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SOONER OR LATER, THE INTERNET MUST PAY

The Napster adventure captures the Internet's confusing present and uncertain future. By many accounts, Napster is the fastest-growing new Internet application ever. There are 62 million registered users for something that started in April 1999. They can download and copy virtually any music ever recorded in digital format.

But now a federal court threatens to close Napster's free distribution as a type of techno-theft that violates copyright laws. Whether Napster can survive by charging for music and paying royalties is an open question. Indeed, the same sort of question applies to the entire Internet.

Examined coldly, the Internet represents an investment of countless billions of dollars that, as yet, isn't paying its way. It has been lavishly subsidized by venture capitalists, investors and major corporations, which have poured immense amounts into building Web sites and communications networks. What customers pay for the Internet's services -- often little or nothing -- doesn't cover the costs. Until that happens, major corporations are losing their desire -- or ability -- to increase their Internet investments.

Aside from depressing the economy, this slowing of spending will cast the Internet in a harsher light. Dazzled by the technology, we automatically assume that the Net must represent a huge advance in economic efficiency and social well-being -- and someday it may. But for now, the Internet is unproductive, costly and wasteful.

Consider some Internet economic indicators:

In 2000, online retail sales (dominated by computers, software, books, clothes) totaled $25.8 billion, says the Commerce Department. This was eight-tenths of 1 percent of total retail sales of $3.232 trillion.

Internet advertising has stagnated. In the third quarter of 2000, it was $1.99 billion, down from $2.1 billion in the second quarter, reports the Internet Advertising Bureau. Estimated at $8 billion to $9 billion for the year, it would be less than 4 percent of all advertising.

Online stock accounts have increased dramatically, but they haven't obliterated traditional brokerage accounts. The New York Stock Exchange estimates that online accounts rose from 4 million in 1997 to 18 million in 2000, while traditional accounts declined from 61 million to 60 million.

The Internet simply isn't yet the most efficient, convenient or appealing way of delivering most goods and services. The Internet's efficiency -- the cheapness of its information -- is often a mirage. What seems wonderfully inexpensive for the user can be frightfully expensive for the producer.

The Internet's average costs are high and marginal costs are low, nearly zero. The marginal cost of any good or service is the expense of producing (or selling) one more item. For the Internet, this is negligible. Once a data file is stored -- and a communications network built -- the cost of zapping the file to one more user is trivial. Many Internet services are priced at marginal cost: little or nothing. However, companies can survive only if they recover average costs (i.e., the expense of providing the service).

The paradox is that the Internet seems to deliver so much information to users at so little cost that much of it doesn't have much value. When Amazon.com and BN.com offered Stephen King's novel "Riding the Bullet" free of charge, customers downloaded an estimated 500,000 copies within days. But a market study later found that only 5 percent of people read it, says Michael Segroves, vice president of Peanutpress.com, a seller of e-books.

The genius of Napster is that it creates its music inventory free, through software that permitted the swapping of song files. That's what the court branded a copyright infringement. Now, say the commentators, the recording industry should create, with or without Napster, online services that allow songs to be downloaded for modest fees. Business (it's said) would boom. Fabulous. But no one has yet figured out how to do it.

The Internet is a communications network. It isn't going away, and someday it will merge voice, video and data traffic. But Internet spending, a prop of the economic boom, won't continue to propel the economy forward. The Internet is a great giveaway, but it won't drive the economy unless it becomes a great business.

Washington Post Writers Group

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