The real world wins

Three items about the Internet caught my eye recently – one was about the latest round of initial public offerings (IPO) related to social networking sites; the second was an article in Wired about Internet entrepreneurs; and the other was a McKinsey Global Institute report about the impact of the Internet. On the first, The Economist noted in June the plethora of social networking IPOs, saying that, after years in the doldrums, the market has sprung to life in America. What is eye-catching about the IPOs is the valuations versus profits, which, in some cases, are, in fact, losses. Professional social networking site LinkedIn, for example, saw a valuation on the New York Stock Exchange that was 572 times profits; Groupon, discount coupons offered to groups, is said to have a potential value of $15 billion, but lost $390 million last year. There are a number of other social media sites waiting to jump on the IPO bandwagon. Bubble or not? The Economist is hedging its bets. The Wired article was about Y Combinator, headquartered in Silicon Valley, California, a company that organises events where digital entrepreneurs sell their ideas, after coaching, to individuals ready to invest. The crop covered in the July 2011 issue included: an online game; online radio; a business email service; remote teaching; mobile apps; an online fax service; software distribution; and an online restaurant dinner party organising site. Y Combinator is not the only game in town and the impression is that there's an investor feeding frenzy on the go – everyone's looking for the next Facebook. What they all have in common is that not one of them makes anything. They provide 'lubrication' or a 'supercharge' to existing activities, so to speak. And that's where the McKinsey Global Institute report comes in. With all the heat, steam and froth that continue to surround Internet businesses, you would have thought that it really would have something to say about the impact of these new businesses and how the Internet has delivered a second industrial revolution. Well, it actually says that, while the Internet's effect is often likened to the Gutenberg press, it has really turned out to be more like electricity. And that is because it has helped drive efficiency in existing businesses for the most part, rather than create new types of business. The statement is backed by the fact that, in the 13 mature industries studied and which account for 70% of global GDP, more than 75% of the value of the value added via the internet is in traditional businesses. And the market researcher further highlights that manufacturing is one of the sectors enjoying the greatest impact from the Internet. "The brunt of [the Internet's] economic contribution derives from established industries that, in the shadow of the Internet, have become more productive, have created more jobs, have increased living standards and have contributed more to real growth," McKinsey says. The Internet is responsible for 5.4% of GDP in the UK, 3.4% across all 13 countries. If its effect were measured as a sector of the economy, across the 13 countries it would be a larger sector that agriculture, utilities, mining and communication, the report says. But remember that it's driving existing business expansion for the most part and is not a separate, new sector. Now, reality won't stop over-inflated valuations or reams of coverage being given to digital millionaire hopefuls, of course, but bear all this in mind.