Engine of Growth; Those who pray for a tech-stock revival should look beyond the Google IPO, and search the X Internet.(the concept of an "extended Internet")(Industry Overview)(Cover Story)

Byline: George F. Colony, Colony is the CEO of Forrester Research, Inc.

What's the secret to putting tech back into growth mode? While consumers continued to buy DVDs, flat-panel TVs and other new technologies during the recession, corporate spending on tech has been moribund for three years. The same companies that increased their tech spending 12 percent per year in the late 1990s have been decreasing their spending for the past three years. And since 2001 no important tech companies have gone public to challenge the old guard of Cisco, Intel and Microsoft. What will turn these trends around?

Some believe that Google will save the day. The miraculous Web search engine is rumored to be exploring a spring IPO that could value the company at $10 billion to $20 billion. A successful, high-profile public offering, goes the thinking, would revive tech stocks and re-engage investors.

Google has an amazing search tool, with excellent technology and good leadership. It has goosed the Web's usefulness and made it much easier for buyers and sellers to find each other online. But it faces big challenges: there are no barriers to entry in the search market; rapacious competitors, led by Microsoft, are gunning for the company, and the Web will eventually be more interactive, devaluing Google's proprietary search scheme. Given Google's challenges, a $10 billion-plus valuation doesn't make sense. What the world needs now is a calm, ordered, rational, smart equities market in technology--not Bubble II.

So if it ain't Google, what's going to get the tech market moving again? The company Irun, Forrester Research Inc., thinks that something called the extended Internet will inject new mojo into the sector. This "X Internet" connects the physical world of things to the digital world of information. While lots of desktop computers and corporate servers have been linked to the Internet for years, most of the rest of the world sits unconnected.

Think of the Internet revolution in two phases. In phase one, from 1994 to 2004, a "wire" was created that connected every company to every customer. That's the Web connection we now have to our banks, newspapers, booksellers, etc. In phase two, from 2004 through the next 10 years, a wire will be created that connects every company to every product it has ever made. In this second revolution, vehicles, machinery, home appliances, medical instruments, soda cans, razors and pacemakers will all have some type of link to the Internet. Forrester believes that we will move from 750 million connected devices to 14 billion devices by 2010.

Why will companies want to make this connection? Lower costs and higher revenue are big drivers. Here's an example from the retail world. Stores are always managing a balancing act between too little and too much inventory. The less inventory you have stacked up in the back of your store, the lower your costs. But if you have too little inventory, your shelves will be empty and your revenue will decline. By putting electronic tags on toothpaste, shampoo or dog food, a store would know exactly where it stands in this balancing act at any moment in time. Just as the last tube of Crest is being taken from the shelf, a new case will arrive at the back entrance, ready ...