The New Dot-Economy

Plummeting Costs Give Rise to a Wave of Internet Entrepreneurs

SAN MATEO, Calif. -- Allan Leinwand's start-up, Vyatta, sells networking products for one-third the price of those sold by his former employer, Cisco Systems.

In the same office park, serial entrepreneur Munjal Shah recently launched an Internet search engine for images, a gamble that would have been prohibitively pricey just a few years ago.

Half a mile away, tiny Zimbra is going head to head with mighty Microsoft by peddling cheap e-mail programs to businesses.

Across Silicon Valley and beyond, young companies are capitalizing on a freefall in technology costs to enter markets considered too expensive to brave as recently as two years ago. The resulting boom in new Web sites has been widely chronicled, but the economics making it possible have stayed mostly out of sight.

Computer costs have been falling inexorably for decades, driven down by steady improvements in the tiny chips that serve as their brains. But new factors are compounding those gains, unleashing a second wave of Internet start-ups.

Computer chips are being paired in new ways to dramatically expand their abilities. At the same time, the free-software movement born in the 1990s is arming a new generation of entrepreneurs with powerful development tools -- at little or no cost. Other advances have slashed the cost of high-speed Internet access, another key expense for start-ups. Today, a Web site pays one-twentieth of what it did six years ago to reach visitors over its broadband connection.

These cascading cost reductions are transforming every layer of the computer industry, from components inside machines to the arcane innards of the Internet and all the way up to e-mail software and Web applications used by millions of people.

"The threshold for starting a young Internet business has never been lower," said Ram Shriram, a venture capitalist and an original board member of Google.

Shah, who launched the online shopping service Like.com last month, said his company could not have existed five years ago because it would have cost too much to develop the technology for scanning and analyzing the millions of product images on the Web.

"There are structural reasons this boom is happening," he said.

His firm, Riya, paid about $50,000 for its software by relying mostly on free, open-source programs for its operating system, Web server and database manager. That compares with the $4 million Shah spent on software seven years ago when he started his first online company, which made software for managing eBay auctions.

Shah said the cost of the servers powering his new Web service is one-tenth of what it would have been a few years ago, a reduction made possible by the new ways computer chips are harnessed to work together. And instead of paying for advertising, Shah looks to the free buzz of the Internet to attract customers.