(FORTUNE Magazine) – TAKE a moment out from the heat of your current pitched battle, and chew on the implications of this thought: We are, right now, in the very early stages of a new economy, one whose core is as fundamentally different from its predecessor's as, say, the automobile age was from the agricultural era. If you grasp this premise, it's much easier to understand a lot of what's going on around you, including why a seemingly unrelenting tsunami of change keeps washing over you and your business. As with any such tectonic shift, the ability to recognize the new economy for what it is, to track its progress, and then to foresee its consequences could be crucial to prevailing -- or surviving -- in it. The heart of this new economy is the tiny microprocessor, the transistor- packed silicon chip that combines with clever software and laser optics to make possible what we glibly call the Information Age. The microprocessor has been around for more than 20 years, but its power has been increasing exponentially, and it has now become an essential, affordable, ubiquitous fixture in our lives. Just as the internal combustion engine pumped the lifeblood through our old economy for decades, so is the microprocessor the vital organ of the new one. Technology doesn't altogether define the new economy. A continuing shift of workers away from manufacturing and into services, where almost 80% of U.S. jobs reside, is another critical feature of the new terrain. But the chip is implicated in this development too. Service companies grow to once unimaginable size at a speed never dreamed possible because of the instantaneous flow of information, and much of the clerical and managerial job-shedding of the past five years resulted directly from more efficient management of information through chips. A few well-placed skeptics play down the profundity of the transition to the new economy, pointing out that some very fundamental economic activities haven't changed much. Says Andy Grove, CEO of Intel, the world's largest chipmaker and a true behemoth of the new economy: ''It's not all that dramatic, really. Didn't the telegraph and the telephone change business too? Wal-Mart still sells socks and toothpaste and computers. And we're still a manufacturer. We make things and sell them. The new economy is really just the old economy using technology as a competitive means of survival.'' We thinks he doth protest too much. No one suggests that the manufacturing sector is about to disappear, any more than agriculture stopped being important when manufacturing took center stage. As General Electric CEO Jack Welch points out, the percentage of U.S. GDP contributed by the manufacturing sector is unchanged over the past ten years at about 20%. But in the next breath Welch talks with excitement about the gains in productivity and sophistication brought to manufacturing management by the chip. Perhaps it's easier to be blase about business as usual if your company, like Grove's, doubles in size every two years and enjoys a gross profit margin of almost 60% -- the most profitable company of its size in the world. But if your natural skepticism still hungers for a hard statistic supporting this notion of a new economy, here's one: For almost four years now, U.S. industry has been spending more on computers and communications equipment than on all other capital equipment combined -- all the machinery needed for services, manufacturing, mining, agriculture, construction, whatever. The advent of the new economy is unequivocably good news for the U.S., which holds a wide lead over the rest of the world in developing, applying -- and now exporting -- technology. Yet this news has gone largely ignored because we still measure economic activity with indicators created for the post-World War II mass-production era. Simply toting up the number of things produced -- bushels of wheat, tons of steel -- and then dividing them by the number of people and hours worked no longer tells the story. The added components of service and convenience and quality are huge today, and largely unmeasured. Says Bill Lewis, director of McKinsey & Co.'s Global Institute in Washington: ''We no longer have a good fix on how our economy is performing. The data and the measurements are woefully behind. By missing these components, we badly underestimate the overall output of the service economy.'' Exacerbating the confusion is the speed at which the new economy unfolds. By definition, life in a chip-based economy must move along at a dizzying, almost dissociative, pace. Why? Because chip capability -- raw computing power -- doubles every 18 months. That's Moore's law, a prescient formula postulated years ago by physicist Gordon Moore, Intel's chairman and a founder of the company with the late Robert Noyce, the co-inventor of the microprocessor as ) well as its building block, the integrated circuit. One impact of Moore's law is that computing power once considered awesome now seems trivial as silicon intelligence turns up everywhere: in cars, cellular phones, microwave ovens, pagers, stereos, children's toys, watches. You receive one of those little greeting cards that plays ''Happy Birthday'' when you open it. Casually toss it into the trash, and you've just discarded more computer processing power than existed in the entire world before 1950. Your home videocamera wields more processing power than an old IBM 360, the wonder machine that launched the mainframe age. Sega, the gamemaker, will soon begin selling a system called Saturn, which runs on a higher-performance processor than the original 1976 Cray supercomputer, accessible in its day to only the most elite physicists. The ever-plunging cost of computing power helped the personal computer spread more widely than almost anyone foresaw. For most of its 13-year history, this desktop machine thrived as a business tool. Then, in the Nineties, the PC moved into the home. Some 32 million U.S. households have PCs. Meanwhile, business began to leave the isolated PC behind and take the next important step -- to the client-server model, lots of small computers linked together in networks. All this processing power increased in tandem with the boom in software, which in some ways is to the chip as gasoline was to the internal combustion engine. None of us would know what to do with a chip without the tools crafted by the now archetypal nerds who have turned software into America's fastest- growing industry. As Thomas Edison did a century ago, these code writers transform the forward leaps of pure physics into affordable, useful products that we all rush out and buy. Inconceivable as it seemed at the time, Microsoft's near equaling of IBM in market value last year (they're now $30 billion, vs. $36 billion) wasn't an anomaly. It was merely another indicator of the coming of the new economy, in which companies that are low on physical capital but intense in intellectual capital -- pure thought stuff -- can blow by those burdened with the role of stamping out machines. Says Microsoft founder and CEO Bill Gates, the crown prince of techies and perhaps America's wealthiest entrepreneur: ''The microchip made infinite computing free. Software is the scarce element in the equation. And its value is only in its uniqueness. If two people have the same software, it's worthless.'' And so, while computer makers slug it out in price wars with cheap clone crafters from all over the world, the U.S. software industry holds a virtual lock on unique products. Microsoft, Lotus, Novell, Borland, and Oracle square off fiercely against one another but face only a booming market, and no competition, from abroad. NOW MOST IMPORTANT to the new economy's unrolling is the next big phase of computer technology, which is clearly identifiable. Simply put, the computer is evolving into a device that will be used as much for communication as computation. Here's how Steve Jobs, Apple co-founder and one of the fathers of the personal computer, explains the significance of this transformation: ''If you knew what was going to happen in advance every day, you could do amazing things. You could become insanely wealthy, influence the political process, et cetera. Well, it turns out that most people don't even know what happened yesterday in their own business. So, a lot of businesses are discovering they can take tremendous competitive advantage simply by finding out what happened yesterday as soon as possible.'' All of a sudden, business people realize just how much they could accomplish if only they could get their computers talking with one another effectively. This trend explains a lot: the current boom in networking, groupware, and E- mail; the swarm of new companies trying to build businesses on the Internet; the rapid growth of such computer consulting giants as EDS and Andersen Consulting, which help clients integrate their computers; the repositioning of IBM as a ''solutions'' company. New ways of communicating will, of course, use more chip power, which is why when you visit Andy Grove these days he's eager to demonstrate Intel's new personal digital videoconferencing system, a PC with a camera on top and an attachable earphone that lets you talk with and look at someone as you transfer documents back and forth. It works, and when you use it, you can almost feel yourself in the new economy. Tell Robert Allen, CEO of AT&T, No. 1 on FORTUNE's Service 100 list, that you just landed from Mars and would like to know exactly what kind of company it is that he heads, and he will give you this short answer: ''AT&T is fundamentally a networking company. We bring people, information, and services together.'' All in the name of time-based competitive advantage. ''What's shifting in the minds of our large customers is this,'' says Allen. ''They want all their computer capacity integrated into networks so they can get real-time information from their customers and then make faster, better- informed operating decisions. It's exciting because so much business is going to be enhanced by this move to networks.'' Eventually this same access to information will trickle down to the consumer. Says Gates: ''In another ten years, most decisions -- hiring a part- time worker for your home, buying a consumer product, choosing a lawyer -- will be made on a much more informed basis because of electronic communication. If I want to pick a bank, I can not only compare their offerings with other banks', I can see what their customers have to say about them. I can ignore geographical limits to my shopping. It changes the nature of competition, which becomes pure because you can no longer benefit from customer ignorance. If you believe in markets -- and I love markets -- this is a good thing. It makes all markets work more efficiently.'' SOFTWARE billionaires aren't the only folks who think this way. At least one banker -- Charles Sanford, chairman of Bankers Trust -- does too. In financial services, he says, the ''science of markets'' is still in an extraordinarily early stage of development. But already, he says, ''the speed and power at which computation and communications tasks can be accomplished is so much greater than in the past that it brings qualitative change, not just quantitative change.'' Thus the $16-trillion-a-year global derivatives trading business -- described recently in these pages by a Citicorp executive as ''the basic banking business of the 1990s'' -- simply couldn't exist without today's high- speed computing to calculate and monitor risks.

Sanford foresees the arrival someday of ''true global banking,'' a financial marketplace in which everyone -- individuals, companies, investors, governments -- will be linked through computer and telecommunications technology. Every household will be a branch, and transactions will be instantly verified from anywhere in the world through voice recognition, DNA fingerprinting, and secure data encryption technologies. This sort of stuff is easy enough to envision in the age of the global automated-teller network. But Sanford also talks about banking in the language of physics, advancing his theory of ''particle finance'' -- as opposed to the old model of ''Newtonian classical finance.'' He says researchers already are working on neural networks that mimic the human brain and, when harnessed to massive computing power, will find meaningful patterns in the ''noise'' of financial attributes and help strip away some of the ''apparent randomness of financial events.'' Particle finance, he assures us, ''presents a cornucopia of new business opportunities for financial institutions,'' including the management of myriad, perhaps inexhaustible, risks that must be uncovered and ''rebundled to satisfy client needs.'' The mere fact that an employed banker, much less the chairman of one of the nation's largest financial institutions, can talk this way in public seems sign enough that we have arrived in a new era. Such frame breaking isn't confined to any area of the new economy, nor do applications of technology end with the rapid processing of information. In its broadest sense, the popular phrase ''digital convergence'' could mean that in the new economy, almost every industry and every profession or trade is being pulled closer together by a common technological bond: the digitizing of its work product into the ones and zeros of computer language, in turn spawning revolutionary ways of executing that work. So, in the new economy, a gathering of thinkers from the worlds of, say, automaking, banking, medicine, retailing, art, film, publishing, and aerospace could probably find common ground for professional conversation, perhaps even new ideas for tackling their own digital challenges. This kind of fertile cross-pollination has been developing all along, as illustrated by just one connective sequence of events that shows the new economy morphing out of the old. This particular story started in the mid- Seventies, when filmmaker George Lucas, while making Star Wars, formed a special-effects company called Industrial Light & Magic, which began to explore the possibilities of digital film editing. Soon after, in 1984, the Defense Department began funding research for its controversial Star Wars missile defense program, which never blossomed but helped push along several new makers of powerful workstations, including the now $4-billion-a-year Sun Microsystems and a less successful but interesting company called Silicon Graphics Inc., or SGI. By the mid-Eighties, Industrial Light & Magic was using 3-D computer graphics on SGI workstations to create a new generation of special effects for movies, probably best exemplified by the 1991 poly-alloy liquid-metal character called T-1000 for the film Terminator 2. SGI was passing on some of these applications to other clients -- Ford, for one, which started using the same technology in the liquid molding of auto parts. By 1993, ILM had created the ultimate (so far) in synthetic, photorealistic, high-resolution characters: the dinosaurs for Jurassic Park. In Dearborn, Michigan, meanwhile, Ford designers used exactly the same software to design the skin and interior features of prototype vehicles, reducing the need for blueprints or cutaways. With computer-aided lasers, Ford can cut the prototype part cycle by up to 30 weeks. Now Ford marketers talk about virtual showrooms, where customers could drive cars that don't yet exist. This pattern of technology transfer marks a historic change, argues Ed McCracken, CEO of Silicon Graphics: ''Since World War II, the military has driven the advancement of technology. Now we see that role really moving toward the entertainment industry. They're the ones who push the envelope now. They've got lots of money, very short cycle times, and they want to do things nobody's ever done before.'' Silicon Graphics still works for manufacturers (Ford, GM, BMW, Volvo, Boeing), for the government (NASA, the Defense Department, the CIA), and for the medical community (practitioners of 3-D virtual operating procedures), but it pays a lot more attention to clients from the entertainment world -- Lucas, Time Warner (parent of FORTUNE's publisher), and Nintendo. George Lucas professes little interest in technology for technology's sake, only for its applications. His early pursuit of digital filmmaking, he says, grew from two distinct benefits he envisioned: the abilities to expand creative possibilities and to lower costs -- greatly on both counts. ''I value creative freedom,'' he says, ''and in this business you get that freedom by getting control of the economics. Plus, I want to tell stories that are ambitious. Really, your ability to tell a story is only limited by two things: the limits of technology and the limits of finance.'' IN DIFFERENT WORDS -- and worlds -- Lucas's motivation is identical to Ford's and Bankers Trust's. Even the real hardware guys talk nothing but software-dependent technology these days. Go to Cleveland and listen to Joe Gorman, chief of TRW, the world's fourth-largest maker of auto parts and a major player in the defense satellite business. As government defense spending recedes, TRW sees much of that sector's technology flowing into everyday life, especially into the cars we'll be driving. ''Think of the automobile as one big system, filled with information technology,'' he says. ''The future will hold all kinds of advanced systems.'' He lists a number of them: smart cruise control, with a single radar chip for receiving and sending signals to avoid hitting the car in front of you; radar for lane changing; smart occupant restraint systems, with predictive capabilities for air bags; diagnostic systems so the car can help fix itself; and the intelligent vehicle highway system. ''Technology,'' says the head of this $8-billion-a-year outfit, ''is at the core of everything we're doing.'' In the new economy it's sometimes hard to tell where show business ends and some other business -- like retailing -- begins. Take Home Depot, the Atlanta- based category killer in home-improvement products. It has just announced plans to launch a two-hour Home Depot show on the QVC shopping channel in which it will show the viewer how to install, say, a $99 ceiling fan, then try to sell the fan on the air. Sure, home shopping looks a little clunky, but don't dare sneeze at the potential for interactive commerce: Begun 27 years ago, AT&T's 800-number business today generates 13 billion calls a year -- 40% of its entire calling business. (Another nine billion 800-number calls are made on other carriers.) ''We know for sure that communications will change retailing, and we know we don't want to be the caboose when it does,'' says Dick Hammill, Home Depot's senior vice president for marketing and advertising. ''Let's go ahead to the year 2000,'' he says. ''You've got a library, and it's on a chip. Number 489 is home improvement. Number 489A is how to refinish cabinets. Number 489B is how to plant tulips. It costs a nickel a minute to access this library on- line. You get all the information you need, and then all of a sudden, interactively, you can order the stuff.'' Hammill also envisions all- electronic catalogues on CD-ROM, with lines of Home Depot home improvement books and other products. ''When the time is right,'' he says, ''our entry into these markets should be evolutionary, not revolutionary.'' For now, most people in the infant industry of multimedia -- the electronic amalgam of manipulable text, video, audio, and graphics -- haven't a clue exactly how the market will develop. Says Rick Smolan, a photographer-turned- ! entrepreneur who created From Alice to Ocean, an ambitious piece of literary photojournalism on Australia that is the medium's biggest-selling ''book'' to date: ''I think CDs are just training wheels in this medium. Right now we're at that stage the movies were in when people walked into theaters just to see trains move. We're still waiting for somebody to come along and make it compelling, the way D.W. Griffith did when he said, 'Hey, let's rob that train.' '' Actually, ''Hey, now you can rob that train'' is the message coming from the other corner of multimedia, the videogame makers. To take the joy stick of LucasArts Entertainment's Rebel Assault, the largest-selling CD-ROM game to date (450,000 copies), is to enter your own Star Wars movie, with action that includes 3-D graphic animation, original video, and clips and music from the movie. And it's hard to ignore the game business. Sega and Nintendo, selling mostly cartridge games, last year accounted for more than one-third of the entire U.S. toy business. Their $6.4 billion of sales topped the U.S. box office take for movies by 23%. So what, you say. You're an old economy guy or gal. Couldn't care less about kids' games. You'll take golf anytime. The games may still intrude on your life. How? Meet Vincent Lee, a 26-year-old mechanical engineer with a master's degree from Berkeley. Just the sort of kid you might like to hire. In college he programmed control algorithms for industrial robot arms. And these days he doesn't have much time for playing videogames either. He designs them. Upon graduation, he received offers from three companies: Exxon, IBM, and LucasArts. He made the new economy choice and wound up writing the program for Rebel Assault, for which, he says, he has a ''modest'' royalty agreement. Tell Vincent again exactly why you think he has a bright future in the oil business? Which brings us to a couple of important points to accept about the march of digital technology and its effect on our lives in the new economy: Nothing is going to stop it. You can't ignore its impact any more than an early 20th- century horse lover could ignore the intrusive onset of the automobile. Technology never advances without social consequences. So believe it: Life, especially work, will be different in the world emerging -- as it already is for many. READERS of these pages have encountered many stories on the devolving nature of business organizations. Author-consultants like William Bridges have told us how the ''job'' itself may disappear and be remembered only as an artifact of the industrial age, to be replaced by meaningful, market-driven work assignments in post-job organizations. ''The Nineties are not a good time to work in a large organization,'' says Paul Saffo of the Institute for the Future, a Menlo Park, California, think tank. He notes that the average size of the effective organization is plummeting. ''The organization of GM in the Sixties was a complex analog of a mainframe computer. In this era, the model organization mirrors our networked information structure. It's a web, not a hierarchy. The big difference: In a hierarchy, your title determines your power; in a web, it's who you know.'' Sanford of Bankers Trust envisions a convergence that will produce senior managers who guide their ''artists'' and ''scientists'' like conductors of orchestras rather than through command and control. ''As finance, science, and the arts continue to gradually merge,'' he says, ''the scientist, artist, and manager will become more alike. The leaders' most important functions will be to inspire by articulating a clear vision of the organization's values, strategies, and objectives, and to know enough about the business to be the risk manager of risk managers.'' Yet another Menlo Park theorist, William Davidow of Mohr Davidow Ventures and co-author of The Virtual Corporation, sees information displacing what he calls physical process: ''Much of the current economy is there because of a lack of information. Information equals the things that it can replace economically. Those can include stores, retail clerks, consumption of gasoline. If all the information you need is on your PC, you don't come into the office. That allows you to cut back on office space, secretaries, and file cabinets, which displaces the janitor, the heating bill, the construction worker.'' It's no coincidence that so many new economy theorists sport Northern California addresses. The Bay Area-Silicon Valley region is to computing -- the core of the new economy -- what Detroit was to autos, what Hollywood is to entertainment, and what Wall Street is to finance. To really ''get'' the new economy, study the freewheeling business culture that pervades Highway 101, running through such places as Palo Alto, Mountain View, Menlo Park, Sunnyvale, Santa Clara, and San Jose. In the 55 years since a Stanford professor encouraged Bill Hewlett and Dave Packard to start their instrument company, Silicon Valley -- formerly a region of apricot orchards -- has dominated the frontier of technology. William Shockley, who invented the transistor for Bell Labs, hailed from the valley, and after his breakthrough returned home to assemble a group of proteges that included Noyce and Moore. The valley gave birth to the first VCR and the first practical personal computer. All along the culture has roiled in an odd mix of foresight, anarchy, promotion, spontaneity, luck, competition, occasional corporate earthquakes, and, above all, an insatiable appetite for risking the new, for breaking the paradigm. In the Eighties, without even realizing it, the Californians started a worldwide technology revolution pitting their small but powerful ''open systems'' computers -- PCs and workstations and client-servers -- against the old-line mainframe and minicomputer makers. Through the elegance of their technology, and the boldness of their business tactics, the open-shirted, chino-clad techies won, seriously wounding the big computer makers in the Eastern U.S., Europe, and Japan. In the process, the Californians -- with software accomplices in Seattle; Provo, Utah; and Cambridge, Massachusetts -- set off something much bigger than any of us ever dared imagine. NOW THE NEW ECONOMY is here, challenging us with a brave new world, one informed and empowered by a distribution and power of technology that even the science fiction fantasists have trouble staying ahead of. Says Lucas, one of their breed: ''I see us in the beginnings of the real digital revolution now. This is one of those sociological, historic pivot points that changes the way all society is going to work forever. It's as dramatic a change as the Industrial Revolution was. To a lot of people it's scary because the world is turning upside down, but for those of us who like the future, it's exciting.'' Some things won't change at all in the new economy. Lots of money will be made and lots lost. Human nature will stay much as it is. So we will grapple with all the same old moral issues, occasionally on-line. But these will be exciting times -- as songwriter Paul Simon says, ''days of miracle and wonder.'' It truly will be an era of ''staccato signals of constant information'' and a ''loose affiliation of millionaires and billionaires'' (yes, these are song lyrics). We will all hear the long-distance call, and we will watch ''the way the camera follows us in slo-mo.'' We're fortunate that this new economy arrives at the fin de siecle. This means that when we take stock of ourselves upon entering the 21st century, we can -- for all our frailties -- comfort ourselves with this thought: We're not standing still, and we're not headed back whence we came. We're headed forward. Fast.

BOX: INSIGHTS

The microchip drives the new economy as powerfully as the internal combustion engine drove the old one.

The new economy is good news for the U.S., which leads the world in developing, applying, and exporting technology.

The old economy rewarded hierarchical organizations; the new economy rewards webs.

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