"Using Electronic Networks for Commerce:
Charting a New Course for Business and Government"
Remarks by Larry Irving
Assistant Secretary for Communications and Information
National Telecommunications and Information Administration
U.S. Department of Commerce
E://Comm '97 - USA
June 25, 1997
Thank you for asking me to join you again this year.
A recent issue of the Economist magazine notes that technological turning points are difficult to spot. They noted that at the turn of the century when Studebaker switched from making horse-drawn carriages to making cars, the move was not obvious because in the previous five years New Yorkers had bought 350,000 carriages and only 125 cars.
Now, we are entering a new century, and as Commerce Secretary Daley has noted, the information age is about "change and achieving new impossibilities." This change will affect your businesses. You need to understand it -- and more importantly, take advantage of it. You need to understand the role that telephones, computers, networks, and technology can play in creating new impossibilities. And if you can harness this potential, you will be the successful entrepreneurs and businesspersons who will bring new products to the market, increase consumers' choice and lower costs, and grow our nation's economy.
Just consider for a moment the changes that have taken place in the telecom and information sectors in the several decades. The global network of computers, telephones, and televisions has increased its information-carrying capacity a million times over. In 1960, a transatlantic telephone cable could carry only 138 conversations simultaneously. Today, a fiber-optic cable can carry 1.5 million conversations at one time. Today's laptop computers weigh as little as 1.85 pounds, run Windows 95 software, and are many times more powerful than the $10 million mainframe computers of the mid-1970s. Twenty-five years ago there were only about 50,000 computers worldwide; today that number is estimated at 140 million. (The U.S. leads the world in the number of computers per 100 people -- 35 -- followed by Australia (27), Canada (25), Britain (20), Netherlands (20), and Singapore (18).) In the United States, the high-tech industry was responsible for adding some 240,000 jobs to the economy in 1996, with nearly 60 percent of those in software and computer-related services. (About 30 percent were in manufacturing.) The total number of high-tech jobs is now 4.3 million.
And no communications medium has ever grown as fast as the Internet, which has an estimated 50 million users worldwide. According to the American Business Information Report, at the end of 1996, there were 2,298 Internet providers. Last year, 80 percent of Fortune 500 firms had a Web site. Investors are managing over $100 billion in on-line investments.
Many of us who are interested in electronic commerce have mixed emotions. We're thrilled by the emerging technologies that allow for new forms of business, unsure of the roles of players -- who is a potential partner versus a new competitor, where does the government fit in -- and often confused as to the rules of the game.
Today I wish to address two key issues that are emerging as increasing numbers of individuals and companies use electronic networks to engage in commerce: (1) the need for companies to focus on their value-added; and (2) the need to delineate the appropriate roles of the private sector and the government.
The Risks and Rewards for Businesses -- Focus on Your Value-Added
The explosive pace and unpredictable nature of the technological developments make any attempt to engage in electronic commerce a bit like betting on Silver Charm. Even industry leaders don't always make it to the winner's circle. A story in this past Sunday's business section of the Washington Post on Intuit's foray into online commerce with the idea of private networks and click fees illustrates this point. As Scott Cook, Intuit's chairman said, Intuit simply did not bank on impact that the Internet would have on proprietary networks. With the Internet, banks and consumers did not need a middleman, which was at the heart of Intuit's plan. In recent articles in Forbes ASAP, both Patrick McGovern and Bill Gates discuss the elimination of the middleman.
The Internet, Intranets, extranets, and other communications networks are lowering entry barriers to commerce, enabling both small and large firms as well as consumers to engage in and benefit from electronic commerce. Electronic commerce is already generating important sales and savings for businesses. For example, Amazon.com's increasing share of the bookstore market (by offering discounts up to 40 percent) forced Barnes & Noble and Borders Books on-line. FedEx saved as much as $10,000 a day in 1996 by moving some of its customer service to its Web site. Dell Computer now sells $1 million worth of PCS every day on the Web. General Electric buys $1 billion in materials from suppliers on-line and saves money by streamlining the process and opening it up to more competition.
Keep in mind, however, that it is not simply a matter of creating a Web site. Amazon.com is a success, now valued at $500 million. Interestingly, a British businessman pursued the same idea at the same -- but his company is only worth $3 million today. Why the difference? Jeff Bezos, the American-owner of Amazon.com, researched the industry and relocated to be near one of the world's biggest book warehouses. Mr. Bezos also raised $11 million from venture capitalists at the outset and heavily marketed his business. And he learned how to market effectively worldwide -- Amazon.com's sales outside the U.S. are ten times the British company's sales outside of Britain.
Electronic commerce is not just for big corporations. In fact, it provides exciting possibilities for small companies and entrepreneurs to tap into markets all across the country as well as the world. Moreover, it enables the sharing of valuable information and resources. Last month, Women Inc. (a non-profit organization devoted to helping women business owners succeed) and AT&T announced a partnership that will greatly help women entrepreneurs and could serve as a model for other groups. AT&T has provided Women Inc. with a $25,000 grant to develop and host a Web site that will give Women Inc. members data space for business transactions, space to sell their products and services, the opportunity to "ask the expert" business-related questions, use of chat rooms, and the ability to register for conferences. Through the Web site, members also have access to a host of services, including discounts on AT&T long distance telephone service, FedEx deliver, and office products.
A study released last Thursday by Meta Consulting Group found that 80 percent of the companies polled realized a positive return on their investment in a corporate Intranet. Participating companies ranged in size from $2-million to $35-billion in sales revenue, but an organization's size had no apparent relationship to the returns generated, which averaged about 38% on the initial investment.
The Internet and related goods and services are causing companies to rethink their business plans. In a recent interview in Forbes ASAP, Esther Dyson talks about what she would say to a company if she were advising them about intellectual capital. Dyson noted that it comes down to two things: (1) learning the Net and (2) investing in good people. She notes how the Internet allows for more one-to-one relations with customers, which enables a company to give the customer exactly what he wants: attention.
The Internet is causing a lot of businesses to rethink how they do business. Ask yourself -- if the Net (in its current state) had been around when your company was founded, would you be running your business the way you are doing so today? If the answer is no, why not change now? Think hard about what is your value-added. Can you develop a niche market? How can you compete effectively with off-line companies as well as other on-line companies?.
Appropriate Roles of the Private Sector and the Government
The Clinton Administration believes that the private sector can and should develop many of the solutions to emerging legal, policy, and technical challenges with respect to electronic commerce, particularly activities on the Internet. When activities on the Internet raise new issues, the government should first turn to the private sector to see if a solution can be crafted without government action. The Internet community has a demonstrated record of expanding the Internet, successfully managing its operation and growth, and developing policies and mechanisms to govern its use without government regulation. To be sure, government has substantially contributed to this growth, by providing essential funding (particularly in the early years), by offering its research and technological expertise, and by participating in many of the bodies that operate and administer the Internet.
Many of the solutions to emerging Internet-related concerns lie with technology, and in turning to the private sector we can take advantage of its entrepreneurial energy. The private sector has already demonstrated its ability to develop new technology tools, such as screening software to address concerns about children's access to adult material on the Net, as well as standards that would give individuals the ability to control the disclosure and use of their own personal profiles generated when using the Web.
The Federal government does, however, have a valuable, and at times critical, role to play with respect to the development of electronic commerce. The Federal government should be engaged in: (1) promoting a market-driven environment; (2) creating a predictable legal environment governing electronic commerce transactions, and (3) building business and consumer awareness about externalities that undermine healthy markets. Even as the government takes steps to fulfill this role, we must ensure that any government action is the minimal necessary to achieve goals and one that allows competition and innovation to flourish.
Promoting a market-driven environment
The Federal government has a valuable role to play now to preserve the global environment in which a contract-based, market-driven model of commerce can emerge. Increased commercial activity on the Internet makes it an increasingly attractive target for government regulation to address concerns about fraud, content, and competition, as seen by recent state and foreign government action. Consequently, the Federal government has two distinct, but complementary, roles:
(1) U.S. leadership is needed to preserve Internet as an unregulated, contract-based, market-driven environment internationally as well as interstate.
(2) In some cases concerted international, intergovernmental action will be needed to facilitate electronic commerce and protect consumers. In these cases, U.S. leadership is needed to promote a minimalist approach designed to ensure competition, prevent fraud, foster transparency, and facilitate dispute resolution.
These roles for the Federal government are reflected in a document scheduled for official release next week entitled, A Framework for Global Electronic Commerce. The Framework statement sets forth the Clinton Administration's vision, principles, and policy for electronic commerce.
The Clinton Administration believes that government should minimize regulations and let technology blossom and grow. The Administration's approach to the Internet is that, in general, our first instinct should be to refrain from regulation. No form of electronic media has grown as fast as the Internet, and the Net has grown precisely because it is not regulated. On behalf of the President, I wrote to the Federal Communications Commission asking the Commission not to regulate the use of the Internet to provide telephone service. I feel as strong about regulation of Internet audio and video. If we are to encourage investment and innovation, we need to forebear from regulation.
We are very concerned that a number of nations have taken steps or are contemplating action to censor information received by their citizens via the Internet. We believe that freedom of speech applies in cyberspace and that laws censoring the information that flows over the Internet are both misguided and impractical, especially given the global nature of the Internet.
I am sure that it will surprise no one here today when I say that we strongly believe that the best way to fight misinformation is with more information. To quote Mae West: "Too much of a good thing is wonderful." Moreover, the best guarantee of democracy and stability are informed citizens.
Obviously, on certain issues such as pornography and children's access to adult material, our government is concerned. But even here, we are looking to industry to self-regulate and to develop technological tools that parents and Internet service providers, not the government, can use to filter out material inappropriate for children.
The good news is that the computer industry and the on-line service industry have been moving quickly and responsibly to develop new products and services to make the Internet "family-friendly." For example, the PICS (platform for Internet content selection) system now allows parents to screen and block content they deem unsuitable for their children. These technologies enable parents -- not governments -- to determine what is appropriate for their children.
The Internet and its products also are generating new competition for traditional telecommunications and media companies. The Clinton Administration is concerned with recent attempts by other nations to ban or block Internet telephony calls to protect their state-owned phone companies. The Czech Republic, Hungary, Portugal, and Iceland prohibit Internet telephony. The laws of other countries, including Italy, Norway, and Switzerland, allow them to ban any entity other than the state telephone company from carrying voice traffic. And the European Commission is considering allowing member countries to restrict Internet phone calls.
Creating a predictable legal environment governing electronic commerce transactions
The Federal government also has an important role to play as facilitator and catalyst for electronic commerce. We need to examine whether existing governing standards should continue to apply and whether new ones are needed. The major issues include data security, intellectual property, privacy, and financial issues.
The United States recognizes that other nations are facing these same issues, yet often with a different historical and cultural perspective as well as different legal and regulatory frameworks. Given the global nature of the Internet and other networks, a consensus regarding governing standards needs to be developed on both national and international levels. As part of such an effort, Secretary Daley will be attending the European Ministerial Conference on Global Information Networks, July 6-8, in Bonn Germany, where he will present the U.S. vision and principles on electronic commerce. (Japan and Canada will also be represented at the Bonn Conference.)
Building Business and Consumer Awareness
Many businesses, especially small and medium-sized ones, as well as consumers are unaware of the benefits of electronic commerce for their enterprises or of the externalities that undermine healthy markets. Because they are not engaged in an effort to use electronic networks for their transactions, they are not encountering security and privacy concerns and therefore are not putting pressure on the private sector to develop solutions to these concerns. Experience has shown, however, that once businesses and consumers are aware of the benefits and concerns, they generate demand that the private sector meets. Personal privacy concerns is an example. Until recently, few people were aware of the trail of information they left behind while surfing the Internet. The efforts by the Department of Commerce/NTIA and the Federal Trade Commission (FTC) to educate the public about this issue have resulted in demand by consumers for greater privacy protection tools. And industry has responded with the development of technological tools.
President Clinton has noted that, "Technology is only and always the reflection of our own imagination, and its uses must be conditioned by our own values." President Clinton, Vice President Gore, and Secretary Daley are working hard to create a favorable environment for electronic commerce to flourish, benefitting all Americans and American businesses. We look forward to working with you in this endeavor. Thank you.