Computer programmers forgot the human factor

The plug was finally pulled on ITV Digital last week and the paid-for channels were taken off air. Did you care? There was deserved sympathy for those working in the company's call centres, but the business was obviously a massive turkey.

Vodafone, not so long ago Britain's most valuable company, saw its share price fall below a pound on Friday as it cut forecasts for its German and Italian operations. Almost £200bn has been wiped off the company's value in two years. In real money - which this, of course, is not - that represents about 20% of the annual output of the UK economy.

But, as the saying goes, there is always someone worse off than you are, so at least Vodafone could take comfort in the fact that AOL Time Warner has just reported the biggest corporate loss in history - $54bn. That's billion, not million. And it was just for the first quarter of the year.

Pleasures on offer

This was not the way it was supposed to be. In 1999, when the whole millennarian madness was at its height, those of us who warned that it would all end in tears were told to pipe down and get with the programme. The world was getting wired, so it was time to forget about the laws of economics and think big. Every home would have a couple of set-top boxes, have feature films piped directly into the front rooms, and order mangoes over the internet at 3am.

On the assumption that we all spend 24 hours a day with a mobile handset clamped to each ear, well over £20bn was spent bidding for British licences that would allow us to call up the internet on our phones.

There was no end to the pleasures that would be on offer from the third indus trial revolution. Before long, you would be able to save yourself a trip to the newsagent by browsing the Guardian on your 3G phone. For those people who enjoy scrolling through page after page of text on a two-inch square screen, it was obviously a winner.

An awful lot of intelligent people were taken in by this guff. The craziest business decisions were taken on the basis that the words "new technology" were synonymous with the word "profit", and huge piles of debt amassed on investment that would never show a decent return. Was it ever likely that the deal between ITV Digital and the Football League would wash its face? Shouldn't we expect lavishly paid executives to work out that Grimsby v Watford might not as big a draw as EastEnders? Apparently not. TV money was used by the clubs to justify an inflation in transfer fees and players' wages, creating a secondary bubble from the first.

The demise of ITV Digital is a sign that we are now well into the endgame of the technology miracle. Outside the hi-tech sector, the impact will be minimal. When the boom in railway shares came to an end in the 19th century, it did not mean the trains stopped running; what it did mean was that investors came to their senses and realised that many of the lines built when the markets were at their most manic would never be profitable.

The market response to over-investment and falling profitability is to scrap capacity, consolidate, merge, cut back. That is happening with a vengeance in the technology sector, where capacity utilisation is low and accumulated debts high. With world shipments of personal computers down last year for the first time since 1985 and mobile phone sales falling by 3%, it is hardly surprising that shares of technology companies are bombed out.

Swift recovery looks improbable for three reasons. First, the pace of technological progress has been remarkable. Whereas it took decades for the telephone to be perfected as a business tool, the transformation of the PC from slow, clunky and expensive to fast, slick and cheap has taken less than 20 years. The same applies to mobile phones, which have gone from being the size and weight of bricks in the mid-80s to the feather-light designer objects of today.

Manufacturers of the hardware make money by persuading us to upgrade on a regular basis, but there is less of an imperative to do so when improvements are marginal and from an already high base. Dishwashers and washing machines now have a dazzling array of programmes to tempt the consumer, but most households wait for the old machine to give up the ghost before trading in for a new model. The same will apply to PCs and mobile phones, particularly those sold for personal use.

The second factor is that over-production is forcing down prices. New technology has ceased to be an aspirational good for which people are prepared to pay premium prices, and has become a commodity. What is true of the market for coffee is now true of that for computers; the search for market share to maximise revenue in an over-supplied market leads inexorably to lower prices. This is good news for consumers, bad news for producers.

Finally, and perhaps most importantly, there are signs that the passion for the new technology is cooling. In the City, dress-down Friday is being replaced by no-email Friday. Workers are being told that they should rediscover the art of face to face communication rather than firing off electronic messages to someone in the next office. The advertisement used by British Airways to woo customers lost following the September 11 attacks plays on the idea that something has been lost as well as gained from email; the British company that is prepared to fly to the United States for a business pitch wins out over the company that faxes its presentation.

There is good business sense in this. The novelty value of email quickly wore off as in-boxes became clogged with hundreds of messages. For every one that is useful or interesting, 10 are junk, abusive or from someone sitting less than 10 yards away. Email has broadened the scope of communication, but cheapened and coarsened it. Meaning is conveyed by tone, inflection, body language rather than simply by words; email can be useful as a business tool but it tends to remove the subtleties and nuance from conversation. These limitations are being recognised; if the board of a company wants to do some strategic thinking it does not brainstorm by email; it goes on retreat to somewhere quiet.

A more sophisticated approach is also being taken to use of the internet. It should come as no surprise that after the initial enthusiasm, there is little desire to spend hours surfing the net. The internet is a phenomenal source of information, but so is a dictionary or an encyclopedia. They are all good to have around, but you don't necessarily want to access them all the time. As for the idea that we do all our shopping online, that was perhaps the biggest fantasy of the lot.

Why? Aside from obvious security concerns, it's because we like the human contact of shopping. Man is a social animal, and we find the gleaming, atomised vision of the world provided to us by technology alien and hollow. We would not be without our new toys and gizmos any more than we would be without gas and electricity, but we know there is more to life than that. The reality is that the hi-tech bubble was predicated on utterly unrealistic assumptions. It was the world as the technology buffs wanted it to be rather than the world as it is. Those who have lost a packet got the economics wrong, but they got human nature wrong as well. And do you know what? I'm glad that they did.

larry.elliott@guardian.co.uk