it would be helpful if an agent knew I wanted to see any safety features the new model Lexus might have added. Or, it could alert me to the publication of a new book by Philip Roth, John Irving, Ernest J. Gaines, Donald Knuth, David Halberstam, or any of my other longtime favorite writers. I would also like to have it signal me when a new book appears on some topic that interests me: economics and technology, learning theories, Franklin Delano Roosevelt, and biotechnology, to name a few. I was quite stimulated by a book called The Language Instinct, written by Steven Pinker, a professor at MIT, and I’d like to know about new books or articles on its ideas.

You’ll also be able to find surprises by following links other people have set up. Today, users like to browse the Internet’s World Wide Web, checking the display pages or home pages that include links to other pages with information about a company or links to other companies’ pages. These links are indicated by hot spots, those pictures or buttons that, when clicked with a mouse, cause the requested page to be called to the screen.

Some individuals are creating their own home pages. Personal home pages are interesting to consider. What data or thoughts would you want to publish to the whole world? Will your page have links, and, if so, to what? Who will want to look at your home page?

The electronic world will allow companies to sell directly to customers. Certainly every company will provide a home page to facilitate access to information about its products. Any company that has a successful distribution strategy—in our case, software retailers—has to make a choice about whether to take advantage of this. Putting up the latest information, including the names of your distributors, will be very easy, but it’s also important to protect retailers. Even Rolls-Royce, which has an extremely exclusive distribution system, will probably have a home page where you can see its latest models and find out where to buy them.

Retailers have done a very good job for Microsoft, and we like the fact that customers can go into stores and see most of our products and the salespeople can give them advice. Microsoft’s plan is to continue to sell through retailers, but some of them will be electronic.

Consider an insurance company that has worked effectively through agents. Will the company decide it wants customers to buy directly from the central office? Will it let its agents, who used to sell locally only, sell electronically nationwide? Sales requirements will be tough to define. Each company will have to determine what factors matter most to it. Competition will show which approach works best.

Home pages are an electronic form of advertising. The information highway’s software platform will allow companies total control over how information is presented. Advertisers on the information highway will have to be creative to capture viewers who will have grown accustomed to watching whatever they want, whenever they want, and to being able to skip through almost any program.

Today, advertising subsidizes nearly all of the programs we watch on television and articles we enjoy in magazines. Advertisers place their messages in the programs and publications that attract the largest appropriate audience. Companies placing ads spend a lot of money trying to make sure their advertising strategy is working. On the highway, advertisers will also want some sort of assurance that their messages are reaching their targeted audiences. Advertising doesn’t pay if everyone chooses to skip by the ad. The highway will offer alternatives. One might be software that lets the customer fast-forward past everything except for the advertising, which will play at normal speed. The highway will possibly offer the viewer the option of asking to see a group of commercials. In France, when commercials were grouped and aired together, that five-minute block was one of the most popular time segments.

Today, television viewers are targeted on a cluster basis. Advertisers know that a television newsmagazine tends to attract one kind of viewer and professional wrestling another. Television commercials are purchased with audience size and demographics in mind. Ads aimed at kids subsidize children’s shows; those aimed at homemakers subsidize daytime soap operas; car and beer ads subsidize sports coverage. The broadcast advertiser is dealing with aggregated information about the viewers of a show, based on a statistical sample. Broadcast advertising reaches many people who aren’t interested in the products.

Magazines, because they can be and often are narrowly focused editorially, are able to aim their advertising at somewhat more targeted audiences—car enthusiasts, musicians, women interested in fitness, even groups as narrow as teddy bear fans. People buying a teddy bear magazine want to see the ads for teddy bears and their accessories. In fact, people often buy special-interest magazines as much for the advertising as for the articles. Fashion magazines, for instance, if they’re doing well, are more than half advertising. They offer readers the experience of window-shopping without the walking. The advertiser doesn’t know the specific identities of the magazine’s readers, but it knows something about the readership in general.

The information highway will be able to sort consumers according to much finer individual distinctions, and to deliver each a different stream of advertising. This will benefit all parties: the viewers, because ads will be better tailored to their specific interests, and therefore more interesting; producers and on-line publications, because they will be able to sell advertisers focused blocks of viewers and readers. Advertisers will be able to spend their ad dollars more efficiently. Preference data can be gathered and disseminated without violating anyone’s privacy, because the interactive network will be able to use information about consumers to route advertising without revealing which specific households received it. A restaurant chain would know only that a certain number of middle-income families with small children received their ad.

A middle-aged executive and her husband might see an advertisement for retirement property at the beginning of an episode of Home Improvement, while the young couple next door might see a family vacation advertisement at the opening of the same show, regardless of whether they watched the show at the same or a different time. These closely targeted advertisements will be of more value to the advertiser, so a viewer could subsidize an entire evening of television by watching a small number of them.

Some advertisers—Coca-Cola, for example—want to reach everyone. But even Coca-Cola might decide to direct diet cola ads to households that have expressed an interest in diet books. The Ford Motor Company might want affluent people to be shown a Lincoln Continental ad, young people to see a Ford Escort ad, rural residents to watch an ad for full-size pickup trucks, and everyone else to be sent a Taurus ad. Or a company might advertise the same product for everyone but vary the actors by gender or race or age. They will certainly want to revise the copy to target particular purchasers. To maximize the value of the advertising, complex algorithms will be required to allocate ad space within a show for each viewer. This will take more effort, but because it will make the messages more effective, it will be a good investment.

Even corner groceries and the local dry cleaner will be able to advertise in ways they never could before. Because individually targeted ad streams will be flowing through the network all the time, video advertising is likely to become cost-effective even for small advertisers. A store’s ads might target only a few blocks and address very specific neighborhoods or community interests.

Today, the most effective way to reach a narrow audience is with a classified ad. Each classification represents a small community of interest: people who want to buy or sell a rug, for example. Tomorrow, the classified ad won’t be tied to paper or limited to text. If you’re looking for a used car, you will send out a query specifying the price range, model, and features that interest you and will be shown a list of the available cars that match your preferences. Or you will ask a software agent to notify you when a suitable car comes on the market. Car sellers’ ads might include links to a picture or a video of the car or even the car’s maintenance records, so you can get a sense of what shape it is in. You’ll be able to learn the mileage the same way, and whether the engine has ever been replaced, and if the car has air bags. Perhaps you will want to cross-link to police records, which are public, to see whether it has been in a wreck.

If you put your house on the market, you will be able to describe it fully and include photographs, video, floor plans, tax records, utility and repair bills, even a little mood music. The chances that a potential buyer for your house will see your ad are improved because the information highway will make it easy for anyone to look it up. The whole system of real estate agencies and commissions may be changed by the principals’ having direct access to so much information.

At first, on-line classified ads won’t be very attractive, because not many people will be using them. But then word-of-mouth from a few satisfied customers will entice more and more users to the service. There will be a positive-feedback loop created as more sellers attract more buyers and vice versa. When a critical mass is achieved, which might be only a year or two after the service is first offered, the information highway’s classified advertising service will be transformed from a curiosity to the primary way private sellers and buyers get together.

Direct-response advertising—the junk-mail business is in for even bigger changes. Today, a lot of it really is junk, because we cut down a lot of trees in order to mail out material, much of which is discarded unopened. Direct-response advertising on the information highway will come in the form of an interactive multi-media document rather than a piece of paper. Although it won’t waste natural resources, there will have to be some way to make sure you don’t get thousands of these almost-free communications a day.

You won’t be drowned by the deluge of unimportant information because you’ll use software to filter incoming advertising and other extraneous messages and spend your valuable time looking at those messages that interest you. Most people will block e-mail ads except for those about product areas of particular concern. One way for the advertiser to capture your attention will be to offer a small amount of money—a nickel or a dollar, perhaps—if you will look at an ad. When you have watched it, or as you’re interacting with it, your electronic account gets credited and the advertiser’s electronic account is debited. In effect, some of the billions of dollars now spent annually on media advertising, and on the printing and postage of direct-mail advertising, will instead be divvied up among consumers who agree to watch or read ads sent directly to them as messages.

Mailings offering this sort of paying advertisement could be extremely effective because they can be carefully targeted. Advertisers will be smart about sending messages worth money only to people who meet appropriate demographics. A company such as Ferrari or Porsche might send $1 messages to car enthusiasts, on the chance that seeing a cool new car and hearing the sound of its engine will generate interest. If the ad led to even one in 1,000 people’s buying a new car as a result, it would be worthwhile to the company. They could adjust the amount they offer according to the customer’s profile. Such ads will be available to those not on the advertiser’s A-list. For instance, if a sixteen-year-old car-crazy kid wants to experience a Ferrari, and is willing to do it for nothing, he’ll get the message too.

This may sound a little strange, but it is just another use of the market mechanism for friction-free capitalism. The advertiser decides how much money it is willing to bid for your time, and you decide what your time is worth.

Advertising messages, like the rest of your incoming mail, will be stored in various folders. You will instruct your computer how to do the sorting for you. Unread mail from friends and family members might be in one folder. Messages and documents that relate to a personal or business interest would be in other folders. And advertisements and messages from unknown people could be sorted by how much money was attached to them. There would be a group of 1-cent messages, a group of 10-cent messages, and so forth. If there was no fee attached, they could be refused. You will be able to scan each message and dispose of it if it isn’t of interest. Some days you might not look into any of the advertising message folders. But if someone sent you a $10 message, you would probably take a look—if not for the money, then just to see who thought reaching you was worth $10.

You won’t have to take the money someone bids, of course. When you accept the message, you’ll be able to cancel the payment, so it’s really just the amount the person puts at risk to get your attention. The sender’s credit will be checked in advance. If a man sends you a $100 message suggesting that he is your long-lost brother, you might forgive him the money if, in fact, he turned out to be your brother. On the other hand, if he was just someone trying to get your attention to sell you something, you would probably keep the money, thank you very much.

In the United States, advertisers currently spend more than $20 a month per American family to subsidize free broadcast and cable television. Ads in general are so familiar they don’t really bother us when we watch television or listen to the radio. We understand that programs are “free” because of the commercials. Customers pay for them indirectly because advertising costs are built into the prices of cornflakes, shampoo, and diamonds. We also pay for entertainment and information directly when we buy a book or a movie ticket, or order a pay-per-view movie. The average American household pays a total of $100 a month for movie tickets, subscriptions to newspapers and magazines, books, cable television fees, compact discs and tapes, video rentals, and the like.

When you pay for entertainment by buying a tape or a disc, your rights to reuse or resell it are restricted. If you buy a copy of Abbey Road by the Beatles, you’re actually purchasing the physical disc or tape and a license to replay, any number of times, for noncommercial purposes, the music stored on it. If you buy a paperback book, what you’re really buying is the paper and ink and the right to read, and allow others to read, the words printed on that particular paper with that particular ink. You don’t own the words and you can’t reprint them, except in narrowly defined circumstances. When you watch a television show, you don’t own it, either. In fact, it took a United States Supreme Court decision to confirm that people in this country can legally videotape a television show for their personal use.

The information highway will enable innovations in the way that intellectual property, such as music and software, is licensed. Record companies, or even individual recording artists, might choose to sell music a new way. You, the consumer, won’t need compact discs, tapes, or any other kinds of physical apparatus. The music will be stored as bits of information on a server on the highway. “Buying” a song or album will really mean buying the right to access the appropriate bits. You will be able to listen at home, at work, or on vacation, without carrying around a collection of titles. Anyplace you go where there are audio speakers connected to the highway, you’ll be able to identify yourself and take advantage of your rights. You won’t be allowed to rent a concert hall and play that recording of the music or create an advertisement that incorporated it. But in any noncommercial setting, anywhere you go, you’ll have the right to play the song without additional payment to the copyright holder. In the same way, the information highway could keep track of whether you had bought the right to read a particular book or see a movie. If you had, you’d be able to call it up at any time, from any information appliance anywhere.

This personal, lifetime buyout of rights is similar to what we do today when we buy a music disc or tape, or book, except that there is no physical medium involved. It sounds comfortingly familiar. However, there are lots of other ways to sell the enjoyment of music or other information.

For example, a song could be made available on a pay-per-hearing basis. Each time you listened to it, your account would be charged some small amount, such as 5 cents. At that rate, it would cost 60 cents to listen to a twelve-song “album.” You would have to play the whole album twenty-five times to spend $15, which is roughly what a compact disc sells for today. If you found that you liked only one song on the album, you could play it three hundred times, at a nickel each time, for your $15. Because digital information is so flexible, as the audio quality improves you won’t have to pay for the same music again the way people did when they bought CDs to replace the LPs in their personal libraries.

All kinds of pricing schemes will be tried. We may see digital entertainment that has an expiration date or that allows only a certain number of plays before it has to be purchased again. A record company might offer a very low price for a song but let you play it only ten or twenty times. Or they might let you play a song—or an addictive game—ten times free before asking if you want to buy it. This kind of “demo” usage might replace part of the function served by radio stations today. An author could allow you to mail a new song to a friend, but she will only be able to listen to it a few times before getting charged. A musical group could have a special price, far lower than if every album was bought individually, for a buyer who wanted all their work.

Even today, paying for entertainment information isn’t without nuances. The limited time value of entertainment information affects the way publishers and film studios market their products. The book publisher often does this by having two release windows, hardcover and paperback. If a customer wants a book and can comfortably afford it, he or she pays $25 to $30. Or the customer can wait for between six months and two years and buy the same book, in a somewhat less expensive and long-lasting format, for $5 to $10.

Successful movies are progressively shown in first-run theaters, secondary theaters, hotel rooms, on pay-per-view TV, and on airplanes. Then they are available as video rentals, on premium channels such as HBO, and eventually on network TV. Still later they appear on local television or basic cable channels. Each new form brings the movie to a different audience as customers who missed the previous forms of release (accidentally or on purpose) take advantage of the new opportunity.

On the information highway various release windows for content will almost certainly be tried. When a hot movie, multi-media title, or electronic book is released, there may be an initial period during which it is priced at a premium. Some will be willing to pay a high fee, perhaps as much as $30, to see a movie at the same time it appears in the first-run theaters. After a week, a month, or a season, the price will drop to the $3 or $4 we are charged today for pay-per-view movies. Marketers may try some wild things. Perhaps a movie will come along that you won’t be able to see at all in its first month of release unless you’re one of the top 1,000 bidders in an electronic auction on the highway. At the other extreme, if you have a track record of buying movie posters and merchandise related to what you watch, you may find you can get certain movies for next to nothing or with few, if any, commercial interruptions. Purchases of The Little Mermaid and Aladdin videotapes and associated merchandise might justify Disney’s allowing every child in the world one free viewing.

The transferability of information will be another big pricing issue. The information highway will allow the transfer of intellectual property rights from one person to another at the speed of light. Almost all the music, writing, or other intellectual properties stored on disks or in books sits unused most of the time. When you’re not consuming your particular copy of Thriller or Bonfire of the Vanities, most likely no one else is, either. Publishers count on this. If the average buyer lent his or her albums and books frequently, fewer would be sold and prices would be higher. If we assume that an album is in use, say, 0.1 percent of the time, “light speed” lending might cut the number of copies sold by a factor of 1,000. Lending will probably be restricted so users will only be allowed to lend a copy out perhaps up to ten times a year.

Public libraries will become places where anyone can sit down and use high-quality equipment to gain access to the information highway’s resources. Library committees might use the budgets that today pay for buying books, albums, movies, and subscriptions to fund the royalties for using educational electronic materials. Authors may decide to forfeit some or all of their royalties if their work is to be used in a library.

New copyright laws will be required to clarify the purchaser’s rights to the content under different schemes. The highway will force us to think more explicitly about what rights users have to intellectual property.

Videos, which tend to be watched only once, will continue to be rented, but probably not from stores. Instead, consumers will shop on the information highway to find movies and other programs deliverable on demand. Neighborhood video-rental stores and music stores will face a dwindling market. Bookstores will continue to stock printed books for a long time, but nonfiction and especially reference material will probably be used much more often in electronic rather than print form.

Efficient electronic markets are going to change a lot more than just the ratio of renting to buying for entertainment. Almost any person or business that serves as a middleman will feel the heat of electronic competition.

A small-town lawyer will face new competition when legal services are available by videoconference over the network. A person buying a piece of property might choose to consult with a sharp real estate attorney from the other side of the county rather than using a local lawyer who is a generalist. The resources of the highway, however, will allow the local lawyer to retrain and become an expert in any specialty of her choice. She will be able to compete in this specialty because of her lower overhead. Clients will benefit as well. The prices for executing routine legal tasks, such as the drafting of wills, will be driven down by the efficiency and specialization of the electronic marketplace. The information highway will also be able to deliver complicated medical, financial, and other video consulting services. These will be convenient and popular, especially when they are short. It will be much easier to make an appointment and turn on your television or computer screen for a fifteen-minute meeting than it will be to drive somewhere, park, sit in a waiting room, and then drive back to your home or office.

Videoconferences of all sorts will increasingly become alternatives to having to drive or fly to a meeting. When you do go somewhere, it will be because it is important that a particular meeting be face-to-face, or because something fun requires that you be there physically. Business travel may fall off, but leisure travel will rise because people will be able to take working vacations, knowing they can stay connected to their ofrices and homes through the information highway.

The travel industry will change even though the total amount of traveling may stay the same. Travel agents, like all professionals whose service has been to offer specialized access to information, will have to add value in new ways. Travel agents now search for the availability of travel arrangements using databases and reference books customers don’t have access to. Once they become familiar with the power of the highway and all the information that will be on it, many travelers will prefer to conduct searches themselves.

Smart, experienced, and creative travel agents will prosper, but they will specialize and do more than book reservations. Say you want to visit Africa. You will be able to find the cheapest tickets to Kenya, so the travel agency will have to be able to provide something else. Perhaps the agency books nothing but trips to East Africa—hence, they’ll be able to tell you what other customers especially liked, or that the Tsavo National Park is too crowded, or that if you’re really interested in seeing herds of zebra, you are better off visiting Tanzania. Some other travel agents may decide to specialize in selling travel to, rather than from, their own cities. An agent in Chicago might offer services across the network to people around the world who want to visit his hometown, rather than selling services to Chicagoans who want to visit other places. Customers wouldn’t know the travel agent, but the travel agent certainly would know Chicago, which might be more important.

Although today’s newspapers will be around for a long, long time, the newspaper business will be fundamentally altered when the consumer has access to the information highway. In the United States, daily newspapers are dependent on local advertising for most of their revenue. In 1950, when television sets were still novelties, national advertising contributed 25 percent of the advertising revenue of American newspapers. By 1993, national advertising contributed only 12 percent, in large measure because of competition from television. The number of daily newspapers in the United States has declined dramatically and the burden of financing those that remain has shifted to local retail and classified advertising. Classifieds don’t really work on radio or television. In 1950, only 18 percent of the advertising revenue of daily newspapers in the United States came from classifieds, but by 1993 that had risen to 35 percent and represented billions of dollars.

The information highway will provide alternative, more efficient ways for individual buyers and sellers to get together. Once the majority of customers in a market use electronic access to shop, classified revenues will be threatened. That means much of the newspaper advertising base could be in jeopardy.

It does not, however, mean that newspapers will disappear overnight, or that newspaper companies can’t continue to be important and profitable players in the delivery of news and advertising. But, like all companies that have a middleman or brokering role, they’ll have to be alert to change and take advantage of their unique qualities to succeed in the electronic world.

Banking is another industry destined for change. There are about 14,000 banks in the United States that cater to retail customers. Most people bank with a firm that has a branch office near their home or on their commuting path. Although minor differences in interest rates and services might shift people from one local bank to another, few customers would consider switching to a branch ten miles out of their way. Today, moving your bank records is time-consuming.

But when the information highway makes geography less important, we will see electronic, on-line banks that have no branches—no bricks, no mortar, and low fees. These low-overhead electronic banks will be extremely competitive and transactions will be made through computer appliances. There will be less need for cash because most purchases will be handled with a wallet PC or an electronic “smart card” that will combine the features of a credit card, automatic teller machine card, and checkbook. This is all coming at a time when the U.S. banking industry is already consolidating and becoming more efficient.

A lot of the interest-rate differential between large and small deposits will disappear. With the communications available on the highway, a new kind of middleman will be able to aggregate small customers efficiently and get them a rate very close to what large depositors are offered. Financial institutions will be able to specialize; one bank may choose only to make automobile loans, whereas another concentrates on boat loans. Fees will be generated for all of these services, but the fee structure will be based on broad, efficient competition.

It wasn’t so long ago that a small investor who wanted to put his money in anything beyond a passbook savings account was stymied. The world of stocks and beyond—mutual funds, penny stocks, commercial paper, debentures, and other arcane instruments—was simply off-limits to anyone who wasn’t a Wall Street insider.

But that was before computers changed things. Today, “discount” stockbroker listings are plentiful in the Yellow Pages, and quite a few investors make their stock purchases from a machine at a local bank or over the telephone. As the information highway gains in efficiency, investment choices will proliferate. Stockbrokers, like other middlemen whose job has been merely to chaperon a transaction, will probably have to offer something beyond just purchasing securities. They’ll add value by being knowledgeable. Financial services companies will still thrive. The basic economics of the industry will change, but the volume of transactions will skyrocket as the information highway gives the average consumer direct access to financial markets. Investors with relatively small amounts of money to commit will get better advice and have opportunities to make profits from the sorts of investments now available only to institutions.

When I prognosticate about the future changes in an industry, people often wonder if Microsoft plans to go into that field. Microsoft’s competence is in building great software products and the information services that go with them. We will not become a bank or a store.

Once, when I referred to a bank’s back-end databases as “dinosaurs,” a reporter wrote an article saying I thought banks themselves were dinosaurs and we wanted to compete with them. I have now spent more than a year going around the world telling banks I was misquoted. Microsoft faces plenty of challenges and opportunities in the business we know—whether it’s enterprise support, making computer software, groupware for the Internet servers, or any other part of our business.

Our success in the PC world has come from working in partnership with such great companies as Intel, Compaq, Hewlett Packard, DEC, NEC, and dozens of others. Even IBM and Apple, with whom we have occasionally been in competition, have had an immense amount of our cooperation and support. We created a company that was dependent on partners. We bet that somebody other than us would do great chips, somebody other than us would build great PCs, somebody other than us would do great distribution and integration. We took a narrow slice and focused on that. In this new world, we want to work with companies from every industry to help them make the most of the opportunities the information revolution will bring.

Industry after industry will be changed, and change is unsettling. Some middlemen who handle information or product distribution will find they no longer add value and change fields, whereas others will rise to the competitive challenge. There is a nearly infinite number of tasks left undone in services, education, and urban affairs, to say nothing of the workforce the highway itself will require. So this new efficiency will create all sorts of exciting employment opportunities. And the highway, which will put an immense amount of information at anyone’s fingertips, will be an invaluable training tool. Someone who decides to change careers and go into computer consulting will have access to the best texts, the greatest lectures, and information about course requirements, exams, and accreditation. There will be dislocations. However, overall, society will benefit from these changes.

Capitalism, demonstrably the greatest of the constructed economic systems, has in the past decade clearly proved its advantages over the alternative systems. The information highway will magnify those advantages. It will allow those who produce goods to see, a lot more efficiently than ever before, what buyers want, and will allow potential consumers to buy those goods more efficiently. Adam Smith would be pleased. More important, consumers everywhere will enjoy the benefits.