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



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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


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


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

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


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


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


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


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


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.


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.


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.


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


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 present.gif (1280 bytes)

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.


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:




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

Data pipes



Mb/s -> Gb/s -> Tb/s



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 19th 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 19th 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      paper.gif (1101 bytes) present.gif (1280 bytes)

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:

  1. 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;
  2. Contribute to the construction of a stable and functional regulatory environment conducive to the development of the global information economy and society;
  3. Promote the enhancement of and access to the information infrastructure by creating a competitive marketplace and encouraging market forces; and
  4. 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.


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   present.gif (1280 bytes)

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.


Regis McKenna, Chairman and CEO, Regis McKenna Inc. present.gif (1280 bytes)

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.


* 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.