If you've ever purchased something over the Internet using a plastic card, then you've seen the future.
Buying and selling -- and even money itself -- are rapidly entering the digital age. The marketplace, once a teeming throng of goods, people and hard currency, is becoming a global stream of electronic information. We're on the brink of a new digital economy, and the coming changes are both profound and exciting.
The way people shop for everyday items like books, toys and groceries is already changing as more retailers are setting up electronic stores on the Internet. It is estimated that 200,000 US households made purchases on the Internet in 1998 and that online shoppers spend $4 million a day on computers, books, music and adult entertainment, according to Andersen Consulting and Forrester Research.
Forecasts of how much electronic commerce will grow in the coming years vary widely -- anywhere from $2 billion to $200 billion by 2000 -- but some say even the highest estimates are too low. "Consumer buying over the Internet is wildly underestimated," says Nicholas Negroponte, director of the Media Laboratory. "I believe it will exceed one trillion dollars by 2000."
TIME OF CHANGE
"The next few years will be a time of change and instability for business," says Professor Erik Brynjolfsson, who runs the electronic commerce program at the Sloan School of Management. "There's going to be an explosion of commerce on the Internet, and a lot of the ways business is done on the Internet are fairly different from the ways business is done using conventional channels."
Take bookselling, for example. Electronic book stores like Amazon.com have already taken a big share of the market away from traditional, real-world book sellers. The lower overhead costs of operating in cyberspace mean Internet sellers can offer lower prices.
"The real store has to pay rent, employ salespeople, and keep an inventory," says Joseph Reagle, public policy analyst with the World Wide Web Consortium, an industry collaborative based at MIT. "Real stores are going to feel a lot of pressure from virtual retailers, although I don't think real stores will ever disappear completely."
Product pricing will also become more sophisticated, predicts Professor Brynjolfsson. "Internet-based retailers can tailor their pricing to match supply and demand in real-time. We found that online booksellers and CD merchants change prices in much smaller increments than their counterparts in conventional stores. One store even uses software agents to make sure its prices are constantly updated to beat a key competitor."
Buying on line is also spreading to a huge variety of items, including some that surprised even the experts. In addition to books and compact discs, electronic sales of computers, cars, toys, and even groceries are growing rapidly.
"One of the surprising things an early Internet grocery service told me is that people bought a higher proportion of fruits and vegetables on line than they did in the physical store," says Professor Brynjolfsson.
The convenience of on-line ordering makes it easier for shoppers to replenish these perishable foods more often. "There is a demonstrated market for fresh bread on line," says Negroponte. "I'd buy white truffles in a flash."
As we buy and sell more things electronically, old-fashioned coins and paper money become less useful. "Cash is almost obsolete in theUnited States and Europe due to credit and debit card systems," says Professor Negroponte. "I can leave on a three-week trip with less than $50 in my pocket."
Experts say true electronic cash, in the form of a "smart card" similar to a prepaid phone card, may replace cash altogether in the future. Already popular in Europe, such electronic pocket money could conceivably be recharged from a home computer linked to a bank account.
"As soon as we have an accepted stored-value system, be it e-cash on your hard disk or money in your smart card, cash will be truly obsolete," predicts Professor Negroponte. "We're just not there yet."
Beyond smart cards, some see even more dramatic changes in the nature of money over the long term. One British think-tank predicts that by 2020, we'll be using a single global currency, common to all nations.
"That's possible, for sure," says Negroponte. "But the opposite will happen as well -- a vast array of digital currencies will evolve, issued by all sorts of entities, not just nation states." Examples include store-based loyalty points or kids' cash as well as tiny closed currencies specific to a town or region.
Experts say cutting the tether between government and money will expand markets and increase consumer freedom. In fact, much of the future of the entire digital economic revolution lies in the hands of the consumer. So far, the government has adopted a mostly wait-and-see approach, letting market forces set the pace.
"There are some issues with encryption of sensitive information and with taxation that the government is currently looking at," says Mr. Reagle. "But otherwise they are letting technology and the free market determine the future."
This article was originally published in the winter 1999 issue of Spectrum.
A version of this article appeared in the March 3, 1999 issue of MIT Tech Talk (Volume 43, Number 21).