It says something about the pace of the modern world that an idea, the "virtual corporation," a mere theory on a scrap of paper three years ago, has now become a common phrase in daily business life. In fact, when Bill Davidow and I first came up with the term, we debated whether to use it at all, worried that the audience might be put off by a neologism. Needless to say, just the opposite happened. Yesterday, I heard "virtual" used six times in connection with companies, agencies, towns, and even lifestyles.

Sometimes the term was misused, but that is all part of the development of language. What is especially satisfying is that of the two definitions that competed for prominence -that of similar corporations temporarily joining together into meta-enterprises, and that of manufacturers, suppliers, distributors and even customers linking together in an enduring relationship built on mutual trust - it is the latter, the one we predicted, that has predominated both in language and in application.

But new notions, as they expand out into the language, can have side-effects. One of these is imprecision. A term risks becoming a cliche that everyone uses but no one really understands. Worse, sometimes it can come to mean its own opposite, and thus undermine the original purpose.

It is important, then, to occasionally return to first principles; to remind ourselves just exactly where an idea came from. That's what I propose to do in this article: to explain where the notion of a virtual corporation came from. Then, at the end, I want to predict what its implications mean for the future.

Circles of change

To fully understand what is meant by the term "virtual corporation," one needs to visualize a number of concentric circles, each emanating outward in a chain of implications from circles it contains.

The center-most circle is the pace of technological change. Living in the middle of it, we forget how extraordinary this development has been. In the fifty years since the warehouse-sized ENIAC computer, integrated circuits have improved computing power, price, size and power consumption by a combined total of 32 orders of magnitude -- a jump that literally has no precedent in human history.

This technological engine shows no sign of stopping. It doubles processor performance every couple years, each time revamping existing industries, while at the same time creating new ones. And it just keeps picking up more speed.

This dynamic makes the next concentric circle possible. These are new products and services -- desktop publishing, one-hour eyeglasses, online newspapers, custom automobiles, etc. -- these new technologies make possible. We call them virtual products.

Virtual products

"Virtual," as Computer Currents readers know well from virtual memory and virtual reality, is a long-established electronics term that signifies an entity or experience that perpetually adapts to user needs. Virtual products (or services, the two will become increasingly indistinguishable) might be called mass-customized products. They are characterized by high information content and heavy customer participation in their creation. Virtual products may be created at centralized locations (such as Japan's planned customer-designed four-day cars), at hundreds of small manufacturing sites (lens grinding at Pearle Vision and Lenscrafters) or at user desks (examples of this are Actel's or Xilinx's programmable gate-array circuits). In many cases, virtual products, as they're used, gather information about users and modify their functions to match users' needs (as some personal computer software does today). Others, such as ATMs, act as data-gathering nodes and help vendors track usage and improve service.

Virtual products are exciting. They have enormous appeal to consumers and they tend to overrun every market in which they appear. But they're also highly problematic. As many companies are currently discovering, you can't build virtual products without completely transforming every single operation of a company. And that's the next circle:the virtual corporation.

Virtual demands

You can't just virtualize products overnight because you're likely to be completely unprepared for virtual-product demands placed on your organization. You don't have broadband information-gathering systems in place to learn what you need to about your customer base, and your customers are probably not sufficiently loyal to give you that data. You might not have manufacturing equipment in place or trained personnel, or reliable enough suppliers to create mass-customizable products "anytime and anywhere." And, even if you managed to do all that, your marketing and marketing/ communications functions are probably wholly unprepared to deal with the challenge of creating the lifelong customers you'll need.

Co-destiny

But most of all, and this is something even well-publicized virtual corporations have yet to reach, you're probably far from the level of deep and mutual trust with employees, partners and customers needed to keep a virtual corporation strong and competitive with increasingly virtual competitors.

What's this new level of trust? A most descriptive term is co-destiny. All players in the process, creation, delivery or use of virtual products must willingly surrender a measure of freedom and mobility in exchange for shared beneficial results.

Take suppliers. A manufacturer cannot move fast enough to create and maintain virtual products unless suppliers can not only meet its needs, but anticipate them as well. This can only occur if the suppliers are privy to a manufacturer's future product plans, market strategies, even financials -- a degree of outside access that would scare most modern executives.

Furthermore, to be properly responsive, suppliers will almost have to dedicate production to that one supplier, sometimes even move near that customer, and perhaps also aid that customer in market research. In return for those sacrifices, a supplier will expect sole-sourcing.

Such a relationship, based on co-destiny, will not be possible given the vast supplier pool currently used by many large corporations. As we've seen in electronics, aircraft and automotive industries, supplier rolls are slashed -- and only those suppliers with a commitment to common philosophies, information systems and business style, survive the cut.

The role of distributors and retailers radically changes as well, as they too assume information gathering responsibilities and narrow their lines and increase their commitment to the remaining manufacturers in exchange for greater exclusivity, more timely deliveries and more access to manufacturers' plans.

There remains one other player in the virtual corporation, perhaps the most important: the consumer. To keep customers for life, manufacturers will have to provide consumers with exactly what they need. The only way they can do this is to enlist customers in a co-destiny relationship as well. And hoping that, in exchange for a better product fit, customers will willingly surrender considerable amounts of personal information. That few of us would give up such data today to any company is a measure of how far we have yet to go to arrive at true virtual corporations. It also suggests just how obsolete current practices are in such disciplines as marketing, public relations and advertising.

The Grid

That brings us to the outermost concentric circle: a new society. Just as it is impossible to create a virtual corporation one department at a time, so too is it unlikely that one can build a "virtual" economy one virtual corporation at a time.

What will such a society look like? We already have some clues in such new lifestyles as telecommuters and "Perpetual Motion Executives" (PMXs) -- individuals who use a technological tether to conduct their careers either continuously on the move or from remote locations of their own choosing. We also see clues in the extraordinary popularity of the Internet and America Online, as well as the other early manifestations of the Information Superhighway...or more properly, the Grid. As important as these online services already are, their real value may lie in their development of a new grammar and vocabulary for life in a virtualized world.

These pioneering institutions also suggest that our society may be reshuffling all of its current alignments, such that Democrat vs. Republican or liberal vs. conservative, urban vs. suburban vs. rural may be no more valid than Whig vs. Democrat was in the Industrial Revolution. New oppositions, even confrontations, such as those between telecommuter and office workers, and between global and blue-collar workers, may pit old allies against one another, while creating new alliances between old enemies.

A similar polarization is also likely to occur between those goods and services offered by the Grid and those that can only be provided (such as groceries) nearby. Companies and individuals that operate in-between (regional services) or at the wrong pole (neighborhood video stores) may soon find themselves in desperate straits.

These sweeping changes are likely to send shock waves through society in the next few years, destroying some industries while establishing others, replacing long-established institutions with relevant new ones, and forcing profound changes on government at every level.

If there were doubters just a few years ago, events of the past few months, from giant mergers to the race to the Grid, erase any questions: the Virtual Revolution is the defining business transformation of our generation.

Bill Davidow is the author of two best-selling books: Marketing High Technology and Total Customer Service. He was senior vice president of sales/marketing for Intel Corp. and a marketing manager for Hewlett-Packard's computer group. He's now a general partner of the venture capital firm Mohr, Davidow Ventures based in Menlo Park.

Michael Malone is the author of The Big Score, a respected history of the electronics revolution, and Going Public: MIPS Computer and the Entrepreneurial Dream. He's also well known for his interview program, "Malone," which is widely syndicated on public television.

A POST-MODERN VIRTUAL CORPORATION MODEL

In The Virtual Corporation, Davidow and Malone describe the incredible transformation occurring in businesses due to the increasing power of computing technology. Increasingly, a company's power and productivity is based on information creation, processing and dissemination among its components. Replacing physical components of a company with electronic versions allows great increases in speed and productivity.

Size no longer important

Virtualization of business is already having an impact beyond increasing productivity and customer response. An important change is the switch many companies are making from building private electronic networks to using the Internet, a collection of 35,000 sub-networks worldwide that speak the TCP/IP language.

In the virtual model, most design operations and testing are transferred to electronic realms accessible to all groups within a manufacturing process. The ability of computers to store and process these virtual company components allows rapid alteration at all stages of production and flexible response to consumer demand.

Since this information can be stored and transferred with relative ease, a company ceases to be localized and can provide the same service from all locations.

Once only the largest corporations could afford to create the electronic network necessary for virtuality, but today the Internet acts as a "superconnector" offering all users virtually the same communication.

Confined until recently to a few dozen universities, the Internet currently connects millions of computers. A key feature of the Internet is that it's locally owned and operated. Companies using the Internet to integrate their business need only pay local access fees rather than the cost of constructing a complete network. Increasingly, companies are dispensing with private networks altogether and using the Internet as their sole connector.

Going virtual

Success in a virtual arena is independent of non-virtual components of the corporation. Thus a small startup company has the same chance at running a successful, even dominant, Internet business as does a large corporation which may have, in the words of one executive, "hundreds of people working on the problem."

In the fall of 1993, a program destined to become the Internet's "killer app" appeared - NCSA Mosaic. Built to run on top of the World Wide Web protocol, Mosaic converts a formless mass of millions of Internet computers into a collection of hypertext links.

Mosaic presents each Internet site as an integrated document, not unlike a high-end word processor with clickable buttons supplying text, graphics, movies and sound. The free availability of Mosaic contributed to its popularity. Hundreds of thousands of copies were downloaded from the main NCSA site in only a few months. Amazingly, the software to create Mosaic documents and to supply them to the Internet is also free.

Mosaic, along with low-cost Internet access for users (about $17/month for a 14.4Kbps modem connection with time measured at $2.00/hour), prompted us to form Kaleidospace (formerly Kaleidoscope Media) in January of this year. One of the company founders, Jeannie Novak, had been producing an album of original music independently and was investigating ways in which artists could distribute their works.

Though it is possible using current technology to produce a CD independently, traditional methods of promotion and distribution require a large company's resources. Novak reasoned that if the promotion and distribution mechanism were translated into the virtual realm, it would be possible to duplicate the reach of a large company using computer bytes rather than an expensive physical plant. This brought us to our first discovery.

By using the Internet, small companies can develop a virtual presence as rich, connected and powerful as the largest corporation. It was possible for Kaleidospace to create an Internet site, potentially visible to 20 million users, for a cost comparable to other startups - about $30,000.

The presence of a large physical plant was not necessary, since creating a virtual corporation (essentially software development) is easily within the reach of current computers. In Kaleidospace's case, desktop publishing and multimedia had created inexpensive tools for digitizing images, movies and sound. More expensive tools were not necessary for several reasons. First of all, to reduce piracy we decided to provide samples of artists' works rather than complete pieces. Secondly, transmission speeds on the Internet are not high enough to allow real-time video or CD-quality sound. This restricts promotional material to a size easily handled by individuals.

Within two months, we had completed Kaleidospace. The more virtual a service is, the better a small company can compete effectively with larger ones. The clearest example of this came with one artist who contacted us from Croatia - where few would be likely to send mail, let alone call. E-mail discussions proceeded rapidly, without long-distance charges. The Internet provides a contact system with global reach at low cost.

Coopetition arises

After we completed programming, we learned of the presence of other companies with similar ideas. The Internet is bound to attract a host of competitors, particularly after "secure" versions of Mosaic become available this fall via CommerceNet and NCSA. Packages providing for accounting and online ordering will probably be priced in the $10,000 range - well within the reach of startups.

What's the consequence of many companies sharing the same superconnector? Meta-companies appear which unify various companies under a common interface. These companies may also share resources, such as disk space, in a model for interaction involving both cooperation and competition (Novell founder Ray Noorda coined the term "coopetition").

Since virtual companies may be copied around networks with ease, and since cost is independent of traffic, it makes sense for several companies to share a common pipe and maximize bandwidth use. This will likely give rise to "server farms," companies which do nothing but provide hard disks and Internet drops for small companies.

Shopping malls

"Mall" and "marketplace" models adopted by many Internet companies bear out these predictions. The past few months have witnessed the creation of systems, such as O'Reilly and Associates' Global Network Navigator, that unify many smaller outfits behind a common interface. Although these companies do not necessarily store their data in the same place, users see them as one.

Meta companies make little distinction between company size outside the Internet, mainly because there's little difference in the quality of their electronic presence.

Looming issues

Starting an Internet business is no different than starting any other company. Virtual corporations face these issues:

1. Money exchange - This remains a problem until some monetary standard is established.

2. Common culture - The Internet is such an equalizer partly because it enforces a common standard of software, bandwidth and culture. On one hand, this means that the virtual character of corporations can be created convincingly by people from widely differing cultures - akin to the virtual personalities rampant in MUD and MOO worlds. On the other hand, some Internet features, such as its use of English, are products of a particular culture.

3. Maintaining identity - Ease of transmission and manipulation of electronic information, coupled with low bandwidth, make it difficult for companies to sufficiently distinguish their unique styles.

4. Virtual overload - As more companies fill virtual space, it's possible that they will begin to resemble a single corporation. The web's current architecture - sites connected by links - bears more than a passing resemblance to artificial intelligence expert Marvin Minsky's software agents. Imagine a future where every user pays for Internet use by providing services to agents in a global organization. In this case, top agent levels are software, while bottom nodes are human.

Concepts necessary to describe virtual businesses are undergoing rapid changes themselves - but one thing will likely remain the same. It empowers individuals and small groups, and it equalizes large ones.

This article was contributed by Jeannie Novak & Peter Markiewicz, Kaleidospace's co-founders.