Reprinted from "The World in 2002," a publication of The Economist Group

In the wake of the dotcom meltdown and terrorist attacks, and among 2002’s economic miseries, all the excitement about the personal computer and Internet revolution of the 1990s can seem like a distant memory. While the enthusiasm over the digital revolution has been overshadowed by recent events, its significance has not. The phenomenon that made digital technology an essential part of the workplace, home and classroom is not subject to fashion. The digital future is more important than ever.

Like every technology revolution, this one will come in waves. The first, which spanned the 1990’s, transformed how we communicate and get information. Almost overnight, the pc and the Internet enabled businesses and people to exchange e-mail, ideas and data instantaneously. The next wave will have a far broader impact. As the pc is joined by a growing range of intelligent devices, all connected by faster, cheaper and more reliable network connections, well see a vast transformation of products and services into digital form, from books to movies to business billing systems. The first ten years of the 21st century will be the digital decade.

We’ve already seen how atoms have been transformed into bits in many different media: that is to say huge chunks of the worlds output have dematerialised from the physical to the virtual. But this decade is when we’ll start to think of this digital metamorphosis and the productivity gains that will accompany it in a whole new way. Take music. It has been in digital form since analog long-playing records gave way to compact discs in the early 1980s, but until recently you still needed some kind of disc to carry the musical data. Now, though, music is freeing itself completely from its physical form. As bits, it can be accessed wherever you want it, from any intelligent device that can decode the bit stream.

We will see this phenomenon replicated in products as diverse as software, photographs, video and books. Software has been sold online since the earliest days of the public Internet, but only recently has bandwidth been capable of carrying the enormous number of bits required for sophisticated business, personal, educational or entertainment programs. In the years ahead, as more people have access to cost-effective high-speed lines, the Internet will become the primary way in which software is distributed, updated, maintained and even managed. Software that once came in shrink-wrapped boxes and was updated infrequently if at all will be transformed into dynamic, living code that can update and repair itself over the network.

Take another, domestic, example. Millions of people are now using digital cameras to capture their families’ lives, and using digital photo frames to share memories with family and friends around the block or around the world. The ability to store and share high-quality digital video as easily is just around the corner. And while e-books have yet to take off, Im confident that they will within the decade. New text-display software and new kinds of devices, such as tablet-sized pcs, will make onscreen reading, annotating and searching easier and more enjoyable than ever.

The long-term consequences of this digital revolution will be far-reaching and overwhelmingly positive for many industries, fundamentally transforming the economics of the marketplace. In part, this will occur simply through a decline in costs. Digital goods are cheaper than their material counterparts. And you only have to make them once. Inventory costs will also fall, a result of improved efficiency, and of being able to create a virtual distribution network. E-publishing, for example, offers an incredibly efficient business model, with almost no manufacturing, packaging or distribution costs.

Along with virtual distribution will come an increasing trend towards online billing and payments. According to Jupiter Research, a consultancy, American companies alone spend a combined $18 billion a year preparing and delivering paper bills. Jupiter estimates that online bill payment could eliminate 80% of this expense.

Digital bespoke

The digital revolution will create an entirely new concept of self-service and an unprecedented degree of customer control. Do you want to buy a product, or rent it and receive automatic updates? Do you want the bits now, at a premium, or streamed to your pc overnight, at a discount? The variations are endless, as are the opportunities.

These advances will be equally welcome to both large and small businesses alike. The Internet has already greatly enhanced the ability of small businesses to sell their products globally. The next wave of the digital revolution, powered by technologies such as XML (eXtensible Markup Language), will enable those small firms to tap resources from around the world, combining their expertise with those of others to customise their products and services for customers. In a digital world, product or service development increasingly becomes collaborative. And the factors of production themselves become fluid, because it is the processing technology, rather than the goods themselves, that is being reproduced.

There are some potential pitfalls as the digital revolution advances. As it becomes easier to make perfect counterfeit copies of an increasing number of products, the issue of how intellectual property rights are protected will be of growing concern especially in those countries where enforcement remains inadequate.

Clearly, some industries have struggled to make the jump to a digital world, but far more are reaping the benefits of this transition. Investing in tomorrow’s technology today is more critical than ever to future competitiveness.