Click Till You Drop

By MICHAEL KRANTZ/SAN FRANCISCO

I know we're not normal," Jerry Yang says with a boyish grin, making a halfhearted effort to straighten up his cubicle for his visitor. It's not much of an office by mogul standards: just a nondescript desk, a couple of cheap plastic milk crates bulging with papers, an old futon. Magazines are piled in a corner, and a window offers a distinctly declasse view of the parking lot.

Of course, by the standards of David Filo, 32, Yahoo's other co-founder, 29-year-old Jerry's digs are West Coast Donald Trump. Filo's office is truly a Goodwill collection truck of a workspace, with dirty socks and T shirts jumbled in with books, software and other debris. Even more startling is his office computer: a poky clone running an outdated Pentium 120 chip. Why wouldn't the chief technologist of the Internet's No. 1 website use the top of the line? Filo just shrugs. "Upgrading is a pain."

Could this be the face of 21st century capitalism? You'd better believe it. Two years ago, conventional wisdom still derided the World Wide Web as an amusing toy with little practical application. No more. With striking speed, the business that Yahoo (or, as the company formally calls itself, Yahoo!) has been pioneering has grown into nothing less than a new economic order, a Net Economy! whose exclamation point came last week, when shares of Yahoo surged to more than $200 (closing at $181 on Friday), making billionaires of two young men who just a generation ago would only be beginning their climb up the organization ladder.

Instead they're already creating a world that is about to become your own. The Net economy that Yang and Filo are building doesn't exist merely in the 115 million Web-page views that Yahoo serves up to hungry surfers every day nor in the stock-market pyrotechnics that have given their venture an explosive $8 billion valuation. The real economy exists in the thousands--even tens of thousands--of sites that together with Yahoo are remaking the face of global commerce. Want to snag a $900 suit for $150? Try countryroadfashions.com (but be warned: they're based in Thailand, so you'll have to take your own measurements). Looking for that hard-to-find anthropology book? Amazon.com is your best bet. Yearn to have your weekly groceries delivered to your door? Peapod.com exists to make your grocery shopping easier--and it even lets you specify how ripe you like your bananas. How about if you want to know the difference between several brands of stereo receivers? Try Compare.Net, which offers a free online buyer's guide that allows users to compare features on more than 10,000 products.

And that's the pitch for this new electronic world: faster, cheaper, better. It's the same line we've heard for decades from computer manufacturers, stereomakers and software firms like Microsoft. "Information at your fingertips" is what Bill Gates called it as far back as 1990. Then it was an unimaginably seductive vision. Now it has become a lucrative reality for a select few. Compare.Net, for instance, has grown from four employees to nearly 40 in less than two years, and its revenue growth is a stunning 25%--every month. Yahoo's lucre spreads beyond Yang and Filo. Just ask the dozens of other post-pubescent millionaires who prowl the firm's Santa Clara, Calif., headquarters. Barefoot.

The real promise of all this change is that it will enrich all of us, not just a bunch of kids in Silicon Valley. With online price comparisons, automatic grocery shopping and the ability to get whatever we want whenever we want it, 21st century Americans will face a radical reshaping of the consumer culture we've been building since the 1950s. Think, for a second, about the revolution that shopping malls created in the 1970s and 1980s. They defined not only how we bought stuff but also how we spent our time. The malls themselves became essential parts of a new suburban design, where castles of consumption shaped town layouts in the same way the Colosseum shaped Rome. At its heart, cybercommerce isn't just about building businesses either. It is also, explains Yang, about building a new culture of convenience and speed.

It's an attractive idea. By the year 2000, according to the GartnerGroup, online consumer sales will reach $20 billion, an increase of 233% over this year's estimated $6.1 billion. And online commerce between companies (places like Boeing that now buy computers online from Dell) is growing even faster. In 1998, says the GartnerGroup, business-to-business trades over the Internet will total $15.6 billion--and by 2000 that figure will reach $175 billion. "The new economy," says Joe Carter, managing partner at Andersen Consulting, "could rapidly overtake the existing economy as we know it."

There are skeptics. Stephen Roach, chief global economist at Morgan Stanley Dean Witter, suspects that e-commerce is being oversold, though he admits it's growing rapidly. "I question if it'll ever be big." He is right when he notes that e-commerce is no more than 1% of the U.S.'s $8.5 trillion economy; in fact, consumer online sales now account for only .2% of total retail. And e-commerce, Roach argues, is hardly on a par with the Industrial Revolution. "This is an intangible cerebral revolution, which is a lot harder to pull out."

But for hundreds of front-line businesses, this cerebral revolution has become very real. And very unpleasant. Talk to the folks at 230-year-old Encyclopaedia Britannica, which two years ago dismissed its entire home sales force in North America after the arrival of the Internet at $8.50 a month made the idea of owning a $1,250, 32-volume set of books seem less appealing. Kids, everyone knew, were just as happy to get their information online or from a CD-ROM. In fact, they preferred it. The 170-year-old Journal of Commerce, which made most of its money from publishing shipping logs every week, has been forced to set sail on a new digital ocean in order to survive. "The future is electronic," says publisher Willy Morgan, who shed 65 staff members and hurriedly set up a website last year when he discovered advertisers were junking the paper in favor of the Net.

The geeks have usurped an old financial term, disintermediation, and given it a new meaning to describe what happened to Britannica. To them it means the removal of middlemen, the intermediaries who smooth the operation of any economy--folks like travel agents, stockbrokers, car dealers and traveling salesmen. These people are the grease of a consumer economy, the folks who help you do things more efficiently than you could do them alone. But that's all changing: the Net is creating a new, self-service economy. Gates, who was late in recognizing the value of the Net, nonetheless has come up with the mot juste for this development: he calls it "frictionless capitalism."

Say you're planning a trip. Two years ago, you would have phoned your travel agent. But now the complex, proprietary database systems that control the world's airplane-reservations systems are available online and free, reduced to a set of Web pages so simple that even technophobes can book a trip to Paris. And at sites like priceline.com you can actually tell the computer what you're willing to pay for a ticket and then wait to see if it can find an airline that's willing to take you. But will this replace your traditional travel agent? Do you really want to do your own travel planning? That's the crux of the conflict at the heart of this new economy: which services will survive and which will fail, who will invent new ideas (and reap new millions) and who will close up shop, as useless today as buggy-whip manufacturers became when Henry Ford built the Model-T.

Few businesses illustrate this sort of generational corporate conflict better than the book-selling industry. If you want a snapshot of the e-economy, 1998, you could do worse than Jeff Bezos, the founder of bookseller Amazon.com One day last week, as his stock price rose and fell with typical volatility, he stalked through his shuttered Seattle office, on a phone call, staring at his wristwatch, pacing, talking, thinking, plotting, scheming, then glancing at the watch again. Like the Net Economy, Bezos is all about motion.

His conversion to the Web came in 1995, when he read a report that projected annual Web growth at 2,300%. First he checked that he'd read the figure correctly. Then he quit his job as a hedge-fund manager in New York City, packed his bags and drove out to Seattle. Or, rather, his wife drove; Bezos was busy pecking out a business plan on his laptop.

The idea behind Amazon.com was devilishly simple: type in a book's title, the author's name or even just a general subject, and the site will present you with a list of every matching book in its database. Choose your title, type in your address and credit-card number, and service reps at Amazon.com's Seattle warehouse will find your order and mail it to you, usually within one or two days, and often at a hefty discount. Three years after launch, Amazon.com has 2.25 million worldwide customers, and sales that may reach $350 million this year.

None of this, you can imagine, made bookstore chains very happy. But they held back on the Net. For years the buzz in the book industry was all about building new megastores, where shoppers could sip mochaccinos and chew over big ideas while they sat on comfortable couches. And in the two years that Barnes & Noble and Borders were focusing on what kinds of vanilla-sugar cubes to put in their coffee bars, Bezos was building an empire. B&N has tried to catch up, forging close ties with the gigantic online service America Online and suing Amazon.com over its use of the tag line "Earth's Biggest Bookstore."

Barnes & Noble has been an object lesson to the rest of the retail world, where everyone seems to have a Net commerce story these days. "In many ways this is what we've been doing for nearly 100 years," says Randy Heiple, vice president of advertising production for catalog giant Spiegel Inc., which ventured online in 1995 and has been ravenously growing ever since. Today the Net accounts for less than 5% of the Spiegel catalog's overall sales, but that share has grown fivefold or more in each of the past three years; sales and circulation of Spiegel's catalogs, meanwhile, have plunged.

But even as Spiegel has jumped into the electronic world, other giant retailers have not. Sears, for instance, is taking a more cautious approach. Though it put a catalog of Craftsman tools online last fall, it isn't rushing to build a webstore. "We think it has to be a profitable channel for plans to add any new merchandise for sale," says Paula Davis, a spokesperson for the retailer. But is Sears missing an opportunity? It has already missed Lisa Fontes, a 36-year-old Massachusetts psychologist who went to sears.com last month hoping to buy a freezer. The Sears site, however, didn't have what she needed. "I assumed I couldn't find it because I was stupid or computer illiterate," she explains. But the real illiteracy may have belonged to Sears. It doesn't yet sell freezers online.

Sears may feel the chill soon. Most businesses are finding that the Net is actually pretty lucrative. According to ActivMedia, which surveyed 2,000 commerce-related websites, 46% are profitable and an additional 30% expect to cross that line in the next couple of years. For some firms, the Net has become an essential competitive advantage. Dell, which sells $5 million worth of computers a day on its website, claims that the efficiencies of Web-based sales give it a 6% profit advantage over its competitors. Discount-mortgage broker American Finance and Investment, which conducts 60% of its business online, was profitable 90 days after plugging into the Net. And Eddie Bauer, the outdoor-clothing retailer, has an online operation that has been profitable since 1997 and is growing at 300% to 500% a year. The Net, says Judy Neuman, the firm's vice president of interactive media, "makes you think very differently about your customers."

And customers have begun to think differently as well. Charles Hintz, a retired psychiatrist from Des Moines, Iowa, has found a kind of salvation in the Net's limitless ease and bounty. Hintz, a 68-year-old quadriplegic, was paralyzed in a fall 12 years ago, but for the past three years he has been doing the birthday and holiday shopping for his large family on the computer, which he operates by poking the keyboard with a stick he holds in his mouth. He buys clothes from Lands' End online, CDs from CDnow and books from Amazon.com "It makes me feel independent," he explains.

That, of course, is the real miracle of the Internet. It's not just that it lets you do things better; it lets you do things you couldn't even dream of doing before. The seduction of being online--and this applies to everyone, from novice surfers on AOL to the hardiest hackers on the Web--is that it really does put an awful lot of power in your hands. You can start with the simplest of questions--How do I buy a new sport- utility vehicle?--and step away from your PC in an hour with more information than you might have gathered in a month without a modem. And that information may be better than anything you've ever seen. Carpoint.com the Microsoft website, lets you look at 3D, interactive pictures of the inside of dozens of sports cars--something you can't do anywhere in the real world. The virtual world, for all its hype and promise, is finally delivering on at least one big idea: information, at last, is at your fingertips. This is what explains--even justifies--Jerry and David's billions. More fingertips start their Web travels at Yahoo.com than at any other site.

For Yang and Filo, it's been a strange ride. Filo, a shy, laconic man who radiates intense smarts, remembers when he could visit every site on the World Wide Web in a couple of hours. That was in early '94, when the Web was young, and Jerry, his more outgoing partner, used to record the best websites on his computer for fun. The two shared offices in a trailer at Stanford University that was big enough for a desk and a computer for each of the graduate students.

David developed a navigational guide to search the Web, and soon Jerry found himself keeping track of not only his favorite sites but also David's. They dubbed their growing list "Jerry's Guide to the World Wide Web." But their part-time hobby quickly grew into a full-time obsession. More and more of their friends wanted to keep up with what was happening on the Web, and by fall the two enthusiasts were surfing the Net day and night. "It was impossible even to sleep," says Yang. Clearly there was a demand for some sort of service that could organize and make sense of all that information out there in cyberspace. They decided to turn their sideline into a business.

Their first meeting with a venture capitalist, Michael Moritz of Sequoia Capital, was all they needed. "With no promotion, no advertising and just word of mouth, something was happening," Moritz recalls. "Jerry and David had developed something for themselves that, I think probably to their great surprise and consternation, was as attractive to other people as it was to them." Moritz took a gamble on the entrepreneurs and gave them $1 million for a 25% stake (it turned out to be a good bet--that stake would now be worth around $2 billion). Stanford told them they could keep the venture on campus at least initially, which they did. And they called themselves Yahoo.

One legend about the origin of the name is that it was a playful acronym for "Yet Another Hierarchical Officious Oracle." Yang, however, says they picked it out of a dictionary. "We thought it fit well with what we were doing. It was irreverent, it was reflective of the Wild West nature of the Internet, and a lot of people found it easy to remember, which we thought was probably good." Yang also says that when he asked Moritz if they should change the name to something more serious, Moritz replied that if they did, he'd take back his money.

In the spring of 1995, Yang and Filo put their doctoral theses on hold and moved into their first office, in nearby Mountain View, in the heart of Silicon Valley, near some railroad tracks. It was a relatively big suite, around 1,700 sq. ft., which they needed for the computer servers that would gather and store the data, and the people who would feed and care for them. But by the end of the year they needed more space and moved into a 12,000-sq.-ft. site in Sunnyvale, where they went public. "We thought, 'This is great. We'll never fill this place up,'" recalls Yang. Wrong. Last year, after moving into a 33,000-sq.-ft. floor of a Santa Clara industrial park, they spread onto two additional floors in a neighboring building for a total of nearly 100,000 sq. ft.

The lure of megasites like Yahoo is that in a place like the Net--where people tend to go wherever they want with ease--there are very few locations that attract a mass audience of the sort that advertisers can get through, say, the Superbowl. As a result, search and commerce sites like Yahoo and chief rival Excite have become gateways (the Net buzz word is portals) to the rest of the electronic universe. And owning a portal is looking a lot like owning a toll bridge. Yahoo charges about 4[cents] for every ad it serves up on many of its 115 million pages every day. And those prices will rise as Yahoo develops technology that lets it more closely match advertisers with searchers.

That notion--of personalized content and advertising--has been a kind of Internet holy grail for years. Now, finally, the Web is delivering. Its tens of thousands of sites can match your needs and desires as quickly as your Pentium can get online. It's possible to get everything from custom newspapers to electronic newsletters that alert you to sales of items you've always craved. Futurists used to call these services "The Daily Me," a play on the idea of daily newspapers. But customized websites are delivering something more like "the instant me"--real-time collections of just the information you want, which you can use to shop, buy a stock or plan a last-minute trip. In our 20th century consumer culture, it may seem almost too good to be true: the latest and greatest products, custom-made and delivered whenever you want! And how to pay for all this online bounty? We hope you've bought some Yahoo stock.

--Reported by Patrick E. Cole/Seattle, Wendy Cole/Chicago, William Dowell and Aixa M. Pascual/New York and David S. Jackson/Santa Clara

With reporting by Patrick E. Cole/Seattle, Wendy Cole/Chicago, William Dowell and Aixa M. Pascual/New York and David S. Jackson/Santa Clara