WHEN Oscar de la Renta, an American fashion house, launched a transactional website some years ago, it expected people to buy mostly smaller items such as belts and perfume. The firm was stunned when it received an online order last spring for an $80,000 sable coat from a new customer in New Hampshire. He couldn't get to New York, apparently. Online customers have been snapping up the firm's core product: $4,000 cocktail dresses. "We could not have been more wrong in our expectations of the internet," says Alex Bolen, the firm's chief executive. Online purchases are still a small proportion of total sales, but growing rapidly.

Most luxury-goods firms are less open-minded. Many scorn the internet as a plaything for plebs. A product sold online, wrote Jean-Noël Kapferer, a French branding guru, in "The Luxury Strategy", published last year, ceases to be a luxury item. In early 2008, of 178 luxury firms around the world surveyed by Forrester Research, only a third sold their products on the internet. That figure has risen, but still about half of firms don't sell online at all, estimates Federico Marchetti, the founder of Yoox Group, owner of Yoox.com, a luxury-goods website.

Prada, an Italian design house, had no website until 2007. It did not start selling products online until last year. Several American companies, such as Tiffany & Co, have thriving web businesses, but European firms, especially the old French houses, such as Chanel and Hermès, are still afraid of mice.

Luxury executives explain that the internet is too impersonal for their products, which need the human touch. Allowing anyone to buy online can mean a loss of cachet. Luxury firms like to dazzle customers with plush stores and sleek ads, so that they think only about beauty and not at all about price. The web, by contrast, shines a clear light on price. "That's the last thing I want people to think about," wails an executive from the watch industry.

It is largely the industry's own fault that the internet is associated with lower prices for its products. For years, firms discreetly disposed of end-of-season stock at deep discounts via websites such as Yoox.com. Some fashion houses make clothing exclusively for Yoox.com as a way to use up left-over fabric. Also, by shunning the internet in its early days, legitimate firms helped to create a vacuum that counterfeiters were happy to fill, says Uché Okonkwo, the author of "Luxury Online".

There is every sign, however, that buyers of full-price luxury goods crave the convenience of online shopping, so companies are being forced to adapt. In April Richemont, a Swiss luxury-goods giant, bought Net-a-Porter, a specialist fashion online retailer founded in 2000, in a deal valuing it at £350m ($535m).

Net-a-Porter's appeal is not price, says Danny Rimer of Index Ventures, a venture-capital fund which backed the firm, but the convenience of getting items delivered to your door before they sell out. Executives are now watching to see whether Richemont will allow Net-a-Porter to sell its many other brands, including Cartier watches. Most luxury-watch firms, such as Hublot, do not sell online. This seems perverse: watches fit easily and buyers are usually collectors who know the models well. The main problem, explains Jean-Claude Biver, chief executive of Hublot, is that watch firms have long-standing agreements with independent retailers, and selling online would disrupt the system.

Another sign of change is a new venture by a former Richemont executive, Mark Dunhill, to revive Fabergé, a jewellery-maker (one of whose baubles is pictured above), using the internet as its chief global distribution channel. Fabergé, owned by Pallinghurst Resources, a mining firm, launched last September with a single shop in Geneva and a sophisticated, interactive website. The industry is watching the experiment closely. If a luxury brand can thrive without a vast investment in retail space, says Luca Solca of Bernstein Research, barriers to entry will fall.

A person close to Fabergé says it has reached its nine-month target of hooking 50 new clients, each spending on average $100,000. Even Prada now says that within five years, some 40% of its revenues in America will come from the internet. Observers, however, doubt that such an aggressive target is realistic, noting that Prada currently sells only bags, wallets and other accessories online, not its main clothing and footwear collections.

Luxury firms may at last be waking up to the internet, but they have a long way to catch up. Carmakers have been innovating online for nearly a decade, observes Ms Okonkwo. With exceptions, luxury websites tend to be showy but unoriginal, since firms often use the same web designers. Few are properly interactive: customers usually cannot view products from different angles, or try on clothes virtually.

The most innovative online luxury firms are typically small start-ups, such as Net-a-Porter, Yoox (which went public late last year) or Gilt Groupe, a website which runs exclusive sales for members. All these companies have built successful new business models. The industry's ageing giants have been caught with their elegant trousers down.

Louis Vuitton, a maker of leather goods and clothes, is one of the few luxury brands to have prospered online. Unlike many of its peers, it offers nearly all its products on the web. The internet brings in as much money as one of its biggest bricks-and-mortar shops, says Antoine Arnault, the firm's communications director. But Louis Vuitton's parent, LVMH, was last year forced to shut down eLuxury, a website founded in 2000 which sold a wide variety of luxury brands, because it lost money by the suitcasefull. According to insiders, it failed mainly because it lacked focus: it sold expensive products alongside relatively cheap ones. It is odd that an industry that would not be seen dead in last season's colour is wedded to the last century's technology. Divorce beckons.

A COUPLE of months or so after becoming Britain's prime minister, David Cameron wanted a few tips from somebody who could tell him how it felt to be responsible for, and accountable to, many millions of people: people who expected things from him, even though in most cases he would never shake their hands.

He turned not to a fellow head of government but to...Mark Zuckerberg, the founder and boss of Facebook, the phenomenally successful social network. (It announced on July 21st that it had 500m users, up from 150m at the start of 2009.) In a well-publicised online video chat this month, the two men swapped ideas about ways for networks to help governments. Was this just a political leader seeking a spot of help from the private sector--or was it more like diplomacy, a comparison of notes between the masters of two great nations?

In some ways, it might seem absurd to call Facebook a state and Mr Zuckerberg its governor. It has no land to defend; no police to enforce law and order; it does not have subjects, bound by a clear cluster of rights, obligations and cultural signals. Compared with citizenship of a country, membership is easy to acquire and renounce. Nor do Facebook's boss and his executives depend directly on the assent of an "electorate" that can unseat them. Technically, the only people they report to are the shareholders.

But many web-watchers do detect country-like features in Facebook. "[It] is a device that allows people to get together and control their own destiny, much like a nation-state," says David Post, a law professor at Temple University. If that sounds like a flattering description of Facebook's "groups" (often rallying people with whimsical fads and aversions), then it is worth recalling a classic definition of the modern nation-state. As Benedict Anderson, a political scientist, put it, such polities are "imagined communities" in which each person feels a bond with millions of anonymous fellow-citizens. In centuries past, people looked up to kings or bishops; but in an age of mass literacy and printing in vernacular languages, so Mr Anderson argued, horizontal ties matter more.

So if newspapers and tatty paperbacks can create new social and political units, for which people toil and die, perhaps the latest forms of communication can do likewise. In his 2006 book "Code: Version 2.0", a legal scholar, Lawrence Lessig noted that online communities were transcending the limits of conventional states--and predicted that members of these communities would find it "difficult to stand neutral in this international space".

To many, that forecast still smacks of cyber-fantasy. But the rise of Facebook at least gives pause for thought. If it were a physical nation, it would now be the third most populous on earth. Mr Zuckerberg is confident there will be a billion users in a few years. Facebook is unprecedented not only in its scale but also in its ability to blur boundaries between the real and virtual worlds. A few years ago, online communities evoked fantasy games played by small, geeky groups. But as technology made possible large virtual arenas like Second Life or World of Warcraft, an online game with millions of players, so the overlap between cyberspace and real human existence began to grow.

From the users' viewpoint, Facebook can feel a bit like a liberal polity: a space in which people air opinions, rally support and right wrongs. What about the view from the top? Is Facebook a place that needs governing, just as a country does? Brad Burnham of Union Square Ventures, a venture-capital firm, has argued that the answer is yes. In the spirit of liberal politics, he thinks the job of Facebook's managers is to create a space in which citizens and firms feel comfortable investing their time and money to create things.

Facebook has certainly tried to guide the development of its online economy, almost in the way that governments seek to influence economic activity in the real world, through fiscal and monetary policy. Earlier this year the firm said it wanted applications running on its platform to accept its virtual currency, known as Facebook Credits. It argued that this was in the interests of Facebook users, who would no longer have to use different online currencies for different applications. But this infuriated some developers, who resent the fact that Facebook takes a 30% cut on every transaction involving credits.

Like any ruling elite that knows it relies on the consent from the ruled, Facebook seeks advice from its members on questions of governance. It allows users to vote on proposed changes to its terms of service, and it holds online forums to solicit views on future policies. And like any well-intentioned politico, Facebook makes blunders: its members were infuriated earlier this year by changes to its policy that made public some previously private information. If Mr Zuckerberg achieves his goal of creating the world's favourite "social utility", he may need to give users a more formal say--a bit like a constitution.

Experience shows that networks which neglect governance pay a price. Take MySpace, which was once much bigger than Facebook: its growth stalled a couple of years ago when its managers let the site become too disorderly. There is a thin line, it seems, between the freedom that spurs creativity and a free-for-all.

For now at least, real governments still have some aces; they can simply pull the plug on the service. Facebook is blocked in China, and in May it was temporarily cut off in Pakistan, under a court ruling about a page that advertised a contest to draw the Prophet Muhammad. Perhaps Facebook is less a nation than a giant transnational movement--comparable to the Red Cross or the Catholic church--which has an overarching aim and can speak to governments on something like equal terms.

As Facebook's masters present it, their mission is just to make the world more open and connected--and bring closer the "global village" predicted in the 1960s by Marshall McLuhan, a futurologist they love. Their claim to be accelerators has some force. Facebook's success "raises a lot of issues that we thought were a generation away," says Edward Castronova, a professor at Indiana University. One of them is how much impact virtual economies and currencies will have on real world ones. The Chinese government has repeatedly curbed virtual currencies. Last year it banned their use to buy real-world goods and services, in part because of concerns about the impact on the yuan.

Facebook may also influence how governments supply services, and compete to provide them. For instance, the firm allows members to use their Facebook profiles to log into other sites around the web, creating a sort of passport. A similar facility could help people on the move retain access to government services. And then there is the question of how social networks will change politics. Clearly, they help to stimulate discussion and marshal action, and they let governments trawl for and test proposals. When Messrs Cameron and Zuckerberg conferred, the main topic was how to get new ideas for cutting public spending.

Like many diplomatic relationships, theirs was fickle. Days after the chat, Facebook was rebuked by the British government for allowing tributes to a murderer to be posted. The firm refused to remove the offending page, which was later taken down by its creator. "Facebook is a place where people can express their views and discuss things in an open way, as they can and do in many other places," it said. Mr Zuckerberg may not have any territory, but he was determined to stand his ground.

WATCHDOGS are growling at the web giants, and sometimes biting them. In May European data-protection agencies wrote to Google, Microsoft and Yahoo! demanding independent proof that they were making promised changes to protect the privacy of users' search history. They also urged Google to store sensitive search data for only six months instead of nine.

In April ten privacy and data-protection commissioners from countries including Canada, Germany and Britain wrote a public letter to Eric Schmidt, Google's boss, demanding changes in Google Buzz, the firm's social-networking service, which had been criticised for dipping into users' Gmail accounts to find "followers" for them without clearly explaining what it was doing. Google promptly complied.

Such run-ins with regulators are likely to multiply--and limit the freedom of global internet firms. It is not just that online privacy has become a controversial issue. More importantly, privacy rules are national, but data flows lightly and instantly across borders, often thanks to companies like Google and Facebook, which manage vast databases.

A recent scandal dubbed "Wi-Figate" exemplifies the problem. Google (accidentally, it insists) gathered data from unsecured Wi-Fi networks in people's homes as part of a project to capture images of streets around the world. A number of regulators launched investigations. Yet their reaction varied widely, even within the European Union, where member states have supposedly aligned their stance on online privacy. Some European watchdogs ordered Google to preserve the data it had collected in their bailiwicks; others demanded that information related to their countries be destroyed (see table).

Despite such differences within Europe, the gap is much greater between Europe and America, home to many of the world's largest online social networks and search engines. European regulations are inspired by the conviction that data privacy is a fundamental human right and that individuals should be in control of how their data are used. America, on the other hand, takes a more relaxed view, allowing people to use a patchwork-quilt of consumer-protection laws to seek redress if they feel their privacy has been violated. Companies that handle users' data are largely expected to police themselves.

Some experts say this dichotomy explains why Silicon Valley firms that strike out abroad have sometimes been the targets of European Union data watchdogs. Jules Polonetsky of the Future of Privacy Forum, a think tank, says that many American firms have yet to learn that showing up in Europe and extolling the virtues of self-regulation is likely to be as ineffective as rightwing politicians denouncing anti-discrimination laws back home.

Guarding the guardians

Transatlantic friction between companies and regulators has grown as Europe's data guardians have become more assertive. Francesca Bignami, a professor at George Washington University's law school, says that the explosion of digital technologies has made it impossible for watchdogs to keep a close eye on every web company operating in their backyard. So instead they are relying more on scapegoating prominent wrongdoers in the hope that this will deter others.

But regulators such as Peter Schaar, who heads Germany's federal data-protection agency, say the gulf is exaggerated. Some European countries, he points out, now have rules that make companies who suffer big losses of customer data to report these to the authorities. The inspiration for these measures comes from America.

Yet even Mr Schaar admits that the internet's global scale means that there will need to be changes on both sides of the Atlantic. He hints that Europe might adopt a more flexible regulatory stance if America were to create what amounts to an independent data-protection body along European lines. In Europe, where the flagship Data Protection Directive came into effect in 1995, before firms such as Google and Facebook were even founded, the European Commission is conducting a review of its privacy policies. In America Congress has begun debating a new privacy bill and the Federal Trade Commission is considering an overhaul of its rules. David Vladeck, the head of the FTC's Bureau of Consumer Protection, has acknowledged that "existing privacy frameworks have limitations".

Even if America and Europe do narrow their differences, internet firms will still have to grapple with other data watchdogs. In Asia countries that belong to APEC are trying to develop a set of regional guidelines for privacy rules under an initiative known as the Data Privacy Pathfinder. Some countries such as Australia and New Zealand have longstanding privacy laws, but many emerging nations have yet to roll out fully fledged versions of their own. Mr Polonetsky sees Asia as "a new privacy battleground", with America and Europe both keen to tempt countries towards their own regulatory model.

Privacy laws are somewhat more common in Latin America, where countries such as Argentina and Chile boast relatively strict European-style regimes. Mexico, which last year made data privacy a constitutional right, is also pushing through a new federal data-privacy law. The likely outcome is a mix of European and American privacy frameworks, predicts Katitza Rodriguez of the Electronic Frontier Foundation, a privacy group.

Canada already has something of a hybrid privacy regime, which may explain why its data-protection commissioner, Jennifer Stoddart, has been so influential on the international stage. She marshalled the signatories of the Google Buzz letter and took Facebook to task last year for breaching Canada's data privacy laws, which led the company to change its policies.

Ms Stoddart argues that American companies often trip up on data-privacy issues because of "their brimming optimism that the whole world wants what they have rolled out in America." Yet the same optimism has helped to create global companies that have brought huge benefits to consumers, while also presenting privacy regulators with tough choices. Shoehorning such firms into antiquated privacy frameworks will not benefit either them or their users.

SOME fight wars with words, others with numbers. Hardly a day passes without new data on mobile apps, the small applications that can be downloaded to smart-phones to perform all kinds of feats, such as accessing social networks, playing games and identifying unknown music. Apple recently announced that its App Store now offers 225,000 apps, which collectively have been downloaded 5 billion times. Android Market, the storefront for the operating system that powers many other smart-phones, now boasts 60,000 apps and is catching up fast. And GetJar, an independent mobile store that offers programs for all kinds of handsets, claims 72,000 apps and 1 billion downloads.

As this is all part of the ongoing "platform war" between different mobile operating systems, the numbers should be taken with several grains of salt. The more the numbers are puffed up, not least with some double-counting, the more users and developers the respective app stores hope to attract. Ilja Laurs, GetJar's chief executive, admits that his tally includes different versions of the same software--because this is industry practice. What is more, many apps are the mobile equivalent of marketing: they are given away to tout other wares. On June 15th Apple even released an app that lets users order the latest version of its own iPhone. Others apps are labours of love that have been put out free by passionate developers.

Nevertheless, research firms are trying to measure the market with tried and tested methods, sensing there are lucrative reports and consulting services to sell. In a recent study Juniper Research put last year's revenues from mobile apps at nearly $10 billion and estimated that it will more than treble by 2015. Yet such figures are educated guesses at best, argues an analyst with a rival market-research firm which has refrained from making predictions of its own because of the paucity of data.

This makes it extremely difficult to gauge how good a business mobile apps really are. Developers of the programs get to keep a large part of what users pay to download one--70% in most cases. Apple says that it has already passed on more than $1 billion in revenues (meaning that its App Store, launched in July 2008, has so far generated $1.4 billion in revenues). Some developers are certainly making a killing. But success is often a matter of luck and much depends on how an app is promoted by the mobile store.

Despite the lack of hard data, at least the dynamics of the app economy are becoming clearer. And they seem to be more like the music business than the software one. On average, it takes about the same time to write an app as it does to compose a song, says GetJar's Mr Laurs. Both cost about the same to download, $1.90 on average. In each case, some make it big but most never become hits. And apart from evergreens, such as games, utilities and programs to use Facebook and Twitter, even the most successful mobile apps often quickly fade into obscurity.

In much the same way as recorded music is increasingly considered a loss leader for other products, paid-for apps are likely to become an ever smaller piece of the pie. More apps are likely to be given away to get users to pay for premium services or "virtual goods", like weapons or clothes in online games. And ads are about to become more important as a source of revenue. On July 1st Apple will launch its new advertisement platform, which allows the placement of ads directly within apps.

This does not mean apps are mere eye candy on small screens. In fact, they are bound to become more widespread. Newspapers and record labels have started to wrap their content in apps that come with additional features, hoping that it will allow them to charge for more things. And as other electronic devices--television sets, alarm clocks, e-readers and even electricity meters--become smarter and more connected, consumers will be able to download apps for these too. Perhaps, in the end, everything will have an app.