Computers and Information Systems

▪ 2009

Introduction

Smartphone: The New Computer.

      The market for the smartphone—in reality a handheld computer for Web browsing, e-mail, music, and video that was integrated with a cellular telephone—continued to grow in 2008. According to research firm Gartner, in the second quarter, worldwide smartphone unit sales increased at a rate of 15.7% year-on-year. The fastest-growing market was North America, with 78.7% sales growth. Sales in Western Europe were up 29.3%.

      The rise in sales was fueled in part by Apple's introduction in July of the iPhone 3G (the 3G referred to third-generation wireless networks, which sent and retrieved data more rapidly). The iPhone 3G was in high demand; one million iPhone 3Gs were purchased during its first three days on the market. There were early technical problems, which included dropped calls and poor connections, but it was unclear whether the problems were primarily the responsibility of Apple or of AT&T, the only American network on which the iPhone could be used.

      The iPhone and a similar device, called iPod Touch, created a new market for third-party applications software, such as games, that could be downloaded from Apple's online App Store. Apple claimed that consumers downloaded more than 100 million applications, some free and some for purchase, in the first 60 days that they were offered.

      Google's first smartphone, a model from Taiwan-based cell-phone maker HTC called the G1, used Google's Android operating software. Like the iPhone, the G1 was controlled by a touch screen, but unlike the iPhone, it had a physical keyboard rather than a virtual one on the screen. The G1 was initially available only from T-Mobile in Europe and in the U.S., where it initially cost $179 with a two-year cell-phone contract, slightly less than the iPhone. The consensus was that the Google phone had broken little new ground and thus was simply a competitive phone introduced after the iPhone and the BlackBerry, from Research in Motion.

      The popularity of smartphones was aided by another technological trend in the United States: more Americans than ever before were giving up their traditional landline telephones for cellular telephones. In a survey of Internet users by Jupiter Research, 12% said that they did not subscribe to a landline-telephone service, and another 12% said that they planned to switch from a landline to a cellular telephone in the next year. Another study, by market researcher Nielsen, said that 17% of all American homes relied exclusively on cellular telephones rather than landline telephones.

Wi-Fi Service.

      While the cellular telephone networks continued to serve a growing demand for data, short-range Wi-Fi (wireless fidelity) found in homes, hotels, restaurants, airports, and other public places continued to spread as a common wireless alternative for Internet access. The telecommunications industry began looking ahead to a new wireless standard, called 4G (fourth generation), that would transmit laptop and smartphone data faster than present-day cellular networks while greatly extending the range of its signals. Two competing wireless technologies— WiMax and LTE (Long Term Evolution)—were expected to form the basis of the new standard. In tests by T-Mobile and Nortel Networks, LTE was able to download data at speeds of up to 170 million bits per second and upload data at speeds of up to 50 million bits per second from a car that was traveling about 67 km (42 mi) per hour.

       Philadelphia, the first American city to commit to a citywide public Wi-Fi network, tried to reinvigorate the plan after EarthLink abandoned the project in the wake of complaints about weak signals. The Wi-Fi network, which was 80% complete, was being taken over by local investors under the name Network Acquisition Co. Its plan was to sell Wi-Fi service to local businesses and use that revenue to pay for free public Wi-Fi in outdoor locations. The new network operators also hoped to generate Wi-Fi revenue through advertising and transaction processing, such as handling the sale of entertainment tickets.

       Automobile manufacturer Chrysler said that it would offer Wi-Fi connections with Internet access as an option on its 2009-model vehicles. Called UConnect Web, the service was to be offered as entertainment for backseat passengers.

       Delta said that it would offer Wi-Fi service on flights that traveled within the continental United States. Through an agreement with communications firm Aircell, Delta said that it would install Wi-Fi on more than 330 aircraft that flew U.S. routes, although installation would take until mid-2009 to complete. During flights passengers would be able to access the Wi-Fi network with laptops, smartphones, and handheld computing devices; the cost was to be $9.95 for flights of three hours or less and $12.95 for longer flights.

Companies.

      In October the 2008 revenue forecast for the semiconductor industry was reduced from 4% to 3.5% by research firm iSuppli, which noted that strong sales of desktop and notebook computers could help buffer the computer-chip manufacturers from the worldwide economic woes. A worsening worldwide economic crisis, however, drove sales downward 7.2% from October to November, according to the Semiconductor Industry Association, and in mid-December research firm Gartner forecast that for the year the semiconductor industry worldwide would post a 4.4% decline in revenue.

      Computer-chip firm AMD said early in the year that it would eliminate 1,650 jobs, or about 10% of its workforce, because of deteriorating business conditions. By October the firm had announced that it would split into two companies, one that designed computer chips and another that manufactured them. AMD was to retain the design portion and own 44.4% of the manufacturing arm in partnership with the Advanced Technology Investment Co., which was owned by the government of Abu Dhabi, U.A.E., and included two investment funds. In November the company said that it was laying off 500 more employees.

       Hewlett-Packard Co. said that it would eliminate 24,600 jobs over the following three years as part of its recently completed $13.9 billion acquisition of Electronic Data Systems Corp. Layoffs had been expected, but the magnitude of the cutbacks, nearly 8% of HP's 320,000 employees, surprised Wall Street.

       Intel filed a lawsuit against the European Commission (EC) in which it claimed that it had not been permitted a fair defense against charges that it violated antitrust regulations by giving discounts to retailers. The commission, the EU's antitrust regulator, accused Intel of giving retailers rebates in exchange for their promise not to sell PCs that used chips from Intel competitor AMD. The EU regulator and Intel had been sparring over antitrust complaints since 2001, when AMD complained about Intel's conduct. In a separate incident, South Korea ordered Intel to pay $25.4 million for having allegedly violated fair-trade regulations by offering South Korean computer firms rebates to hinder sales of AMD chips.

      The EC fined Microsoft a record $1.35 billion in 2008 for failure to make changes that the EC had ordered in 2004 when it found that Microsoft had abused its position of market dominance. The latest fine brought to $2.3 billion the total amount that the commission had fined Microsoft in the long-running dispute. Microsoft was fined more than $600 million in 2004 for the initial finding of wrongdoing and was fined more than $350 million in 2006 for failing to license networking technology as required in the 2004 ruling.

      June marked Bill Gates's departure as a full-time employee of Microsoft, which he cofounded in 1975 after dropping out of Harvard University. He did not exactly leave the company, however. Gates was expected to spend some of his time working on future Microsoft products and services while remaining chairman and Microsoft's largest shareholder. He also planned to devote time to his charitable organization, the Bill & Melinda Gates Foundation.

       Apple's stock was adversely affected by persistent rumours that CEO Steve Jobs was seriously ill, something Jobs said was not true. Jobs had appeared unusually thin at the company's Worldwide Developers Conference in June, and it was a widely known fact that Jobs had been treated for pancreatic cancer a few years earlier. The stock reaction was tied to Jobs's perceived key role in determining Apple's strategy and products.

      In 2008 Google settled two copyright lawsuits filed in 2005 that had resulted from its plans to digitize and share short excerpts from copyrighted books without official permission. The company agreed to pay $125 million to settle a class-action suit by authors and the Authors Guild and a suit by five members of the Association of American Publishers. The settlements, however, did not resolve whether Google had violated copyright law by its unauthorized scanning of the books in question.

      After pursuing an acquisition for several months, late in the year video-game company Electronic Arts dropped its $2 billion hostile takeover bid for Take-Two Interactive, which owned Rockstar Games, the publisher of the popular Grand Theft Auto game series. Electronic Arts said that the deal had become less attractive because it was too late for the company to incorporate Take-Two into its operations in time for the all-important fourth-quarter holiday selling season. Take-Two had said that the bid was too low. Grand Theft Auto IV, introduced by Rockstar in late April, sold 8.5 million copies in its first month.

Microsoft, Yahoo!, and Google Interactions.

      In what would have been the merger of the year in the computer industry, Microsoft sought to acquire all or part of Yahoo! Microsoft, the world's largest software company, pursued separate deals with Yahoo!, but no agreement was reached. Microsoft initially sought to acquire all of Yahoo! and made an offer of $44.6 billion, which was subsequently raised to $47.5 billion. The merger would have put Microsoft in a much better position to compete with Google, the leader in Internet search and increasingly a threat to Microsoft in the new market for Internet-based software applications known as “cloud computing.” (In cloud computing, large data centres handle computing applications for PCs, smartphones, and other devices with an Internet connection.) After withdrawing its bid, Microsoft approached Yahoo! about a more limited financial deal—one reportedly worth about $1 billion annually in new operating income for Yahoo! Under that proposal, Microsoft would have owned 16% of Yahoo!, acquired Yahoo!'s search business, and shared revenue for searches that originated with Yahoo! Stating that the sale of its search business to Microsoft was not a good long-term strategy, Yahoo! broke off the second round of talks. Although many of the stockholders at Yahoo!'s annual meeting were displeased about the company's financial performance and the failure to work out a merger with Microsoft, the company's management survived a bitterly contested vote by stockholders.

      Following the failed talks with Microsoft, Yahoo! turned to Google for a partnership. Google was to place ads next to some search results on Yahoo!'s American and Canadian Web sites. Yahoo! and Google said that the deal would make Yahoo! a more viable business at a time when advertisers wanted to preserve online advertising competition and Yahoo! had fallen behind Google in search advertising. Microsoft opposed the Yahoo!-Google deal, and it was not alone. A group that represented about 18,000 newspapers worldwide, the World Association of Newspapers, opposed the search-advertising partnership between Yahoo! and Google as anticompetitive. The group said that it objected to the deal—even though the agreement applied only to advertising in the U.S. and Canada—because of Google's growing influence over Internet traffic, its use of online newspaper content on Web sites such as Google News without compensation to newspapers, and its dominant position in online advertising. Several American advertising organizations—including the Association of National Advertisers—also protested the Yahoo!-Google agreement on the grounds that it would bolster Google's leadership in search advertising, which could lead to higher ad prices.

      The U.S. Department of Justice (DOJ) showed interest in examining the Yahoo!-Google agreement for possible antitrust implications. The start-up of the partnership was delayed at midyear and again in October to give the department more time to review potential antitrust ramifications. Faced with a postponement in the advertising partnership, Yahoo! said that it would lay off about 10% of its 15,000 employees to reduce expenses. In early November the DOJ indicated that it would block the agreement despite last-minute concessions from both companies, and Google withdrew from the deal. Less than two weeks later, Yahoo! cofounder Jerry Yang announced that he would resign as CEO of the company, although he would retain a role in developing corporate strategy.

      Despite strained relations with international newspapers, Yahoo! pursued a partnership with newspapers in the United States for selling online display advertising. The goal was for Yahoo! to handle the purchase of national display advertisements that would appear on up to hundreds of newspaper Web sites and then provide information on Web-user behaviour and demographics in order to determine which advertisements should appear on a given Web page. The arrangement was seen as helping newspapers make more revenue from online advertising, advertisers to extend their reach, and Yahoo! to become a major player in online display advertising as an alternative to the Internet-search-based advertising, where Google was dominant.

Mergers and Acquisitions.

       Samsung Electronics made an unsolicited $5.85 billion offer for data-storage producer SanDisk, which rejected the proposal because it believed that it undervalued the company. Samsung later withdrew its offer, citing the global financial crisis and SanDisk's worsened financial circumstances related to lowered demand and falling flash-memory prices.

      Electronics retailer Best Buy acquired Napster, a digital-music service, for $121 million. Napster, with about 700,00 subscribers to its online music catalog, bore little relationship to its namesake, the free and illegal music-distribution system created by Shawn Fanning and shuttered by a 2001 court decision. Napster had about one-half of the digital-music subscription market, and Best Buy was seeking a way to deal with declining CD sales and compete against Apple's iTunes.

       Time Warner said that by early 2009 it would separate AOL's advertising business from its dial-up Internet-access business, which observers said could be a prelude to selling one or both of the units. AOL had been a financial drag on its parent company, and the dial-up portion had been considered a declining business as dial-up customers moved to higher-speed broadband connections.

      Microsoft bought Greenfield Online, owner of European price-comparison Web site Ciao.com, for $486 million. The goal was to improve Microsoft's search-engine business, which lagged behind those of Google and Yahoo! in the worldwide market.

      Security software firm McAfee, best known for its antivirus software, acquired Secure Computing Corp. for $465 million in a bid to increase its share of the business-security market.

The Internet.

      A survey conducted in the second quarter of 2008 found that twice as many people as a year before (an estimated 63% of American consumers) watched streaming video on their computers, primarily as a result of a wider range of content and an increase in the number of broadband users, said market researcher ABI Research. Although nonprofessional video from Web sites such as YouTube accounted for much of that viewing, there also was growing interest in watching TV shows and movies as streaming video over the Internet, the research firm said. Some shows and movies could be viewed through TV-network Web sites, the online video service Hulu.com, and YouTube (in a partnership with MGM). Netflix, whose main business was delivering movies on DVD via postal mail, also offered Internet streaming movies directly to PCs and indirectly to TVs via Internet-linked set-top boxes from a number of manufacturers. They included the Netflix Player from Roku, Blu-ray high-definition DVD players from LG and Samsung, the Xbox 360 videogame console from Microsoft, and a TiVo digital video recorder.

      Sending video over the Internet consumed considerable bandwidth, whether it was being transmitted to users from commercial Web sites or—perhaps illicitly—from peer-to-peer networks. A new lobbying group called Arts + Labs, which represented content owners (such as Viacom), Internet-technology firms (such as Microsoft), and the Songwriters Guild of America, said that it wanted to promote the idea that Internet service providers (ISPs) had the right to block file sharing that took up too much bandwidth on their networks. It was unclear whether such a video-blocking policy would run afoul of much-discussed but as-yet-nonexistent government rules on net neutrality, a concept under which ISPs would be prohibited from favouring specific content that traveled over their networks.

      At one point ISP Comcast acknowledged that it had slowed down traffic from peer-to-peer networks to prevent bandwidth hogging, but the U.S. Federal Communications Commission ordered the company to stop doing so on the grounds that it was an unreasonable restriction on some Internet users. Other ISPs, including Time Warner Cable, discussed metering Internet use to prevent some users from gobbling up too much bandwidth.

      As an alternative to restricting only peer-to-peer traffic on its Internet-access network, Comcast said that it would limit all customers' monthly downloads and uploads of text, graphics, music, movies, photographs, and other information—although the company said that it set the limit so high that fewer than 1% of its customers were likely to be affected. Comcast reserved the right to terminate service to any residential customer who disregarded company warnings and twice violated a monthly limit of 250 gigabytes. Comcast said that the average customer used only about two to three gigabytes per month. Prior to the announcement, there had been no specific monthly limit.

      Telephone company Verizon Communications said that it was benefiting from its decision to change the infrastructure of residential Internet and video-delivery services. The firm had made a $23 billion investment to lay fibre-optic cable directly to American homes. In 2008, four years after Verizon's FiOS (fibre-optic service) project began, the firm said that there was strong demand for its services, which included high-speed Internet, high-definition TV, and telephone. About 24% of the homes with FiOS had signed up for the Internet service, which was up to five times faster than normal cable-modem Internet-access speeds, the company said. Some industry observers commented, however, that it was still too early to know whether there would be a sufficient number of new customers to repay Verizon's big investment.

      In what was called a sweeping change in the Internet address system, a large number of new Web-address suffixes (such as .news and .sports) were voted into existence by the Internet Corporation for Assigned Names and Numbers, or ICANN. The so-called top-level domain names would include city abbreviations and brand names and were expected to sell for hundreds of thousands of dollars. Multiple requests for the same name would be settled by auction. Some critics predicted that the new system of domain names would confuse Internet users and be expensive for businesses that had to protect their trademarks by registering new domain names such as .coke. The familiar .com, .edu, .gov, .net, and .org domain names were created in the 1980s; new domain names such as .biz, .info, and .name were introduced in 2001 and 2002. Over time, domains also were added for country abbreviations, such as .uk for United Kingdom.

       Social networking continued to thrive on Web sites such as Facebook, MySpace, and Flickr, where consumers could share text, pictures, video, and, in a limited way, music with an ever-growing circle of friends and extended common-interest groups. Twitter, one of the newest entrants in the social-networking sphere, was a combination of blogging and text messaging. The Web-based service allowed several million people to send brief but frequent messages detailing their whereabouts and activities to groups of people on the Twitter service who were interested in such minute details of daily life. Users followed the daily routines of others on the service through constant updates, called tweets. Among users of cellular-telephone data services, Facebook and MySpace were the most popular social networking sites. About 46% of all social networking users had connected to them via a mobile phone, according to ABI Research. In 2008 Facebook settled a lawsuit against the company and founder Mark Zuckerberg that had alleged that Zuckerberg misappropriated the Facebook concept from three fellow Harvard University students who founded ConnectU, a Facebook competitor. The terms of the settlement were not disclosed.

       Bloggers, people who wrote personal reports on the Web about events both significant and inconsequential, played a bigger role in the 2008 U.S. political conventions in comparison with previous presidential election years. More than 100 bloggers were admitted to cover the conventions alongside the mainstream media in the belief that bloggers' moment-by-moment live accounts—often partisan and aimed at niche audiences—would supplement TV viewing for a growing segment of the Internet-user population. The importance of bloggers in the political campaign followed the prominent use of the Internet for political fund-raising. (See Special Report (Citizen Journalism: A News {{[}}R{{]}}evolution ).)

       The Wall Street Journal's Web site (which, unlike most major newspaper sites, made most of its content available only to paid subscribers) tried to combine social-networking features with traditional journalism. In addition to being able to comment online about individual stories, a feature found on other news Web sites, the Journal's Web site allowed readers to e-mail each other and create personal profiles that allowed others to view their activities on the Journal's Web site.

E-Commerce.

      The music industry—which had previously adopted piracy-prevention efforts that had included suing individuals caught sharing songs online—experimented with free advertising-supported online music through MySpace. MySpace Music, a joint venture between MySpace and the four largest music firms—the Warner Music Group, the EMI Group, Sony BMG, and the Universal Music Group—was to be a free online jukebox capable of streaming several million different songs to MySpace users. Streaming allowed a user to listen to songs but not record or keep them. With the new service, MySpace users would be able to create multiple streaming-music playlists of their own and share a playlist with other users by posting it on a MySpace profile. To move the music to a digital music player or another computer, however, a user would have to buy downloadable copies of the same music.

      In other action that signaled change in the online music business, the four music labels behind MySpace Music all agreed to deals that permitted subscriber-service Napster and the online store Amazon MP3 to sell songs that did not have digital-rights-management (DRM) software. DRM restricted the devices on which music could be played, and Napster and Amazon MP3 became the first online music companies to sell unprotected music from all four major music firms.

      The motion-picture industry complained that the music industry's online piracy problems—a direct result of easy file copying—were about to afflict it as well. Several Hollywood studios—Paramount Pictures, 20th Century Fox, Universal Studios, Warner Brothers, Columbia Pictures, Walt Disney, and Sony—sued RealNetworks, a digital-media company that had introduced a DVD-copying program that could duplicate movies onto more than one personal computer. The suit sought a temporary restraining order to prevent the software from being sold. RealNetworks was also suing several movie studios, seeking a court judgment that the product was legal. DVD movies normally could not be copied because of encryption software; the inability of consumers to copy disks had helped protect the movie industry's $16 billion in annual DVD sales. The $30 RealDVD program for Windows PCs, however, allowed users to make a single copy of a movie (except high-definition movies) on the computer that copied the DVD. It was possible to transfer the copy to up to five other PCs, provided they also had the RealDVD software. The copies made by RealDVD also were encrypted to prevent further copying.

      Previously, legal action by the movie industry had kept software for copying DVD movies off the market on the grounds that it infringed the movie industry's copyrights on content. Several movie studios and the Motion Picture Association of America had won a court victory in 2004 over 321 Studios, which had marketed a program called DVD X Copy. In that case, the court said that the DVD X Copy program violated the Digital Millennium Copyright Act. In 2007 the DVD Copy Control Association (an alliance of film distributors) was unsuccessful when it sued Kaleidescape, a firm that sold computer servers capable of copying and storing movies. While the Kaleidescape case was under appeal, RealNetworks concluded from the initial ruling in the case that it could legally sell a DVD-copying program.

      Equal access to the Internet was also an issue. Target Corp. paid $6 million to settle a class-action lawsuit that claimed that visually impaired people were blocked from using the Target.com Web site in 2006 by technical problems that the company declined to solve. The suit was filed by the National Federation of the Blind on behalf of California residents. Visually impaired customers could access Web sites by using software that read text aloud and identified technical features such as animated buttons or drop-down menus. The suit alleged that problems with the Web site made it impossible for the software to read the “checkout” button needed to make online purchases.

Computer Security and Crime.

      A potentially huge Internet security problem that would have enabled hackers to misdirect Web traffic to phony Web sites was uncovered and fixed before it became a major problem. The security flaw allowed an attacker to take control of a domain name server, a computer that helped transfer a computer user to a requested Web page. That in turn enabled the attacker to redirect the unsuspecting user to a bogus Web site in an effort to steal information or commit fraud. In one incident some Internet users were sent to a false Google site where programs automatically clicked on certain ads to make money for hackers, who then claimed the profits from the advertising activity.

      An activist cyber-monitoring group, the Citizen Lab at the University of Toronto, and American firms such as Arbor Networks said that the Russian invasion of Georgia in August was accompanied by cyberwarfare designed to disable the Georgian Internet infrastructure. The reports seemed to confirm long-held suspicions that cyberwarfare would increasingly be utilized as part of conventional wars.

      In one of the largest online crime sprees of its type, federal charges were filed in the U.S. against 11 persons from five countries in the theft of more than 41 million credit-card and debit-card numbers. The numbers were gained through tapping into the wireless computer networks of major brick-and-mortar retailers, including OfficeMax, Barnes & Noble, the Sports Authority, and T.J. Maxx. U.S. federal authorities in Boston said that the hackers electronically identified wireless networks with security flaws simply by driving past stores. Hackers then used “sniffer programs” to capture transaction information such as card numbers. The stolen numbers were either sold online or encoded in the magnetic strips of blank cards that could be used to withdraw money from automated teller machines (ATMs). The total amount of money stolen as a result of the card-number thefts was unclear.

      In a separate incident, a computer break-in allowed hackers to steal an undisclosed number of customer PINs, or personal identification numbers, from a network of ATMs operated by Citibank at convenience stores. The theft was notable because PINs were protected by encryption that should have rendered them unreadable. It appeared that some PINs were unprotected while being sent between the ATMs and the remote computers that handled ATM transactions.

      A gang of malicious programmers who were apparently based in Russia launched a new type of attack on American computers with software tools that were typically used by computer network administrators. By secretly installing their malicious software in legitimate data centres that ran programs for customer companies, the attackers were able to take control of about 100,000 other computers and capture their user information, such as passwords and bank records.

      MySpace won a record $230 million in damages in a Los Angeles federal court against two purveyors of spam, or junk e-mail, although it was in doubt whether it could collect such a large award. The pair allegedly used MySpace accounts—their own and those of others—to send spam e-mail to other MySpace members in an effort to lure them to marketing-oriented Web sites.

      In an unrelated case, a U.S. Federal Trade Commission (FTC) investigation resulted in an international spam operation's being shut down by a U.S. federal court under the CAN-SPAM Act of 2003. In what the FTC said was one of the largest spam operations foiled to date, the group sent billions of spam messages over a 20-month period in an effort to sell purported luxury products, bogus drugs, and pornography. Federal officials said that criminal charges might eventually be filed against the spammers.

      Some brick-and-mortar retailers sought legislation that would force eBay and other online sellers to police whether people were selling stolen merchandise through their Web sites. The legislation would force online marketplaces to remove merchandise listings when there was sufficient evidence that the goods had been stolen. It also sought to make selling stolen merchandise on the Internet a felony. By year's end the legislation had not been enacted.

Government Issues.

       Congressional hearings in 2008 on Internet- privacy issues—in particular, the extent to which Web sites captured personal information and the way the information was used to aim advertisements at specific groups of consumers—generated concern but no new privacy legislation. Some Internet firms told Congress that they had used targeted advertising on consumers, based on the consumers' personal information, without clearly saying that they were doing so.

      Yahoo! tried to counteract some of the concern by saying that it would allow consumers to turn off targeted advertisements that were based on known user preferences—even though such ads often generated more revenue because, some believed, they were more effective. Yahoo! said that it thought it might attract even more consumers by offering them the right to opt out of targeted advertising. Yahoo! did not offer to stop collecting personal information from consumers who visited its Web sites, however, because, according to the company, it used the data not just for advertising but also for detecting fraud and for financial auditing.

      In a new twist on Viacom's 2007 copyright-infringement lawsuit against Google and YouTube, which sought more than $1 billion in damages, a U.S. federal judge ordered Google to provide Viacom with records of which of its users watched YouTube videos. That raised privacy concerns, since the court order potentially could have revealed the viewing choices of millions of YouTube users, but Google and Viacom said they would try to protect users' identities during the lawsuit. The situation was a reminder that the vast amounts of user data collected by many Web sites could be disclosed as a result of a lawsuit.

      The open-source software movement won a significant legal victory when a U.S. federal appeals court ruled that free software could be protected by open-source licensing terms. The case revolved around a company that sold commercial software for model trains but did not disclose that its software contained code from a competing open-source program, even though the open-source license required acknowledgement of the code's use and a description of how it had been modified. The ruling also was expected to boost the use of free software by large organizations that previously had worried about the code's legal standing.

      A computer failure at a U.S. Federal Aviation Administration (FAA) data centre near Atlanta caused delays at major U.S. airports in late August. The failed system, which handled flight plans for commercial airlines, put additional load on a companion data centre in Salt Lake City for several hours. Although the problem affected only flights on the ground and not those in the air, some flights were delayed because their flight plans had to be refiled with the FAA before the planes could take off.

Computer Games.

      Video games, once aimed solely at boys and men, continued to draw a growing female audience, a trend that had begun in recent years. By 2008 girls and women made up 40% of the game-playing population, said the Entertainment Software Association, a trade group. With worldwide sales reaching $9.5 billion in 2007, the video-game industry sought further growth by increasing investment in games and game machines that might attract women. Nintendo was a leader in appealing to women customers, first with its handheld DS game machine and then with the Wii console, both of which featured general-interest games and required less button-pushing expertise than other consoles.

      Music games proved to be a category that attracted both men and women. The music industry and game industry jointly succeeded with video games such as Guitar Hero from Activision and Rock Band from MTV Games. Guitar Hero allowed users to “play along” on simplified versions of guitars that essentially mimicked the rhythm of a song. The games were accessible to casual game players, and they provided the music industry with a new way to license its songs.

      Microsoft cut the price of its Xbox 360 video-game console in September; the company said that the cut would stimulate demand because there was a broader market for a console that cost less than $200. The Xbox 360's base price was lowered from $279 to $199 at a time when the $249 Nintendo Wii was clearly the top-selling video-game machine and sales of Sony's $400 PlayStation 3 appeared to be slightly ahead of Xbox 360 sales. The Wii's success was linked to Nintendo's decision to focus the console and its games on novice or casual game players rather than so-called hard-core gamers. The video-game industry's traditional audience, hard-core gamers demanded sophisticated and increasingly difficult-to-master games, including online games in which thousands of consumers participated.

New Technology.

      Microsoft's Windows Vista was greeted by consumers and businesses with little enthusiasm—the operating system (OS) was blamed for software crashes and slowing down PCs, and some businesses decided to skip upgrading to it. Microsoft sought to repair both the technical and public-relations damage. Much of the technical problem was related to the need for new drivers, the computer software that made equipment work with Vista. Battered by a successful Apple advertising campaign based largely on Vista's alleged unpopularity, Microsoft began talking about future versions of Windows less than two years after Vista's introduction. Details remained sketchy, but a successor OS tentatively called Windows 7 was expected to be commercially released in 2009 or 2010. Another new version of Windows, rumoured to be called Windows Strata, was expected to emphasize cloud computing.

      Google introduced its first Web browser, Chrome, to compete with Microsoft's Internet Explorer and Mozilla's Firefox. The introduction of Chrome brought Google into another level of competition with Microsoft; the two companies already clashed in the areas of Web search, Internet advertising, cell-phone operating systems, productivity software (such as spreadsheets), and Web-based e-mail. The Google browser also was seen as another step in Google's transition to Web-based applications software.

      The netbook, or nettop—a tiny no-frills computer for Web browsing and light computing—gained popularity with prices as low as $300. It was a commercialized version of the low-cost PC that the nonprofit organization One Laptop per Child developed for use in less-developed countries, and more than 20 models had become available. Netbooks were not suited to tasks such as editing photos or watching high-definition video and had limited storage space because they used small disk drives or relied on small quantities of flash memory. Advocates said that they were less expensive and lighter than laptops; critics said that they were overpriced for their limitations and ran too slowly. Research firm Gartner predicted that as netbooks became more advanced, they would begin to take some sales away from laptops; it said that netbook shipments could climb from 5.2 million in 2008 to as many as 50 million by 2012.

      The ongoing battle between Sony's Blu-ray and Toshiba's HD DVD formats for high-definition discs appeared to come to an end in February when Toshiba announced that it was abandoning the format that it had developed. In January Warner Brothers—the last major studio to support both formats—had announced that it would be using only the Blu-ray format, and major retailers had said that they would stop selling HD DVD players and movies. By year's end streaming video over the Internet and other online delivery methods were hindering Blu-ray DVD sales, which still lagged far behind those of standard DVD movies.

      Apple's iPod continued to dominate the digital music player market. Although there were many alternative players with much smaller market shares, Microsoft's Zune was seen as the only competitor trying to add new features at the same rate as Apple. By late 2008 Apple had added to various iPod models a feature that readjusted the picture on an iPod's screen for vertical or horizontal viewing, depending on which way the player was held. The feature made use of an accelerometer, and on a new iPod Nano model, the device also allowed the user to shake the device to change songs. The Zune had Wi-Fi capabilities that allowed a user to listen to songs streamed from its online site or to purchase songs and download them. The Zune also had a built-in FM radio, and a user could tag a song heard on the radio for later purchase.

      Another way to purchase music was introduced during the year, but it was unclear whether it would be a hit. SanDisk, which made computer-chip-based flash memory for computers, cellular telephones, cameras, music players, and keychain-sized flash drives, said that it would issue music albums on a microSD flash memory card that was designed to fit into a cellular telephone or digital music player. The card then provided the music-player software in the device with prerecorded songs. The initiative, called slotMusic, would provide a USB-port adapter so that the card could also be read by a computer.

      Seagate Technology, one of the world's largest manufacturers of disk-drive data-storage devices, said that it would develop products using flash memory, a competing technology that had the advantage of having no moving parts to break or wear out but the disadvantage of being more expensive. The worldwide demand for disk drives continued to grow, however, and Seagate predicted that the drives would be vitally important for years to come.

      Google, Microsoft, and other firms worked with medical companies to create computerized health records. The idea was that electronic records would be under the control of consumers rather than doctors, hospitals, or insurance companies. The personal health care records would be portable between health care providers or insurance companies in different parts of the country. Microsoft began a pilot project with Kaiser Permanente, the largest American nonprofit health maintenance organization.

      The search continued for a handheld electronic reading device, or e-reader, that could take the place of printed books or printed newspapers. Because newspapers were increasingly being viewed online, several e-readers that sought to make reading Internet news easier gained attention in 2008. Among them were the iRex Digital Reader 1000, the Amazon Kindle, and the Sony Reader, all costing several hundred dollars. Key considerations for the wireless devices were weight, battery life, screen size, and the ability to read the screen even in bright light (a difficult task with most portable computer screens).

      According to research firm Gartner, there were more than one billion personal computers in use in the world in 2008. Given the current growth rate, it was estimated that there would be two billion PCs in use by 2014, the firm said. About 58% of the world's PCs were located in mature PC markets such as the U.S., Western Europe, and Japan, even though those areas had only 15% of the world's population.

Steve Alexander

▪ 2008

Introduction

New wireless technology appeared, and the use of online video exploded. Privacy issues received new attention as online social networks took off and disparate consumer databases were to be merged. The music industry seemed poised to embrace advertising-supported free music.

New Technology.

      The introduction of the Apple iPhone, which was really a handheld computer running a version of the firm's Macintosh operating system (OS), was easily the biggest event of 2007 for consumers. It combined an Apple iPod, touch-screen controls, and a cellular telephone that exclusively used AT&T's wireless network for voice and data.

      The iPhone went on sale in the United States at the end of June, and more than one million units were sold in less than three months. It was introduced in Europe late in the year. Apple's initial European agreements were to provide the iPhone to Germany through T-Mobile, to the U.K. through O2, and to France through Orange. One concern was that the iPhone was not technically capable of taking advantage of faster European wireless networks that sped up Internet use.

      The iPhone became one of the most quickly marked-down electronic gadgets, undergoing its first price cut—from $599 to $399 for the most popular model with 8 GB (gigabytes) of storage—in only two months. Apple CEO Steven Jobs said that the price cut was intended to increase demand for the iPhone during the all-important holiday shopping season, when sales of consumer electronics products typically hit a peak. Although price cuts generally were popular with consumers, the move angered those American customers who had paid up to $599 for their iPhones immediately after the product was introduced. Apple tried to mollify them with $100 store credits.

      The number of Internet services delivered to cellular telephones continued to grow. The main developers of wireless Internet software were Symbian, Microsoft, Palm, and Research in Motion, plus some smaller players that used the Linux OS. The hottest area was so-called interactive Web content, including music, games, and video. More evidence of the broadening Internet-ready cellular-telephone market appeared when RealNetworks said that it would cooperate with MTV to sell songs that were downloaded over the Verizon Wireless cellular-telephone network for use on cellular telephones and handheld smart devices. Some new services, such as Twitter, were crossovers that served computers and cellular telephones. Twitter provided networks of friends with short messages so that they could stay constantly in touch, via either computer-based instant messaging and Web forms or cellular-telephone text messaging.

      The iPhone added momentum to the trend of accessing the Internet via Wi-Fi (wireless-fidelity) hot spots, which were found in restaurants, hotels, and coffee shops. Smart telephones equipped with Wi-Fi could reach the Internet at several times the speed of cellular networks. Some experts believed that Wi-Fi Internet access would rival cellular, both for data and for voice calls that used Voice over Internet Protocol (VoIP), which had begun to catch on with consumers. Sprint Nextel was one cellular-telephone company that took the threat seriously. It planned to spend as much as $5 billion over three years to build a high-speed voice-and-data network that used a next-generation wireless Internet technology called WiMAX, which exceeded the speed and range of Wi-Fi. The status of that strategy was in doubt, however, after the company's CEO resigned.

      Apple also took advantage of the Wi-Fi trend with its new iPod Touch (essentially an iPhone without the cellular-telephone capability), which for the first time allowed an iPod to download music directly from Apple's iTunes online music store via a Wi-Fi hot spot. Previous iPods required first downloading a song to a personal computer.

      Municipal Wi-Fi networks, widely seen as a way to provide ubiquitous broadband in cities and to offer lower-cost service that more people could afford, suffered their first setback as high-profile projects in San Francisco and Chicago were dropped over cost issues. Wi-Fi network builder EarthLink, which announced internal cutbacks and layoffs, declined to pursue a contract with San Francisco to build a citywide network. Chicago dropped its plan for a citywide network after it was unable to reach an agreement with either AT&T or EarthLink, the two companies bidding to build the network. Meanwhile, municipal Wi-Fi networks were up and running in Philadelphia, New Orleans, Anaheim (Calif.), and Corpus Christi (Texas) and were under construction in other cities, such as Minneapolis (Minn.).

       Microsoft introduced its new Windows Vista PC operating software at the end of January, but after most of a year in the marketplace, it generated so little enthusiasm that Microsoft agreed to keep selling its older Windows XP for several months after it was to have been discontinued. User complaints about Vista included error messages while copying files, OS crashes, and problems with attached printers. Several PC makers, including Fujitsu, provided easy ways for customers to “downgrade” their new computers from Vista to the older XP operating system. Google claimed that the OS made it difficult to use non-Microsoft programs for “desktop searches” (scanning a PC's hard drive for information). To avoid a lawsuit, Microsoft agreed with the U.S. Justice Department and 17 state attorneys general to change Vista so that consumers could more easily use alternative desktop search programs.

 Microsoft said that it would begin to market a commercial computer for information kiosks that used a touch-sensitive screen and had the ability to recognize some physical objects. Called Microsoft Surface, it was a pedestal-shaped device with a 12-cm (30-in) screen inside a tabletop. Besides physical touch, it could recognize input from a digital camera or the bar code on a plastic ID card placed on its screen.

      Two scientists received the 2007 Nobel Prize for Physics for their discovery of a physical effect that was soon used to reduce the size of computer hard-disk drives. Albert Fert of France and Peter Grünberg of Germany in 1988 independently discovered the effect, called giant magnetoresistance. (See Nobel Prizes .) Giant magnetoresistance made it possible to read fainter magnetic signals on a magnetic disk, which in turn made it possible to increase the density of data on the disk. The first hard-disk drive that used the discovery was introduced in 1997.

      Corporations in the U.S. were forced to deal with a potential computer problem created when the country extended Daylight Saving Time by a month. The clocks inside most computers were programmed to recognize the old daylight-time schedule established in 1986. Although no major problems were attributed to computers' or smart telephones' being out of sync with official time, publicly traded U.S. corporations spent an estimated $350 million to fix the problem with software patches.

      The One Laptop per Child Foundation, which was trying to provide less-developed countries with low-cost portable computers that could use a pulley for hand-generated electrical power, said that it planned to begin full production late in the year. The Massachusetts organization said that although initial computer units would cost $200, it expected the price to drop to $100 per computer by the end of 2008. One reason for the low price was the computer's use of the free, open-source Linux OS, although it also would be able to run a version of Microsoft Windows XP.

      IBM said that it had developed a way to remove computer- chip processing bottlenecks by swapping one type of memory technology for another. By speeding up a traditionally slower type of chip memory called dynamic random-access memory, or DRAM, IBM was able to substitute it on computer chips for static random-access memory, or SRAM. The swap allowed the amount of memory on a computer chip to be tripled, which eliminated a bottleneck caused when data could not be pulled into the chip's processor fast enough from an adjacent memory chip. The modification allowed the processor chips to work up to twice as fast.

      Meanwhile, chip manufacturers Advanced Micro Devices (AMD) and Intel continued their competition to put the most processors on a single chip. AMD released its latest Opteron chips—for computer servers—which each contained four processors. Adding more processors per chip increased the chip's calculating speed and energy efficiency. Intel previously had offered Xeon server processors that combined two chips with two processors each. Intel also said that it had made an experimental chip that contained 80 computer processors capable of handling more than one trillion operations per second while using less electricity than an ordinary chip, but the company said that the device was only for research and would not be marketed.

      The two types of high-definition DVD players, Sony's Blu-ray and Toshiba's HD DVD, continued to battle over which one would become the industry standard, much as VHS videotape recorders competed with Betamax recorders to become the consumer TV-recording standard in the 1980s. Blu-ray, which offered the greater disc capacity, appeared to be gaining ground in retail disc sales over HD DVD, which offered a simpler manufacturing process. The uncertainty over the outcome continued to slow consumer acceptance of high-definition video recorders.

The Internet.

       Social networking Web sites continued to gain in popularity to the point that e-marketers sought to capitalize on them. (See Sidebar (Social Networking-Making Connections on the Web ).) Popular social networking sites such as MySpace and Facebook allowed users to tell about themselves and to post public comments on friends' profile pages, creating an ongoing discussion and a growing group of interested participants. Facebook, whose membership more than quadrupled in 2007, went a step farther by enabling search-engine users to find its members—something it had not done before. It did, however, give existing members a choice whether to keep their pages private or make them available to people who used external search engines or Facebook's own search function. Other Facebook plans went less smoothly. In response to protests by privacy advocates, Facebook modified a plan to tell members' friends what they had bought online. The company said that it would get explicit approval from a user before disclosing his or her Internet shopping.

      Concerns grew that social networking sites were being used by sexual predators seeking to contact children. Four families sued News Corp. and its MySpace site in a California court after their underage daughters allegedly were sexually abused by adults whom they had met while using the online service. The suits alleged negligence, recklessness, fraud, and negligent misrepresentation. Under pressure from authorities in several states, MySpace said that it had discovered and deleted more than 29,000 profiles belonging to registered sex offenders. In a settlement with New York's attorney general, Facebook agreed to post stronger warnings about the risks to children who used its service; the case was based on allegations that Facebook had misled people by minimizing the threat posed by sexual predators.

      Social networking also created other legal problems. The founder of Facebook, Mark Zuckerberg (Zuckerberg, Mark ), was sued for allegedly having misappropriated the idea from his Harvard University roommates. Three founders of ConnectU, a Facebook competitor, sued in federal court, alleging that Zuckerberg agreed to help finish their Web site but wound up taking their ideas and creating Facebook. In what amounted to the refiling of a 2004 lawsuit dismissed on a technicality earlier in the year, they alleged fraud, copyright infringement, and misappropriation of trade secrets, and they asked the court to shut down Facebook. Facebook sought to have the case dismissed.

      Online video took off in 2007, both because of the runaway popularity of Google's YouTube and because conventional TV networks embraced the Internet as a place to showcase their programs after they had already appeared on television. Because video files were larger than e-mail or Web pages, they quickly became a large portion of Internet traffic—more than 40% by some estimates.

      For TV networks, streaming shows online helped to build viewer loyalty and, to a lesser extent, to sell more advertising. (It was advertising that viewers could not skip as they could within TV broadcasts recorded on digital video recorders.) The shows viewed on a computer screen initially featured smaller images than most consumer TV sets produced, but the networks later offered the shows in a larger image size—up to full-screen pictures. New Web-only TV shows also were created. MySpace agreed to showcase a new television-like series called Quarterlife, about young peoples' lives after college. Warner Bros. Studios outlined plans for 24 different Internet-based entertainment productions, including games, TV-like shows with episodes, and a short form dubbed “minimovies.”

 The online video trend was aided by new technology that made it possible to stream TV shows over the Internet in a format that approximated the quality of new high-definition TV sets. Adobe Systems, a software maker known for its free Flash video software that could be used by nearly all personal computers, incorporated a high-definition video format into the Flash player. Apple supported the same high-definition standard in its QuickTime video software, while Microsoft pursued its own proprietary approach to high definition over the Internet called Windows Media VC-9.

      Business interests were affecting the flow of Internet video, however. Viacom, the corporate parent of the MTV and Comedy Central cable TV channels, sued YouTube and its corporate parent, Google, for intentional copyright infringement and sought more than $1 billion in damages. Previously Viacom had demanded that YouTube remove more than 100,000 video clips of its copyrighted programming, and YouTube had done so. As the result of a pricing dispute between Apple and NBC, iTunes stopped offering new NBC TV shows in the fall and would remove all NBC shows from its store at the end of the year—a significant decision, since NBC material accounted for about 40% of the iTunes video downloads. Apple, which sold TV video for $1.99 per episode, said that NBC's proposed new pricing would have forced the price up to $4.99 per episode. Meanwhile, Amazon.com struck a deal with the federal National Archives and Records Administration to copy and market online some of the thousands of historic films and videotapes held in U.S. archives.

      Electronics manufacturers continued to offer consumers different ways to combine the two largely separate multimedia worlds of the TV set and the Internet-connected computer. Apple introduced the $299 Apple TV, which allowed up to five computers in a household to stream downloaded video wirelessly to a TV set. The Apple TV unit also could store up to 50 hours of video on its hard drive. Some new cable TV set-top boxes began to provide TV sets with links to Internet Web sites and also functioned as DVD burners. Sony offered the $299.99 BRAVIA Internet Video Link, which enabled some of its high-definition TVs to view a limited selection of Internet videos, movie trailers, and music videos. Microsoft said that its Xbox 360 video-game console could display Internet video on TV sets that used a technology called Internet Protocol Television. Electronics retailer Best Buy offered to create a home network in which hardware and software from different manufacturers played PC-to-TV video and music, operated light switches and a thermostat, and ran two remote cameras. Including installation, the price was $15,000.

      Although the U.S. lagged behind other countries in the percentage of people who had broadband Internet access, the availability of high-speed access for Americans continued to grow. A study by the Pew Internet & American Life Project showed that 47% of all adult Americans had a home broadband connection in early 2007, a 5% increase from a year earlier. (The percentage of home Internet users with broadband access was 70%.) Rural areas continued to lag behind cities in broadband adoption, with only 31% of all adults having high-speed Internet connections at home.

       Cable TV, eager to keep its lead over telephone companies in providing high-speed Internet access in the U.S., pushed for higher speeds. Cable-TV firm Comcast demonstrated a replacement for cable modems that would download data at 150 megabits (million bits) per second, about a 25-fold speed increase, but the company said that the technology might not be ready to sell for two more years. Meanwhile, a relatively small number of consumers could get from Verizon Communications a fibre-optic home service called FiOS (fibre-optic service), which operated at 50 megabits per second but had the potential for delivering 100 megabits.

       Bloggers—persons who voiced their personal opinions by writing regularly on Web sites—became more of a mainstream force in the discussion of national issues. Several U.S. Democratic presidential candidates appeared in Chicago before a conference of self-described “progressive” bloggers called YearlyKos. Some who attended said that the group of 1,500 conventiongoers was hardly a diverse cross-section of society; they mostly tended to be white males. As the role of bloggers in writing highly partisan attacks aimed at political opponents came into question, there were discussions in blogger circles about creating a voluntary code of conduct that would raise the level of discussion on blogs, or at least set some minimal ground rules, but it was unclear whether the fragmented blogger community could agree on such standards.

      U.S. politics entered the Internet in a new way when televised presidential debates were sponsored by cable network CNN and YouTube, the most popular Web site for amateur video. Initial questions for the candidates came from uploaded Internet video from the public, while a CNN moderator asked follow-up questions. A more Internet-centric approach followed when MTV and MySpace held several Webcasts with individual presidential candidates as they answered questions submitted live via instant message, text message, or e-mail.

 The concept of mashups—a term originally used to describe combinations of different songs, which was then extended to combinations of the Google Maps interface with new kinds of demographic information—began to permeate Internet culture as companies such as Yahoo!, IBM, and Microsoft tried to make a business out of it and increase Web traffic. The idea was to allow users to combine information from different sources for business or entertainment purposes, such as combining a street map with the addresses of places offering Yoga training or the locations on a world map of two people communicating via instant messaging. The companies hoped to increase the appeal of mashup software by making it simple to use. People with minimal technical skills were able to combine information as diverse as hobbies, highway detours, or whale sightings with existing maps, sometimes adding photos, sound, and video to the mix. Even more conventional maps of crime statistics and weather conditions often were the work of amateurs.

       Widgets were a widely used type of Internet-based consumer software, particularly on social networking sites. In their simplest form, widgets provided such features as YouTube videos, music players, photo viewers, weather forecasts, puzzles, or news headlines in a tiny area of a Web page otherwise devoted to social networking, on a personal blog, or on the desktops of some personal computers. As the year drew to a close, several companies had begun to use widgets as an advertising medium.

      The ever-growing use of e-mail, plus an increase in the number of e-mails with large attachments, caused even large e-mail in-boxes to reach overflowing. That led to yet another round of offers from free e-mail providers of even higher-capacity in-boxes. Google's original offer of 1 gigabyte of free e-mail storage per in-box was eclipsed in 2007 by Yahoo! and AOL, both of which offered unlimited free e-mail storage, and by Microsoft, which provided 5 GB for its free Windows Live Hotmail. Google's free e-mail storage limit increased on an ongoing basis and reached 6 GB by year's end.

      SunRocket, an Internet phone service provider that used VoIP technology, closed suddenly. The action left customers without service and, in some cases, likely to lose money on their two-year contracts. Although it was the second largest independent VoIP company, behind Vonage, SunRocket was facing stiff competition from cable TV companies that were selling similar telephone service, sometimes at discounted rates, if customers also bought other cable services.

Companies.

      A U.S. federal judge set aside a $1.5 billion patent-infringement judgment against Microsoft—the largest patent judgment ever. The suit had been filed by Alcatel-Lucent over the rights to the widely used MP3 digital music format, which was used by Microsoft's Windows Media Player as well as by the music software of many other firms. The judge ruled that Microsoft did not infringe on one of two patents and that ownership of the other patent was unclear.

      Not all went well for Microsoft, however. The European Court of First Instance rejected a Microsoft appeal in a 2004 European Commission antitrust ruling and upheld the $689.4 million fine. Microsoft said that it would not appeal the latest decision and would comply with the 2004 antitrust ruling by making it easier and less expensive for competitors to work with Microsoft software. The original ruling was based on Microsoft's alleged abuse of its dominant market position with the Windows OS.

       Apple made sharp gains in personal computers to an estimated 8% of the U.S. market, and some analysts attributed the performance to a “halo effect” from the iPod. Apple also introduced the latest version of its Macintosh operating system, nicknamed Leopard (also known as Mac OS X 10.5). Although not dramatically different, it automated and simplified useful but often-neglected tasks such as backing up data, programs, and system settings. Record-setting Macintosh computer sales in Apple's fourth fiscal quarter helped make the company a significant player in the U.S. personal-computer market, along with top manufacturers Hewlett-Packard and Dell. Apple also was one of the companies caught up in the U.S. government investigation of corporate backdating of executive stock options, a practice that maximized the gain for option recipients. Although the company was not charged, the Securities and Exchange Commission filed charges against the firm's former general counsel and former chief financial officer in connection with fraudulent option dating. In addition, Apple settled its long-running court battle with Apple Corps, the Beatles' music company, over the use of the Apple name and logo. Apple Inc. gained ownership of all trademarks related to “Apple” but licensed some back to Apple Corps. Apple also settled a trademark dispute with Cisco Systems over the iPhone's name.

       AOL, which was trying to convert its business model from that of a dial-up Internet access provider to that of a seller of online advertising, said that it would lay off 2,000 of its 10,000 worldwide employees and move its headquarters from Dulles, Va., to New York City. It was the biggest layoff at the company since it cut 5,000 employees worldwide in late 2006.

      The growing competition between Google and Microsoft took another turn when Google began to offer free downloadable versions of Sun Microsystems' $69.95 StarOffice, a competitor of Microsoft Office for personal productivity software such as word processing and spreadsheets. The move was significant because, compared with Google's free online word-processing and spreadsheet applications, StarOffice had more features and thus was more comparable to Microsoft's Office product. In an effort to fight back, Microsoft offered free software online for e-mail, picture sharing, and blogging. IBM also announced that it would offer a free alternative to Microsoft Office, the downloadable Lotus Symphony, which would offer word-processing, spreadsheet, and presentation software. IBM also downsized its worldwide operations by 4,170 employees, or about 1%.

      The degree to which eight million customers worldwide relied upon their BlackBerry wireless e-mail service became clear when North American customers suffered a 10-hour outage in April, provoking howls of protest. Service provider Research in Motion attributed the outage to software problems at its Canadian network operations centre that handled all e-mail messages for BlackBerry units in North America.

      PC maker Dell Inc., acknowledging that some quarterly results had been falsified in the years 2003–06 to meet sales targets, reduced its earnings for fiscal year 2003 to the first quarter of 2007 by $92 million, a relatively small amount for a company with about $57 billion in annual sales. Its downward adjustment in revenue for the period was less than 1%. Dell, which had become the number two PC company worldwide, after Hewlett-Packard, began to sell PCs through traditional retail stores for the first time. It completed deals with a number of retailers, including Wal-Mart stores (in the U.S., Canada, and Puerto Rico), 1,400 Staples office-supply stores, and several overseas companies.

      Intel said that it would build a $2.5 billion computer-chip plant in China, the company's first major manufacturing operation in Asia. According to the company, China was its fastest-growing major market.

Mergers and Acquisitions.

      Microsoft bought online advertising firm aQuantive for about $6 billion, its largest acquisition ever and a sign of the growing importance of online advertising as consumers spent more time on the Internet. Although online advertising accounted for only 6% of total U.S. advertising expenditures in 2006, that number was expected to grow to more than 12% by 2010, according to research firm eMarketer.

      Microsoft's competitor Google also made its largest acquisition to date, buying online advertising firm DoubleClick for $3.1 billion. It was part of Google's effort to expand from its search-engine business into advertising by combining the two firms' databases of information in order to tailor ads to consumers' individual preferences. (Google maintained its lead in Internet searching over second-ranked Yahoo! and third-ranked Microsoft, according to Internet traffic-measurement firm comScore. In September Google had 57% of U.S.-based Internet searches.) Google's DoubleClick deal proved controversial, sparking an investigation by the Federal Trade Commission over whether the combination had antitrust implications. A European consumer group, BEUC, was concerned that the combining of the two firms' databases, which contained extensive information on consumer use of both the Internet and Internet search engines, might hurt privacy rights and limit consumers' choice of Internet content. Microsoft also complained that the deal would reduce Internet advertising competition, but Google disputed the claim.

       Yahoo! bought two online advertising companies—Right Media for $680 million (Yahoo! already owned 20% of the firm) and BlueLithium for $300 million. Right Media ran auctions for buying and selling online ad placements. BlueLithium was one of several companies that sought to show consumers relevant advertising by tracking their behaviour as they moved from one Web site to another, a type of behavioral targeting. Yahoo! also paid $350 million to acquire Zimbra, which provided Web-based e-mail to businesses.

      Google acquired Internet security company Postini for $625 million. The deal allowed Google to expand the business services it offered through its network of data centres, an extension of its practice of providing online applications such as e-mail and word processing. Among other services, Postini routed corporate e-mail through its own computers to eliminate junk e-mail, or spam.

      Database firm Oracle, which had been buying up corporate software firms, acquired Hyperion Solutions for $3.3 billion. Hyperion provided “business-intelligence” software that analyzed corporate data to reveal business trends. Following Oracle's move, German software firm SAP bought Business Objects, another business-intelligence software company, for $6.8 billion. Oracle also acquired Agile Software, a maker of business-management software, for $495 million.

      Networking firm Cisco Systems paid $3.2 billion for WebEx Communications, which provided online conferences and secure instant messaging. WebEx was estimated to have 64% of the online meeting market. Cisco also paid $830 million to acquire privately held security software firm IronPort Systems.

      Computer and printer maker Hewlett-Packard acquired two software businesses, paying $1.6 billion for Opsware, whose software automated data-centre administration, and $214 million for Neoware, which made software for centralizing the management of desktop computers in corporations.

      Acer of Taiwan acquired American PC maker Gateway for $710 million. Gateway, founded in 1985 as a direct-sales PC firm that had no stores, had fallen on hard times in the decade since Compaq Computer offered to buy it for $7 billion. (Compaq itself was later bought by Hewlett-Packard.) The acquisition made Acer the world's third largest PC maker, behind first-place Hewlett-Packard and second-place Dell. The combined company would have more than $15 billion in revenue and ship more than 20 million PCs annually.

E-Commerce.

      The rapid growth of e-commerce slowed noticeably in 2007, something that experts said was inevitable given the fact that Internet sales had become so large. Internet sales in the U.S. were projected to be $116 billion for the year, which would make them 5% of all retail sales. A decline in the rate of growth had been under way for some time. Online retail sales in the U.S. grew 25% in 2004 but only 20% by 2006, according to Jupiter Research. The growth rate was expected to be about 16% in 2007 but well under 10% by 2011, the firm said.

      Experts said that the declining growth rate for e-commerce also indicated that consumers were shifting their buying patterns. For example, the growth rate for online sales of toys and video games was expected to rise, while the growth rate for clothing sales was expected to decline, according to Forrester Research. Online sites that helped consumers make everyday buying decisions continued to be popular. Craigslist rivaled newspaper classified ads as a leading venue for buying and selling, and Angie's List was able to charge members for consumer reviews of household-service providers, such as plumbers and movers.

      Apple, which had about 70% of the music-download market, introduced a major change in May in the way music was sold online. In an arrangement with EMI Group, Apple began to offer EMI songs from iTunes without digital-rights-management software, which meant that the songs could be used directly on digital music players other than the iPod. The unprotected songs cost $1.29 each and were said to have slightly higher audio quality owing to a higher bit rate of 256 Kbps (kilobits per second) versus 128 Kbps for other songs purchased from iTunes. (The bit rate measured the amount of data contained in each second of music; more bits per second meant better sound.) Apple said that iTunes would continue to sell copy-protected songs for 99 cents. Amazon.com and Wal-Mart, the largest CD seller in the U.S., reported that they would also sell some songs online without copy protection.

      Earlier in the year, Apple's Jobs had urged the four major music companies to abandon copy protection, largely because the vast majority of the music they sold—as CD recordings—had no copy protection. Some analysts predicted that all record companies would have to abandon digital-rights-management software on songs sold online if they wanted Internet music sales to grow enough to offset a decline in sales of music CDs. A music-industry sales report showed that in 2006 the sales of digital music online did not increase fast enough to make up for the decline in CD sales.

      Online music piracy continued unabated, even though the Russian Web site AllofMP3.com—a particularly egregious offender in the view of the music industry—was shut down. The Web site had sold albums for as little as $1, about one-tenth the standard online price, and had claimed to be the second largest seller of online music, after iTunes. AllofMP3.com had been accused of piracy in a dispute over payment of music-industry royalties.

      The record labels scored a victory in the first of their consumer lawsuits against online song sharers to go to a jury trial (many had previously been settled out of court.) A Minnesota woman was found to have infringed on music copyrights and was ordered to pay $222,000 in damages, even though she could have settled out of court before the trial for $4,750. Hers was one of about 30,000 lawsuits that the music industry had filed since 2003 in an effort to curb music piracy.

      Analysts said that although the music industry had won the courtroom battle, it was losing the larger war against online song sharing. About 85% of all downloaded digital music still consisted of illegal copies, said Gene Munster, a digital-music-industry analyst for brokerage firm Piper Jaffray. In addition, the line between free illegal songs and for-pay legal music was beginning to blur. The well-known rock band Radiohead sold its latest album online for whatever people were willing to pay, and the music industry itself was experimenting with an advertising-supported Web site, SpiralFrog.com, that allowed users to download free but copy-protected music.

      PC shipments, for both online and retail store sales, were on track to grow about 12% in unit sales worldwide in 2007, said market-research firm iSuppli Corp. Sales of laptop computers fueled most of the growth, but sales of desktop computers—which had been falling out of favour as laptops gained in capability—showed improvement over the previous year.

Computer Security and Crime.

      In March a federal judge struck down the 1998 U.S. law known as the Child Online Protection Act, which made it a crime for Web site operators to let children view “harmful” content. The ruling said that parents could protect their children through software filters and other means that did not limit the free-speech rights of others. Civil-liberties advocates and other opponents of the law had argued that it was constitutionally vague and would have a chilling effect on freedom of speech. The ruling came three years after the U.S. Supreme Court upheld a temporary injunction against the law on the grounds that it probably would be struck down.

      Police in London questioned alleged members of a worldwide Internet pedophile ring and rescued 31 children. More than 700 suspects worldwide were under scrutiny. The adults were said to have used an Internet chat room called “Kids the Light of Our Lives,” which showed images of children suffering sexual abuse.

      The Storm Worm became the biggest e-mail attack in more than a year. Clicking on an executable file that was contained in an infected e-mail caused the Storm Worm to hide itself while it shut down computer security software, which in turn allowed additional malicious code to be downloaded and personal information on the computer to be stolen. PCs also could be turned into “ zombies” within a group of compromised computers called a “botnet,” which was typically used to launch additional attacks.

      Google advocated the creation of new international privacy standards for the ways in which consumer data would be collected and used. It proposed the standards as an alternative to the existing situation in which privacy laws varied around the world. The company suggested that the standards be set by the United Nations or some other recognized international group and that individual countries adopt the rules and adapt them to local needs. (Underscoring the problem of an online service's having to comply with varied local laws, Google agreed to block four YouTube video clips after the government of Thailand complained that the videos broke Thai laws against offending the country's king.) Google changed its own privacy policy by saying that it would keep logs linking Internet searches to specific computers and Web browsers for only 18–24 months and would make the logs anonymous after that. It had been keeping the logs indefinitely.

      Microsoft also made a request for industry privacy standards, and it promised to keep search logs for only 18 months. It said that its search users would be able to opt out of behaviorally targeted advertising, which triggered the display of particular types of ads depending on what Web sites a person looked at while online.

      Google's commitment to privacy was questioned, however, after it introduced a mapping service, called Street View, that showed street-level photographs from around the U.S. that were searchable by street address. Some photographs provided users the view through house windows or captured persons sunbathing. Google defended the service by saying that the images showed only what a person could see by walking down the street.

      The former chief executive officer of Computer Associates, which changed its name to CA, Inc., was ordered to pay nearly $800 million in restitution to investors who lost money owing to the firm's fraudulent accounting. The executive, Sanjay Kumar, also began to serve a 12-year prison sentence after having pleaded guilty in 2006 to having conspired to inflate the company's 1999 and 2000 sales figures and to having interfered with a federal investigation of the accounting at the software firm.

      The U.S. Department of Defense began blocking access to several Web sites by anyone who used its network, including troops in Iraq. YouTube, MySpace, and 11 other Web sites, which soldiers used to communicate with friends and family as well as to entertain themselves, were blocked because of the load they placed on the military's private network and because of concerns that soldiers might disclose sensitive military information.

      A California man, Jeffrey B. Goodin, became the first person found guilty by a jury of having violated the 2003 federal law that banned unsolicited e-mail with false return-address information. Goodin violated the CAN-SPAM Act with a scheme that tricked AOL subscribers into disclosing credit-card information in the belief that they were dealing with AOL's billing department. Goodin then used the data to make purchases. He was sentenced to 70 months in federal prison and ordered to pay about $1 million to the victims of the scheme.

      A Minnesota man who illegally ran an Internet pharmacy that sold about $24 million of prescription drugs was sentenced to 30 years in prison by a federal judge. Government prosecutors said that Christopher William Smith deserved the long sentence because he defied court orders to shut down his Web site and allegedly made a death threat against a witness in the case.

Computer Games.

      With its Wii video-game console, Nintendo emerged during the year as the unexpected winner of the video-game machine wars. Wii lacked state-of-the-art graphics but provided entertaining game play for the average person. There also was continuing growth of online games and online “virtual worlds” that were like alternate universes in which players could pretend to live.

      To earn its share of the $13 billion spent annually in the U.S. on video games and related equipment, Nintendo catered to casual gamers, who wanted games that were easy to learn and intuitive to play (such as by swinging a motion-sensitive control device as if it were a tennis racket). That strategy ran counter to the conventional belief in the industry that new video-game machines had to cater to the so-called “hard-core” players who wanted the latest and greatest graphics and the most challenging game play. In unit sales the Nintendo Wii outsold the more expensive Microsoft Xbox 360 and Sony PlayStation 3 consoles (the PS3 lagged the most), which were aimed at serious gamers. Both Microsoft and Sony were forced to cut prices to stimulate sales, and Microsoft also had to deal with extensive repairs on many of its Xbox 360 machines at a cost estimated to be as much as $1.15 billion. Microsoft got some good news when the Xbox 360 first-person shooter game Halo 3 proved to be a success with serious game players; it was seen as one way for the Xbox 360 to compete with the popularity of Nintendo's Wii.

       Second Life, one of the most popular virtual worlds where participants could meet, travel, and buy property, had millions of registered users (some critics said that only about 200,000 were regular participants) and its own currency—the Linden dollar—that could be exchanged for real money. Real-life retailers such as tennis-shoe manufacturer Adidas set up shops in Second Life in hopes that people, using their cartoonlike avatars as their representatives, would go to Second Life stores to make virtual purchases.

      Scientists at the University of Alberta improved an existing game software called Chinook to a level that it would never lose (that is, it would always either win or achieve a draw) in a traditional game of checkers. Checkers was the most complicated game to date to have been completely mastered by a computer. The project took 18 years to complete and verify.

Steve Alexander

▪ 2007

Introduction

Cities were setting up municipal networks for high-speed Internet access. Concerns over identity theft rose to new levels. Google's $1.65 billion acquisition of Web phenomenon YouTube harked back to the dot-com acquisition boom of the late 1990s. Hewlett Packard was chastised for allegedly using illegal means to spy on board members believed to be leaking information to the media.

City Wireless Networks.

       Philadelphia, the first large U.S. city to announce plans for a metro Wi-Fi (wireless-fidelity) network, signed a 10-year contract with EarthLink in January 2006 to construct and operate such a network. More than a hundred other cities, including San Francisco and Minneapolis, were either planning a municipal Wi-Fi network or had one under construction. By the end of the year, many smaller cities had networks in operation, though relatively few major networks had been completed. City governments cited several reasons for wanting to set up and provide municipal Wi-Fi networks. They believed that the networks would reduce their cost for telecommunication services, help attract businesses, and close the “digital divide” between those residents who could afford access to the Internet and those who could not. The city networks typically promised Internet-access speeds that would be comparable to or faster than similarly priced high-speed access from telephone or cable television companies. The municipal Wi-Fi networks were essentially giant versions of the public Wi-Fi hot spots that were already available in airports, hotels, restaurants, and coffee shops to users with Wi-Fi–equipped computers. Whereas existing Wi-Fi hot spots typically provided high-speed Internet access to areas a few hundred metres across, municipal Wi-Fi networks were expected to offer wireless Internet access across an entire city by wirelessly linking thousands of individual hot spots and then feeding the data through conventional fibre-optic cables to reach the Internet.

      Some of the planned municipal networks stirred up controversy, however. In San Francisco, where Google and EarthLink had been selected to build the municipal wireless network, there were concerns about a plan to offer two-tiered service. Under this plan Google would provide a free but relatively slow 300,000-bits-per-second service, while EarthLink would provide a connection that was several times faster for about $20 a month. The plan was controversial because users of the free network would be forced to view on-screen advertising and because Google planned to track their Web browsing in order to show them relevant advertising.

      Meanwhile, cellular telephone companies tried to remain competitive with new Wi-Fi networks by extending the capacity of their own services, which besides voice calls included Internet access, transmission of e-mail and digital photos, and downloading of music, games, video clips, and cellular telephone ring tones. As a result, the cellular telephone companies bid heavily in a U.S. government auction held in August–September for an unused portion of the public airwaves in the radio-frequency spectrum. In the biggest auction of its kind since 1994, the purchasers of the 1,087 government airwave licenses paid a total of $13.9 billion for the exclusive use of specific wireless-transmission frequencies in certain geographic regions. The two top bidders were the cellular telephone companies T-Mobile USA, owned by Germany's Deutsche Telekom, and Verizon Wireless. The new wireless licenses were expected to give the cellular companies a boost in marketing what were called third-generation, or 3G, data networks, which served not only cellular telephones but also other devices equipped with wireless capability, such as handheld personal digital assistants (PDAs), portable game machines, and laptop computers.

Computer Security and Crime.

      By some estimates the personal records of about 73 million people in the U.S. were accidentally disclosed, lost, or stolen in 2006. In one high-profile case, a burglary at the home of an employee of the U.S. Department of Veterans Affairs resulted in the theft of a computer that contained personal data on more than 26 million current and former members of the U.S. military. The computer was later recovered, its data apparently untouched by the thieves, who had not realized what they had taken. There were fears that millions of other people might not be so lucky, however. In many cases the lost information included credit-card and Social Security numbers, which fueled concerns that stolen information could lead to widespread consumer fraud. In an 18-month period during 2005–06, well over 200 different security breaches at companies and government agencies were reported. As a result, credit-card issuers tried to reduce their vulnerability by pressuring companies that handled credit-card transactions to comply with strict new credit-card security standards that were backed by Visa and MasterCard. As the year ended, it appeared that identity theft had not risen to the level suggested by the amount of personal information that had been compromised, but there was no way to know whether identity thieves were simply biding their time before they used the information to steal money through bank or credit-card accounts.

      Perpetrators of identity theft who had been caught recounted the ease with which they cashed in on stolen information. Thieves typically stole identity information when it was inadvertently disclosed or through “ phishing” schemes, in which they used e-mail to persuade people to submit a credit-card number or other personal information to a fake Web page that pretended to represent a real business. Using a stolen credit-card number, the thieves then transferred money to themselves from a victim's account or purchased goods by using the victim's identity. The scope of the theft efforts was huge; in a single month more than 17,000 phishing attacks were reported to volunteer groups trying to prevent identity theft.

      A federal government crackdown on Web sites that sold records of individuals' private phone calls—data that had apparently been gathered illicitly—led to more than 20 Web sites' going out of business. Fears of identity theft, combined with concerns about personal privacy, led to changes in the way corporations and government agencies handled personal information. Time Warner's AOL apologized for having turned over to Internet researchers a list of individual Web searches gathered from more than 650,000 anonymous members. Complaints had been raised that the list was so detailed that it could be used to identify individual persons from the searches that they had made.

      Another security threat came from zombies, computers that had been surreptitiously taken over by hackers to respond to commands via the Internet. Groups of such machines (popularly called zombie armies, or botnets) were being used to send spam (unwanted commercial e-mail) or launch denial-of-service attacks (computerized attacks in which a Web site is bombarded with data that paralyze it). Denial-of-service attacks often were intended to force Web-site owners to pay protection fees to the hackers. The advertising Web site MillionDollarHomepage.com reported that hackers had demanded $50,000 to halt their denial-of-service attack against the site.

       Microsoft continued to be plagued by security problems, and it regularly issued critical software patches for its operating systems (OS) and other software products to prevent them from being exploited by hackers. In October it issued patches for 26 flaws, including 15 that were labeled “critical,” which meant that if the patch was not installed, a hacker could potentially use the software vulnerability to take over a PC without any action on the part of the computer user. This situation was much different from the threat posed by computer viruses, which required that the computer user do something—such as click on an e-mail attachment—to set them in motion. In an unusual move, Microsoft tried to block preemptively any security flaws in its new Windows Vista operating system, which was being completed for release. The company issued what amounted to an open invitation to a group of about 3,000 computer security professionals to break into Vista in any way they could as a way of uncovering flaws before the product was shipped to customers. Microsoft said that Vista was the first product to be completely developed under the firm's “secure development life cycle” program, which required Microsoft software designers to consider how new features might be misused by a hacker.

      Microsoft was not alone in battling hackers who tried to exploit security holes in software. Analysts projected that 2006 would be a record year for the reported number of software vulnerabilities from all companies. A group of experts at Atlanta-based Internet Security Systems estimated that software vulnerabilities for 2006 would total 7,500, up from nearly 5,200 in 2005, but projected that in 2006 the percentage of critical software flaws would be reduced to 17%, compared with about 29% in 2005.

      Consumers paid a large price for the Internet's various unsolicited problems, such as viruses, spam, phishing scams, and spyware (programs that monitored computer use and reported it to others over the Internet). A survey by Consumer Reports magazine said that consumers had paid up to $7.8 billion in 2004–05 to fix or replace computers afflicted with such problems. At the top of the list were viruses, which cost consumers $5.2 billion during the period. Consumers also were warned about the growing threat from “keyloggers,” malicious programs that were sometimes hidden inside legitimate programs that were downloaded from the Internet. Keyloggers recorded all keystrokes on a computer and secretly reported them back to a waiting party on the Internet. By this method passwords, credit-card numbers, and other important information that was routinely typed could be recorded and stolen.

      Although most hackers remained unidentified, a few were caught. A British hacker accused of illegally tapping into nearly 100 government computers, many of them belonging to the U.S. military, was to be extradited to the U.S. after having been arrested in Britain. A Florida man was sentenced to eight years in prison for having stolen more than 4,700 computer files from data-management firm Acxiom Corp.; the files contained names, phone numbers, and street and e-mail addresses.

      The U.S. government cracked down on online gambling—an Internet activity considered legal in many parts of the world but not in the U.S. There were an estimated 2,500 online gambling operations, nearly all of them based outside the U.S., and the crackdown came when about one-half of the $12 billion annually spent worldwide on Internet betting originated in the U.S. Because of online gambling's international nature, many doubted that the U.S. could control it, but the enforcement efforts appeared to frighten investors away from the stocks of Internet gambling firms. In July U.S. officials arrested the chief executive of BetOnSports, David Carruthers, while he was awaiting a connecting flight in the U.S. Carruthers, whose high-profile gambling firm was publicly traded in the United Kingdom, was charged with racketeering and conspiracy. Government prosecutors said that BetOnSports should not be allowed to accept bets from U.S. customers, and within two days the company had suspended its online gambling operations. In October the U.S. Congress passed legislation that forbade banks and credit-card firms to make payments to online gambling businesses.

Companies.

       Hewlett Packard (HP) forced the resignation in September of its chairperson, Patricia Dunn, in connection with a corporate spying scandal, and members of the HP management team were called before the U.S. House of Representatives to explain their actions in relation to the scandal and endure scathing criticism. CEO Mark Hurd apologized for HP's actions, saying that they had been out of character for the company and incompatible with its values. The issue began when leaks about discussions by the HP board of directors began to surface in the news media. The detectives who were hired by HP to investigate the leaks matched phone-call records of news reporters and HP board members and subsequently identified the source of the leaks as board member George Keyworth II, who subsequently resigned. A firestorm of controversy erupted when it was revealed that investigators had used pretexting, a technique in which a caller would pretend to be someone in order to obtain that person's records. It was under Dunn that the company's questionable tactics gained attention, and the California attorney general filed felony charges against Dunn and four other current or former HP employees for their alleged roles in the spying investigation.

      Google spent large sums to secure what appeared to be significant marketing advantages. In August it announced that it would pay $900 million over three and a half years for the right to sell ads on MySpace.com. Yahoo reportedly had also been interested in the deal. In March Google launched finance.google.com, a financial Web site that was designed to compete with similar offerings from Microsoft and Yahoo. Among other new Web-based services, Google launched a test version of what was called Google Spreadsheets, software that could read and create the type of spreadsheet data files used by Microsoft's Excel software. Google planned to spend more than $1.5 billion in 2006 on new technology and facilities, including huge computing centres in Oregon.

      Google also set up an unusual for-profit philanthropy arm, called Google.org, and funded it with about $1 billion. As a for-profit entity, Google.org would be able to provide money for start-up firms or form partnerships with an eye toward advancing a social agenda, including efforts to combat poverty, disease, and other international problems.

      Google's advertising was the target of a suit that alleged that the company overcharged thousands of advertisers for sales leads through an activity called click fraud. Click fraud occurred when users clicked repeatedly on Web-page advertising links without buying anything. The extra clicking drove up costs for the company that sponsored the links, since it had to pay for the placement of the advertising on the basis of the number of clicks. Google paid $90 million to settle the suit.

      The war between long-dominant PC- chip firm Intel and competitor Advanced Micro Devices (AMD) continued both in the marketplace and in regulatory proceedings in Europe. Intel had been losing market share as AMD produced a series of competitive chip products. At midyear, analysts said that Intel's share of the basic chips that powered consumer and business computers had dropped from 82% to 73% over the previous year, while AMD's share had increased from 16% to 22%. Intel tried to fight back by introducing new chips that would consume less power while providing better performance. In September, however, Intel said that it would cut its workforce by 10%, or 10,500 jobs, and reduce its costs by $5 billion. Analysts said that the moves were crucial to Intel's efforts to regain its market share. Meanwhile, the European Commission's five-year investigation of Intel's alleged antitrust violations continued. In late 2006 the commission took over a separate German investigation into whether Intel was pressuring a large computer retailer to stock only PCs that used Intel chips.

      The growth of Apple Computer continued to be fueled by the iPod digital music player, which in turn benefited from Apple's dominance in online music sales through its iTunes service. Analysts said that the iPod held 78% of the U.S. digital music player market and that iTunes sold 87% of all the online music sold in the U.S. In sharp contrast, Apple's share of the U.S. personal computer market remained at less than 5%. In an effort to attract more customers, Apple developed software that allowed its Macintosh personal computers that used Intel chips to run Microsoft's Windows XP operating system. Users could choose to run either the Apple or Microsoft operating system each time they turned on the computer.

      Apple was beset with complaints of unfair competition. Regulators in Denmark, Norway, and Sweden maintained that Apple's policy of preventing other digital music players from being able to play songs bought online from the iTunes music store violated local laws in those countries. Apple said that the regulators were exceeding their authority and that it was not willing to change its policy. (Apple also noted that consumers could easily get around its limitations by first burning an iTunes song to a compact disc and then transferring the song to a non-iPod music player.) The same issue resulted in France's passing a law that required Apple and other companies to share technical information to overcome the copy-protection systems that made their digital music products incompatible with each other. The law's impact was unclear, however, because it had yet to be interpreted by French courts.

      Apple faced competition from Microsoft, whose new Zune digital music player was to vie for customers' attention and help launch Microsoft's online music store, the Zune Marketplace. The Zune included wireless capability that would enable users to share favourite songs, playlists, or pictures with others nearby who also had Zune players—something the iPod could not do. The Zune, made for Microsoft by Toshiba, initially had a 30-gigabyte memory, enough to hold about 7,500 songs.

      Another iPod competitor found itself in legal trouble in 2006 as the Recording Industry Association of America (RIAA) sued XM Satellite Radio for marketing the Inno, a satellite-radio receiver that could also record songs as MP3 digital music files. RIAA said that although consumers were allowed to record songs from traditional radio broadcasts, they should not be allowed to record satellite digital broadcasts because it was too easy to record only selected songs. (The songs recorded on an Inno could not be copied from the player to another medium, such as a computer hard drive or compact disc.)

      In May Apple won a British lawsuit over the use of its apple-shaped logo. The suit was filed by Apple Corps, a company owned by the Beatles, which also used an apple-shaped logo. Apple Corps had argued that Apple Computer's use of an applelike logo for iTunes violated a 1991 agreement in which each company had agreed not to enter the other's business.

      The backdating of options was a serious issue at a number of computer companies, including Apple and McAfee, an antivirus software firm. Apple admitted that it had backdated some stock options granted to employees from 1997 to 2002 as a way to inflate their value. As a result, Apple said that it probably would have to restate some of its past revenue and earnings reports but had not determined how much money was involved or for what period of time. McAfee, which was also investing stock options accounting problems related to backdating, fired its president and said that its CEO would retire. Its accounting problems were expected to force the company to restate previous earnings and revenue reports.

      Microsoft and the European Union continued their long-running antitrust dispute that was centred on whether Microsoft had failed to meet the terms of a 2004 antitrust ruling against the company in regard to the Windows XP OS. The EU fined Microsoft $357 million in 2006, an amount that was in addition to an earlier $613 million antitrust fine. The EU also warned Microsoft that its new Windows Vista OS, which was designed to replace Windows XP, might violate the same antitrust laws involved in the 2004 antitrust case. Microsoft said that it was responding to EU concerns about the new operating system.

      In a decision that had big implications for 2006 holiday sales of PCs, Microsoft delayed the introduction of Windows Vista until January 2007. Analysts said that the decision hurt retailers, who had been counting on Vista to deliver a burst of new computer sales in the fourth quarter. Microsoft said that the delay was to help ensure the operating system's security. Some Microsoft competitors said that Vista represented unfair competition. Antivirus software firms Symantec and McAfee complained that in a significant change from earlier versions of Windows, Vista was designed to prevent competitors' software from communicating with the central part of the OS, called the kernel. The two companies complained that the change made it more difficult for Symantec and McAfee to offer competitive security products, but Microsoft said that it had restricted access to the kernel to help protect Windows users from malicious software on the Internet.

       Bill Gates, one of the most familiar names in computer technology, said that he would leave his operational role at Microsoft in two years to devote time to the Bill and Melinda Gates Foundation, the world's largest philanthropic organization. Gates, 50, said that he would continue to be Microsoft's chairman and keep his stock holdings in the business that he cofounded with Paul Allen in 1975. Gates remained Microsoft's largest shareholder, with about 10% of the stock. (See Biographies (Gates, Bill and Melinda ).)

       Sony Corp. suffered a financial setback when a potential safety hazard forced it to recall as many as 9.6 million lithium-ion laptop computer batteries that it had made for several computer manufacturers as well as for its own products. Dell said that it was recalling 4.2 million of the laptop battery units, and Lenovo and IBM jointly said that they were recalling more than 500,000. Apple recalled 1.8 million, and Toshiba recalled 830,000. The battery recall caught the public's attention when a few laptop computers were reported to have caught fire spontaneously as the result of battery malfunction.

      Research in Motion Ltd. settled a patent-infringement lawsuit in which adverse rulings threatened to force the shutdown of its service to 3.2 million American users of the BlackBerry handheld wireless e-mail device. The $612.5 million settlement with NTP Inc. ended a nearly five-year dispute. American businesses that relied on the Blackberry were relieved, but some questioned whether the size of the settlement would spur the filing of more patent-infringement suits.

Mergers and Acquisitions.

 Google continued to grow two years after it went public and became a stock-market phenomenon. Its expansion was fueled largely by keyword-based Web advertising, which provided it with a sound footing to compete with Microsoft and Yahoo for dominance in new Web services such as the delivery of video content. Signs of this competition were visible when Google said that it would buy YouTube—the popular Web site where consumers could post, watch, and comment upon personal and commercial videos—for $1.65 billion in stock after Yahoo had earlier been in negotiations to buy the company. The large sum paid for YouTube, which had been founded only the year before and was unprofitable, caused some to wonder whether the price of Internet companies was once again climbing beyond reasonable bounds as it had during the dot-com boom of the late 1990s. That boom ended in 2000 and resulted in a sharp decline in the stock-market valuation of Internet-based companies. There were also questions about how Google would cope with the potential for copyright-infringement lawsuits over the copyrighted content that some consumers included in their homemade videos without permission. To reduce that risk, YouTube negotiated deals with a number of entertainment companies that would allow copyrighted video material to appear on its Web site and give YouTube users the right to include certain copyrighted songs in their videos. It also agreed to remove tens of thousands of copyrighted video files from its Web site.

       Freescale Semiconductor, which unlike YouTube had a long history and profitability to justify a high price, was acquired for $17.7 billion as part of the largest leveraged buyout in the history of the technology industry. Leveraged buyouts were acquisitions done largely with borrowed money. Under the terms of the deal, Freescale, whose stock had been publicly traded, became a private company. The acquirer, Firestone Holdings LLC, was made up of the Blackstone Group, the Carlyle Group, some funds associated with Permira Advisers LLC, and Texas Pacific Group.

      In other acquisitions, AMD paid $5.4 billion for ATI Technologies, a manufacturer of graphics chips. Motorola acquired Symbol Technologies, a manufacturer of computerized scanners and wireless technology, for $3.9 billion. IBM went on a shopping trip in 2006, buying document-management software firm FileNet Corp. for $1.6 billion, network-monitoring firm Internet Security Systems Inc. for $1.3 billion, and asset-tracking firm MRO Software Inc. for $740 million.

The Internet.

      Dial-up Internet customers continued to shift to broadband service for faster Internet connections. The entry-level broadband service offered by telephone and cable television companies cost as little as $15 per month in some parts of the U.S., a price comparable to that charged by some dial-up services. As a result of the shift, dial-up Internet provider AOL had watched its base of dial-up service subscribers decline from nearly 27 million in 2002 to 17.7 million by 2006. In an effort to reposition itself, AOL no longer sought to be the premier provider of dial-up service and instead tried to become a free, advertising-supported Internet portal like Yahoo and Google. AOL offered its customers two approaches: they could still pay for dial-up Internet access from AOL, or they could pay for Internet access from another company and still access many AOL features for free. As part of the plan, AOL said that it would begin to give away features, such as its familiar e-mail accounts and its parental controls for regulating children's Internet usage, that had previously been available exclusively to subscribers.

      There was no resolution in the dispute over U.S. policy concerning net neutrality—the principle that, among other things, network providers should be required to treat all broadband consumers equally instead of charging some consumers higher prices for using more bandwidth (data-carrying capacity). Proponents of a U.S. net-neutrality law favoured the idea of prohibiting broadband Internet service providers from offering differently priced tiers of service to online content or software providers on the basis of their Internet use. Opponents questioned whether cable and phone companies could afford to invest in advanced security or transmission services if they could not charge a premium for them. In general, big Internet providers of content and software supported net neutrality, while the cable television and telephone companies were against it. The dispute was not likely to be decided until sometime in 2007, when Congress was expected to overhaul the U.S. telecommunications laws.

      A study of Internet access showed a narrowing of the digital divide in Internet usage between different racial and ethnic segments of American society. The survey of people 18 and older showed that 74% of whites, 61% of African Americans, and 80% of English-speaking Hispanics used the Internet. Those figures showed far less disparity than a similar survey had shown in 1998, when the numbers were 42% of whites, 23% of African Americans, and 40% of English-speaking Hispanics.

      Some blogs (a shortened form of Web logs) gained fame as entertainment and gossip sources. Time magazine named the Drudge Report founder Matt Drudge and the Huffington Post founder Arianna Huffington among America's 100 most influential people. Social-networking Web site MySpace, acquired in 2005 by Rupert Murdoch's News Corp., also became a well-known Internet brand. According to one Web-traffic-measuring service, MySpace had become one of the five most popular Web sites in the world.

      The Internet proved to be a powerful political tool in U.S. elections in 2006. Candidates used it to raise money, disseminate their views, and mobilize their political bases. Both Democrats and Republicans used Web sites to raise hundreds of thousands of dollars in funding, and e-mail became the new avenue for direct-mail campaigns to potential supporters. Blogs played a dramatic role in kindling voter support, particularly for underdog candidates such as Ned Lamont, who won Connecticut's Democratic primary for a U.S. Senate seat.

      In February ) (Barton, Richard N. ), creator of the travel Web site Expedia.com, introduced a new Web site called Zillow.com, which provided sales information and building details for tens of millions of homes in the U.S. Using publicly available information, which varied by location, Zillow also provided free estimates of home valuations. Although the accuracy of the information was called into question—most notably by a national economic justice organization called the National Community Reinvestment Coalition—the site proved popular among Internet users.

E-Commerce.

      Online digital- music sales continued to surge, with about 6% of all music purchases being made online. One music-industry study said that annual online sales had reached $1.1 billion by the beginning of 2006 as consumers purchased music to be played on computers, portable digital music players, and cellular telephones that had music-playing capability. About 60% of the revenue came from online purchases, and about 40% came from the sale of songs or portions of songs ( ring tones) to mobile phones.

      Fears that Internet music piracy was hurting legitimate sales led the music industry to file lawsuits against individuals around the world. The International Federation of the Phonographic Industry filed a combination of 8,000 criminal and civil lawsuits against persons in 17 countries for illegally sharing copyrighted music online. The federation said that it had sued people who uploaded songs to unauthorized online file-sharing services, including BitTorrent, DirectConnect, eDonkey, Gnutella, Limewire, SoulSeek, and WinMX. Illegal music-sharing service Kazaa changed from pirate to legitimate online music seller as a result of an out-of-court settlement between its owner, Sharman Networks, and record labels EMI Group, Sony BMG Music Entertainment, Universal Music, and Warner Music. The deal, valued at more than $100 million, ended music industry lawsuits against Kazaa for facilitating the exchange of copyrighted music and set the stage for Kazaa to use its peer-to-peer technology to sell rather than share music.

      Another of the music industry's concerns was the low-priced Russian online music service AllofMP3, based in Moscow. AllofMP3 stated that it was operating within Russian copyright law, but the U.S. Commerce Department claimed that it was the world's biggest online marketer of pirated songs, and Visa International halted credit-card transactions with the Web site because of alleged copyright violations. AllofMP3 said that it paid music artists by giving a portion of its revenue to the Russian Multimedia and Internet Society, but several international music industry organizations said that the Russian group was not authorized to act on their behalf. Although Russian officials said they would restrict AllofMP3.com, little action appeared to have been taken by year's end. In late December several music-industry companies filed a federal lawsuit in New York City that accused the company behind AllofMP3, Moscow-based Mediaservices, of selling copyrighted music without paying the music companies. The suit was intended to force the surrender of the service's Web-site address, which would shut down its operations.

       India, home to many information-technology outsourcing companies that provided help-desk or other support via Internet or telephone connections, faced a shortage of qualified technical workers. Although the country produced 400,000 engineers annually, a study showed that only 25% of them had key skills such as technical competency, the ability to work in groups, and the ability to speak English well.

      The U.S. television networks began using the Internet as a marketing vehicle for current prime-time shows by streaming video of new episodes shortly after they aired on television. The video, which often included advertising, was free to watch but could not be recorded. In a few cases the online episodes were sold as downloads through Apple's iTunes store. The television networks hoped to learn how much advertising revenue could be generated by presenting television episodes online and how the online episodes would affect the syndication of shows for reruns on television.

      For-profit online education got a financial boost when the U.S. Congress revised the law that governed federal student aid. New legislation eliminated a requirement that colleges provide at least one-half of their classes on a campus instead of online in order to qualify for student aid. The change was expected to benefit primarily several dozen Internet-only universities that were private for-profit businesses.

      Some e-commerce experts believed that advertising-supported Web sites based on wikis—collaborative Web sites with free content that was created and modified by its users—would be the next successful online business model. Of the several wiki creations that had surfaced, the Web-tracking service Nielsen/NetRatings said that none proved as popular with consumers as Wikipedia, an online encyclopaedia headed by Jimmy Wales. The Gartner Group, a technology consulting firm, predicted that one-half of all corporations would use a wiki for internal communication or collaboration by 2009.

Computer Games.

 Video games continued to grow in popularity. One poll showed that 40% of adults in the U.S. played video games on either a special-purpose game console or a personal computer. Among those who played video games, 45% played online games, some of which allowed thousands of people to play simultaneously. (See Sidebar. (Virtual World of Online Gaming ))

      The video-game industry eagerly welcomed the late 2006 debut of Sony's PlayStation 3 and Nintendo's Wii. Like Microsoft's previously introduced Xbox 360, they represented the next generation of game consoles that were aimed at fueling a new round of growth for the $30-billion-a-year video-game industry. By October American sales of video-game software alone were on track to rise 11% for 2006, a sharp improvement from earlier in the year, when they were projected to be either flat or down as much as 5%. Video-game sales were helped in 2006 by the continuing appeal of Sony's PlayStation 2, which by late in the year had shipped 106 million units worldwide, more than any other game console.

New Technology.

      The ongoing application of new digital technology had led to the development and marketing of a wide array of digital consumer electronic devices—especially for communication, entertainment, and photography. (See Business: Special Report (Digital Consumer Electronics Boom ).)

      Apple joined the crowd of companies trying to create the “digital living room,” where content would flow from one device to another over a wireless network. Apple's iTV, which was to be commercially introduced in 2007, would wirelessly stream video and music from the Internet or one of the company's computers to a living room television receiver. Microsoft's Xbox 360 and Sony's PlayStation 2, both of which used television receivers, already had the capability of connecting to the Internet for online games. Some PC makers were also interested in technology that would move information from the computer to TV equipment.

      The use of automobile computer technology continued to expand into the automotive industry, which already offered cars with electronic warning systems to detect obstacles while parking, electronic navigation systems, and video screens for movies. In 2006 the automobile industry was experimenting with building cars with connection points for portable digital music players or laptop computers and providing Wi-Fi capability for Internet access within range of a Wi-Fi hot-spot antenna.

      Some experts said that the IBM Cell processor in Sony's PlayStation 3 could be used for computing tasks other than video games. Given the chip's graphics capabilities, IBM said that it could be used in cellular phones, handheld video players, and high-definition television receivers. Beyond consumer gadgets, the Cell processor might be used to help design cars, build supercomputers, or create extremely detailed medical imaging of the human body.

      Researchers at Intel and the University of California said that they had created a silicon chip capable of producing a laser beam. This was seen as the first step in the eventual development of products for faster computers and data transmission in which computer chips would use light instead of electrical signals to communicate with each other.

      A new technology called “ perpendicular recording,” which sharply increased the amount of data that could be stored on a hard-disk drive, debuted in PCs. By recording bits of data vertically rather than horizontally on the disk surface, drive manufacturers overcame the storage-capacity limit of conventional drives that resulted from the magnetic interference between segments of data recorded too close together. Initially the perpendicular recording technology was being used to increase disk-storage capacity by one-third, but it was expected to boost storage capacity to 10 times that of conventional hard-disk drives within several years.

Steve Alexander

▪ 2006

Introduction

These are a few of the things computer people were talking about in 2005: PHISHING, CLICK FRAUD, ZOMBIES, DARKNETS, MASHUPS, DUAL CORES, HOTSPOTS, and TEXTING.

      In 2005 people were the most wirelessly connected ever. Cellular phones were the most common electronic gadget in the world, with about 700 million expected to be sold globally in 2005. According to research firm Gartner Inc., annual sales were expected to climb to one billion cellular phones by 2009, which meant that 40% of the world's population would be using cellular phones. Adding to the appeal of the phones were features that also made them function as digital cameras or digital music players. They were also widely used as text-messaging devices. (See Sidebar (Text Messaging: WAN2TLK? ).)

      In another sign of things to come, it appeared that technology jobs were losing their lustre as demand for programmers declined. Some experts forecast a 30% decline worldwide in technology jobs by 2010. In the United States workers grew wary of seeking careers in engineering as corporate outsourcing sent tens of thousands of such jobs to other countries where wages were lower. Gartner predicted that as many as 15% of high-technology workers would leave that job category by the end of the decade, not including reductions due to natural attrition.

Computer Security and Crime.

       Identity theft was a growing Internet problem during 2005. Computer hackers had grown adept at stealing credit-card numbers and associated personal information from e-commerce businesses and financial institutions and then selling that data online. The U.S. Federal Trade Commission (FTC) estimated that such theft cost American consumers $5 billion and American business $48 billion each year.

      There was an increase in reported breaches of security in commerce and banking Web sites, although the rise appeared to be related to new U.S. government rules that required federal banks, state-chartered banks, and savings-and-loan institutions to tell customers if their personal information had been compromised and subject to misuse. The Bank of America introduced a new security system for online banking in an attempt to recover from some embarrassing security failures. In February the bank revealed that it had lost computer tapes that contained the personal information of some 1.2 million employees of the U.S. government, and in May the Bank of America and Wachovia had to alert more than 100,000 customers after nine persons, including seven bank employees, were charged with trying to steal financial information belonging to customers. Another security breach was reported by MasterCard International, which disclosed that 40 million credit-card and debit-card numbers had possibly been obtained by someone outside the company who had gained access to the information via a firm that processed credit-card transactions. Clothing retailer Polo Ralph Lauren suffered data theft that might have affected 180,000 persons who held General Motors-branded MasterCards. The information-database firm LexisNexis reported that the personal data of 310,000 people may have been revealed inadvertently since early 2003, and competitor ChoicePoint said that fraud perpetrators who posed as businessmen had accessed data from about 145,000 persons.

      Computer security experts blamed the leaks on several things, including the growth of data collection as a business, the poor design of software and security systems, and the lack of corporate oversight. U.S. investigators confirmed that corporations were still reluctant to report security breaches. An annual survey by the FBI and the private Computer Security Institute reported that in 2004 only about 20% of businesses were willing to report computer intrusions, a number that had changed little from previous years. Corporations feared that the disclosure of computer attacks would harm their public image and help their competitors, the FBI said.

      The semiannual Internet Security Threat Report issued by the California-based security firm Symantec said that the motives of hackers appeared to have shifted from engaging in malicious behaviour (such as creating Internet viruses and worms) to seeking monetary gain, primarily through information theft. Such theft often was accomplished by means of “ phishing” or “ spyware.” In phishing a bogus e-mail message was typically used to direct a consumer to a Web site that mimicked the appearance of a familiar bank or e-commerce Web site. Consumers were then asked to “update” or “confirm” their accounts and unwittingly disclosed confidential information such as Social Security numbers or credit-card numbers. Some types of spyware were designed to steal Social Security numbers, passwords, and other private information directly from the computer's hard drive, while others altered the results of Internet searches in order to surreptitiously redirect computer users to a Web site that would infect their PCs with even more spyware. Internet scam artists were willing to pay spyware creators for these tasks, and security-software firm Webroot Software estimated that spyware generated about $2.4 billion in annual revenue for its perpetrators. Companies and law-enforcement agencies tried to fight back with lawsuits. The state of New York sued an Internet marketer for allegedly installing spyware and adware (software that displayed unwanted pop-up advertisements) on consumer PCs. Microsoft filed 117 civil lawsuits that sought to learn the identities of people who were believed to have perpetrated phishing attempts against the customers of its Hotmail e-mail service and MSN Internet service.

      Internet auction fraud was on the rise in 2005. The FTC annual report stated that complaints of such crimes over the period 2002–04 had nearly doubled. Old-fashioned fraud also prospered on the Web. Hurricane Katrina generated a wave of Internet scams that involved raising money for fake relief efforts. Spam, or junk e-mail, continued to be an enormous problem for e-mail users. Spam made up 69% of all e-mail traffic in mid-2005, up from 50% in 2003. Microsoft said that it had settled a suit it had filed against alleged spam distributor Scott Richter and his Colorado firm, OptInRealBig.com. Richter and the firm agreed to pay Microsoft $7 million.

      A much different kind of fraud troubled some Internet advertisers. Called “ click fraud,” it involved trying to harm Internet advertisers financially by repeatedly clicking on an Internet ad, either manually or by means of a malicious computer program. Such tactics drove up the cost of Internet advertising, since each click required the advertiser to make a payment to the owner of the Web page where the ad appeared. Likely perpetrators were said to be unhappy employees, companies that were trying to boost the ad costs of their rivals, and disreputable Web-site operators seeking to boost their revenues from advertising.

      Internet service providers (ISPs) came under increasing pressure from the computer industry to rid their networks of zombies (computers that had been taken over by hackers for the purpose of launching Web-site attacks or phishing scams). The FTC promised to provide ISPs with reports of zombie PCs on their networks and asked that ISPs quarantine those machines and help customers cleanse them of infections. Some ISPs already offered their customers virus- and spam-filtering services, spyware-detection software, and firewall protection. A few also tried to regulate the outflow of e-mail from their networks in order to limit spam.

      In June the British government said that there had been “industrial-scale” attacks aimed at stealing valuable data from computer networks across Britain and that their origin had not been determined. Over several months the attackers mounted assaults on government and private-sector computer systems in such fields as communications, energy, finance, health, and transportation.

      A German teenager received a suspended sentence in 2005 for having created the Sasser computer worm, which in 2004 caused thousands of computers running Microsoft's Windows 2000 or Windows XP operating systems to crash and also slowed Internet traffic. Sven Jaschan, 19, was found guilty of computer sabotage and illegal alteration of data. The celebrated case of who hacked hotel heiress Paris Hilton's cellular phone appeared solved when a Massachusetts teenager pleaded guilty in the incident. The crime was widely reported because revealing photographs and celebrity contact information from the hacked device were posted online. The 17-year-old perpetrator, who was not identified, was sentenced to 11 months of detention and two years of supervised release without access to the Internet. A British man, Gary McKinnon, was arrested in 2005 for allegedly having hacked into U.S. military computer networks in 2001 and 2002, but he sought to avoid extradition to the United States. Prosecutors said that he had caused $700,000 in damages by illegally gaining access to 97 U.S. government computers, the largest such effort on record.

E-Commerce.

      The issue of levying sales taxes on goods purchased online, which had been largely avoided in the United States for fear of stunting e-commerce, was raised again by a California appeals court decision that found an online bookseller liable for taxes for portions of the years 1998 and 1999 because the firm had combined its stores and online subsidiary in the state. In 1992 the U.S. Supreme Court had ruled that online retailers did not have to collect taxes unless the customer was in a state where the retailer had physical operations. The bookseller, Borders, insisted that it was protected under the 1992 ruling because its online operations and California bookstores were run by separate corporate entities. The California court disagreed and said that the two business units had worked together and therefore were not protected under the Supreme Court ruling. The California court decision led states once again to press for changes in the tax law, which they claimed unfairly deprived them of an estimated $15 billion a year in tax revenue on Internet sales.

      Digital music was flourishing in 2005. Digital music players, which were also referred to as digital audio players, seemed to be everywhere, with about 95 million expected to be sold worldwide during the year. Early in 2005 a study showed that 22 million U.S. adults—about 11% of the population—owned a digital music player.

 The iPod digital music player continued to drive Apple Computer's financial performance; the company's profit more than quadrupled, to $430 million, in the fourth quarter of its fiscal year. Analysts were surprised by the continued unit-sales growth for the product. At midyear the iPod accounted for about three-fourths of the digital music players sold in the United States, analysts said. Apple continued to roll out a steady stream of advances, including the iPod Nano players (which were much smaller than previous full-featured iPod models because they used flash memory instead of disk drives), a video iPod that could display music videos or TV shows, and a telephone equipped with Apple's iTunes software, manufactured by Motorola. Apple also settled a class-action suit brought on behalf of an estimated 1.4 million consumers who had battery problems with iPods purchased through May 2004. The settlement gave consumers $50 vouchers for use in purchasing Apple products and extended service warranties.

      The war against music piracy continued. File-sharing Web sites that aided the free trading of copyrighted music files lost key court decisions that left them open to further legal action by the music industry. The U.S. Supreme Court ruled that the creators of the Grokster and Morpheus file-sharing services could be considered liable for contributing to copyright infringement through the trading of copyrighted songs, even if their services had some legal uses. Grokster abruptly shut down in early November as part of a settlement with the recording industry. An Australian court ruled that Kazaa, another free file-sharing network, violated Australian copyright law. The music industry continued its practice of trying to curb online file sharing by suing consumers. By mid-2005 the number of suits filed over several years had reached a cumulative total of nearly 12,000, although many of the lawsuits had not yet been resolved. The research firm Yankee Group estimated that about 5 billion songs were downloaded via free file-sharing services in 2004, whereas authorized online music stores sold about 330 million songs in the same period. Moreover, the music industry's lawsuits were not always successful. Two universities in North Carolina invoked the right to privacy and successfully resisted attempts by the music industry to learn the identities of two students who allegedly shared copyrighted music on the Internet through university networks. North Carolina State University and the University of North Carolina at Chapel Hill said that they did not condone music piracy but that student privacy rights were more important.

      Another threat to the music companies was the development of what were termed “darknets,” a type of peer-to-peer file-sharing network that allowed participants to share information with far more anonymity than other file-sharing networks. The networks linked trusted members of a group and protected their communication with encryption techniques.

      Other efforts were being made to prevent Internet piracy from carrying over into the world of movies. A new U.S. law sought to discourage the illegal trading of motion pictures over the Internet by providing penalties of up to three years in prison for persons who secretly videotaped films in movie theatres. Copies of movies illegally taped in theatres, together with prerelease copies surreptitiously given out by industry insiders, were said to be the chief sources of new films that were available online via file-sharing services. Meanwhile, Hollywood studios prepared to allow consumers to buy and download a wide selection of movies over the Internet, partly because they feared that the proliferation of high-speed Internet connections would increase piracy if there was not a legal alternative.

      An effort by Sony BMG records to protect music CDs from unauthorized copying backfired when the copy-protection software included on the CDs came to be perceived as malicious. When played on the user's PC, the CDs automatically installed software that spied on the user's music-listening habits and opened the PC to computer-virus attacks. Attempts to remove the software left the operating system damaged. Sony offered a software patch, but experts said the patch also created PC security problems. Sony then announced that it would stop using the copy-protection software, remove three million CDs that incorporated the software from store shelves, and recall the two million such CDs that already had been sold.

Governmental Issues.

       Cable TV companies that offered high-speed cable modem Internet access gained a big advantage over their telephone industry rivals. The U.S. Supreme Court ruled that the cable firms did not have to open up their networks to rival ISPs that wanted to reach customers via the cable network. The ruling was based on the idea that cable TV companies provided a high-speed “information service,” which was mostly unregulated by law, whereas telephone companies offered a high-speed “ telecommunications service,” which was regulated. The ruling disappointed consumer groups pressing for more commercial competition in high-speed Internet access and further limited the ability of slower dial-up ISPs to reach a wider audience by purchasing broadband access through the high-speed network of another company.

      Cable TV's Internet rivals, the big telephone companies, also won a big victory when the Federal Communications Commission (FCC) ruled that they no longer had to provide competing ISPs with access to their lines at discounted rates. The FCC said that it believed the move would speed the growth of DSL (digital subscriber line) broadband service by giving telephone companies more incentives to upgrade their networks. Some consumer groups, however, said that the move would limit competition for broadband service and result in higher prices. The FCC said that the rule change would take effect in one year.

      Legal and political action played a large role in determining the direction being taken by computer technology. A preliminary court decision limited the liability of nearly 300 technology companies that went public during the 1990s dot-com boom. The decision had the effect of diverting the wrath of investors who claimed they had been defrauded by the companies toward a group of 55 investment banks that allegedly provided favoured clients with stock from popular initial public stock offerings. Under the arrangement the companies would not have to pay if the investors recovered more than $1 billion from the investment banks. If they recovered less, the companies would have to pay the difference.

       Microsoft continued its long-running fight with the European Union over its antitrust suit. Microsoft was ordered in 2004 to change the way it sold software in European countries and to pay a fine of €497 million (about $613 million), but Microsoft appealed. In 2005, as required, Microsoft introduced a version of Windows that did not include Windows Media Player, a move designed to prevent Microsoft from having an unfair advantage over other companies that sold music and video players for PCs, but Microsoft also filed a lawsuit against the European Commission over the antitrust issues. For its part the European Commission said that it had received new complaints about Microsoft that could result in a new anticompetition case against the software industry giant.

      The Google Print Library Project— Google's plan to digitize the world's library books and put them online—ran into trouble, first from opposition by France and then from lawsuits by authors and publishers who were concerned about copyright infringement that could result from the unauthorized duplication and distribution of book content. French government officials, fearing that their language and culture might take a backseat under the Google plan, said that France should devise its own plan to put library collections online. The Authors Guild, which represented 8,000 writers, filed a class-action suit that alleged copyright infringement; the suit sought an injunction against the Google project and monetary damages. The Association of American Publishers, which represented five book publishers, sued Google and sought an injunction against the project to halt alleged copyright infringement. Google said that although millions of copyrighted books from five large libraries would be digitized, copyright holders could opt out of having their books scanned and, in any event, only a few sentences at a time from any book still under copyright would be viewable by readers on the Internet. No printing or downloading of the books would be allowed.

      The FBI said that it had lost about $104 million on a major computer-system upgrade project that failed and that a replacement computer system would not be ready until the end of 2006. Virtual Case File, an automated case-management system, was to have cost a total of $170 million, but it was abandoned in 2005 after the FBI concluded that it was already outdated and that its performance did not meet expectations. A Department of Justice (DOJ) report said that the computer-technology problems at the FBI could affect national security.

      A federal audit of the controversial E-rate program that funded Internet connections for American schools and libraries found that the $2.25-billion-a-year effort was plagued by fraud and abuse. Investigators blamed some of the schools and libraries that were recipients of the money and some of the companies that provided them with Internet connections. Investigators also said that the FCC failed to provide good oversight for the program's operation.

Companies.

       Google's strong financial results reflected the rapid growth of Internet advertising in general and Google's popularity in particular. The company's third-quarter profits increased 700%, and analysts attributed part of that success to a shift in advertising spending toward the Internet and away from traditional media, including newspapers, magazines, and television. Google also became the most highly valued media company in the world, with a stock-market capitalization of more than $90 billion. A new Google technology effort captured public attention; the Google Earth service allowed people to call up on their PC screens detailed satellite images of major cities and overlay them with information as diverse as street names, crime statistics, or coffee-shop locations. Microsoft later introduced a similar online service called Virtual Earth. Some users of the online satellite images devised “ mashups,” in which they overlaid the images with information of their choosing, such as real-estate prices, movie filming locations, and sites where unidentified flying objects (UFOs) allegedly had been seen. Mashups proved useful to some Hurricane Katrina evacuees, who used their computers to see whether their homes had been damaged by the storm.

       Carleton S. Fiorina resigned as CEO of computer manufacturer Hewlett-Packard after the board of directors asked her to do so. The resignation revolved around problems within Hewlett-Packard in the three years since she successfully completed the company's controversial merger with computer manufacturer Compaq. Among the issues facing the company was an internal debate over whether it should be broken into smaller firms—a move she had opposed—and complaints that her strategies for the company were not being executed well. Fiorina, who had been a high-profile CEO since taking the job in 1999, also was one of the best-known women executives in the U.S., where she was the first woman to head one of the 20 largest publicly owned companies. Under successor CEO Mark Hurd, Hewlett-Packard said that it would lay off 14,500 employees, or about 10% of its workforce, in 2005 and 2006. The company also froze its pension plan for employees not yet vested in it. The two-pronged plan was intended to save the company about $1.9 billion annually beginning in 2007. Meanwhile, Dell, the eponymous PC company founded by Michael Dell (Dell, Michael ) (see Biographies), showed record earnings in early 2005.

       Microsoft settled the last of the big antitrust suits that it faced in the U.S. by agreeing to pay RealNetworks $761 million. Chief among RealNetworks' claims was that Microsoft had used its dominant position in operating systems to promote its free Windows Media Player, which hurt sales of the RealNetworks Real Player software. Earlier in the year, Microsoft had settled claims brought by IBM for $850 million and settled antitrust and other claims brought by Gateway for $150 million over four years. Microsoft had cleared accounts with Sun Microsystems in 2004 and AOL in 2003. Microsoft settled another antitrust suit by agreeing to pay Burst.com $60 million. Burst had sued Microsoft in 2002 over alleged antitrust violations and patent infringement related to Burst's video-playing software; Microsoft had denied the claims. Burst alleged that its technology and trade secrets were improperly used in Microsoft's Windows Media Player.

      Computer-chip manufacturer Advanced Micro Devices (AMD) sued microprocessor industry leader Intel for alleged antitrust violations, including claims that Intel threatened to retaliate against companies that purchased from AMD. Intel denied doing anything wrong and claimed that AMD's problems were of its own making. Both companies remained at the forefront of chip technology, introducing new microprocessors using “dual core” technology, which was designed to combat the problem of heat generated by computer chips inside computers. As the speed of traditional chips increased, their heat output had risen to the point that the need to dissipate it had become a serious problem. The dual-core chips used two processors on a chip, each running at a speed slow enough to keep temperatures manageable.

       Time Warner was poised to pay $2.4 billion to settle a class-action suit based on allegations of fraudulent business practices at AOL, both before and after it merged with Time Warner in 2001. Time Warner earlier had agreed to pay $300 million to the Securities and Exchange Commission to settle civil fraud charges related to the improper inflation of AOL revenues and to pay $150 million to settle an investigation by the DOJ. AOL laid off hundreds of employees and repositioned itself as a group of free Web sites rather than a proprietary online service. Time Warner reportedly was negotiating to sell an interest in AOL to one of three suitors, Google, Microsoft, or Yahoo! All were interested in the 112 million unique monthly visitors that AOL could bring to their advertising-supported Web sites.

       IBM showed improved earnings while it completed the sale of its PC business to Lenovo of China, settled an antitrust case it had filed against Microsoft, and laid off 13,000 employees, most of them in Europe. Analysts believed that the company's stronger financial results showed that corporate spending on information technology, which had been in a lull, was increasing slowly. IBM also bought software company Ascential Software for $1.1 billion; Ascential's software helped organize large quantities of raw data for business customers.

      Apple dropped IBM and Freescale Semiconductor as its longtime suppliers of the computer chips used in Macintosh computers in favour of Intel, whose microprocessors were also used in Windows-based computers. Amazon.com, with an eye on the popularity of downloaded music, said that it would download short literary works to online customers for 49 cents each. The book industry was divided over whether the downloads, called Amazon Shorts, posed a threat or boon to traditional publishers.

      Howard Stringer (Stringer, Howard ) (see Biographies), Sony's new CEO and its first top executive from outside Japan, promised to improve the firm's electronics division, which had been badly hurt by competing consumer electronics products, including Apple's iPod music player, and by declining prices for items such as digital cameras. The electronics business contributed about two-thirds of Sony's revenue. When Apple introduced new iPod models late in the year, Sony said that it intended to challenge Apple's dominance in digital music players. Sony also announced it would eliminate 10,000 jobs as part of a reorganization, however, and that it expected to lose about $90 million in the fiscal year ending in March 2006. Sony had earlier predicted a profit of $90 million.

Mergers and Acquisitions.

       Oracle bought Siebel Systems, which made software for managing customer relationships, for $5.85 billion. It was part of Oracle's continuing effort to be a consolidator in the business software market; Oracle said that the Siebel acquisition would make it the world's leader in that field. Oracle's biggest rival was the German business software company SAP. The relatively quiet acquisition of Siebel was less than a year after Oracle's year-and-a-half pursuit and hostile takeover of business software firm PeopleSoft for $10.3 billion. Early in 2005 Oracle outbid SAP for Retek, a retail-oriented business software maker, for which Oracle paid $643.3 million.

      Sun Microsystems acquired Storage Technology for $4.1 billion in cash. Analysts said that Sun was trying to revitalize its business by strengthening its storage capabilities, which was likely to please corporate customers concerned about the long-term storage and security of data. Sun's revenue had reached a peak in 2001 and had lost money the next three years on diminished revenues.

      Adobe Systems, creator of the Acrobat document-and-graphics software, acquired Macromedia, a multimedia firm, for $3.4 billion in stock. The deal promised a combined firm with both document-sharing and Web-design capabilities.

      There was a consolidation in the online brokerage business as online trading continued a two-year decline. Ameritrade bought TD Waterhouse for an estimated $3 billion. E*Trade Financial Corp. paid $700 million in cash for competitor Harrisdirect. The deals were made in the belief that size would be a key factor in determining which companies prospered.

      In an unusual purchase of a technology firm by private investors, Agilent Technologies sold its semiconductor business for $2.66 billion to two equity companies, Kohlberg Kravis Roberts and Silver Lake Partners. At the same time, Agilent, itself a spin-off from Hewlett-Packard five years earlier, said that it would spin off its chip-testing operations as two companies in 2006.

       EBay bought Internet phone company Skype Technologies of Luxembourg for about $2.6 billion in cash and stock, although that amount could rise based on performance, the companies said. Skype software users could talk over the Internet for free, using their PCs instead of phones. The company also offered a premium service that allowed PC users to make calls to and receive calls from traditional telephones. EBay made the acquisition after Google, Microsoft, and Yahoo! began to offer online phone-calling services.

       IAC/InterActiveCorp, the owner of travel Web site Expedia as well as television's Home Shopping Network, bought search engine company Ask Jeeves for $1.85 billion. While most search engine Web sites searched for key words or phrases, Ask Jeeves was designed to search for answers to specific questions.

       DoubleClick, an Internet marketing firm, was acquired for $1.1 billion by Hellman & Friedman LLC, a firm that specialized in buying out media companies. Despite a sharp increase in spending for online advertising, competition between firms that provided Internet ads to Web sites had driven down prices and left DoubleClick in a commodity market, some analysts said.

The Internet.

      In 2005 the United States insisted that it would indefinitely retain control of a group of Internet “root servers,” which acted as traffic directors for PCs navigating the Web. The move was a departure from previous U.S. policy and came at a time when many nations favoured putting an international body in charge of overseeing the root servers. The U.S. government said that its decision was both a response to security threats and a way of ensuring Internet dependability for communications and business, but some countries believed that the United States was improperly tightening its grip on the Internet. In the end an international forum was created to discuss Internet issues, but the U.S. remained in control of the Internet's address system.

      A resolution was reached in a long-running dispute between the Internet Corporation for Assigned Names and Numbers (ICANN), an Internet oversight group, and VeriSign, the company whose computers controlled much of the flow of traffic destined for Internet addresses that ended in “.com” and “.net.” VeriSign in 2003 created a service that provided Web surfers who misspelled an Internet address with suggestions about what they might have intended to type. Because VeriSign sometimes profited from directing traffic to some of the Web sites it suggested, ICANN pressured the company to halt the service. VeriSign then sued ICANN on the grounds of business interference. ICANN and VeriSign reached a settlement that extended VeriSign's control of the “.com” addresses an extra five years beyond the existing 2007 contract expiration date but gave ICANN the right to review new services that might affect the Internet's address system.

       Bloggers, persons who published personal opinions at their own Internet addresses, continued to gain more recognition and, in some cases, instant fame. A number of bloggers became self-appointed public watchdogs, and a few were credited with precipitating the resignations of prominent persons in the mainstream news media, such as Dan Rather, who quit the CBS Evening News several months after bloggers exposed flaws in a major news story that he had reported. Some observers, however, feared that blogs (a shortened form of the words Web logs) gave individuals the power of the press without the accompanying accountability for accuracy and fairness. Some blog-oriented businesses that specialized in “social networking” became hugely successful. MySpace.com, begun in 2003 as a social network in which members could share their likes and dislikes about popular music, attracted more than 30 million members, many of them aged 14 to 20. In 2005 the Internet traffic of MySpace rose 840% over the previous year, and News Corp. acquired MySpace's parent company, Intermix Media, for about $580 million.

      High-speed Internet access, also called broadband, continued to spread and grow in popularity. The extent to which broadband had become established in a country was viewed by some as a measurement of the country's preparedness for the future. South Korea ranked first in broadband use as a percentage of its population, whereas the United States ranked 12th, according to the Organisation for Economic Co-operation and Development. In terms of the number of broadband users, however, the United States ranked first and South Korea was third. In the U.S., broadband service was not evenly distributed, and because of costs the rollout of broadband service sometimes skipped over areas that were too lightly populated, too distant from network equipment, or—some charged—too poor to afford the service. A few large U.S. cities planned their own broadband networks to make certain their entire population would be served. Philadelphia sought to construct a network using Wi-Fi, or wireless fidelity technology, to cover the entire city (350 sq km [135 sq mi]) with wireless broadband service. In San Francisco the establishment of a city wireless Internet network was opposed by commercial broadband providers—telephone and cable TV companies. Broadband services that transmitted data signals over electrical power lines became available in a small number of U.S. cities, but questions remained whether that form of broadband service would be economically viable.

      Wi-Fi hotspots, which functioned as short-range wireless links to a broadband Internet connection, proliferated in coffee shops, bookstores, hotels, and airports. Some hotspots offered free connections; others required a payment. The business of providing Wi-Fi for a fee proved to be less profitable than originally thought, and many commercial providers who sought to charge consumers for Wi-Fi underwent a consolidation. Security software firm McAfee acquired Wireless Security; networking firm Cisco Systems bought Wi-Fi firm Airespace; and electronics giant Siemens AG acquired Chantry Networks.

Computer Games.

 The game industry prepared for the next generation of video-game consoles. Microsoft's new Xbox 360 debuted in late 2005, but the competing Sony PlayStation 3 and Nintendo Revolution consoles were not expected to reach consumers until mid-2006. Microsoft hoped to pull ahead of Sony by introducing its game console earlier; in the previous generation of consoles, the Sony PlayStation 2 outsold the Microsoft Xbox nearly four to one, with Nintendo's GameCube coming in third. In the handheld video-game market, the Nintendo DS and various Game Boy models from Nintendo got some competition from Sony's new handheld unit, the PlayStation Portable, which was dubbed the PSP.

      Grand Theft Auto: San Andreas, the latest in a series of controversial video games known for their casual attitude toward violence, had its rating changed from “mature” to “adults only” after a controversy erupted over sexually oriented material that was found hidden in the game's code. (Games rated “mature” could be purchased by those 17 or older; games rated “adults only” could be purchased only by persons 18 or older.) Hackers discovered they could unlock hidden animated sex scenes that had been part of the game during its development but had been eliminated before the game was introduced by its creator, Rockstar Games. The hackers then used the Internet to distribute the code that unlocked the sex scenes. The code was widely downloaded, which created an outcry in Congress and prompted the Entertainment Software Rating Board to change the rating of the game. As a result, many retailers removed the game from their shelves, which dealt a financial blow to Rockstar, whose Grand Theft Auto series of video games had collectively sold more than 21 million copies over four years. Rockstar later offered a software patch for the game that disabled the code for the sex scenes, and it also released a new mature-rated version of the game.

New Technology.

      A battle over standards threatened to disrupt the introduction in 2006 of next-generation DVD players that would be able to play high-definition TV programs and movies. It was feared that consumers might be reluctant to purchase next-generation players for fear that one of the two incompatible standards, Blu-ray from Sony and HD DVD from Toshiba, would lose out to the other and thereby render the purchase worthless. Movie studios faced a potentially expensive situation if they produced movies for the losing format. Computer and software firms such as Intel and Microsoft were concerned because new computers would need to have a DVD disk drive that used one or the other standard, since the technology would be a key to making PCs the centre of home multimedia networks. The first Toshiba HD DVD player was expected to appear in the U.S. in the spring of 2006, whereas the first Blu-ray DVD player to hit the American market would likely be the disk drive in Sony's PlayStation 3 video-game console, which would probably ship in late 2006.

       Microsoft rechristened its upcoming version of Windows for consumers. The company changed the development codename, Longhorn, to its product name, Windows Vista. Microsoft promised security enhancements, better graphics, and new ways of searching for data. Vista was to be introduced in 2006, but test versions became available in mid-2005 as part of the company's efforts to refine the product before releasing it.

      Disk-drive manufacturers rushed to make smaller drives, which they hoped would be used in consumer devices such as cellular phones. Hitachi and Seagate Technologies developed drives with capacities of several gigabytes that used disks only 2.5 cm (1 in) in diameter. Anticipating that such consumer devices would sometimes accidentally be dropped, drive makers were developing motion-sensing technology for hard drives that would detect when the hard drive was falling. The technology would make it possible to move sensitive components of the drive into a safe position before impact. In another area of disk-drive technology, Toshiba was the first manufacturer to introduce a commercial disk drive that used “ perpendicular recording,” a method of orienting the magnetically recorded data on a disk in a way that dramatically increased storage capacity.

Steve Alexander

▪ 2005

Introduction

Computer Security and Crime.

      Internet users in 2004 faced numerous threats to computer security because of the ongoing emergence of new versions of malicious Internet software known as viruses and worms and because of security flaws in commercial computer software. According to the Internet Security Threat Report published by Symantec Corp., in the first half of 2004 there was a sharp increase in malicious Internet software aimed at computers using Microsoft Corp.'s Windows operating system (OS), and the number of newly discovered software security flaws in Windows-based applications rose in the first half of 2004 after having declined in the second half of 2003. Microsoft recommended that Windows XP users upgrade to the latest version of the software, called Service Pack 2, which it said added security features and removed applications that potentially were security risks. Service Pack 2 itself, however, also required some security patches.

      After his arrest in Germany in May, Sven Jaschan, an 18-year-old German student, confessed to having created two harmful Internet worms, Netsky and Sasser. His creations took advantage of security flaws in Microsoft software, and one software-security company said that the worms had been responsible for up to 70% of the Internet computer-worm infections in the first half of 2004. In May alone the Sasser worm disrupted hundreds of thousands of computers.

      Some of the threats posed to computer security were illustrated in June when a flaw in Microsoft's Internet Explorer Web browser was exploited by hackers on the Internet to install spyware on users' computers. (Spyware is a program that can surreptitiously divulge private information, including lists of Web sites visited and keyboarded passwords and credit-card numbers, to unknown parties via the Internet.) The attack that exploited the flaw in the browser was headed off by blocking a Web server in Russia that was playing a major role in the attack. Microsoft did not offer a corrective software patch for the security hole until late July. The incident indicated that hackers could find security holes in software faster than software developers could plug them.

      In addition to attacks from worms and spyware, Internet users were hit with a surge of unsolicited commercial e-mail ( spam). With spam out of control and clogging e-mail in-boxes everywhere, the U.S. government passed a law to outlaw it. The law, called the CAN-SPAM Act, went into effect in January, but it did little to dampen the volume of spam. By August spam represented about 65% of all e-mail, up from 58% when the law was passed, according to Symantec. Taking their own initiative, some Internet companies—including Microsoft, online marketer Amazon.com, Internet portal Yahoo!, and Internet service providers America Online (AOL) and EarthLink—sued groups they considered to be major producers of spam. Another widespread problem for Internet users was e-mail with fraudulent requests for information (a practice known as phishing, as in “fishing” for information). About 17 times as many such attacks were reported in July 2004 as in December 2003, according to the Anti-Phishing Working Group, an industry association that focused on the problem.

      The U.S. government said in August that more than 150 people had been arrested for Internet-related crimes that involved spam, phishing, or corporate espionage that resulted in the theft of about $215 million. In one case a software engineer working for AOL was arrested after he sold about 92 million AOL customer screen names to an outsider for more than $100,000. The man who purchased the names later sent spam to the AOL customers. In another case a Texas man arrested for using phishing techniques received an unusually severe sentence of 46 months in jail. He had created e-mails that appeared to be from either AOL or online-payment firm PayPal in order to trick consumers into revealing their credit-card numbers. The e-mails told them that their accounts had lapsed and could be restored only if they submitted their credit-card numbers and passwords.

      The U.S. government also passed a new identity-theft law to help curb online fraud. The law added two years to the prison sentences of those convicted of using stolen credit-card numbers or other personal information to commit a crime and five years to the sentences of those who used such data for terrorist offenses. For four years identity theft had been the most frequent consumer complaint received by the U.S. Federal Trade Commission, and Internet-related fraud accounted for more than half of all consumer-fraud complaints. The FTC also brought suit against a number of software firms that were alleged to have infected computers with software that delivered unwanted pop-up advertising and then to have tried to persuade owners of the computers to pay $30 each to fix the problem. The suit sought an end to the practice, as well as the payment of restitution to those affected. The U.S. Congress was considering legislation that would increase penalties for the use of such software, but there was concern in the software industry that the legislation was overly broad and might impede legitimate efforts to use the Internet for remotely updating computer application software and security programs.

      Other varieties of illegal computer-related activity also received the attention of law-enforcement officials. In April law-enforcement officials seized more than 200 computers in the U.S., Europe, and Asia with the aim of breaking up an online distribution network for $50 million of pirated music, motion pictures, and software. According to the industry trade group Business Software Alliance, the value of pirated software worldwide was estimated at nearly $29 billion in 2003, or about 60% of the value of legally purchased desktop software that year.

      The federal E-rate program, which subsidized the cost of connecting financially needy schools to the Internet, came under fire after allegations of fraud or waste were disclosed in hearings in the U.S. Congress. The program, paid for by telephone-company customers, financed the wiring of schools for Internet access, beginning in 1998; by mid-2004 about $8.1 billion had been spent. In a controversial decision, the U.S. Federal Communications Commission (FCC) suspended funding for the effort. The move was estimated to have delayed the disbursement of about $1 billion in government grants in 2004.

      Frank Quattrone, a former investment banker who made tens of millions of dollars during the Internet-stock boom, was sentenced to 18 months in prison and two years' probation and fined $90,000 for having obstructed government investigations of technology stock offerings. The case against him was based largely on an e-mail from December 2000 in which he urged company employees to “clean up” their files during ongoing government investigations.

Economic News.

      It was a difficult year for those seeking employment in high-tech jobs. Hiring in the United States was modest at best as companies waited for evidence of a turnaround in the slowed national economy. A report funded by the Ford Foundation in early 2004 showed that about 403,300 jobs in information technology (IT) had been lost in the United States over the previous three years and indicated that the outlook for American workers remained unfavourable. Another report said that American technology companies—including those in computers, electronics, telecommunications, and e-commerce—had eliminated more than 118,000 jobs in the first three quarters of 2004.

       Offshoring, the controversial practice of outsourcing jobs to countries where wages were lower, continued to be a top labour issue. There were varying estimates of how many IT jobs had been lost in the U.S.; some labour groups claimed that as many as 160,000 IT jobs had been sent to other countries over a three-year period. Defenders of the offshoring of IT jobs said that it would reduce the labour costs of technology companies and boost their competitiveness in the marketplace. (See Economic Affairs: Special Report (Offshoring ).)

      Microsoft underscored the unsettled nature of the technology economy when it said that it planned to cut costs by nearly $1 billion in the 2004–05 fiscal year, and it predicted that the number of Windows-based personal computers (PCs) in use around the world would grow by 60%, to one billion machines, by 2010. Analysts said that the cutbacks were being made because Microsoft had continued to invest in new projects during the slowdown in the technology industry, which meant that in recent years corporate expenses had risen faster than revenues.

      Comdex, one of the key conventions of the computer industry during the Internet boom, canceled its 2004 show for lack of attendees and exhibitors. During the boom years the Las Vegas, Nev.–based show had attracted more than 200,000 visitors a year. Though an effort was made in 2003 to revitalize Comdex by reorienting the convention toward the corporate market and away from consumers, former exhibitors had already begun to shift the focus of their efforts to the Consumer Electronics Show, which was also held in Las Vegas.

E-Commerce.

      In 2004 online advertising more than recovered from the slowdown that followed the dot-com boom year of 2000. Internet advertising revenue was a record $2.37 billion in the second quarter of 2004, up 43% from the previous year, and it even exceeded the levels of revenue reached during the boom. Leading the surge was a near doubling in advertising tied to Internet search engines. Some analysts suggested that the growth of online advertising did not represent the independent emergence of a new advertising medium so much as it represented the diversion of existing direct-mail advertising revenue to the Web.

      Internet shopping also was on the rise. A survey by the Pew Internet and American Life Project in Washington, D.C., showed that 65% of Internet users were online shoppers. In 2000, 47% of Internet users had shopped online. Amazon.com and eBay began selling inexpensive used books in such large numbers that the book industry began to wonder whether new book sales were being harmed. Particularly disturbing to the publishers was the fact that sales of used books did not generate royalties for the publishers or the writers and that the used editions were being marketed alongside new ones. Some surveys showed that used books were making up a slightly larger percentage of total book sales than before.

      Online fantasy sports leagues were increasingly seen as an advertising-supported business. Participants in the leagues put together sports teams of their choice to compete in imaginary games. In hopes of attracting new subscribers and retaining existing ones, AOL introduced a service in which anyone could play for free rather than having to pay to play, as required by several earlier Internet fantasy sports leagues.

       Google Inc., the brainchild of two former Stanford University graduate students, Sergey Brin and Lawrence Page (see Biographies (Brin, Sergey, and Page, Larry )), became the envy of many e-commerce businesses in 2004 because its superior search-engine technology made it into the equivalent of an Internet portal site—a starting point for Web surfers. With 200 million searches a day, it had a popularity in its chosen niche that was unparalleled, although Microsoft promised to catch up in the search-engine business. Google also set the pace for change in free Web e-mail. It announced plans for a free e-mail service called Gmail that offered an unprecedented one gigabyte (one billion bytes) of free e-mail storage space but also presented the users of the service with advertisements based on keywords Google found in their messages. A preliminary version was made available to the public in April. Microsoft's Hotmail and Yahoo! quickly responded to the announcement by greatly increasing the amount of storage space they provided with their free e-mail services. In December, Google announced that it was working with several major libraries to begin making their holdings freely available on the Internet.

Companies.

      Changes in accounting practices forced changes in the way that many computer companies paid their employees. Stock options, a favourite method of compensating workers in addition to their salaries, had not been included on income statements, and the omission tended to boost reported corporate profits. In early 2004, however, the Financial Accounting Standards Board voted to include options in income statements, arguing that their inclusion provided investors with a more accurate picture of a company's financial condition. The ruling set off a firestorm of protest by technology firms. A bill seeking to overturn the FASB ruling was introduced in the U.S. Congress, but as of the end of 2004 the fate of the bill was unclear.

      Google's initial public offering on August 19 was viewed as a major Wall Street event, and it raised $1.66 billion for the company and some of its shareholders. Google executives and bankers, fearing the offering might not be as successful as they had originally hoped, lowered the initial stock price to $85 a share from a planned range of $108–$135. The stock was well received by the market, however, and by year's end it had more than doubled its initial offering price. The stock offering also made news because of the unusual way it was handled. Shares were sold in a public auction intended to put the average investor on an equal footing with the professionals of the financial industry.

       Advanced Micro Devices (AMD), Inc., expanded its operations in China with plans for a $100-million investment in testing and manufacturing facilities. China had gained favour with American technology companies because it offered relatively low costs for labour and electricity, two of the major expenses in manufacturing.

       Intel Corp., facing stiff competition from AMD, introduced a microprocessor for large corporation servers and for high-end desktop workstations. It could process 64 bits of data at once and was backward compatible with the existing 32-bit computing standard. AMD had made a similar move a year earlier.

      At Computer Associates International, Inc., the world's fourth largest software firm, former executives disclosed in guilty pleas that there had been a conspiracy to backdate company contracts, which thus enabled the firm to match Wall Street profit predictions. A company restatement of 2000 and 2001 financial results reflected improper booking of $2.2 billion in revenue. Former executives also pleaded guilty to having conspired to lie to prosecutors and to the company's own lawyers about their business practices. In a settlement with government investigators, Computer Associates agreed to pay $225 million in restitution to shareholders who had incurred financial losses because of the fraudulent practices.

       IBM Corp. partially settled a class-action lawsuit over its pension plan by agreeing to pay $320 million to current and former employees. If the courts were to find that a new IBM pension plan was illegally discriminatory, IBM's liability under the settlement was limited to an additional $1.4 billion.

      German firm Infineon Technologies AG pleaded guilty in the U.S. to having fixed prices of memory chips for three years and agreed to pay a $160 million fine. U.S. prosecutors said Infineon was one of several companies in a worldwide cartel that cooperated in fixing prices for dynamic random access memory chips (DRAMs).

      Microsoft, which generated $1 billion a month in extra cash and already had large amounts of cash on hand, had been under pressure to share its wealth with stockholders. In July it announced a one-time dividend of $3 a share, or $32 billion, which was a substantial portion of the more than $50 billion in cash reserves that the company had at the time. The move was seen by some observers as an acknowledgment that Microsoft shares had become a blue-chip stock, bought for dependability as an investment, rather than a hot stock, bought for an anticipated sharp increase in price. Microsoft also settled most of the consumer class-action suits that were still pending against it. The civil suits, which revolved around Microsoft's alleged use of monopoly power to set prices for consumer software, had continued long after the U.S. settled its antitrust suit with the company. The largest settlement was $1.1 billion in a California suit. Separately, a federal appeals court upheld the 2002 settlement of the U.S. government's antitrust case against Microsoft. In another matter Microsoft agreed to pay Sun Microsystems $1.95 billion to settle a lawsuit brought by Sun over antitrust and patent claims.

Mergers and Acquisitions.

      Acquisition activity was dominated by the long-running effort of Oracle to mount an unfriendly takeover of PeopleSoft and by PeopleSoft's determination to fight it. The battle ended in December, when the two companies reached an agreement under which Oracle would acquire PeopleSoft for $10.3 billion. Oracle appeared to have the advantage after it defeated a federal antitrust lawsuit that had sought to block the takeover as anticompetitive. The takeover battle was unusual, both because the participants were important software firms and because unfriendly takeovers were rare in the technology field, since they often backfired when the acquired firm's brightest employees fled the company.

      The struggle, which had begun with Oracle's initial bid for PeopleSoft in 2003, created turmoil in the market for Enterprise Resource Planning (ERP) software—software that corporations used to record and share corporatewide information about accounting, finance, inventory, and human resources. Some competitors said that their business was being hurt because the market uncertainty over the Oracle-PeopleSoft takeover battle was causing customers to defer purchases until a winner became apparent.

      The U.S. Department of Justice (DOJ) opposed the acquisition on antitrust grounds and sued to stop the deal, which had fluctuated in value over many months as Oracle changed its bid price. The government said that the deal would reduce competition and cause an increase in ERP software prices, and government lawyers at the ensuing antitrust trial insisted that Oracle and PeopleSoft were the only companies other than SAP AG, a German software company, that competed for the largest enterprise customers. Oracle insisted, however, that competition would not be hurt by its acquisition of PeopleSoft because it had other ERP competitors, even though the total number of competitors was declining owing to industry consolidation. Oracle won the case when a federal judge ruled that the acquisition would not give Oracle enough market power to impede competition.

      During the course of the year, the Oracle-PeopleSoft battle took a number of twists. PeopleSoft sought to show that it was moving ahead with its own business by announcing a technology partnership with IBM that would involve a minimum investment of $1 billion by the two firms over five years. Soon afterward PeopleSoft's CEO, Craig Conway, was fired over what the board of directors of the company called a loss of confidence in his leadership. Some analysts said that the move indicated that PeopleSoft might be willing to begin merger talks with Oracle. Meanwhile, the battle shifted to a state court in Delaware, where Oracle sought to eliminate antitakeover measures put in place by PeopleSoft. One such measure was designed to raise the acquisition cost in the event of a takeover by greatly increasing the number of shares of PeopleSoft stock.

       Symantec Corp. announced that it would purchase Veritas Software Corp., a data storage and management firm, in a stock transaction valued at about $13.5 billion. The deal was expected to produce the world's fourth largest software firm.

      IBM, which once dominated the personal computer business, said it would sell its PC business to China-based Lenovo for $1.75 billion worth of cash, stock, and debt. The sale underscored the fact that personal computers had become a commodity business with relatively low profit margins.

      Juniper Networks, Inc., a manufacturer of network gear, agreed to buy NetScreen Technologies, Inc., one of the leading firms in computer security, for about $4 billion in stock. Analysts said that the large amount paid reflected heightened concerns about corporate and home computer security.

      Orbitz, Inc., an online travel business started in 2000 by five American airlines, was acquired for $1.25 billion in cash by Cendant Corp., a travel and real-estate firm that also owned rental car and hotel companies. The move came at a time when some airlines were offering lower fares for flights booked online instead of through a travel agent in an attempt to save on booking costs.

      Computer-chip designer ARM Holdings PLC paid more than $910 million in cash and stock to acquire Artisan Components, Inc., a designer of chip components. The deal was described as one likely to improve computer-system-on-a-chip design efforts.

      AOL paid $435 million in cash to acquire Advertising.com, Inc., a firm that helped companies advertise on the Internet and measure the results of those marketing campaigns. In addition, Time Warner ended a two-year federal investigation by agreeing to pay the U.S. government $510 million to settle criminal and civil charges that its America Online business improperly inflated revenue figures. AOL also laid off about 750 employees in a cost-cutting and business-repositioning move; the layoffs followed two years in which the number of subscribers to its Internet access service had declined by about four million.

      Personal computer maker Gateway, Inc., bought privately owned eMachines, Inc., a low-cost PC manufacturer, for $289.5 million. The deal was seen as a way to remake Gateway, which had reported a long string of quarterly financial losses, by making it the third largest PC firm in the U.S. market and strengthening its low-end PC product line. The CEO of eMachines became the CEO of Gateway. Gateway also reorganized, laying off thousands of employees and closing its retail stores.

      The eBay Inc. online marketplace company bought a 25% ownership of craigslist, an unorthodox community-oriented online business that sold employment advertising to for-profit businesses but allowed free listings for housing, garage sales, professional services, and dating. The craigslist Web site had listings for 60 cities. Terms of the deal were not disclosed.

       Lucent Technologies, a large provider of telecommunications equipment, whose return to profitability had been led by its CEO Patricia Russo (see Biographies (Russo, Patricia F. )), continued to form partnerships with computer networking firms to add newer technologies such as Internet Protocol transmission and Ethernet networking. The firm had been hurt by the telecommunications industry's move toward Voice over Internet Protocol (VoIP), which had reduced demand for Lucent's traditional communications gear.

Governmental Issues.

      The Federal Communications Commission FCC made a tentative finding that VoIP phone calls, also known as Internet telephone service, should be subject to government wiretapping in cases involving suspected criminal or terrorist activity. Though VoIP calls would therefore be subject to the same wiretapping regulations as conventional telephone lines, it appeared by year's end that the FCC would demand less overall regulation of VoIP than of traditional phones. It remained unclear what the cost to VoIP service providers might be to comply with the wiretapping requirement, since there were technology hurdles that might be difficult and expensive to overcome.

      Microsoft appeared to have lost its fight over a European Union antitrust ruling against the company that carried a $665.4 million fine. In March the European Commission had ruled that Microsoft was guilty of using the dominance of its Windows OS to improve its position in new markets, including that of network server computers. In an appeal to an EU court, Microsoft argued that the antitrust ruling would hurt customers, create market confusion, and damage Microsoft by forcing it to share proprietary information with competitors. In December Microsoft lost its appeal. The court ruled that the company must pay the fine and comply with the penalties imposed by the European Commission, which included a requirement that Microsoft offer computer manufacturers a version of Windows without its media player, software that played music and video files. Microsoft could still appeal the ruling to the European Court of Justice, but it was unclear whether it would do so. The court rejected Microsoft's request to delay the penalties pending any appeal.

      The European Commission also filed complaints against France, The Netherlands, Sweden, and Finland for allegedly favouring Intel in government computer-purchasing contracts. According to the complaint, the contracts required that the computers contain Intel computer chips or the equivalent, and Intel rival AMD complained about the practice. Separately, the commission reopened an antitrust investigation of Intel that two years earlier had produced no evidence of anticompetitive actions. The status of the new antitrust investigation remained unclear.

      The U.S. Supreme Court upheld a lower-court decision to block the Child Online Protection Act, an antipornography law that would have set fines of up to $50,000 for making it easy for children to obtain Internet material deemed harmful to minors. The law would have required adults to register or to use access codes in order to be able to see such material. In a 5–4 decision, the Supreme Court said that the 1998 law was an unconstitutional limit on free speech. The case was returned to a lower court for trial, however, to give the government another opportunity to prove that the law was not unconstitutional.

      A federal court ruled that e-mail messages could be intercepted without violating U.S. antiwiretapping laws, provided the messages were stored briefly on the computer of an Internet service provider while they were being processed. The ruling effectively outlined a legal loophole that made it permissible for the government or other groups to read supposedly private e-mail messages without first obtaining a court order. The DOJ said that the ruling created an undesirable gap in Internet-related wiretapping laws and asked an appeals court to review the decision.

The Internet.

      Sales of personal music players were bound up in the battle for supremacy in online music purchases. Apple Computer, Inc., found itself embroiled in a dispute with RealNetworks, Inc., which decided to provide consumers with software for converting downloadable songs from a RealNetworks music service into a format that could be played on Apple's highly successful iPod. The move followed an unsuccessful effort by RealNetworks to license the iPod music format. The apparent motive was to lure customers away from Apple's iTunes online music service, since the iPod could play music only in a format used by iTunes or in the widely available MP3 format. RealNetworks insisted that it was within its rights, but Apple accused the firm of unethical behaviour.

      The battle underscored the growing competition in the online music market, which some analysts estimated would generate $270 million in sales in 2004, more than double 2003 sales. In April Apple said its iTunes service had sold more than 70 million songs at 99 cents each during its first year, although that fell somewhat short of the 100 million songs the company had projected it would sell in that period. It surpassed the 100-million-song mark three months later. Apple faced a growing field of online music competitors, including Microsoft's MSN Music, RealNetwork's Rhapsody, Yahoo!'s Musicmatch, Roxio's Napster, and Sony's Connect. Yahoo!, a late entry to the market, had paid $160 million for the Musicmatch online music business.

      Some surveys showed that more than 20 million people in the U.S. continued to download free music from the Internet in apparent violation of copyright laws. The music industry's trade association, the Recording Industry Association of America, continued to file copyright-infringement lawsuits against consumers whose computers were found to be sharing copyrighted music. The music was typically downloaded by means of online file-sharing services by which a computer user essentially opened a window into his or her computer and allowed other participants in the service to copy the music files. Although the participants could use false names, their computers could be identified by their IP addresses, which in turn could be traced to individual file sharers through their Internet service providers.

      One major effort of the music and motion picture industries had been to stop the Internet file-sharing networks that consumers used to download copyrighted music. The U.S. Supreme Court, however, rebuffed the music and movie industries when it declined to review a lower-court ruling that Internet peer-to-peer networks (which linked individual consumer PCs) were not legally liable if their users exchanged copyrighted music and movies. The 2003 lower-court decision the Supreme Court let stand also said that the music and motion picture industries could not rely on subpoenas alone to force Internet service providers to disclose the names of customers who allegedly shared copyrighted files; a court review would be required first.

      The U.S. Congress considered aiding the music industry in its fight against file-sharing networks. The Senate introduced a bill, called the Inducing Infringement of Copyrights Act, that would make a person who induced another to violate copyright law legally liable for the violation. The legislation would, in effect, ban the peer-to-peer networks, but some analysts feared that it also could adversely affect some consumer electronics products, such as MP3 -music players, that could potentially be used in violation of copyright.

      The success of online music sales piqued Hollywood's interest in online movie rentals. The distribution of online movies was being handled through authorized movie-download services that permitted viewing a rental for a limited period of time. The services generally offered a relatively small selection of titles, but some permitted rental of an unlimited number of the available films for a flat monthly fee. The process of downloading feature films was slow and could take hours. TiVo, the maker of a digital video recorder that copied television programming onto a computer hard disk, planned an alternative service that would enable consumers to download movies and music from the Internet for a fee.

      High-speed, or broadband, service for Internet access continued to grow. By some estimates it was being used by slightly more than one-half of U.S. residential users who had some type of Internet access, up from slightly less than 40% one year earlier. Broadband service was offered both by telephone companies, typically through a digital subscriber line (DSL), and by cable TV firms. The number of broadband subscribers worldwide was expected to more than triple between the beginning of 2004 and the end of 2008. In the long run, wireless Internet service and satellite Internet service also were expected to contribute to the spread of broadband. A handful of U.S. cities, including Philadelphia, expressed interest in providing broadband service to their citizens through wireless technology.

Computer Games.

      The U.S. Army continued to use PC games as a recruiting tool. Two years after the launch of America's Army, a series of free realistic combat games for the PC, there were more than four million registered online players. The army said prospective recruits who played the game before contacting a recruiter were more likely to enlist than those who had not played. A commercial version of Full Spectrum Warrior, a game commissioned by the U.S. Army, focused on military strategy in street combat.

      The long-awaited PC game Doom 3, a follow-up to the original game that a decade earlier had helped create the category of violent video games called first-person shooter, debuted to mixed reviews. It was visually impressive and required the capabilities of a high-end personal computer to generate its special effects, but many players found the game to be lacking in game-play innovation.

       Online gaming, long a staple of the PC market and growing among users of game consoles from Sony and Microsoft, remained a relatively small part of the computer-game business. The business continued to promote online play in the belief that participation would increase as the use of high-speed Internet connections grew and that online game playing would generate additional revenue through subscriptions or advertising.

      The convergence of movies and computer games continued, and production costs rose as games were developed with detail-laden imagery, special effects, elaborate musical soundtracks, and the voices of well-known actors. Game-production costs were more than triple those of the late 1990s, and for some new titles marketing expenses sharply increased the total cost. There was concern in the industry that game-development costs would rise even more sharply once Sony, Microsoft, and Nintendo introduced new game consoles within one to two years. New versions of the Microsoft Xbox and Sony PlayStation 2, in particular, were expected to have increased computing power that would require more sophisticated game software. Some software firms predicted game-development costs could double or triple, which in turn might force some companies to exit the game business.

      Nintendo introduced a dual-screen version of its Game Boy for the holiday selling season, and Sony promised to introduce its PlayStation Portable in early 2005. Nintendo had long controlled the handheld gaming market with devices that were limited to game play; since 1989 it had sold about 170 million Game Boy units. Sony said that it would market a different type of handheld game player, which would also play digital music and video.

      In a nod to the employment potential of the computer-game industry, several universities began offering game-related studies. Rensselaer Polytechnic Institute, Troy, N.Y., reported that its students would be able to minor in video-game studies. The University of Southern California formed a partnership with Electronic Arts, the largest game firm, to create a degree program in video-game design. Other universities that offered video-game-related classes included Princeton and Carnegie Mellon, Pittsburgh, Pa.

New Technology.

      Technology contributed to a shift in PC sales toward laptops. According to analysts, consumer enthusiasm for laptops was driven by their increasing computing power (which nearly matched that of desktops), a desire for portability, and the growing availability of built-in Wi-Fi wireless Internet capability for going online. Laptop Wi-Fi could be used with Wi-Fi connections available in many coffee shops, airports, hotels, and other public places either for free or for a monthly fee, and many people had a wireless network at home so that several desktop or laptop computers could share a high-speed Internet connection. From mid-2003 to mid-2004, about 51% of the revenue from U.S. retail sales of computers was from laptops, surpassing sales revenue from desktop PCs for the first time. Desktop PCs, which typically cost less than laptops, continued to lead with 64% in retail unit sales.

      While Wi-Fi use grew steadily, some companies that tried to market the service had a difficult time. One such company, a joint venture of Intel, AT&T, and IBM called Cometa Networks, closed for lack of funding after having faced stiff competition from similar Wi-Fi companies and from the increasing popularity of free Wi-Fi service.

      Intel announced that it was investing in a longer-range wireless Internet technology called WiMax, which could reach several kilometres, compared with only a few hundred metres for most Wi-Fi installations. WiMax held the promise of connecting hundreds or thousands of widely separated computers to the Internet through a single centralized antenna.

      Intel shifted its PC microprocessor production to a new design that included more than one processor on a chip. The shift was made because raising the clock speed (measured in gigahertz) of single-processor chips generated too much heat inside a PC. Because this thermal barrier limited future improvements, Intel abandoned some existing chip-development projects and focused on the new dual-processor technology, in which the two processors shared the PC's workload.

      Floppy-disk drives continued their slow decline as PC manufacturers increasingly left them out of basic configurations. Although the drives remained available as an add-on option for PCs, many consumers were turning to writable CDs or flash-memory devices as better ways to make data portable. The standard floppy disk, almost unchanged for a decade, stored up to 1.44 MB, whereas CDs stored up to about 700 MB. Various models of finger-sized flash-memory devices, called flash drives, which were designed to be attached to the USB port of a computer, had storage capacities ranging from 32 MB to 2 gigabytes (2,000 MB). Sales of flash drives were reported to have tripled since 2003.

       Linux, an open-source operating system, received increased attention as a result of efforts to make it a stronger competitor to the Windows OS. (With open-source software the underlying programming, or source code, was shared among independent developers; this practice contrasted with the traditional approach used by software companies of closely guarding source code.) The Free Standards Group, a nonprofit trade organization, promoted a new version of the Linux OS called Linux Standard Base 2.0. The group hoped to re-create a worldwide standard for the OS. Since the release of the original version of Linux in 1991, the operating system had mutated into several different commercial versions, which diluted its influence as an alternative to Windows. Several companies backed the new standard, including IBM, Intel, AMD, Dell Computer Corp., and Hewlett-Packard Co. (HP). Microsoft acknowledged that Linux was a serious competitor when it told the Securities and Exchange Commission that open-source software was putting increasing pressure on all parts of its business.

      Microsoft delayed some of the technological improvements that it had promised with Longhorn, the code name for its long-awaited upgrade of the Windows XP operating system. The company had diverted much of its resources to the improvement of the security features of the existing Windows XP after a number of vulnerabilities were highlighted, analysts said. The introduction of the final version of Longhorn was rescheduled for 2006.

      The U.S. government made use of development contracts to spur technological advancement among several suppliers of high-speed scientific computers called supercomputers. The machines were used for research in scientific fields, including weather, astronomy, and biotechnology, as well as in classified government defense operations. The company that developed the fastest supercomputer was expected to have the best chance of selling its product to American scientists, who believed that they were falling behind Japanese researchers who were using the world's fastest supercomputer—the Earth Simulator, built by Japanese firm NEC. The Earth Simulator had a speed of 35.86 trillion calculations per second, but by year's end an annual industry review had ranked IBM's BlueGene/L as the fastest supercomputer in the world, with 70.72 trillion calculations per second.

      At the small end of the computing spectrum, sales of hand-held personal digital assistants (PDAs) continued to fall because of competition from smartphones, cell phones that possessed sufficient computer power to allow them to provide PDA features, such as calendars and contact lists, and to function as digital cameras and MP3 music players. As a result, Sony dropped out of the American and European PDA markets, although it continued to offer PDAs in Japan.

      Apple, which had become a relatively small competitor in the market for personal computers, introduced an unusual new iMac in which the computer processor and other components fit within a compartment behind a flat-panel monitor. To maintain its lead in the music-player market, Apple cut prices for the iPod and unveiled new models. Inside their pocket-sized cases, iPods held tiny hard drives that packed as much as 60 gigabytes of storage.

      Several other companies entered the market with small hard-drive-based music players, among them HP and Dell. Microsoft tried to broaden the functions of such devices with a device called the Portable Media Center, which could play music, recorded TV programs, and videos, as well as display photographs. Apple responded with iPod Photo, which, in addition to playing music, could store thousands of digital photos and display them on the screen of a conventional TV set.

Steve Alexander

▪ 2004

Introduction

      A flurry of legal and Internet activity swirled around the computer industry in 2003, contrasting sharply with slowed sales for computers and software. While industry sales languished and layoffs continued, consumers and businesses experienced the wrath of Internet worms and viruses. Junk e-mail, called spam, clogged e-mail inboxes everywhere, and legislators mobilized against it. The U.S. Supreme Court once again wrestled with the difficult issue of restricting Internet pornography. Music held centre stage as the battle over downloading free songs from the Internet boiled over. The Recording Industry Association of America (RIAA) filed lawsuits against 261 consumers for allegedly sharing copyrighted music.

Music and Film on the Internet.

      While the music industry previously had taken online file-swapping services such as Napster to court, 2003 marked the first time that the industry had sued consumers. The RIAA blamed illicit downloading—some analysts estimated that there were at least 57 million Americans sharing digital music files freely on the Internet—for a double-digit drop in sales of music compact discs (CDs) since the early 1990s. The music industry could not prove online music trading was the sole cause of the CD sales decline, however, and some research firms estimated that only a fraction of the drop was due to free downloading.

      Besides struggling against free music downloading, the music industry also had to cope with what appeared to be a shift away from CDs sold in stores and toward Internet downloads. Forrester Research predicted that by 2008 about 33% of music sales would come from downloads, while CD sales would drop 30% from their peak in 1999.

      The RIAA represented the five largest music companies, Universal Music Group, Sony Music Entertainment, Warner Music Group, BMG Entertainment, and EMI. As the year ended, the music industry reported that it was in the process of filing more lawsuits against consumers. It offered an amnesty program for those who had not been sued but who would admit wrongdoing and promise to delete downloaded songs.

      Despite the often negative reaction to its lawsuits against consumers, the music industry complained that it had run out of legal alternatives. Napster's free online music service was stopped through court action, but new services such as Kazaa and Morpheus quickly emerged as replacements. Because they used peer-to-peer sharing between computers, they had no central Web site that could be shut down by court action. In addition, the music industry lost a case in which it tried to prove that some of the new free music services were guilty of copyright infringement. A U.S. district court ruled that those free music services were analogous to videocassette recorders that allowed consumers to make copies of TV broadcasts.

      In filing the consumer lawsuits, the RIAA alleged that the potential harm caused by consumer copyright infringement was measured in the millions of dollars, but most consumers who were sued were permitted to settle the cases for a few thousand dollars. That was far less than the RIAA had demanded earlier in the year when it sued four college students for sharing music through personal Web sites; those individuals settled their suits for amounts ranging up to $17,500.

      Many consumers who downloaded music seemed unmoved by the music industry's fury. The number of people using free online music services declined after the lawsuits were filed, but millions continued to use them. Informal polls indicated that many who downloaded music for free either claimed they did not understand that the action was wrong or made it clear that they did not care.

      At the same time that the music industry was trying to stop free downloading, it sought to provide consumers with an alternative. Several authorized for-pay music download services debuted and claimed success. Apple Computer Corp. reported that its iTunes online service sold more than 10 million songs at 99 cents each in a five-month period. At year's end Apple expanded its service from the niche market for Apple Macintosh computers to the broader audience who used Microsoft Corp.'s Windows operating system (OS), which accounted for well over 90% of personal computer (PC) users. Napster made a comeback as a for-pay service owned by software company Roxio. Other online sellers included consumer electronics retailer Best Buy, which resold the Rhapsody service operated by RealNetworks.

      Meanwhile, the movie industry tried to avoid the illicit-downloading problem by establishing legal ways to download Hollywood films, such as the for-pay online services Movielink and CinemaNow. It was expected that movie downloads would increase after more households had high-speed broadband connections, a must for downloading large movie files. It remained unclear, however, whether the Internet movie downloads could compete with established for-pay movie sources such as cable and satellite TV, video stores, and the online rental firm NetFlix.

Security Issues.

      In January the Slammer worm (a worm is a malicious program that replicates without human intervention) exploited a weakness in Microsoft Web server software, spreading so quickly that it overloaded tens of thousands of business and government computer servers on the Internet. It was the largest such incident since the Code Red and Nimda worms struck the Internet in 2001.

      There was worse to come in August when the Blaster worm struck hundreds of thousands of Internet-connected computers by attacking a known flaw in several versions of the Windows OS software. The worm triggered computers to shut down and restart and dramatically slowed corporate networks as it spread itself to other computers in a flood of electronic messages. Blaster and its variants collectively caused an estimated $2 billion in damage during eight days of Internet attacks that affected people ranging from employees of the Maryland motor vehicle agency to Internet users in Sweden. Experts agreed that the Blaster attack could have been prevented had corporate and home computer users downloaded and installed a Microsoft software patch for Windows. The patches often were not installed, however, typically because corporate information technology (IT) departments were too busy or consumers were unaware that the patches were available. A similar patch had been available in advance to prevent the Slammer attack on corporate servers, but it also was not widely installed. Critics asserted that these lapses revealed serious flaws in the industry's method of issuing critical software updates.

      The effects of the original Blaster worm had barely begun to subside when a new variant of the worm, called Welchia, appeared. Welchia also gained entry to computers via a Windows security flaw but on an altruistic mission: it counteracted Blaster by downloading and installing the Microsoft patch that prevented future Blaster infections. Despite this, Welchia proved to be just as troublesome as Blaster because it spread itself to new computers so quickly that it clogged corporate networks.

      About the same time that Welchia attacked networks, users of Internet e-mail were struck by a fast-spreading computer virus called SoBig.F. Every time a recipient opened a virus-laden e-mail attachment, SoBig.F infected the computer and e-mailed copies of itself to other computers. As a result, the virus filled e-mail in-boxes around the world and multiplied faster than had any previous computer virus.

      There was wide accord on the need for more Internet security but less agreement on how to achieve it. The administration of U.S. Pres. George W. Bush favoured a cooperative partnership between government and industry to improve security rather than new government regulations. The Bush administration's plan, called the National Strategy to Secure Cyberspace, urged the creation of an emergency-response system to confront Internet attacks. The Department of Homeland Security was to be in charge of the project and later created a partnership with Carnegie Mellon University's CERT Coordination Center, which tracked Internet threats, in hopes of improving techniques for preventing, monitoring, and responding to attacks. Some data-security professionals argued that the plan's chief shortcoming was that it contained few security guidelines for industry to follow.

      Despite the government's plan, private security experts worried that the Internet had entered a new era in which threats were easy to launch but had devastating impact. Some experts claimed that attacks could not be prevented until major software products had been completely redesigned to be more secure, a process that might take years. That was bad news at a time when Internet threats were increasing. According to Symantec Corp., an antivirus software firm, the number of potentially harmful software vulnerabilities discovered rose 12% in 2003 compared with the prior year. The firm also stated that about 80% of new software vulnerabilities could be exploited by someone working remotely on the Internet.

      Most of the Internet attackers evaded law-enforcement officials because of the anonymous nature of the Internet. The few who were caught appeared not to be the masterminds behind the attacks but copycat attackers who adapted existing Internet worms or viruses or downloaded the building blocks for computer attacks from Internet sites devoted to hacking. Authorities arrested a 24-year-old Romanian man, an 18-year-old high-school student in Hopkins, Minn., and an unidentified juvenile for allegedly having created copycat versions of the original Blaster worm. The original authors of the Blaster or Welchia worms or the SoBig.F virus, however, had not been found by year's end.

      Although not as disruptive as computer worms and viruses, the rising tide of unsolicited commercial e-mail, or spam, was a burden to e-mail users worldwide. By some estimates spam accounted for about half of the e-mail most people received daily, and pornographic spam was an increasing annoyance. As a result, there was much discussion about new laws to regulate spam or new technical solutions to limit it, such as filtering software that kept unwanted e-mail from reaching a recipient's inbox.

      Some Internet service providers (ISPs) rushed to offer filters. The largest provider, America Online (AOL), claimed to have stopped more than two billion spam messages in a single day, but most software filters proved unable to block all undesirable e-mail without also deleting some “good” e-mail as well. A self-taught programmer who admitted to having sent more than 100 million pieces of spam in a 12-hour period told a U.S. Senate committee that he could easily outwit even sophisticated software filters. A survey of Internet users showed that fewer than half found spam-filtering software to be effective.

      One popular legal solution discussed in Congress was a “do not spam” list similar to the Federal Trade Commission's (FTC's) “do not call” list that telemarketers were supposed to heed. Violators of the “do not spam” list would be fined or jailed. Congress passed and President Bush signed an antispam law that authorized the FTC to study the feasibility of a “do not spam” list. The law also prohibited sending bulk commercial e-mail that concealed the identity of the sender or sought to trick the recipient with a misleading subject line. In addition, the law required that commercial e-mail allow recipients to opt out of receiving future e-mail and that pornographic e-mail carry an identifying label.

      Those familiar with the Internet believed that such a law would be difficult to enforce because it was too easy for senders of spam to conceal their identities. Some observers pointed out that people sending spam often made illicit use of a feature called “open relay,” which was found in some computer e-mail servers around the world. Those servers would relay spam automatically to recipients and, in effect, conceal the original sources of the messages. Direct marketers opposed the creation of a “do not spam” list, arguing that it would hurt law-abiding Internet marketing companies and have no effect on disreputable firms that chose to ignore the list. The Direct Marketing Association, however, supported the antispam legislation, saying that a national law would result in uniform enforcement of e-mail marketing rules.

      The new federal law invalidated a stricter California antispam law, which had banned sending most forms of commercial e-mail to or from the state unless the recipient had specifically requested it. The California law went farther than regulations in most other U.S. states because it attempted to regulate all e-mail advertising, not just the type that was deceptively labeled in order to encourage recipients to read it. The broad wording of the law had been expected to draw court challenges.

      Spam also posed problems for e-commerce. Amazon.com filed 11 lawsuits against online marketers who allegedly forged Amazon's name to their e-mails, using a technical trick known as “spoofing.” The real e-mail sender's identity was concealed, and in its place was put the name of a reputable third party—in this case Amazon—whose e-mail Internet users were more likely to open.

      A new Internet business venture disturbed antispam activists and raised privacy issues, but it folded after less than a month. VeriSign, a company that assigned and administered some Web addresses, launched a for-profit service that was designed to help Internet users who typed in erroneous Web addresses. Instead of giving the users error messages, the service gave them alternative Web addresses or paid advertising links. Critics observed that the service would help defeat antispam filtering software and that it raised privacy questions by redirecting Web surfers without their permission. In the end the Internet Corporation for Assigned Names and Numbers, an Internet oversight group, pressured VeriSign to drop the service.

Corporate News.

      The economy made 2003 another tough year for computer technology companies. Corporate IT spending continued to be depressed, which put even more pressure on the bottom lines of companies that supplied computers and software. As the year ended, the Connecticut-based research firm Gartner Group predicted that the three-year downturn in computer-related spending was ending and that global technology spending would rise from $2.27 trillion in 2003 to $2.4 trillion in 2004.

      Several corporate consolidations took place during the year. Yahoo spent $1.6 billion to buy Overture Services, Inc., which pioneered the concept of companies' paying for a favourable position on a search engine's results page. Data storage systems firm EMC Corp. bought Legato Systems, a storage software firm, for $1.3 billion and acquired Documentum, Inc., a document management software firm, for $1.43 billion. Database firm Oracle's $7.25 billion unfriendly bid to take over enterprise human resources software firm PeopleSoft was extended to February 2004, the sixth extension of the deadline. As PeopleSoft's outlook improved, its stock rose above Oracle's per-share bid price and thereby cast doubt on whether the transaction would occur. The deal also hinged on whether it was considered anticompetitive by U.S. and European Commission regulators. Oracle had launched its bid days after PeopleSoft reported that it would acquire manufacturing-integration software firm J.D. Edwards for $1.7 billion. Palm bought personal digital assistant competitor Handspring, but the value of the deal was difficult to calculate because the stock transaction excluded the value of Palm's PalmSource software operations, which were slated for a separate spinoff. Palm and Handspring were combined to form PalmOne.

      Other companies reacted to the economy by trying to be more nimble. Advanced Micro Devices (AMD) sought to stay a step ahead of its larger rival, Intel Corp., by introducing its own version of the 64-bit microprocessor, the next step in boosting computer power by processing larger slices of data at one time. AMD's new 64-bit chip offered backward compatibility with 32-bit programs written for PCs and network servers, while Intel's two-year-old 64-bit chip had required new software written specifically for its architecture—a factor cited by some industry observers as the reason Intel's chip had been slow to take off.

      Apple led the way as personal computer manufacturers tried to remake themselves into consumer electronics companies in order to deal with the slowed market for personal computers. Apple gained considerable publicity with its iPod MP3 music player and its iTunes authorized music-download service, especially when iTunes was adapted to the much larger Windows-based PC market late in the year; these initiatives contributed to a 36% increase in Apple's revenue over the previous year. PC companies trying to branch out into consumer electronics included Dell Inc., Gateway, Inc., and Hewlett-Packard Co. (HP). Dell, for example, introduced a music player, an online music service, a liquid crystal display television set, and a new handheld computer. While Dell made the move into consumer electronics from a position of strength in the PC business, Gateway sought to use consumer electronics devices to save its financially ailing PC business. Meanwhile, HP, fresh from its takeover of Compaq Computer Corp., released digital cameras and other digital entertainment products.

      AOL's parent company, AOL Time Warner Inc., changed its name to Time Warner Inc. to shed the image of its slowing AOL Internet access business. Observers considered this an admission that the 2000 merger of AOL and Time Warner had been a failure. AOL announced plans to gain more customers by offering a discounted $9.95 per month dial-up Internet access service under its Netscape brand name; that represented a considerable reduction from the $23.90 a month charged for the AOL brand-name service.

      Many companies reduced employment to cope with a difficult economy. Sony Corp. announced that it would eliminate 20,000 jobs, or 13% of its workforce, as part of a plan to save $3 billion over three years. EDS Corp., the second largest computer-services firm, planned to eliminate about 2% of its workforce, or some 2,700 employees. Sun Microsystems cut about 3% of its workforce to cope with more than two years of declining sales. Gateway eliminated more than 1,900 jobs and closed 80 of its retail stores. High-end computing firm Silicon Graphics laid off nearly one-fourth of its employees as it tried to cut expenses.

      The number of students pursuing computer technology careers in college continued to drop, an apparent reflection of the reduction in job prospects in the field due to the economy. Colleges with big computer science and electrical engineering departments reported enrollment declines of 20–40% in those departments since 2001, which was shortly after the bursting of the Internet bubble of business activity. The lessened interest in technical fields came at the same time that the U.S. government and IT companies were defending the outsourcing of computer technology jobs to countries where wages were lower. Gartner predicted that by 2008 a quarter of all technology jobs would be located in less-developed countries with low costs.

      Some technology firm executives stated that American corporations would reinvest the money saved through outsourcing and that this would lead to more American jobs in the long run. Others suggested the impending retirement of the post-World War II baby-boom generation would open up more computer technology job opportunities in the U.S., despite outsourcing. Computer executives also admitted that there was a risk that outsourcing might simply result in fewer American computer technology jobs. The U.S. government opposed any limits on the outsourcing of computer technology jobs, calling it a short-term protectionist approach, but there was some concern in Congress over the offshore outsourcing of work on government contracts.

      The PC industry seemed to be on an upward trend late in the year, although there was little economic recovery in the American business market, a key segment for the PC industry's prosperity. Worldwide PC shipments grew faster than anticipated in the third quarter and were about 15% higher than in the same period a year earlier.

      As the year drew to a close, IBM Corp. reported that it was beginning to see signs of economic stabilization and expected to create 10,000 new jobs in 2004. Google, the privately owned search engine company that had become nearly a household word, remained consistently profitable. Google's edge was its private computer network that periodically scoured and stored a large percentage of the Internet's Web pages and then used them to provide what were widely considered the best searches of that information. By year's end investors were expecting an initial public stock offering (IPO) from Google that some estimated could value the company at more than $15 billion.

      PC industry pioneer Adam Osborne, a former technical writer who introduced the first portable personal computer in 1981, died at age 64. (See Obituaries (Osborne, Adam ).)

Internet Access.

      Wireless computer networks grew in popularity as more coffee shops, hotels, restaurants, and airports offered “hot spots” (very localized signal-coverage areas) based on a technology called Wi-Fi (for wireless fidelity). The same technology was used for home computer networks because it eliminated the need to run wires between computers. Within a radius of 9–90 m (30–300 ft) from the hot spot's antenna, computers equipped with Wi-Fi circuit cards or chips could connect to the Internet without visible communications links. Two commonly used versions of Wi-Fi, known as 802.11b and 802.11g, enabled wireless transmission speeds of 11 million bits per second (bps) or 54 million bits. Next-generation Wi-Fi standards being developed held out the promise of speeds of 200 million bps or more.

      Some businesses, such as Starbucks coffee shops and McDonald's restaurants, charged customers for Wi-Fi use, while others offered the service for free in order to attract customers. Free service was practical because Wi-Fi equipment was relatively inexpensive and because many businesses already had high-speed connections to the Internet that also could handle the added Wi-Fi traffic.

      Intel introduced its new Centrino microchips that provided laptops with built-in Wi-Fi capability. In addition, new Wi-Fi accessories for videogame consoles simplified playing games over the Internet by connecting game machines in the living room to a high-speed Internet connection in another part of the house.

      Wi-Fi, however, was in its early days, and for-pay hot spots were expected to generate no more than $20 million–$60 million in annual revenue in the U.S. Some analysts predicted Wi-Fi revenue might reach $1 billion or more in the U.S. in only three years. Cellular telephone companies appeared poised to become significant Wi-Fi providers; T-Mobile was an early entrant that provided service in more than 2,500 bookstores and coffee shops. Conventional wired telephone companies saw Wi-Fi as an extra service they could use to keep digital subscriber line (DSL) customers from defecting to cable modems, which operated over cable TV networks. For example, Verizon Communications, the largest U.S. local telephone company, continued to add hot spots in parts of New York City. It offered free use of the hot spots to customers of its wired DSL service.

      Wi-Fi also created new security problems for the unwary. People using public hot spots might have their e-mail communications intercepted by others, and home and business owners of Wi-Fi networks did not always know they should encrypt their network traffic to safeguard it from passersby with laptop computers. Sophisticated wireless snoops could sometimes steal Internet access, as well as data, user names, and passwords.

      ISPs saw an increasing number of their customers switch from dial-up Internet access to high-speed broadband during the year. In the U.S., cable modems continued to outpace DSL; by mid-2003 cable modem connections had more than a two-to-one lead over DSL. As DSL providers such as Verizon, SBC Communications, and EarthLink began cutting prices to be more competitive, some cable systems responded by increasing the speed they offered consumers. By year's end cable companies Comcast Cable Communications and Adelphia Communications were claiming they would increase Net access speeds to 3,000,000 bps for downloads, about double the previous maximum the firms offered their consumer customers (upload speeds remained a relatively slow 256,000 bps).

      South Korea, with the encouragement of its government, became a showcase for high-speed Internet access. Telecommunications companies there built what was widely considered to be the most elaborate Net access system in the world. South Koreans adapted by making online gaming and video a part of their daily lives. Experts expressed concern about the risks in broadband connections around the world because these systems were “always on” and therefore more vulnerable to hackers than traditional dial-up connections, which were connected only intermittently.

      Those in the U.S. who lacked broadband connections could buy a little more speed for their existing dial-up modems. Dial-up customers, who paid about $20 a month for Internet access, had the option of paying an extra $5–$8 monthly for data-compression software that made Web pages download more than twice as fast. That was still well short of broadband speeds, but it was also cheaper, since broadband typically cost $40–$50 a month. The compression software sometimes adversely affected the quality of photographic images, a problem that could be cleared up by slowing the download speed.

Legal Decisions and Crime.

      The U.S. Supreme Court agreed to step into a controversial case about how to protect children from inappropriate online material. The Child Online Protection Act, passed in 1998 to punish Internet sites that failed to prevent children from seeing pornography or other inappropriate material, was overturned twice by an appeals court on the grounds that it was too restrictive of what adults had a right to see. The act, which was not in force pending the outcome of the Supreme Court case, was backed by the federal government but opposed by the American Civil Liberties Union, on the grounds that it restricted free speech. The act was the government's second effort to enact Internet protections for children. The Supreme Court had ruled in 1997 that a previous law, the Communications Decency Act (passed in 1996), was unconstitutional because it restricted free speech.

      The Supreme Court upheld another controversial law restricting Internet access, the Children's Internet Protection Act, which required libraries and schools to use Internet filters to protect against inappropriate material or risk losing federal funds. Librarians lost their challenge that the law was unconstitutional.

      In a closely watched legal battle that could affect the rest of the electronics industry, IBM was the subject of more than 200 lawsuits brought by employees who claimed that they were harmed by chemicals used in the firm's electronics-manufacturing processes. The case could affect other manufacturers of semiconductors and computer hard-disk drives that used similar chemicals during the 1970s and '80s. As the first of the cases went to court, IBM protested that there was no evidence that the employees became sick because they were exposed to chemicals on the job. IBM also denied plaintiff allegations that it covered up the chemicals problem.

      IBM also was locked in a legal fight over OS software. The SCO Group filed a $3 billion lawsuit, charging the computer industry giant with having illegally taken pieces of SCO's Unix computer operating software code and put them into the IBM version of the Linux OS. IBM filed counterclaims alleging that SCO had violated IBM patents and engaged in unfair trade practices.

      While Microsoft had settled the U.S. government's antitrust suit against it in 2001, the firm continued to have antitrust trouble in Europe. The European Commission accused Microsoft of unfairly using its dominance in media-player software and in Web and e-mail servers to improve its position in other parts of the software market. As part of a four-year antitrust case, the European Commission let it be known that it was considering a fine against Microsoft and possibly the forced disclosure of Microsoft's server software source code to other firms. Microsoft declined to comment on the likely outcome of the case but said that it would try to respond to the commission's concerns. Microsoft also described software-licensing changes that it had made in connection with its settlement of the U.S. government's antitrust lawsuit. The company asserted that the changes made it simpler and less expensive for competitors to use Microsoft source code to make sure their server software worked well with Windows OS software.

      Some experts reported in 2003 that computer crime was becoming more elaborate. The head of the U.K.'s National Hi-Tech Crime Unit said organized crime had increased its presence on the Internet, where it was engaging in extortion, child pornography, and financial scams. Internet security experts affirmed that the online sale of stolen credit-card numbers, once carried out by lone hackers, had become a group activity in which large numbers of people used Internet relay chat to buy and sell the stolen card numbers as well as to check the validity of the numbers.

      Adrian Lamo, a 22-year-old hacker, faced federal charges in connection with his alleged illegal accessing of the internal computer network at the New York Times newspaper in 2002. A 19-year-old Pennsylvania college student, Van Dinh, was accused by the Securities and Exchange Commission of having used hacking and identity theft to aid in bogus securities transactions in which he sold stock options in Cisco Systems a week before they were to expire. A 25-year-old New York City man was arrested for having stolen bank-account information from 450 customers of a photocopying shop; police said he placed software on the shop's computers that captured customers' keystrokes and thus revealed their personal information.

      Sometimes security lapses made online theft easier. Microsoft acknowledged that a security flaw in its Internet Passport service, which was designed to make Internet commerce easier by identifying customers to Web merchants, had left 200 million consumer accounts vulnerable to hackers. Microsoft said that only a small number of Internet Passport users were hurt by the security lapse, but the company would not say how many.

      In one of the first cases of its kind, a British man was acquitted of dealing in child pornography after convincing the court that his PC had been infected by a rogue hacker program that collected the illegal child-pornography photos and stored them on his hard drive without his knowledge. A computer security consultant who examined the man's PC found a dozen so-called “Trojan horse” programs on the hard drive that had been placed there by outsiders.

E-Commerce.

      E-commerce played a role in changing attitudes toward romance as online dating services became more socially acceptable. By midyear 45 million Americans were visiting online dating services every month, nearly a 30% increase from the end of 2002. Subscription revenues for dating Web sites were projected to total about $100 million a quarter in 2003, or 10 times more than they had been at the beginning of 2001. Genealogy software and online databases (both free and subscription) offered people new ways to investigate family history and had the potential to provide “genetic genealogy” in the search for more distant ancestry. (See Sidebar (Genealogy Takes Root on the Internet ).)

      A new approach to online book marketing rankled authors by disclosing a considerable amount of a book's content for free. An Amazon.com feature that let people search the texts of 120,000 books for specific words or phrases let users view up to 20 pages of a book at once, and sometimes much more if the user performed a series of searches. About 190 publishers took part voluntarily in the Amazon service, but some declared that they wanted to make sure the service did not hurt book sales.

      Demand for online retailing led to a resurgence in IPOs. That was a welcome change for a group of companies that had not fared well with potential investors since the burst of the Internet bubble three years earlier. While the amounts raised in the IPOs were relatively modest, in the range of tens of millions of dollars, the change in investors' mood was expected to make it easier for other online sellers to raise operating capital.

      Online auctions, one of the major success stories of e-commerce, were nonetheless plagued by fraud. Some law-enforcement officials reported that auctions accounted for nearly half of all Internet fraud complaints. In a crackdown on auction fraud, the FTC and 33 state and local law-enforcement agencies filed 51 criminal and civil cases for questionable auction activities. Violations ranged from sellers' failing to deliver items that had been sold to sellers' using phony third-party escrow services that purported to hold payment money from the buyer until goods had been delivered by the seller. Identity theft, in which auction accounts were set up using names and numbers from stolen credit cards, was another source of auction fraud.

      E-commerce seemed likely to benefit from the U.S. government's continued philosophy of not taxing Internet access. At year's end some members of Congress were leaning in favour of extending the tax ban, but final passage of a measure was delayed until at least early 2004. The U.S. House of Representatives passed a bill that would extend and expand a five-year-old Internet tax holiday. The tax moratorium would ban state and local governments from taxing Internet access and would end legal loopholes that had allowed some states to keep their Internet taxes. Some U.S. senators were in favour of permanently banning taxes on Internet access, but the Senate bill worried state tax collectors, who feared that all telephone company voice-call charges eventually would become exempt from taxation when telephone companies converted to Internet telephony, in which calls were routed over the Internet instead of through the traditional telephone network. A complete shift to Internet telephony appeared to be years away.

Computer Games.

      The once-mighty Sega Corp. faced a merger with Japan's Sammy Corp., but after talks fell through, Sammy instead became the biggest shareholder in Sega. Observers alleged that Sega's sales had fallen because it tried to make too many different types of games and wound up with many that were unremarkable. The company's financial troubles also were related to its failed Dreamcast game console, which it had discontinued in 2001.

      Competition also hurt Nintendo's GameCube game console, and the company temporarily stopped manufacturing it in August when GameCube sales were running behind those of Sony's PlayStation2 and Microsoft's Xbox. At year's end some analysts considered Nintendo to be in the least-favourable position of the three console makers, despite a sales spurt for GameCube following a September price drop from $150 to $99. Nintendo faced new competition in the handheld-gaming-market segment that it previously had dominated. Cellular telephone manufacturer Nokia introduced the N-Gage, a combination cell phone and game machine that competed with Nintendo's latest handheld, the GameBoy Advance SP. Sony announced plans to introduce its own portable game player, the PSP, in late 2004.

      Violent videogames got an unexpected endorsement when the journal Nature published one of the first studies to document the benefits of playing video games. The research showed that experienced first-person shooter players were 30% better than nonplayers when it came to noticing things that happened around them by means such as peripheral vision and rapidly switching attention.

New Ideas.

      Hard-disk-drive manufacturer Maxtor announced that it had developed a new technique called “perpendicular recording.” The technology, along with a new type of recording surface for hard disks, could more than double the amount of data on a 9-cm (3.5-in) disk to 175 billion bytes. Magink, a display technology firm, produced a sort of “electronic paper” with a surface that looked like paper but behaved like an electronic screen. The technology could produce high-resolution colour images by using electric charges to change the way surface particles reflected light.

      There were some signs of technological cooperation that had long been lacking. The Reuters Group, an information services firm, announced interoperability agreements between its relatively small instant messaging (IM) service and those of IM giants Microsoft, AOL, and the Lotus division of IBM. Lack of interoperability had prevented users of one IM service from communicating with users of another.

      A new wireless data service continued to blur the distinction between telephones and computers. Picture phones (cellular telephones with built-in cameras) became one of the hottest wireless products, even though the photographs they took were of low quality. The key appeared to be their immediacy; a picture-phone owner could, in a few moments, take a photo and transmit it to another wireless phone or send it over the Internet to an e-mail recipient. The picture phones were the latest in a series of hybrid phone-data devices that included phones that could send e-mail, browse the Internet, or function as palmtop computers.

      The year was not without some techno-silliness. “Flash mobs”—groups of strangers who were mobilized on short notice via Web sites, online discussion groups, or e-mail distribution lists—took part in bizarre but harmless activities in public places, such as calling out the same words or eating the same food. While flash-mob antics tended to be silly, some experts conjectured that they held the promise of organizing people for more practical purposes, such as political demonstrations.

Steve Alexander

▪ 2003

Introduction

      The year 2002 was not a good one for computer technology companies. The recession sharply reduced sales; thousands of information technology (IT) workers lost their jobs; and technology-related stocks were battered on Wall Street. Even in hard times, however, the technology world seethed with activity. The legal battle over the future of on-line music continued, and there was no resolution in sight. Enthusiasm for broadband Internet access cooled, but the battle for on-line customers between AOL Time Warner, Inc., and Microsoft Corp. heated up. Hewlett-Packard Co. (HP) acquired Compaq Computer Corp. for $19 billion, despite a hard-fought battle by some shareholders to prevent the deal.

Music and Film on the Internet.

      The legal issue that drew the most attention was the battle between the music-recording industry and various unauthorized Web sites that distributed music for free over the Internet. The recording industry managed to drive Napster, the high-profile Web service that had popularized free music downloads, off the Internet with a court order. (Napster later filed for bankruptcy after it failed to raise capital in order to become a for-pay music service.) Other Web organizations, however, took Napster's place and attracted millions of consumers. These new organizations appeared to be harder to shut down, since they used peer-to-peer network sharing, in which a central Web site like Napster's was not necessary for individuals to trade files.

      The Recording Industry Association of America (RIAA) pressed ahead with more lawsuits, sometimes in concert with the Motion Picture Association of America (MPAA), which was concerned because some of the free Internet music services also distributed free unauthorized copies of Hollywood films. (Only about 10% of U.S. households had the high-speed broadband Internet connection that was needed to make downloading a movie practical.) In October 2001 the RIAA and the MPAA filed suit against Napster successors Kazaa BV, Grokster Ltd., and StreamCast Networks, Inc., all of which distributed software created by Amsterdam-based Consumer Empowerment BV, or FastTrack. A Dutch court ordered the owners of the Kazaa software to stop distributing the music-sharing software over the Internet, but in March 2002 the Amsterdam Court of Justice ruled on appeal that the Kazaa software owners were not liable for abuse of their file-sharing program, which had other uses besides downloading copyrighted music and films.

      Internet service providers (ISPs) also became a legal target. In August 13 record labels sued four ISPs—AT&T Broadband, Cable and Wireless, Sprint PCS, and WorldCom, Inc.'s UUNet Technologies—in an effort to stop them from providing access to a Chinese Web site, Listen4ever.com, from which unauthorized music files could be downloaded. The suit was withdrawn once the Web site had gone off-line. In July the RIAA claimed in U.S. federal court that the 1998 Digital Millennium Copyright Act required Verizon Communications to reveal the identity of one of its Internet access customers who allegedly had downloaded music. Verizon, backed by Yahoo! and other Internet firms, opposed the move, claiming the RIAA sought to put ISPs in the role of policing music copyrights.

      The recording and movie industries also issued warnings to groups that operated high-speed networks. About 2,300 colleges received letters urging them to curb student downloading of free music; the letters were signed by the RIAA, the National Music Publishers' Association, the Songwriters Guild of America, and the MPAA. The same groups also warned top corporate executives not to let their employees use high-speed company networks to download copyrighted material for free.

      Informally, the recording industry let it be known that it would use technology to disrupt the free music services; it hired software companies to flood the free on-line services with fake copies of popular songs. The recording industry helped create authorized, for-pay music Web sites to combat the free services, but restrictions placed on consumers' ability to download music and copy it to compact discs (CDs) or other devices, such as MP3 players, limited the appeal of the authorized music sites. As a result, the authorized music Web sites did not attract the millions of consumers that flocked to the free music services.

      There was debate inside and outside the recording industry about whether the availability of free music on the Internet was contributing to a drop in sales of music CDs at retail stores. The International Federation of the Phonographic Industry reported that worldwide music sales fell 5% in 2001, to $33.7 billion, and analysts confirmed that sales continued to drop in 2002. Representatives of the recording industry insisted that free music was undercutting sales of legal CDs, but some observers suggested that allowing consumers to sample free music on the Internet actually contributed to CD sales and that the sales slump was related to the economy rather than to Internet file trading. Still others said that CD sales and authorized on-line music sites suffered because the recording industry was not willing to satisfy consumer demand for unlimited usage of one song at a time, a capability that was offered by the free music services. The debate occurred at the same time that several major record labels and music retailers agreed to pay $67.3 million to settle a two-year-old CD price-fixing antitrust lawsuit brought by 43 U.S. states.

      The music industry experimented with copy-proof music CDs that were sold in retail stores, but either the copy protection made the CDs difficult to play or purchasers soon found simple ways to overcome the protections. One side effect of the copy-proof technology was that it prevented a CD from being played on some personal computer (PC) CD-ROM drives and DVD players.

The Internet.

      The adoption rate for broadband Internet access—primarily cable modem and digital subscriber line (DSL)—slowed, largely as a result of the depressed economy. A study by PricewaterhouseCoopers in June predicted that it would be 2006 before broadband Internet access was used extensively enough to create demand for broadband-only services, which would offer such great amounts of data that a dial-up Internet connection would not be fast enough. The report projected that by 2006 there would be 35.3 million U.S. broadband subscribers, up from 9.4 million in 2001, and that the number of broadband Internet access customers would nearly equal the number of customers using slower dial-up Internet access (about 38.2 million).

      AOL Time Warner and Microsoft's MSN service continued to battle for Internet access customers—both broadband and dial-up—by introducing new versions of their software that offered features to combat junk e-mail and foster a sense of on-line community. AOL, which with some 34 million customers remained the world leader in Internet access, was profitable, while MSN had about 8.7 million customers and was not profitable.

      America Online, a part of AOL Time Warner, reexamined the idea of creating original Internet content, a strategy it had departed from five years earlier when it chose to lease space on its service to other content developers. Faced with a sharp drop in Internet advertising and a desire to attract and retain customers who had broadband Internet access, AOL said it would sell directly to its own customers, using formats such as text-only chats with celebrities, movie trailers, and videos of vacation destinations. It was believed that AOL would make money selling tickets and merchandise and that customers with high-speed Internet access might pay extra for broadband-only on-line services.

      One of the Internet's larger broadband access services, AT&T Broadband, changed ownership as Comcast Corp. combined AT&T's cable business—which included Internet access, cable television, and telephone services—with its own cable operation. The $45 billion stock deal was approved by shareholders in July but would not be completed until 2003.

      Microsoft conceded that its .Net plan to make computer applications more available over the Internet had been slow to take off. The company said it would try to accelerate adoption with new .Net-related versions of its Windows operating system (OS) and server software. The .Net effort was best known for its Web services, a form of distributed computing that was expected to make linking different computer systems and applications easier than it was in 2002. Market research firm IDC indicated that widespread adoption of Web services was still years away.

      In September the U.S. Department of Commerce (DOC) gave the nonprofit Internet Corporation for Assigned Names and Numbers (ICANN) one year to improve its performance. The DOC reported that there had been numerous complaints about ICANN, which was established in 1998 to manage, under government contract, the system that translates familiar Internet addresses into the numbers used by the Internet to route requests for information. The DOC also said that ICANN's attempts to reform itself were promising. The one-year contract extension required ICANN to be more open about how it made decisions and more responsive to Internet users and to create an advisory role for national governments.

      A study by the Pew Internet & American Life Project found that 86% of college students had gone on-line, compared with 59% of the general population. The study also showed that nearly three-fourths of college students in the U.S. used the Internet more than they used conventional libraries. A large majority of those students said the Internet had been a big help in their education. The study was based in part on more than 2,000 responses from undergraduate students at 27 American colleges and universities. Elsewhere, there were concerns that some students were misusing the Internet to cheat. (See Education: Special Report (New Frontiers in Cheating ).)

      Worries about the “digital divide,” the idea that people who did not have on-line access were at a disadvantage compared with those who did, subsided a bit in the U.S. in 2002. Recent figures demonstrated that Internet access was growing the fastest among households earning less than $15,000 a year and that the use of the Internet was more equal than before among different racial and ethnic groups. The figures also showed that households with incomes above $50,000 were three times more likely to have Internet access at home than households with incomes under $25,000. The United Nations concluded, however, that the international digital divide was growing. According to the International Telecommunications Union, much of the world suffered from a lack of computerized information and more than 80 countries had fewer than 10 telephone lines for every 100 inhabitants. In 60% of countries, fewer than 1% of citizens used the Internet.

      Unsolicited commercial e-mail, or spam, increased to the point that it annoyed virtually anyone with an e-mail account. Many of the unwanted e-mails offered pitches for pornography and low-cost loans. By some estimates the volume of spam increased from 8% of all e-mail in late 2001 to 35% by mid-2002. Those who sent spam apparently were encouraged by its low cost as an advertising medium. On the basis of the cost of buying mailing lists, each spam message cost only a fraction of a cent to send. As a result, a single message could feasibly be sent to thousands or millions of people.

      Public libraries in the U.S. were freed from the federal requirement that they use Internet filters to block pornography from being viewed on library PCs. In May a federal appeals court overturned the Children's Internet Protection Act, signed into law in 2000, because the act also would have forced libraries to block access to Web sites that contained free speech that was protected under the law.

      The biggest Internet traffic slowdown in several years occurred in October when a software upgrade by UUNet caused problems. UUNet, which handled as much as half of all U.S. Internet traffic, slowed communications for most of a day. While the Internet was built to withstand the failure of even a major provider of high-speed communications, rerouting Internet traffic to follow other pathways required using smaller lines with less capacity, which resulted in slowdowns for Internet users.

Companies.

      Hewlett-Packard's $19 billion acquisition of Compaq Computer was completed in 2002, despite the opposition of a group of stockholders led by Walter Hewlett, son of one of HP's founders. Hewlett, who had favoured the acquisition as a company director, said in late 2001 he would fight the deal instead. He was joined by David W. Packard, the son of HP's other founder, and they later were joined by the David and Lucile Packard Foundation. Collectively, the family members controlled about 18% of HP's shares. The hard-fought and very public battle culminated on March 19 at a Hewlett-Packard shareholders meeting at which the acquisition was narrowly approved. Soon afterward, Hewlett filed a lawsuit in Delaware Chancery Court alleging that HP had unfairly influenced the shareholder vote of Deutsche Bank and had not disclosed problems encountered during the planning on how to combine HP and Compaq. A Delaware court judge dismissed the lawsuit, ending the family's challenge to the acquisition, which had been championed by HP's chairman and CEO, Carly Fiorina. (See Biographies (Fiorina, Carly ).)

      IBM Corp. agreed to buy the consulting arm of PricewaterhouseCoopers for an estimated $3.5 billion. The agreement was expected to augment IBM's computer consulting business, which already was a major force in that market. IBM sold its hard-disk-drive business to Hitachi Ltd. for $2.05 billion. IBM disclosed in government regulatory filings that the disk-drive business had been losing money and that it had a pretax loss of $423 million in 2001. Hitachi was to own 70% of the disk-drive business initially and through a series of payments would gain full ownership after three years. The Internet auction business eBay Inc. paid $1.3 billion to acquire PayPal, a provider of on-line payment services between individuals and businesses.

      In November U.S. District Judge Colleen Kollar-Kotelly gave her approval to most details of the antitrust settlement reached earlier between Microsoft and the U.S. Department of Justice (DOJ). The settlement for the most part ended the opposition of nine states and the District of Columbia that had pushed for stronger penalties for the software industry giant. By December Massachusetts and West Virginia had said that they would appeal. Among other requirements, the court held that Microsoft had to reveal some of its technical information to competitors months ahead of schedule. The judge said that a corporate compliance committee made up of members of Microsoft's board of directors would ensure that Microsoft met the requirements of the settlement.

      Microsoft previously said that it was making progress under the proposed settlement it reached in 2001 with the DOJ and nine states. In August 2002 Microsoft listed the technical ways in which it was complying with the proposed settlement. The compliance involved application programming interfaces that enabled third-party software firms to make their products work smoothly with Microsoft's Windows OS software. Microsoft released details of the communications protocols that linked desktop Windows to Microsoft's server version of Windows and revealed how it would allow computer makers and consumers to conceal Microsoft's Web browsing, media player, instant messaging, e-mail, and Java-related software in the Windows XP and Windows 2000 versions of its desktop OS. Microsoft also explained how it had created a more evenhanded system of licensing Windows in response to allegations during the antitrust trial that it used licensing to help some PC makers and hinder others. In December Microsoft was ordered to include Java in its Windows operating system.

      The DOJ and Microsoft made minor changes in the wording of the proposed settlement in February, and in July they got the approval of Judge Kollar-Kotelly for properly disclosing their discussions about the settlement. Until November the judge had continued to review the proposed settlement and to consider a request for stiffer penalties against Microsoft that was submitted by the nine dissenting states and the District of Columbia. The dissenting states originally were part of a group of 18 states that were co-plaintiffs in the federal government's antitrust suit.

      In June Microsoft resolved a dispute with the Securities and Exchange Commission (SEC) in which the company said that it would not use reserve accounts to make up for shortfalls in revenues during tough economic times. The SEC alleged that at least part of the reserves did not comply with generally accepted accounting principles and claimed that Microsoft was deliberately understating its revenues. Microsoft consented to a cease-and-desist order without admitting or denying allegations that it had maintained such reserve accounts from 1994 through 1998. In August the company settled charges by the Federal Trade Commission (FTC) that it had overstated the security and privacy aspects of its Passport Internet identification service. The service stored user passwords and credit card numbers on Microsoft servers as a way to simplify Web surfing and on-line purchases. The FTC complained that Microsoft had exaggerated the safety of transactions made through its service.

      Microsoft irritated many of its corporate customers by changing the way it licensed its software, but it appeared to have retained most of those customers. The licensing plan forced corporate customers to switch from paying when they upgraded their software to paying annually for upgrades under a two- or three-year contract called Software Assurance. Customers complained that this resulted in sharp increases in licensing costs. Microsoft said the new plan would help customers spread out the cost of software upgrades over several years rather than force them to pay a lump sum when an upgrade occurred.

      AOL Time Warner also was investigated by the SEC, which probed AOL's practice of trading on-line advertising for stock in Internet companies or for equipment or services from other firms. Questions were raised about whether the trades reflected the true value of transactions, and there were concerns that the value of advertisements might be inflated or that supplier companies might be expected to return some money in the form of advertising purchases. AOL Time Warner said in August that $49 million might have been inappropriately treated as AOL revenue over an 18-month period; in October the company raised that figure to $190 million over a two-year period.

      The SEC investigation came at the same time that stockholders were complaining that the 2001 merger of AOL and Time Warner had not produced the dominant company they expected. Analysts said that the expected synergy between Time Warner's TV, film, and magazine media and AOL's on-line information packaging never materialized. In addition, economic conditions lowered AOL's on-line advertising revenues and caused a slowdown in the rate at which AOL's on-line subscriber base grew. In September the company said AOL's on-line advertising for the year would be $100 million less than previously forecast.

      The economy plagued computer technology companies, nearly all of which suffered from reduced IT spending by customers. Many were forced to lay off workers, including Electronic Data Systems Corp., data storage firm EMC Corp., and Quantum Corp., a data protection and storage firm. Industry giant IBM announced job reductions, but some analysts expected that many more would occur later. IBM layoffs totaling more than 15,600 took place in the second quarter. In October IBM cut 3,700 full-time and independent contractor jobs when it closed a hard-disk-drive plant in Hungary, citing weak demand. Analysts suggested that IBM was doing better during bad economic times than many other technology companies, largely because it had begun emphasizing services, an area where customers could more easily realize benefits from their spending. HP, in a consolidation move growing out of its acquisition of Compaq, announced that it planned to cut at least 15,000 jobs from its 150,000-employee workforce.

      The IT hiring market stabilized. The Information Technology Association of America in December reported that more than 1.1 million jobs were filled in 2002, and a third-quarter report indicated that layoffs had declined.

      Global Crossing Ltd., a telecommunications firm that spent $15 billion to build a worldwide network to serve high-speed Internet and telephone customers, filed for bankruptcy in January. When WorldCom in July became the largest Chapter 11 bankruptcy ever, a large chunk of the Internet itself was involved because UUNET provided a large part of the Internet's “backbone,” the long-distance segment of the Internet. The Internet backbone operated by UUNET continued to function despite the parent company's bankruptcy.

E-Commerce.

      Privacy was a major concern of those monitoring e-commerce practices. DoubleClick Inc., which provided advertising services to Internet marketers and Web sites, paid settlements in two privacy-related cases. DoubleClick placed on consumers' computers “cookie” files that tracked Web surfing; the firm then showed advertising that was aimed at the shopping and Web-surfing preferences each consumer had exhibited.

      In connection with that practice, DoubleClick settled consolidated class-action lawsuits from several states that claimed that DoubleClick violated state and federal laws by tracking consumers' Web-surfing habits and combining that information with personally identifiable data to create profiles. DoubleClick agreed to pay legal expenses of up to $1.8 million, to tell consumers about its data-collection activities in its on-line privacy policy, and to get permission before combining a consumer's personally identifiable data with his or her Web-surfing history. In another case DoubleClick agreed to pay $450,000 to settle differences with attorneys general from 10 states who were investigating its information gathering. Privacy advocates said DoubleClick and other on-line advertisers would not be greatly hindered by the settlements because it was still feasible to match ads to consumer Web-surfing preferences without collecting personally identifiable information.

      Meanwhile, some traditional businesses also found Internet marketing useful. Major League Baseball began experimenting with for-pay Webcasts of its games, although the audience was limited to consumers who had high-speed Internet connections and who were willing to accept a lower-quality picture than television provided. The first Webcast game was offered for free on the league's official Web site (mlb.com) in August and attracted 30,000 viewers. The Web continued to be important to car sales as a way to acquaint customers with what was available long before they visited an auto showroom. As a result, automobile manufacturers and dealers tended to advertise on the Internet, particularly on car-related Web sites.

      On-line education—colleges and universities offering courses over the Internet—did not prosper, and investment in it sharply declined. University officials said that they had underestimated the costs and overestimated the demand for on-line learning. While commercial on-line learning faded, however, the U.S. government pressed ahead with its eArmyU program, which was intended to boost army retention by offering on-line college degree programs. Only soldiers with at least three years of army service ahead of them were eligible to participate.

      Selling digital subscriptions of magazines and newspapers over the Internet was tried, but the results were not clear. The idea was to sell a digital version of the entire print publication rather than merely provide part of it free on a Web site, as was widely done by newspapers. About 60 newspapers, including the New York Times, offered the full digital copies. Subscribers to such services were highly valued because they could be counted in a publication's paid-circulation figures, which were used to determine what advertisers could be charged.

      The MGM Mirage casino announced plans to start an Internet casino, becoming the first American casino to join what was said to be a $3.5 billion annual market for on-line betting. However, the MGM on-line casino would not be allowed to accept bets from residents of the U.S., where on-line gambling was illegal. The on-line casino's computer operations were to be based outside the U.S. on Britain's Isle of Man.

Personal Computers.

      PC market penetration leveled off in the U.S. in 2001 after having reached about 60% of the nation's households, and penetration seemed unlikely to grow in 2002 because of the economy and because, according to some analysts, consumers did not believe new PCs offered significant new benefits. In September IDC forecast that worldwide PC sales would grow 1.1% in 2002; that was a sharp reduction from IDC's June prediction of 4.7% growth. IDC said the lowered prediction reflected slowed consumer spending and the decision of many corporations to postpone buying new PCs. Apple Computer Corp. said it did not expect a recovery in sales in the near future. Despite slow sales, the industry continued to offer ever-faster new PCs. Processor speeds of 3 GHz (gigahertz) were expected by year's end, even though there were few consumer PC applications that required that much speed. Despite the bad news in PC sales, the phenomenal two-decade rise of the PC as an essential mainstream tool passed another milestone. It was estimated that in April the one billionth PC had been shipped. If all those computers were still in use—which was doubtful—there would be about one PC for every six people on Earth.

      A new type of device, the portable Tablet PC, which used a special version of the Windows XP operating system, was introduced by several manufacturers in November. The Tablet PC used a touch-sensitive screen that allowed users to use plain handwriting, which the PC would recognize and, if desired, convert into conventional text. Some wireless telephone service providers upgraded their networks to handle data at the speed of a dial-up modem in a desktop computer and announced future plans to build third-generation (3G) networks that would have enough capacity to handle streaming video and audio rates of two million bits per second or more. (See Special Report (Wireless Revolution ).)

      There was continued adoption of the Linux open-source OS. Linux was a competitor of Microsoft's Windows that, unlike Windows, could be modified because its underlying structure, or source code, was freely available. Versions of Linux that had been modified for consumers typically were offered free or sold at a much lower price than that charged for Windows. Microsoft acknowledged that Linux was a serious competitor but said it would compete on the basis of what it perceived to be the additional value of Windows and would not compete on price. Linux also became more popular in science and industry. Los Alamos (N.M.) National Laboratory reported that it would buy a $6 million Linux supercomputer to run its nuclear weapons simulation software. IBM said Linux would be the main OS on its new line of supercomputers, which would be introduced in 2005 or 2006.

      On-line gaming on PCs got some competition from specialized video-game consoles when Sony Corp. began its on-line service for the PlayStation 2 console in August. Initially the on-line gaming service was free, but customers had to provide their own Internet connection and had to purchase a $39.99 connector that allowed the PlayStation 2 to be attached to the Internet. Microsoft launched a for-pay on-line service for its Xbox video-game console in November. Sales of traditional off-line computer games and video games appeared recession-proof for most of the year, but by late fall analysts had begun to lower their expectations for the fourth-quarter holiday period that was critical to the game industry. By some estimates game and hardware sales would total $10.5 billion in 2002, still above the $9.4 billion in sales for 2001.

Computer Security.

      In the year following the terrorist attacks in the U.S. on Sept. 11, 2001, there were concerns about the security of the Internet. Because of poor economic conditions, little corporate money was spent on new security efforts, and many companies cut their spending on information technology. The U.S. government, however, boosted IT spending 64%, to $4.5 billion, for the fiscal year begun in October 2002.

      In August Richard A. Clarke, who headed the Office of Cyberspace Security in U.S. Pres. George W. Bush's administration, said the biggest threat to computer security might be other nations rather than terrorists. The administration said foreign governments might have been responsible for computer intrusions at U.S. government laboratories in 1999 and 2000 and for the 2001 attack of the Code Red worm, which initially was aimed at the White House. In addition, the federal government reported that it had detected electronic attacks in August against U.S.-based ISPs; the government suggested that the attacks might have originated in Western Europe.

      In October the federal government investigated whether terrorists or hackers were responsible for a “distributed denial of service attack” aimed at 13 Internet servers that handled the Internet's Domain Name System (DNS). (The DNS translates the Web addresses typed into Web browsers into the numerical codes that identify computers on the Internet.) The distributed denial of service attack attempted to overwhelm the 13 servers by flooding them with phony communications, but it slowed Internet traffic only briefly.

      Other government computers were found to be vulnerable. A computer security firm said that it had cracked U.S. military and government computers as part of a test and had learned that thousands of machines containing sensitive data were accessible. The information obtained included techniques of military data encryption, Social Security numbers, and credit card numbers. In another case some detailed engineering plans for NASA space vehicles were obtained by a Latin American hacker, who passed them on to a magazine reporter in August.

      There also was interest in a new form of computer security, which involved using computers to recognize the faces of terrorists from their images on video cameras installed in public places. Recognizing faces posed a difficult computing problem in what was called “signal processing.” While it was possible to recognize faces—even those disguised by beards or glasses—there was a problem with doing it in “real time,” or at the moment that thousands of people passed the cameras. To do so would require huge amounts of computer processing power. In addition, some champions of civil liberties worried that scanning faces in public locations created the potential for tracking the movements of individual citizens, since the information could be retained in a database. (See Social Protection: Special Report (Security vs. Civil Liberties ).)

      The U.S. Department of Defense gave Carnegie Mellon University a $35.5 million, five-year grant to develop ways of fighting “cyberterrorism.” Research was said to involve different means of identifying people who used computers, which thus would make it harder for hackers or terrorists to remain anonymous. Electronic signatures, fingerprints, eye patterns, face-recognition technology, and voice scans were among the methods under consideration. The centre also was researching how computer components could be made to shut down automatically if a computer attack occurred.

Computer Crime.

      Computer crime took many forms, including industrial espionage. In April three Chinese citizens who in 2001 had been accused of the theft of trade secrets from Lucent Technologies also were said to have taken information from four other firms that had licensed portions of their software to Lucent or that sold circuit boards to Lucent. The charges included conspiracy, possession of trade secrets, and wire fraud. The men were accused of planning to steal the ideas behind Lucent's PathStar system for data and voice transmission and to provide them to Internet service organizations in China.

      Old-fashioned fraud also made news. A man and a woman received 12-year prison sentences for auction fraud after they sold items on Internet auction sites run by eBay and Yahoo!; the pair took money from buyers but did not ship the items purchased. The two were caught as part of a cooperative effort by U.S. federal and state law-enforcement agencies, and the sentences they received were believed to be among the longest ever for Internet-related fraud. The FTC said that on-line auction fraud accounted for most of the Internet-related complaints it received.

      In the United Kingdom a 21-year-old man was arrested and accused of having written a piece of software called T0rnkit that helped an intruder conceal his or her presence after gaining access to a computer running the Linux OS. Civil libertarians were upset over the arrest because it appeared to equate the creation of a program that had malicious potential with the creation of a destructive program such as a virus that had actually caused damage. Unlike a virus, T0rnkit did not spread itself, and the T0rnkit author was not accused of having used it to break into any computers. However, T0rnkit was said to have been found on several hacked Linux machines over the past two years. In another case David L. Smith, the author of the Melissa virus, was sentenced to 20 months in U.S. federal prison and ordered to pay a $5,000 fine. The Melissa virus caused major problems on the Internet in 1999; although not damaging to PCs, it replicated itself so quickly that it brought some corporate e-mail systems to a halt.

      Some existing computer viruses continued to plague the Internet, although their threat was diminished. Klez.E, a virus that deleted or destroyed a variety of PC file types, including Microsoft Word and Excel, video, image, and Internet files, became one of the most common computer viruses in the world, but by late in the year the publicity about it had served as a warning to users, and damage from it declined. Meanwhile, a nondestructive variant called Klez.H—which nonetheless could cause trouble by e-mailing a recipient's personal documents to others—continued to spread itself across the Internet.

      In March U.S. officials arrested 90 people said to be members of a nationwide Internet child-pornography ring. Those arrested were charged with crimes that included possession, production, and distribution of child pornography. The Federal Bureau of Investigation said 27 of those arrested admitted to having molested children. In a murder case a 25-year-old man was arrested on federal charges of having used an interstate device—the Internet—to entice a child into sexual activity. The man helped police find the body of a 13-year-old Connecticut girl whom he had met over the Internet.

      Spying by using the Internet became an issue when Princeton University officials accessed student admissions information at rival Yale University. Princeton's president, Shirley Tilghman, apologized and admitted that basic principles of privacy and confidentiality had been violated when Princeton tried to learn whether some students had been admitted to Yale. A Yale report said that 14 breaches of its admissions Web site had originated from Princeton's admission office.

      When the Chinese government began using its influence over China's ISPs to block citizen access to the search engine Google, some computer enthusiasts in the U.S. responded by providing the Chinese with ways to circumvent their government's actions. Chinese computer users were allowed to reach Google through a second, specially constructed Web site that was not blocked by China's government. Those close to the effort said there was a widespread hacker effort to aid computer users in a variety of nations that engaged in censorship or electronic surveillance of Internet users.

New Technology.

      Scientists at IBM designed a miniature computer circuit that covered less than one-trillionth of a square inch. Rather than being made of silicon, the ultratiny circuit was composed of individual molecules of carbon monoxide on a copper surface. It was said that an equivalent silicon transistor circuit would be 260,000 times larger. The technique, however, worked only at the incredibly low temperature of a few degrees above absolute zero.

      IBM also said that its researchers had created carbon nanotube transistors that performed much better than advanced silicon chip transistors while using the same design parameters. Nanotubes are tiny tube-shaped carbon molecules that are thousands of times thinner than a human hair; it was hoped that they could be used to make circuits out of strings of carbon atoms rather than out of wires. Ultimately nanotubes might result in chips that were smaller, faster, and less expensive, but IBM said commercial use of them was probably years away. Hewlett-Packard scientists said they had developed a way of manufacturing molecular-sized circuits. The circuits could make it possible to pack billions or trillions of switches into an area smaller than a fingernail. That could result in powerful and cheap computers, although the scientists said practical use of the technology was at least five years in the future.

      One purported breakthrough turned out to be a fake. In September an in-house review committee ruled that advances in physics claimed by scientists at Lucent's Bell Labs—including claims that the group had created molecular-scale transistors—were based on fraudulent data. The committee said the data in research published from 1998 to 2001 had either been manipulated or made up. The blame was placed on Bell Labs scientist J. Hendrik Schön, whom Bell Labs fired.

Steve Alexander

Microelectronics

      In 2002 the global semiconductor industry made a slight recovery from its worst-ever year, with worldwide sales projected to rise by 1.8% to $141 billion, according to the U.S.-based Semiconductor Industry Association (SIA). Much bigger increases, of 19.8% (to $169 billion) and 21.7% (to $206 billion), were anticipated in 2003 and 2004, respectively. The association believed that recovery was under way and that growth would be steady over the next few years, with global sales in 2004 expected to be higher than those in the peak year of 2000.

      Asia-Pacific continued to be the world's largest semiconductor market and the only one of the four major world markets to grow in 2002 (by 30% to $52 billion). The SIA predicted 24% growth in 2003 to $64 billion and a 25% increase in 2004 to $80 billion. The Americas market, which fell 12% to $31 billion in 2002, was expected to increase in 2003 by 14% to $36 billion and in 2004 by another 14% to $43 billion. For Europe, down by 9% to $27 billion, increases of 18% (to $32 billion) and 19% (to $39 billion) were forecast for 2003 and 2004, respectively. The Japanese market, which declined 7.5% to $31 billion, was expected to rebound 22% (to $37 billion) in 2003 and 18% (to $44 billion) in 2004.

      Sales of dynamic random-access memory (DRAM) rose by 35% to $15 billion in 2002. DRAM chips, which had previously been used almost exclusively in computers, were by 2002 found in a variety of consumer and communications devices. The SIA predicted that the DRAM market would grow by another 35% to $20 billion in 2003 and by 43% to $29 billion in 2004. The market for digital signal processors, which were used in both wired and wireless communications equipment, grew by 15% to $4.9 billion in 2002 and was projected to increase 33% to $6.5 billion in 2003 and another 29% to $8.4 billion in 2004. The application-specific standard products (ASSP) market—which included consumer, computer and related peripheral, communications, automotive, and industrial markets—grew by 5.7% to $15 billion in 2002, despite a decline of 27% in 2001. The SIA predicted increases in the ASSP market of 18% to $17 billion in 2003 and 21% to $21 billion in 2004. Sales of flash memory, used in communications and digital-photography applications, grew by a mere 0.7% to $7.7 billion in 2002 after a huge rise of 133% in 2000 and a sharp drop of 27% in 2001. The SIA forecast a hike of 39% to $11 billion in 2003, however, and a 28% rise to $14 billion in 2004. Other semiconductor categories—including discrete components (such as power transistors and radio-frequency solutions for wireless consumer products), analog products (required for upgraded networks for Internet and digital telecommunications technologies), microprocessors (used in personal computers), optoelectronics (including lasers and image sensors), metallic oxide semiconductor programmable logic devices, and microcontrollers (used in consumer and automotive applications)—experienced either slow growth or a slight decline in 2002, but sales were expected to climb in 2003 and 2004.

      In July 2002 the global top 10 semiconductor suppliers were listed by the American market-research company IC Insights, Inc. (on the basis of sales in the first half of 2002). Although the U.S.-based companies Intel Corp. and Texas Instruments, Inc., remained in first and third place, respectively, the South Korean supplier Samsung Electronics Co. Ltd. rose from fifth to second place. Taiwan Semiconductor Manufacturing Co., the world's largest manufacturer of semiconductors on a contract basis, jumped from the 15th to the 9th position.

      During 2002 some consolidation of the microelectronics industry took place. In June, Infineon Technologies AG (the sixth largest semiconductor supplier and a subsidiary of Siemens AG of Germany) bought the microelectronics unit of the Swedish telecommunications supplier Telefonaktieabolaget LM Ericsson for €400 million (€1 =  about $1). In the same month, French telecommunications supplier Compagnie Financière Alcatel completed the sale of its semiconductor business to the French-Italian company STMicroelectronics (ST) for €390 million. Toward the end of the year, ST (the fourth largest supplier) was engaged in talks with seventh-place Motorola, Inc., of the U.S. with a view to a possible merger in early 2003.

      Over the past few years, consumers worldwide had become increasingly dependent on wireless products, including a vast array of mobile phones, laptop computers, and personal digital assistants. (See Special Report (Wireless Revolution ).) In May IBM Corp. reported that it had shipped its 100 millionth silicon-germanium microchip, which was introduced in 1998 and had become widely used in mobile phones and other wireless devices. In October IBM revealed that research was progressing on carbon-based electronic circuits, which could eventually replace silicon semiconductors. Also in October, Intel announced that it would invest $150 million in companies developing wireless technology. The company expected as many as 30 million laptops with wireless connectivity by late 2005, with its own Banias mobile computing technology available in the first half of 2003.

Alan Stewart

Telecommunications.

      Financially, 2002 was even worse for the global telecommunications industry than the previous year had been. In Sweden, The Netherlands, the U.K., and Germany, Telefonaktieabolaget LM Ericsson, Royal KPN NV, Vodafone Group PLC, and Deutsche Telekom AG, respectively, experienced the biggest losses in corporate history. The telecommunications sector's problems brought bankruptcies, criminal investigations, and job losses and led to changes in the leadership of a number of major companies.

      The first of the year's major collapses was that of the Bermuda-based international fibre-optic communications company Global Crossing Ltd., once valued at nearly $50 billion. In January the company filed for Chapter 11 bankruptcy protection, owing its creditors more than $12 billion. Global Crossing's problems were dwarfed, however, by those of WorldCom, Inc., owner of the long-distance carrier business MCI and the Internet backbone provider UUNET. At the end of April, under pressure from his board of directors, Canadian-born Bernie Ebbers stepped down as chief executive of the company, which he and three friends had founded in 1983 in Hattiesburg, Miss. In June 1999 WorldCom was valued at $180 billion, but its worth had dropped to $7 billion by the time Ebbers resigned. In June WorldCom's chief financial officer, Scott Sullivan, was fired after the discovery that $3.8 billion of operating expenses in 2001 and 2002 had been improperly recorded. In the same month, the company announced that it was laying off 17,000 people, one-fifth of its worldwide workforce. The following month, owing its creditors more than $30 billion, WorldCom filed for Chapter 11 protection in the biggest bankruptcy in U.S. history—twice as large as that of Enron Corp. in December 2001. In early August, when WorldCom reviewed its accounts for 1999 and 2000, an additional accounting error of $3.3 billion was uncovered. In November Michael Capellas, formerly president of Hewlett-Packard Co. (HP), became chairman and CEO of WorldCom. Before HP's merger with Compaq Computer Corp. in March, Capellas had held the same posts at the latter firm. In December six WorldCom directors resigned.

      Criminal investigations were launched into the business affairs of WorldCom and Global Crossing, as well as those of Qwest Communications International, Inc., which was already being investigated by the U.S. Securities and Exchange Commission for its use of “swaps” of network capacity with other operators. In late August Sullivan and Buford Yates, WorldCom's director of general accounting, were indicted by a grand jury on securities fraud charges.

      WorldCom was not the only telecommunications company to acquire a new face at the top in 2002. In January Patricia Russo returned to American equipment supplier Lucent Technologies, Inc., her former employer, as chief executive after less than nine months with Eastman Kodak Co. as president and chief operating officer. Dutch-born Ben Verwaayen, previously with Lucent and KPN, replaced Sir Peter Bonfield in February as CEO of British Telecommunications PLC. Joseph Nacchio, chief executive of Qwest, was replaced in June by Richard Notebaert, previously chairman of telecommunications equipment supplier Tellabs Operations, Inc. In July David Dorman was announced as the new chief executive of AT&T Corp., to replace C. Michael Armstrong after the latter became chairman of the newly merged AT&T Comcast Corp. Ron Sommer, chief executive of Germany's largely state-owned carrier Deutsche Telekom AG (DT), resigned under pressure in July from the German government. Sommer was replaced in November by Kai-Uwe Ricke, director of DT's mobile and on-line businesses and chairman of T-Mobile International, DT's mobile phone division. Michel Bon, executive chairman of France Télécom (also mainly state-owned), resigned as a result of disagreements with the French government. Bon was replaced in September by Thierry Breton, who had been executive chairman of the French electronics group Thomson Multimedia.

      In March Telia AB of Sweden and Sonera Corp. of Finland became the first two partially state-owned telecommunications companies to agree to a cross-border merger. The combined company, TeliaSonera, would have its headquarters in Stockholm. In May the largest Chinese fixed-line company, China Telecommunications Corp., was split into two. One of the successor companies retained the trading name China Telecom, while the other merged with data communications company China Netcom Corp. Ltd. to form China Netcom Group.

      The major U.K. telecommunications equipment supplier Marconi Corp. PLC, which had been worth £35 billion (£1 = about $1.58) in September 2000, avoided bankruptcy by restructuring its debt in August so that bondholders and banks owed £4 billion by the company received stock in exchange. Existing Marconi shareholders, however, were left owning only 0.5% of the company. In July the alternative communications carrier Energis Communications Ltd.—carrier of nearly 50% of the U.K.'s Internet traffic—was also saved from bankruptcy by a cash injection of £150 million from its bankers. Archie Norman, a Conservative Party MP and former chairman of the British supermarket chain Asda, became chairman of Energis, while John Pluthero, chief executive of the U.K.'s largest Internet service provider, Freeserve.com PLC (Energis's biggest customer), took over as CEO.

      New products, including third-generation (3G) phones, were altering the telecommunications industry. (See Special Report (Wireless Revolution ).) In October software company Microsoft Corp. entered the mobile-phone market by providing software for a new “smartphone” launched in the U.K. by Orange SA. This device combined a cellular phone, a handheld computer with colour screen, and a camera, and it incorporated Microsoft's Outlook e-mail program, as well as Media Player to play music and show video clips. In the same month, Vodafone launched its Vodafone live! service, which the company intended to use as the platform for its 3G services in 2003. Like the Orange smartphone, Vodafone's new colour-screen handsets provided picture messaging, arcade games, and e-mail services. In late 2002 Hutchison 3G UK Ltd. was planning to launch its third-generation Internet, videoconferencing, and voice service in Italy and the U.K., the first consumer 3G service in Europe. Manx Telecom Ltd. (a subsidiary of mmO2 PLC) and Sonera had launched 3G services in late 2001 on the Isle of Man and in early 2002 in Finland, respectively, but at the end of 2002, these services were still running in test mode owing to a shortage of handsets.

Alan Stewart

▪ 2002

Introduction

Computers

      The recession year 2001 hit the computers and information systems sector hard. Already reeling from the collapse of dot-com companies a year earlier, the industry had to deal with reduced demand for its products and services. That in turn produced a steady stream of corporate cutbacks and layoffs. The terrorist attacks in the U.S. on September 11, which stunned the world and sent the U.S. stock market tumbling, dealt the troubled technology sector yet another blow.

      The computer industry laid off tens of thousands of workers in 2001 as a slowing U.S. economy combined with fallout from the previous year's meltdown of high-tech dot-com companies to reduce demand for information technology products. Cisco Systems, reporting its first quarterly loss in its 11-year history in May, took more than $3 billion in charges against earnings. The charges were mainly related to inventory Cisco believed it might never sell because of the downturn in demand. Layoffs were announced at dozens of computer-related companies, including AOL Time Warner, Inc., Dell Computer Corp., IBM Corp., Sun Microsystems, Inc., Oracle Corp., Texas Instruments, Inc., Siemens AG of Germany, and the Japanese companies Fujitsu, Ltd., Hitachi, Ltd., and Toshiba Corp.

      Yet out of the decline a new industry was taking shape. The Hewlett-Packard Co. said it would purchase competitor Compaq Computer Corp., combining two major competitors in the personal computer (PC) market. In the long-running Microsoft Corp. antitrust trial, an appeals court freed Microsoft from the threat of a breakup, and the Department of Justice (DOJ), under the new Republican administration of Pres. George W. Bush, indicated that it would not pursue the software-bundling issues that had been the heart of the original lawsuit.

      The Internet became less competitive. The contracting economy left even strong electronic-commerce (e-commerce) companies struggling with losses, and brick-and-mortar companies began to see their e-commerce operations less as profit centres and more as strategic efforts. The huge declines in the value of technology stocks and the dearth of new capital for technology companies resulted in the collapse of alternative high-speed digital subscriber line (DSL) Internet access providers.

      The music industry won its battle against Napster but not the war against free Internet music. Napster, the renegade World Wide Web site that stood accused of aiding copyright infringement by allowing consumers to trade music files for free, was shut down by court order, but other file-sharing Web sites rose up to take its place.

      Attitudes toward computer security changed in the wake of the September 11 terrorist attacks. Personal privacy on the Internet seemed likely to decline as the government gained additional freedom to track e-mail, instant messaging, and Web surfing. Several devastating attacks by malicious Internet software resulted in coordinated government and business efforts to prevent future threats.

Microsoft.

      The Microsoft antitrust case ended the year without a resolution, but the year was a busy one in the ongoing battle over Microsoft's behaviour. The company appeared to have avoided being broken up, but it still faced court penalties for violating antitrust laws.

      A federal court previously had found that Microsoft violated federal antitrust laws through actions intended to maintain Microsoft's monopoly on PC operating system (OS) software. That finding was confirmed in June by a seven-judge panel from the U.S. Court of Appeals for the District of Columbia Circuit, which held that Microsoft had violated antitrust laws repeatedly.

      The appeals court judges vacated, or nullified, the breakup of Microsoft imposed the previous year by U.S. District Judge Thomas Penfield Jackson, who had put his ruling on hold pending appeals. At the same time, the appeals court removed Jackson from the case, an unusual action, and criticized him for comments about the case he had made outside the courtroom. A newly appointed federal judge, Colleen Kollar-Kotelly, ordered settlement talks. In October the U.S. Supreme Court declined to hear Microsoft's appeal, which requested that the high court dismiss the lower court's findings against the company on the basis of the appeal court's reprimand of Judge Jackson. It was a setback for Microsoft, but one that many who followed the case had expected.

      The Bush administration signaled late in the year that it did not have as much enthusiasm for pursuing the Microsoft case as former president Bill Clinton's administration had. The DOJ said in September that it had decided not to seek a breakup of Microsoft or to insist that Microsoft's bundling, or inclusion, of its Internet Explorer browser with the Windows OS was illegal. Instead, the DOJ said it would pursue limitations on Microsoft's business conduct similar to those Jackson previously ordered. Those restrictions included requiring Microsoft to share Windows technical information with other software companies, to offer PC manufacturers “unbundled” versions of Windows that did not include extra Microsoft software, and to sell Windows to all PC makers at the same price. Microsoft previously had resisted efforts to place any restrictions on what it could bundle into its operating system. Some legal experts said that at least part of the government's announcement was a practical move—a breakup of Microsoft was unlikely to occur, because the federal appeals court had already vacated Jackson's initial breakup order.

      In early November Microsoft and the DOJ reached a tentative settlement, but half of the 18 states that had joined the federal government in the case appeared unwilling to compromise. Some of the states threatened to carry on their antitrust cases independently if the DOJ settled with Microsoft on terms the states considered too easy.

      Nine states—California, Connecticut, Florida, Iowa, Kansas, Massachusetts, Minnesota, Utah, and West Virginia—plus the District of Columbia rejected the federal government's settlement with Microsoft because they said it let the company off too easy, and planned to continue the antitrust suit. California, one of the largest states in the group, was expected to pay much of the cost involved. It appeared that a hearing on what action the federal court should take against Microsoft would occur in March 2002.

      The states wanted rules to prevent Microsoft from combining or "bundling" with Windows any additional free software features—a move that worked to the disadvantage of Microsoft's competitors. In addition, states wanted the court to prevent Microsoft from offering incentives to PC manufacturers to put Microsoft applications software on new PCs instead of applications from competitors. (The states said the federal settlement would only prevent Microsoft from penalizing PC makers for not using its software.) The states also wanted competitors to have better access to underlying Windows software code than required under the proposed federal settlement.

      The states also continued to be concerned about recent Microsoft behaviour not directly related to the antitrust case: Microsoft's new Windows XP operating system, which bundled new technologies—such as streaming video and instant messaging—that could adversely affect Microsoft's competitors. Windows XP went on sale on October 25, but details of what it contained had been disclosed by Microsoft months earlier. In a separate class-action suit, Microsoft offered a settlement that would include donating computer equipment and software to schools. Opponents, led by Apple Computer Corp., objected that this action would effectively expand Microsoft's inroads into education, where it did not yet have a monopoly.

      Microsoft faced other antitrust issues in Europe. A European Commission investigation focused on how Microsoft used Windows at the PC level to help sell its network server computers. In October Microsoft denied claims carried in the press that some European officials believed that Microsoft had misled the commission in its antitrust investigation. The investigation had the potential to result in a fine totaling as much as $2.5 billion, or 10% of Microsoft's annual revenue.

Personal Computers.

      The PC industry was in decline in 2001 as demand dropped, and a price war broke out between PC manufacturers. It was a sharp reversal for a traditional growth industry. When worldwide PC shipments dropped 1.9% in the second quarter, it was the first decline since 1986.

      A revised outlook issued in early September by market research firm IDC predicted that PC shipments worldwide would decline 1.6% in 2001, to about 130 million units. That was in sharp contrast to IDC's June prediction that shipments would grow 5.8% and far less than IDC's earlier prediction that shipments would grow 10.3% for the year. The consumer portion of the PC market declined even more than the overall market; unit shipments were expected to drop 9.6% worldwide.

      The slack demand resulted in a price war between manufacturers that was expected to lower revenues for the PC industry. IDC predicted a 10.8% drop in worldwide PC revenue for the year. Some PC companies decided they had had enough. Micron Electronics dropped out of the PC business and laid off 400 people who worked in that business unit.

      It was unclear how the IDC projections would be affected by the September 11 terrorist attacks, which shook consumer confidence and rattled the U.S. economy. Merrill Lynch & Co. said in late September that the struggling PC market had been hurt further by the attacks as well as by a likely global recession and that a recovery from the decline in PC unit shipments, revenues, and average sale prices was not expected for at least a year.

      In the first quarter of 2001, Dell replaced Compaq as the world's largest PC maker. It was the first change in the top position in several years. Later in the year Dell aggressively courted additional customers by continuing the price war it had begun in 2000. The company said its goal was to increase its mid-2001 global market share of 13% to 40% over several years.

      Windows XP was considered by many to be the PC industry's best hope to boost demand. Because many older PCs lacked the processing power and memory required for running XP, industry observers expected the product launch to increase sales of new PCs. Windows XP featured higher reliability than earlier versions of Windows, plus new features dealing with instant messaging, digital photography, and security (in the form of a “personal firewall” to block Internet intruders). While some feared that the ongoing Microsoft antitrust case might lead government regulators to try to block the introduction of XP or force it to be altered, that did not happen, and the product was launched as expected.

      By the time Windows XP was introduced in October, many industry watchers were predicting that it would not make a significant difference in 2001 PC sales, both because of concerns about the economy and because XP did not offer enough incremental benefits to boost sales of PCs that came equipped with the new operating system.

      Another potential roadblock to the XP introduction did not have much impact. Some privacy advocates asked the Federal Trade Commission to take action against Microsoft based on their contention that Windows XP facilitated the collection of too much personal information about consumers through the sign-up for Microsoft's on-line e-commerce services.

      Microsoft made some changes to Windows XP on its own in response to industry complaints. In June the company removed XP's “smart tags,” which could link any word on any Web page to another Web site selected by Microsoft. The implication was that Microsoft would be able to use XP to divert e-commerce customers to its own Web sites. Another controversial XP technology, called product activation, remained. To prevent customers from installing one copy of XP on multiple computers, the software took the “electronic fingerprint” of the PC on which it was installed. Substantial changes in that computer would cause XP to deactivate, on the theory that the operating system had been installed on a different machine. Some industry watchers said merely upgrading a computer could cause the deactivation; Microsoft said the changes to the machine would have to be more elaborate than that but did not provide details.

      Windows XP also caused a dispute over which icons, or graphic links to programs, Microsoft would require computer manufacturers to put on the desktop (the first screen displayed on the monitor when a PC is started). Microsoft at first appeared to offer computer companies a great deal of latitude in placing the icons of Microsoft competitors on the Windows XP desktop. This would be a boon to PC makers, who could sell desktop icon placement to Microsoft competitors. Microsoft later countered that if competitor icons were placed on the XP desktop, three Microsoft icons also had to appear there.

      Apple's rival operating system, Mac OS X, which was released for public beta testing in 2000, began shipping in early 2001. A much-anticipated upgrade, OS X version 10.1, followed in the autumn. During the year Apple opened the first of a series of company-owned retail stores in high-traffic shopping malls, veering away from its strategy of selling strictly through independent resellers, large electronics retailers, and its own Web site. The firm hoped to attract some current users of Windows-based PCs at a time when Apple's share of the PC market was about 4.5%. The company's independent dealers believed the new stores were a necessary evil that would take some sales away from dealers but would ultimately help Apple compete against the market domination of Windows-based PCs. Apple also discontinued its Power Mac G4 Cube, a small cube-shaped computer introduced a year earlier, blaming lower-than-expected sales. The company, in a move to remain competitive with Windows-based PC prices, brought back a $799 iMac desktop computer that had been replaced by higher-priced models. In October Apple introduced iPod, a pocket-sized portable music player that could download and play up to 10 hours of music in the popular MP3 format. A Windows version was expected to follow.

      PCs got faster, but as the price of chips came down, they debuted at lower prices than previous top-of-the-line models. In August PCs installed with Intel Corp.'s 2-GHz (gigahertz) Pentium 4 chips (operating at two billion computing cycles per second) arrived. Their beginning prices were as low as $1,500, a switch from the previous generation of new computers; less than a year and a half earlier, a low-end 1-GHz PC had cost $3,000. In large part the price declines were related to lower selling prices for microprocessor chips.

      Another kind of PC, the handheld personal digital assistant (PDA), continued to make inroads with consumers and business customers, although sales growth slowed and manufacturers cut prices in response. The best-known PDA brands from Palm, Inc., and Handspring were more than handheld organizers but less than laptop computers. They had date and address books, to-do lists, and memo pads and used handwriting-recognition software. Handspring licensed the Palm OS, but more capable and expensive devices running the Microsoft Pocket PC operating system were being positioned to compete in the business market.

Acquisitions and Mergers.

      The biggest industry deal of the year was announced in September. Hewlett-Packard, the third largest PC maker, said it would buy Compaq, the second largest, for $25 billion in stock. The merged firm would control about 70% of the retail PC market and would rank second in sales to IBM, with $87.4 billion. To realize cost savings, the two firms would need to cut some 15,000 jobs, leaving the combined company with about 135,000 workers. Carly Fiorina, chairman and chief executive of Hewlett-Packard, was to retain those positions in the combined company, and Michael Capellas, chairman and CEO of Compaq, would be president. The acquisition was not viewed positively by Wall Street. Between the September announcement and mid-October, when a shareholder group voiced opposition to the combination, Hewlett-Packard shares fell 22% and Compaq shares fell 20%. Analysts said one concern was that there was too much overlap between the operations of the two firms. Shareholder opposition to the deal grew as members of the Hewlett and Packard families, who held 18% of the company's shares, publicly opposed the merger. Should shareholders vote against the merger, it was widely believed that Fiorina would lose her top post at Hewlett-Packard. A shareholder vote on the deal was expected in early 2002.

      In January Ariba, Inc., a business transaction software company, announced plans to acquire Agile Software Corp., which helped manufacturing companies collaborate on the Internet, for $2,550,000,000 in stock. LSI Logic Corp., which manufactured communications and storage chips, bought C-Cube Microsystems, Inc., for $878 million in stock. TMP Worldwide Inc., the parent company of Internet jobs Web site Monster.com, tried to acquire HotJobs.com, its biggest competitor, but was outbid by Yahoo, which agreed to pay $436 million.

      Jupiter Media Metrix, Inc., which measured the popularity of top Web sites and advised companies on Internet use, was acquired by NetRatings, another Web audience-measurement firm, for $71.2 million. Computer Associates International, Inc., successfully resisted an effort to take over its board of directors, turning back a bid by investor Sam Wyly to replace four directors, including the company's founder and chairman.

On-Line Music.

      On-line music downloading continued to blossom, despite the music industry's efforts to stop unauthorized free distribution of copyrighted music and the industry's own slowly unfolding plan to sell music over the Internet.

      There was a major development in the Recording Industry Association of America's lawsuit against Napster, the high-profile Web service that popularized free music downloads. A federal judge in July ordered Napster to halt its music-file-sharing service until it could show that it had taken all possible steps to prevent the free exchange of copyrighted music. Napster was later allowed to resume Internet operations but chose not to in order to prepare for the 2002 launch of its new membership service. In addition, Napster settled separate copyright-infringement suits filed against it by the heavy-metal band Metallica and the rap artist Dr. Dre, although settlement terms were not disclosed.

      Other free file-sharing services took Napster's place, and one, Fast Track, even exceeded the volume that Napster had had at its peak. In October some 30 music and film studios filed suit in federal court against three Internet music Web sites—MusicCity.com, Grokster Ltd., and Consumer Empowerment BV—alleging that they improperly allowed the exchange of music, images, and movies that were copyrighted.

      The new free music services on the Internet presented the music industry with vexing legal problems. Court injunctions might be unable to shut down the new services, which allowed music sharing directly between PCs instead of relying on a centralized corporate Web site, as Napster did. Shutting down the Web sites might not end the file sharing among users.

      The music industry announced plans to offer, by year's end, two for-pay subscription services for on-line music. Sony Music Entertainment Inc. and Universal Music Group cooperated on a service to be called Pressplay, while EMI Group PLC, AOL Time Warner, Bertelsmann AG's BMG, and RealNetworks, Inc., were behind a competing service to be called MusicNet. Other, similar services were likely to emerge. The exact nature of the music offerings was not disclosed, but the industry's licensing arrangements with music publishers and songwriters covered streaming music—a technique that would let customers listen to music but not record it—and music file downloads that would be limited by how much or how long they could be used. The music industry's efforts to move into for-pay on-line music distribution prompted the DOJ to launch an antitrust investigation aimed at determining whether the music industry was attempting to dominate Internet music illegally. It also was uncertain how successful the initially limited for-pay offerings would be against the free file-sharing services.

The Internet.

      Despite growing demand for high-speed Internet service, the declining economy effectively reduced the number of competitors, and the DSL service was left largely in the hands of the former regional Bell telephone companies. Several independent companies that provided DSL either failed or were in serious trouble. NorthPoint Communications Group, Inc., and Rhythms NetConnections Inc. shut down. DSL firm Covad Communications Co., which sought protection from creditors in bankruptcy court, said it hoped to attract $200 million in cash investments that would make it profitable again by the end of 2003.

      The cable modem service offered by cable TV system operators, which was DSL's chief competitor for high-speed Internet access, had fewer spectacular declines, but even there business failure occurred. At Home Corp. (which did business as Excite@Home), a provider of high-speed Internet access to about four million subscribers through various cable TV systems, filed for bankruptcy protection in September but continued to serve its customers. A month earlier Excite@Home's auditing firm, which had already been slated to be fired, had raised doubts about the company's ability to continue in business. These doubts were confirmed in early December as hundreds of thousands of AT&T Broadband subscribers were left temporarily without Internet access when Excite@Home canceled its contract with AT&T and cut off their service. Excite@Home said it would cease operations in February 2002.

      Wireless high-speed networking companies also ran into trouble. Metricom, Inc., which offered wireless Internet access for notebook computer users in several cities, filed for bankruptcy in July and began selling its assets. MobileStar Network Corp., which provided high-speed wireless Internet access to Starbucks Corp.'s coffee outlets and to several hotels, laid off its workforce and planned to sell its assets.

      The world's largest Internet access provider raised prices for its dial-up modem service. America Online, a part of AOL Time Warner, boosted its popular unlimited-use plan by about 9%, to $23.90 a month. AOL justified its first price increase in three years by saying usage of its service by customers had increased more than 50% in that time. AOL remained the market leader in U.S. Internet access. At the time of the price increase, AOL had about 30 million subscribers, MSN (Microsoft Network) was second with about 5 million, and EarthLink, Inc., was third with about 4.8 million. Freeserve remained the most widely used provider in the U.K., with AOL second.

      Late in the year President Bush signed legislation that extended a moratorium on Internet-related taxes for two years, at least temporarily preventing states from levying their own Internet taxes on billions of dollars in e-commerce sales as well as on the sale of Internet access services. There had been fears that Internet taxation by states might contribute to the nation's economic problems.

      The virtual world of the Internet proved to be vulnerable to natural disasters in the real world. In July a fire in a Baltimore, Md., train tunnel burned fibre-optic telecommunications cables. Rerouting Internet traffic to other cables resulted in slowdowns in Internet traffic. Damage to undersea cables near China, probably caused by cargo ships dragging their anchors, disrupted Internet traffic between Asia and the U.S. in September.

      The U.S. Census Bureau reported in 2001 that 51% of the households in the nation had one or more personal computers in 2000 and that more than 40% of households were connected to the Internet. The results were based on a survey of about 50,000 U.S. households in August 2000. A similar survey in the U.K. in May 2001 found that 10 million British users had an Internet connection in their homes, up from 6 million households a year earlier.

      An Internet-oriented product, the Web appliance, began to disappear from the market owing to lack of demand. Web appliances were intended to offer consumers an easier way to browse the Web and often were less complex than a PC. They were not much less expensive than a PC, however, and never sold in significant numbers. Sony, 3Com Corp., and Gateway, Inc., dropped Web appliance products in 2001.

E-Commerce.

      E-commerce continued the downward slide that had begun in early 2000. In the first half of 2001, U.S. Internet advertising revenues declined 7.8% from the same period a year earlier. The on-line ad sales decline compared with revenue growth of 78% in 2000 and marked the end of several years of substantial growth in on-line ad revenues. The Interactive Advertising Bureau, a trade group, said the decline in Internet advertising had come at a time when traditional TV, radio, and newspaper advertising revenues also had dropped.

      Many smaller e-commerce players dropped out of the market, and even top players such as Yahoo! were troubled. A 44% decline in revenue caused a third-quarter net loss at Yahoo! and led the company to warn that difficult times and layoffs lay just ahead. Amazon.com, another big player, eliminated 1,300 jobs on January 30, 450 of them by shutting down a distribution centre in McDonough, Ga. One of the few Internet ventures to buck the downward trend was the on-line auction firm eBay Inc., which was flourishing under its president and CEO, Meg Whitman. (See Biographies (Whitman, Meg ).)

      For big corporations e-commerce took on a different tone. On-line business units of brick-and-mortar retailers were valued less as profit centres and more as on-line testing grounds for measuring the appeal of new products and identifying customer buying patterns. In addition, the automobile industry, which knew that consumers were inclined to do their car-buying research on the Web, concentrated on using the Internet as a means to draw people into traditional showrooms rather than as a way to sell cars directly.

      E-commerce companies, which relied heavily on credit card purchases, became concerned about increasing credit card fraud. Some claimed that Web fraud expanded after credit card companies ruled that sellers would be liable for disputed card purchases unless the seller had a copy of the buyer's credit card or of the buyer's signature. E-commerce marketers who did business over the Web usually did not have those copies and as a result found themselves stuck for purchases that buyers said they did not make.

      In tough times new, unorthodox methods of competition arose. When customers visited some e-commerce sites, free software that ran in the background of a customer's computer would flash ads for competing services on the PC's screen. This software, typically downloaded for free from sites such as Gator.com, offered to make Web browsing easier. In another unusual move, many search engine Web sites, unable to make enough money with advertising, sold listings. This essentially guaranteed that a paid customer would show up near the top of search query results on a particular topic. Web sites that did not sell listings in their searches were able to differentiate themselves from the competition.

      Microsoft was undeterred by the e-commerce downturn and introduced its new .NET strategy for selling more services on-line to consumers and businesses. Microsoft said its .NET My Services would sell subscription-based Internet services revolving around on-line content, banking, shopping, and entertainment.

Crime, Security, and Law.

      After a year in which malicious attacks by creators of Internet viruses and worms made headlines for weeks, it was the U.S. government's actions following the September 11 terrorist attacks that had the greatest potential impact. In October President Bush signed into law the USA PATRIOT Act, which gave law-enforcement officials greater ability to tap telephones and track Internet users.

      The new law expanded the use of a federal government Internet spying technology formerly called Carnivore. Carnivore allowed the government to collect, through an Internet service provider (ISP) network, a person's e-mail, instant messaging, and Web surfing activities. The law also expanded the way information was shared between government agencies and made it easier for government investigators to obtain wiretapping permission for Internet activity. In addition, ISPs would be required to make it easier for the government to install wiretaps on their systems. Unlike some other parts of the new law that would not expire, the Internet surveillance portion would expire at the end of 2005.

      Privacy advocates criticized the new law as a hasty action that unnecessarily expanded the government's surveillance powers, particularly when there was not much evidence that greater surveillance would have warned of the September 11 terrorist attacks.

      Some observers worried that another wave of terrorist attacks could be made against “infrastructure” computer systems, including those that ran the electric power grid. Utilities, telecommunications plants, and factories that ran process-control equipment at remote locations by using the Internet were considered potentially vulnerable. The Internet Corporation for Assigned Names and Numbers planned to review the security of the Internet's domain name system, which enabled Web traffic and e-mail to be sent to its intended destination.

      Computerized disaster-recovery services, originally envisioned to help corporations recover data lost in natural disasters such as fires or storms, got more attention as corporations and Wall Street firms recovered from the terrorist attacks. Disaster-recovery firms provided crucial computer network repairs, temporary data-processing centres, and replacement computers.

      Following the terrorist attacks, there was much discussion of increased security. Microsoft said it would increase internal security after six employees in its Reno, Nev., office were exposed to life-threatening anthrax spores sent by mail from Malaysia. Elaborate computer security schemes for airports were discussed, including facial-recognition systems that would pick out people whose features matched those of suspected terrorists. Fear of flying also produced a surge of interest in videoconferencing, which enabled businesspeople to meet face-to-face even though they were hundreds or thousands of kilometres apart.

      The CERT (originally the computer emergency response team) Coordination Center, a government-funded group that monitored computer security threats, estimated that the number of Internet attacks could double in 2001 compared with 2000, when there were nearly 22,000 recorded attacks, each representing a report filed by a company or an organization. The projected increase was attributed to growth in the Internet as well as to an increase in the number of attackers.

      The Code Red worm attracted national attention when it struck in July and reappeared in August. (A “worm” is a malicious Internet program that reproduces itself. Unlike a virus, which tricks a computer user into starting it, a worm acts without human intervention and thus spreads rapidly.) Code Red attempted to attack the White House Web page in mid-July by first infecting an estimated 225,000 Internet Web server computers worldwide. It did so by taking advantage of a well-known Microsoft server software flaw, for which Microsoft had issued a software “patch.” Many companies operating these Web servers had not put the patch in place. Code Red then used those servers to launch a “denial of service attack,” in which the infected computers tried to overload the White House Web page by sending thousands of simultaneous requests for information. Some 350,000 computers were ultimately infected.

      Code Red provoked major concern about the Internet's ability to withstand the attack. The FBI's National Infrastructure Protection Center called Code Red a significant threat that could “degrade services running on the Internet.” Those fears were heightened when a second version of Code Red appeared in early August; that version of the worm left open a “back door” on a server that would allow a hacker to gain access to the server. The Internet as a whole never was seriously affected by Code Red. Other high-profile attacks included the “SirCam” virus, which arrived as an e-mail attachment and could delete or e-mail files from infected PCs, and the Nimda worm, which infected both Web server computers and PCs and caused damage by overwriting computer files.

      There were some high-profile computer-related crimes and court cases during 2001. Dmitry Sklyarov, a Russian cryptographer, was one of the first people to be prosecuted for allegedly violating the Digital Millennium Copyright Act, a 1998 law that limited unauthorized copying of digital material. Sklyarov was arrested after he gave a presentation at a hacker convention on how to decode software used to protect electronic books. About 100 people were arrested in August for what federal officials said was participation in a global Internet child pornography ring. The investigation revolved around Landslide Productions Inc. of Fort Worth, Texas, which offered subscribers access to foreign-based Web sites containing child pornography.

      The FBI and the DOJ said 90 individuals and companies were charged as part of an Internet fraud investigation called “Operation Cyber Loss.” Based on losses by thousands of people totaling $117 million, the unnamed defendants faced federal and state charges that included wire fraud, mail fraud, bank fraud, money laundering, and violation of intellectual property rights. The charges revolved around on-line auction fraud, nondelivery of products bought on-line, bank fraud, and pyramid schemes.

      The Securities and Exchange Commission (SEC) accused two former top executives at software company AremisSoft Corp. of having defrauded investors of at least $200 million. In a civil suit the SEC said the two had used untrue financial statements in order to sell millions of shares of company stock at inflated prices.

      The U.S. Supreme Court ruled in favour of a group of freelance writers who had sued newspaper and magazine publishers for infringing on the writers' copyrights. The suit claimed the publications had infringed by not obtaining permission to make articles available in computer databases following publication. (See Media and Publishing : Newspapers.) Another case scheduled to go before the court was a challenge to the 1996 Child Pornography Prevention Act, which had widened the definition of child pornography. The law extended a ban on images of real children engaging in sexual acts to cover computer-generated images that did not involve real children. Civil libertarians argued that the law set a dangerous precedent by punishing creators of computer-generated pictures; proponents of the law said the wider definition was needed to protect children from pedophiles who wanted such images.

Other Developments.

      Lernout & Hauspie Speech Products NV, the Belgian firm that was Europe's largest developer of speech-recognition and translation software, was declared insolvent, and a court ordered its assets liquidated. The firm had sought protection under the bankruptcy laws of Belgium and the U.S. in late 2000 after a $100 million cash shortfall was discovered in its South Korean unit and an investigation showed that the company's questionable accounting practices had overstated overall company sales by $373 million from 1998 to 2000.

      IBM designed the world's most powerful supercomputer for the U.S. government's Lawrence Livermore National Laboratory, Livermore, Calif. The supercomputer was to be used to simulate nuclear weapons explosions. It was funded by the Accelerated Strategic Computing Initiative, which paid computer manufacturers to build supercomputers from ordinary computer components.

      IBM also said it had found a way to speed up computer chips by using conventional chip-manufacturing technologies to reduce electrical resistance in chips, which resulted in processing speeds up to 35% faster. Meanwhile, scientists believed that nanotubes, cylinder-shaped molecules 1.4 nanometres (billionths of a metre) in diameter, held out the promise of improving future computer chip designs. Researchers from Michigan State University and IBM said the molecules could help chips run cooler by conducting heat away and might be used as structurally stronger replacements for the tiny metal wires connecting transistors on a chip.

      Computer chip manufacturers also were seeking higher chip performance by switching from aluminum to copper (which conducts electricity better than aluminum) for the tiny wires on a chip. In addition, Intel said it was considering using strands of fibre-optic material in place of aluminum and copper wires inside computers. Initially that would mean connecting separate computer components with fibre optics, but eventually the technology could be used on computer chips too. The fibre-optic technology, which used pulses of laser light, could help boost chip performance because it required less power than wires.

      Bell Labs, the research unit of Lucent Technologies Inc., said it had created a tiny organic transistor by assembling carbon molecules. Scientists said the technology might one day be used to make computer chips that were faster, smaller, and easier to manufacture.

      Video game enthusiasts had a good year in 2001. Nintendo Co., Ltd., introduced its new Game Boy Advance handheld game machine, which served a market segment dominated by the company. In November two next-generation game console machines, the Microsoft Xbox and the Nintendo GameCube, were introduced. Xbox and GameCube competed with the Sony PlayStation 2. Another competitor, Sega Enterprises Ltd., ended production of its game console, the Dreamcast.

      The game industry was attacked in a study from Japan's Tohoku University that said video games might adversely affect brain development in children. A game industry group, the European Leisure Software Publishers Association, claimed that the Japanese university research had only a “very limited focus” and that game playing developed several skills.

      Gordon Moore, cofounder and retired chairman of Intel, and his wife, Betty, donated $600 million to the California Institute of Technology, from which Moore had graduated with a Ph.D. in chemistry in 1954. It was believed to be the biggest gift ever received by an individual American school. Moore, age 72, was CEO of Intel from 1975 to 1987 and was chairman until 1997.

Steve Alexander

Microelectronics.

      In 2001 the global semiconductor industry suffered its worst-ever decline, with projected worldwide sales of semiconductors down 31% to $141 billion, according to the U.S.-based Semiconductor Industry Association (SIA). The association predicted, however, that sales of personal computers (PCs), wireless communications solutions, and consumer products would enable the global semiconductor industry to recover from the inventory buildup that occurred in 2000 and the weak demand for end-market equipment in 2001. After the beginnings of recovery in the fourth quarter of 2001, the industry was expected to continue with slow growth of 6% to $150 billion in 2002 and then return to a traditional growth pattern with 21% increases in sales to $181 billion in 2003 and $218 billion in 2004.

      Sales of flash memory decreased 27% to $7.8 billion in 2001 after hving grown 133% in 2000. The SIA predicted that demand for flash-memory devices, led by cellular deployment, digital photography, and automotive applications, would bring growth of 5% to $8.1 billion in 2002. Advances of 23% in 2003 and 25% in 2004 to $12 billion would make flash memory one of the fastest-growing semiconductor sectors. Digital signal processors (DSPs) were another fast-growing sector, for which the SIA expected the key drivers to be wireless and wired communications, emerging digital consumer applications, and portable information devices. Despite having declined 34% to $4 billion in 2001, sales of DSPs were predicted to grow 16% in 2002, 33% in 2003, and 29% in 2004 to $8 billion. The dynamic random access memory sector decreased 60% to $12 billion in 2001, but the SIA expected it to increase 16% in 2002, 44% in 2003, and 54% in 2004 to $29 billion. The microcontroller market declined 17% in 2001 to $10 billion, but it was predicted to rise to $16 billion by 2004. The market for programmable logic devices, which included display drivers for flat-panel displays, declined 28% in 2001 to $25 billion but was expected to grow 6% in 2002, 21% in 2003, and 19% in 2004 to $38 billion. The microprocessors found in PCs, servers, and embedded applications decreased 28% in 2001 to $23 billion. Growth of 7% in 2002, 16% in 2003, and 10% in 2004 to $31 billion was predicted by the SIA, however. The optical storage market was expected to be driven by a rapid shift to compact disc-read/read and write (CD-R/RW) and digital versatile (or video) disc-read only memory (DVD-ROM), especially as more CD-R/RW and DVD-ROM drives were being preinstalled in PCs. In 2001 the optoelectronics market declined 22% to $7.6 billion, but it was predicted to grow 0.1% in 2002, 15% in 2003, and 20% in 2004 to $11 billion.

      Although all four major world markets decreased in 2001, the Asia-Pacific market (including Singapore, South Korea, Taiwan, China, and India) declined least (23% to $39 billion) and therefore took over from the Americas (North and South) as the world's biggest semiconductor market. The SIA predicted that Asia-Pacific would be the fastest-growing region over the next three years and was likely to reach $67 billion in 2004. The Americas market declined 43% in 2001 to $36 billion, but it was expected to grow to $56 billion in 2004. The market in Japan, which declined 26% in 2001 to $35 billion, was projected to reach $52 billion in sales by 2004. The European market (down 29% in 2001 to $30 billion) was predicted to rise to $44 billion.

      In July 2001 U.S. integrated circuit analyst IC Insights listed the worldwide top 10 semiconductor suppliers (on the basis of sales in the first half of the year). U.S.-based Intel Corp. remained at the top, followed by Toshiba Corp. (Japan), NEC Corp. (Japan), STMicroelectronics (France), Texas Instruments Inc. (U.S.), Samsung Electronics Co., Ltd. (South Korea), Hitachi, Ltd. (Japan), Motorola, Inc. (U.S.), Infineon Technologies AG (spun off from Siemens AG of Germany), and Mitsubishi Electric Corp. (Japan). The top three positions were unchanged from 2000, with Intel's sales figure ($11 billion) greater than those of the next two companies combined, despite being down 20% from the previous year.

      On August 27 Intel introduced the world's first 2 GHz (gigahertz) microprocessor in the form of the latest version of its Pentium 4 chip. The company also demonstrated a Pentium 4 running at 3.5 GHz, noting that the chip's microarchitecture was expected to scale to 10 GHz eventually. In September Intel introduced its 845 chipset for Pentium 4-based PCs. Microsoft Corp.'s Windows XP operating system, released on October 25, was optimized for the Pentium 4 for processor-intensive applications. In August Intel demonstrated a new technology called hyper-threading, which enabled microprocessors to handle more information concurrently by sharing resources more efficiently. This was achieved through multiprocessing on a single chip, which the company intended to bring to market in its Xeon processor family in 2002. The company also disclosed details of its forthcoming Banias mobile processor architecture, which would deploy new low-power circuitry and design techniques.

      In August Advanced Micro Devices, Inc., the world's second largest microprocessor supplier (with around 22% of the market; Intel was first with 77%), marked the second anniversary of its Athlon processor by announcing that its new 1.2 GHz mobile Athlon 4 processor would be used by Compaq Computer Corp. in its Presario notebook computers and introducing its Windows XP-compatible 1.6 GHz Athlon 1900+.

Alan Stewart

Telecommunications.

      In 2001 telecommunications companies around the world experienced a year of tumbling stock prices and huge job losses. By September the stock market valuation of the world's telecom carriers and suppliers had declined by $3.8 trillion from a peak of $6.3 trillion in March 2000. More than a quarter of a million jobs were lost globally in the second quarter of 2001 alone. The major equipment manufacturers—Motorola, Inc., Lucent Technologies, Inc., and Cisco Systems (U.S.), Marconi Corp. PLC (U.K.), Siemens AG (Germany), Ericsson (Sweden), and Nokia Corp. (Finland)—all announced job cuts both in their home countries and in subsidiaries around the world. Some of the biggest losses were announced by the Canadian supplier Nortel Networks Ltd., which shed 50% of its workforce (almost 50,000 jobs). In France equipment manufacturer Alcatel cut 33,000 jobs—almost a third of its employees.

      On October 1 FOMA, the world's first third-generation (3G) cellular phone service, was launched in Japan on a fully commercialized basis by NTT DoCoMo, Inc., the wireless operator in which the country's main telecom carrier, Nippon Telegraph & Telephone (NTT), had a 64% holding. A pilot version of the service had been running since May 30. FOMA (which stood for Freedom Of Mobile multimedia Access) was initially available in the Tokyo area only, but it was to be extended to other major cities in late 2001 and early 2002. As well as a voice service, the 3G handset also provided 64-Kbps (kilobits-per-second) digital communication for a videophone service and a maximum 384-Kbps data downlink for DoCoMo's i-mode mobile Internet service. On November 19 DoCoMo introduced i-motion, a video-clip distribution service using FOMA at speeds of up to 384 Kbps. Movie trailers, news highlights, and music tracks were provided by 28 content providers from 37 i-motion sites accessed via DoCoMo's official i-mode portal. Full video- and music-distribution services were planned to begin in the spring of 2002.

      In October Motorola forecast that mobile phone sales would fall for the first time ever in 2001, predicting global sales of 380 million–400 million, compared with around 400 million in 2000. To counter this trend, rival Nokia unveiled an “entertainment phone,” featuring a full keyboard, digital music player, FM radio, five games, and advanced messaging capabilities. In April Ericsson and Sony Corp. of Japan announced that they were setting up a joint venture, based in London, to combine the two companies' cellular handset manufacturing businesses. Bell Labs, the research and development arm of Lucent Technologies, introduced the first high-capacity all-optical router, under development since 1999. Bermuda-based international carrier Global Crossing Ltd. was the first customer for the technology, deploying the router on its global fibre-optic network.

      During 2001 much of the telecom industry was dominated by spin-offs, mergers, and acquisitions. AT&T Corp. and British Telecommunications PLC (BT) implemented restructuring plans announced in late 2000, which included demerging their wireless businesses. AT&T Wireless became an independent company on July 9. In October AT&T Wireless Services, Inc., which held a 23% stake in American wireless provider TeleCorp PCS, Inc., acquired the rest of that company for $4.7 billion. AT&T had paid $135 million in March for the assets of the bankrupt American digital subscriber line provider NorthPoint Communications Group, Inc. In October AT&T and BT decided to unwind their loss-making international joint venture Concert, set up in 1998, and return its assets to the parent companies in the first half of 2002. In December Comcast Corp. agreed to pay $72 billion to acquire AT&T's cable television business, AT&T Broadband, to form a new company to be called AT&T Comcast Corp. The transaction was subject to regulatory and shareholder approval and was expected to close at the end of 2002.

      In January BT confirmed that it would buy 45% of VIAG Interkom from German energy conglomerate E.ON AG for €7,250,000,000 (about $6.5 billion), giving it complete ownership of the German fixed and mobile operator. BT took full ownership of Irish mobile operator Esat Digifone in February, acquiring the 49.5% stake held by Norwegian carrier Telenor ASA for $1,240,000,000. As of March 31, BT's debt stood at £27.9 billion (£1 = about $1.42). Calls from shareholders for changes at the top led to the departure of Sir Iain Vallance as chairman in April, to be replaced by Sir Christopher Bland, chairman of the BBC. During the summer the new management seemed to reverse course. BT sold to Vodafone Group PLC, the U.K.'s largest wireless operator, its 17% stake in the Spanish mobile operator Airtel Móvil, SA, for £1.1 billion, as well as its interests in Japan Telecom and J-Phone Co., Ltd., for £3.7 billion, and announced that it had agreed to sell its interest in Rogers Wireless Communications Inc. in Canada to AT&T Wireless for £269 million. In October it was announced that Sir Peter Bonfield would stand down at the end of January 2002 after six years as BT's chief executive. BT Wireless (which had been renamed mmO2 in September) became independent on November 19.

      The main French carrier, France Telecom, in June relaunched its Itineris wireless network (which had a 48% market share) under the Orange brand. In 2000 Vodafone had acquired U.K. rival Orange plc as part of its purchase of German wireless network Mannesmann AG and had then sold Orange to France Telecom, the majority of whose wireless interests were merged with Orange's to become the Orange SA group. On June 12 BT Wireless and T-Mobile International, the wireless business of Germany's main carrier, Deutsche Telekom AG, announced that they would cooperate on the rollout of 3G networks by their subsidiaries in the U.K. (BT Cellnet and One2One) and in Germany (VIAG Interkom and T-Mobile).

      A similar agreement was announced in October by two of the largest American wireless communications companies. VoiceStream Wireless Corp. (which was acquired by Deutsche Telekom in May) and Cingular Wireless (a joint venture between SBC Communications Inc. and BellSouth Corp.) agreed to share their networks in New York City, California, and Nevada. In November the U.S. Federal Communications Commission voted to relax rules imposing a cap of 45 MHz on ownership of wireless spectrum capacity in cities. The spectrum cap was raised to the rural level of 55 MHz immediately and was to be abolished completely as of Jan. 1, 2003, which could lead to mergers among the six U.S. national wireless operators.

Alan Stewart

▪ 2001

Introduction

Computers

      The saga of Microsoft Corp.'s legal troubles dominated technology news in 2000, as did the decline of the high-flying stock market that had powered the rise of dot-com companies that for the most part did not earn any money. A much different legal case pitted the music industry against a World Wide Web site called Napster, which allowed the distribution of music for free over the Internet but claimed it was not violating copyright laws. In technology, wireless Internet access emerged as the latest trend; it allowed cellular phones and handheld personal digital assistants (PDAs) to browse the Web and handle e-mail.

Microsoft.

      Microsoft lost its hard-fought antitrust case when a federal judge, siding with the U.S. Department of Justice (DOJ), ruled that Microsoft was guilty of anticompetitive behaviour. The key event in the case, in which the federal government and 19 states were plaintiffs, was the June ruling by U.S. District Court Judge Thomas Penfield Jackson that Microsoft had violated the Sherman Antitrust Act, the nation's main antitrust law, by anticompetitive actions that were intended to maintain Microsoft's monopoly on the operating system (OS) software used to run the vast majority of personal computers (PCs). Jackson ordered that Microsoft be split into two companies. One would be in charge of Microsoft's Windows OS, and the other would be responsible for other software and Internet business. The ruling also put restrictions on Microsoft's conduct.

      Microsoft said it was confident it would win the case on appeal. Denying it had violated the law, Microsoft characterized the judge's ruling as likely to “undermine our high-tech economy, hurt consumers, make computers harder to use, and impact thousands of other companies and employees throughout the high-tech industry.”

      Microsoft opponents, such as Sun Microsystems, Inc., applauded the ruling. Sun had long maintained that Microsoft used unfair tactics to keep competitors' products from running on computers using Windows OS. The decision also was lauded by the former CEO of Netscape Communications Corp., the once-dominant Web-browser company acquired by America Online (AOL) in 1998 after having suffered from what Netscape officials maintained were unfair Microsoft marketing tactics.

      The Microsoft ruling was not surprising, since the judge had issued findings of fact in late 1999 that Microsoft had misused its monopoly power to the detriment of competitors and consumers. Jackson said after his ruling that he had decided to split up the world's largest software company because of what he described as “Microsoft's intransigence” in the court case. The judge said Microsoft was “unwilling to accept the notion that it broke the law or accede to an order amending its conduct.” Microsoft criticized the judge for speaking publicly about the case, but Jackson said he had acted properly.

      Jackson put his order to break up Microsoft on hold until all appeals had been completed. The judge then proposed a “fast track” handling of the appeal that would have taken the case directly to the U.S. Supreme Court, but the Supreme Court declined. As a result, the case was referred to a federal appeals court, a process that put off further rulings until at least 2001. The appeals court could rule in the case or return it to Jackson for additional court proceedings. It addition, it was unclear whether the appeals court would have the final say in the case or whether Microsoft's fate ultimately would be decided by the Supreme Court.

      The shifting of the case to the appeals court, which Microsoft had sought in its court pleadings and the DOJ had opposed, was widely viewed as at least a temporary victory for the software giant. Many believed that the delay caused by the appeals process meant that the final outcome of the case could be changed by shifts in software industry competitive conditions or by a change in Washington politics following the November presidential election.

      Microsoft faced another legal setback in December when it reached a settlement on a case filed in 1992 by thousands of temporary workers hired after 1986. The company agreed to pay $97 million to some 8,000–12,000 “permatemps,” long-term workers who claimed they had been denied company benefits such as health care and pensions because they had been hired through temporary agencies. Microsoft had altered its hiring policies in 1997.

      On a high note, Microsoft introduced its newest OS, Windows 2000, during the year. Microsoft chairman Bill Gates called it “the most ambitious software project ever done” and said that creating Windows 2000 had required 5,000 technical people, $2 billion, and 750,000 people to test early versions of the software.

High-Tech Stocks.

      The recent American economic boom had been fueled largely by technology companies, but a sharp drop in technology stock prices in April 2000 sent shockwaves through the dot-com and e-commerce communities, where stock market valuations and not profits had provided the fuel for growth. By late in the year, the stock prices of even some of the most promising Internet firms were down 50–90% from a year earlier.

      The decline in the stock market resulted in postponements of public stock offerings, which in the past had seemed a foolproof way for Internet start-up companies to raise cash. Venture capital money also became harder to find. Venture capitalists had been willing to pour huge amounts of money into start-up Internet companies when they could recover their investments through the soaring stock market. When technology stocks were at their peak, venture capitalists often could sell stock in start-ups for much more than they paid for it. When the stock prices declined, however, the venture capitalists became much more careful about supporting companies that had no profits in sight.

      The setbacks for the Internet firms also had ripple effects. Employees whose long-term compensation was tied to stock options of those firms saw that incentive decline. Companies that sold hardware and software to dot-com and e-commerce companies found that many start-up companies could no longer afford expensive capital spending.

Napster.

      A court fight of another sort resulted from the activities of Napster, the high-profile music-sharing Web site, and it pitted the music industry against Internet file sharing. Napster's peer-to-peer networking technology allowed thousands of people simultaneously to share the contents of their computer hard drives in order to exchange music, much of it copyrighted, in the form of compressed MP3 files, which could then be played on an MP3 player or a PC. Napster said it had more than 30 million users.

      The Recording Industry Association of America (RIAA), which represented record labels, music publishers, and artists, sued Napster for allegedly contributing to copyright infringement on a huge scale. Some musicians also took swipes at Napster, including the band Metallica and rap artist Dr. Dre, who searched for people downloading their songs and demanded they be removed from the service. In addition, Metallica sued some universities where students downloaded songs from Napster.

      The Napster case occurred at the same time that another music site, MP3.com, lost a court case brought by Universal Music Group. MP3.com, facing damages of as much as $250 million for maintaining an archive of digital music on its Web site without legal permission, in November agreed to pay Universal $53.4 million. The difference between Napster and MP3.com, however, was that Napster did not maintain a music archive, since the music resided on the computers of its users.

      Napster's court defense against the RIAA was based partly on the groundbreaking Betamax case, in which members of the motion picture and television industries sued Sony Corp. over its development of video recorders. In January 1984 the U.S. Supreme Court had declined to ban the videocassette recorder, even if it was used for copying movies protected by copyright, on the grounds that it had substantial “noninfringing” uses as well. Napster also argued that the Audio Home Recording Act of 1992 protected the rights of consumers to share music as long as they did not make money from it.

      Initially, neither argument made much headway in federal court. A district court judge in San Francisco issued a preliminary injunction that ordered Napster to stop its users from trading copyrighted songs pending the outcome of the trial. Napster said it could not comply without shutting down, since it was impossible to tell which music was copyrighted. Two federal appeals court judges stayed the preliminary injunction pending the outcome of an appeal by Napster.

      At year's end the U.S. Court of Appeals for the Ninth Circuit had not decided the case, but a new development hinted at a solution for the controversy. German media giant Bertelsmann AG said it would join with Napster and offer subscription-based music downloads, which would thereby ensure that musicians were paid. In return, Bertelsmann agreed to drop its lawsuit against Napster, leaving the rest of the music industry to pursue the court case on its own. In any event, there was speculation that other methods of sharing music over the Internet would survive the court case, since they did not depend on central computer servers as Napster did.

      Publicity about the case had made an overnight celebrity out of Shawn Fanning, the programmer who created Napster in 1999 when he was a college freshman. The publicity also served to increase sharply the number of people using Napster. In September Internet tracking firm Media Metrix said the number of people using Napster had quadrupled in five months. The music industry took note and began tentative steps to sell music over the Internet, something that had not been widely tried before.

      Many experts suggested that the ramifications of Internet file sharing were enormous and that Hollywood movies might be the next digital product to be freely exchanged. One of the first dot-com companies to enable users to share movies, Scour, Inc., was caught in an even worse position than Napster. Sued by both the recording and the motion picture industries, it filed for bankruptcy but continued to operate.

      A Norwegian teenager became embroiled in another type of copyright controversy when he developed a computer program that cracked the security codes on digital versatile discs (DVDs) used to distribute theatrical movies. The Hollywood movie industry and a DVD copyright organization sought to use the federal courts to prevent other people from distributing the software over the Internet.

Wireless Developments.

      The Web went wireless in 2000. Web-enabled digital wireless telephones and PDAs were developed that could use special browsing software to download information such as news stories, stock prices, driving directions, and business phone directories. The functions of Web phones were limited, however. Receiving an e-mail was feasible, but sending one was an arduous process because of the small telephone keypad. The phones had slower modem speeds than desktop PCs and therefore were limited to text-only content (downloading graphics from the Web would be too time-consuming), and because the phones could effectively access only those Web sites that were formatted for their tiny screens, Web phones initially accessed only a small part of the Internet. Experts promised that wireless phones and PDAs would become more attractive as their screens improved in clarity and their modem speeds increased. It also appeared that there would be more crossover wireless devices with features of both phones and PDAs.

      Acceptance of wireless Web phones appeared to be broader in Europe and Japan, where computer access to the Internet was relatively expensive, than it was in the U.S., where PCs were more widely available and Internet access costs were lower. In the U.S. the first target market for wireless Web phones was mobile professionals, although they also were being offered to consumers. In other countries the phones were used more for personal use, particularly for sending text messages, such as real-time instant messaging.

      Bullish pundits predicted that Web phones eventually would become the main way of connecting to the Internet, but toward the end of the year, wireless phone service providers and manufacturers registered awareness that some projections had been too optimistic. In addition, there was concern about how much money the wireless phone service providers would have to spend on government auctions of wireless broadcast spectrum in order to provide higher-speed wireless access in the future.

      In the U.S., PDAs and other handheld computers, some of which included add-on modems and telephones, gained in popularity with businesspeople and consumers. The most popular units came from Palm, Inc.; Handspring; and Microsoft (which made the operating system Windows CE for handhelds but left device manufacturing up to other firms). Palm, formerly a unit of 3Com Corp., was spun off as a separate company in early 2000 and had its initial public stock offering (IPO) in March. Handspring, which was started by two founders of Palm and marketed handhelds based on the Palm OS, had its IPO in June.

Computer Hardware.

      Unit sales of personal computers continued to grow in 2000, although more slowly than in the past. It was projected that American market growth would reach just over 12% for the year. Prices continued to decline, with the average selling price projected to be $1,000 when accessories were included.

      Some saw signs that the PC market might be reaching saturation, even though 40% or more of American households still did not own a computer. Dell Computer Corp., the largest manufacturer of Windows-based PCs, warned that demand for PCs was less than expected. Microchip manufacturer Intel Corp. concurred, although other PC makers said they expected no shortfall in sales. Some analysts predicted the PC market would become largely a replacement business. Other observers suggested that the worldwide market, where about 435 million PCs had been installed, remained largely untapped. They predicted that several times that many PCs might eventually be sold. In addition to a dearth of new buyers, some analysts attributed slower PC sales to a weak euro currency in Europe and to slow adoption of Microsoft's new Windows 2000 operating system.

      Apple Computer Corp., which wowed the industry in 1998–99 with its award-winning designs and its financial comeback, suffered a slowdown in demand for its popular iMac and initially disappointing sales of its highly touted new G4 Cube in the latter half of 2000 that left it falling short of newly lowered Wall Street revenue projections. The company announced price cuts and a hiring freeze. Earlier in the year, Apple had introduced for beta testing an early version of its long-awaited new operating system, the Mac OS X, which was expected to increase demand for Apple computers when the final version was introduced in 2001.

      While it initially was believed that PCs would face competition from low-priced Internet appliances, which would offer Internet access and little else, those fears appeared to have been exaggerated. The appliances did not sell particularly well, partly because they were nearly as expensive as low-priced PCs. Proponents of the appliances said that once more households had high-speed broadband Internet connections, Internet appliances would be more appealing.

      The hottest new computer accessory of 2000 was the “CD burner,” a recordable compact disc (CD) drive, the popularity of which was fueled by the ability of consumers to download free music from the Internet. The burners, more properly called CD-recordable (CD-R) and CD-rewriteable (CD-RW) drives, could then be used to create new music CDs that could be played on a standard CD music player. The drives also could be used to copy existing music CDs onto new discs and to store other kinds of computer data on high-capacity 650-megabyte computer CD-ROMs. By year's end many new PCs came with the drives already built in.

      A shortage of electronic parts affected the profits of many manufacturers during the year. Makers of computers, cell phones, and other electronic products were affected. Among the components in short supply were memory chips and the liquid crystal displays used in computer screens.

The Internet.

      As use of the Internet continued its rapid growth, privacy and security became major concerns in 2000. There were changes in the demographics of people who used the Internet and new studies about the “digital divide”—the gulf between those with access to the Net and those without. There also were major shifts in the still-new world of e-commerce.

      Fear of losing privacy was the number one concern of most people who went on-line, as well as the chief worry of a majority of those who chose not to go on-line at all, according to a survey of American Internet users by the Center for Communication Policy at the University of California, Los Angeles. The amount of trust people had in the Internet was linked to the amount of time they spent using it, the survey showed. Those who had not purchased goods or services on-line were almost all concerned about the security of their credit card information. A series of corporate actions and events on the Internet in 2000 highlighted privacy concerns. (See Special Report (Invasion of Privacy on the Internet ).)

      Another broad privacy issue involved the right of dissidents to criticize corporations on the Internet, which had become a place where grievances were freely aired. Some corporations said the Internet provided an unfair forum in which their reputations could be damaged, and they were willing to use lawsuits to force the operators of Web sites to disclose the real identities of anonymous critics who posted commentaries on their pages. Civil libertarians argued that using lawsuits to identify critics was a way of stopping on-line free speech and dampening the Internet's potential as a place where ideas could be freely discussed.

      The security risks of using the Internet became apparent in February when hackers launched a series of “denial of service” attacks that immobilized the computer servers at some well-known corporate Web sites and some universities. Denial of service attacks involved flooding a server with countless ostensibly innocent requests for a response and thereby rendering it useless. A series of virus attacks also were launched by hackers early in the year, some of them causing billions of dollars in damage to computers around the world.

      The apparently coordinated denial of service attacks in February showcased the vulnerability of the Internet to disruption. They began with an attack on Yahoo.com, then continued with attacks on e-commerce sites Amazon.com, eBay.com, Buy.com, and etrade.com and news media sites CNN.com and ZDNet.com. Experts said the hackers commandeered other computers around the Internet to host the time-delayed messages used in the attacks. At a predetermined time, software planted on those computers launched the attacks and bombarded the target Web sites with messages that jammed their servers. A Canadian youth later was arrested and charged with being part of a group that coordinated the attacks; he pleaded innocent to the charges.

      While the attacks were disruptive, experts said they were not technically difficult to achieve and, because of the structure of the Internet, would be hard to defend against in the future. By year's end, an Internet industry group was developing a list of “best practices” on how to respond when under a denial of service attack.

      In May computers around the world were struck by the “I Love You” virus, which was transmitted by e-mail. The name came from the subject line on the e-mail, which presumably enticed people to open the e-mail and thereby set in motion its destructive activities. The virus attacked and destroyed certain types of computer files, including files containing electronic photographs. The virus, which began its rampage in Hong Kong, also spread by mailing copies of itself to the computers of people listed in a victim's electronic address book.

      Worldwide damages for what became known as the “Love Bug” virus were estimated at several billion dollars. An international search for the perpetrator traced the virus to the Philippines, where a 24-year-old college dropout was arrested but later was released on the grounds that the evidence against him was insufficient. The Philippine government, concluding its laws were inadequate to cover computer crime, passed new legislation to cover that area of the law.

      The Internet also was the vehicle for other types of crimes—some old, some new. A 15-year-old New Jersey boy was caught in an Internet stock-manipulation scheme that earned him more than $270,000. A 16-year-old from Miami became the first juvenile hacker sentenced to jail in the U.S. after he on several occasions broke into computer systems at the Department of Defense and NASA. A stock-market day trader in Houston, Texas, was arrested after he allegedly posted a fake news release on the Internet that caused a decline in the stock price of Lucent Technologies. In October hackers broke into Microsoft's corporate network and allegedly viewed the source code for some Microsoft programs. Microsoft said that, while no damage was done, it was an act of industrial espionage.

      Sometimes crime not only did not pay, it was also expensive. The operators of a group of pornography Web sites who were found to have fraudulently billed more than 700,000 credit card holders were fined $37.5 million in a Los Angeles federal court. Two men and a woman who operated half a dozen adult-content Web sites were found to have bought credit card account information from a California bank, then initiated fake charges to some of the cardholders.

      Western Union disclosed that a technical error had made its cash-transfer Web site vulnerable, and a hacker had downloaded the credit card and debit card numbers of about 15,700 customers. Western Union advised the customers to cancel their cards. A hacker tried to extort $100,000 from Internet music seller CD Universe by threatening to release some of the 300,000 customer credit card files he claimed to have copied from the company's Web site. CD Universe refused to pay the blackmail, and the hacker posted some of the stolen credit card information on the Internet.

      The Internet Corporation for Assigned Names and Numbers (ICANN) began in August to accept proposals for new Web site suffixes that would expand the list of names available for Internet addresses. It was believed that new top-level domain names, in addition to existing suffixes such as .net, .org, and .com, would make it possible to add many new Web site names. In November ICANN's board of directors, after debating a list of close to 200 domain names submitted by numerous organizations, voted in favour of seven new suffixes—.aero (for aviation sites), .biz (businesses), .coop (cooperatives), .info (general information), .museum (museums), .name (individuals), and .pro (professionals such as doctors). There were some complaints from applicants whose suggested names had been rejected, and registry agreements were still to be worked out, but the new names were expected to begin appearing in 2001.

      New ways of browsing the Web also came into play with the arrival of “voice portals” that let people obtain Web information by speaking into a telephone. Users of the services could obtain news, sports scores, stock prices, and directory information. About 30 companies offered the service, using colourful names such as Tellme, BeVocal, and Quack.com. The number of companies offering free Internet access service increased in 2000, but the availability of free access did not make major inroads against for-pay service. One reason may have been that free services often required users to view advertisements and to allow their on-line surfing habits to be tracked for advertising purposes. Providers of free service counted on advertising revenues to pay their operating costs. Freeserve, the U.K.'s largest Internet service provider, which began in 1998 as a free service in which customers paid only phone charges, introduced flat-rate, unmetred service in May. At year's end, however, financial setbacks forced the sale of the company to Wanadoo, a branch of France Télécom, for a fraction of its previous value.

      Internet telephony sites, which allowed people to place free long-distance phone calls from their computers by using the Internet instead of the conventional telephone network, remained more of a curiosity than a threat to the telephone companies. One reason may have been the long lag times that could be introduced into a conversation if packets of voice data became stalled on the busy Internet. Experts said that planned improvements eventually would give voice packets priority over other data and thus reduce the lag time in Net-based telephone conversations.

      In the U.S. a study by Nielsen/NetRatings found that blue-collar workers spent their on-line time at home, while professional people went on-line mostly at work. While the study highlighted the differences in Net use between people in different income brackets and job types, it also was said to be an indication that Internet use had become more pervasive. Another study, by Media Metrix, indicated that low-income households, defined as at or below $25,000 in annual income, were the fastest-growing segment of Internet users. In addition, women were becoming a greater force on the Internet, a trend that was forcing e-commerce sites to cater to their tastes. Several studies showed that women accounted for half of the Web audience, and some showed there were more women than men. A survey by the Office for National Statistics found that 32% of all households in the U.K. had Internet access at home, with the total rising to 45% when access at work was included. While this was lower than in the U.S., it exceeded that of most of Britain's European neighbours.

      The reach of high-speed cable modem and telephone digital subscriber line (DSL) services continued to grow. While dial-up phone-line connections to the Internet continued to predominate, the high-speed services with their always-on connections were favoured by businesses and by consumers who downloaded large data files, MP3 music files, or video. On the horizon was a wireless form of high-speed Internet access called multichannel multipoint distribution service; customers would have receivers and transmitters on the outside of their homes or office buildings to connect to the Net.

E-Commerce.

      The growing impatience on Wall Street with profitless e-commerce firms led some Web-based companies to change their strategies. The most successful raised their prices or sought useful alliances. The less successful underwent layoffs, consolidations, and retrenchments. E-commerce, however, continued to grow, and experts projected that on-line advertising, another source of revenue for e-commerce firms, would increase sharply in the next few years. Meanwhile, traditional bricks-and-mortar companies continued to try to extend their reach with on-line marketing.

      Raising prices represented a sharp change of strategy for e-commerce companies, which tended to underprice their bricks-and-mortar competitors by up to 15%, largely because their operating costs were lower and they had taken a long-term view of achieving profitability. Raising prices was seen as a way to help profitability at a time when venture capitalists and other investors no longer wanted to support profitless firms, a decision tied to the decline in technology stock prices. E-commerce companies raised prices in several forms: reduced discounts, higher shipping charges, and more narrowly aimed promotional prices.

      Corporate cutbacks became common. On-line firms such as home furnishings site Living.com, drugstore More.com, and eSprocket, an on-line marketplace for used metal-working machinery, laid off staff in an effort to maintain viability. Even big players were affected. Brokerage firm Merrill Lynch closed two Web sites aimed at consumer purchases, Shopmerrill.com and Merrillauctions.com, as part of a retrenchment. Other firms were acquired by competitors for a fraction of the stock valuations they had held only a few months before.

      Meanwhile, bricks-and-mortar companies turned to the Internet to boost sales, both on-line and in their retail outlets, and to increase customer awareness. Kmart, the second largest American discount retailer, offered free Internet accounts through its BlueLight.com e-commerce site. Despite the slowing of on-line retail sales at midyear, expectations were that they would continue to grow. Forrester Research predicted that on-line sales could account for more than 7% of all retail sales by 2004. Web advertising was also projected to increase. A study by Veronis Suhler, an investment banking firm, predicted that Internet advertising would increase at nearly a 40% compound annual growth rate and would exceed $24 billion by 2004.

      U.S. Pres. Bill Clinton signed into law a bill that gave legal status to electronic signatures and thus allowed electronic contracts to be finalized on-line. The law recognized as legal a signature that was electronically entered into a computer, then transmitted over the Internet. It was presumed the law would result in consumers' signing electronic contracts for bank loans and other types of transactions.

      Some new e-commerce ventures were controversial. Orbitz, an on-line travel agency started by five airlines (American, Continental, Delta, Northwest, and United), postponed its start from September 2000 until mid-2001, apparently because of complaints from travel agents that it would use the site to control the on-line ticketing market. Orbitz invested in a new search engine that could more effectively seek the optimum fare and offered some fares available only through airline Web sites. Some travel agencies worried they would not be able to offer the same fares. A complaint filed by the Association of Retail Travel Agents resulted in a congressional hearing on whether the Orbitz site was an antitrust issue. Orbitz argued that the start up was delayed in part owing to complicated new technology.

      Car sales on the Internet heated up, especially as Amazon.com announced it would sell cars. Amazon buyers could configure the vehicle of their choice, get a price quote, and put down a deposit with a credit card, although the vehicles actually would be purchased from a car dealership. Earlier in the year, Autobytel.com began selling cars by acting as a broker between shoppers and car dealers. Car manufacturers also expressed interest in selling over the Internet. Meanwhile, U.S. federal regulators agreed to let five large automakers buy supplies through a single business-to-business Web site.

      The issue of Internet taxes continued to be a hot topic. While no new U.S. taxes on the Internet were created, the U.S. General Accounting Office estimated that states and cities would lose somewhere between $300 million and $3.8 billion in tax revenue as a result of sales over the Internet. The wide range of the estimate was attributed to difficulties in tracking Internet sales.

Acquisitions and Mergers.

      Thanks to the high-flying stock market of early 2000, some acquisitions paid for with stock carried huge valuations. The grandest acquisition of all was AOL's plan to buy entertainment firm Time Warner in an exchange of stock. The deal was valued at $183 billion when it was announced by AOL's ambitious CEO, Steve Case (see Biographies (Case, Steve )) in January. In March AOL was active again, buying out Bertelsmann's interest in AOL Europe and AOL Australia in a deal said to be worth between $6,500,000,000 and $8,250,000,000.

      The merged AOL Time Warner, with its on-line, media, and entertainment properties, promised to be a powerful giant; some called the planned acquisition the most significant deal ever struck in the Internet business. That was precisely what worried regulators. By October the European Commission had approved the merger, then revalued downward to $165 billion, but antitrust regulators in Washington, D.C., had proved harder to convince. While the Europeans had been concerned mainly about stopping the merged companies from controlling on-line music distribution, the U.S. Federal Trade Commission was concerned that the combined companies would be the biggest provider of on-line services in the nation and also would own one of the country's largest cable TV networks. Though these regulatory concerns delayed completion of the deal in 2000, it was likely to be completed in January 2001.

      Other big mergers and acquisitions included the January announcement that JDS Uniphase Corp. would acquire E-TEK Dynamics, Inc., in an all-stock deal worth roughly $15 billion. In February software firm Computer Associates International, Inc., planned to acquire Sterling Software for about $4 billion in stock; both firms were strong in storage-management technology. A deal that fell apart was the plan of Corel Corp., a proponent of the Linux OS, to acquire Inprise/Borland Corp., a maker of Linux software tools, in an all-stock deal that in early 2000 was valued at more than $1 billion. When Corel's stock price declined, the deal was canceled. VeriSign, Inc., which dealt with Internet security, said in March that it would buy Network Solutions, which handled the registration of Web site names, for $21 billion in stock.

      In May Internet portal Web site Lycos was purchased by Terra Networks SA, the Internet unit of Spanish telephone firm Telefónica, in a $12.5 billion exchange of stock. Educational publisher Pearson PLC in July paid $2.5 billion in cash for National Computer Systems, Inc., which provided school software and managed information for the U.S. Census Bureau. In August Phone.com, a wireless Internet service provider, and Software.com, a maker of Internet messaging software, said they would merge in a stock deal worth $6.4 billion. AT&T paid $1.4 billion in cash in August for a 32% stake in Net2Phone, an Internet telephony firm. Broadcom Corp., which made chips for accessing broadband telecommunications networks, said in August that it would pay $1.2 billion in stock to acquire Silicon Spice, Inc., which made chips that enabled voice, video, and data to travel over a single network.

      Despite some national security concerns, the U.S. allowed Nippon Telegraph and Telephone Corp. to purchase Verio, Inc., a Colorado-based Internet service provider, for $5.5 billion. Verio linked a number of large American corporations to the Internet, and there were concerns that the Japanese might be able to obtain classified information if the U.S. tapped Internet communications through Verio during an investigation.

      Late in the year it was disclosed that computer hardware manufacturer Hewlett-Packard Co. was discussing the purchase of PricewaterhouseCoopers's management and information technology consulting practice for an estimated $17 billion–$18 billion in cash and stock. (In 2000 Hewlett-Packard also named Carly Fiorina board chairman following her first year as president and CEO. She was one of the few women to be a top executive in the computer field.) In October two makers of computer hard disks prepared to merge to form the world's largest disk-drive firm. Maxtor Corp. said it would buy Quantum Corp.'s hard-disk-drive group in a stock exchange valued at $2.3 billion.

Other Developments.

      In consumer electronics the biggest event of the year was the frustrating U.S. introduction of Sony's PlayStation 2 video game machine. Plagued by component shortages, Sony could deliver only half as many of the units as planned for the October introduction. That resulted in long lines of would-be buyers, and many gamers were disappointed when stores ran out of the machines on the first day they were available. The shortfall led to speculation that Sega Enterprise Ltd.'s competing Dreamcast video game machine would prosper during the 2000 holiday season and that new game machines due out from Nintendo and Microsoft in 2001 might have an easier time competing against Sony than had been thought. Despite the popularity of video games, critics of the game industry continue to oppose its marketing of violent games. An industry-devised ratings system aimed at keeping some of the more violent games out of the hands of young teenagers failed to allay those concerns.

      A study critical of computer use in public schools said the billions of dollars spent on computers and Internet access should go instead for educational needs such as more teachers. The report by the Alliance for Childhood said that American public schools had spent more than $27 billion on computers and related technology over the previous five years, even though there was not much research to show what impact they were having on education. Others urged more computer use by everyone. In an effort to promote computer literacy among its employees, Ford Motor Co. said all of its 350,000 workers around the world would be offered a desktop computer with unlimited Internet access for $5 a month. As factories grew more automated, companies such as Ford expressed concern that they needed employees who were familiar with computers.

Steve Alexander

Microelectronics.

      Projected worldwide sales of semiconductors grew 37% to $205 billion in 2000, according to the Semiconductor Industry Association (SIA). This was the first time sales had exceeded $200 billion. The industry expected to see growth of 22% in 2001 to $249 billion and to $319 billion within three years. Sales of communications solutions for data networking, broadband, wireless, and optoelectronics as well as continued demand for personal computers (PCs) contributed to the record number. The optoelectronics category, including laser devices and image sensors, grew 68% in 2000 to $10 billion and was projected to be $19 billion by 2003. The market for programmable logic devices was expected to grow at a compound annual rate of 17% through 2003. The market for digital signal processors (DSPs), fueled by the use of DSPs in MP3 music players, digital cameras, digital video (or versatile) discs, camcorders, colour printers, and video games, grew 48% to $6 billion, and the microcontroller market rose 35% to $19 billion. Flash memory, the fastest-growing market segment, grew 130% in 2000 to $10 billion and was projected to increase to $23 billion by 2003. The microprocessors usually found in PCs and imbedded applications grew at an 11% rate, with sales of $30 billion. The PC market was expected to increase only 6% in 2001; over the next three years, it was likely to become a $39 billion market. Dynamic random access memory was a big growth area, up 48% to $31 billion.

      The Americas (North and South) increased sales 34% in 2000 and at $64 billion continued to lead the world markets. This was expected to become a $96 billion market by 2003. The Asia-Pacific region (Singapore, South Korea, Taiwan, and India) was the fastest-growing microchip market, up 41% in 2000 to $52 billion. The Asia-Pacific market was expected to increase to $85 billion by 2003. The Japan market increased 42% to $46 billion and was projected to reach $72 billion in sales by 2003, while the European market, up 33% to $42 billion, was expected to rise to $66 billion. The SIA pointed out that 10 years earlier the two largest markets, the U.S. and Japan, had constituted about two-thirds of the global semiconductor market. By 2000, however, the Americas and Asia-Pacific constituted less than 60% of that market.

      Intel Corp., the world's largest chip manufacturer, signed a $1.5 billion deal to supply flash memory to Telefon AB L.M. Ericsson over the next three years. To meet demand, Intel bought two facilities from Rockwell International Corp. in Colorado Springs, Colo., and planned to build another facility in Chandler, Ariz. The shortage of Intel's Pentium III processors continued well into the year. On July 31 Intel introduced the world's fastest chip, a 1.13-GHz (gigahertz) version of its Pentium III processor, but the company promptly recalled all 10,000 of those shipped because of design problems and announced it would reintroduce the chip in the second quarter of 2001. The Pentium 4, a 32-bit chip formerly code-named Willamette, was introduced in November. Running at 1.4 GHz and 1.5 GHz, it consisted of 42 million transistors. Intel planned to retire the Pentium III processor at the end of 2001. Intel also tested Itanium, a 64-bit chip running at 800 MHz and designed to be used in high-end servers and workstations. In October Intel canceled plans for the lower-end Timna chip.

      Advanced Micro Devices, Inc. (AMD), the world's second largest chip company, with a 17% market share, signed a $400 million deal in January to supply flash memory to Samsung Electronics Co. Ltd. for use in its mobile telephones. Unlike Intel, AMD beat analysts' predictions for its third quarter with revenues of $1.2 billion, double 1999's third quarter. The quarterly profit was $219 million versus a loss of $99 million in 1999. After the recall of Intel's 1.13-GHz chip, AMD's 1.2-GHz Athlon became the new speed leader.

      A new microprocessor manufacturer, Transmeta Corp., began producing its Crusoe family of low-power microchips for mobile computers. The chip, which ran both the Linux and Windows operating systems, used an advanced power-management feature that could throttle back power and scale performance dynamically with a software application running. Fujitsu, Ltd., and the Sony Corp. announced plans to use the Crusoe chip in some of their notebook computers.

      Lucent Technologies Inc. announced it would spin off its Microelectronics Group in 2001. This would allow the new concern, named Agere Systems Inc. in December, to sell chips to any company. Motorola, Inc., China's biggest foreign investor ($3.4 billion), announced plans to spend $1.9 billion to expand its electronic chip and cellular phone production in Tianjin, China. In April Motorola announced the purchase of a $2 billion facility in Dunfermline, Scot. The plant, which was built by the Hyundai Motor Co. of South Korea in 1997 but never opened, would be Motorola's largest microchip-fabricating facility in Europe.

Thomas E. Kroll

Telecommunications.

      In June 2000 the U.S. Federal Communications Commission (FCC) approved AT&T Corp.'s $44 billion purchase of MediaOne Group, Inc. Along with the company's purchase of Tele-Communications, Inc. (TCI), in 1999, this further increased AT&T's presence in the cable television market. The FCC also required that AT&T meet the 30% ownership limits for cable providers.

      On October 25 AT&T announced its intention to split into four separate companies. With AT&T's consumer long-distance voice service in a rapid decline and stagnant growth in its business services unit, the company's chairman, C. Michael Armstrong, abandoned his vision of one-stop shopping for telephone, cable, and Internet services. The four new publicly traded companies would provide business services, consumer services, wireless, and broadband (cable). In 1996 AT&T had split into three companies—Lucent Technologies, NCR, and AT&T.

      On November 1 WorldCom, Inc., the nation's second largest long-distance phone company, announced its own restructuring. This would create two tracking stocks and separate business customers and data and Internet services from the consumer long-distance business, which would be renamed MCI. A proposed merger of WorldCom and Sprint, the third largest long-distance provider, was blocked by the U.S. Department of Justice on the grounds that it would reduce competition in the telecommunications industry. Rebounding from the failed Sprint merger, WorldCom announced it would acquire voice and data network operator Intermedia Communications Inc. and a controlling interest in Digex, Inc., a World Wide Web site hosting operation, for $6 billion.

      Lucent (the former AT&T equipment manufacturer), which was plagued by a falling stock price, failure to meet forecasts, component shortages, and a product line that had not kept up with the fast-changing technology, replaced its CEO, Richard McGinn, with its original CEO, Henry Schacht, until a permanent replacement could be found. Lucent spun off Enterprise Networks Group, the division that provided office telephone equipment, during the year and formed Avaya, Inc. Lucent was also proceeding with plans to spin off the microelectronics division into a separate company.

      Iridium LLC, the bankrupt $5 billion satellite communications system backed by Motorola, Inc., was purchased for $25 million by a group headed by former Pan Am executive Dan Colussy. Prior to the sale's approval, there were plans to decommission the 66 satellites already launched and dispose of them by using the reentry heat of the atmosphere.

      Owing to industry consolidation and an FCC ruling allowing only one wireless phone license in any market, two new major wireless companies were formed. Verizon Wireless was formed from the cellular resources of Bell Atlantic Corp., British-based Vodafone AirTouch PLC, and GTE Corp., which had bought Ameritech Cellular when Ameritech Corp. was purchased by SBC Communications, Inc., in 1999. Verizon had 25 million customers in 96 major markets and joined AT&T Wireless, Sprint PCS, Nextel Communications, Inc., and newly formed Cingular Wireless for nationwide service. Cingular, a $12 billion company with 19 million customers, was formed in 2000 by merging the wireless services of SBC (CellularOne) and BellSouth Corp. In August Verizon purchased digital subscriber line (DSL) provider NorthPoint Communications Group, Inc., for $800 million and broadband-data provider OnePoint Communications for $250 million.

      In July the FCC authorized a new nationwide three-digit code, 511, to be used for telephone numbers that provide traffic reports and travel information. The FCC also decreed that all telephone companies had to provide local number portability, the option to keep one's telephone number when switching service providers, for wireline phones by the end of 2000 and for wireless phones by 2002.

      The U.S. Supreme Court upheld an appeals court ruling that would allow telephone companies to use customer information to market other services to their customers without their consent. This decision was contrary to FCC rules implementing the 1996 Telecommunications Act. In May the FCC and AT&T announced lower long-distance telephone bills made possible by reducing access charges that long-distance carriers paid to local telephone companies. At the same time, AT&T filed with the FCC for other rate increases. Owing to a deluge of consumer complaints, however, AT&T backed off and deferred the rate hikes. After the FCC received 2,900 complaints, WorldCom agreed to pay $3.5 million for “slamming”—switching customers' long-distance provider without their permission.

      Vodafone acquired the German firm Mannesmann AG in May for $170 billion in stock. This constituted the world's largest corporate takeover. The agreement headed off a potential hostile takeover by Vodafone and created the world's largest mobile communications company. Japan's largest mobile phone company, NTT DoCoMo, Inc., attempted to purchase VoiceStream Wireless Corp., the eighth largest provider in the U.S., but was outbid by Deutsche Telekom AG, which offered over $50 billion for the company. Mexican telecommunications giant Teléfonos de México requested the overturn of a ruling by Mexico's federal telecommunications regulators (Cofetel) that reduced by 63% the interconnection fees the company's competitors were required to pay for international calls originating or terminating in Mexico.

      As the Internet and wireless telephony began to merge, mobile phone giants Motorola, Sweden-based Ericsson, and Nokia of Finland announced plans to develop standards jointly for the security of electronic transactions over mobile devices. In May the European Commission created the Wireless Strategic Initiative, a consortium of four leading telecommunications suppliers in Europe—Ericsson, Nokia, Australia-based Alcatel, and Siemens AG of Germany—to develop and test new prototypes for advanced wireless communications systems. After meeting with an international think tank, the consortium partners in December invited other companies to join them in a Wireless World Research Forum to be held in 2001.

Thomas E. Kroll

▪ 2000

Introduction

Computers

      The phenomenal growth of the Internet was the dominant theme in computers and information systems in 1999. New World Wide Web-based companies, such as Amazon.com, became familiar names; ordinary people bid in on-line auctions; and traditional bricks-and-mortar companies, such as banks, pursued e-commerce strategies.

E-commerce.

      E-commerce continued to grow with meteoric speed in 1999, powered by Internet retailers such as Amazon.com, which, under the leadership of its founder and CEO, Jeff Bezos (see Biographies (Bezos, Jeffrey P. )), expanded beyond selling books on-line to offering toys, consumer electronics, videos, music, auctions, gifts, and electronic greeting cards and prepared to get into the on-line grocery business. Despite all of those offerings, Amazon.com was unprofitable, as were many other Web-based e-commerce efforts. Nonetheless, e-commerce sites continued to pop up as investors seemed to believe that e-commerce would provide big paybacks in the future.

      Traditional companies sought to meet the competition from on-line marketers. Barnesandnoble.com, the on-line extension of the retail bookseller, redesigned its Web sales effort, added a music store (expanding on its existing limited music selection), and announced plans to add videos. Several other Web retailers launched major music-retailing efforts. Smaller retailers also got a chance to join the e-commerce revolution when Amazon.com said it would allow other merchants to sell through its Web site to its millions of customers.

      Meanwhile, technology was being adopted that would make shopping on-line more attractive. Among the new techniques were three-dimensional on-line catalogs that allowed products being viewed on the screen to be rotated so they could be viewed from any angle. In addition, models with the same physical measurements as the viewer could “try on” clothes and be viewed from all angles on a computer screen. Booksellers used software to track the buying preferences of customers; the software would recommend a book to a customer on the basis of buying habits of other consumers with similar tastes.

      On-line auction sites continued to grow, including regional or city-based auctions aimed at attracting transactions for hard-to-ship items like cars and furniture. Those items could instead be exchanged locally once the auction had been completed. The dominant Web auction site, eBay, offered more than three million items for sale at any one time. Other sites tried to catch up, and, as a result, 100 different Web sites said they would band together to share auction listings. That meant bidders on one site could bid on an auction at another participating Web site. The volume of auctions, however, sometimes caused Web sites to be out of order for hours at a time. On-line auction operators also struggled with determining what could be sold. The eBay auction prohibited sales of firearms, alcohol, and tobacco but continued to permit the sale of pornography. The company said it was troubled by the fact that what could be sold legally in one jurisdiction, such as a state, might be illegal to sell in another.

      Other forms of commerce also bloomed on the Net, particularly on-line Wall Street brokerages that allowed investors to buy stock at lower commission prices and to trade stocks at times when the stock exchanges were not open. These stock-trading sites proved so popular, recording hundreds of thousands of stock trades daily, that they often became overwhelmed by the sheer number of would-be participants. Many suffered extended periods of being out of service. Charles Schwab was the leading on-line brokerage firm, but by year's end some big Wall Street firms, including Morgan Stanley Dean Witter and Merrill Lynch, had endorsed the rise of on-line investing at less-than-traditional brokerage fees. (See Economic Affairs: Special Report (Electronic Trading ).)

      Non-Web businesses also got into the e-commerce act. The Bank of America disclosed a pilot project for viewing and paying bills on-line, in effect acting as a billing intermediary for other companies. Banks were said to have an interest in allowing consumers to pay bills on-line because it allowed the banks to maintain control over transactions. Other nonbanking firms were pursuing a similar strategy by consolidating bills from such varied companies as utilities, credit card firms, mortgage companies, and cable TV firms.

      Not everyone was happy about the growth of e-commerce. State governments feared losing substantial sales tax revenues to on-line purchases that were not currently taxed. The states complained that a lack of taxes would hamper the ability of state and local governments to deliver essential services, such as fire protection. The Internet Tax Freedom Act, a law passed in 1998, prohibited states from taxing on-line sales and on-line access for three years. Late in the year, however, a congressional panel began studying potential Internet taxes in light of projections by firms such as Forrester Research, which predicted that e-commerce would total $64.8 billion by 2003. Another study, by Jupiter Communications, projected that on-line grocery shopping alone would grow to $3.5 billion by 2002. Still another study suggested that on-line sales of music on compact disc (CD) would amount to $4 billion in 2004.

      The arrival of e-commerce also created problems with unorthodox selling efforts. On-line sales of prescription drugs raised concerns about medical ethics when it became clear that some on-line pharmacies were shipping drugs across state lines without the proper authority and that some doctors were writing prescriptions for people on the Net whom they had never examined or even met. In April Amazon.com shut down an auction on its site in which stock in a software company was being sold. While the legality of the stock auction was open to question, Amazon's move came at a time when complaints of on-line stock fraud were on the rise. The federal Securities and Exchange Commission said on-line stock fraud was one of its greatest enforcement challenges.

      Other types of on-line fraud were also troublesome. While on-line auction sites were public, the resulting transactions were between buyer and seller, and some sellers proved to be swindlers who took money without providing the purchased goods. In addition, some auctioned merchandise was shown to be stolen property. Authorities recommended that consumers minimize fraud by using credit cards for Internet transactions rather than check, money order, or cash. Credit-card purchases in particular could be disputed if fraud was suspected.

      E-commerce also raised privacy issues. European and U.S. trade negotiators became enmeshed in a dispute over data-privacy issues, with the European Union advocating stronger privacy protections than its U.S. counterpart. In addition to protecting consumer privacy, Europeans were concerned about whether consumers would have access to data companies collected on them as a result of Net transactions.

      Amazon.com was confronted with privacy concerns after it became clear that the company was amassing personal data on the buying habits of its millions of customers. The information, based on identifying characteristics such as geography, employer, or professional organization, would enable customers to see what others were buying. The Web firm countered by saying it would allow customers to request that their personal information not be compiled.

      Another type of commerce flourished as a result of the growth of e-commerce Web sites and other types of Internet activity: the stock market. The high valuations given many technology stocks became a major issue for investors, with arguments being made both ways about whether Net companies—most of which showed little or no profit—had inflated stock prices. One effect was that the large number of initial public stock offerings by Net firms attracted investor capital that otherwise would have been invested in existing stocks. The importance of technology stocks to the economy was indisputable. In November microchip manufacturer Intel Corp. and Microsoft were two of the four new stocks added to the 30-stock Dow Jones industrials list.

Computers.

      The year in computer hardware was marked by sharply declining prices. Two factors were responsible; manufacturers discovered that personal computers (PCs) priced below $600 sold well, and a series of rebate programs from Internet service providers (ISPs), such as AOL and CompuServe, brought the purchase price of computers within the reach of a mass audience.

      The low-cost, or in some cases free, computer movement began with Free-PC, a marketing program offering consumers no-cost PCs if they agreed to view a steady diet of advertising aimed at them on the basis of the demographic details the customer had to provide. While many consumers responded to the Free-PC offer, mass interest in discounted PCs did not occur until retail stores began offering programs in which customers who signed up for three years of Internet service at standard rates got a $400 rebate on new computers. The rebates, combined with new, low-price points pioneered by PC manufacturer eMachines, which sold new PCs without monitors for as little as $400, helped stimulate computer sales. The eMachines pricing strategy enabled it to become a major player in the PC industry in only about four months; by March it was one of the top five PC suppliers in the U.S. retail market. By year's end name-brand manufacturers such as Hewlett Packard and Compaq were offering new computers for under $600.

      The rebates were not without controversy, since they merely shifted the time period over which a computer was purchased. An initial fear that the rebate programs might be undermined by the arrival of free ISP service evaporated after the free Net access model failed to catch on in the U.S. A form of free Internet service did become popular in Europe, but it was offered there because ISPs could make money another way, by collecting a portion of the telephone charges customers had to pay to access the Internet.

      In the second half of the year, Merrill Lynch was forecasting rapidly diminishing prices and profits for the PC industry—a direct result of the popularity of low-cost PCs. In the face of that trend, IBM, the company that created the PC industry, said it would pull out of the U.S. retail market for consumer computers by early 2000 and concentrate on Internet-only sales. Meanwhile, PC-maker Packard Bell NEC Inc. closed its Sacramento, Calif., manufacturing facility and cut 2,600 jobs as a result of its inability to compete as PC prices continued to sink. Packard Bell NEC conceded that it also was dogged by an image of having poor quality, although it said those problems were behind it.

      Lower computer prices caused other changes as well. Intel, seeing a decline in profits from its PC chips, decided to pursue the more lucrative market for telecommunications chips. Other PC makers reversed roles. Dell Computer beat Compaq to become the largest PC supplier in the U.S., but Compaq maintained the number one market share position worldwide.

      At the same time, PCs became more fashionable, inspired by the success of Apple Computer Corp.'s colourful and streamlined iMac. Rather than compete only on the basis of price and performance, PC makers hoped to make money with variations in size, shape, and colour. Meanwhile, the iMac continued to boost Apple's market share, as it had since its introduction in mid-1998. The iMac-based iBook was another major driver for Apple.

      Some computers cost their manufacturer money. Toshiba said it spent about $1 billion to settle a class-action suit. The suit alleged that Toshiba sold notebook computers with malfunctioning floppy disk drives that could erase or damage data without any warning.

      Hand-held computers, led by models from Palm Computing, became increasingly popular in 1999. Analysts predicted that the number sold would increase to 21 million annually by 2003, up from 3.9 million in 1998. Palm, which made products aimed largely at traveling businesspeople, gained considerable publicity by providing one of its new models with wireless access to the Internet.

      Home networking was a budding market for computer equipment manufacturers. The idea was to enable households with more than one computer to share a printer or a high-speed Internet connection. Trend watchers predicted that in the future home networks might enable music downloaded from the Internet to be played in different rooms of a home or that a home network might link TV sets, telephones, digital cameras, and smart kitchen appliances.

High-Speed Access.

      One of the hottest technological products of 1999 was high-speed Internet access, which made Web site information download more quickly and eliminated lengthy log-ons. There were three types of high-speed internet access: digital subscriber lines (DSL), which used existing telephone lines; cable modems provided by cable TV companies; and satellite download via home satellite dish. High-speed connections ranged from 256,000 bits per second (256 kbps or 256K) for the most widely used consumer version of DSL to 1.5 million bps for most cable modem systems. What all high-speed access sources had in common was that they far outdistanced the fastest conventional computer modems, which were limited to about 56K. Some Web sites began to cater to high-speed Internet users by offering video or music files, which could be downloaded quickly with the new access technologies but were time-consuming to download at ordinary modem speeds.

      High-speed access, however, was not without its problems. There were complaints that DSL service was difficult for ordinary people to set up, and some early users of cable modems and DSL discovered that there could be network security breaches that allowed others to view information on their PCs. There were warnings that always-on high-speed connections might make consumers more vulnerable to computer hackers who sought to disrupt the computers of others. Most high-speed access was also more expensive than conventional computer modem access. As a result, some analysts predicted that four years hence conventional modem users would still outnumber high-speed access customers by two to one.

      The new high-speed access technologies also spawned a political fight between cable TV companies and ISPs. ISPs, intermediaries that offered gateways to the Internet, ranged in size from the giant America Online (AOL), which offered service to millions of users, to small providers with a few customers. Some ISPs were angered that while they could offer high-speed DSL through resale agreements with the telephone companies that provided them, they were unable to offer high-speed cable modem service because most local cable TV companies had exclusive agreements with outside firms such as Excite@Home and Road Runner. ISPs appealed to local cable franchising authorities to open up the high-speed cable modem market, setting the stage for a legal battle between local governments, the Federal Communications Commission (FCC), giant cable TV operator AT&T, and AOL. The confrontation came on the heels of AT&T's 1999 entry into the cable business through its acquisition of Tele-Communications, Inc.

      The battle over what ISPs called “open access” and what cable firms called “forced access” became one of the largest regulatory fights in Internet history. At stake was a nascent cable-related industry that AT&T believed would provide a major source of its future revenues as a result of service offerings such as e-mail, e-commerce, telephone service, and movies on demand.

      As the year ended, a federal district court in Portland, Ore., had upheld the right of local governments, which sign cable TV franchise agreements on behalf of their citizens, to open up cable TV Internet services to competition, but the ruling had been appealed. The FCC, acting as a “friend of the court” in legal proceedings, backed AT&T and the cable industry by arguing that only the federal government had the authority to regulate Internet telecommunications services. Excite@Home, the largest high-speed cable modem service, argued in a similar filing that open access would give ISPs a “free ride” on the substantial financial investments cable TV companies had made in their networks. In a separate lawsuit GTE, a huge local telephone company, accused AT&T and cable company Comcast of violating antitrust laws by excluding ISPs from high-speed Internet access via cable modem.

Crime.

      Computer crime grew to match the rising interest in the Internet in 1999. Four New York City securities brokers were charged with a multimillion-dollar stock fraud after they promoted eight stocks by planting misleading stories about them on a Web site. While the opportunities for fraud were increased by the Internet, other, more serious crimes also flourished. A California man was charged with stalking a woman and using the Internet to encourage others to attack her. He allegedly did so by publishing the woman's name, address, and telephone number in personal ads on the Net. In an unrelated crime, a California man was sentenced to two years in prison for e-mailing death threats to Hispanic people. The arrest of a computer industry executive for allegedly trying to arrange a sexual relationship with a 13-year-old girl over the Internet highlighted the risks the new medium posed for children. Federal officials said pedophiles frequently searched the Net to arrange meetings with children and that the number of indictments for using the Internet for transmitting child pornography was increasing.

      Computer viruses adversely affected hundreds of thousands of computer users in 1999. In April the worldwide effects of the Chernobyl virus (which struck on the 13th anniversary of the Chernobyl nuclear disaster) turned out to be more destructive than expected. The virus, which was designed to erase a PC's hard drive while scrambling system settings so the computer could not be restarted, reportedly affected more than 2,000 computers in the U.S. and hundreds of thousands in other countries. The damage was said to have exceeded that caused by the Melissa virus less than a month earlier. Another virus, called Worm.ExploreZip, struck in June. California-based Computer Economics Inc. estimated that computer viruses caused more than $7 billion in damage to U.S. computer systems in the first half of 1999.

      Hacker attacks on government Web sites continued to be a problem. The army, the Department of Agriculture, and other agencies reported electronic break-ins at their Web sites. In October the FBI told Congress that it had traced to Russia some hackers who stole weapons information from government and private computer networks. The stolen material was said to be unclassified but sensitive, and the disclosure seemed to confirm previous warnings that government computer systems remained at risk to outside attacks. The highest risks were considered to be in computer systems used for national defense, law enforcement, air traffic control, and government benefit payments. Some attacks appeared to be politically motivated. When NATO inadvertently bombed the Chinese embassy in Belgrade, Yugos., in May, hackers attacked the Web sites of the U.S. embassy in China and the Departments of Energy and the Interior.

      As a result of hacker attacks, the CIA announced plans to create a “cyberwar” centre to head off potential threats to the computers that run Defense Department war rooms, power plants, telephone systems, air traffic control centres, and international financial transactions. The government said computer attacks could become a national security threat that ranked just behind nuclear, biological, and chemical weapons. In September the Defense Department showcased a $15 million computer lab designed to trace hackers through the Internet and to recover important information from computer disks that had been deliberately destroyed. It said the lab would be used to gather electronic evidence in cases involving espionage, murder, or the military.

      Famed computer hacker Kevin Mitnick, who admitted having broken into the computers of several high-tech companies, stolen software, and installed programs that caused millions of dollars in damage, paid token restitution of $4,125 as a result of a court ruling. He previously had been prohibited from having access to computers, cell phones, televisions, or any Internet-access equipment for three years after his release from prison following a 3-year and 10-month sentence. He was arrested in 1995 after a cross-country hacking spree.

      After having long opposed blanket permission to export strong encryption software that could protect international messages and transactions from being examined, the U.S. government relented and proposed rules that would let security software firms export their strongest retail products without first having to obtain an export license for each customer. Exceptions were to be made for countries considered to be unfriendly to the U.S.

Microsoft Trial.

      Testimony in the antitrust suit filed against Microsoft by the U.S. Justice Department in May 1998 and joined by 19 (originally 20) states came to an end in June 1999. Microsoft and the government engaged in settlement talks in March, while the trial was in recess, but were unable to reach an agreement. In March questions were raised about whether AOL's acquisition of Internet browser firm Netscape Communications—a company that figured heavily in the antitrust suit's allegations—would affect the trial, but the suit went on as planned.

      In its suit the government claimed that Microsoft had acted in an anticompetitive manner to maintain its strong market position, while Microsoft insisted that its policies had actually helped consumers. Specifically, the government claimed that Microsoft violated antitrust law by proposing to three other firms that they divide up markets and that it discouraged other companies from competing with Microsoft's Windows PC operating system (OS) and set the stage for Microsoft's future domination of Internet software. Microsoft claimed that the government had failed to prove antitrust behaviour because it did not show that Microsoft prevented other firms from creating and marketing new software. Microsoft also claimed that it did have competition and did not control prices and that its much-discussed combination of Windows with its Internet Explorer browser provided benefits to customers. On November 5 U.S. District Court Judge Thomas P. Jackson issued a harshly worded 207-page findings of fact in which he rejected nearly all of Microsoft's claims as “specious.” The judge concluded that the software company “enjoys monopoly power” and that “some innovations that would truly benefit consumers never occur for the sole reason that they do not coincide with Microsoft's self-interest.” Additional findings of law and a final ruling were expected in 2000.

      Another prominent antitrust suit filed in 1998 against Intel Corp. by the Federal Trade Commission (FTC) ended when an out-of-court settlement was reached. The suit involved Intel's alleged refusal to share details of its microchips with computer makers unless Intel gained access to their technologies in return.

Computers and Society.

      After a year in which Internet access for schools was a top priority, a report by the U.S. Department of Commerce suggested that closing the “digital divide” between technology haves and have-nots would require more than just additional Internet access. Studies showed that minorities, poor people, and residents of rural areas were less likely to have computers, access the Internet, or use new technologies than were whites and those financially better off. The report warned that the digital divide would hurt the ability of minorities to get jobs in areas that required technology skills. It was said, however, that lower prices for PCs had helped bring computing to more lower income families and that federal subsidies had helped bring Internet access to more schools and libraries.

      The government issued its rules aimed at protecting children from intrusive Internet marketers. The FTC, acting in response to the Children's Online Privacy Protection Act of 1998, said that Web site operators had to prominently post their privacy polices and set forth what information they collected from children, how that information was used, and whether it was passed on to other people. It also said that parents had to be given access to data collected on their children and be able to have that information deleted if they requested it. The FTC also required Web sites to get verifiable consent from parents before children gave the sites personal information.

Changes in the Music Business.

      The nontechnical field most influenced by computers in 1999 was probably the distribution of music. The new and widely accepted MP3 technical format made it feasible to download popular music files from the Internet and then listen to them on a PC or transfer them to a special MP3 player. One major limitation was that music files were large and thus took lengthy periods to download by means of conventional computer modems.

      By year's end some well-known musical artists were trying to sell entire new albums over the Internet, while others saw the Net as more of a promotional vehicle for new CDs being sold in retail stores. In addition, the new Net sales method changed the dynamics of the music industry by offering some musicians a larger portion of the profits from the sale of their music than they had been able to get from traditional music distributors. As a result, a new music-distribution industry began to grow up around the Internet, with competing Web sites offering new music.

      Meanwhile, the Recording Industry Association of America, a music industry trade group, tried to prevent illegal copies of copyrighted music from being distributed over the Internet. The music industry lost a key court decision in June when a federal appeals court said the Rio portable MP3 player did not violate antipiracy laws. The Rio, an inexpensive device that plugged into a computer to access MP3 music files downloaded from the Internet, was opposed by the association, which claimed the Rio was made for illegal pirating of copyrighted music. Following the court decision, the music industry focused on new portable players that would compete with Rio. It was hoped that the new players would incorporate the Secure Digital Music Initiative (SDMI) technique, which prevented illegal copying of MP3 files.

      Sony Music licensed downloading of some of its music titles to music stores through a private high-speed computer network. Stores would be able to download music for recording, in the store, on a CD or other disc format. Music also could be transferred directly to portable players that conformed with the SDMI.

New Technology.

      Internet 2, an effort to connect 140 universities with a faster network than the Internet, took a step closer to reality in 1999 when three dozen U.S. universities were linked by the Abilene Network. The network was one of several next-generation Internet projects under development through the Internet 2 private consortium and the federal government.

      Linux, the alternative OS developed by Finnish programmer Linus Torvalds (see Biographies (Torvalds, Linus )), continued to gain adherents. Proponents worried that Linux, a version of the established UNIX OS in which the underlying source code was freely available for anyone to use and improve, might be splintered into rival groups backing different Linux versions. In the 1970s and '80s, such splintering resulted in UNIX being split into several incompatible forms, which then became proprietary products controlled by individual companies. Linux proponents believed that the strength of Linux was that it was not backed or controlled by a single company. Late in the year Red Hat Inc., the leading marketer of Linux, began what it called the Red Hat Center for Open Source to lobby for the “open source” concept, in which source code is freely shared.

      The new Dreamcast game machine from Sega Enterprises Ltd. was introduced in the U.S. in September and exceeded initial sales forecasts by about 25%. The game highlighted a three-way struggle for market share between Sega and the more successful Nintendo 64 and Sony PlayStation game machines. Improved computer chips in Dreamcast gave its games more realistic computer graphics images. Meanwhile, Sony and Nintendo said they were developing new game machines that also would have better graphics.

      One new technology that disappeared during 1999 was digital video express (Divx), an alternative standard for digital video disc players (DVD). In June consumer electronics retailer Circuit City said it would discontinue Divx, a different DVD standard in which discs would be purchased for a few dollars for temporary viewing only. Consumers who wanted to continue using the discs had to authorize payment for a larger purchase price through a telephone hookup with their home Divx players. Divx never made much headway against DVD, in which discs either were rented or were purchased for full price at a store.

Acquisitions and Layoffs.

      In April computer networking giant Cisco Systems announced plans to buy GeoTel Communications for $2 billion worth of stock and stock options, a move that would help Cisco expand its reach in the telecommunications field. In August Cisco said it would acquire two computer networking firms, Cerent Corp. and Monterey Networks Inc., for about $7.4 billion. Cisco also invested $1 billion in the KPMG LLP accounting and consulting firm so that KPMG could develop Internet data, voice, and video services for its clients.

      Storage system firm EMC Corp. agreed to buy Data General Corp. for $1.1 billion. Internet firm Excite@Home bought Bluemountain.com, an electronic greeting card firm, for about $1 billion. IBM acquired Sequent Computer Systems for $810 million, and Intel bought networking chipmaker Level One Communications Inc. for $2.2 billion.

      Compaq, which expected to lay off as many as 8,000 employees, identified its problems as lessened demand for PCs, price wars, and an incorrect product mix. In April Compaq dismissed Eckhard Pfeiffer, its president and CEO. Japanese electronics giant NEC said early in the year that it would cut 15,000 jobs over three years because of big financial losses in several areas of its business. Computer services company Electronic Data Systems announced that it would cut 5,200 jobs and focus on electronic business to stimulate sluggish demand. Computer equipment firm NCR Corp. said it would eliminate 1,500 jobs worldwide, partly because it was leaving the market for branch bank automation. Silicon Graphics Inc. affirmed plans to cut 1,000 to 1,500 jobs and sell its Cray supercomputer business unit.

Steve Alexander

Microelectronics

      Projected worldwide sales of semiconductors grew 15% to $144 billion in 1999, according to the Semiconductor Industry Association (SIA). The downturn in sales during 1998, caused by Asia's economic problems, reversed itself, and the industry expected to see average growth rates of more than 20% in the next two years, primarily because of the growth in Internet-related products and wired and wireless information appliances. The SIA anticipated a growth rate of 21% in the year 2000 and 20% in 2001, which would result in sales of $234 billion by 2002.

      Flash memory was the fastest-growing product in 1999, owing to its use in mobile phones and digital cameras. The SIA estimated that the flash-memory market grew 63% in 1999 to $4.1 billion and that in the year 2000 there would be 80 million subscribers to wireless telephone services, an increase of 33% over 1999. Other growth areas included dynamic random access memory (DRAM), up 31% in 1999, and microprocessors, which grew 11% to $28 billion as the market shifted from the maturing personal computer (PC) market to embedded applications. Digital signal processors (DSPs) were becoming the fastest-growing product line in the industry. Along with microcontrollers, this segment of the market was expected to grow faster than microprocessors, becoming a $22 billion market by 2001. MOS Logic, used in video games and networking infrastructure products, was expected to grow from a $23 billion market in 1999 to $37 billion by 2002, an increase of more than 37%.

      The Americas (North and South) represented about one-third of worldwide chip revenues, and the SIA expected revenues of $47 billion in 1999, a 13% increase over 1998 and an increase of 20% over the next two years. Owing to the turnaround in its countries' economies, the Asia-Pacific market (Singapore, South Korea, Taiwan, and India) had become the second largest chip market, increasing to $35 billion (21%) in 1999, overtaking Europe, where the growth rate was only 6% (to $31 billion) in 1999 but was expected to increase significantly in the next two years. Japan, while growing 21% in 1999, was still somewhat influenced by its recession.

      National Semiconductor announced in May that it would sell its recently acquired Cyrix microprocessor facilities and abandon the PC market, though it would continue to produce integrated processors for information appliances. Cyrix started the year with less than 16% of the PC-chip market, mostly in the low-end computer market, with tight profit margins. Meanwhile, Advanced Micro Devices (AMD) unseated Intel Corp. as the majority provider of chips for the PC market. In 1999 almost 44% of PCs were equipped with AMD's K6 processors, 4% more than those with Intel chips.

      Intel announced its next-generation Pentium chip, the PIII. With speeds of 450 MHz and 500 MHz, the chips included multimedia instructions to improve the performance of three-dimensional (3-D) graphics, video, and audio applications. Intel used a new 0.18-micron copper technology to increase the PIII speed up to 600 MHz. AMD introduced the Athlon, clocked at 650 MHz. By November, however, Intel had introduced a 733-MHz PIII chip and a mobile 500-MHz microprocessor.

      The Federal Trade Commission reached a legal settlement on its antitrust suit against Intel on March 17. Intel agreed to share technical details about its chips with other companies, except in rare circumstances, although it did not admit to monopoly powers. In an effort to gain entry into the field of the Internet-related semiconductors, Intel agreed to pay $2.2 billion to acquire Level One Communications Inc. In October Intel agreed to pay $1.6 billion to purchase DSP Communications Inc., a cellular phone chip manufacturer.

      Mobile phone access to the Internet emerged as a new and fast-growing application in the microelectronics industry. The emergence of third-generation cellular phones (3G), based upon Wideband Code-Division Multiple Access (W-CDMA) technology, was being driven by global system for mobile (GSM) communications standards and the world's largest wireless provider, NTT DoCoMo of Japan. Companies such as Motorola were partnering with network providers such as Cisco Systems to create Internet-based wireless networks. These new Internet phones would include 32-bit embedded processors with a real-time operating system, DSPs for signal processing, an encryption processor with smart-card interface, a data communications controller, and several megabytes of random access memory. Transmission rates of up to 348,000 bits per second (348 kbps, or 348K) would be available by the year 2001. VLSI Technology received an order in April from Samsung Electronics Co., Ltd., for $34 million worth of its GSM chipset. The Federal Communications Commission's intent to provide wireless 911 service would see chip manufacturers incorporating Global Positioning Satellite capabilities into their cellular products.

      Recession-plagued Japanese-owned Mitsubishi Electric Corp. and NEC Corp. both announced layoffs of almost 15,000 employees each over the next three years. More than one-third of the layoffs would be in their overseas operations. Siemens AG spun off its semiconductor operation into a new 25,000-employee company named Infineon Technologies AG. In February Motorola Inc. announced that its Semiconductor Products Sector, the third largest chip manufacturer, would outsource up to 50% of its production by 2002. In May the Texas Pacific Group acquired Motorola's low-end chip operations for $1.6 billion and took on a new name, ON Semiconductor.

Thomas E. Kroll

Telecommunications.

      The year 1999 reflected the influences of the Internet on the telecommunications industry, notably in terms of industry consolidation. Within one year AT&T, the largest long-distance carrier in the U.S., also became the largest cable television provider with its acquisition of cable companies Tele-Communications Inc. (TCI) for more than $53 billion and the MediaOne Group for about $58 billion. MCI WorldCom, the country's second largest long-distance company, bid $115 billion for number three Sprint Corp., including its wireless network, which made WorldCom, the company's new name, the beneficiary of the largest takeover in corporate history. Also completed in 1999, after almost 17 months of waiting for approvals by local and federal regulators, was the purchase of Ameritech Corp. by SBC Communications Inc. (formerly the Southwestern Bell Telephone Co.) for about $72 billion. This reduced the original number of regional Bell operating companies formed by the breakup of AT&T in l984 to four. As part of the approval process, Ameritech sold its wireless service to GTE for nearly $3.3 billion. Three days after completing the merger, former Ameritech chairman and CEO Richard C. Notebaert announced his retirement at year's end after 31 years. Less than a week later, Ameritech Illinois Corp.'s president, Douglas Whitney, was terminated by the new owners.

      Bell Atlantic and GTE combined for $65 billion. Vodafone AirTouch PLC (the company formed by the approximately $60 billion acquisition of AirTouch Communications, Inc., by Britain's largest wireless company, Vodafone Group PLC, in January) merged its U.S. network with the Bell Atlantic Corp., which made Bell Atlantic the largest wireless phone company in the U.S. High-speed Internet cable provider @Home Corp. acquired Excite Inc., an Internet entry site, for $6.7 billion and became AT&T@Home when AT&T acquired its major shareholder, TCI. Hardware mergers included Lucent Technologies' $24 billion purchase of Ascend Communications, a major manufacturer of the packet switches used by Internet providers. Motorola, Inc., bought General Instrument Corp., a manufacturer of set-top boxes used to deliver Internet services to TVs, for $11 billion.

      U.S. Pres. Bill Clinton used the on-line “chat room” concept for a town hall meeting in November, the first president to use the Internet for that purpose. The popularity of the Internet for accessing information via phone, cable, and wireless media was exemplified when Encyclopædia Britannica introduced its World Wide Web site, Britannica.com, and experienced more than 10 million hits (attempts to access the site) per day, which initially exceeded the site's capacity.

      Iridium LLC, a $5 billion global satellite telephone network, lost more than $500 million in the first quarter of 1999 and saw three of its top executives leave the company. Heavily backed by Motorola with about a 20% stake, Iridium failed to meet its sales objectives. With phones costing as much as $3,000 and connection charges of more than $3 per minute, it attracted only about 2% of its forecast customer base. In August Iridium defaulted on $1,550,000,000 in loans and filed for Chapter 11 bankruptcy protection. Shares plummeted from a l998 high of $72 per share, and Motorola took charges of almost $1 billion in its third quarter to cover Iridium expenses. Meanwhile, Motorola announced it would invest $1 billion over the next 10 years in a joint venture with Sun Microsystems, Inc., to ensure that its mobile phones were compliant with the Wireless Application Protocol Internet phone technology. This technology would allow global Internet access at speeds up to 128,000 bits per second (128 kbps, or 128K). AT&T and Sprint (WorldCom) also announced high-speed wireless phone services. AT&T and British Telecommunications PLC announced an extension of their 1998 $10 billion joint venture to provide compatible wireless phone services to more than 41 million customers in 17 countries.

      In January the U.S. Supreme Court gave the Federal Communications Commission (FCC) authority to set guidelines for how much local companies could charge for access to their local networks in order to implement provisions of the 1996 Telecommunications Act. Reversing a 20-year ban, the FCC also proposed in January to license low-powered (below 1,000 w) FM stations. Other actions by the FCC during 1999 included a mandate to the telephone companies to provide easier-to-read telephone bills, endorsement of the SBC-Ameritech merger, and approval of the AT&T–British Telecom global joint venture. In November the FCC allowed AT&T to raise the fee levied on phone bills for subsidizing services to the poor and hard-to-service areas and for school Internet access to $1.38 from 99 cents. In January the Supreme Court also rejected a bid by SBC, U.S. West, and Bell Atlantic to enter the long-distance telephone market until they met the open-markets requirement of the 1998 Telecommunications Bill. In November the Department of Justice rejected a bid by Bell Atlantic to provide long-distance service in New York, stating that they were not doing enough to open their local markets. Congress passed legislation in 1999 to allow satellite content providers to offer local stations to their customers, provided they met certain requirements.

      In April the NBC television network broadcast The Tonight Show in high-definition TV, which made it the first regularly scheduled program to be delivered in HDTV. It was expected that as more stations became capable of delivering HDTV signals and more programming became available, the price of HDTV sets would decrease to around $2,000, about one-fifth of the cost in 1999.

      The U.S. telecommunications network, once noted for its reliability, suffered a number of outages during the year, the most significant of which was a 10-day outage of MCI WorldCom's frame relay network, costing the company $29 million in credits to its customers. The failure was attributed to upgrades to one of the two frame relay networks carrying the majority of its customer traffic. Some 3,000 customers, including the Chicago Board Options Exchange, many small Internet service providers, and automatic teller machines were affected. The company planned to provide two parallel nets to prevent future catastrophes.

Thomas E. Kroll

▪ 1999

Introduction

      In 1998 information technology was dominated by a single event, the Microsoft Corp. antitrust trial, but although the outcome of that trial promised to have ripple effects throughout the computer and software industry, the year produced other notable events as well. These included the dramatic recovery of Apple Computer, Inc., the arrival of high-speed Internet access via telephone and cable television networks, the acquisition of Digital Equipment Corp. (DEC) by Compaq Computer Corp., the merger of America Online (AOL) and Netscape Communications Corp., and the introduction of high-definition television (HDTV). Throughout the year many people expressed growing concern about the approach of a new millennium and whether the world would be prepared to handle the attendant potential computer problems. (See Sidebar (Millennium Bug ).)

Industry Developments.

      In May the U.S. Justice Department filed an antitrust suit against Microsoft, alleging that Microsoft had used monopoly power to restrict competition. Based on the contention that Microsoft improperly sought to dominate the market for Internet browser software—to the disadvantage of Netscape, maker of the most popular World Wide Web browser—the case grew to include allegations of broader anti-competitive actions to dominate the Internet software market. The broadened suit alleged that Microsoft, which in September passed General Electric to attain the highest market value in the nation, had used its influence as the maker of the Windows operating system (OS) for personal computers (PCs) to restrict competition. Among the actions at issue was the government's contention that Microsoft offered AOL, the world's largest on-line service provider, a prized spot for its software on the Windows "desktop" in exchange for AOL's decision to use Microsoft's Internet Explorer as its main Web browser. The federal suit was joined by 20 states (one of which later withdrew from the case) and after some delay went to trial in October before District Court Judge Thomas P. Jackson. Microsoft responded that the Justice Department's broadening of the case reflected desperation and that, whereas the company undeniably was a powerful player in the software market, it had done nothing illegal. It also asserted that, rather than trying to hurt competition by combining its Internet Explorer with Windows, as the government claimed, Microsoft had combined the products to improve Windows. Government lawyers introduced testimony by some of Microsoft's competitors and partners, internal memos and electronic mail (E-mail) messages, and excerpts from a videotaped deposition by Microsoft's founder and chairman, Bill Gates.

      In late November AOL announced two startling deals: a $4.2 billion agreement to acquire Netscape and an alliance with Sun Microsystems, which had filed a separate suit against Microsoft over the alleged misuse of Sun's Java programming language. Government lawyers denied that the AOL-Netscape-Sun deal weakened their arguments, and the case was still pending at year's end. A lower-profile antitrust suit was filed by the Federal Trade Commission in June against computer chip giant Intel Corp. That suit accused Intel of using monopolistic practices when it stopped or threatened to stop providing vital information about Intel chips to three computer manufacturers that declined to license key patents to Intel. Intel maintained that it had the right to act as it did. A trial on that suit was set for February 1999.

      Apple Computer staged an amazing recovery that became apparent in January when the firm returned to profitability and continued during the year with the introduction of successful new computer models, such as the Power Macintosh G3 and the iMac consumer computer. Apple introduced the iMac in August and promoted it on the basis of its ease of use and obvious physical differences from other machines, including a two-tone, "bondi blue"-and-white, semitransparent case. By early in the Christmas season, Apple's iMac had become the top-selling PC in retail stores; in November the iMac made up about 7% of consumer PC sales through retail and mail-order outlets. The machine was described as Apple's reentry into the consumer market after an absence of six years. Along the way, however, some other hard choices had had to be made. In February Apple dumped its Newton hand-held computing device, a pioneer in what had come to be called personal digital assistants that also had been the butt of many jokes about its initially limited handwriting-recognition capabilities. Apple said the Newton had not been profitable. Overseeing Apple's recovery was Steve Jobs, the cofounder and interim CEO, who had returned to the company in 1997 after having been ousted in 1985. During 1998 Apple turned doubters into believers as it consistently remained profitable, but the company remained a relatively small player in the industry, where its machines were overshadowed by computers that used Windows. Although sales of all of Apple's computer models combined to give it a 10% retail market share in late 1998, roughly double its position in July, Apple continued to trail the retail PC sales of Compaq, Packard-Bell NEC, Hewlett-Packard, and IBM.

      In the biggest acquisition to date in the computer industry, Compaq announced in January that it would buy DEC for $9.6 billion in cash and stock. The purchase represented a sea change in computing history, since it entailed the takeover of an aging maker of minicomputers, a 1970s technology, by the largest manufacturer of PCs, an industry that began only in the 1980s. Once the world's third largest computer maker, DEC had lost billions of dollars and half its employees since the late 1980s. The purchase was expected to make Compaq the world's second largest computer manufacturer, behind IBM. While DEC had been financially ailing as interest in its proprietary computers and software waned, it still provided a doorway through which Compaq, still basically a PC manufacturer, could enter the markets for higher-end computer workstations and computer networks. In 1997 Compaq had paid $2.8 billion for Tandem Computers, which manufactured computers used by banks and telecommunications firms.

      Consolidation also occurred in the software industry. Mattel Inc., known primarily for its toys but also as a player in the entertainment software business, said that it would purchase educational software firm The Learning Company., Inc., based in Massachusetts, in an exchange of stock valued at about $3.8 billion. The Learning Company. had been the world's second largest consumer software firm, after Microsoft. The acquisition followed The Learning Company.'s agreement earlier in the year to buy Brøderbund Software, another entertainment firm, for about $420 million in stock.

      Despite a general trend toward good news in the high-technology world, several companies announced large layoffs. In June Motorola Corp. said it would eliminate 15,000 jobs because of depressed conditions in the computer chip industry. The firm cited slowed demand in Asia for cellular telephones, pagers, and other products that were heavy users of Motorola chips. It also said it faced tougher competition from Asian firms that could afford to cut prices because their currencies had been devalued in relation to the U.S. dollar. Following its acquisition of DEC, Compaq announced in June that it would cut 5,000 manufacturing jobs worldwide as part of the process of consolidating its operations. Most of the impact was outside the U.S. AMP Inc., the world's largest supplier of electric and electronic connectors, said in July it would eliminate 3,500 jobs. AMP was hard hit by economic problems in Asia, price competition for PC components in the U.S., and slowed sales of cellular phones in Europe. The PC business got some good news late in the year. Inventory surpluses that had driven down prices in the first half of 1998 began to disappear as the PC market turned around. Worldwide sales, which grew 11% in the second quarter, were expected to grow 12.2% in the second half of the year. Strong sales in the U.S. and Europe were expected to offset economic instabilities in Asia and Russia. Strong sales by Apple in the second half of the year were thought likely to push Apple from the seventh-ranking PC supplier in the U.S. and the world to the fifth largest.

Technology Developments.

      Early in 1998 a barrier to achieving widespread use of 56,000 bits-per-second (56 kbps, or 56K) modems was overcome when a universal standard for the devices was adopted by the International Telecommunications Union, a standards-setting body in Geneva. Prior to that, 56K modem makers had been divided into two warring camps with modems that were so different and mutually incompatible that Internet service providers often had to choose between supporting one or the other. In 1997 U.S. Robotics Corp., which had developed one type of 56K modem, was acquired by 3Com Corp., and in October 1998 Hayes Corp., one of the original modem manufacturers, filed for Chapter 11 bankruptcy protection after losses of more than $12 million in the first half of the year.

      Even as the 56K modem standard was being established, telephone and cable television companies were introducing high-speed Internet-access services in more cities. The telephone technology was called digital subscriber line (DSL), and the cable TV technology was described as a cable modem. While the speeds provided by the two technologies differed, both were substantially faster than a 56K modem. Some providers were promising speeds up to 125 times faster. Despite the growing shipments of cable modems, conventional analog computer modems still accounted for about 90% of the market. Two trends, however, appeared to favour cable modems: the increasing number of households with computers, and decisions by some PC makers to offer cable modems as an option on new home computers. Computer makers also gave DSL a boost. In January Intel, Microsoft, and Compaq announced plans to develop open standards for DSL. The high-speed Internet-access technologies had been slow in arriving because telephone and cable TV companies largely failed to live up to optimistic timetables. As consumers and businesspeople increasingly relied on information downloaded from the Internet—and became frustrated with slow conventional download speeds—they clamoured for high-speed Internet access. Some analysts predicted that there would be 500,000 cable-modem users in the U.S. and Canada by the end of 1998, up from about 200,000 at midyear. The promise of a budding cable-modem business also led to the rise of intermediary firms, such as @Home, that would provide high-capacity voice, video, and data transmission to cable-modem users via their cable companies.

      HDTV, a long-awaited consumer product, was introduced as part of a government-ordered switch to the new TV technology. The first publicly broadcast program, the launch of the space shuttle Discovery, was presented in November. The major American TV networks (CBS, NBC, ABC, and Fox) would be required to provide HDTV signals in their top 10 markets by the end of the year. It was anticipated that by the year 2000, 50% of the country should be able to receive HDTV content. HDTV picture quality was sharper and brighter than conventional television and was expected to be akin to satellite TV or to the digital pictures produced by digital video (or versatile) disc (DVD). The downside of the switchover was that, according to the government's plan, nondigital TV signals would be phased out within 10 years. Since all broadcasts would be digital by the end of that period, consumers who wanted to watch television would have to buy a new set. Almost no one was watching in 1998, however, because although some television signals were available in digital format, the HDTV sets were prohibitively expensive for most people. Few HDTV sets were available at year's end, and those that could be found in stores cost about $7,000 each. While manufacturers had not intended to make the sets so expensive, they said the cost of the electronic and optical components had risen sharply. Manufacturers also had priced the sets higher to make up for what they expected would be only a small number of sales. As a result, broadcasters were expected to provide only minimal amounts of television programming in HDTV format in the immediate future; by some estimates all the TV networks combined would offer a total of only a few hours of HDTV programming a week.

      International Data Corp. (IDC), a computer-industry research firm, predicted that "mass market acceptance of digital TV is years away, despite 42 U.S. TV stations transmitting digital broadcasts as of November 1 [1998]. Consumer confusion, incomplete infrastructure, hardware costs, and technical questions will prevent digital TV—particularly HDTV—from growing as quickly as many have predicted." IDC predicted that more than 13 million HDTV units would be installed by the end of 2002 and that 138 million would be in use by the end of 2007.

      Another milestone was passed in June when Microsoft finally delivered its Windows 98 OS software. The Justice Department had sought to block the shipment of Windows 98—which combined the Internet Explorer browser with the Windows OS—on antitrust grounds, but a federal appeals court ruled that antitrust restrictions placed on earlier versions of Windows did not apply to the new operating system. Although PC manufacturers quickly embraced Windows 98 and shipped it with new computers, the OS debuted to lacklustre reviews. Microsoft had described Windows 98 in much lower-key terms than Windows 95, and most reviewers labeled Windows 98 as merely an incremental upgrade to Windows 95 rather than the radical change that was evident between Windows 3.1 and Windows 95. That perception probably was reinforced by Microsoft's explanation that Windows 98 was the last in a line of Windows OS and that its successor would be more like the business-oriented operating system, Windows NT (the next version of which would be called Windows 2000). In August Microsoft issued an addition to Windows 98, which the company described as a multimedia enhancement, but some observers said it was designed mainly to fix software errors, or "bugs," in the just-released Windows 98 software. Despite the grumbling, Windows 98 sold as well as Windows 95 had when it was first released. It was estimated that at year's end about 376 million PCs in the world would be using some version of the Windows OS.

      Despite the overwhelming success of Windows, several computer companies backed an alternative OS called Linux. Although Linux had a tiny market share compared with Windows, its use rose more than 200% in 1998. Linux, which resembled the better-known Unix, was created in Finland in 1991 and by 1998 was used as an OS for servers in local area networks. What made it unusual was that its computer code was available free to anyone willing to download it. It also could be modified to fit a user's particular needs. Still, Linux suffered from being an underdog OS. There was a lack of technical knowledge among corporate computer managers that made using Linux for key corporate functions, such as database management, a challenge. Even though makers of database software offered technical help with Linux versions of their products, the support was not as deep as it was with more conventional OS products.

      There was yet another version of the world's fastest computer unveiled in 1998 when IBM introduced a new computer, called Blue Pacific, that could handle 3.9 trillion calculations per second. Blue Pacific contained more than 5,800 computer microprocessors and more than 25 trillion transistors. It was designed under a $96 million research contract from the U.S. Department of Energy and was used by the department's Lawrence Livermore National Laboratory to simulate nuclear weapons explosions without conducting actual nuclear tests.

      PC prices continued their decline as consumers warmed to a new category of PCs, the under-$1,000 group. In late 1998 IBM introduced a $599 consumer PC (sold without a monitor), becoming the first of the major PC suppliers to drop the price below $600. At year's end the market was still awaiting what appeared to be the least-expensive PC ever, a $399 model (without a monitor) made in South Korea by a company named TriGem. Retailers were hoping the new low-priced machines would enable them to sell computers to the 55% of the U.S. households that did not own one. There was concern among retailers that even PCs at the $800 level had merely attracted second-time buyers who otherwise might have bought more expensive machines. Even at the high end of the PC market, prices continued to decline. PCs with speeds as high as 450 MHz—about twice as fast as low-end models—sold for under $3,000.

      A computer technology with both computing and entertainment aspects, the DVD player faced an uncertain future in 1998. DVD was a videocassette recorder (VCR) replacement technology that played movies on a TV with a picture and sound of much higher quality than VCR tapes. The DVD player's cousin, the DVD disc drive, became available on some PC models in late 1998. These computer DVD drives could store huge amounts of computer data and, in a crossover computing-entertainment application, also could play DVD movies on computer screens. DVD movie players for TVs were modestly popular in 1998, with about 600,000 sold within the first full year of marketing. DVD itself was threatened by a competing player technology called Digital Video Express (Divx). DVD discs, like VCR videotapes, could be played endlessly for the original purchase price. Divx discs cost only a fraction of their DVD counterparts but could be played for only two days unless an additional fee was paid. Late in 1998 some DVD players that incorporated Divx technology came on the market. There also was another threat to DVD on the horizon: pay-per-view digital cable TV. Such cable service still lay in the future, however, which gave DVD and Divx a window of opportunity to become more widely accepted in 1999.

The Internet.

      On-line use continued to grow in popularity throughout 1998. An IDC survey predicted that 23% of all U.S. households would be using an on-line service provider by the end of the year. The prediction was based partly on lower prices for PCs; the use of more hybrid PC-TV products, such as WebTV, which allowed TV users to surf some parts of the Internet; and the growing availability of high-speed cable modems. The potential for WebTV-like products was clear. At year's end AOL was said to be seeking a manufacturer of TV set-top boxes so that it could compete with Microsoft's WebTV product. Yet another WebTV-related product emerged from an unlikely source. Sega, known for its computer game consoles, introduced in Japan its new Dreamcast game console, which would also function as a WebTV-like unit. Software to turn the game machine into a Web-browsing device was not expected to be available until mid-1999. In addition, Sony Corp., the leading competitor in home video-game machines, was expected to offer something similar in the future.

      Retail sales on the Internet also increased as consumers began to take greater advantage of electronic commerce. (See Sidebar (Internet Retailing ).) On-line sales lived up to expectations during the Christmas holiday season. AOL reported a 350% increase in on-line shopping. Analysts estimated that more than two million households shopped on-line for the first time and that sales in the fourth quarter of 1998 would hit about $3.5 billion, as expected. That was almost three times the 1997 total. The unanswered question was how many of those holiday shoppers would become regular Internet buyers.

      The running battle between the computer industry and the federal government over Internet encryption software continued, even though the federal government relaxed its export restrictions. Encryption, or encoding, software was intended to protect the privacy of on-line data transmissions and help safeguard business transactions. The software-encryption industry and some of its key customers had been battling the government for several years, claiming that encryption was important to the development of electronic commerce. In addition, American software companies had complained that export regulations made it difficult for them to compete in the world market for encryption. New rules from the Commerce Department allowed American firms to export products using the 56-bit Data Encryption Standard, the equivalent of an electronic lock with more than 70 quadrillion possible combinations. The government continued to limit exports of more powerful encryption software, although some could be sold in 46 countries to particular industries, such as insurance and health care. Despite relaxing export rules on encryption, the government continued to push for FBI access to computer-industry encryption experts so that potential criminal activity on the Internet would not be protected from government scrutiny. The government promised it would place no limits on the export of encryption products for which the government was provided with codes, or keys, for reading the encrypted messages.

      In September the Internet played a role in the White House scandal of 1998. First it was chosen by Congress as the distribution medium for the text of Independent Counsel Kenneth Starr's report on his eight-month investigation into Pres. Bill Clinton's relationship with a former White House intern. Only days later it became one of the means of disseminating the video of Clinton's grand-jury testimony in the case. Because the streaming video technique used to deliver Clinton's testimony consumed much more bandwidth than the text-based report, there were concerns of gridlock on the Internet when many people tried to download the video at once. In the end the problem did not arise, because far fewer people downloaded the video than had downloaded Starr's report. The same news story helped boost the fortunes of the Internet's leading gossip columnist, Matt Drudge, who had helped break the White House scandal story in January by posting information on his Web site, the Drudge Report. Drudge, who had no journalistic training, maintained that the Internet opened up new opportunities for people who were not establishment journalists to present news information to a wide audience.

      The makeup of that wide Internet audience also became a concern in 1998 when a scientific study suggested that African-Americans were being systematically excluded from the on-line world. In April a study published in the journal Science reported that whites in the U.S. with annual household incomes below $40,000 were six times more likely than African-Americans to have used the World Wide Web within the previous week. Among low-income households, whites were found to be twice as likely to own a home computer as blacks. The study contended that because a smaller percentage of black households than white households had incomes of more than $40,000, computer access in the U.S. was being restricted to a smaller portion of the African-American population than the white population. The Internet's role in rearranging American personal habits also was examined in 1998. A study showed that Americans were using the Internet to supplement TV news and newspapers, not to replace them, but it also found that 20% of Americans were going on-line at least once weekly to read the news, compared with 6% two years earlier.

      Long-distance telephone service over the Internet, once a technical curiosity, showed signs of becoming a real business in 1998. Several phone companies offered a service in which phone calls were transmitted digitally over the Internet at reduced rates. The Internet was designed to carry data packets, not voice calls, and adapting phone calls to the Net had resulted in some complaints of spotty voice quality. By year's end the service had improved to the point that Internet telephony could compete on the basis of its lower price. Typically the service sold for far less per minute than conventional long-distance service—largely because Internet telephony bypassed much of the conventional telephone switching network but also because Internet telephone service providers were exempt from some fees that conventional long-distance companies had to pay. In a few cases Net phone service was sold for a flat monthly rate that covered unlimited long-distance calling privileges. While relatively few cities were covered by the service, some companies were planning national service introductions by late 1998 or early 1999.

      In the U.S. Congress several bills favourable to the computer industry were pending in late 1998. One would expand the ability of American companies to hire skilled foreign workers. Corporations wanted to be able to hire more foreign workers because of a shortage of technology workers in the country. Another bill would benefit firms that sold products over the Internet by giving them a three-year period in which they would not have to charge customers sales tax. During that time the government would devise a tax plan for Internet sales. Legislation also was pending that would create penalties for commercial Web-site operators who offered material considered harmful to minors. This legislation was opposed by the American Civil Liberties Union and some companies with Internet Web sites. Other U.S. government actions affected many public schools and libraries that had hoped for improved Internet access. They were to be beneficiaries of federal telecommunications reforms that allocated money for telecommunications services, Internet access, and some high-tech wiring costs. The subsidy turned out to be less than expected when the Federal Communications Commission (FCC), under pressure from Congress, cut funding for the program by 42% and shifted the emphasis to helping the nation's poorest schools and libraries. The FCC's cuts were made after Congress listened to complaints from long-distance telephone companies, which said they could not provide most of the $2,250,000,000 to fund the program without raising rates paid by their customers.

Computer Crime.

      Computer security continued to be a major concern as outside electronic attacks by computer "hackers" on government and business computers reached new heights, sparking investigations into who was responsible. Those investigations led to a number of arrests but underscored the vulnerability of many computer systems connected to the Internet. The Computer Security Institute, a nonprofit research group in San Francisco, reported that 24% of corporations participating in its annual survey indicated that they had suffered an outside computer break-in within the previous year. About 44% said they had experienced incidents of unauthorized access to their computer systems by employees. In March a boy was charged in Massachusetts with having caused airport-control-tower computers to be out of service for six hours. The boy accomplished the task by wiping out telephone access to the airport's control tower. The shutdown also affected the airport's fire department and security and weather services and the operations of several private airfreight firms. In April a Canadian man was arrested for having broken into a NASA Web site and caused more than $70,000 worth of damage. That same month the University of Minnesota was hit by a "smurf denial of service" attack on its computer systems, which shut down some computers, caused some data losses, and resulted in network slowdowns. (Such an attack floods the victim's computer network with replies to false tests of remote network computers.) In July two California teenagers pleaded guilty to juvenile delinquency charges after they accessed computers at the Lawrence Livermore National Laboratory and the U.S. Air Force. Although no classified computer systems were breached, the attack raised government fears because it indicated the effectiveness of a well-organized and systematic hacker attack.

      That same month flaws were discovered and corrected in two widely used E-mail programs that would potentially allow technically knowledgeable people to sabotage other people's PCs remotely. The unexpected flaws, which turned up in both Microsoft and Netscape E-mail programs, would enable an outsider electronically to crash or steal information from the computer that was using one of the affected programs.

      In March more than 60 people were arrested as accused pedophiles who were trying to set up meetings with unsuspecting children over the Internet. New Hampshire police posed as children on the Internet to set up meetings with the accused adults (most of whom lived in northern Europe) and then arranged for them to be arrested. In September police in the U.S. and 11 other countries arrested more than 100 people in an international crackdown on the exchange of child pornography over the Internet.

      A puzzling new computer virus struck near the end of the year, but experts were undecided about how big a threat it posed. Called the "Remote Explorer" virus, it was written by clever destruction-oriented programmers and was able to spread itself through corporate computer networks more rapidly than previously known viruses had. The virus attacked only computers using the Windows NT OS and only under certain conditions. Some experts said the virus had the ability to bring entire companies to a halt. It was unclear, however, whether the virus was a widespread phenomenon.

STEVE ALEXANDER

▪ 1998

Introduction

      The year 1997 was one in which the computer industry's financial troubles, government investigations, prominent lawsuits, and business consolidations captured as much attention as advancing technology and the continuing growth of the Internet and on-line services. It also was the year in which the U.S. Supreme Court struck down the Communications Decency Act, an attempt to regulate the content of the Internet. The act had been signed by Pres. Bill Clinton in early 1996 in an attempt to protect children from pornography on the Internet, but opponents had claimed the law was so general it could be used to regulate other, more legitimate types of expression. The legislation made it a crime to publish indecent material on the Internet in a way that would make it available to those under 18; violators could receive up to two years in prison and a $250,000 fine. In June the high court threw out the Communications Decency Act on the grounds that it was too broad, vague, and in violation of the Constitution because it "lacks the precision that the First Amendment requires when a statute regulates the content of speech."

Industry Developments.

      It was a troubled year for Apple Computer, Inc. Already weakened by declining computer sales, Apple was in turmoil in July when Chairman and CEO Gilbert F. Amelio resigned from the company after some 18 months on the job, during which Apple lost nearly $1.5 billion. Apple's board of directors reportedly was displeased by falling sales of Apple's Macintosh computers. By the first quarter of 1997, Apple's share of the U.S. personal computer (PC) market had fallen sharply to 3.3% as customers continued to favour PCs that ran Microsoft Corp.'s Windows operating system (OS). Though Amelio, who had been welcomed as a corporate turnaround specialist, was unsuccessful, the roots of Apple's troubles ran deep. They were said to include lack of technical innovation, product-handling mistakes, and management upheaval, plus thousands of layoffs.

      The year also marked the return of Apple cofounder Steve Jobs, an articulate but temperamental leader who had been pressured to resign as chairman in 1985. Beginning as an unpaid Amelio adviser in December 1996 after his firm, NeXT Software, Inc., was acquired by Apple for more than $400 million, Jobs stepped up his participation in Apple's management as the company tried to find a way back from the brink. In August he announced that Microsoft, a longtime rival of Apple, would buy $150 million in nonvoting Apple stock. Although the Mac OS competed with Windows, it was believed that Microsoft, which sold a substantial amount of applications software to the Macintosh market, had much to gain by helping its competitor remain in business. In September Jobs became interim CEO. During the same month, most of the Apple board of directors resigned, and Apple agreed to buy Power Computing Corp., a Macintosh clone manufacturer, for $100 million, in effect halting the corporate strategy of allowing others to produce clone copies of the Macintosh under license.

      Microsoft had no financial problems but ran into difficulty with the federal government. In October it was accused by the U.S. Justice Department of violating the 1995 court order barring it from anticompetitive licensing activities. The Justice Department asked a federal court to impose a $1 million-a-day fine on the software industry leader for requiring PC manufacturers to use Microsoft's World Wide Web browser, Internet Explorer, on their machines when they installed Microsoft's Windows 95 OS. As evidence, the Justice Department said Compaq Computer Corp. claimed that it was threatened with the loss of its license to use Windows 95 if it removed Internet Explorer from some of its PCs. Microsoft said antitrust regulators were mistaken and that it would defend its position; it called the disagreement with Compaq an ordinary dispute over licensing terms.

      The Microsoft-Justice Department battle had the potential to have a major impact on the marketing contest between Microsoft and Netscape Communications Corp., both of which were trying to make their own browser the most widely used on the Internet. Justice Department attorneys said they were trying to prevent Microsoft, which had a virtual monopoly in personal computer operating systems, from using that power to take control of the Internet browser market. At issue was the Justice Department's interpretation of a 1995 consent decree with Microsoft that had settled another antitrust dispute. Microsoft said that far from violating the agreement, it was merely making technological improvements to its existing Windows 95 product by adding browser software to it.

      Another industry leader, Intel Corp. under Chairman and CEO Andrew Grove ) (Grove, Andrew S. ), also drew the interest of federal government regulators. Intel, the world's leading manufacturer of microprocessor chips for PCs, learned in September that it was being investigated by the Federal Trade Commission (FTC) in connection with its business practices in the PC market. The FTC said it wanted to determine if Intel had tried to monopolize or otherwise restrict price competition in its role as supplier of about 85% of the microprocessors used in PCs. Intel also was the subject of an antitrust investigation by the FTC from 1991 to 1993 that did not result in any action against the company.

      In a surprising move, Digital Equipment Corp. sued Intel in May, alleging that Intel's Pentium microprocessor chips violated as many as 10 Digital patents. Intel denied that it used Digital technology in the Pentium chip, but the suit, which sought unspecified damages, had the potential to cost Intel billions of dollars as well as cripple its ability to use the Pentium technology. The suit also had the potential to disrupt the entire PC industry by forcing Intel to redesign its Pentium chips.

      The dispute involved Digital's Alpha microprocessor. Digital claimed that Intel had access to proprietary information about the chip in 1990, when it was evaluating whether to license the Alpha technology from Digital. Intel responded by suing Digital for the return of information about Intel's next-generation Pentium chips. Since many Digital computers depended on Intel chips, Intel's apparent intent was to hurt Digital's computer-development efforts and put Digital at a competitive disadvantage in the PC market. In August Intel filed a counterclaim that alleged Digital had violated 14 Intel patents. Intel claimed that the technologies the patents represented were widely used throughout Digital's product line.

      In the end the legal storm passed almost as fast as it began. In October Intel said it would buy Digital's Alpha chip development and manufacturing operations for $700 million as part of an agreement to end their legal wrangling. Digital would keep its Alpha design teams to work on future versions of the chip. The deal also included a series of patent cross-licensing agreements for which Intel would pay Digital an undisclosed sum. Both companies said their lawsuits against each other would be kept on hold, pending government approval of the agreement.

      A battle over software standards also escalated into a major lawsuit. Sun Microsystems sued Microsoft in October in a battle for control of Java language software standards. Sun's suit claimed that Microsoft's Internet Explorer 4.0 software contained a variant of Sun's Java programming language that differed from the standard version. Sun accused Microsoft of infringing on Sun's Java trademark, false advertising, breach of contract, unfair competition, and interference. Microsoft denied Sun's allegations and countersued, seeking a dismissal of the Sun suit and asking the court to uphold Microsoft's right to claim that its products were "Java compatible. "

      There were indications of at least one impending class-action lawsuit against several computer makers for allegedly continuing to sell PCs that could not cope with the "year 2000 problem." This problem, also called the "Millennium Bug," had arisen because old computer systems designed to use a two-digit date to represent the year (e.g., 97 to represent 1997) could fail on Jan. 1, 2000, when faced with the two-digit date 00; they would read this as 1900.

      Consolidation continued in the fast-changing computing market. In February 3Com Corp. made the surprise announcement that it would merge with U.S. Robotics Corp., a leading manufacturer of high-speed modems, in a $6.6 billion exchange of stock. The intent was to build one of the largest companies in the rapidly growing field of computer networking. Japanese computer maker NEC Corp. announced in December that it was increasing its stake in Packard Bell NEC, Inc., from 20% to 49%.

      In April Microsoft acquired WebTV Networks, which sold units that allowed people to connect to the Internet directly through their television sets, for $425 million. The software company said it wanted to "dramatically accelerate the merger of the Internet and television." In a similar move, Sun Microsystems in July said it would acquire Diba, a maker of Internet set-top boxes that could compete with Microsoft, but terms of that deal were not disclosed. As part of Sun, Diba was to work with consumer electronics companies to provide Internet-ready TVs, set-top boxes, satellite reception boxes, and "smart" telephones.

      Compaq's purchase of Tandem Computers for $4 billion in stock was completed in August. Compaq was a major manufacturer of PCs and PC server computers, and Tandem pioneered highly reliable machines called fault-tolerant computer systems. In September America Online Inc. (AOL) agreed to buy its biggest competitor, the CompuServe Inc. on-line service. While CompuServe would continue as a separate operation, it would be operated by AOL, which would then have a combined customer list of more than 11 million subscribers. In a complex deal a third company, telecommunications firm WorldCom, was to buy CompuServe from H&R Block for $1.2 billion in stock and then exchange CompuServe's Interactive Services division for $175 million and AOL's ANS Communications. In the end, WorldCom was to become AOL's largest network service provider.

Technology Developments.

      New high-speed Internet access technologies for consumers began to appear during the year, including satellite downlinks, cable modems (which transmit signals over cable TV systems), and a group of telephone industry technologies known collectively as digital subscriber line (DSL). Satellite downloads, for example, promised speeds that would be up to 14 times faster than conventional 28,800 bits per second telephone modems. One version of DSL, called asymmetric digital subscriber line, was said to offer speeds of up to six million bits per second over standard telephone lines. At year's end, however, these technologies were in very limited use.

      Although digital versatile (or video) disc (DVD) became available to consumers in mid-1997 as a VCR-replacement technology for viewing films, its computer cousin, called DVD-ROM, was in only limited use as a CD-ROM drive replacement for personal computers. A DVD-ROM disc, which could hold about 4.7 billion bytes of information, or about seven times more than a CD-ROM, would enable software companies to offer more complex programs on a single disc. Industry analysts said DVD-ROM drives were held back owing to lack of software, issues of compatibility with the Windows 95 OS, and delays needed to put additional copyright-protection mechanisms in the drives to satisfy Hollywood that DVD-ROM drives would not be used to copy commercially released DVD movies. DVD-ROM was expected to become widely available in PCs in 1998.

      IBM said in May that it had developed the highest-capacity hard disk drive for portable PCs, one capable of storing up to five billion bytes of data. That surpassed the previous top capacity of about three billion bytes, although hard drives with one billion to two billion bytes were more common.

      Intel and Hewlett-Packard were said to be developing a next-generation microprocessor code-named Merced that could radically change the PC industry because of its design and capabilities. Merced, which was believed to be scheduled for introduction in two years, would use a different set of computer instructions than the line of PC chips Intel had been selling since 1979. Some analysts believed Merced would have a speed of nearly 1,000 MHz, which would more than double the peak performance of the fastest chips in 1997. It also would be a 64-bit microprocessor and therefore able to process data faster than today's 32-bit chips.

      The federal government also joined in the development of new technology by moving forward with the Clinton administration's $100 million plan to build a next-generation version of the Internet that would be faster, more reliable, and more secure than one in use in 1997. The government's plan was essential to more than 100 universities throughout the U.S. that were trying to develop new voice, video, and data uses of the Internet that required higher transmission speeds than the present system provided. The planned next-generation Internet would offer the universities, national laboratories, and research institutions 100- to 1,000-times-faster speeds.

      Smart cards—credit or other financial cards containing computer memory chips—got a boost in 1997 after a long period of languishing. Industry groups agreed on standards for the cards, and Visa International and Bank of America announced a pilot program under which a small number of people would make purchases over the Internet by using monetary value stored on smart cards.

Computer Crime.

      Computer crime also continued to gain attention, from the standpoint of both computer sabotage and copyright infringement. The Computer Security Institute, a San Francisco-based association of information security professionals, said that U.S. companies and other organizations it surveyed had reported losing $100 million in the previous 12 months owing to computer security breaches. The institute said the problems included damage from computer viruses, financial fraud, theft of proprietary information, and sabotage. Dataquest, a market-research firm, predicted that corporations around the world would spend $6.3 billion on computer network security in 1997.

      In October the Presidential Commission on Critical Infrastructure Protection said that U.S. telephone and banking systems were vulnerable to computer sabotage. The commission recommended that the government increase its spending on computer security research to $1 billion a year from $250 million. The commission also touched on another hot computer security issue—encryption, which involves coding Internet or other computer messages so they cannot be read by anyone who lacks a software "key. " The FBI had lobbied hard for a system under which the police would have a software key to unlock all encrypted communications in order to uncover criminal activity. The commission's detailed findings were not made public, but according to some news reports, the commission endorsed some key access by government officials without recommending widespread access to encrypted messages by the police.

      Computer crime also involved copyright infringement. A study by accounting firm Price Waterhouse showed that 28% of software sold in North America was pirated, compared with 68% in Latin America, 80% in Eastern Europe, 43% in Western Europe, and 74% in the Middle East. In March Los Angeles police said they had raided one of the biggest software-counterfeiting rings on the West Coast, recovering allegedly pirated Microsoft software and cash valued at about $10 million.

      Software, communications, and entertainment companies lobbied heavily in Congress for copyright legislation that would make it illegal to defeat electronic anti-copying protection and could make Internet service providers at least partly liable if people who infringed on copyrights used their networks to do so. The legislation was tied to the ratification of two new international treaties dealing with copyrights. Some library groups, Internet service providers, and telephone companies said the protections sought in the bill were too broad.

The Internet.

      The Internet continued to grow and attract more attention during the year. While the growth rate slowed somewhat—to about 80% from 100% a year—some experts predicted there might be 200 million computers connected to the Internet by 2000, up from about 16 million in January 1997. The number of people using the Internet via those computers in 1997 was not known precisely but was estimated at about 35 million. The Internet's growing use became clear when NASA landed its Pathfinder space probe on Mars in July. Between the landing on July 4 and July 8, the Mars Pathfinder Web site—where photographs of the mission were made available to the public—recorded nearly 220 million hits, which far exceeded NASA's expectations. The Internet also suffered a major interruption of service in July when a computer technician at the company that handled the Internet's directory of addresses accidentally loaded the wrong information on the network's computers. As a result, E-mail and Web surfing were disrupted on a global scale.

      The huge scope of the Internet worried some government officials, who saw unfettered Internet gambling as a threat to society. A report by the National Association of Attorneys General warned that during the previous year widespread Internet gambling had become more technologically feasible—even though Internet gambling was illegal in most states. In October federal legislation that could prohibit states from legalizing such gambling was proposed. One version of the legislation would impose strict fines and prison terms on violators.

      Internet use also raised privacy questions. In June FTC hearings produced warnings that Americans were giving out more personal information than they realized and that much of it was available through the Internet. Information was being compiled from people who used the Internet, called toll-free numbers, registered to vote, or sent in product registration cards; more information could be gleaned from federal, state, and county courthouse records that had become available on-line.

      The year also marked the first time that a champion chess player was beaten by a champion chess computer in a traditional match. In May world chess champion Garry Kasparov lost his match with the IBM computer Deep Blue. ) (Chess ) The year before, Kasparov had defeated an earlier version of Deep Blue.

STEVE ALEXANDER

      This article updates computers (computer).

▪ 1997

Introduction

The Internet.

      It was the year of the Internet's World Wide Web, which by the end of 1996 had so permeated the public's consciousness that even nontechnical adults were likely to speak of the "Net" and the "Web." Companies large and small began including a Web-site address in their print advertising and television commercials. Big telecommunications firms such as AT&T and MCI Communications Corp. began offering their customers Internet access services, competing with America Online, Inc., CompuServe Inc., and hundreds of smaller firms that already did so. Meanwhile, Internet access was no longer limited to computers. New smart telephones were able to send Internet E-mail messages, and televisions equipped with special set-top boxes were able to provide access to the Web.

      As a result, some Internet-related companies had a big year in the stock market. Yahoo! Inc., an Internet search engine company that held its initial public stock offering in April, watched its stock rise from the offering price of $13 a share to $33 a share at the close of the next day's trading. It was the most closely watched high-tech public offering since the explosive 1995 debut of Netscape Communications Corp., the Web browser company founded by entrepreneur James Clark and software developer Mark Andreessen. (See BIOGRAPHIES (Andreessen, Marc ).)

      Profitability, however, eluded most companies doing business on the Internet. While Web-site advertising grew by 83% in the first half of 1996, few commercial business operations on the Internet made money. In fact, most of the advertisers were high-tech companies buying advertising on each other's Web sites. Consumer product companies continued to be cautious about Internet advertising.

      Most advertisers tried to capitalize on the Internet's strength—reaching narrowly defined audience groups. For example, the Discovery Channel Online—the Internet cousin of the cable TV Discovery channel—sought to provide information on the Web that would appeal to the same demographic segment as its TV audience, mainly well-educated, upscale men aged 25 to 54.

      There was great interest in extending the Internet to more people. In March U.S. Pres. Bill Clinton participated in a new California school event that spawned subsequent efforts across the country. Called NetDay96, it was a grassroots volunteer campaign to wire schools for Internet access at little cost to the public. By the year's end other states were promoting similar efforts, but the Internet revolution still had not reached many public libraries and schools that could most benefit from easy access to a world of information. An amendment to the Telecommunications Act of 1996 authorized subsidies for information technology to libraries and schools, but late in the year the federal government was just receiving recommendations on how to make that happen.

      Some studies suggested the Internet might facilitate learning. The Center for Applied Special Technology, based in Washington, D.C., reported that a study of urban school districts showed that elementary school students with access to the Internet had an advantage in learning over those without access. The study concentrated on 500 fourth- and sixth-grade students in Chicago, Ill.; Dayton, Ohio; Detroit, Mich.; Memphis, Tenn.; Miami, Fla.; Oakland, Calif.; and Washington, D.C. Its results showed that students who used the Internet scored higher on nine learning criteria, which included greater insight into a topic and accuracy in handling information.

      Meanwhile, the major telephone and cable television companies tried to participate in the Internet boom by offering Net access services at previously unheard-of speeds. A new high-speed cable modem that would allow a personal computer (PC) to access the Internet through the same fibre-optic cables that transmitted cable TV programs was introduced in selected cities. It offered access speeds more than 300 times faster than those of most consumer computer modems. Telephone companies spent the closing months of 1996 preparing to introduce "xDSL" transmission technologies, which would allow telephone lines to access the Internet more than 50 times faster than present modems. As the year ended, there were questions about how soon either telephone companies or cable TV companies could introduce the new services to the general population, since in many areas the transmission lines would need to be upgraded before consumers could take advantage of the new services.

      Telecommunications reform became more controversial than ever before when the U.S. Congress early in 1996 approved a bill containing the hotly debated Communications Decency Act. The act provided for fines and jail sentences for Internet content providers who distributed "indecent materials" to minors. In June a three-judge federal panel ruled that the Communications Decency Act was unconstitutional. As part of the opinion, one judge wrote, "As the most participatory form of mass speech yet developed, the Internet deserves the highest protection from governmental intrusion."

      That ruling faced federal court appeals, however, and, in the meantime, some states began passing their own restrictive laws governing on-line content. Connecticut, Maryland, New York, and Oklahoma passed laws that restricted the transmission of on-line material. This raised the possibility of widely varied regulations based on geographic boundaries.

      Moral questions dogged other media as well. To deal with concerns about the content of television programs, work continued on technology that would allow in-home blocking of certain programs based on a system of ratings. Necessary for such blocking was computer circuitry called the V-chip, which would be built into TV sets.

Computer Consumer Technologies.

      Digital video (or versatile) disc (DVD) was one of the most talked-about consumer computer technologies in 1996, even though most consumers had not yet seen it. A DVD player would read a shiny disc similar in appearance to a computer CD-ROM but able to hold about 4.7 billion bytes of data, compared with 650 million bytes on a CD-ROM. (Future DVD discs were expected to hold more than eight billion bytes.) The increased DVD storage capacity also would make possible higher-quality video and sound than could be obtained with a videocassette recorder tape and would make it feasible for a moviemaker to sell a single DVD containing several different endings to the same film or multiple versions of the same movie, each in a different language. The first consumer DVD players were expected to debut in the U.S. in early 1997.

      Digital photography, a marriage of computer chips and traditional cameras that could capture photos in electronic form, began to trickle into the U.S. market during 1996. These electronic cameras had previously cost from $1,500 to $30,000, but prices had dropped dramatically. Proponents hoped digital cameras costing less than $1,000 would compete for part of the $13 billion that U.S. consumers were expected to spend in 1996 on conventional cameras, photographic accessories, and film processing, while camera manufacturers and computer makers hoped that consumers would be interested in taking digital photos that could be edited on PC screens.

Industry Developments.

      The computer industry's Internet obsession also fueled competition. The biggest rivalry in 1996 may well have been the one between software giant Microsoft Corp. and Netscape. In a battle for "mind share" in the Internet market, each company pitted its free Internet browser software against the other's. The war between Netscape Navigator and Microsoft Internet Explorer was fought mainly in the reviewers' columns of computer trade journals, and for most consumers choosing a winner was largely subjective. The contest was important to Netscape, which was trying to maintain its lead as the most innovative Internet communications firm as well as its 80% market share, and to Microsoft, which was trying to prove that it had abandoned its reluctance to develop for the on-line world.

      The battle became a legal one as well. In August Netscape sent a letter to the U.S. Justice Department accusing Microsoft of deliberately preventing companies such as Netscape from running some types of Internet server software on Microsoft's Windows NT 4.0 Workstation system software. Microsoft responded that the NT Workstation software was not appropriate for the use Netscape intended.

      One of the major new markets for the computer industry in 1996 was the Intranet, an internal company version of the Internet. Intranets allowed workers with PCs to access information from company computers via the same user-friendly browsing software used on the Internet. Corporations that adopted this approach said Intranets simplified employees' work and thus led to higher worker productivity and lower frustration levels.

      Computer-security experts continued to worry about on-line hackers who attacked corporate computers. One of the newest trends was the "denial-of-service" attack, in which a series of phony messages were sent to the target computer via the Internet. This kept the computer so busy that legitimate users could not gain access to it. The potential for such attacks was intensified by the ease with which hackers could learn to become attackers. Anyone could learn denial-of-service techniques simply by visiting Web sites that published information of interest to hackers.

      Hackers also broke into U.S. government-related computer systems and altered official Web sites operated by the Justice Department (in August), the CIA (in October), and the air force (in December). Although no serious damage was done, it was increasingly apparent that improved security measures would be crucial on the expanding Internet.

      One of the most talked-about new computer products of 1996 was the "network computer," a stripped-down machine intended to replace the limited-function computer terminals used by corporate workers such as bank tellers, retail clerks, and airline ticketing agents. Priced in the range of $700 without a computer screen, the network computer was designed for users who did not need the complexity of a PC and its software. IBM's first such machine, the Network Station, was to use only browsing software for accessing the Internet or an Intranet. Other companies—notably Sun Microsystems, Inc., and Oracle Corp.—quickly announced their own network computers. To some extent, the network computer threatened to undermine the PC market by providing a lower-cost alternative for some types of work.

      Intel Corp., which manufactured the microprocessor chips that controlled most PCs, launched a counterattack by declaring that it would make PCs more affordable by lowering the costs of using them in computer networks. For instance, it said it would offer products that made it easier to diagnose PC problems remotely over a network. The aim was to make PCs more competitive with network computers, which were relatively low-maintenance devices.

      Windows 95, which was heavily promoted by Microsoft during the summer of 1995, sold 40 million copies in its first 12 months, which made it a success by any standard. Some software companies that wrote programs for Windows 95 had expected even greater sales of the upgraded operating system (OS), however, and were disappointed. Sales were slowest among corporations, which typically were reluctant to replace the previous version of Windows, which seemed to be working well. Most Windows 95 sales were made through the sale of new PCs that came equipped with the software. Another Microsoft product, the Windows NT OS, continued to sell briskly, and analysts estimated that by year's end it would outsell all types of the Unix operating software.

      Meanwhile, the PC increased in power in 1996 to 200-225 MHz, nearly twice the speed of the fastest consumer computer a year earlier. At the same time, next-generation PCs were being developed that would raise performance to the range of entry-level supercomputers, the high-performance machines used in science and industry. Exponential Technology, Inc., demonstrated a 500-MHz microprocessor chip, while Intel planned its model P7 chip, which would process instructions 64 bits at a time rather than 32 bits at a time, as did the microprocessors used in 1996 PCs.

      No matter how powerful computers became, the human mind could still withstand their challenge. In February 1996 Russian chess champion Gary Kasparov defeated Deep Blue, an IBM machine touted as the world's best chess computer. (See SIDEBAR (Deep Blue ).)

      Some traditional computer suppliers suffered in 1996. The year ended with the future of PC industry pioneer Apple Computer, Inc., still in doubt. While the company reported a $25 million profit in the last quarter of its 1996 fiscal year, which ended in late September, its sales declined by almost $700 million compared with the same period a year earlier. In addition, Apple lost more than $800 million during its fiscal year. Gilbert F. Amelio, Apple's chairman since early 1996, was engaged in what was expected to be a three-year corporate turnaround.

      The direction of that turnaround took on a new dimension at year's end when Apple, which had been negotiating with Be, Inc., for the use of its Be OS, unexpectedly announced the acquisition of NeXT Software, Inc., for $400 million. The deal also signaled the return to Apple of its cofounder, Steven Jobs, who formed NeXT after being ousted from Apple by the board of directors in a 1985 power struggle. It was uncertain how NeXT's highly regarded but little-used NeXTSTEP OS would be incorporated into a new, more advanced replacement for the aging Macintosh operating system (Mac OS). Jobs would reportedly be a part-time adviser at Apple while continuing in his role as the chief executive at Pixar Animation Studios, which took the world by storm in 1996 with its full-length computer-animated film, Toy Story. (See Special Report (Computer Animation ).)

      Apple also hoped to get a boost from the decision of Motorola, Inc., which manufactured the PowerPC microprocessor chips used in recent Macintosh computers, to begin making "clones," PCs that would run the Mac OS. Although Apple had previously been reluctant to license the Mac OS, in 1996 licensed clone makers included Power Computing Corp., DayStar Digital, Inc., and the Taiwanese manufacturer Umax Data Systems, Inc.

      Digital Equipment Corp. also continued to be troubled, losing $433 million in the fiscal year ended in mid-1996 and announcing it would eliminate 7,000 jobs. In its following quarter DEC lost another $66 million, disappointing Wall Street with a decline that was far larger than expected.

      It also was a year for consolidation in the PC industry. In June U.S. PC manufacturer Packard Bell said it would merge with the PC operations of Japanese computer manufacturer NEC. The $300 million deal would create the largest PC firm in the U.S., which would be headed by Packard Bell management. NEC previously had been a major shareholder in Packard Bell.

      During 1996 government agencies and corporations appeared to be taking a more serious look at the computer problems posed by the approaching end of the century. Because of a flaw in the way some computer programs handled calendar dates, many programs would cease functioning or give wrong answers in the year 2000. For more than 30 years, most computer programmers had been abbreviating calendar-date years as the last two digits—a shortcut that originally served the purpose of saving expensive computer memory capacity but continued as common practice long after computer memory had become relatively cheap. As a result, while all computer programs could recognize that "96" meant 1996, most either could not make sense of the year 2000 abbreviated as "00" or else concluded that it meant 1900. The problem was complicated by the ingenuity of the original computer programmers, who hid date calculations inside programs in clever and unexpected ways and thus made it difficult for modern programmers to locate and change all two-digit dates to four-digit ones. Some analysts calculated that the cost of finding and fixing all "year 2000 problem" flaws would be between $300 billion and $600 billion worldwide by the end of the decade.

      In a sense, the year 2000 problem had already arrived by 1996, because forward-looking business programs, such as those that calculated home mortgages or interest or that did sales forecasting, already had bumped up against the year 2000 in their daily tasks. As a result, a mini-industry of year 2000 consulting and programming services was growing up to help corporate and government computer users solve their problems.

      The computer industry lost a major talent when computer pioneer Seymour Cray (see OBITUARIES (Cray, Seymour R. )) died of injuries suffered in an automobile accident in October.

      (STEVE ALEXANDER)

      This article updates computers (computer); information processing.

▪ 1996

      Two forces dominated developments in the computer industry in 1995—the arrival of Microsoft Corp.'s new Windows 95 personal computer (PC) operating system and the overnight ascendancy of the Internet (see SPECIAL REPORT (Cyberspace )) and the World Wide Web, a subset of the Internet designed for multimedia use.

      Events in 1995 drew so much attention to both Windows and the Web that by year's end the computer mouse had become almost as well known to the world's population at large as the television set remote control. In fact, the trends that played out during 1995 led many to argue that a computer mouse might soon be used as much as the TV remote control to call up everything from computer-served movies on demand to news stories and E-mail from friends and families. The decline of the well-known supercomputer company Cray Computer Corp., which filed for bankruptcy in March, was further evidence of the growing dominance of the PC industry.

      Windows 95, which made its world debut on August 24 accompanied by a $300 million global advertising campaign, was a major overhaul of Microsoft's Windows operating environment, which added a "point-and-click" operating system known as a graphic user interface, or GUI, to the text-based disk operating system, or DOS, used in most PCs.

      The graphic World Wide Web evolved in academic computer laboratories during the early 1990s as software originally developed by the European particle physics consortium CERN, headquartered in Geneva, was adapted to allow people using the global Internet computer network to use the same sort of graphic manipulations available in systems such as Microsoft Windows and Apple Computer, Inc.'s Mac OS. Until the Web appeared, the Internet itself had been used virtually exclusively by business, scientific, government, and academic professionals rather than by the public at large.

      Both Windows 95 and the Web were mileposts on what clearly emerged during the year as the road toward something that industry analysts started calling "convergence." The term pointed toward the coming integration of all forms of information from simple text to moving video as digital data that could be processed, stored, and manipulated by computers using a graphic interface.

      By year's end it was clear that PC operating systems, led by Mac OS and Windows 95, had evolved into easy-to-use tools capable of working with converging audio and video material, as well as with the text and photographic images of the past. It also was clear that in the future the medium of exchanging digital information ranging from grocery lists sent via E-mail to full-length Hollywood-type motion pictures would be the World Wide Web. Thus did convergence cross the divide between prediction and reality. Encyclopædia Britannica, Inc., was one of many companies that joined the rush toward convergence in 1995 when it announced that the entire text of its reference work would be available to individual subscribers through the Web, as well as in its 32-volume print set and in a new CD-ROM version.

      Businesses such as computing network giants Oracle Systems Corp. and Novell Inc. began adapting the networks used in corporate computing enterprises to use the same software and communications protocols that made convergence with things such as digital movies possible at the home-entertainment level. Executives and computer scientists at both of these companies, as well as their counterparts all across the industry, increasingly adapted business computer enterprises to operate under the Internet-developed procedures known as Transmission Control Protocol/Internet Protocol (TCP/IP), which was the key technology needed to bring about convergence across computer networks.

      TCP/IP can convert any type of data moving from computer to computer via long-distance communications lines into small packets of data that can be transmitted in quick bursts over whatever communications line is available at any given time. For example, one packet, or part of a computer file, might be transmitted from New York City to London by undersea cable, while a second packet is sent via microwave to Los Angeles, Singapore, and Paris before reaching London, depending upon the traffic patterns on the Internet. TCP/ IP thus allows computers to communicate easily, regardless of geographic distances.

      Seizing on this power, companies such as Oracle began setting up TCP/IP networks for their business clients to allow customers to reach into the companies' databases from remote points as part of the course of doing business. Such links would allow a company to set up databases to handle product-support calls and to establish systems that would allow remote customers to scan data banks showing what products are in stock and to order them on-line, as well as to perform numerous other efficiencies. Oracle executives noted that the company also set up TCP/IP networks that would allow customer companies to handle their own internal affairs, such as in-house messaging, publishing training materials, and tracking everything from inventory to vacation schedules.

      Meanwhile, with Internet computers pervading traditional corporate business environments, 1995 saw a marked acceleration of a trend that surfaced in 1994 as many of the world's leading media companies, including Time Warner Inc., Viacom Inc., and the Walt Disney Co., began forging alliances and consummating mergers with enterprises in the computer and telecommunications industries. Driving the mergers was the clear need of companies with one part of the convergence formula to join forces with companies owning other parts. In each case the combined enterprise was positioned to seize on the opportunities inherent in reducing the totality of the world's information, education, and entertainment content into computer-ready digital form and then selling it through distribution channels pegged to the GUIs of PC operating systems and of the Web.

      The largest of the 1995 convergence-related mergers linked the Walt Disney Co. with Capital Cities/ABC, Inc., a $19 billion acquisition plan geared toward a marriage of Capital Cities' holdings in television networks, television stations, cable television systems, newspapers, and radio stations with the huge studios and cable networks used by Disney to produce and sell programming.

      Shortly after the Disney-Capital Cities merger was announced, Time Warner announced it would acquire Turner Broadcasting System, Inc., owned by the media magnate Ted Turner. (See BIOGRAPHIES (Turner, Ted ).) Time Warner combined the largest magazine publishing company in the U.S. with Warner Bros. Inc., the world's top producer and distributor of movies and TV programming. Subsidiaries included a major music recording company, book publisher Little, Brown & Co. Inc., and Home Box Office, the largest cable TV movie provider. Time Warner also owned cable television systems that reached nearly 15 million households by the end of 1995. Turner Broadcasting owned the worldwide CNN news organization along with four cable television entertainment networks in the U.S. and four others in Latin America, Asia, and Europe.

      Turner also had formed a strategic relationship with the world's leading maker of PC microprocessor chips, Intel Corp., to provide television programming to desktop computers equipped with television circuit boards built by Intel. In November Intel announced that its new chip, the Pentium Pro, would include the ability to serve as a digital television set within the circuitry of every PC equipped with the chip.

      The merger mania extended from the media giants into the more traditional computer industry, which saw a wave of mergers, acquisitions, and consolidations that dramatically altered the industry's power structure and dynamics. Apple Computer, which faced increased competition from Windows 95 and from newly released Macintosh clones, remained the subject of takeover rumours.

      By far the largest of the completed mergers involved the $3.5 billion acquisition of Lotus Development Corp. by IBM Corp., an alliance that most analysts viewed as a strategy to position IBM, the world's largest computer company, as a participant in the same convergence linking the media companies.

      The chief asset of Lotus was an Internet-capable computer networking package called Lotus Notes, designed to let businesses move digital data across multiple types of machines, including IBM's large mainframe computers, mid-range business computers such as IBM's AS/400 and RS/ 6000 lines, and PCs using Windows, Mac OS, IBM's competing OS/2 GUI operating system, and the UNIX operating system long in use by business and academic computing experts. By acquiring Lotus Notes, which worked across multiple computing platforms and was capable of handling the full range of digital content being developed elsewhere, IBM hoped to counter Microsoft, which reigned as the world leader in personal computing, both with its Windows operating system and with a number of projects under development designed to use desktop computers as servers capable of sending cable television programming and movies on demand to other computers linked via the World Wide Web.

      Oracle, which previously had focused much of its enterprise toward huge business networks running databases for Fortune 500 companies, took steps to put the company into position as a server of the digital data, such as movies and archived television programs, that the media mergers were geared toward developing and marketing.

      In order for virtually all of the other developments to work, however, computers would have to be linked by much faster data-transmission links than the telephone lines that accounted for the great bulk of on-line traffic. There was a strong consensus that achieving this speed was only a matter of time because the technology for the speed needed to send movies along with text down a wire already existed in the form of cable television systems and the fibre-optic cables that phone companies installed in much of the U.S. In fact, much of the merger activity of the year involved owners of these high-bandwidth transmission facilities (such as Time Warner and Capital Cities) joining forces with content providers.

      Companies producing the software needed to manage the developing digital communications networks when, and if, they became a reality also benefited from this dynamic. The most visible players were a pair of competing companies, Netscape Communications, Inc., and Spyglass, Inc., both producers of the software called Web servers and Web browsers needed to let people actually use the digital data that came in over their wires to the World Wide Web.

      Early in 1995 Microsoft licensed Spyglass' Web browser, Mosaic; changed its name to Microsoft Internet Explorer; and made it the centre of the company's own on-line service, the Microsoft Network. The three largest on-line computer services—America Online, CompuServe, and Prodigy—charged that this Microsoft business initiative gave the company an unfair monopoly because the software needed to access the Microsoft Network was built into the Windows 95 operating system itself.

      Netscape, however, proved to be a hugely popular competitor, more than holding its own against Microsoft as some surveys showed that more than 80% of those using the World Wide Web were using Netscape's browser, the Netscape Navigator. Netscape started selling stock to the public in the summer of 1995, and its shares proved to be one of the hottest issues in the history of trading, which thereby underscored the volatility of 1995 computer industry developments. Netscape shares went on sale below $20 each, and a frenzy of trading drove the new issue well above $80 per share within hours. At the close of trading during its first day on the market, Netscape, which had recorded less than $20 million earnings in its entire history, had a market value above $2 billion. This prompted USA Today's editors to note that thanks to excitement over the so-called information superhighway that dominated the 1995 media business scene, Netscape had risen overnight to the point where its market value was greater than that of Maytag Corp. Late in the year, Spyglass announced a stock split to compensate for the quadrupling of its own share price.

      (JAMES COATES)

      This updates the articles computers (computer); information processing.

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