The Digital Economy in International Perspective -- Analytical Summary and Report

Berkeley Roundtable on the International Economy (BRIE)
2234 Piedmont Avenue
University of California, Berkeley
Berkeley, CA 94720 USA
510-642-3067

The Digital Economy in International Perspective:

Common Construction or Regional Rivalry¹

A Conference of the University of California E-conomy™ Project ²

The Willard Inter-Continental Washington
Washington, D.C.
May 27, 1999

Analytical Summary and Report

Prepared by John W. Cioffi*

Table of Contents

INTRODUCTION AND OVERVIEW: COMMON STAKES IN THE E-CONOMY

John Zysman, Professor and Co-Director, BRIE, University of California, Berkeley

OPENING REMARKS:

David Beier, Chief Domestic Policy Advisor, Office of the Vice President

Andrew Pincus, General Counsel, U.S. Department of Commerce

ANALYTIC OVERVIEWS:

J. Bradford De Long, Professor, Department of Economics, University of California, Berkeley; former Deputy Assistant Secretary for Economic Policy, U.S. Department of the Treasury

Peter Harter, Vice President, Global Public Policy and Standards, EMusic; former Global Public Policy Counsel, Netscape Communications

SESSION I: DIFFERENCES IN TECHONOLOGY AND USE

Panel 1: Developments in enabling network technologies and infrastructure

Introduction: Michael Borrus (Co-Chair)

, Adjunct Professor and Co-Director, BRIE, University of California, Berkeley; Managing Director, Petkevich and Partners

François Bar, Assistant Professor of Communication, Stanford University

Jiro Kokuryo, Associate Professor and Head of the Electronic Commerce Research Project, Graduate School of Business Administration, Keio University, Japan

Erkki Ormala, Director, Technology Policy, Nokia Corporation

Glenn Woroch, Visiting Professor of Economics and Executive Director, Consortium for Research on Telecommunications Policy, Haas School of Business, University of California, Berkeley

Axel Zerdick, Professor of Economics and Mass Communication, Freie Universität Berlin

Panel 2: E-Commerce Applications in Sectoral Perspectives

Stuart Feldman, Director, IBM Institute for Advanced Commerce

Mark Kvamme, Chairman, USWeb/CKS

Niels Christian Nielsen, Executive Vice President, Danish Technological Institute

David Pecaut, Senior Vice President, Boston Consulting Group

DIGITAL ECONOMY OR DIGTAL SOCIETY? A U.S.-EUROPEAN CONVERSATION

Elliot Maxwell, Special Advisor to the Secretary of Commerce for the Digital Economy, U.S. Department of Commerce

Erika Mann, Member, European Parliament, Member of the Committee on External Economic Relations and the Committee on Economic, Monetary Affairs and Industrial Policy

SESSION II: INTERNATIONAL INTEROPERABILITY AND GOVERNANCE IN THE E-CONOMY

Peter Cowhey (Co-Chair), Professor, Graduate School of International Relations and Pacific Studies, University of California, San Diego; former Chief, International Bureau, FCC

Denis Gilhooly (Co-Chair), Advisor for Telecommunications, World Bank; former Vice President for Business Development, Teledesic

Panel 3: Governance institutions and venues for dispute resolution

Don Abelson, Assistant U.S. Trade Representative for Industry

Peter Cowhey, Professor, Graduate School of International Relations and Pacific Studies, University of California, San Diego former Chief, International Bureau, FCC

John Dryden, Head of the Information, Computer and Communications Policy Division, Directorate for Science, Technology and Industry, OECD

Panel 4: The construction, structure and operation of networks

Don Cruickshank, Chairman, Action 2000, Department of Trade and Industry, U.K.; former Director General, Office of Telecommunications, U.K.

Robert Pepper, Chief, Office of Policy and Plans, FCC

Jonathan Sallet, Chief Policy Counsel, MCI/Worldcom

Panel 5: Laws for digital transactions and their relationship to social values

Helen McDonald, Director General of Policy Development, Electronic Commerce Task Force, Canada

Patricia Paoletta, Vice President for Government Affairs, Level 3 Communications, former Counsel for the Majority, Office of Representative Tom Bliley (R-VA)

Bror Salmelin, Head of Unit, DGXIII - Information Society: Telecommunications, Markets, Technologies, European Commission

Pamela Samuelson, Professor, Boalt Hall School of Law and School of Information Management and Systems, University of California, Berkeley

Closing Remarks

Tales from the Silicon Valley: Governance, Technology and Civil Society

Regis McKenna, Chairman and CEO, Regis McKenna Inc

INTRODUCTION AND OVERVIEW: COMMON STAKES IN THE E-CONOMY

John Zysman, Professor and Co-Director, BRIE, University of California, Berkeley

John Zysman opened the conference by stating its purpose: to frame and begin an international dialogue addressing technological, economic, and policy issues in the common construction of the digital economy. The extraordinarily rapid growth and international spread of the Internet and e-commerce makes such an international exchange imperative, he said. Digital networks and e-commerce strategies are transforming the organization and practice of economic activity. Productivity advances and successive waves of innovation will generate enduring economic gains commensurate with the scale of the e-conomy and the networks that define it. Accordingly, the OECD countries have a common interest in the construction of an integrated digital economy. How to achieve that goal depends on one’s view of what is happening in the international and digital economies. The significance of such differences in perspective can be made most obvious by comparing the view from Silicon Valley and the view from the EU.

The Single E-conomy View: The Silicon Valley-centric view of the e-conomy maintains that technology and business models inexorably spread from Silicon Valley. Hence, in this view, policy driven by market transformation rooted somewhere south of Palo Alto will overcome and sweep away national economic models and the state’s capacity to regulate, forcing the development of a single international market. The Silicon Valley view has been the dominant perspective on the development and character of the e-conomy. The vision builds on the common understanding of the world as comprised of technological leaders and followers. The leaders occupy their position by virtue of superior (i.e., neo-liberal) policies and first-mover advantages; the followers are burdened by policies that retard their progress while aimed at slowing the advance of the leaders. This view implies a single model of the e-conomy on which all societies and policies must converge. Because the U.S. has the lead, the rules governing the e-conomy are likely to reflect American regulatory and economic institutions and practices.

The dominance of American firms in the creation of the enabling technologies for digital networks and e-commerce applications, and in setting the terms of competition and policy, has lent this view plausibility. For example, American competition policies encourage the development of low-cost data networks that give users influence over network design. These arrangements have altered the dynamics of network innovation. For many, this is the core of the Silicon Valley technological and economic model. The Silicon Valley view also embodies, at least in part, a form of "techno-determinism" in its belief that technology will dominate choices about policy. No matter which country or region leads the world market, the powerful communications instruments of the digital technology will produce a single global market and similar business models under the governance of convergent, presumably neo-liberal regulatory regimes. Other forms of regulation and protectionism will either be circumvented, swept aside, or else doom the offending jurisdiction to technological backwardness. Certainly these "techno-determinists" are right in saying that new capabilities will erode or at least alter inherited market and regulatory structures. But there may be more to this unfolding story, as described in a second view.

The Alternative "Plural E-conomies" View: Leading-edge users of the Internet and e-commerce are beginning to emerge in Europe and Asia as well as the United States. As new e-commerce technologies, uses, business models, and legal frameworks develop outside the U.S., they challenge the early dominance of American policy and market leadership. In this view, the outcome of these divergent or conflicting technological, economic, and regulatory developments may be a number of differing e-conomies. Regionally and nationally based lead users, or their regionally specific needs, may drive distinctive lines of technology development in which local firms may have an advantage. Differences in policy may also profoundly affect the development of technology, markets, and products. All markets are to some extent created by policy.³ Intellectual property, commercial and contract law, privacy and security regulations, and payment systems are all to some extent the products of policy. Likewise, the regulation of telecommunications and other networks will substantially influence the organization of the e-conomy with respect to universal access, competition, and network technologies and architectures. Finally, different processes of policy formation and implementation encourage different approaches to matters such as self-regulation and the setting of network and product standards.

By what means can we determine whether different local configurations of market demand and policy consolidate into distinct trajectories of development and separate national e-conomies? We suggest several fundamental empirical criteria:

Distinct technologies and applications;

Distinct market structures;

Distinct business models;

Distinct structures of comparative advantage;

Distinct legal and policy frameworks.

These areas are the hallmarks of cross-national differentiation in all other trade arrangements. They are thus the logical starting points to explore national developments in the e-conomy.

This conference and the E-conomy™ Project are designed to explore the divergent developmental trajectories, variations in political economic structure, and governance issues generated by the growth of the digital economy. The U.C. E-conomy™ Project seeks to understand the nature and implications of the changes unleashed by the advent of the digital economy. As the digital economy becomes a larger and more important structural feature of national economies, the comparative and international analyses framed here will become essential to understand the political, economic, and regulatory conflicts that inevitably accompany significant technological transformations.

OPENING REMARKS:

David Beier, Chief Domestic Policy Advisor, Office of the Vice President

David Beier set out the central issues facing the United States government in the age of the digital economy. They include:

The architecture of the Internet and related network technologies;

The regulation of informational content on the Internet;

The framework of legal rules needed to create and buttress new and ill-defined markets in cyberspace; and

Governmental policy with respect to the profound and increasingly important and visible social issues raised by the growing importance and ubiquity of digital communications.

The fundamental issue facing the U.S. regarding the architecture of e-commerce and the digital economy is availability of and access to broadband network connections. The primary tools in addressing these problems are a vigorous and effective competition policy, technological neutrality, and regulatory transparency. Each of these features of regulatory policy is designed 1) to remove government from the role of interfering with market processes unless they are clearly malfunctioning, and 2) to prevent the use of government by private interests to entrench their market positions through the creation of favorable laws. The goal is to make broadband connections available to as many people at the lowest cost as possible.

Recently, government has shown increasing willingness to regulate the content of material on the Internet. Of course, any such regulation will have an impact on the development of e-commerce and the government’s role in it. The tension remains between political pressures for content regulation and First Amendment principles that have already led the United States Supreme Court to strike down content regulations on Internet material as unconstitutional.

Some of the greatest and most far reaching policy challenges posed by the rise of the Internet and e-commerce involve the reform and creation of legal rules to govern and regulate market transactions in cyberspace. Jurisdictional rules defining the applicability of national and local laws and the power of courts to apply these bodies of law in specific cases may present some of the most novel and difficult questions of law, policy, and sovereignty in over a century. These jurisdictional issues will become increasingly urgent—and difficult—as e-commerce undermines established rules defining the geographic and substantive limits on governmental authority to tax and regulate in increasingly global markets. The need for new legal rules extends to substantive areas of law such as consumer protection, privacy, the legal definition of goods and services, taxation, and intellectual property. Anglo-American common law jurisprudence and legal institutions are not sufficient to address these myriad problems. A new paradigm of international law may be required by the nature of the problems. What that paradigm might look like we cannot yet envision.

Although much has been made of the current dispute between the European Union and the United States over the issue of online privacy protection, these negotiations may provide a model for the resolution of international disputes over e-commerce and its regulation. The U.S. has, in fact, undertaken to protect privacy under American law and this satisfies the E.U.’s adequacy requirement under its Privacy Directive. The relationship between the EU and U.S. remains cooperative and takes the form of a common dialogue on areas of common interest.

The greatest danger we face in the emerging digital age is the creation and deepening of a "digital divide" between rich and poor. E-rate, the FCC’s program to wire all schools in the U.S. for Internet services, is the first move to address this vitally important policy area. The same problem becomes international in scope as poor and rural nations are threatened with isolation from the digital economy, while the technology that promises to eliminate distance reinforces that isolation more harshly than before. The U.S. has been in discussion with the World Bank and other international organizations to formulate responses to this problem. Efforts must begin with the regulatory reform of telecommunications around the world to ensure greater efficiency and transparency. This alone will help equalize access to Internet services by driving down the prices charged to the end user.

However, government regulation should proceed with the greatest caution. Vice President Al Gore has said, "First hardware, then software, and last policy." This implies that regulation and policy should respond to developments in the digital economy. Indeed, government is far behind business in knowledge and understanding of the new digital technologies and markets. If government is to be effective, it will have to listen to and learn from business rather than take precipitous action. Policy concerning the digital economy is not simply a matter of government programs, but of an ongoing discussion with business about what policies and rules are necessary or desirable. As e-commerce activities grow as a proportion of the national GDP, the shortage of skilled workers grows more acute. Policy discussions may be expanded to include both business and labor in the formulation of (extra-legal) best practice codes to address such issues as skill formation, worker training, and continual education. These interests should also be included in discussions about education reform to foster the creation of learning centers that ensure computer access in communities, and teacher training to improve computer education and the use of digital technology in the classroom and in individualized instruction.

Andrew Pincus, General Counsel, U.S. Department of Commerce

Andrew Pincus argued that the "market for voters" will shape policy resolutions relating to e-commerce. The development of the Internet and e-commerce departs from the usual pattern of economic change and policy response. Typically, an economic phenomenon develops slowly without attracting much public or governmental attention. Consequently, there are few calls for legislation and regulation until the phenomenon has matured and its implications can be more clearly discerned. In contrast, the Internet and e-commerce have grown with extraordinary speed and have demonstrated a potentially pervasive and substantial impact on economic and social relations. Because of its visibility and the rapidity of the change, the Internet and e-commerce have quickly generated calls for regulation by social, economic, and political interests that perceive themselves as threatened.

The danger at this point is not in moving to regulate too slowly, but in moving too quickly without adequate time to deliberate and consider the likely problems and implications of the emergence of e-commerce. Moreover, because the Internet and e-commerce are inherently global and international phenomena, the regulatory and governance response must also be international in scope and character. The danger is that in times of rapid change and consequent confusion and uncertainty, governments and policymakers will fall back on old paradigms of governance, legislation, and regulation to address new problems requiring novel policy responses and legal mechanisms. The temptation is that national governments will seek to create additional international institutions to address the problems of e-commerce. This would represent the old post-war paradigm of bureaucratic responses to governance and regulatory problems. The challenge now is to address the problems of the digital economy without stunting or misdirecting its development. Accomplishing both goals simultaneously will require government to consult and learn from business before imposing policy choices on a vibrant but still embryonic technology.

There are multiple forms of regulation. For example, policy makers can impose regulatory command and control rules and standards or they can facilitate self-regulation. The debate between the EU and U.S. over privacy protection reflects the tendency to rely on old forms of regulation in the face of rapid change and the resilience of regulatory traditions. The E.U.’s Privacy Directive reflects a tradition of more extensive state regulation of the economy than that of the U.S. However, Europe is also confronting regulatory and legal issues in e-commerce that the U.S., with its lead in the development of these technologies and markets, has already faced. Although the initial European response has been more regulatory, the implementation of the Directive’s provisions has exposed both the great difficulty in directly regulating e-commerce and the benefits of U.S.-style self-regulation.

Beyond the form of regulation, the substance of legal rules is becoming a contentious area of policy. Content regulation remains one of the most contentious areas of all. Different national social traditions and legal cultures produce variations in the extent and subject matter of content regulation. American law places strict limitations on the regulation of the content of speech, and this tradition has manifested itself in resistance to imposing technologies and liability rules on Internet service providers that regulate the content of online speech—even indirectly. At the international level, this resistance to content regulation has led the U.S. to object to extra-territorial regulation of content under the laws of other countries. The focus in the U.S. has therefore been on technical fixes in the form of blocking programs that screen out some forms of online content. The question remains whether these programs will be distributed or put in place at the ISP or user level.

ANALYTIC OVERVIEWS:

J. Bradford De Long, Professor, Department of Economics, University of California, Berkeley; former Deputy Assistant Secretary for Economic Policy, U.S. Department of the Treasury⁴

J. Bradford DeLong posed seven questions he considers essential to any analytic overview of the emerging digital economy. Some of these questions do not presently have any clear answers—an indication of the uncertain and confused state of our knowledge at this point—but together they do convey how the digital economy is different, in some ways startlingly so, from the market economy of orthodox economics.

The first question, and one at the thematic center of this conference, is whether the economies of scale unleashed by the interconnection and interoperability of digital networks will compel convergence towards a single, uniform framework of governance and regulation and substantially curtail institutional variation and experimentation. DeLong argues that this enforced convergence is in fact likely. This is paradoxical because the high degree of uncertainty created by dramatic technological and economic change typically generates wide-ranging variation and experimentation in institutional frameworks, forms, and practices in a search for functional adaptation. But enormous complications characterize this technological revolution. Massive economies of scale created by the instantaneous connection of points around the world erode the efficacy of the nation-state through their near-total disregard of the artificial political and jurisdictional boundaries.

The last period of such dramatic and fundamental technological and economic change occurred a century ago during America's Gilded Age. Then, the spread of truly low-cost railroad transport combined with the massive economies of scale of the second industrial revolution reshaped America as an economy of industrial oligopolies and a society of bosses, workers, unions, and regulatory agencies like the FTC and the ICC. Instead of fruitful variation in corporate governance and organization, a regulatory and organizational race to the bottom drove corporations to incorporate in New Jersey and then Delaware, which offered unique advantages to managers interested in entrenching themselves. Instead of fruitful variation in consumer regulation, regulatory politics degenerated into a process of competitive rent seeking at the state and federal levels. These were hardly the social and political outcomes anticipated as the new productive technologies first came on the scene.

Today, economies of interoperability and interconnection will not only greatly limit the range for variation and experimentation, but also compel the creation of a comprehensive and global legal and regulatory framework at once with little idea in advance of how to do it right. Further, this governance and regulatory structure will likely be subject to powerful path dependency effects allowing little latitude for change once it has been put in place.

The second question asks why fashioning governance and regulatory structures for the digital economy is so different and difficult. Those skeptical of the entire notion of the "e-conomy" would argue that several enormous waves of technological revolution have swept over the industrialized countries in this century, e.g., electrification or the mass proliferation of the automobile, and ask: what makes digital technology any different? In short, why is it harder to regulate e-commerce? The difference is that technologies such as automobiles, or electric motors, or even textile mills could be integrated into the economy within the existing framework of laws and regulatory institutions. In contrast, the digital economy is—as Stephen Cohen and John Zysman like to say—analogous to the enclosure of the common lands in early modern Britain that paved the way for the economic agricultural revolution that paved the way for the British industrial revolution. The new economic order required new, post-medieval, definitions of private property in land and new structures of control and appropriability to create the incentive structures necessary for rapid agricultural improvement. The process was brutal and wrenching. There were big winners--the rural rich with parliamentary influence--and big losers--the rural poor relying on traditional common rights for survival. Today we are facing a similar problem of fashioning fundamentally new structures of legal rights of control, appropriability, and use that together comprise the rights of property.

This leads to the third question: What should this new legal and regulatory framework be? The new digital "commodities" being produced and sold do not look like the standard goods or services of economic theory. Standard goods are "rival," "excludable," and "transparent." ⁵

A good is "rival" if its use by one party precludes its use by another. A given use thus diminishes the consumption opportunities of others. From the standpoint of an efficient social-allocation-and-distribution system, the user of a rival good should pay the full reproduction cost of what he uses. The use is imposing a cost (the diminution of consumption opportunities) of others. The first principle of a functional economic incentive system is that individuals should bear the full social costs of their actions.

A good is "excludable" if it is easy to control who gets to do what with a good. In such situations, it makes sense to push control decisions away from the regulatory center out to decentralized "owners," who have a better chance of figuring out what the best use of the good is. Decentralization—when attainable—maximizes the chance of allocating decision making power in the hands of those possessing the information needed to make an informed decision. Further, decentralization is nearly costless when goods are excludable: the owner has the right incentives to monitor and assign rights of use.

Finally, a good is "transparent" if a buyer knows what is being bought up front, i.e., the operation and utility is understood. This makes comparison-shopping easy and straightforward. It also limits the market power of sellers: one-shot, separate transactions mean that each seller has to be careful not to give past customers an incentive to buy from someone else in the future. But informational goods such as software and data are almost inherently non-transparent. They are goods whose operation and utility are for the most part unknown to the buyer at the time of sale. If this information was known, the customer would already possess the value of the good and decline to pay for it. In markets for non-transparent goods what is really being sold is a relationship and an upgrade path. Value is assessed by the likelihood of a producer’s ability to retain good programmers so that the consumer is reasonably assured that there will be a good upgrade of the product in five years. The non-transparency of goods reinforces the lock-in effects of technology and the massive market power of sellers over near-captive customers based on early promises and the high transition costs of changing software and purchasing another non-transparent good. These lock-in effects and market-power relations are becoming an important feature of the digital economy.

When markets are optimal, prices equal the full reproduction costs of goods, and control over goods is decentralized to encourage repeated, arms-length transactions based on the best available information and comparison shopping. This is a model of Adam Smith’s ideal market as a powerful and effective incentive structure. Such markets require rivalry, excludability, and transparency of goods. But, as indicated above, goods and services in the digital economy typically are not rival, excludable, or transparent. EMusic's store of music tracks is not diminished at all when one downloads a track. They are barely excludable; only with great difficulty can one restrict distribution of costlessly reproducible goods to those and only those with valid licenses. And digital goods are not transparent: a consumer does not know how good a piece of software or database is before purchase and how good its successor versions will be in the future. In the absence of rivalry, excludability, and transparency, policy makers will not be able to replicate the ideal market of neo-classical economics through the design of a legal and regulatory framework. In DeLong’s apt words, "trying to replicate Adam Smith's ideal might well generate something we don't like--a form of carpal tunnel syndrome of the Invisible Hand." The digital economy is indeed new, and it will require new conceptions of policy and new legal and regulatory mechanisms to keep it functioning.

The fourth question—and perhaps the most important for this conference—is whether organizations and persons are now achieving greater mobility and, if so, whether this will substantially delimit the institutional and regulatory options open to policy makers. If this turns out to be the case, nation-states unwilling or unable to conform to the dominant legal, institutional, and market arrangements defining a global digital economy may find that they have placed the economic health of their e-conomy sectors at substantial risk. A subordinate question arises: what will be the dominant form of political and economic organization in the coming era? The path may constitute a global race to the bottom, some coordinated and deliberate attempts to shape the structure and operation of the digital economy, or some combination of the two.

The fifth question follows from the fourth: how can we ensure that the policies pursued by nation-states in fostering and adjusting to the digital economy will produce positive-sum games, rather than the zero or negative-sum games that are all too common in the world of international affairs? Neither of these questions points to clear answers at this early stage in the development of the global and digital economies. Yet we had better keep them in mind as we face the inevitable challenges and strains of political economic change.

Peter Harter, Vice President, Global Public Policy and Standards, EMusic; former Global Public Policy Counsel, Netscape Communications

Peter Harter began by noting the ambiguous character of e-commerce as a social and cultural phenomenon. Using online trading as an example, he noted that the same class of online economic transactions sustains diametrically opposed images of e-commerce. Charles Schwab’s advertisements emphasize consumer education, advice, and service. They even recommend that customers visit the SEC’s website to learn more about investor self-protection. Ameritrade’s ads, in contrast, do not recognize the need for advice, service, or protection. Rather, the image created is one of unfettered individuality and autonomy. Each image favors the type of business promulgating it and its source of revenues. In short, our understanding of e-commerce is constructed to benefit different economic interests.

Another ambiguity is the effect of disintermediation made possible by the Internet and e-commerce. Disintermediation is typically thought to lower prices by removing the costs imposed by intermediating firms and institutions between the manufacturer and consumer. However, the added cost of intermediated relationships also reflects the regulatory burdens often placed on intermediaries in order to protect consumer interests. Disintermediation does indeed remove these burdens and costs but effectively shifts them back onto the consumer. Discussions of the regulation of e-commerce typically ignore this shift and thus present an excessively positive view of the benefits to the consumer. Such images, along with those of the consumer as a liberated and autonomous individual, help foster the myth that digital markets are self-regulating and that the government is a foreign and undesirable interloper in the digital economy. And a myth it is.

Since its inception, the Internet has always been regulated and intertwined with government. U.S. government defense policy developed the ARPAnet which led to the Internet. NSCA created the graphical interface browser. The Web was developed by CERN, a publicly supported European physics research institute. Hence, the digital economy is built upon a foundation comprised entirely of public goods and then left to private industry for commercial exploitation. Intellectual property has become increasingly important in the digital economy yet is entirely dependent on the state and legal frameworks for its existence. Without the enforcement of legal and regulatory rules by the state and international bodies property rights would remain too ill-defined and insecure to encourage innovation and commercial development. In sum, substantial governmental subsidies, regulation, and public institutions to enforce legal rules and rights were essential to the rapid growth of the digital economy and remain so today.

As the digital economy and e-commerce begin to mature, new roles for public policy have begun to emerge. The expense of creating websites reflects a shortage of skilled employees in the American workforce, despite market demand, that should be the concern of policy initiatives to ensure an adequate labor supply. Lack of confidence in the protection of privacy and security reduces participation in e-commerce and suggests that additional legal and regulatory protections may be desirable to foster the growth of the digital economy and broad participation within it. Competition policy and antitrust enforcement remain vital to the maintenance of a vibrant digital economy. The arrogance of a Microsoft or an Intel not only damages the competitive marketplace, but ultimately themselves as well.

Political parties and coalitions are split and in flux with respect to e-commerce regulation and policy. These splits are apparent on issues such as content regulation and intellectual property. Even more divisive is a new generation of policy issues, including the need to improve worker education and skills, computer literacy (in addition to the traditional sort), and access to computers and the Internet. These new issues indicate the economic centrality of e-commerce and the Internet, and thus the policy debate surrounding them is likely to intensify. The resolution of these issues is far from apparent. What remains certain is that rules are essential to the digital economy and that government in some capacity is at the core of rule making.

SESSION I: DIFFERENCES IN TECHNOLOGY AND USE

This session explores whether there are significant emerging differences in digital networks among OECD countries, how such differences might generate different regional and national patterns of technology development and use, and whether those differences have competitive implications for trade relations between the U.S. and other parts of the world. It examines emerging international and cross-national differences in enabling technologies, infrastructure provision and e-commerce applications. The panelists also explore the potential economic implications flowing from these differences in terms of market structure, business models, competitiveness, and innovation.

Co-Chairs: Michael Borrus, Adjunct Professor and Co-Director, BRIE, University of California, Berkeley; Managing Director, Petkevich and Partners

Stephen Cohen, Professor of City and Regional Planning and Co-Director, BRIE, University of California, Berkeley

Martin Kenney, Professor of Human and Community Development, University of California, Davis; Senior Project Director, E-conomy™ Project, BRIE

PANEL 1: DEVELOPMENTS IN ENABLING NETWORK TECHNOLOGIES AND INFRASTRUCTURE

This panel looks at the differences in digital networks among OECD countries and how they might generate different regional and national patterns of use and market structures. In particular, the panel will examine differences in the development of wireless networks, charges for access and services, the deployment of network technologies relating to bandwidth as well as the horizontal and vertical segmentation of networks and markets (e.g., the separation of the pure "pipe" function from user services, or different bundles of services provided over differentiated networks). The panel will then consider the possible consequences of national differences with respect to such issues as which actors and interests will drive innovation and change, differences in business models, and differences in uses and usage patterns.

Introduction: Michael Borrus

Paraphrasing John Doerr, Michael Borrus suggested that if anything the Internet is underhyped. Its extraordinary power derives from its elemental capacity to facilitate and reduce the costs of communication. Given that communication underlies virtually all social, economic, and political activity, the Internet has the capacity to fundamentally transform each of these areas of life. Yet however dominant it may be, the Silicon Valley view of e-commerce and the digital economy as a uniform, global phenomenon defined by the U.S. (and Northern California in particular) and autonomous from policy and government regulation may also be wrong. At issue is whether there will be one digital economy or many. The first place to look in addressing this question is the enabling technologies that constitute the communications backbone of the Internet and digital networks. First we must examine who provides this technology and related services, cross-national differences in technological capacities, and variations in patterns of telecommunications and network usage. Second, we must determine whether any of these cross-national variations gives rise to different comparative advantages in economic competition and what developmental outcomes have or may issue from these differences.

Glenn Woroch, Visiting Professor of Economics and Executive Director, Consortium for Research on Telecommunications Policy, Haas School of Business, University of California, Berkeley

Glenn Woroch pointed out that the essential characteristic of e-commerce is its reliance on telecommunications networks. The telephone system is a switched network of dedicated (largely) copper lines and wireless relay stations designed for the transmission of voice signals. The cable system is a network of coaxial cables designed for video transmission. None of these networks were designed or are optimized for interconnection or Internet traffic. Not even the PC is optimized for the Internet.

Thus, we are now in a technologically unsettled age in which the leading technologies and applications are not yet well matched to a network infrastructure. This has been one reason why mergers and joint ventures in the telecommunications and digital technology sectors have been increasingly important to the development of networks. These deals seek to combine technologies and use the Internet as a mechanism to force the integration and convergence of technologies within global networks. These mergers and joint ventures will affect the outcome of network development just as legacy effects of prior telecommunications systems will.

Governmental interference in telecommunications has distorted demand signals and market incentives that will continue to have an impact on the development of the communications infrastructure and the services provided over it. Cross-national differences in pricing structures imposed by governments drive differences in both investment patterns in the telecommunications sector and the demand structure within communications systems. Flat-rate pricing in the U.S. has produced greater demand for communications services than in Europe or Asia. The use-based pricing common to Europe and Asia, and the absence of flat rate pricing, can be viewed as having created an artificially low level of demand for such services, and slowing the global diffusion of digital network technology and Internet-driven e-commerce.

Regulation also shapes the development of telecommunications networks. In the U.S., a complex patchwork of regulators and bodies of regulation create inconsistencies and ambiguities that distort market processes. Wire telephone, cable, and wireless communications systems are not regulated under one coherent body of regulation and their integration has therefore been hampered and distorted by methods that seek to avoid regulatory bottlenecks and blockages. Wireless networks are rich in possibilities precisely because they are less locked into regulatory and hardware legacies than copper wire and cable networks and less burdened by regulatory bottlenecks in the formation of comprehensive networks. Legacy systems and inherited bodies of regulation will continue to have an effect on the development and availability of broadband capacity, digital line upgrades, interconnection among different networks and network technologies, and telecommunications market structures.

Erkki Ormala, Director, Technology Policy, Nokia Corporation

Erkki Ormala focused on two main issues: an overview and the driving forces of the Finnish Information Society, and the future social and economic opportunities created by the widespread introduction of wireless communications technology. Finland has the highest penetration of mobile phones in the world. A new generation of users has widely adopted wireless telephony as their preferred mode of communication. For example, Finnish teenagers use digital Short Message Services (SMS) via their mobile phones as their main means of communication. Finland also has the highest number of Internet hosts per capita in the world, exceeding the figures for the next most highly rank countries, the U.S., Norway, Iceland and Sweden. Likewise, electronic banking in Finland is far more prevalent and advanced than in other advanced industrialized countries, with more electronic banking transactions per capita than in any other country. Transactions through the Internet account for 49% of stock exchange transactions, 26% of bill payments, and approximately half of the population is connected to Internet banking services. Since 1992, it has been possible to pay bills in Finland through GSM phones, and SMS statements became available, and immediately popular, in 1997. The use of electronic payment mechanisms has become pervasive and has transformed commerce and the normal course and mode of commercial transactions of all types. Finland has the highest proportion of card to cash payments and lowest amount of bank notes as a proportion of GDP. Accordingly, the Finnish people are already economically, technologically, and culturally prepared for electronic money. In contrast, the United States appears wedded to its existing—and less efficient—credit card payment system, and other industrialized countries have resisted even the widespread use of credit cards.

A number of factors have driven this prodigious development of cellular and digital technology. First, Finns have traditionally emphasized the development of technology as a matter of economic policy and corporate strategy, and early on saw vast opportunities in the development of telecommunications markets and technologies. This strategic focus on technology manifested itself in an early commitment to digital applications, communications and other services. Just as important, Finland has maintained an open and competitive telecommunications market since the 1980s. The wireless market has been open and competitive since the 1990s. Competition and innovation was driven further by low telecommunications tariffs. A strong, sophisticated, and competitive system of service providers, network operators, and equipment manufacturers grew and prospered in this environment.

Public policy and the commitment of the public sector played—and continue to play—a critical role in the development and penetration of digital technologies in Finnish society. The role of public education has been central to Finnish success in telecommunications and digital technologies. All schools will have Internet connections by 2000 and all the pupils will learn the basic skills for Internet usage. Further, the Finnish government established a program to make adults computer literate. The government has instituted an Internet "driver’s license" certification procedure to ensure that adults are capable of using the Internet. The government has also established virtual universities and in public libraries anybody can have free Internet access for one hour per day, to encourage people to utilize the new communications technologies. Likewise, all communication with authorities will be possible through the Internet by 2000. In April 1999, Finland issued some of the first Third Generation wireless licenses in the world. In all, there exists a strong public-private partnership committed to competition and innovation facilitating regulation as well as governmental strategies to develop and promote the information society.

A wireless information society presents extraordinary opportunities to all who can and will seize them. New wireless multimedia terminals will consolidate and integrate communications media by offering data and phone services, as well as access to the Internet. There are three powerful drivers of this integrative trend. First is the development of the Internet itself. The Internet has expanded and proliferated so swiftly and dramatically that it is now nearly ubiquitous in its penetration of Finnish society, and the number of Internet connections has exploded. Wireless technology and applications will further advance this trend. Nokia has adopted a strategy that incorporates wireless communications as an important part of the next generation of Internet technologies and applications and an important driver of increased Internet and telecommunications usage.

The second driver behind the development of a wireless information society not only in Finland but globally is digital convergence. As devices become cheaper, what were once separate devices will be combined into new multipurpose digital mechanisms. Devices and applications will be personal digital tools using the same terminal and combining multiple telecommunications channels through the Internet for a variety of different, and increasingly customized, purposes.

The third driver is the development of vastly increased wireless transmission capacity. Within two years, the wireless connection will provide access to the Internet with the same data transmission speed that is now provided by wired connections. This will dramatically improve the utility and versatility of wireless connections and applications and create entirely new markets and modes of competition in digital communications. ⁶
^{As these new technologies and applications

become available, people will need to learn new ways of exploiting them to perform old

tasks. For example, the new mobile phone technology would allow the user to use his phone

as a credit card, electronic cash, a debit card, home and office keys, identity card,

driver’s license, and/or passport. WAP, the wireless application protocol, enables

the expansive development of wireless electronic commerce. WAP opens up the Internet to

wireless communications (and vice versa) and a wide range of data and voice services can

be offered to mobile consumers. WAP service via Nokia's mobile phone on Online Travel

ticketing allows a travel agent to notify a customer if a flight is delayed and, if

needed, permits the customer to make fast and simple reservation changes through the

ticketing service via phone. This is only the beginning of the sort of innovative and

increasingly pervasive digital applications that will soon be developed and

marketed—if we create and maintain the proper policy and market conditions.}
^{Jiro Kokuryo, Associate

Professor and Head of the Electronic Commerce Research Project, Graduate School of

Business Administration, Keio University, Japan

Jiro Kokuryo addressed the potential of the Japanese economy to

embrace and adapt to the digital economy. In opposition to those who would write off the

Japanese economy as hopelessly moribund and incapable of the adjustments necessary to take

advantage of the sweeping technological and economic changes now taking place, Kokuryo

believes that Japan will adapt and prosper in the coming age. In making this argument, he

sought to dispel a set of common myths about the Japanese failure to play a leading role

in the development and application of network technologies.

Although it is true that the Japanese economy faces considerable

problems in adapting to the new network technologies, this does not lead to a foregone

conclusion of failure. Japanese industry has had considerable difficulty in adapting to

the open architecture of digital networks and the flexibility of Silicon Valley business

models. These are organizational and ultimately cultural problems. Hence, the

country’s primary challenges are not technological in nature. There is a

path-dependent element to this situation. Japan has remained stuck in its established form

of industrial organization. As the Japanese mode of socio-economic organization has been

enormously successful and the principle source of Japan’s economic strength, managers

and policy makers have been loath to give it up. That industrial model has been based on

an organizational structure favoring closely bound and interdependent companies and

company groups (keiretsu) with highly integrated capabilities of designing and

manufacturing products. However, both industry and government are now acknowledging the

different character of open network architectures, how they are used in e-commerce

applications, and are beginning to take steps to catch up to the United States.

In addition, Japan’s economic crisis may not be as insoluble as

thought. The administration of Prime Minister Obuchi is proving to be far more effective

in dealing with Japan’s economic problems than many expected. This presents a

potential opportunity for the country to escape the cycle of stagnation it has been in for

nearly a decade and begin again to focus policy and financial resources on adaptation,

innovation, and competition.

Nor are Japanese telecommunications trapped in obsolete systems and

practices by the monopoly held by NTT. NTT has recently announced that it will institute

flat rate pricing along the lines of the U.S. telecommunications market. This move should

boost demand for advanced telecommunications services including the Internet and other

forms of digital networks. Further, NTT is planning to make use of the Japanese

system’s capacity for large scale infrastructure projects to develop a comprehensive

fiber optic network to supply broadband access. This may create an enormous supply of

telecommunications capacity to drive the development of more sophisticated network

communications and services.

Japanese society and consumer demands may provide some avenues for

new technological and market developments in the digital economy. The cash orientation of

Japanese consumer culture and the corresponding low usage of credit cards do create an

obstacle to the development of e-commerce. Yet, this may make the Japanese more amenable

to the development and use of other forms of payment such as digital cash and smart cards.

In this respect, Japan may be free of the United States’ path dependency on credit

cards and its consequent incapacity to embrace alternative payment systems. Japanese

society has always had great enthusiasm for digital entertainment, from games to

animation. This existing set of preferences provides built-in consumer demand for digital

services and may drive new developments in digital products.

Finally, the notion of a Japanese "keyboard allergy"

because of the late introduction of keyboards that could handle Japanese characters is

largely a myth. Keyboard processing of Japanese written characters has been commonly

available only since 1983. But at this point an entire generation has grown up with them

and even the older generations are catching up in their use.

Axel Zerdick,

Professor of Economics and Mass Communication, Freie Universität Berlin

Axel Zerdick delivered a response especially critical

of the idea of American dominance and convergence in e-commerce policy and business

models. According to him, just as English is a second language around the world, the U.S.

model of the digital economy is only a secondary reference in other countries. Their

primary reference remains their inherited models of political economic organization and

practice.

The economic structures of Europe, and of Germany in particular, may

provide certain advantages to European competitors in e-commerce as they emerge. The

European telecommunications infrastructure is in some ways superior to that in the United

States. Early and systematic development of advanced infrastructure dates from the

mid-1970s through the mid-1980s. Europe has superior wireless phone technology and

systems, and it has played the dominant role in setting technical standards for wireless

communications. Likewise, Europe has better traffic messaging and telephone technology

that may advantage European firms and consumers as network communications develop.

Europe may also create a regulatory structure more coherent and

efficient than the complex, detailed, litigious, and fragmented regulatory system

governing telecommunications in the United States. This is in part a product of

Europe’s ability to learn from American mistakes in the process of deregulation and

part a product of the Continental regulatory tradition. This will help avoid the wasteful

and inefficient petty regulatory conflicts common to the American system. Rather than

embrace overly doctrinaire antitrust and competition policies, a European regulatory

regime may foster the sorts of co-opetition and coexistence that may fuel the digital

economy of the future as vertically integrated legacy systems are replaced by business and

communications webs.

Commercial practices and cultural preferences in Europe differ from

those in the United States and this may ultimately benefit European firms in competition

with American firms. The differences in preferences and the greater risk aversion of

Europeans in social, political, and economic matters will tend to drive divergent

developments in the United States and Europe. Moreover, these differences in consumer

wants and behaviors may give European firms an edge in capturing these customers in the

digital marketplace.

Finally, although the United States has reached critical mass first

in establishing e-commerce, the population is critical of what infrastructure and services

are in place. They want better, easier services and it is not yet certain what firms will

develop them and where. The culture clashes that fuel rapid and dramatic change have been

nearly exhausted in the United States, but are only now beginning in Europe.

François Bar, Assistant

Professor, Department of Communication, Stanford University

François Bar explored the conceptualization, structure, and

function of the "electronic marketplace." He emphasized that in descriptions and

analyses of the digital economy and—to use a much-overused term—cyberspace, the

notion of "place" is far more important than typically realized. In the

environment of the digital economy and the networks and electronic marketplaces that

comprise it, place translates into the architecture of cyberspace. These architectures

determine who has access to digital networks, what roles they will play within them, what

activities they can engage in, and what functions network environments perform. Such

features are built directly into the software that defines the space of cyberspace. They

are not the products of negotiation within functional, let alone hyper-functional markets

in which end users bargain with or comparison shop among service providers. This is not to

say that markets are not important in the emerging digital economy, but only to point out

that some of its key technological features depart from the logic of market economics and

that these departures and their implications must be recognized.

The excessive emphasis on markets in the construction of the digital

economy has its source in two myths about the market in this new environment. First, there

is a widespread belief that dramatically more transparent and increasingly frictionless

markets have proliferated on the Internet. This contradicts the fundamental aim of

e-commerce strategy: to exploit the "stickiness" of digital markets and the

powerful tendency of consumers to visit the same sites repeatedly rather than use the

capacity of the Internet to comparison shop and discover new sources for the same goods

and services. Further, electronic markets are biased towards certain sites and proprietors

through the architecture of the digital networks themselves and the exercise of

proprietary control over these architectures. The very point of e-commerce is the

exploitation of these structural and behavioral biases. And these dynamics reflect market

failures, not a rebirth of the market in the digital image of Adam Smith’s ideal.

The second myth is that the Internet and e-commerce are effecting a

pervasive disintermediation of economic relations that drives down supply and consumer

costs and renders commerce ever more efficient. The reality is hardly so simple and clear.

The Internet and e-commerce certainly do drive disintermediation, but at the same time

they are fundamentally reforming and restructuring the value and supply chains by creating

new intermediaries as well. The identity and function of these new intermediaries and the

configuration of the value chains in which they position themselves are significantly

influenced by network architectures that determine market structures and market access.

Barriers to market entry vary according to who controls the network architectures on which

emerging electronic markets depend and the relationship of a prospective market entrant to

these controlling parties.

These myths contribute to the questionable conclusion that the new

digital markets will converge globally on a uniform model approximating the ideal markets

of neo-classical economics and, more importantly, the American institutional pattern.

However, cross-national and regional variations in market structures are likely to be

quite pronounced and resilient. In France, for example, the state is likely to continue

using its capacity to influence behavior in the telecommunications and financial sectors

to build relationships and networks among Francetelecom, banks, and other entities to

provide new services unlikely to emerge under different (i.e., free market)

institutional conditions. Differences in laws and regulations will also drive

differentiation in market structures and services. Strong legal protection of consumer

privacy interests in France and Europe as a whole structure e-commerce markets and

services and may shape the relations among national and regional markets. Finally, old

mental patterns that define much consumer behavior die hard. Consumer preferences carry

over from old markets and cultural norms and create variations in demand.

Under these circumstances, local firms may retain some commercial

advantages in tailoring markets and services to local consumers. Heterogeneity rather than

homogeneity may be the emergent trend in the global digital economy, setting the stage for

substantial policy issues with respect to interconnection, interoperability, and

regulatory authority and standards.

PANEL 2: E-COMMERCE APPLICATIONS IN SECTORAL

PERSPECTIVE

This panel looked beyond technology to developments

in sectors where digital technologies are being applied, to explore whether distinctive

trajectories of use and innovation are emerging. The key questions were whether different

applications of digital network technology are characteristic of specific sectors (e.g.,

financial services, retail, high tech, and small business) and whether these applications

vary cross-nationally.

Mark Kvamme, Chairman,

USWeb/CKS

Mark Kvamme provided a crash course in the role and significance of

media and media markets in the digital economy. Marketing has become a major industry

generating enormous revenues in the United States and worldwide. In the United States,

$400 billion was spent on marketing last year, with a worldwide total of $800 billion. The

growth of this spending reflects the increasing importance of branding in domestic and

global markets and the increasing returns to scale in digital markets for those firms that

successfully develop and exploit brand identities.

Media itself has been transformed by the development of network

technologies. In 1970 the "big three" broadcast television networks had a ninety

percent share of the audience. With the profusion of cable and satellite channels, that

share now has fallen to fifty percent. This unprecedented fragmentation of media forms and

channels has now reached a new level with the explosion of the Internet as a means of

communication. The Internet may be expected to follow, and indeed intensify, the pattern

of fragmentation followed by other mass media. The Internet will drive the development of

new modes, channels, and applications of digital network communication. New brands will

emerge in this environment and have been emerging very rapidly. At the same time, mass

markets may become increasingly concentrated, not less so. The average Internet user

visits five to seven web sites. As more consumer transactions are relocated to the

Internet, this tendency to rely on a relatively limited and fixed number of sites may

further concentrate consumer retail markets and will dramatically enhance the value and

global scope of branding.

The Internet is important for one fundamental reason: it is the

first medium that can perform and transform the entire product sale cycle from marketing

and advertising, to ordering and sale, to shipment, and finally to after-sale service

provision. Moreover, these functions become vastly less costly over the Internet. To

paraphrase Dell Computer founder Michael Dell, the Internet results in "zero variable

cost transactions, the only thing better would be mental telepathy."

We cannot yet see the limit to the potential of these new

technologies and their uses. The penetration and utilization of new network technologies

such as e-mail has been unprecedented. This year, ninety five percent of all messages sent

in the United States were sent by e-mail. Within twelve to eighteen months, wireless

gigabit technology will come into use, fostering another explosion of innovation and

growth. The growth in the user base has been similarly dramatic. Forty eight percent of

current Internet users came online in 1998. With growth figures like this, it would be

foolhardy to hazard predictions regarding the limits of network technologies or the

digital economy.

At the same time, such caution should also extend to predictions

that the American model of markets, business, and institutions will spread inexorably in

the wake of expanding digital networks. Regulatory and institutional barriers and

variations will continue to exist and have a significant impact on the development of

global networks and markets. Likewise, the digital divide among rich and poor countries

remains a disturbing feature of the emerging global order. North America, Europe, and

Japan (and parts of East Asia) dominate usage of digital networks and advanced information

technologies. Even as differences among networks and e-commerce markets emerge among these

developed countries and regions, the gap between them and the less developed countries

threatens to become a defining feature of the global economy.

Stuart Feldman,

Director, IBM Institute for Advanced Commerce7

Surveying the content of contemporary e-commerce,

Stuart Feldman noted that the common focus on retailing and business-to-consumer

e-commerce is misplaced. The value of business-to-business e-commerce is five to ten times

larger than business-to-consumer e-commerce. Further, most predictions indicate that this

ratio will continue to be lopsided for many years to come. The distinction between

business-to-business and business-to-consumer e-commerce is practically important to

business and policy makers. Though the most visible, flashy, and entertaining technologies

will be those used by consumer end-users, fundamental changes in information sharing,

transmission, management, and distribution are the province of business and will leave a

more profound and lasting stamp on the economy and society. Only later will these changes

spill over into the consumer realm. For example, streaming media will be used equally by

both businesses and consumers, but the increased bandwidth necessary to exploit its

potential will first become available in enterprise environments.

The general focus on business-to-consumer e-commerce

has also led to misconceptions regarding what is driving the explosion of network

technologies—including, but not limited to, the Internet. In particular, the widely

held belief that flat rate telephony pricing is the source of all growth of the Internet

in the U.S. is incorrect. Flat rate pricing has been a significant determinant of home

usage, but approximately two thirds of Internet access was and still is from enterprises (e.g.,

company, school, or government office). Such organizations have always paid time-based

charges and fully allocated costs for their data connections. Even under these conditions,

they have found that Internet connections are essential and cost-justified8.

Most discussion so far at this conference about

"infrastructure" has concentrated on delivery of bits (voice circuits, DSL,

coaxial cable, fiber-to-the-home, satellites, classic wireless, megabit and even gigabit

wireless). Of course, base communications technologies and "pipes" are

essential, but they form only the bottom of a stack of layers of infrastructure. In short,

one person’s application is another person’s platform. The implications of this

observation are substantial. We have learned in recent decades that software is actually

longer lasting than hardware and produces stronger path dependent or lock-in effects.

Personal computers that are just a few years old are running software that is, at its

core, ten to thirty years old. The following table9 describes some of the products and technologies and the

infrastructure layers in which they are situated:

^{Layer

Examples

Business

webs

Markets,

portals, communities

Supply chains

Shared

business processes and services

Complex

transactions, workflow, auctions, negotiations, information search,

libraries, payment, authentication, authorization, PKI, anonymizers,

trusted support

Applications

and their APIs

Productivity

applications, Enterprise Resource Planning, Commerce sites

Information

Management

XML

services and DTDs, search services, personal privacy management

Middleware

Database

management systems, transaction management systems, commerce platforms,

etc.

Information

Standards and protocols

HTML,

XML, EDI, MPEG-n, WAP

Addressing

and routing

IP,

Domains

Network

management

Control

interfaces

Data

protocols

TCP/IP,

ATM, SONET/SDH

Operating

Systems

Unix,

Windows NT

Hardware:

Data pipes

Servers

Storage

Mb/s

-> Gb/s -> Tb/s

MIPS->GIPS

TBs->PBs}

As an outcome of early experience and de facto agreements,

effective standards for the higher layers of the infrastructure and their interfaces

(e.g., information sharing, use of services, the structure of business webs) will be

determined over the next few years. The emerging dominant players in a particular field

will define the architecture and operational standards; the results are likely to be very

sticky and not easily subject to major change. Many standards will be embodied in

significant software products or components. Interfaces also will be defined as formal

pieces of software. Even more abstract concepts such as business processes and business

models may be encapsulated in workflow descriptions executed by programs and managed by

software engineering techniques.

National, regional, and continental differences will affect

the structure of networks, the architectural location and effects of technological

lock-ins, and the identity of those who will control them. The environment in the United

States can be characterized by advanced business experimentation, very widespread use of

ever-cheaper personal computers, the projected rapid arrival of affordable broadband

backbone and access, and continuing dependence on credit cards, checks, and EDI. We

therefore expect that critical decisions about advanced data and media streaming,

graphical and 3D use, credit card mechanisms, and many new business approaches will be

made in North America. European and Asian information and telecommunications environments

are characterized by greater use of wireless communications, EFT, smart cards, and mobile

and consumer devices. We therefore expect that many of the practical protocols and

business processes utilizing mobile and wireless network technologies will arise in the

countries and regions of Europe and Asia. Smart card applications for authentication and

personal data storage are also likely to be developed and embraced first in Europe.

In fact, the United States may be hobbling itself by

focusing on landline telecommunications systems and the adaptation of credit card payment

mechanisms at the expense of losing the leading edge in the development of wireless and

smart card technologies. Likewise, smart card and digital cash system introductions in the

United States have not been major successes due to the lock-in effects of existing and

extensive credit card payment systems. Moreover, the recent decisions on patenting of

business processes in the United States may also give a perverse advantage to countries

that do not follow this path. Refusal to grant intellectual property rights in such

fundamental ideas will subject businesses to greater competitive pressure by allowing them

to copy successful approaches and by forcing them to innovate through strategy,

technology, and organization.

Accordingly, the terms and dynamics of competition in the

digital economy are not fixed and predetermined, and they may not drive global convergence

in policies and market structures.

Niels Christian

Nielsen, Executive Vice President, Danish Technological Institute

Niels Christian Nielsen focused on the effects of digital

networks on small business in Europe, and Denmark in particular, and the role of small

business in the digital economy. Small firms are often lost in the hype and publicity

surrounding the giant market leaders such as AOL/Netscape, Microsoft, Amazon.com, and

E-bay. Yet in the United States and Europe small firms generate a large portion of the

innovation underpinning the growth of the digital economy. Nielsen argues that innovation

occurs where differences meet. Finding complementary relationships among organizational

capacities, business and production processes, and markets fuels the development of new

and more efficient markets, organizational frameworks, and services. A wealth of such

complementarities exists within the extraordinary diversity and number of small firms in

any country or region. Further, the greatest value created by the digital economy lies

where information and knowledge is shared within and among businesses. Small firms

connected by advanced digital network technologies thus promise to add an enormous amount

of value in the years to come.

Unknown to most, Denmark leads the world in per capita

business-to-business digital transactions. This rapid adoption and extensive utilization

of digital networks in an economy characterized by a predominance of small and medium

sized firms reflects long-standing and well-established business practices that favor the

cultivation of stable, cooperative, but flexible networks among firms. These networks have

long been a source of comparative advantage in the Danish economy. Through them, firms

seek joint solutions to technical and business problems. Networks work on the principle of

mutual interest and complementary relations among firms. Small firms benefit substantially

from coordination in the design and production of products, the management of resources,

and the organization of markets. These relations improve the quality of vertical and

sub-contractual relations while preserving the flexibility and efficiency of multi-firm

market structures.

These networks and complementary relationships have proven

especially useful in the e-commerce environment. For one, networks can more easily handle

the rapid and novel ways in which e-commerce reconstitutes the organization of the value

chain and the functions of the nodes contained within it. E-commerce blurs the boundaries

between business-to-business and business-to-consumer activities as it transforms how

supply, production, marketing, distribution, and service functions are conducted and

integrated. This process also blurs the boundaries between markets and the hierarchies of

the firm, and thus calls into question the definition of what a firm and a business is.

Firms will incorporate markets within themselves and the boundaries among firms will

become increasingly permeable. Networks of firms can accommodate this change and are

displaying these sorts of changes in economic organization.

In this era of fundamental economic change, small firms are

far better positioned than commonly thought to take advantage of the innovative forms of

reorganization made possible by network technologies. The death of small and medium sized

enterprises has been predicted for decades, yet they continue to thrive. However, the

ability of small firms to seize this historic opportunity depends on the preexisting

institutional and organizational structure of specific political economies. Denmark, for

example, has a long and firmly established tradition of small firm networks that enable

its economy to use digital networks in ways that exploit this structural advantage. An

economy like the United States, without this inherited network structure, would have great

difficulty in replicating the Danish variant of the digital economy. This points out both

the importance of small firms and the likelihood of national variations in the development

of the digital economy. Economic change will be inevitable and fundamental as digital

network technologies spread around the world. But the form this change will take and the

extent to which innovation is unleashed by it depends in large measure on the

institutional structures and political economic organization initially in place.

David Pecaut,

Senior Vice President, Boston Consulting Group

David Pecault identified and discussed several drivers of

cross-national differentiation in the digital economy. He argues that these factors are

enormously important in defining areas of potential conflict, complementarity, and

cooperation in the international economy as networks become ever more important in the

organization of the domestic and international economies. The first driver of

differentiation is different technical hardware, such as telecommunications systems and

ancillary technology. Legacy systems in each country will create different sets of

technical constraints and opportunities in the development of domestic digital networks.

Preexisting and new technical standards, established either through market or regulatory

processes, also will substantially shape the structure and evolution of domestic digital

economies and the interconnections among them.

Differences in consumer preferences and behavior will also

drive cross-national differentiation. These variations among consumer populations reflect

cultural differences as well as differences among markets and firms in different

countries. In particular, distinctions among financial markets and systems will drive

variation in the development of digital payment systems. Countries with stronger

traditions of retail catalogue shopping will likely witness an easier and swifter move of

retail commerce to the Internet. In the United States, the prevalence of credit cards will

powerfully influence online payment systems, not only because of the existing

infrastructure in place, but also because consumers are accustomed to and enjoy the

favorable features of the credit card system. They enjoy consumer protection under law and

receive financial "float" between the time of charge and payment. In Europe, the

absence of active equity markets means that banks will mediate changes in consumer credit

and capital markets rather than the new breed of online discount brokers increasingly

common in the United States. The degree to which entrepreneurs’ access to new and

cheaper funding will increase through European efforts to emulate American venture capital

markets (e.g., Germany’s Neue Markt), and the uses to which they will put it

will depend on preexisting institutional arrangements and consumption patterns.

Peoples’ attachment to their place of residence will

further drive (or maintain) cross-national and regional economic and institutional

differentiation, even in a digital age. Populations, like institutions, are

"sticky." They do not readily or easily move in response to change. Accordingly,

population movements will not drive economic convergence; rather, their absence will blunt

it. Similarly, human resource preferences will also increase economic divergence and

differentiation. Economies that depend on skilled workforces and those that depend on less

skilled but more flexible workforces will likely continue to rely on markets that make use

of these types of labor pools.

Dominant firms in domestic economies will also have far

more resilience than is often realized. Schwab, Dell, and other firms from the

pre-Internet world are leading in E-Commerce in their fields.

This is not to argue that the rise of the digital economy

and e-commerce will not have profound effects on markets and competition. E-commerce can

intensify scale effects and encourage increasing market concentration. Competition will be

especially fierce and decisively important within distinct layers of infrastructure. These

"layer players"will compete to dominate critical standards that effectively

govern digital communications and commerce. These players may themselves become extremely

powerful new intermediaries. Internet navigators, for example, have become intermediaries

in this respect and may themselves define the products and markets of the digital economy.

Despite the powerful market position of today’s navigators, many have sold their real

estate to the highest bidder rather than being objective guides to the best products and

services. This failure to exploit the market power and economic value of branding may open

opportunities for new competitive navigator services.10

Scaling and market concentration will vary tremendously

across sectors and market niches. Large numbers of firms will target small niche markets

and compete by using falling communication and information costs. However, these

businesses must be extremely attentive to their precise customer base and maintain ways of

communicating with it. In addition, what appears to characterize the economy today is

continuous change without even temporary equilibrium points. In contrast, when Japanese

lean production techniques destabilized world market for manufactured goods in the 1970s

and 1980s, imitation eventually normalized production processes. Today, we do not see any

normalization processes.11

Digital Economy or Digital Society? A

U.S.-European Conversation

Elliot Maxwell,

Special Advisor to the Secretary of Commerce for the Digital Economy, U.S. Department of

Commerce

Elliot Maxwell began this informal exchange of American and European

views on the digital economy and public policy by commending François Bar’s emphasis

on the idea of place. Maxwell, however, focused on cyberspace—the space in which

e-commerce takes place and digital markets emerge—as a place unto itself and a

territory shaped by public policy. The primary challenge today is to make cyberspace and

the Internet a space in which people feel safe and secure. Public policy must therefore

ensure that privacy and security are protected online and provide for adequate

authentication processes and consumer protection. These are necessary conditions for the

continued rapid expansion of the Internet and e-commerce.

As this new space extends beyond the established boundaries of

geographical and political space, the issues created by the rise of the digital economy

are inevitably global in scope. Such global issues will require global solutions, but what

constitutes a global solution in this era remains undefined. Notwithstanding the need for

interoperability of networks, we are unlikely to witness the emergence of a single set of

rules for electronic commerce or identical regulatory frameworks.

The dialogue between the United States and European Union over the

E.U.’s Privacy Directive may provide a model for international conflict resolution

and cooperation in the digital age. This dialogue has revealed a broad area of shared

principles on which to build common approaches to the governance and regulation of

networks and e-commerce. Officials must understand and work with these shared principles.

Countries will resist limitations on their regulatory sovereignty unless shared values, a

common vision of the future, and mutual trust makes this sacrifice of unilateral power

acceptable. An agreement to disagree without cutting or damaging cross-national and

cross-regional economic activity may provide the basis for managing conflict in the

future. Under these circumstances countries might be willing to acept differences in the

implementation of the common principles. Despite the necessity of governmental policies

and action on such issues as privacy and security, government must avoid precipitous

regulatory and policy initiatives. The government lags in understanding of the digital

economy, from the technologies that make it work and how they interoperate, to the new

organizational and economic dynamics that have been created in this new environment.

Likewise, there is no clear understanding of which levels of government should regulate

which aspects of the digital economy and how these levels will or should interact. In this

environment, with this rudimentary state of knowledge, premature action will likely be

wrong. On the other hand, patience may yield consensus regarding the ends and means of

regulations. As a benefit of waiting for such general agreement on policy, broad

acceptance of regulatory norms commands both greater legitimacy and increased compliance.

In order to foster greater consensus and to minimize

unintentional damage by policy and regulation, dialogue must be infused with an

understanding of how the technology is developing and its impact on social and economic

life. In short, we must know what we are trying to regulate before we attempt to do so.

That is precisely what remains uncertain at present and why caution continues to be called

for. One positive sign is that emergent problems in the digital economy and e-commerce

have been identified and brought to public attention. Difficult and subtle issues such as

the use of the Internet for de facto price collusion have been identified and aired

publicly. Even marginalized groups have been able to access the political process and make

their criticisms of e-commerce public. 12

Finally, the Internet and e-commerce have created

unprecedented challenges for economic development around the world. The divide between the

developed and less developed countries is growing and constitutes a global problem of the

first order. The first task for the developed nations of the world is to convince the less

developed countries that they will benefit from joining the digital economy. The less

developed countries must be made aware that it will be worth the investment in

infrastructure and human capital needed for this effort, and that the result will not be

digital exploitation.13 Obviously the industrialized democracies must be

willing to explore new ways of assisting less developed coountries in their efforts to

increase their participation.

Erika Mann, Member,

European Parliament, Member of the Committee on External Economic Relations and the

Committee on Economic, Monetary Affairs and Industrial Policy

Erika Mann, as the European half of the conversation, began her

response by noting that Elliot Maxwell’s statements underlie the views of both the

United States and the EU. Indeed, in this they point to the broad area of shared

principles referred to above. But this picture elides the conflicts between Europe and the

United States over such issues as privacy. The key for the moment is dialogue. As these

conflicts continue to exist, we need ongoing dialogues among high level contacts in

government and business. In the wake of Internet-driven re-engineering of the economy,

there is simply not enough knowledge and intellectual capacity in government to keep pace

with technological and economic developments.

The American and European approaches to policy and regulation with

respect to e-commerce reflect the different traditions and political agendas in the two

places. The European model is the product of the project of European integration into a

single internal market. The priority is on the harmonization and uniformity of rules, but

the regulatory mechanisms build on long-standing legal and policy traditions. Thus, the

political, institutional, and legal inheritance of Europe continues to influence current

policy and regulation regarding the digital economy.

In light of the conflict over privacy, many have framed the

relationship between the United States and the EU as one of competition. This is an

inaccurate view of the EU. Further, it represents an outdated view of politics, policy,

and social values as the product of undifferentiated aggregates in an age of increasing

autonomy. Accordingly, differences in regulation and governance cannot be justified as the

reflection of differences in culture and traditions as if these categories embrace entire

populations and confer instant legitimacy. Regulatory politics is just that: politics. And

we will have to find political ways of dealing with international conflicts over the

regulation of the digital economy and e-commerce. The results may be quite surprising. In

the EU, the Basques joined a political coalition that defeated a measure to regulate

content on the Internet. Though not especially liberal, the Basque leadership became

concerned about the threat to political content if content regulation was authorized by

law.

Further, in order to begin this political process of addressing the

questions of global governance and regulation attending the rise of the digital economy, a

U.S.-EU model of the digital economy cannot be developed through bilateral dialogue and

agreement and then imposed on the rest of the world. The construction of global governance

mechanisms for the digital economy and the networks that will drive it must incorporate

the rest of the world from the start. Therefore, the U.S.-EU dialogue can remain only

that. At most, it can temporarily address salient issues between the two regions. Global

solutions to global governance and regulatory issues will have to await a more

comprehensive forum for discussion and negotiation. What level of government should

address different problems created by the rise of the Internet and e-commerce cannot be

answered with any certainty, especially in a polity as complex and multi-layered as

Europe’s. This allocation of authority and responsibility will undoubtedly take

substantial negotiation within the EU and among the member states, and will be subject to

an extended process of trial and error.

The Internet and e-commerce represent a new form of globalization.

The Internet constitutes a layer of global activity and communication, but as a distinct

layer it leaves intact underlying national regulatory differences. This structure creates

considerable tensions between the old authorities and authoritative norms and the new and

far less fettered world of digital communication. There is little choice but to accept a

more open world of commerce and intercultural communication. The alternative is to

squander the potential benefits of this change on a losing battle.

Session II: International Interoperability and

Governance in the E-conomy

This session considered the most important legal and

regulatory issues raised by the emerging digital economy, areas of domestic and

international conflict over these legal issues, and how best to avoid the emergence of

rival national e-conomies with conflicting standards. Each national e-conomy must

establish rules to construct its digital marketplace, rules that involve issues like

intellectual property rights, protection of privacy and security, competition, and

taxation. At the same time, the multitude of national e-conomies must be interconnected,

whether through common harmonized rules, compatible standards, or some combination

thereof.

Peter Cowhey (Co-Chair),

Professor, Graduate School of International Relations and Pacific Studies, University of

California, San Diego; former Chief, International Bureau, FCC

Denis Gilhooly

(Co-Chair), Advisor for Telecommunications, World Bank; former Vice President for Business

Development, Teledesic

Panel 3: Governance Institutions and Venues for Dispute

Resolution

Management of cyberspace and the digital economy situated within it

may require innovative and cooperative efforts to create new governance institutions and

supranational and international venues for dispute resolution. The panelists discussed how

policy makers confront the legacy of established domestic institutions and international

bodies that were designed for a pre-digital era. To do so, they had to address the issue

of just how revolutionary the digital network revolution really is. On this question turns

the determination as to whether the digital economy requires new policies and

institutional arrangements that depart from those inherited from the post-World War II

era. The speakers then considered which institutional mechanisms will best avoid the

construction of rival national or regional e-conomies with conflicting standards.

Don Abelson, Assistant

United States Trade Representative for Industry & Communications, United States Trade

Representative (USTR)

Abelson focused on the dilemma of rulemaking and the challenge of

creating governance structures in the vibrant technological environment presented by

electronic commerce. In focusing on this challenge, Abelson also clarified what is meant

by the Administration's insistence on "letting the private sector do it." While

firms, through their activity in the market, establish business practices for electronic

commerce, it is government that still must create the framework of broad trade-related

rules that enable markets and firms to operate effectively. In the first instance,

government faces the task of searching for those mechanisms that enable it to establish a

minimalist regulatory framework for the new economy.

Electronic commerce presents issues of how to handle governance

structures not only in the U.S. but throughout the world. When considering issues related

to the governance of electronic markets, the Office of the United States Trade

Representative asks a fundamental question: is what already exists in law,

regulation, or industry practice sufficient to provide a stable and coherent framework for

e-commerce activity? Because the digital age is new and assumed to be positive, the

implication is that governance and regulatory structures developed prior to the digital

age are inadequate, obsolete, and thus require renovation. Abelson and his colleagues in

government question this logic. Adaptation and better enforcement of existing regulatory

structures or, alternatively, ensuring that a global perspective is built into new

initiatives, such as the Administration's 1997 Electronic Commerce Initiative, may suffice

to adequately address the emerging problems of the digital economy.

More important and urgent is the need to clarify the roles of both

the public and private sectors. Indeed, the private sector should lead wherever possible,

but businesses can not set tax and tariff policy. Only government can do this. Similarly,

the private sector does not establish intellectual property laws; governments set such

laws. Accordingly, there is a legitimate role for the private sector in establishing

protocols for e-commerce, but government retains a fundamental role in creating the legal

rules and institutional conditions essential to this activity.

Rather than create new supranational institutions, the Clinton

Administration has tried to work within existing institutions. The Administration is

aiming to make cyberspace duty-free through an initiative in the WTO which also aims to

establish that electronic commerce benefits from WTO principles of open nondiscriminatory

trade. This will be accomplished if the less developed countries are fully integrated into

the electronic commerce environment. It is important to shed the myth that less developed

countries are not interested in electronic commerce. Promoting the expansion of electronic

commerce among the LDCs through existing institutions is critical if they are to

participate in the mutual benefits of this new technology.

The Administration also relies upon bilateral agreements to lock-in

concepts that both government and the private sector can agree upon. Multilateral

agreements on governance structures and processes are also appropriate where there exists

broad consensus on common interests and the means to attain them. Again, the

Administration favors letting the private sector establish business and self-regulatory

practices, and then using these practices as the basis for designing appropriate public

governance structures and bodies of regulation. This division of labor between the private

and public sectors will avoid overreaching change in governance and regulatory

institutions and allow each to do what it does best.

Peter Cowhey,

Professor, Graduate School of International Relations and Pacific Studies, University of

California, San Diego; former Chief, International Bureau, Federal Communications

Commission

Peter Cowhey noted that there have been two great eras of economic

globalization: the British-dominated 19^th Century and the American-led

post-WWII era from 1945 to the 1970s. Both eras shared the characteristics of convertible

currencies, innovations in transportation and communications, and a dramatic rise in the

cross-national flow of goods. These characteristics are certainly present in the current

era as well. However, there are a number of significant differences between those prior

periods of globalization and the one in which we are now living. First, each epoch bore

the stamp of the institutions and policies of the dominant power. The classical liberalism

of the 19^th Century, in which the state was limited to protecting currency,

property rights, and national security, mirrored the political structure and policies of

the U.K. at that time. The post-WWII era was made in the image of the United States’

New Deal, including such basic tenets as the widespread acceptance of a social welfare

state, a government role in the management of the economy, and a proactive and catalytic

role for the state in integrating the world economy. The stagflation of the 1970s ended

the unquestioned dominance of the New Deal model of governance and policy. Yet the arrival

of Reagan and Thatcher did not end the role of the state or international institutions

such as the World Bank and the IMF that had developed during the post-war period. These

inherited institutions and modes of policymaking continue to shape both government policy

and the process of globalization itself.

The New Democrat and New Labour coalitions in the U.S. and U.K.

represent a hybrid between the modern activist state and the neo-liberalism of Reagan and

Thatcher. The Internet and e-commerce emerged in this hybrid environment. Indeed, the

Internet and digital economy look quintessentially American. The core technology was

developed and has diffused most rapidly in the U.S. The lead firms in e-commerce are

American. The lead governance functions, such as the granting of domain names, are

American or dominated by American interests. The Internet is by its very structure

culturally pluralistic and, in its structural openness, it represents the ultimate vehicle

for global economic liberalization, integration, and dynamism. For these very reasons, the

rise of the Internet and the digital economy threaten entrenched interests and arouse

deep-seated fears of loss of control over collective life and cultural identity.

In the United States, the policy response to the Internet and the

digital economy has been a classic instance of the New Democrat approach to governance and

regulation. First, the Clinton Administration has largely eschewed new regulatory controls

and taxes on e-commerce. Second, it has emphasized the role of intellectual property

rights and their enforcement as the optimal mode of ordering this new economic space.

Third, the Administration has endorsed a governance strategy for the digital economy that

combines globalization with privatization. In the absence of any significant defined

governmental agenda, the private sector gains in importance and power by default.

But the revolutionary implications of the Internet

and the digital economy now require the state to take on new roles and develop new

policies and governance institutions. The increasingly global character of the digital

economy has prompted advocacy of international governance bodies, the incorporation of

foreign interests in American dominated institutions, and the development of new

organizational forms for governance of the digital economy such as privatized or

quasi-private governance institutions.14 These attempts to create new governance institutions or extend the reach of old

ones will likely build on well-established principles and institutional models for the

integration of the world economy. These principles and institutions developed over the

post-war era to develop common standards and rules. National, regional, and international

institutions grew along with the size and complexity of the world economy. At the same

time, procedural safeguards increased to ensure accountability and matched the growing

power of these bodies.

The application of existing approaches to

international economic integration will be the next frontier in Internet governance and

regulation. Further, the process of international governance requires the interaction of

standards organizations, political institutions, and business organizations. Different

models of how these three types of institutions interrelate (e.g., liberal, corporatist,

and self-regulatory) will be central to the emergence of tensions and conflicts over

international governance and regulation of the digital economy. In fact, the United States

attempted to effectively impose its own institutional preferences for neo-liberal

minimalist regulation and self-regulation on the world by crafting the National

Information Infrastructure as an international agenda. The European governments and the EU

shrewdly countered this attempt and the lead held by the American private sector by

fashioning a new inter-governmental regulatory arrangement through the EU that is built on

more corporatist regulatory traditions.

These considerations pose a number of challenges for governance and

policymaking in the age of the Internet and e-commerce. First, the U.S. emphasis on

privatizing and limiting the role of government may ignore the need for, or impair the

ability of, government to ensure competition in a networked world. Second, in an age of

rapid and profound economic change government must play an active role in the

restructuring of entire economies by breaking up state monopolies, deregulating the

communications sector, and addressing the dislocation caused by globalization and

disintermediation. Third, these challenges to state authority and functioning may pose

greater problems for smaller, more specialized economies such as those in Europe as rapid

change disrupts the markets that define their comparative advantages. Accordingly,

technology policy may become increasingly important even in the advanced industrial

economies. Even in the United States, where business appears to have gained an advantage

in shaping and advancing the regulatory agenda, the government still holds the balance of

power in areas such as antitrust policy, intellectual property, taxation, law enforcement,

and the negotiation of international agreements concerning regulation and governance.

John Dryden,

Head of the Information, Computer and Communications Policy Division, Directorate for

Science, Technology and Industry, OECD15

John Dryden spoke about the importance of

supranational discussions and initiatives concerning the governance of e-commerce and

digital infrastructure development and the potential role of the OECD and other

international bodies in facilitating them. In particular, he addressed the need for

globally interoperable solutions for electronic commerce and how the approaches adopted by

the United States and EU can be made to converge or at least to co-exist.

There is a striking degree of consensus rather than disagreement

over the broad principles underlying electronic commerce policies. The predominance of

consensus over disagreement emerges clearly enough from statements such as the U.S./EC

joint statement on electronic commerce. But there are emerging doubts that an

all-embracing global regulatory framework for the Internet or e-commerce is desirable or

even possible. However, although it remains with individual countries to decide how best

to use the OECD and a range of other international bodies, supranational initiatives may

be complementary to national policies and international organizations may facilitate

beneficial discussions and cooperative strategies.

The emergence of electronic commerce heralds a major structural

change for enterprises and economies in the OECD member countries, but is still embryonic

with respect to both technologies and market dynamics. Even a $1 trillion business would

be only 0.5 percent of total retail sales in OECD countries. Even so, a recent study in

the U.S. attributed to information-economy related activities one third of the economic

growth and one third of the job creation – and the earnings of those jobs were one

third higher than the average. Clearly, much of the growth, incomes and jobs are being

created in the "e-conomy," but relatively little is understood of how it works

or how policies can be developed which will maximize its benefits for all strata of

society.

As global information networks do not respect geographically defined

borders, governments are naturally concerned about issues of sovereignty and jurisdiction.

Law enforcement, the potential erosion of the tax base, and regulatory authority and

control represent significant policy challenges. They point to the urgency of addressing

the legal and regulatory issues, the interoperability of networks, the identification of

appropriate supranational initiatives, and the selection of suitable venues for such

initiatives.

The main objectives of the OECD’s agenda on

e-commerce16 focus on four themes:

Help generate a climate of user trust in the information society and

in electronic commerce and for that trust to be soundly based on security principles;

Contribute to the construction of a stable and functional regulatory

environment conducive to the development of the global information economy and society;

Promote the enhancement of and access to the information

infrastructure by creating a competitive marketplace and encouraging market forces; and

Provide flexible and pragmatic guidance on how to maximize the

benefits of the new technologies without imposing rigid regulations.

Cyberspace is not a lawless frontier. Many rules of the game already

exist, but they are poorly developed and integrated. For governments, the problem may lie

in a lack of clear and generally accepted jurisdictional rules. This may necessitate

supranational governance initiatives, such as those under way at the OECD, and, even more

pertinent, raises the question whether a global system of regulation of electronic

commerce is now needed.

The OECD is an intergovernmental organization, comprised of twenty

nine Member countries representing the developed countries of the world, which seeks to

improve economic growth, job creation, trade, and development. Although it has no

governmental powers and works on a consensus basis, exchanges between member countries may

lead to formal agreements or to policy recommendations, such as those on privacy, security

and cryptography. Although non-binding, there is a strong moral obligation on the member

countries to implement these recommendations. More often, however, these discussions and

the economic analysis and data collection performed by the OECD improve policy making

within member governments.

Without global reflection on dismantling existing barriers, the lack

of adequate frameworks will inhibit the use of electronic commerce, the new information

and communications technologies, electronic commerce and the Internet. Supranational

initiatives will provide fora for such reflection and deliberation. Still, it is worth

asking whether a "global regulatory system" is really the key which will unlock

the potential of the information economy.

Given that international consensus on the global regulation of the

Internet is not even on the horizon, it is clear why self-regulatory options are so

appealing. Some argue that the dynamism and extraordinary evolution of the Internet and

e-commerce have been possible because of the absence of burdensome and restrictive

regulation. This has increased the appeal of international co-operation, policy

coordination, and "soft law" options such as OECD Recommendations and

Guidelines. The OECD wants to facilitate the development of effective market-driven

self-regulatory mechanisms through codes of conduct, model contracts, guidelines, and

enforcement mechanisms developed by the private sector itself. Governments of the OECD

countries are generally in agreement with this approach.

At a conference held in Ottawa in October 1998, the Ministers asked

the OECD to undertake an action plan to:

establish Guidelines for consumer protection in e-commerce during

1999;

develop guidelines to implement the 1980 OECD Privacy guidelines in

an online environment;

analyze methods of digital authentication and certification;

work to improve the definition and measurement of electronic

commerce;

analyze the economic and social impacts of electronic commerce;

examine the policy implications of digital networks; and

set up technical advisory groups with business to address taxation

issues.

In addition, the OECD is examining government use of electronic

commerce, trade related issues, the problems of small and medium-sized enterprises,

education and skills development, and, of course, issues of economic development. All

these efforts are ongoing. A Paris conference, to be held at the OECD on 12-13 October

1999, will mark a new phase in the dialogue among the stakeholders in the new digital

economy to achieve these goals.

PANEL 4: THE CONSTRUCTION AND OPERATION OF NETWORKS

The legacy of past telecommunications policies, regulatory

frameworks, and institutions provide the underlying structure in the development of global

digital networks. Examples include telecommunications regulation and deregulation,

wireless standards, and open access policies for cyberspace. Antitrust and competition

policies are also crucial. These policies determine how existing markets are segmented;

what sorts of competition takes place within these segments; and what sets of bundled

packages of services are possible within different competitive environments.

Don Cruickshank,

Chairman, Action 2000, Department of Trade and Industry, U.K.; former Director General,

Office of Telecommunications, U.K.

Don Cruikshank praised the steady move of the rest of the world

towards the U.S.-U.K. model of telecommunications competition. The final chapter in this

long process of development is the introduction of competition to the local loop where

soon specialized and general-purpose digital networks will vie for dominance. In addition,

the mode of competition remains quite different even between the U.S. and the U.K. The

U.K. focused on pricing in driving competition, not unbundling services as in the U.S..

Consequently, the U.K. eliminated price controls, price caps on individual services,

access charges, and cross-subsidies. The experience revealed that universal service could

be delivered under competitive conditions and delivered much more cheaply.

In contrast to the U.S. approach to deregulation, there were no

restrictions on the scope of telecommunications businesses. Instead, the U.K. approach

pursued competitive markets that prevented "layer players" dominant at the edge

of the network (e.g., in the last mile) from abusing their market position and that

exploited the intelligence of consumers to optimize their own service packages. The

American approach to unbundling services proved to be a costly and enormously

time-consuming mistake, as entrenched monopolies sought to maintain their portions of a

market subjected to enforced and artificial fragmentation. The U.K.’s focus on price

competition circumvented this problem without sacrificing service.

Competition policy is crucial in the telecommunications sector and

thus in e-commerce. Network economy effects produce endemic market failures requiring the

intervention of regulators. These economic characteristics of networks and network

industries reveal the primacy of competition policy and rules. Antitrust and competition

policies have thus experienced a renaissance. Regulators are compelled to think through

such difficult issues as the definition and indicia of market power, what is the proper

definition of the relevant market for competition purposes, and what constitutes the

proper price in markets defined by near zero marginal costs.

Competition rules and antitrust enforcement also build on a rich

tradition of the jurisprudence of markets, a nuanced and flexible web of principles and

rules that is more easily adapted to the new conditions of the digital economy than the

inherent rigidities of regulation. This use of antitrust is an enormous advantage over

regulation in an era of rapid, dramatic, and unpredictable technological and economic

change. Further, antitrust and competition policy is necessarily pro-consumer. In

contrast, regulation is subject to all the pathologies of capture and ossification. For

example, there has been virtually no significant representation of consumer interests in

the American debate over the regulation of e-commerce. While antitrust law and competition

policy cannot address all concerns, structural bottlenecks, predatory pricing, gateways,

interoperability, and abuse of proprietary standards are all well within the purview of

antitrust.

As a measure of the renewed centrality of antitrust regulation, the

most important litigation in over a decade is the government’s antitrust suit against

Microsoft. The likely resulting remedy will be a prohibition of exclusive agreements and

the tying of products to the operating system, compulsory allowance of the installation of

competitors’ software, and an end to discriminatory pricing. This one suit may

transform the character of the digital economy as its core is opened to competitive forces

and the innovation they drive.

Robert Pepper, Chief,

Office of Policy and Plans, Federal Communications Commission \

Robert Pepper argued that, as a result of unintended consequences,

the 1996 Telecommunications Act has actually had an enormous positive impact on the

development of the Internet. Despite the fact that the 1996 legislation mentions the

Internet in only two places, the effort to create a new regulatory regime for the

telecommunications industry has aided the growth of the Internet and e-commerce. The 1996

Telecommunications Act changed some of the assumptions built into the regulatory framework

that had prevailed since the 1887 Interstate Commerce Act. These assumptions included

creating regulatory silos; protecting monopoly incumbents; defining industry service

boundaries; protecting consumers through rate regulation; and governments deciding winners

and losers. In challenging these assumptions, the law was really designed to open the

voice markets between local and long distance carriers. Local carriers would supposedly

get into long distance; long distance carriers would compete with locals; cable companies

would get involved with telephony. What the law overlooked, however, was the demand for

high bandwidth data networks.

However, by upending the established telecommunications market

structure, the 1996 Act created a much more competitive environment to spur broadband

access to the Internet. In particular, the Act will open local exchange networks to

broadband Internet traffic that will benefit both consumers and businesses. As a result of

this competition, investment is expanding into local networks where there had been serious

bottlenecks to open broadband Internet access. Because of the new law, cable modems and

new local exchange providers of DSL technology are now challenging the position of local

incumbents in these areas.

There has always been a high degree of investment in long haul, high

bandwidth networks, but a striking disconnect occurred when it came to investment in high

bandwidth local networks, the so-called "last mile." The steady breakdown in

long distance and local service boundaries since 1996 began a virtuous circle in the

telecommunications industry much like the circle in the computer industry. As transport

and switch costs drop, bandwidth increases; as bandwidth increases, applications increase;

and as applications proliferate, investment increases and further drives down transport

and switching costs. The key question now is how this virtuous circle can lead to

investments where there are remaining bottlenecks in the local exchange network for high

bandwidth data linkage and transmission.

Pepper claims that as a result of the 1996 law, investment behavior

on the part of local exchange companies has begun to change already. The new and more

competitive environment in the local exchange network has resulted in faster erosion of

market share among incumbent local monopolies than the erosion of AT&T's long distance

market twenty years ago when it was forced to open its long distance business to the entry

of competitors. While the competitive local exchange carriers still cater predominantly to

business customers, the availability of broadband services is growing and in the process

the Internet is exploding.

In the end, there are a number of lessons to be learned from the

1996 Act. Because the Act forced local monopolists to unbundle the physical elements of

the network and to lease the local loops at forward-looking costs, it effectively created

a new infant industry that put competitive pressure on local incumbent exchange companies.

Without the unbundling rules these local loops, these new companies and this new

competition could not have emerged and far less investment would have been made in the

digital subscriber loop technology which incumbents have been slower to deploy. In

addition, we have witnessed the take-off of high bandwidth Internet access through cable

modems. In the foreseeable future there will be a race between phone companies with DSL,

and cable companies racing to deploy high-speed networks. This competitive race and the

economic and technological benefits that it generates would not have been possible without

the reforms initiated by the 1996 Telecommunications Act in its implementation by the FCC.

Jonathan Sallet,

Chief Policy Counsel, MCI/Worldcom

Jonathan Sallet offered an analytical overview of telecommunications

deregulation and competition policy in the U.S. and the difficulties prior policy choices

have created for the regulation and governance of Internet-based systems. The

Telecommunications Act of 1996 addressed almost exclusively the competition issues and

economic incentive structures with respect to voice telephony (though the Act did have

some limited implications for video transmission as well). This emphasis on voice networks

and transmission has been dramatically superseded by the development of digital networks

and the dramatic growth in their utilization. Current estimates indicate that by 2004

ninety nine per cent of telecommunications traffic will be in data—only one per cent

will be in voice. In such a radically changed environment, the policy choices and

regulatory structures designed to address competition and access issues in voice telephony

are becoming obsolete.

Policy makers made a fundamental choice in the design of the 1996

Act between compulsory structural divestment leading to competition in all market

segments and the imposition of behavioral conditions on incumbent

telecommunications monopolies. The Telecommunications Act of 1996 embodies the latter

approach. Regional phone companies were left to dominate the local loop and last mile of

the wired network that provided access to the end user. Behavioral conditions, in the form

of regulatory limitations on anti-competitive practices, and economic incentives to open

local markets to competition were, and remain, the chosen mechanism to ensure a

competitive markets for local and long distance communications.

This choice proved to be a terrible mistake. Behavioral regulation

is difficult and cumbersome to enforce. Given that entrenched dominant players remain in

place, the incentive structure created by this model of regulation encourages avoidance

strategies seeking to maintain market power and control over market segments. Overcoming

the anti-competitive effects of these strategies and the inertial tendencies of monopolies

requires enormous vigilance and patience by enforcement officials to ensure that markets

become truly open and competitive over time. Maintaining the required momentum of

political commitment, regulatory vigilance, and enforcement effort is exceedingly

difficult. What we are witnessing now is the waning of this momentum and the erosion of

once steadfast commitments to opening the local telephone markets that may leave local

monopolies in place. In both local telephony and cable services, the U.S. will be burdened

by non-competitive markets and closed networks inherited from an era in which monopolies

were thought the best way to achieve specific social goals. This increasingly likely

outcome provides a cautionary tale of how not to design a competition policy and model of

regulation. Not only has the original policy failed, regulatory measures have been

indiscriminately (and inappropriately) lumped together and treated as discredited at a

time when redoubled efforts to construct effective competition policies and supporting

regulatory mechanisms are needed.

There remain two basic possible mechanisms that could preserve

competitive markets in telecommunications and digital network services. First, we can hope

that technological innovation drives competition by creating adequate alternative forms of

communications to weaken monopoly power over any one market or segment in one network.

Second, government action through regulation can create and/or maintain competitive, open

markets for telecommunications services of all types. Faith in the technological fix to

competition problems in a sector substantially defined by network economies is likely

blind and misplaced. Technology is unlikely to break the monopoly control that local

carriers have perpetuated over the last mile. Accordingly, some form of government

competition policy and regulatory enforcement is necessary.

The central question faces policy makers: what

principles should underlie government competition policies? First, the Internet must be

maintained as an open platform. Taking advantage of the current structural characteristics

of the Internet before it is fragmented into multiple closed proprietary networks can

prevent monopolies and competition problems rather than address them once they emerge.

Such an approach would avoid regulatory failures that have characterized the long and

fruitless attempts to dislodge the local phone carriers and open local telecommunications

markets. Second, monopoly market power must be eliminated through structural antitrust

remedies that take advantage of the possibilities of seamless data networks combining

multiple technologies from content provider to the end user. Experience with telephone

deregulation and competition policy has revealed the deficiencies of the unbundling

approach to opening markets.17 The

vertical and seamless integration of information and media services suggests a market

model that seeks to preserve competition among bundled services provided over networks

that are open all the way to the end user. This would create user-driven network

development, encourage optimal innovation in content provision, and remove bottlenecks at

the local loop that have suppressed innovation and investment in the last mile. DSL is not

a new technology, yet the incentive to invest in it has been substantially curtailed by

the closure of the local markets that must be rewired to justify the expense of building

an extensive DSL network. Likewise, UU-net and @home face discrimination from the regional

Bell local carriers and anticompetitive biases created by regional Bell tying arrangements

as they seek to enter the data transmission markets. These competition issues are

ascendant today and will require substantial rethinking of government competition policy

and antitrust regulation.

Panel 5: Laws for digital transactions and their

relationship to social values

As in any period of profound technological and economic change, the

interplay between emerging rules and institutions and deeply held social norms is central

to the development of the e-conomy. How will social norms be translated into policy, and

affect company strategy? How will competing notions of social values be decided in

cyberspace? These questions point to the most significant legal and regulatory issues in

the digital economy: the scope of intellectual property rights and contract law in

e-commerce; the protection of privacy and related issues of security and encryption; and

content restrictions on network communications.

Helen McDonald,

Director General of Policy Development, Electronic Commerce Task Force, Industry Canada18

Helen McDonald discussed the policy motivations and

scope of Canada’s proposed privacy protection legislation. The proposed legislation

(still before the Canadian Parliament) is part of the Canadian policy framework for

electronic commerce.

Polling of Canadian citizens reveals that privacy concerns are

slowing the use of the Internet; fifty-six percent of respondents to one survey said they

would not do business online because they did not know what would happen to their personal

information. Self-regulatory approaches by businesses have not succeeded in convincing

consumers that their personal information will be adequately protected. The Canadian

government has been encouraging business to protect privacy and personal data since the

1981 OECD privacy guidelines were approved, but had seen little change in business

behavior. The rise of the Internet and e-commerce has increased the urgency of the

situation. The Canadian government has therefore proposed broad framework legislation that

would cover all personal information collected, used or disclosed in commercial

transactions.

Under the new legislation, companies would be required to comply

with the ten fair information practices of the Canadian Standards Association model

privacy standard. This latter represents a consensus among business, consumer

organizations and governments as to best practices, and was approved as a national

standard is 1996. A key concept is that of informed consent – under the Canadian

bill, organizations engaged in commercial transactions must secure an individual’s

consent before it may collect, use, or disseminate personal data.

The law recognizes the individual’s right of privacy, while

respecting the need of organizations to collect, use and disclose information and avoiding

undue distortion of developing e-commerce markets and technologies. By legislating to a

management standard, organizations have flexibility in implementation – consent, for

example, can be express or implied, depending upon the circumstances.

Oversight is intentionally light – the Privacy Commissioner of

Canada is empowered to receive and investigate complaints, and to mediate solutions. He is

given a strong public education role, but has no binding powers – his strongest

weapon is his ability to publish the names of firms violating the terms of the act. This

form of oversight has worked well in the past in Canada, and is expected to be equally

successful with the private sector. There is, however, a possibility of further recourse

to the Federal Court if organizations persist in flouting the Commissioner’s

recommendations.

Canada has thus chosen a "soft" law

approach that relies on publicity, moral and social suasion, and market pressures as the

enforcement mechanisms. This removes the threat of regulatory rigidity and enforcement

excesses that fuel much resistance to legal protection of online privacy.19

By legislating to a management standard, companies

can have their policies and practices audited for compliance. A number of Canadian firms

have had their company codes assessed for compliance and we know of one instance in which

a foreign company (an Australian telco) had an independent audit performed of its

performance relative to the CSA standard.

The Canadian legislative approach occupies a middle ground between

the American policy of self-regulation and the E.U.’s more traditional, and in some

instances, stricter regulatory approach. The Canadian bill meets the requirements of the

1998 European data protection directive law, which requires member states to block flows

of data to third countries which lack adequate protection for privacy, but in a way which

builds on existing self-regulatory initiatives of Canadian businesses.

The Canadian law is necessary, but it is not sufficient, to protect

privacy. Effective privacy protection will require that technologies be designed and

deployed in ways to enhance privacy, that consumers are educated about how to protect

themselves, and that firms turn the fair information practices (standard) into policies

and practices tailored for their particular circumstances.

Domestic law cannot extend beyond the border. Canadian law cannot

easily cover Canadians when they go to a foreign Internet site, and it will have little

impact on the design of technologies imported from abroad which may be configured in ways

which reduce privacy (e.g., the Pentium chip containing the serial processor number).

Canadian businesses potentially face different privacy rules in every country in which

they wish to do business – a situation which could slow global electronic commerce.

These challenges are not unique to Canada. Economic transactions in

cyberspace are very complex, and the tangled jurisdictional puzzle created by the internet

poses new challenges to privacy protection. Some observers believe that the marketplace

will sort out these issues – and there is evidence that the commercial imperative is

becoming increasingly aligned with good privacy protection. Businesses are increasingly

realizing that privacy matters to customers and thus makes good business sense. Still,

government will likely have some role in setting standards, preventing abuses of personal

data, and inducing business to act collectively in its own best interest.

Internationally, there is widespread agreement on the general

principles of privacy protection and best practices – these can be seen in the OECD

guidelines, the CSA standard and the E.U. directive. The problem is enforcing these and

providing redress when something goes wrong. Businesses, for example, sometimes try to

"cherry pick" by embracing some principles and ignoring others.

In addition, better methods of testing the adequacy of different

modes of privacy protection are needed in order to design better policies and to

facilitate the international discussion of online privacy. To date, no such adequacy tests

have been developed and political and policy debates have remained in a virtually

data-free vacuum.

The ongoing U.S.-E.U. debate over privacy protection may

generate an agreement on core principles of privacy protection and the "safe

harbor" concept may serve to enrich the "tool kit" available to policy

makers. An international privacy standard would be most useful, to help bridge the gulf

between self-regulatory and legislative approaches and encourage harmonization

internationally. Compliance could be audited if there were disputes and the standard could

be cited in contracts when personal data travels across borders. Such a standard could

also influence technology design and implementation, and could be the basis for an

internationally recognized system of icons or seals.

The privacy paradigm is shifting over time, and this means the

dialogue must continue, if we are to have effect privacy protection around the world. Such

dialogue must be conducted multilaterally, not just bilaterally, and must involve

consumers as well as industry and governments.

Bror Salmelin, Head of

Unit, DGXIII - Information Society: Telecommunications, Markets, Technologies, European

Commission

Bror Salmelin is spearheading a research program within the European

Commission on technology policy with respect to information technology and e-commerce.

This research effort, which is global in its perspective, is aimed at uncovering business

models and enabling the development of new business paradigms better able to exploit the

new digital information technologies. This research on new technological, economic, and

business paradigms is intended to become part of a dialogue on policy initiatives designed

to create a coherent legal and regulatory environment for new technologies and facilitate

the development and adoption of e-commerce. This integration of policy development and

research is the result of an interactive process reflecting a commitment to a strong

bottom-up approach.

Three basic forces are transforming the economic situation in

Europe: (1) electronic commerce; (2) the single European market; and (3) the creation of

the single currency through the European Monetary Union. The intersection between new

legal and regulatory frameworks, the self-regulating mechanisms of the private sector

reflecting best practices of business firms themselves, and research initiatives within

both industry and government have created the foundations for a paradigm shift in European

business models. These EU-sponsored research efforts are the product of the need to

transform old business models into paradigms compatible with electronic commerce and the

idea of competence-based value creation through digital networking. These research

programs are open for global participation.

Despite the importance of both government and business in helping

establish new business paradigms, the European Commission and DGXIII can only serve as a

catalyst and a link to policy initiatives. Industry sectors and working groups within

industry involved with electronic commerce must themselves reach agreements and

understandings on key interoperability issues before the Commission is able to play a

constructive role.

The research of the DGXIII Unit on the Information Society looks at

how to combine the technical with the legal, social and economic dimensions of innovation

in order to provide a useful framework for the creation of new business models. This

effort has been undertaken in the spirit of basic research and the research framework is

open to all countries of the world that wish to use it and benefit from it. Through such a

program, public authorities can become a strong catalyst for creating a favorable

environment for the development of electronic commerce.

Patricia Paoletta,

Vice President for Government Affairs, Level 3 Communications, former Counsel for the

Majority, Office of Representative Tom Bliley (R-VA)

Patricia Paoletta, now working in the private sector, reflected upon

her experience on Capitol Hill and the difficulties of implementing policy on electronic

commerce in a partisan political environment. Different constituencies, notably carriers

and users, have very different interests in terms of policy and its implementation.

Carriers want liability protection in tension with demands for consumer protection. At the

same time, users of digital networks and telecommunications services often have divergent

interests in terms of content. Some users want unencumbered access while others want

content-based restrictions on sexual or violent content. Policy outcomes are sometimes

dependent upon the connections that exist between certain individuals in key

constituencies and politicians. These connections can establish the context for policy

debate. As a consequence, when it comes to national domestic implementation for electronic

commerce, policy making is contentious, unstable, and often inconsistent.

In terms of the legislative agenda, the House and Senate will debate

three key issues in the foreseeable future: (1) privacy, (2) digital signatures, and (3)

on-line content. While privacy is currently limited to protect children, Paoletta warns

that that here is momentum building for some kind of adult privacy legislation.

Politicians may have no choice but to respond. In terms of digital signatures, there is

currently a bill pending, spearheaded by Representative Bliley, to expand both

business-to-business and business-to-consumer e-commerce by making digital signatures

legitimate for a range of electronic transactions. Finally, the 1996 Child’s Online

Pornography Protection Act (COPPA) legislated online decency standards, but there may be

much legislation and regulation with respect to online content forthcoming. Fortunately,

despite the continuing partisanship shaping the policy agenda, both Republicans and

Democrats appear equally committed to expanding electronic commerce in the future.}
^{Pamela Samuelson,

Professor, Boalt School of Law and School of Information Management and Systems,

University of California, Berkeley 20}
^{Pamela Samuelson concluded the final panel of this conference by identifying five

difficult and salient challenges for those seeking to fashion a policy and legal

infrastructure for the digital economy. Law and regulation will organize and empower

different economic and social interests through its allocation of authority, rights, and

duties. The character of the digital society and the economy likewise will be shaped

substantially by the legal relations among these interests. None of the questions and

challenges posed admit easy or clear solutions, but all must be dealt with—and

probably recurrently—in the coming years.}

^{First, policy makers must determine whether

existing legal regimes or principles can be applied or adapted to digital phenomena, or

whether new legal rules are required. The E.U. faced just such a dilemma when it created a

new sui generis form of intellectual property protection for the contents of

databases. The EU legislation extended broad intellectual property protection to databases

that are the product of laborious effort in a break with established principles of

intellectual property requiring some element of creative activity for the legal

recognition of a property right in information. Copyright law in the U.S. and elsewhere

has been adapted to works in digital form, sometimes through judicial reinterpretation and

sometimes through novel legislative initiatives. Although digital technologies pose new

challenges for copyright law, on the whole, the development of copyright law has addressed

the novel problems created by digital information and copying in a functional and largely

beneficial fashion. Patent law, on the other hand, has remained more controversial, with

some commentators arguing that it is unsuited to digital information and others countering

that patent law now has begun to adapt reasonably well to the problems of the digital era

after a difficult period of transition.21 This reconsideration of existing law does not stop with intellectual property.

Contract law, for example, contains well-developed doctrines concerning the place of

contracting and the identity and legal capacity of the parties. E-commerce and digital

transactions raise sui generis legal issues involving contracts formed by

electronic agents in cyberspace. Implicit assumptions and established conceptions

regarding the identity of legal actors, agency, legal capacity, and jurisdiction may all

require fundamental reconsideration and reformulation.}
^{Second, policy makers are confronted

with the difficult task of devising proportionate responses to new

legal and economic problems that arise in a digital economy. Where

officials perceive market failures in new markets or for digital goods

and services, the tendency may be to overreact by providing excessive

protection by extending intellectual property farther than necessary.

The current U.S.-E.U. debate over privacy protection in cyberspace

and e-commerce turns on this issue. The E.U.’s privacy protection

directive unleashed sweeping regulatory authority to protect personal

privacy and met with sharp protests that the restrictions are excessive

and damaging to the development of e-commerce and the Web. The E.U.’s

database protection regime reflects also this tendency. The Directive

preserves the incentive to create and market data, but it also may

unnecessarily curtail beneficial uses of information without creating

a corresponding economic benefit for the compiler. The U.S. has objected

to both these regulatory initiatives as excessive and damaging. In

contrast to the European regulatory approach to these issues, the

U.S. government has been pushing for industry self-regulation to protect

privacy and the adaptation of unfair competition principles to protect

data base compilations.

22

Third, policies and legal frameworks

must remain flexible enough to permit adaptation in the face of rapidly

changing circumstances and technologies. Effective law and policy

frameworks should not be technologically dependent in the sense that

they rely on a given state of technological development (e.g.,

the Internet as currently structured or personal computers as the

dominant access devices to it) to the extent this can be avoided.

In addition, law cannot be so detailed that it precisely addresses

current or foreseeable issues while failing to articulate general

principles capable of adaptation to emergent problems. Obviously,

there are limits to our foresight. Policy must be revisited many times

as conditions change. If law is to be effective in responding to the

conflicts in need of resolution, the application of legal principles

must be a continuous, iterative process. In short, as set forth in

the Clinton Administration’s Framework for Global Electronic

Commerce, simple, predictable, consistent, and minimalist laws

are more likely to succeed in providing a functional framework for

legal development.23 Open-ended principles and statutory provisions, rather than

a tightly structured code, provide this sort of framework. Indeed,

this as been an advantage of the American common law approach to intellectual

property over the code-driven civil law tradition of Continental Europe.

Yet such open-ended doctrinal principles are under threat even in

the U.S. where the common law tradition supported this mode of law

and regulation. The doctrine of fair use of copyrighted materials

has been a boon to innovation and intellectual development into the

digital era. But recent proposals to amend the Uniform Commercial

Code law for digital contracting would replace a slim and broadly

phrased set of functional principles with the legal equivalent of

"bloatware." The proposed UCC Article 2B intended to cover

digital contracting is complex, detailed, and ultimately unpredictable

in its significant departures from established principles and even

such basic terminological definitions as that for what constitutes

a "computer program." Any efforts to ensure effective and

responsive law and policy will have to reverse this tendency.

Fourth, as in any era of dramatic and

rapid change, policy makers will have to confront divisive conflicts

over the preservation or accommodation of established social values

in the face of substantial technological and economic threats to their

continued vitality or existence. The most visible and striking examples

of conflict over the vindication of social values in the digital economy

is the ongoing conflict between the U.S. and Europe over the E.U.’s

Privacy Directive. Political and legal battles over content restrictions

have become commonplace and will almost certainly continue to erupt

throughout the world. The E.U.’s Privacy Directive is itself

a noble attempt to preserve and vindicate a worthwhile social value

against industries and network systems that can collect massive amounts

of personally identifiable data. Yet the regulatory approach taken

by the E.U. also highlights the problems in seeking to reconcile old

values with new technological and market structures. Such stringent

privacy protection may require extensive regulation of copyright management

systems that allow electronic publishers to exist but also allows

them to collect extensive data on consumers’ reading habits.24

Controversy over the fair use doctrine in U.S. copyright law provides

another good example of this phenomenon. Fair use in substantial part

reflects deeply held social values favoring the open availability

and use of information under a broader range of circumstances than

would be permitted under a legal regime defined solely by property

rights. The rise of digital networks and digitized information and

copying has threatened these values and their legal manifestation

from two directions. First, network technology itself creates a "space"

in which the network architecture can effectively regulate and control

the behavior and activities more completely than any framework of

policy, law, or regulation.25

Second, some segments of industry and a number of overenthusiastic

officials have pushed for expansion of property rights in information

and the elimination or reduction of public policy exceptions to proprietary

control over informational content. This is precisely the result of

the Digital Millennium Copyright Act: its "anti-circumvention"

rules curtail the existing scope of fair use and encourage the closure

of information networks.

Fifth, the emergence of a truly global digital

economy faces policy makers—and polities—with the challenge

of developing systems of cross-national and international policy coordination

and cooperation. Even if complete regulatory harmonization is not

feasible, some degree of policy and regulatory consistency and interoperability

is necessary. Policy makers throughout the world now confront two

central questions: (1) which matters must be addressed by international

action? and (2) what institutional mechanisms will be needed to accomplish

these goals? There are no clear or simple answers to these questions.

Existing conditions create incentives for countries to rush policies

into effect to gain first mover advantages. The E.U. Privacy Directive,

the Database Protection Directive, and the neo-liberal regulatory

strategy embodied within the Clinton Administration’s National

Information Infrastructure White Paper may all be seen as examples

of rushing for first mover status. The process of negotiating a common

set of rules as in the case of the World Intellectual Property Organization

(WIPO) Treaty is slow and cumbersome. Reciprocity agreements are easier

to deploy but also constitute a form of manipulation or coercion by

conditioning the benefits of trade or legal protection in one jurisdiction

on another jurisdiction’s adoption of a similar or comparable

law. The E.U. has used this reciprocity approach aggressively in both

the database protection and privacy areas. In the first case, European

authorities threatened American firms with the loss of legal protection

for their databases unless the U.S. enacted a "comparable"

database law. In the second, E.U. authorities have threatened to block

data flows between the U.S. and Europe unless the U.S. takes regulatory

measures to protect privacy in personal data deemed "adequate"

under the Directive. The drawback of this approach to "harmonization"

is plain: manipulation and coercion generates more conflict than harmony.

Moreover, policy makers need to recognize that

they will sometimes be subject to lobbying and interest group pressure

that will reflect not the needs of an industry but rent seeking desires

for monopoly profits or protection against competition from new upstarts.

This is especially evident in the field of intellectual property policy,

which has been vulnerable to manipulation by contending interests.

Policy makers in all countries need to insulate themselves from the

excessive influence of intellectual property professionals who tend

to favor overprotection of intellectual property. These professionals

by training and economic ties bias policy debates towards strengthening

intellectual property rights to excess. Policy makers need to pay

attention to the actual economics of intellectual property and digital

markets for information. The U.S. is a particularly fertile ground

for this type of pragmatic economic thinking because intellectual

property, as a matter of constitutional law, has always been based

on the utilitarian premises. The more formal code-based and doctrinal

legal traditions of the civil law jurisdictions of Europe will confront

greater problems in this respect. More empirical analysis of the effect

of laws and regulations on innovation and cultural life is needed

to formulate coherent and beneficial policies. Policy makers must,

above all, remember that information is not just a commodity. It is

the basis for a rich and developing cultural life and for democratic

discourse; it is also an essential input for innovation. The policy

decisions and legal reforms of today are critical and will have enduring

effects. Excessively strong intellectual property rights in pursuit

of the perfect market may lead us into a social nightmare. Such policies

may create the framework for a global digital economy, but not one

in which many of us would want or choose to live.

CLOSING REMARKS - TALES FROM THE SILICON

VALLEY; GOVERNANCE, TECHNOLOGY AND CIVIL SOCIETY

Regis McKenna,

Chairman and CEO, Regis McKenna Inc.

Regis McKenna closed the conference with an impassioned

paean to the almost limitless possibilities of the digital revolution,

arguing that this era differs sharply from those that preceded it.

Two quotes frame this account of Silicon Valley. First, as Paul Vallery

said, "The future isn’t what it used to be." In the

case of Silicon Valley, the future being formed by the capacities

and possibilities of technology and innovation cannot be anticipated

as an extrapolation from the past. This is one of those rare and extraordinary

moments in history when the future is indeed unwritten because the

possibilities of the present are so vast. Second, we should accept

the implied counsel of Paul Boorstin when he observed that "innovation

and change have never been impeded by ignorance, but by the assumption

of knowledge." Given our current inability to understand the

limits and potential of the technological revolution underway, policy

makers should not assume knowledge they do not have and impose policies

that might impede technological and economic progress. That we have

in fact entered a startlingly new era is born out by the information

we do have. Economics, medicine, politics, design, institutional organization,

and administration are all being transformed by new information technologies

and networks.

Digital technologies shorten product life cycles

as continual innovation and mass customization become possible and

are driven forward by the forces of competition. This acceleration

increases the speed with which markets and organizations respond to

consumer demands and the degree to which complex organizations can

satisfy individual needs and desires. The combination of competition

and increased technological capacity is forcing organizational change

throughout the economy as the value chain is broken up and reconstituted

in novel ways to maximize efficiency and flexibility. The functions

of design, supply, assembly, distribution, and logistics are broken

apart and re-formed into new networks of economic relationships. Dell

Computer, for example, is a logistics company organizing and maximizing

the value added by value-chain functions, not a manufacturing or assembly

company.

Firms and networks of firms will have to develop

multiple product designs and models simultaneously to keep up with

competitors and increasingly fragmented and customized markets. This

fragmentation of mass markets and increased design, production, and

distribution capacities will generate increasingly complex products

and services. Economic institutions themselves will likewise become

more complex as the traditional concept of the firm becomes outdated

and networks become the dominant organizational form in a digital

economy restructured by information systems. Intensifying competition

drives increased consumer choice together with dropping prices and

profit margins. The vastly more transparent markets of the digital

era will empower consumers to a degree never before seen and, by driving

margins down, will generate immense and irresistible pressures for

corporate restructuring.

The impact of digital technology will be pervasive

and ubiquitous. Humans will build 10¹⁷ transistors next

year, roughly one for every ant on the face of the earth. This explosion

in computational capacity has already begun to produce an enormous

array of consumer applications. In the near future these applications

and digital goods will become ever cheaper, adaptable, miniature,

and mobile. Value and utility will derive increasingly from using

systems rather than self-contained goods. Medical care, for example,

is already being transformed by digital monitoring devices and networks.

Today, an endocrinologist can monitor patients’ insulin levels

remotely via a digital wireless device linked to an office computer.

Care is cheaper, better, and less disruptive to the patient’s

life. Cellular phones and wireless communications networks provide

instant infrastructure. These networks will soon surpass the utilization

and quality of wired phone networks. Wireless communications networks

will provide the basis for an extremely adaptable platform on which

to build further innovations and permit ubiquitous digital applications

by breaking the ties to physical network connections.

Our perceptions of time and space are transformed

by real-time information technologies. Borders will collapse as geographic

boundaries become irrelevant to communications. More money will be

spent this year on private communications networks than on traditional

telecommunications networks. These networks expand markets worldwide

and fuel the trends we have come to know as globalization. With the

transaction costs of relocating economic activities so dramatically

reduced and the inefficiencies created by inherited and obsolescent

regulatory regimes growing more apparent, information technology has

helped drive deregulation world-wide.

Social relations will evolve in tandem with economic

relations. Traditional societies were defined in terms of hierarchy

and dependence. Liberal society has been defined in terms of

individual autonomy and independence. We are now on the verge

of a historical transformation that will recast social relationships

in terms of interdependence. In both the economic and social

realms, this rapid and dramatic change will create instability and

destroy the remaining moorings of tradition or disconnect populations

from the constraints of a self-contained and localized culture. This

will undoubtedly unleash resistance and perhaps generate alienation

in destabilized societies. But it also can liberate experience to

a degree never before seen.

We can already see this world emerging. Consumer

choice has steadily proliferated, contrary to the logic of mass production

and markets. The number of brands is growing, revealing a steady increase

in diversity of goods and services. The dominant trend in the global

economy is not consolidation but differentiation. Multiple channels

of finance capital allow for a wider array of business strategies,

a greater appetite for risk, and increased economic capacity to finance

innovation. These changes in consumer and financial markets have given

rise to an entrepreneurial culture and a wealth of innovation occurring

in small firms. Large corporations remain the dominant manufacturers

and distributors, even in the digital economy. The economic institutions

characteristic of the U.S. have produced an optimal ratio of small

to large firms that maximizes risk taking, innovation, and economies

of scale.

The digital revolution is giving rise to the age

of the unsatisfiable consumer. In this world, there are no citizens,

only consumers. And individuals are treated as such in more and more

aspects of their lives. Political platforms, policies, social interactions

are all marketed as the consumer model becomes universal. All these

changes are most clearly evident in the U.S. where the digital economy

was born and remains most highly developed. Political responses to

"consumer" demand are faster and less consistent. Social

trends display the same tendency. But it is the relentless pace of

economic change that drives all these developments. The U.S. economic

model drives the development and the spread of the digital economy

and will continue to for the foreseeable future. Along with the remarkable

bounty of the digital age, the U.S. will be first to feel and deal

with the problematic aspects of the digital economy and society. Social,

political, and economic organization will have to confront a world

of shallower commitments and more volatile demands. The digital age

has also begun to produce another byproduct: increased inequality.

Each of these trends will require responses if the health of societies,

polities, and the increasingly global digital economy is to be maintained.

There is every reason to remain optimistic about this future, despite

the challenges that will accompany it. Imagination has brought us

to this point of promise, and imagination will be our most precious

resource in the effort to fulfill its potential.

Footnotes

^* Research

Associate, Berkeley Roundtable on the International Economy, Doctoral

Candidate, Department of Political Science, University of California,

Berkeley. Cynthia Berg, Gary Fields, and Annina Ruottu helped in the

preparation of this report. Ann Mine and Dan Adler provided essential

editorial aid.

^{¹Special

thanks for the conference go to BRIE and E-conomy Project donors,

to the German Marshall Fund of the United States and the European

Commission for program and research support, respectively, and to

the European Institute, Washington, D.C. for additional assistance.}

²The

new UC E-conomy ™ Project is a collaborative undertaking of BRIE

(the Berkeley Roundtable on the International Economy), the College

of Engineering, the Haas School of Business, and SIMS (School of Information

Management & Systems) at the University of California, Berkeley,

with participating faculty from other UCB departments as well as from

UC campuses at Davis, Irvine, Los Angeles, and Santa Barbara.

³The political creation

and structuring of markets has been the ongoing subject of research

and discussion among the group of scholars at the University of California,

Berkeley that formed the nucleus of the E-conomy project. In particular,

Prof. Peter Lyman has argued that the transformation of information

and intellectual property rights driven by the development of digital

information technologies is directly analogous to the enclosure movement

that began the evolution of capitalism. Digital communications and

information technologies promise much, but also threaten to "enclose"

the information that constitutes the "commons" of culture,

scholarship, ideas, and raw data that provide the basis of a rich,

dynamic, and democratic society. The extent to which processes of

marketization engulf and commodify information traditionally in the

public domain is a question of politics and public policy that cannot

be ignored or avoided in the coming years.

^{⁴This section

is drawn heavily from written remarks provided by J. Bradford DeLong.}

^{⁵DeLong credits these

points to Paul Romer of Stanford University and Michael Froomkin of

the University of Miami Law School; see DeLong & Froomkin

"The Next Economy?" at http://econ161.berkeley.edu/Econ_Articles/newecon.htm

⁶One should add that

expansion of the digital capabilities of wireless communications would

also be a boon to the developing world, where wireless systems can

substantially reduce the infrastructure costs of building communications

systems and Internet connectivity. Hence, the improvement of wireless

capacity may help address the serious and pressing problem of the

emerging "digital divide" between the developed and undeveloped

countries.

⁷This section is drawn

from written remarks provided by Stuart Feldman.

⁸Feldman also observes

that just as business-to-consumer relations are being transformed

by information technologies, government-to-citizen interactions may

be similarly transformed. Advanced digital technologies are well suited

to delivering public sector services, although they are just beginning

to be exploited for such uses. On the other hand, he notes, they are

also ideal for accomplishing such time-honored political activities

as siphoning off money into numbered accounts, accepting anonymous

contributions, and broadcasting scurrilous information about opponents.

⁹Source: Stuart Feldman.

This visual representation of the infrastructure "stack"

is only one of many ways to describe it. In such a stack some items

appear in more than one guise. In this rendition, the higher layers

build upon the lower ones.

¹⁰This argument once

again points out the growing importance of trust as a valuable asset

in a digital economy characterized by information overload and the

close and potentially profitable relationship between consumer trust

and brand identity.

¹¹The digital economy

has not displayed tendencies toward punctuated equilibrium. Instead,

processes of continual innovation dominate the emerging digital economy.

As a result, the stakes of competition are growing ever larger along

with the price of falling behind the technological and market leaders.

This stark fact has not been lost on policy makers and business leaders

in Europe and Asia. Whether economies and societies can withstand

this endless and intensive pressure to innovate and compete over time

remains to be seen. Likewise, we cannot foresee whether the current

period of rapid innovation reflects the first and thus the most dramatic

development and exploitation of a new technological paradigm. If so,

innovation may slow and take on a more incremental pace that favors

the political economic organization of Europe and Japan, just as those

economies were able to refine mass production techniques in the later

post-war period.

¹²However, it may

be premature to regard the participation of numerous groups in public

debate as meaningful and beneficial. The democratic and responsive

character of the regulation and governance of the Internet and e-commerce,

or even public debate concerning it, cannot be assessed prior to the

adoption of even a rudimentary regulatory agenda and governance structure.

The ability of less affluent and politically connected groups to voice

to their opinions will amount to little if they are effectively powerless

in actual regulatory politics and policy making.

¹³How this case can

be made to the developing world is uncertain to say the least. Whether

this case can be made without a credible promise of substantial subsidy

and redistribution programs on a global scale remains to be seen.

¹⁴The American (and

thus the world’s) approach to the creation and registration of

domain names may be an example of a new type of global governance

institution: globally representative, comprised of private actors,

but non-profit in character. International institutions have been

significantly influenced by the American policy approach. The OECD

has endorsed a policy of "neutral taxes" on e-commerce to

prevent discriminatory tax policies that might inhibit this new form

of economic activity. The WTO has adopted rules to prevent the government

telecommunications monopolies from halting or slowing the spread of

the Internet and e-commerce.

¹⁵John Dryden stressed

that the views the set forth here are his own and do not necessarily

represent those of the OECD or its member countries.

¹⁶The ICCP Division

provides information on the OECD’s activities in information

and communications policy, including electronic commerce, and access

to all public OECD documents on these subjects. See http//www.oecd.org//subject/electronic_commerce/documents/annex.htm.

¹⁷This strategy preserves

or, rather, segments monopoly power over an informational value chain

that has become increasingly integrated. Monopolies in any market

segment both prevent this potentially beneficial integration and tend

to become insulated from political and thus regulatory attacks on

their positions.

¹⁸This section kindly

prepared by Helen McDonald. Italics indicate notes added by the Editors.

¹⁹This choice of

enforcement mechanisms also reveals the importance of transparency,

trust, and branding in e-commerce. The plummeting cost of acquiring

information online allows the government an efficient means to provide

consumers with information needed to make their own informed decisions

and to protect their own privacy. Firms, on the other hand, will pay

a price for failing to protect their customers’ privacy by sacrificing

trust and thereby diminishing the value of their brand in the consumer

market. The Australian telephone company’s experience notwithstanding,

it remains to be seen whether this type of enforcement by publicity

will effectively protect privacy in the more chaotic environment of

the Internet and e-commerce.

²⁰This section is

taken largely from written remarks prepared by Pamela Samuelson and

has benefited greatly from her editorial comments.

²¹One extremely problematic

development of contemporary patent law is the new trend towards business

model or business concept patents. Numerous panelists and members

of the audience repeatedly noted and decried the damaging effects

such patents will have on competition and innovation. This extraordinary

expansion of property rights gave rise to apparent unanimity of condemnation.

Samuelson’s comments, however, took a broader view of the issue

and traced the source of this maladaption of patent law to the digital

environment to an overly simplistic, uncritical, and ultimately ideological

view of property rights and markets. As her remarks indicate, this

expansive vision of property rights has driven judicial and legislative

changes of dubious wisdom in a wide range of doctrinal areas.

²²The U.S. itself

has overreacted to the threat of digital piracy, most notably in the

Digital Millennium Copyright Act which prohibits a wide range of activities

and technologies used to circumvent anti-copying and encryption mechanisms—even

where reasonable and socially beneficial. See Pamela Samuelson, "Intellectual

Property and the Digital Economy: Why the Anti-Circumvention Regulations

Need to be Revised," 14 Berkeley Technology Law Journal 519

(Spring, 1999).

^²³William J. Clinton &

Albert Gore, Jr., A Framework for Global Electronic Commerce (1997),

available at http://www.ecommerce.gov/framewrk.htm.

The Framework for Global Electronic Commerce has been identified

with Ira Magaziner, the Administration official in charge of the National

Information Infrastructure project at the time of its drafting, and

is commonly referred to as the Magaziner Report.

^{²⁴Further, the Privacy

Directive, as a general European-wide framework, has already generated

knotty implementation and enforcement problems as different E.U. countries

incorporate it into their national law in different and often conflicting

ways. The Directive has also given rise to significant enforcement

difficulties. How are public authorities to enforce the privacy rules

within vast networks comprised of huge numbers of e-commerce enterprises?

The U.S. has avoided this question entirely by refusing to protect

privacy by law and merely encouraging self-regulation. Canada has

avoided it by precluding formal enforcement proceedings. The E.U.

must confront this problem directly, and it is not clear that a solution

to it has been found.

25This argument echoes the theoretical

work of Lawrence Lessig of Harvard Law School that addresses "code

as code," i.e., the regulatory function of network architecture.}}}