Remarks by Assistant Secretary Irving at Reinventing Commerce At Net Speed: Stanford 99

Net Power: Creating the Rules for a New Commercial Playing Field
June 22, 1999
Remarks by Larry Irving
Assistant Secretary for Communications and Information
National Telecommunications and Information Administration
U.S. Department of Commerce

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Reinventing Commerce At Net Speed: Stanford 99
June 22, 1999


Good morning. It's a pleasure to be here at my alma mater, Stanford University, to talk about "Net Power: Creating the Rules for a New Commercial Playing Field."

I've been asked to speak on the role of government in the area of electronic commerce (or e-commerce). That's tantamount to describing government's role in the Industrial Revolution. The only differences are that we are still in the midst of the "Internet Revolution" and that government is still defining, and redefining, its role. The other difference is that, while what we're seeing today may have as significant a role as the Industrial Revolution, it is happening at 100 times the speed. What the Industrial Revolution accomplished in two or three hundred years, the Internet Revolution is accomplishing in just a couple of years and it is happening simultaneously across the globe.
 

Understanding the Digital Economy

Given the tremendous growth of electronic commerce, what is the government's role in its continued development? It should be no surprise to anyone here that e-commerce is a priority for the Administration, given its growing importance to our nation's economy and to our global competitiveness.

Indeed, Secretary of Commerce William Daley now jokes that the Department of Commerce should be renamed as the "Department of E-Commerce" because so much attention is now focused on online commerce. This month alone, we are issuing three reports on this issue: the second update to the Emerging Digital Economy report (which Secretary Daley is releasing today in Denver); a report on the worker shortage in high-tech industries; and a report on the "digital divide" examining which Americans are connected to our nation's infrastructure, and which don't yet have access to the Internet.

We know that the economy is being transformed by e-commerce. As Internet use increases, both consumers and businesses are turning to the Internet to conduct commercial transactions. The Department of Commerce estimated $9 billion in retail sales in 1998 (three times higher than 1997's $3 billion), and estimates that e-commerce retail sales will generate $30 billion in year 2000. Greenfield Online found that 39 percent of US spend less time shopping in offline stores and malls. That's significant because Americans with Internet access account for 60 percent of the total consumer buying power in the US.

The figures I just gave you don't even begin to approximate the level of online sales among businesses. In four years, Forrester Research projects that online business trade will jump from its current level of $43 billion in revenues to $1.4 trillion -- 10 to 20 times the projected retail market.

Because e-commerce is playing an increasingly important role in our economy, Secretary Daley also announced recently that the Department will be tracking online retail sales (or "e-tail") separately. We want to better measure what e-commerce means and doesn't mean to the economy.

Last month, the Department of Commerce hosted a conference on the Digital Economy to review recent research on implications of the digital economy and to frame an agenda for future research and measurements. At the opening of that Conference, Secretary Daley noted a truism - The Internet is color blind. No one knows if the owner of an on-line store is an African American, a Hispanic, an Asian American or a Native American. The Internet and electronic commerce presents us with an opportunity to breakdown barriers that have existed in business in the 20th century. They also provide community building opportunities for discrete segments of our society.

We cannot expect our economy to flourish and our society to grow, however, if whole segments America are excluded from participating in the Information Revolution. Understanding the issue of access to the Internet and the differences between the technology "haves" and "have-nots" is of great importance to the Department of Commerce and to our nation.

In August of last year, my agency (NTIA) released startling findings regarding this issue in our report Falling Through the Net II: New Data on the Digital Divide. For example, white households are more than twice as likely to own a computer than African-American or Hispanic households, and the gap in computer ownership between those at upper and lower income levels - and between urban and rural areas was actually growing. Within the few weeks, NTIA will be releasing new data on the digital divide in an effort to further our understanding of the digital disparity within our society.
 

Letting the Private Sector Lead

So how do we promote the growth of our national infrastructure and the digital economy so that more Americans, and more people worldwide, can benefit?

The Clinton/Gore Administration has long believed that the best approach is to let the private sector lead and to minimize government regulation of this growing new medium. We believe that development will most likely occur if the Net remains an unfettered marketplace, and that innovation, better services, and lower prices are more likely to arise in a market-driven environment than in a regulated environment.

In July 1997, President Clinton set forth a Framework for Global Electronic Commerce in which he established a number of guiding principles. Among these, he emphasized the importance of relying on market forces, instead of government regulation, to drive the development of the Net marketplace. Private investment has led to the astounding wealth of goods and services, and new technologies, that now pervade the Net. We want to do little to disrupt that dynamic process. For six years, I have given speeches on behalf of the Administration exhorting local, state, federal, and international regulators to "resist the urge" to regulate.

This has been the approach we have pursued in the last few years. But as my former boss, Congressman Ed Markey, recently noted: while policymakers have pledged not to regulate the Internet, Congressmen on both sides are not shy to regulate the part they want to regulate. As Congressman Markey said:

I am absolutely convinced that Congress won't regulate the Internet… that's right: no laws, except of course laws regulating access to pornography, prohibiting obscenity, dealing with alcohol sales online, tobacco sales online, gambling online, tax evasion online, firearm sales online, rules equitably generating subsidies to provide links to schools and libraries, laws addressing encryption policy, rules addressing law enforcement's access to your email, privacy rules dealing with how companies track your mouse-clicks from site to site, and new rules perhaps to address thorny subjects such as bomb-making sites and hate crimes sites. Except for those examples - and maybe a few others I'm forgetting at the moment - rest assured, the World Wide Web will be a free and frontier-like experience for everybody. The truth of course is that efforts to regulate the Internet will come from both parties. Rules for cyberspace are inevitable in my view, the only question remaining is what form they will take.

Our job at this point is to remain vigilant in protecting the Internet from harmful, reflexive, and inflexible regulation. And principally, we must be careful in considering rules and regulations for e-commerce because whatever America does here will affect what the rest of the world does as well.

What I'd like to do for the rest of the time is to talk about why the market-driven approach is essential, even for some of the toughest areas relating to e-commerce such as taxes, consumer protection, and privacy.

Taxes/Tariffs. One area where we have tried to limit government regulation is taxes and tariffs. Imagine how electronic business would fare if you had to comply with different tariffs imposed by 180 countries, or taxes levied by 50 states. The Administration is therefore advocating that countries worldwide refrain from imposing tariffs on products or services when they are delivered by Internet to foreign markets. We are applying the same principles at home. The Administration endorsed, and Congress recently enacted, the Internet Tax Freedom Act, which places a three-year moratorium on state and local taxation of Internet access and multiple or discriminatory taxation of e-commerce. In the meantime, a Congressionally-authorized commission will be studying how best to tackle these complex issues in the future.

The Advisory Commission on Electronic Commerce (ACEC) was created by Congress to study federal, state, local and international taxation and tariffs on transactions using the Internet and Internet access. This week, the commission's 19 members which include three governors, heads of several major information technology corporations and other government and business leaders from across the nation met face-to-face for the first time in Williamsburg, Virginia.

Internationally, we are making significant progress in reaching agreement in this area. On May 20, 1998, all 132 members of the World Trade Organization (WTO) endorsed a declaration agreeing to extend the current prohibition against such tariffs. The declaration also called for a comprehensive program to examine all trade-related issues relating to global economic commerce. Over the next year, we will be working with countries to make this commitment legally binding.

Consumer Protection. Another issue on which we have focused attention is consumer protection. While it is easy to applaud the global and dynamic aspects of the Net, the same features that make it a unique marketplace can also create problems. It may be easy for a new company to start a business online, but what happens if it can't deliver the goods it promises? What if an item is misrepresented by an online seller? Or what if a consumer needs to file a complaint against a virtual seller who has since vanished from the Net?

These problems are arising more and more frequently as the number of electronic transactions rises. And they are problems that often arise in the context of online auctions. The Internet Fraud Watch recently reported that Web auction complaints made up nearly 70% of the Internet fraud reports for 1998. That's up from 26% of all Internet complaints the previous year. As the Wall Street Journal noted in a recent article on Web auctions, when you rely on individuals to describe the items they are selling, that individual can easily misrepresent the item or sell it at a higher value than it's worth. What's described as an antique rocking chair online may turn out to be yesterday's woodworking project.

Protecting consumers from such fraud is a priority for the Administration. On November 30, 1998, President Clinton directed the Secretary of Commerce, in consultation with the Federal Trade Commission and other federal agencies, to work towards ensuring effective consumer protection on the Net. We have formed a working group, which is developing a work plan for the Administration's efforts in this area. Because the Net is an international forum, we are also working with governments and industries at home and abroad to adopt effective strategies. Just two weeks ago, the Federal Trade Commission and the Department of Commerce met with federal consumer protection agencies from around the world to discuss international issues and considerations surrounding on-line consumer protection.

The Administration's approach to consumer protection is multi-faceted. On the one hand, we are relying on the private sector to develop effective consumer awareness campaigns and to guard against consumer fraud online. And we are seeing numerous examples of industry stepping up to the plate. AOL, for example, now has a certified merchants program, which requires AOL merchants to follow guidelines for online customer service. Among other things, AOL merchants must post details of their return policies and shipping information, and ship the item displayed and not a substitute item.

The Administration is also stepping up law enforcement efforts online. We believe that the existing consumer protection laws are generally sufficient to combat online fraud. However, we recognize that enforcement must be better coordinated and more aggressive to adequately combat fraud online. For that reason, the Administration issued an initiative two weeks ago to better coordinate civil and criminal enforcement efforts by the Department of Justice and other regulatory authorities.

Of course, the global nature of the Internet can complicate domestic efforts to ban online fraud. We are therefore working on an international basis with private industry and foreign governments. Private sector groups, such as the Global Business Dialogue and the Transatlantic Business Dialogue, have identified consumer protection as a priority this year. We are also actively engaged in international policy discussions with our trading partners and international organizations, such as the OECD. As ever, we hope that industry will take the lead in fashioning effective remedies, and that governments will refrain from mandating common global rules and enforcement mechanisms.
 

Privacy. Finally, a related issue is the question of online privacy. The Administration has become increasingly concerned about privacy issues because of the potential for misuse of personal information online. According to a recent American poll, 86% of Americans are concerned about their privacy when engaged in e-commerce. As Secretary Daley said, "If 86 percent of Americans can agree on something, you know this is a serious matter."

These occurrences shake your faith in buying goods online, and we need to do as much as we can to prevent them. As Vice President Gore noted, "People will not put their faith, their trust or their cash into electronic commerce if they feel that in order to buy a product, they must first sell their privacy." He therefore established an Electronic Bill of Rights, proposing that every consumer have: the right to choose whether her personal information is disclosed; the right to know how, when and how much of that information is being used; the right to see that information; and the right to know if information is accurate and to be able to correct it if it is not.

The Administration believes that the private sector should take the lead on putting these goals into place. We have been working closely with private industry and privacy advocacy groups to develop and adopt effective codes of conduct. We want companies to implement systems to notify customers of their privacy policies, process consumer privacy preferences, protect customer data, and handle inquiries and complaints. And we are seeing some online businesses begin to do so. Many companies are signing onto programs, such as BBBOnline and TRUSTe, which require merchants to adhere to fair trade practices. These programs provides a seal to businesses that post privacy policies that meet certain criteria. This gives customers some assurance, when they see that seal, that the business is following fair information practices.

On May 12, Georgetown University released encouraging results of an Internet privacy policy study that shows that the private sector is on track with this approach. The study shows that nearly two-thirds of a random sample of 7500 most popular web sites - accounting for virtually all web traffic - now post privacy policies or information practice statements. This is a dramatic improvement from a year ago, when the Federal Trade Commission conducted a similar study and found privacy policies posted on only 14% of web sites. The top 100 web sites are doing even better, with 94% posting either a privacy policy notice or an information practice statement.

The progress over the last year is tremendous - but all of us realize that there is still work to do. The challenge for all of us - industry, the privacy community, and government - is to figure out the best way to build on the momentum demonstrated in the Georgetown survey. Posting privacy policies is an essential first step, but our goal is to make good privacy practices widespread in cyberspace. The Department of Commerce will continue to consult with privacy advocates and the business community in working to finish the job.

We are also working with other nations and the European Commission to reach an understanding that will permit data flows while according privacy protection. We are trying to bridge our approach to privacy with the European Data Protection Directive, which prohibits the transfer of personal data to third countries that do not provide "adequate" data protection. To date, we have identified broad areas of agreement, and are engaged in intensified efforts to overcome the remaining differences.
 

Conclusion

There are many other issues that affect e-commerce that I could talk about today. But I've highlighted several to explain why it's essential that industry lead the way in creating a new market that is safe, secure, and conducive to continued growth. Those who are engaged in e-commerce should be the ones defining the rules of the future, not government regulators or Congress.

E-commerce is, indeed, creating a revolution; it has revolutionized the way we conduct transactions, purchase goods, and share ideas. As Peter Drucker, the preeminent management theorist stated, "[the greatest danger in times of turbulence is not the turbulence. It is to act with yesterday's logic." That applies to businesses as well as to government. Businesses need to define a role for themselves online, and government should do the opposite. In the past, government has been quick to regulate any new medium; let me state again that we need to resist this urge to regulate and let e-commerce's growth continue unfettered. Only if business and government assume these respective roles will we continue to promote the greatest revolution that we've seen this decade, and will be likely to see in the next century.