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e-Commerce: its effect on business and government

A Note by the Director (Ditchley 2000/12)
 
In association with Andersen Consulting
 
1-3 December 2000
Over the first weekend of December we looked at the effect of e-commerce on business and Government and whether and how it might be regulated.  We asked whether we were living through a real revolution or just another technological development.  We concluded that never had any technology been diffused so rapidly on a global scale with such profound effects and with relatively modest capital costs.  It was a real revolution – akin to the industrial revolution – whose ultimate effects we could only guess at.
In looking at the influence of e-commerce on business we thought that the main winners so far had been the high-tech companies which had provided its infrastructure, and the main benefit an extraordinary reduction in the cost of electronic data transmission.  It was, however, much harder to identify the effects of all this at a macro level in the economy.  B2B exchanges were expected to rise in five years to some 6 trillion dollars.  But, it was pointed out, the cost of the goods involved formed a major part of the exchange.  Perhaps a stock market was a better analogy where enormous volumes of transactions took place with only modest profit for the enablers.  Nevertheless it was claimed that, between 1994 and 1998, the information and communications industries had lowered US and UK inflation by 0.5% a year and would increase sustainable growth by 0.5% a year over the next decade.
In looking at the relative weight of B2B exchanges over B2C, we found that B2B’s lead was unsurprising.  Business transactions had traditionally been characterised by the need to exchange large volumes of data for which the internet and IT systems were ideally suited.  Its transparency offered competitive advantages to many suppliers and allowed for buyers to aggregate their purchasing power.  This was, however, a basic approach.  As buyers and suppliers, particularly of sophisticated products, became more integrated and interdependent so open market bidding would decline.  In contrast B2C was a complex area where local cultural factors played a greater part, as did  confidence and trust in the system – two themes which ran through the conference.
Would e-commerce prove a globalising influence?  We noted its characteristics of speed, not just for businesses but also for Governments whose failure, for example, to cut red-tape could materially affect advances in e-business in their countries.  The cost was modest and the technology was easy to operate, factors which had assisted the spread of e-technology and commerce.  But we also noted, on the downside, that speed brought with it the possibility of rapid global contagion as the “Love-Bug” had demonstrated.  It raised problems of exclusion both between developed and developing countries as well as within developed countries and it greatly facilitated certain sorts of crime.
The other key issues were payments, security and language.  The latter seemed to pose the least difficulty in that English was already well established as the language of most common use.  And for those who wished, automatic translation would soon be available.  Payments and security were currently much greater problems.  In both these areas the potential gains were so great that we felt the market would produce better solutions than Government intervention. 
We looked at the role of Governments and the desirability or otherwise of national strategies.  We identified education as perhaps the single most important issue in ensuring that society generally was able to benefit from the e-revolution and that some sectors of society were not excluded (children would in future be e-literate or illiterate).  Sweden was quoted as an example of a country which had, as a matter of Government policy, decided to make Pcs available widely to its citizens of all ages.  We attached, however, equal importance to the training of teachers and the provision of good soft-ware programmes which would allow the hardware to be used effectively.  We saw a role for business in helping schools where children were capable of learning quickly – net skills appeared to be intuitive.  At the other end of the spectrum we were told that certain cities were already in fierce competition for elite talent, and that Government policies on taxation and emigration could determine the outcome.
Some of us suggested that Governments should regard themselves as businesses.  The provision of government services on the net could produce major benefits for the public in terms of convenience and cost.  Savings could be passed back to the tax-payers.  It was urged that Governments should adopt private sector benchmarks for the provision of services.  We should not accept two-tier public/private standards.  More broadly, we suggested that Government would never fully realise the potential of the net until it had absorbed the e-culture into its internal workings and developed new ways of relating to its citizens.
A final comment on the role of Government came from a US participant.  Perhaps the greatest contribution Government leaders might make at this stage of the e-revolution was to highlight its historic potential in their speeches and by their public attitude, thus creating a generally hospitable environment for the technology to develop and spread.
Against this background we looked at the role of regulation and legislation.  A variety of problems were identified together with different approaches on how to resolve them.  We were advised by a participant with long experience that consistency was not a good idea.  The medium was free and flexible.  Heavy handed attempts to impose uniformity would probably be counterproductive and almost certainly overtaken by technology.
There was a strong school of argument that self regulation and, where necessary, co-regulation was preferable to Government regulation – “Market mediated regulation rather than politically mediated regulation”.  The threat of Government regulation could, however, sometimes be a spur to self-regulation.  One participant encouraged the major US companies to think global in terms of the regulatory regime and involve themselves in the debates in the EU and Japan to try to ensure the compatibility and interoperability of the systems and regimes being put in place.
We looked in detail at the questions of privacy, jurisdiction, confidence, tax and crime.  Privacy was a fundamental issue whose definition had caused great difficulty.  In the USA financial information was regarded as almost as sensitive as medical information.  For example the amount of access the Finnish authorities had to information on individuals’ finances would never be accepted in the USA.  The privacy issue needed to be addressed as a priority, since without agreement on privacy there would be no trust and without trust market efficiencies would not be achieved.  The problem was compounded by the fact that a number of countries and regions claimed to have achieved acceptable levels of privacy protection without there being any confidence that they were in practice capable of fulfilling their claims.
Jurisdiction was another problem area, highlighted by the recent decision in the French courts against Yahoo for permitting access by French citizens to Mein Kampf.    It was argued that the French Government was entitled to apply its own law in France but not to impose its legislation and values on the US and other citizens whose laws did not prohibit access to this work.  The hope was expressed that technology might provide an answer to this problem but given the nature of the internet it was hard to see how any technological solution would be proof against people determined to gain access to a website in another country.  We considered the compromise of “safe-harbours” reached after difficult negotiation between the EU and US where mutual recognition of each others regimes had been agreed.  It was pointed out, however, that such solutions depended on a high level of confidence in the social and legal norms of all the parties involved.  To help with the jurisdiction and other difficulties the EU had supported Alternative Dispute Mechanisms.  However, commented one participant, voluntary codes were all very well but at the end of the day they remained voluntary.  Regulation was usually introduced in an attempt to get markets to function more efficiently.  It was doubtful if it could be avoided entirely.
Tax and consumer protection were also discussed.  The EU’s approach that there should be no discrimination between on line and off line sales and that tax should be paid by the consumer raised difficulties for some US participants who pointed to the differing sales tax regimes in individual US states.  The fact that the US had in place a moratorium on taxing e-commerce transactions, could, suggested one participant, become a major trade dispute between the EU and the USA.  More generally where e-commerce led to a transfer of goods, tax appeared to be less of a problem but it was difficult to envisage a wholly effective way of collecting tax on electronic transfers of services.  Consumer protection through industry wide guarantees and insurance, on the model of package holiday sales in the UK, was considered as a possible way of increasing confidence in B2C sales.
In an examination of cyber crime we worried about a highly undesirable and unintended consequence of e-technology, in that it gave criminals enormous new opportunities to commit fraud and attempt perversion of young children.  On closer examination the problem became even more complex.  Reconciling different legal codes and cultures might provide enhanced opportunities for international lawyers but was likely to diminish greatly the advantages offered by e-commerce.  On the specific issue of child pornography we believed that a sufficient consensus existed and might be articulated by UNESCO or some other multilateral body into a binding instrument outlawing those who sought to make use of the net to indulge their perversions.  A final speculative thought was the suggestion that hackers might be employed to identify and disrupt those sites, chat-rooms etc where child abusers might be active.
We concluded that our debate had identified a number of complex issues which posed challenges for companies, regulators and society generally which future Ditchley conferences might examine in greater depth.  One such issue was anti-trust which we touched on briefly at times during the weekend.  The Director duly took note and would like to express his thanks to Andersen Consulting for their help and support for this conference.
This report reflects the Director’s personal impressions of the conference.  No participant is in any way committed to its content or expression.
PARTICIPANTS

Chairman :  Ms Mary A Tolan
Managing Partner for Growth and Strategy, Andersen Consulting.
CANADA
Dr Charles Freedman

Deputy Governor, Bank of Canada.
Mr Martin J Lippert
Vice-Chairman, Royal Bank of Canada.
Dr Peter J Nicholson
Chief Strategy Officer, BCE Inc.
EUROPEAN COMMUNITY
Mr Michael Niebel

Adviser on e-commerce issues, DG INFSO Directorate C, European Commission.
FRANCE 
M Francis Lorentz

Director General LaSer, Galeries Lafayette.
M Christian Menanteau
Director General and Editor, La Tribune.
M Jean-Marc Noël
Managing Director, Trusted Shops GmbH.
GERMANY
Dr Karl Wilhelm Pohl

Founder and partner, Pohl & Merrem Solicitors.
Mr Patrik Zeigherman
Member of the Executive Board, net.IPO AG.
IRISH REPUBLIC
Ms Vivienne Jupp

Partner Government Market Unit, Andersen Consulting.
Mr Brendan Tuohy
Secretary General, Department of Public Enterprise.
UNITED KINGDOM
Mr Robert Ayling

Senior International Adviser, Dorsey & Whitney LLP.
Mr Alastair Ballantyne
Executive Director, Morgan Stanley Dean Witter.
Mr Ian Blair QPM
Deputy Commissioner, Metropolitan Police.
Mr Jonathan Cornthwaite
Partner and Head of e-commerce law, Wedlake Bell, Solicitors.
Dr Amelia Fletcher
Frontier Economics.
Mr Mike Gannaway
Director of Marketing & Communications, Andersen Consulting.
Dr DeAnne Julius
Member, Monetary Policy Committee, Bank of England.
Dr Raymond Knott
Market Infrastructure Division, Bank of England.
Mr William Macintyre CB
Director, Communications & Industries Directorate, Department of Trade and Industry.
Miss Judith Mayhew
Special Adviser to the Chairman, Clifford Chance, Limited Liability Partnership.
Mr Hugh Morris
Partner Communications & High Tech, Andersen Consulting.
Mr Rommel Pereira
Head of Chasedotcom, EAME.
Dr David H Sambar
Chairman, British American Capital Inc.
Mr Peter Settle
Client Director, Strategic Partnerships, I-Solutions, Electronic Data Systems.
Mr John Spencer
Head of E-Business Strategy, HM Customs & Excise.
Mr Ian Taylor MBE MP
Member of Parliament (Conservative), Esher and Walton.
Mr Chris Yapp
ICL;  Director, Internet Society of England.
UNITED STATES OF AMERICA
Ambassador David L Aaron

Senior International Advisor, Dorsey & Whitney LLP.
Mr Gary Bengier
Chief Financial Officer, eBay Inc.
Dr Michael S Greve
Director, Federation Project, American Enterprise Institute for Public Policy Research.
Ms Candace Johnson
Founder and President of Board of Directors, Europe Online Networks SA.
Mr Sarwar A Kashmeri
Co-founder, Publisher and CEO, EbizChronicle.com, Inc.
Mr George M Newcombe
Head, Palo Alto, Californian Office, Simpson Thacher & Bartlett.
Mr Paul S Raines
Vice President – Internet Security, New York Federal Reserve Bank.
Mr Randall Rothenberg
Editor-in-Chief, Strategy & Business, New York.
Mr Fred L Smith Jr
President and Chief Executive Officer, Competitive Enterprise Institute.