The digital economy: Where do we stand?

The rapid transition towards a “digital economy” was enabled by a converging set of innovations. Computing saw the development of the semiconductor transistor, integrated circuit, personal computers (PCs), operating systems, and graphical interfaces. The physical layer of telecommunication was enabled via the emergence of optical fiber and new wireless communication technologies, while networking saw the development of the Internet (essentially packet switching) and the World Wide Web. These advances combined to realize a series of new applications of information and communications technologies (ICTs) such as business software, e-mail, and e-commerce. However, progress seriously stumbled with the collapse of the dot com bubble, which among other things revealed a huge amount of misdirected investment that could have been used more productively. The question of the day is thus how to realize new “killer apps” to stimulate a new round of growth. The use of cell phones for communicating text, pictures, and video is a rapidly expanding area, but it seems unlikely that these applications will have a macroeconomic impact. Entertainment is a key industry whose fortunes are entwined with ICTs. Indeed, the application of ICT to innovating entertainment products is an important driver for the continued growth of the industry. Distribution of music and video via the Web could significantly stimulate demand but also raises the thorny question of how to protect intellectual property rights (IPR) of content providers. Another possible killer apps are interactive video-on-demand and telecalls/teleconferencing. The latter would, among other things, stimulate adoption of telework. The current Internet is capable of handing neither one-way transmissions of high-quality video nor interactive video-on-demand. There are bottlenecks both for the “last mile” connection from Internet service provider (ISP) to the home but also the “first miles” from originating server to ISP. The effective first miles bandwidth has not increased along with improvements in equipment, essentially because demand increases with capacity and thus traffic jams on the net continue. Digital subscriber line (DSL) technologies over telephone wires, and possibly wireless networks, will play important roles in getting over the last mile hurdle. Upgrading the first miles will probably require new networking protocols beyond TCP/IP that support multimedia and also changes in the economic model of information transfer via the Net.