While supply chains linked over the Net are more responsive than their predecessors, they have their limits, too. "The flexibility now being demanded by customers exceeds the physics of what the supply chain can actually deliver," says Kevin Burns, chief materials officer for contract manufacturer Solectron, whose big customers include Cisco and IBM. Now that companies have switched to web-based models, he notes, they expect to be able to ramp up or halt production of a product within weeks. But it still takes at least three months to get a specially designed chip made in a Taiwanese foundry and around 40 weeks to order an LCD screen.

Obstacles don’t disappear, but it’s easier to see the far-reaching potential of the Net in industries that are primarily about moving information rather than goods. Take financial services. In many ways, financial products are ideally suited to the Internet, since they deal only with information. A recent Goldman Sachs survey reported that 63% of financial companies had sold their products through an e-marketplace or a web site, the highest of any industry.

The Internet is already well on its way to transforming financial services. Online brokers such as E*Trade Group have completely changed how the retail brokerage business worked. And Net services are now offered by nearly every US bank and credit union. Bank of America says it’s signing up 130,000 online customers a month, giving it more than 3 million Net customers. Citigroup has 2.2 million, Wells Fargo, more than 2.5 million.

But as in the case of entertainment, technological and institutional barriers are slowing down the eventual gains. Consider online bill-paying, widely anticipated to be the "sticky app" that drives traffic. The benefits of paying bills on the Net, for both consumers and businesses, could be enormous. But the technology has proven exceptionally complicated, and it has hit a wall trying to penetrate the banking industry. Among the problems: Banks and billers have been unable to agree on how bills should actually appear online. Still, Bank of America plans to launch a big ad campaign later this year to promote its bill-paying service.

And then there’s health care. Despite the tangible nature of many medical services, health care has a very large information component that makes it a natural for Internet applications. Just shifting claims- processing to the web could save $20 billion a year, according to the Brookings economists. At a leading provider of prescription drug care in the US, it costs a matter of cents to handle a prescription order on the Internet, as opposed to more than $1 through other methods.

Broadband’s promise

But there are enormous institutional barriers. For one, privacy considerations may slow down the full shift of health-care records to the web. Moreover, health-insurance companies, doctors, and hospitals are unwilling to give up control of patient records and insurance payments to a third party. This reluctance helped frustrate WebMD and Healtheon, which expected to lead a restructuring of health care by moving many claims, payment, and related processing services to the Net. WebMD’s efforts to provide real-time payment capabilities were shunned by insurers and HMOs, who prefer the current cumbersome process that lets them hold onto the money longer.

There’s also the technology factor. In the long run, realizing the promise of the Net will depend on the widespread introduction of advanced technologies such as broadband to the home and high-speed wireless. With broadband connections over telephone or cable-television lines, consumers will be able to watch TV-quality video clips of the NCAA basketball tournament or download crystal-clear music files faster than ever before. What’s more, they’re more likely to use the Net because they’ll always be connected and won’t have to spend minutes dialing into the Net each time they want to visit a site.

The problem is that getting the new technologies in place may take longer than expected. Financially stressed telecom companies are slowing down the roll out of broadband. The failure of small telecom providers means that subscriber growth may slow down in second- or third-tier markets. And the prices for high-speed Internet access may rise.

In the end, the Internet seems likely to revolutionize mainly communications-intensive industries. If that seems too
limited, remember that almost every breakthrough technology over the last 200 years affected some areas of the economy more than others. The automobile transformed personal transportation and patterns of housing while little affecting manufacturing. Electricity radically altered manufacturing practices and any industry that was power-intensive, while not having an enormous effect on health care. The Net deserves to be put in such august company.

Michael J Mandel and Robert D Hof with inputs from Linda Himelstein in Silicon Valley, Dean Foust in Atlanta, Joann Muller in Detroit, and bureau reports—BusinessWeek