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A STATEMENT BY THE RESEARCH AND POLICY COMMITTEE OF THE COMMITTEE FOR ECONOMIC DEVELOPMENT

Library of Congress Cataloging-in-Publication Data

Committee for Economic Development. Research and Policy Committee. The digital economy: promoting competition, innovation, and opportunity : a statement on

national policy / by the Research and Policy Committee of the Committee for Economic Development.p. cm.

Includes bibliographical references. ISBN 0-87186-141-0 1. Electronic commerce—United States. 2. Information technology—Economic

aspects—United States. I. Title.

HF5548.32 .C656 2001 338.973 — dc21

2001017410

First printing in bound-book form: 2001Paperback: $15.00Printed in the United States of AmericaDesign: Rowe Design Group

COMMITTEE FOR ECONOMIC DEVELOPMENT477 Madison Avenue, New York, N.Y. 10022(212) 688-2063

2000 L Street, N.W., Suite 700, Washington, D.C. 20036(202) 296-5860

www.ced.org

iii

CONTENTS

RESPONSIBILITY FOR CED STATEMENTS ON NATIONAL POLICY vi

PURPOSE OF THIS STATEMENT x

CHAPTER 1: FINDINGS AND RECOMMENDATIONS 1Competition Policy 2Innovation and Intellectual Property 3Privacy and Security 4The Digital Divide 5Conclusions 7

CHAPTER 2: WHAT IS NEW ABOUT THE “NEW ECONOMY”? 8The New Economy 8Embracing the Digital Economy and Facilitating Its Growth and Development 11Specific Policy Challenges 12

CHAPTER 3: COMPETITION POLICY 13Antitrust Enforcement and Merger Policy 13Economic Regulation of Market Leaders 19Conclusions 22

CHAPTER 4: INNOVATION AND INTELLECTUAL PROPERTY 23Patents 23Copyright 28Conclusions 31

CHAPTER 5: PRIVACY AND SECURITY 32Privacy 33Security 37Conclusions 44

CHAPTER 6: OVERCOMING THE DIGITAL DIVIDE 45Policy Issues 45Recommendations 46Conclusions 59

MEMORANDA OF COMMENT, RESERVATION, OR DISSENT 60

OBJECTIVES OF THE COMMITTEE FOR ECONOMIC DEVELOPMENT 64

<THE DIGITAL ECONOMY>

PROMOTING

COMPETITION,

INNOVATION,

AND

OPPORTUNITY

The Committee for Economic Develop-ment is an independent research and policyorganization of some 250 business leadersand educators. CED is nonprofit, nonparti-san, and nonpolitical. Its purpose is to pro-pose policies that bring about steady eco-nomic growth at high employment andreasonably stable prices, increased productiv-ity and living standards, greater and moreequal opportunity for every citizen, and animproved quality of life for all.

All CED policy recommendations musthave the approval of trustees on the Researchand Policy Committee. This committee is di-rected under the bylaws, which emphasizethat “all research is to be thoroughly objec-tive in character, and the approach in eachinstance is to be from the standpoint of thegeneral welfare and not from that of anyspecial political or economic group.” Thecommittee is aided by a Research AdvisoryBoard of leading social scientists and by asmall permanent professional staff.

The Research and Policy Committee doesnot attempt to pass judgment on any pend-

ing specific legislative proposals; its purpose isto urge careful consideration of the objectivesset forth in this statement and of the best meansof accomplishing those objectives.

Each statement is preceded by extensivediscussions, meetings, and exchange of memo-randa. The research is undertaken by a sub-committee, assisted by advisors chosen for theircompetence in the field under study.

The full Research and Policy Committeeparticipates in the drafting of recommenda-tions. Likewise, the trustees on the draftingsubcommittee vote to approve or disapprove apolicy statement, and they share with theResearch and Policy Committee the privilegeof submitting individual comments for publi-cation.

The recommendations presented herein arethose of the trustee members of the Research andPolicy Committee and the responsible subcom-mittee. They are not necessarily endorsed by othertrustees or by non-trustee subcommittee members,advisors, contributors, staff members, or othersassociated with CED.

RESPONSIBILITY FOR CED STATEMENTS ON NATIONAL POLICY

vi

RESEARCH AND POLICY COMMITTEE

Co-ChairmenPATRICK W. GROSS, Founder and

Chairman, Executive CommitteeAmerican Management Systems, Inc.BRUCE K. MACLAURY, President

EmeritusThe Brookings Institution

Vice ChairmenIAN ARNOF, Retired ChairmanBank One, Louisiana, N.A.ROY J. BOSTOCK, ChairmanB/com3 Group, Inc.CLIFTON R. WHARTON, JR., Former

Chairman and Chief Executive OfficerTIAA-CREF

REX D. ADAMS, DeanThe Fuqua School of BusinessDuke UniversityALAN BELZER, Retired President and

Chief Operating OfficerAlliedSignal Inc.PETER A. BENOLIEL, Chairman,

Executive CommitteeQuaker Chemical CorporationFLETCHER L. BYROM, President and

Chief Executive OfficerMICASU CorporationDONALD R. CALDWELL, Chairman and

Chief Executive OfficerCross Atlantic Capital PartnersROBERT B. CATELL, Chairman and Chief

Executive OfficerKeySpan CorporationJOHN B. CAVE, PrincipalAvenir Group, Inc.CAROLYN CHIN, Chief Executive OfficerCebizA. W. CLAUSEN, Retired Chairman and

Chief Executive OfficerBankAmerica CorporationJOHN L. CLENDENIN, Retired ChairmanBellSouth CorporationGEORGE H. CONRADES, Chairman and

Chief Executive OfficerAkamai Technologies, Inc.

KATHLEEN B. COOPER, ChiefEconomist and Manager,Economics & Energy Division

Exxon Mobil CorporationRONALD R. DAVENPORT, Chairman of

the BoardSheridan Broadcasting CorporationJOHN DIEBOLD, ChairmanJohn Diebold IncorporatedFRANK P. DOYLE, Retired Executive

Vice PresidentGET.J. DERMOT DUNPHY, ChairmanKildare Enterprises, LLCCHRISTOPHER D. EARL, Managing

DirectorPerseus Capital, LLCW. D. EBERLE, ChairmanManchester Associates, Ltd.EDMUND B. FITZGERALD, Managing

DirectorWoodmont AssociatesHARRY L. FREEMAN, ChairThe Mark Twain InstituteRAYMOND V. GILMARTIN, Chairman,

President and Chief Executive OfficerMerck & Co., Inc.BARBARA B. GROGAN, PresidentWestern Industrial ContractorsRICHARD W. HANSELMAN, ChairmanHealth Net Inc.RODERICK M. HILLS, PresidentHills Enterprises, Ltd.MATINA S. HORNER, Executive

Vice PresidentTIAA-CREFH.V. JONES, Office Managing DirectorKorn/Ferry International, Inc.EDWARD A. KANGAS, Chairman,

RetiredDeloitte Touche TohmatsuJOSEPH E. KASPUTYS, Chairman,

President and Chief Executive OfficerThomson Financial PrimarkCHARLES E.M. KOLB, PresidentCommittee for Economic DevelopmentALLEN J. KROWE, Retired

Vice ChairmanTexaco Inc.

CHARLES R. LEE, Chairman andCo-Chief Executive Officer

Verizon CommunicationsALONZO L. MCDONALD, Chairman

and Chief Executive OfficerAvenir Group, Inc.NICHOLAS G. MOORE, ChairmanPricewaterhouseCoopersSTEFFEN E. PALKO, Vice Chairman

and PresidentCross Timbers Oil CompanyCAROL J. PARRY, PresidentCorporate Social Responsibility

AssociatesVICTOR A. PELSON, Senior AdvisorWarburg Dillon Read LLCPETER G. PETERSON, ChairmanThe Blackstone GroupS. LAWRENCE PRENDERGAST,

Executive Vice President of FinanceLaBranche & Co.NED REGAN, PresidentBaruch CollegeJAMES Q. RIORDANQuentin Partners Inc.LANDON H. ROWLAND, Chairman,

President and Chief Executive OfficerStillwell Financial Inc.GEORGE RUPP, PresidentColumbia UniversityHENRY B. SCHACHT, Chairman

and Chief Executive OfficerLucent TechnologiesROCCO C. SICILIANOBeverly Hills, CaliforniaMATTHEW J. STOVER, Presidentedu.comALAIR A. TOWNSEND, PublisherCrain's New York BusinessARNOLD R. WEBER, President EmeritusNorthwestern UniversityJOSH S. WESTON, Honorary ChairmanAutomatic Data Processing, Inc.DOLORES D. WHARTON, Chairman and

Chief Executive OfficerThe Fund for Corporate Initiatives, Inc.MARTIN B. ZIMMERMAN, Vice

President, Governmental AffairsFord Motor Company

vii

*Voted to approve the policy statement but submitted memoranda of comment, reservation, or dissent. See page 60.

*

*

*

*

SUBCOMMITTEE ON ELECTRONIC COMMERCE

Co-ChairmenIRWIN DORROSPresidentDorros AssociatesROBERT H. LESSINChairman and Chief Executive OfficerWit Soundview Group, Inc.ELLEN R. MARRAMPartnerNorth Castle Partners

Trustees

THOMAS J. BUCKHOLTZExecutive Vice PresidentBeyond Insight CorporationDONALD R. CALDWELLChairman and Chief Executive OfficerCross Atlantic Capital PartnersROBERT B. CATELLChairman and Chief Executive OfficerKeySpan CorporationJOHN B. CAVEPrincipalAvenir Group, Inc.CAROLYN CHINChief Executive OfficerCebizJAMES P. CORCORANExecutive Vice President, Government

and Industry RelationsAmerican General CorporationRONALD R. DAVENPORTChairman of the BoardSheridan Broadcasting CorporationJOHN DIEBOLDChairmanJohn Diebold IncorporatedCHRISTOPHER D. EARLManaging DirectorPerseus Capital, LLCW.D. EBERLEChairmanManchester Associates

EDMUND B. FITZGERALDManaging DirectorWoodmont AssociatesCAROL R. GOLDBERGPresidentThe Avcar GroupALFRED G. GOLDSTEINPresident and Chief Executive OfficerAG AssociatesRONALD GRZYWINSKIChairmanShorebank CorporationJUDITH H. HAMILTONPresident and Chief Executive OfficerClassroom ConnectWILLIAM F. HECHTChairman, President and Chief

Executive OfficerPPL CorporationRODERICK M. HILLSPresidentHills Enterprises, Ltd.WILLIAM C. JENNINGSChief Executive OfficerUS Interactive, Inc.JOSEPH E. KASPUTYSChairman, President and Chief

Executive OfficerThomson Financial PrimarkC. JOSEPH LABONTEChairmanThe Vantage GroupJ. TERRENCE LANNIChairmanMGM MirageWILLIAM W. LEWISDirector, McKinsey Global InstituteMcKinsey & Company, Inc.DAVID E. MCKINNEYPresidentThe Metropolitan Museum of ArtDEBORAH HICKS MIDANEKPrincipalGlass & Associates, Inc.

NICHOLAS G. MOOREChairmanPricewaterhouseCoopersDONALD K. PETERSONPresident and Chief Executive OfficerAvaya Inc.DEAN P. PHYPERSNew Canaan, ConnecticutARNOLD B. POLLARDPresident and Chief Executive

OfficerThe Chief Executive GroupS. LAWRENCE PRENDERGASTExecutive Vice President of FinanceLaBranche & Co.DANIEL ROSEChairmanRose Associates, Inc.EDWARD B. RUST, JR.Chairman and Chief Executive

OfficerState Farm Insurance CompaniesJOHN C. SICILIANOVice President, InternationalDimensional Fund AdvisorsMATTHEW J. STOVERPresidentedu.comCHANG-LIN TIENNEC Distinguished Professor of

EngineeringUniversity of California, BerkeleyLINDA S. WILSONPresident EmeritaRadcliffe CollegeMARGARET S. WILSONChairman and Chief Executive OfficerScarbroughsKURT E. YEAGERPresident and Chief Executive OfficerElectric Power Research InstituteMARTIN B. ZIMMERMANVice President, Governmental AffairsFord Motor Company

viii

*Voted to approve the policy statement but submitted memoranda of comment, reservation, or dissent. See page 60.

*

*

*

Ex-Officio Members

FRANK P. DOYLERetired Executive Vice PresidentGEPATRICK W. GROSSChairman, Executive CommitteeAmerican Management Systems, Inc.CHARLES E.M. KOLBPresidentCommittee for Economic DevelopmentBRUCE K. MACLAURYPresident EmeritusThe Brookings InstitutionJOSH S. WESTONHonorary ChairmanAutomatic Data Processing, Inc.

Non-Trustee Members

ROBERT O. BALL IIIVice President, Business DevelopmentAkamai Technologies, Inc.F. WILLIAM CONNERPresident, eBusiness SolutionsNortel NetworksTHOMAS C. SIEKMANSenior Vice President and General

CounselCompaq Computer CorporationIAN SMITHChairman and Chief Executive OfficerCCG.XM

Special Guests

VINTON CERFSenior Vice President, Internet

Technology and ArchitectureMCI WorldComESTHER DYSONChairmanEDventure HoldingsREG FOSTERVice President and General ManagerGlobal Communications Industry

GroupUnisysJOHN T. MANARASGeneral Counsel, eBusiness SolutionsNortel NetworksCOLIN WATSONSenior Vice President, Strategic

Marketing & e-BusinessKeySpan Corporation

ADVISORSEVERETT EHRLICHPresidentESC Co.ROBERT LITANVice President and Director of

Economic StudiesThe Brookings Institution

PROJECTDIRECTORELLIOT SCHWARTZVice President and Director of

Economic StudiesCommittee for Economic Development

PROJECTASSOCIATESTAREK ANANDANResearch AssociateCommittee for Economic DevelopmentMICHAEL BERGResearch AssociateCommittee for Economic Development

ix

x

PURPOSE OF THIS STATEMENT

When this project began in June 2000,the prospective impact of the Internet and e-commerce on the national and global econo-mies was less clear than it is today. Some viewit as ironic that convincing evidence of anew, more productive economy has emergedjust as the U.S. economy has begun to slowfrom its nearly ten-year expansion and the“dot-com bubble” has burst. Nevertheless, ithas become clear that the spread of digitalnetwork technologies, in particular theInternet, is rapidly transforming the way wework and live. Developments in informationtechnology are making the exchange of glo-bal information faster, easier, and more per-vasive, thus redefining the productive capaci-ties of the global economy. From ourperspective, the deflating of the dot-comssuggests that the new economy operates un-der the same principles and standards as theold. Profitability and competition still mat-ter. Similarly, we can now see more clearlythat e-commerce is not an oddity detachedfrom normal business practices, but a tool tobe integrated into nearly all forms of com-mercial activity.

CED’s study of the digital economy fo-cuses on the two-way interaction betweenpublic policies and e-commerce. In one di-rection, Internet-based commercial activity ischallenging government policies and theprinciples that underlie them, for examplein the protection of intellectual property,where new technology undercuts the physi-cal basis of copyright protection. In theother direction, government policies areshaping the development of these technolo-gies and the business models that employthem, as illustrated by the effects communi-cations policies are having on the develop-ment of broadband services and the compe-tition between cable and telephone-basedsystems.

Although e-commerce is already makingsubstantial contributions to economicgrowth, it has enormous potential to contrib-ute even more. The digital economy is still inits infancy. Its growth is limited by numerousfactors, including public concerns regardingconsumer privacy and computer security,and government policies that are sorely inneed of modernization. At this early stage inthe evolution of Internet-based commerce,the decisions of business and governmentleaders can have an extraordinary influenceon the future course of events. As businessand education leaders, we recognize thegrowing importance of e-commerce to oureconomy and society. We hope that our rec-ommendations on some of the central policyissues facing the digital economy will helpguide its development in ways that promotesustained economic growth with opportunityfor all, CED’s long-held goal.

CED’S DIGITAL CONNECTIONSCOUNCIL

This policy statement is only a first step.We plan to maintain an ongoing interest andpresence in this area. In particular, we wel-come reader comments on the policies dis-cussed in this policy statement or on otherissues of related interest. Comments shouldbe directed to the project director, ElliotSchwartz, who can be reached throughCED’s website (www.ced.org).

To sustain discussion of these issues, CEDhas assembled leaders from businesses andother institutions that are guiding societyinto the digital age who have direct expertisein the field of information technology. To-gether, these leaders will form CED’s DigitalConnections Council. The Digital Connec-tions Council will build on the recommenda-

xi

tions of this report, provide a forum foropen discussion of current and emerginge-commerce issues, and exchange informa-tion on successful programs and methodsthey have employed. The Council will pickup where The Digital Economy leaves off inhelping to amplify the benefits and reducethe frictions of the new economy.

ACKNOWLEDGMENTSThis policy statement was developed by

the committed and knowledgeable group ofbusiness, academic, and policy leaders listedon pages viii and ix. We are grateful for thetime, effort, and care that each put into thedevelopment of this report.

Special thanks go to the subcommitteeco-chairs, Irwin Dorros, President of DorrosAssociates, Robert Lessin, Chairman andCEO of Wit Soundview Group, Inc., andEllen Marram, Partner at North Castle Part-ners, for their guidance and leadership.Others who took leadership roles by chairingworking groups on the substantive issuesinclude Carolyn Chin, Donald Peterson,

John Siciliano, and Martin Zimmerman. Weare also indebted to Elliot Schwartz, VicePresident and Director of Economic Studiesat CED, and Van Doorn Ooms, CED’s SeniorVice President and Director of Research, fortheir contributions, and to Tarek Anandanand Michael Berg for research assistance.Thanks are also due to the project’s expertadvisors, Everett Ehrlich and Robert Litan,for their substantial contributions to thiswork, and to Fred Cate, Professor of Law andDirector of the Information Law and Com-merce Institute at Indiana University, whocontributed at an early stage to our under-standing of many of these issues.

Patrick W. Gross, Co-ChairResearch and Policy CommitteeFounder and Chairman, Executive CommitteeAmerican Management Systems, Inc.

Bruce K. MacLaury, Co-ChairResearch and Policy CommitteePresident EmeritusThe Brookings Institution

The spread of digital network technolo-gies, in particular the Internet, is rapidlytransforming commercial relationships, eco-nomic opportunities, and social life. Overall,these technologies are creating beneficialeconomic and social change. Faster, easier,and more pervasive exchange of global infor-mation is intensifying competition, fosteringmarket economies, expanding choice andopportunity, improving productivity, and rais-ing global education and living standards. Atthe same time, these technologies are dis-rupting established practices and forcing pri-vate enterprise, government, and other socialinstitutions to adapt. Individuals, whether act-ing as consumers, workers, students, or inother roles, are also adapting to these newtechnologies.

The United States and other nations thatface such changes must facilitate the produc-tive deployment and acceptance of digitalnetwork technologies to reap the substantialgains they offer. The actions that need to betaken are reasonably clear. In general terms,the government must preserve and protectthe underlying institutions and incentivesthat have propelled us to economic success.It must continue to foster innovationthrough the legal and practical protection ofintellectual property—patents, copyrights,and trademarks—and a competitive environ-ment that allows each producer a chance tocompete in open markets. Firms operatingover the Internet and using other digitaltechnologies need to ensure that proprietaryand personal information of customers isprotected for those who wish it, that unwant-

ed material can be blocked by consumerswho wish to block it, that legitimate govern-ment surveillance can be carried out subjectto court-ordered approval and limited only tothose included in the court order, and thatconsumer scams over the Internet are moni-tored and removed. Consumers need tomake greater efforts to educate themselvesabout their rights, obligations, and means ofself-protection when engaged in online com-merce. In addition, government and businessmust work together to improve access tothese path-breaking technologies for thosewho typically lack such access and to closethe gaps in economic opportunity by usingthe new technologies to improve education,computer and Internet literacy, and the deliv-ery of social services.

We are at an important stage in the evolu-tion of digital network technologies, govern-ment policies, and business strategies, wherethe decisions of business and governmentleaders can have an extraordinary influenceon the future course of events. This reportfocuses on key public policy issues that willshape the environment not only for e-com-merce, but for other commerce as well,which increasingly relies on network tech-nologies. The report does not try to tackle allproblems, nor does it always provide detailedsolutions. For example, we do not addresssuch important economic issues as taxationof online sales, cross-boundary dispute reso-lution, and product life-cycle concerns(including environmental impacts). Nor dowe address the profound implications forsociety of such social concerns as the legiti-

1

Chapter 1

FINDINGS AND RECOMMENDATIONS

macy of cyber-identities, the rules of civilbehavior (netiquette) in virtual realities, andthe decisions of firms and individuals onwhere to locate and reside.

We have selected a limited number of dif-ficult problems that, in our judgment, arebest addressed by the practical application ofthe sound principles that already underpinour economic system. This report is focusedspecifically on four key areas of public policythat have been roiled by technological andcommercial developments: competition, intellec-tual property, privacy and security, and the gap inskills and income. In the broadest terms, ourrecommendations follow four key findings:

• The success of the U.S. economy inachieving high productivity growth is dueto a combination of factors, including theexistence of a skilled and flexible laborforce, advances in technology, innovationsin business practices, pursuit of economicpolicies that favor investment, and promo-tion of economic opportunity in all seg-ments of society.

• The principles that underlie current poli-cies are generally sound. In some areas,however, the problem is finding practicalsolutions that apply those principles in aneconomy that extensively employs digitalnetwork technologies.

• In some cases, enforcement of existinglaws needs to adapt to changes that haveoccurred in the technological and eco-nomic landscape. The Internet haschanged, undercut, or reduced the rele-vance of some of the means by which laws,rights, and responsibilities have beenenforced.

• Market competition will in time resolvemany of the issues that seem difficulttoday. In part, we need the patience toallow sufficient time for markets torespond.

We recognize that our recommendationswill not completely resolve all problems. Wealso recognize that policy solutions generallycannot be contained within existing local,regional, and even national jurisdictions.Many policies will require international con-sistency, although not necessarily uniformity,to be effective. But we believe that our per-spective, based on experience and businessleadership, will point the way toward a con-tinuing and fuller examination of these issuesand their resolution in the directions we indicate.*

COMPETITION POLICYIn many instances, the Internet increases

competition by lowering barriers that inhibitmarket entry. In a networked economy, how-ever, competition policy must cope with thepotential for some markets to result in lessshort-run competition due to network exter-nalities, which generate substantial benefitswhile tending to favor a single market leaderat any one time. In addition, the speed oftechnological change puts pressure on gov-ernment officials to respond more quickly toantitrust and merger issues.

Competition: Findings and Recommendations.CED finds that in policing anti-competitivepractices—predatory and collusive actions—antitrust policy remains as relevant in thenew economy as in the old. However, otherpolicies on competition and economic regu-lation are losing relevance in an economycharacterized by rapid technological change,lower barriers to market entry, and theprominence of networked products and ser-vices. These policies must be reconsideredand reoriented.

Antitrust (pages 15-16)

• Predatory and collusive practices shouldbe prosecuted in the new economy as theyhave been in the old.

2

The Digital Economy

*See memorandum by JOHN DIEBOLD (page 60).

• In an economy characterized by rapid technological change, antitrust authoritiesshould not take preemptive actions toresolve prospective market dominanceissues that are likely to be resolved bymarket competition.

• The antitrust process should be reformedto include a greater emphasis on promptresolution of issues and cases. Antitrustremedies should lean toward conduct-oriented penalties, rather than structuralones; substantial monetary fines shouldalso be an option. Federal antitrust law-suits should pre-empt state actions.

Mergers (pages 17-19)

• U.S. merger guidelines should raise thedollar threshold from $15 million to $100million for reporting and adhere to a fourto six month limit on the time for review.

• U.S. authorities should work with otherjurisdictions, in particular the EuropeanUnion, to coordinate merger reviews andharmonize standards.

Economic Regulation (pages 19-22)

• Regulators should adopt a wait-and-seeapproach, rather than act preemptively to regulate an industry based on the viewthat a particular technology will confer aninsurmountable competitive advantage.

• When the goal of regulation is to achieve asocial objective, such as the subsidizationof service to high-cost areas, that objectiveshould be addressed through directspending programs rather than by mandat-ed rate structures.

• The goal in broadband markets should beto allow separately regulated markets toconverge toward common rules of compe-tition and taxation. The transition fromthe current system of regulation, however,must be made carefully to avoid creatingdisincentives to investment.

INNOVATION ANDINTELLECTUAL PROPERTY

Intellectual property protection ensuresthat innovators and other creators have sufficient incentive to bring their works tomarket. As we move towards a digital econo-my powered by the Internet and low-costinformation processing and communication,each component of the intellectual propertysystem is being challenged, in particular, thetraditional standards of invention and patentprotection. In addition, the ability to dupli-cate and transmit at near zero marginal costall types of information–data, images, voices,or other digital signals–is changing thenature of the intellectual property protectionproblem by leaving the legal rights to creativeproperty intact while making full enforce-ment of those rights nearly impossible.

Intellectual Property: Findings andRecommendations. CED finds that the founda-tion that underlies intellectual property policy is strong. The application of that poli-cy, however, has created problems in somespecific cases. In some instances, such as auto-mated business method patents, current poli-cy undermines the key objective it seeks topromote—the long-term flow of innovationand creative works. The issuance of patentsfor such common activities as business refer-rals and rapid retail checkout has the poten-tial to divert economic resources to “innova-tions” that are neither productive nor suffi-ciently creative. In addition, for parties thatgather and generate data, current law isunclear as to the copyright protections thatthey retain and unhelpful in terms of provid-ing the appropriate incentives to the develop-ment of electronic information. Blatant copy-right violations, especially for text and media,are a significant concern. A balance needs tobe found between compensation for thevalue-added contributions of authors and per-sonal and fair uses (for example, recording atelevision program for later viewing, or using

3

Chapter 1: Findings and Recommendations

published works in an educational setting orpolitical commentary). Better enforcement ofrights is part of the answer. The combinationof technological solutions and competitivemarket-based outcomes offers the most likelyresolution of current problems.

Patents (pages 23-28)

• Automated business methods should notbe subject to patenting when they merelyreplicate existing physical practice or areobvious. Copyright should be used as themore suitable protection for specificimplementation of a business process by a computer program.

• The patent application process should bemore open to public review and comment.

• The patent system should not create newtypes of patents, differentiated by type ofinvention or number of years of protec-tion.

Copyright (pages 28-31)

• Existing principles for establishing copy-rights should apply regardless of whetherthe content is in digital or analog form.

• Education and enforcement should beused in both public and private efforts tocope with the new realities of copyrightlaw. Private efforts should also emphasizetechnological solutions and better busi-ness models. Enforcement, however,should not be designed to protect a specific technology or business model.

• The United States must engage the inter-national community in standard-settingprocesses, while maintaining the highestpossible standards of intellectual propertyprotection.

PRIVACY AND SECURITYIssues of privacy, consumer protection,

and business security have taken on greaterurgency because of fear that the power of

digital networks could be easily abused.Concerns on the part of consumers aboutthese issues hinder the growth and develop-ment of e-commerce. At the same time, busi-nesses also have concerns related to the costsof guaranteeing the privacy of consumerdata, theft of proprietary business informa-tion, infection by computer viruses, comput-er hacking, and “denial of service” attacks.

Privacy and Security: Findings andRecommendations. Privacy concerns stem fromseveral sources, but in general they start withinformation gathering methods on theInternet that are unique or at least qualita-tively different from anything that precededthem. Many consumers, businesses, and legis-lators lack an accurate understanding of therisks and the protections applicable to onlinecommerce. Even if minimum standards arelegislated, these issues will require action byconsumers and businesses to increase under-standing of potential online dangers and themeans of safely navigating commercial web-sites. Online security threats can be dimin-ished but are unlikely to go away.* The moredependent we are on networks, the more vul-nerable we become to disruptions. The eco-nomic benefits of computer networks vastlyoutweigh the costs due to network interrup-tions, hacking, viruses, and other online dan-gers; nonetheless, those costs can all bereduced through greater security measures.

Privacy (pages 33-37)

• A federal privacy law should establishonline privacy standards. Specifically,businesses, governments, and other par-ties that provide content through digitalinterfaces should be required to disclosefully their practices and policies concern-ing privacy. The federal law should allowand encourage the use of voluntary trustmarks such as BBBOnline and TRUSTe.The Federal Trade Commission should be responsible for enforcement of privacy claims.

4

The Digital Economy

*See memorandum by EDMUND B. FITZGERALD(page 61).

• A federal privacy law should be written ina manner that allows the use and appro-priate disclosure of information neededfor the delivery of services in areas suchas health and finance, which depend heav-ily on the use of such data.

• In general, markets should be allowed suf-ficient leeway to mediate privacy concernsbetween consumers and businesses.

• Businesses and consumers share responsi-bility for educating consumers about thebenefits and costs of privacy restrictions,options for protection, and ways toexpress their preferences.

Security (pages 37-44)

• Businesses should make greater use ofencryption, electronic firewalls, and simi-lar techniques to ensure privacy and secu-rity. Likewise, consumers should takeresponsibility for their online activitiesand educate themselves about the stepsthey can take to improve their security.

• We support strong encryption and wish toavoid a return to policies that restrictencryption technology or limit it to theUnited States.

• We encourage further development ofsecurity reporting systems that allow busi-nesses to report hacking, breaking in,viruses, and other security breachesanonymously, without fear of possiblelegal or financial repercussions.

THE DIGITAL DIVIDEThe spread of digital network technolo-

gies may exacerbate exisiting income andskill gaps, which are already the object ofnumerous public and private programs, bothdomestic and international. Leaders of busi-nesses, civic organizations, educational insti-tutions, and governments have expressedconcern that significant portions of theUnited States and world populations have

thus far not enjoyed the economic and socialbenefits of the Internet because they do notpossess the physical access or basic computerand Internet skills needed to participate inthe digital world.

Digital Divide: Findings and Recommend-ations. The gap between the haves and have-nots of the digital age reflects a lack of tech-nological literacy and access to the Internet,especially among low-income populations.We expect, however, that the current gap inInternet use will narrow in time as a result ofless costly equipment and services, simpleruser operations, more attractive content(including the provision of government ser-vices), and the success of numerous public,private, and nonprofit programs to provideaccess to the Internet and training in basiccomputer literacy.

Bridging the digital divide is in both thenarrow and broad interests of the businesscommunity.* Businesses will gain directly asthe proportion of the population onlinegrows and indirectly as rising prosperity andstronger communities strengthen society.Therefore, business leaders have a particular-ly strong interest in supporting steps to closethe divide. To the business community, thedigital divide presents a barrier to greatereconomic prosperity, a larger potential cus-tomer base, and a high-skilled and more pro-ductive workforce. In that respect, the digitaldivide does not present business or societywith significantly new issues beyond thosealready encompassed in efforts to raise theeducation, skills, and economic potential oflow-income individuals. CED therefore viewsit as critically important that efforts and newprograms to overcome the digital divide notbecome a short-term fad that siphonsresources and energy from core programsaimed at economic advancement. Instead,such efforts should be integrated with cur-rent programs aimed at raising skills andincome; those programs should use the newtechnologies to achieve better results; and

5


*See memorandum by EDMUND B. FITZGERALD(page 61).

high-quality efforts should be sustained overa long period.

General (pages 46-47)

• Programs to close the digital divide shouldnot substitute for sustained efforts to liftpeople from poverty. Computer- andInternet-oriented goals should be integrat-ed into programs that concentrate ondevelopment of basic skills, education,and social and physical infrastructure.New digital technologies should beapplied to enhance the performance ofthose programs.

Access and Literacy (pages 47-53)

• Public and private programs should pro-mote widespread access to the Internet asrapidly as possible. The development ofcommunity access points should be a pri-ority. Computer and Internet literacyshould be fundamental components ofbasic public education and workforcetraining programs. Short-term public andprivate initiatives should focus on provid-ing access to basic digital applications (forexample, email and the Web). We encour-age state and local communities to experi-ment with Internet-based programs andintegrate digital technologies into pro-grams that meet traditional economic andsocial objectives.

• CED supports the objective of equippingschools and libraries for the digital age,but equipment must be accompanied bytraining. Sufficient funds should be madeavailable to support a wider array of tech-nology-related needs, including profes-sional development and classroom soft-ware. In addition, such programs shouldbe funded in ways that allow integration of decision-making for these and othereducational purposes.

• CED recommends that both new and con-tinuing teachers receive comprehensive professional training in the use of com-puters and the Internet for education.

• Because numerous digital divide programsalready exist, while others are being pro-posed and developed, it is important thatappropriate resources be devoted to theirsynthesis and evaluation.

Content to Attract Users (pages 53-56)

• CED encourages private and governmentproviders of Internet content to addressthe interests of the low-income popula-tions that thus far have been excludedfrom the Web.

• Federal, state, and local governmentsshould provide their internal and externalservices electronically and promote theiruse.

Global Issues (pages 56-59)

• Global efforts should proceed with athree-pronged strategy. First, developingcountries should help themselves by estab-lishing the basic institutional groundworkfor sustained economic growth. Second,with international aid organizations, theyshould address the same access and litera-cy issues that are being pursued in theUnited States. Third, they should improvethe technological capabilities of mediumand smaller businesses to engage in inter-national electronic commerce.

• CED urges larger businesses to considerthe implementation of volunteer-based“Digital Corps” programs to supportsmall business development in developingnations.

6

The Digital Economy

CONCLUSIONS The Internet is generating substantial

benefits for businesses, workers, and consumers. Those benefits will not be fullyrealized without some changes in govern-ment policies and similar adaptations by businesses and consumers. This reportembraces the economic advances that areoccurring, seeks new solutions to some oldproblems, and recommends specific actionsthat businesses, governments, and individualscan take to maximize the benefits and mini-mize the costs of the economic transforma-tion we are experiencing.

7


Few observers of American business at thebeginning of the 21st century need to beconvinced that commerce conducted overthe Internet—e-commerce—is of growingimportance to the world economy. Yet, suchcommerce is not well understood. Even itsscope and size are poorly defined and mea-sured. In such an environment, both businessand government decision makers are havingdifficultly understanding this phenomenonand sorting through options for its develop-ment and use.

We are now in a transition stage wheremany of the benefits of e-commerce remainto be realized through continued innovationand diffusion of new technologies and prac-tices. Users are gaining familiarity with thisnew medium of commerce and experiment-ing with new products, services, businessesprocesses, and consumer preferences. Theresults of these experiments will establish thepotential for future economic growth andopportunity.

Based on the accumulated evidence thatinformation technology in general and e-commerce in particular are fueling growthin labor productivity and consumer welfare,we feel confident that these technologies willprovide a strong basis for future economicgrowth, even if temporary setbacks occur.That judgment is tempered only by theawareness that no gains can be guaranteed tocontinue just because they have occurred in the past. Continued growth depends in part

on the resolution of many difficult policyissues that have accompanied the develop-ment of Internet-based commerce. The rec-ommendations of this report aim to facilitatesuch growth through specific policy reforms.

THE NEW ECONOMY Advancements in information technolo-

gies have led in particular to two watersheddevelopments. The first is the conversion ofinformation and its storage in digital form—the zeros and ones of computer language.The second is the creation of a ubiquitouscommunications network, based on openrather than proprietary access, for rapidretrieval and transmission of such informa-tion—that is, the Internet.2 These two devel-opments have combined to create the capaci-ty for nearly instantaneous storage, retrieval,reproduction, and transmission of all types ofinformation at very low incremental cost andthereby to fuel the so-called “new economy”.

A significant element of the new economyis the commercial use of the Internet. TheInternet has created a virtual world of com-merce that is transforming the conduct ofbusiness. An important feature that makesthe Internet different from previous commer-cial electronic media is its accessibility to con-sumers and smaller businesses that had beenleft out of some forms of private electronic

8

Chapter 2

WHAT IS NEW ABOUT THE “NEW ECONOMY?”1

1. Informed readers may skip this background chapter and go directly to the issues in chapters 3-6.

2. See Kahn, Robert E. and Vinton G. Cerf. “What Is TheInternet (And What Makes It Work).” Internet Policy Institute.December 1999. http://www.internetpolicy.org/briefing/12_99_story.html.

commerce. The Internet enables the forma-tion of new products and services, new busi-ness providers, and new and more efficientways of providing existing goods and services.Long-established companies are using thetools of the new economy to become moreefficient and more responsive to their cus-tomers.

From an economic perspective, one of thekey differences between the “old economy”and the “new economy” is the increasedimportance of network effects.3 Networks cre-ate positive feedbacks, which amplify benefits;in a network, the whole can be greater thanthe sum of its parts.4 In individual markets,however, network effects can lead to “winnertake all” outcomes, where both positive andnegative feedbacks lead the strong to getstronger and the weak to get weaker. As indi-cated throughout this report, although net-work effects are not new—they are present inmost forms of transportation and communica-tion—they will play an increasingly importantrole in the economics and policy issues of thenew economy. Nevertheless, network effectsare not the only means by which the Internetaffects competition. Even where networks areless important, competition can flourish andintensify because the Internet lowers transac-tion costs, makes price comparisons amongsuppliers easier, and reduces advantagesbased on location.

Of course, the Internet is not the only factor creating the new economy, and thenew economy is far from a revolutionarybreak from the old economy. No clear delin-eation exists between new and old, orbetween e-commerce and traditional com-merce. Firms engaged in e-commerce, both old and new, are using the Internet andother forms of information technology to

create new products and services and to deliver old products and services in newways.5 They are innovating business practicesthrough such methods as just-in-time inventory control, greater use of Intranets for internal communications, and otherchanges in the organization of business. Aswhen faced with other aspects of a competi-tive marketplace, firms that fail to take advan-tage of opportunities provided by informa-tion technologies and networks to cut costsand improve quality struggle to compete. Atthe same time, newer Internet-based busi-nesses are finding that it takes more than anew technology and an interesting conceptto compete successfully.

The New Economy GeneratesEconomic and Social Benefits

The commercial use of the Internet andassociated technologies is a major factor inraising productivity growth—output per hour of work—which is the key to raisingincomes.6 Higher productivity growth produces large economic and social benefits

9

Chapter 2: What Is New About the “New Economy”?

3. Shapiro, Carl and Hal R. Varian. Information Rules: AStrategic Guide to the Network Economy. Boston, MA: HarvardBusiness School Press, 1999. pp. 173-225.

4. Mann, Catherine, Sue Eckert, and Sarah Cleeland Knight.Global Economic Commerce. Washington, D.C.: Institute forInternational Economics, 2000. p. 27.

5. By e-commerce, we mean financial and commercial transac-tions that take place electronically over open networks, includ-ing on-line sales, off-line support, other internal business applications (such as infrastructure used to support electronicbusiness processes and conduct electronic commerce transac-tions), and on-line services for which no charges are assessed(typically, informational websites). See Organization forEconomic Cooperation and Development (OECD). TheEconomic and Social Impact of Electronic Commerce: PreliminaryFindings and Research Agenda. 1999. pp. 28-29.

6. See for example, Blinder, Alan. “The Internet and the NewEconomy.” Brookings Policy Briefs. Number 60. June 2000.http://www.brook.edu/comm/policybriefs/pb060/pb60.pdf. andJorgenson, Dale and Kevin Stiroh. “Raising the Speed Limit:U.S. Economic Growth in the Information Age.” BrookingsPapers on Economic Activity. Volume 1. March 2000. pp. 125-211.In recent years, the measured rate of growth of labor produc-tivity in the United States has accelerated. From about 1973 to1995, labor productivity growth averaged about 1.4 percentper year, less than half the rate experienced from the end ofWorld War II until 1973. But from 1995 through 2000, thatgrowth rate suddenly rose again to about 3.0 percent. Litanand Rivlin estimate that economy-wide cost savings could easilyexceed $200 billion annually. See Litan, Robert E. and AliceM. Rivlin. “The Economy and the Internet: What Lies Ahead?,”Conference Report #4. The Brookings Institution. December2000. http://www.brookings.edu/comm/conferencereport/cr4/cr4.htm.

when sustained over a long period. The basisfor much of these productivity gains is thedisruption of traditional, less efficient marketrelationships.7 In many markets the Internetcuts out the middleman and allows upstreamfirms and their downstream customers todeal directly. Examples abound of airlines,hotels, stock brokers, computer makers, andautomobile manufacturers cutting away attraditional retail channels to deliver productsand services more efficiently and effectivelythrough the Internet. Other gains comeabout by using better and faster informationto reduce inventories, lower transaction costs,and deliver products and services—such asmusic, computer software, and airline tickets—directly over computer networksrather than in physical form.

Rising productivity frees resources thatcan be put to high-value uses elsewhere. Inaddition, new markets create new opportuni-ties and have led to the creation of new firmsto help consumers navigate the potentiallytreacherous and confusing avenues of cyber-space. These include firms like AOL andYahoo!, which seek to be the trusted portalsthrough which Internet users enter theWorld Wide Web; Amazon, which deliversdirectly to one’s door products ranging frombooks to home furnishings; and e-Bay, whichcreates new markets everyday for the sale ofproducts directly to consumers by other indi-viduals or small businesses. Numerous exam-ples of product and service improvementsexist, as companies that employ the Internetinnovate to meet consumers’ needs throughonline shopping, easy comparison of prices,provision of product information, and otherproduct enhancements that could not previ-ously be accomplished at reasonable cost.

The economic benefits conferred by digital network technologies are accompa-nied by social benefits that may be equally

significant.8 The Internet has made the worldseem smaller by reducing the cost and diffi-culty of communication. It has also promoteda sense of community both within specificgeographic locations and among physicallyseparated users who can meet in cyberspaceto share common interests. Overall, theInternet is an empowering tool that opens aworld of information to the user. People inremote areas can more easily gain access toinformation and services, such as health, edu-cation, and training that previously were lim-ited by physical barriers. The ease of commu-nication and the difficulty of censoring itpromote open societies and make centralstate control much more difficult. Some insti-tutions, including publicly held corporations,are allowing individuals to cast votes over theInternet, thus opening a new means of accessto those otherwise unable to participate.

Governments at all levels are finding thatthey can deliver services more effectively andefficiently by using the Internet. Through theWeb, services can be customized to an indi-vidual’s needs, for example by providing aone-stop portal for government programs.Citizens can more easily access and correctpersonal information, such as their record ofSocial Security earnings. The Internet alsoallows governments to be more efficient intheir own internal processes and procure-ment.

The New Economy Has CreatedInsecurities for Those Who Lack Skills

Leaders of businesses, civic organizations,educational institutions, and governmentshave expressed concern that significant por-tions of the United States and world popula-tions have thus far not enjoyed the economicand social benefits of the Internet becausethey do not have access or possess basic skills.The inability to participate in new forms of

10

The Digital Economy

7. See Schumpeter, Joseph. The Theory of Economic Development.Cambridge, MA: Harvard University Press, 1934.

8. See OECD, The Economic and Social Impact of ElectronicCommerce: Preliminary Findings and Research Agenda, pp. 146-153.

online interaction may have both immediateand long-lasting economic and socialimpacts. The primary concern is that this“digital divide” could lead to a situationwhere those with inadequate training andaccess to information technology would berelegated to a lifetime of low-skill jobs andlow wages. Specifically, the concern is thatthe same network effects that make theInternet so valuable to those who use it willwork as strongly in the opposite direction todisadvantage those who do not. The wagepremium now being paid to skilled informa-tion technology workers has intensified long-standing concerns about the educationand acquisition of job skills and training ofdisadvantaged persons.

EMBRACING THE DIGITALECONOMY AND FACILITATINGITS GROWTH ANDDEVELOPMENT

Government and business decision makerswill greatly influence the future course of thedigital economy. Business decision makerswill face difficult choices on a daily basis.However, the fundamental calculus of com-petitive, market-driven business decisionmaking is unlikely to be changed, even ifboth the risks and rewards are increased.Similarly, public officials should be guided bythe fundamentally sound principles that havehelped the U.S. economy achieve success:

• Private ownership of property and com-petitive markets form the foundation forthe allocation of resources and the distrib-ution of income. The government ensuresthat private contracts are enforced, estab-lishes policies that set the permissiblerules of competition, and enters marketsonly when they fail.

• To support innovation the governmentgrants incentives through temporaryexclusive property rights (patents andcopyrights).

• The government upholds equality ofopportunity through support of universaleducation and other programs to improvework skills.

For the most part these principles, andthe policies that carry them out, should continue to provide a solid foundation upon which economic growth and socialadvancement can be built. In some instances,however, while the principles remain strong,existing policies are being challengedbecause newer digital network technologiesoperate differently than older systems. Inthose cases, public decision makers will confront the difficult task of forging newpolicies and programs that conform to thedigital age.

Government policies and programs that have supported the growth of the digital economy,such as overall macroeconomic policy, marketderegulation, support for R&D and education,and encouragement of the development of private capital markets (especially the market forventure capital), need to be maintained andimproved.9

Macroeconomic policy has made animportant if under-appreciated contributionto the development of e-commerce and the “new economy.” Sustained economicgrowth based on investment oriented fiscaland monetary policies has generated themarkets and income needed to fuel invest-ment and the environment to encourage risktaking. New investment tends to embody newtechnology. Thus, a higher investment ratespeeds the introduction and diffusion of neweconomy technologies. Between 1995 and1999, real business investment in information

11

Chapter 2: What Is New About the “New Economy”?

9. These policies have been supported by CED in previouspolicy statements. See footnotes 11 and 12 for specific references.

technology equipment and software morethan doubled, from $243 billion to $510 billion.10 The maintenance of a pro-investmentmacroeconomic policy that fosters rapid economicgrowth with low inflation is a prerequisite to pro-motion of innovation and closure of the so-calleddigital divide.11

An important factor in sustaining eco-nomic growth and in boosting the adoptionof digital network technologies has been economic deregulation. There is little doubtthat the deregulation of the U.S. telephoneindustry that began in 1984 and culminatedin the Telecommunications Act of 1996 hasspurred competition through innovation incommunications. As important, where thegovernment has continued to be involved ithas generally promoted competition andexpanded network connections, for examplethrough support of interconnect agreementsbetween new entrants and existing localexchange carriers. The deregulation of capi-tal markets has been one of the key factorsfueling new economy entrepreneurship andinvestment. The robustness of U.S. capitalmarkets and the role of venture capitalists isthe envy of the world. These sources of economicgrowth need to be preserved.12

Government and private-sector supportfor research and development has been a keyfactor in the development and deployment ofdigital network technologies. The Internetwas a direct product of federal spendingthrough the Defense Advanced ResearchProjects Agency (DARPA) and the NationalScience Foundation (NSF) to support com-munication among research scientists. After a long decline, real R&D spending by thefederal government, which supports basic and applied research, increased between

1998 and 2000 by about 3.8 percent. Spend-ing by industry and universities, mostly for applied research and development, alsoincreased over the same period.13 Maintainingsupport for research is critical to the further growthof the digital economy.14

SPECIFIC POLICY CHALLENGES

The potential for the Internet to benefitthe economy and society through higher productivity growth and increased consumerwelfare will not be realized unless govern-ment and business leaders respond appropri-ately to numerous policy challenges. It seemsclear that the benefits can be substantial. Asanalyzed in the following chapters, the policyissues are complex and significant but notinsurmountable. In many cases, the Internetis a new dimension that forces a rethinkingof how current policies are carried out. Inother cases, it is fair to say that the Internethas merely focused new attention on a policyarea that was long overdue for reexamina-tion, regardless of recent technologicaladvances. The following chapters analyzepolicies on competition, innovation andintellectual property, privacy and security,and the digital divide.

12

The Digital Economy

10. U.S. Department of Commerce. Digital Economy 2000.Washington, D.C.: GPO, June 2000. p. v.

11. See CED, Growth With Opportunity, 1997, and RestoringProsperity: Budget Choices for Economic Growth, 1992.

12. See CED, Modernizing Government Regulation: The Need forAction, 1998, and Growth With Opportunity, 1997.

13. National Science Foundation, Division of ScienceResearch Studies. “National Patterns of R&D Resources: 2000Data Update.” NSF (01-309). December 2000. Table 1B.http://www.nsf.gov/sbe/srs/nsf01309/start.htm.

14. See CED, America’s Basic Research: Prosperity ThroughDiscovery, 1998.

The Internet has heightened competitionin many markets. As described in Chapter 2,e-commerce has been a disruptive but cre-ative force. It upsets the equilibrium of mar-kets by offering more efficient and less costlyservices and by removing advantages thatoften protect the market power of incumbentfirms. But the vigorous competition createdby the introduction of e-commerce technolo-gies and new business models based on thosetechnologies is raising productivity andincomes.

In some markets, however, Internet-basede-commerce has the potential to result indominance by a single market leader. Thatwould come about because network external-ities and economies of scale, hallmarks of e-commerce technologies, tend to reinforcethe competitive advantages of the marketleader.15 Thus, competition policy, whichfocuses on antitrust violations and mergeractivity, has become a significant concern inthe new economy.

A second factor prompting concern aboutcompetition policy is the speed at which tech-nology is changing. Some believe that tech-nology is changing so rapidly in the high-techworld that antitrust laws are irrelevant or, atthe very least, that regulators and the courtssimply cannot keep up with markets that areconstantly changing and making once domi-nant technologies obsolete.

A separate but related concern involvesthe treatment of industries where the poten-tial for market dominance by a single firm

has led to economic regulation. In someareas of the new economy, notably telecom-munications, the legacy of economic regula-tion is a hindrance to effective market com-petition and technological change becausecompetition now crosses the traditional mar-ket boundaries assumed by regulators.

ANTITRUST ENFORCEMENT AND MERGER POLICY

The central challenge to competition poli-cy is what, if anything, to do about the ten-dency in some e-commerce markets towardsshort-run dominance by a single firm. If thenature of the underlying technology is toproduce a single economically viable marketleader, antitrust action other than policingpredatory behavior would be either self-defeating or economically harmful. At thevery least, officials would be faced with a diffi-cult trade-off between the competing goals ofsupporting economic progress and avoidingthe dangers of concentrated economicpower. The value of antitrust action is dimin-ished if network effects confer only a tempo-rary advantage to the provider of some par-ticular hardware or software. If continuedinnovation displaces that advantage, marketsmay become competitions in serial marketleadership. However, antitrust maintains animportant role in policing actions that havelong been held to be violations of fair compe-tition. Anti-competitive practices such aspredatory pricing, exclusive dealing, and col-lusive agreements that were illegal in the old

13

Chapter 3

COMPETITION POLICY

15. Network externalities are discussed in Chapter 2.

economy will continue to be illegal in thenew economy.

Policy IssuesThe adoption of digital network technolo-

gies by both existing firms and new start-upsis changing the nature of competition. Eventhe nature of the firm is changing. In someindustries, lower information costs tightenrelationships between separate firms in thesupply chain nearly as much as if they werein a single vertically integrated firm. In otherinstances, firms have shed specialized activi-ties that can now be purchased more effi-ciently through competitive markets. In stillother cases, “virtual firms” have arisen to con-nect consumers to suppliers without them-selves providing any of the physical activitiesnormally associated with order taking, pro-duction, or distribution.

These changes provide new context fortraditional antitrust concerns about what con-stitutes fair competition and how to treatmarket dominance by a very large firm. Withregard to fair competition, the JusticeDepartment and the Federal TradeCommission (FTC) have made it clearthrough the prosecution of individual casesthat anti-competitive practices in the neweconomy will not be tolerated any more thanin the old. The Securities and ExchangeCommission (SEC) has also aggressively andappropriately prosecuted securities fraudover the Internet.

The greater challenge for regulators ishow to view the economic power of a marketleader when the future is uncertain. Forexample, the current advantage of a marketleader may arise from strong network exter-nalities, reinforced by the leader’s role in set-ting the industry standard. The marketleader may have certain advantages such asintimate knowledge of trade secrets and easi-er access to capital that allow it to stayentrenched in its position—certainly it canbe expected to try to do so. In general, how-

ever, as long as the firm is competing legallyand fending off challenges to its dominantposition through innovation and greater effi-ciency, it is unlikely to harm the economy. Inthat situation, the role of antitrust authoritiesis to ensure that technologies that can poten-tially compete with the incumbent have achance to do so. As in the past, market domi-nance by itself should not be the criterion bywhich a company is judged. Rather, antitrustofficials should be concerned only with thefirm’s behavior.

Industries with strong network effects—where the value of a product or service to theuser increases with the number of users—cantip toward a dominant firm, as its success isreinforced by positive feedback. Commerceconducted over the Internet—the “networkof networks”—is very likely to be subject tothis effect. Economies of scale also play animportant role in shaping Internet-basedcommerce, especially in information-basedproducts and services, including informationin the form of music or video entertainment.Information services, especially in digitalform, exhibit the classic characteristic ofbeing costly to produce but cheap to repro-duce.16

Development costs make the first copyvery expensive, while additional copies costalmost nothing to produce and, if deliveredover the Internet, almost nothing to distrib-ute. This cost structure—high fixed and verylow variable costs—tends to result in marketsthat are led by just one or a very few domi-nant producers. At the same time, however,the Internet also reduces entry barriers fornew business, and scaling effects can some-times make size a liability. Thus, many mar-kets may become more competitive. The abil-ity of small firms to gain access to world mar-kets by making a relatively small investmentcreates a new competitive dynamic. Thus, onthe one hand, the cost structure of Internet-

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The Digital Economy

16. Shapiro and Varian, Information Rules: A Strategic Guide tothe Network Economy, pp. 20-22.

based competition may give an individualfirm a competitive advantage, while on theother hand, start-up firms are likely to have agreater ability to challenge market leadersthan in the past.

What should antitrust authorities doabout the potential for market dominance?Very little. As long as such dominance resultsfrom the economic forces described earlier,attempts to break up or hobble industry lead-ers would produce undesirable economiceffects. For example, an industry leader mayplay an important role by establishing a prod-uct standard. The establishment of such astandard can be beneficial both to consumersand to other firms, which can build on thatstandard to offer additional products and ser-vices. By reducing uncertainty and searchcosts, the existence of a set standard oftenadvances technological and innovative activi-ty. Where economies of scale are involved,products are made more cheaply and con-sumers pay lower prices than they would oth-erwise.

As important, competition does not endsolely because a market leader emerges. Forexample, although network externalities mayreinforce the position of the market leaderby making it more costly for consumers toswitch to an incompatible network, suchswitches do occur, although perhaps moreslowly than some might like. Technologyleadership in the computer industry haschanged hands several times. Early domina-tion of the industry by the mainframe com-puter gave way first to the mini computerand then to the personal computer, which isnow being challenged by wireless devices andso-called net appliances. Competition mayalso occur across industry boundaries. Intelecommunications, for example, the mar-ket for basic telephone service, which contin-ues to be regulated as a monopoly, is beingchallenged by competitive local exchangecarriers (CLECs), cable television providers,satellite systems, wireless telephones, energy

companies, and even the Internet. Technolog-ical change and, as discussed later, economicderegulation have opened the field of com-petition.

RecommendationsOverall, antitrust policy works reasonably

well to maintain competitive markets underfair rules of competition and continues tohave a place within the digital economy. Allfirms must be well-behaved within the legalparameters of accepted competitive practices.Predatory and collusive practices should beprosecuted in the new economy as they havebeen in the old.

Antitrust policy would be improved, how-ever, by a greater recognition that marketcompetition takes place over a broad rangeof products and services, rather than in nar-row niches. In addition, the processes ofmaking antitrust and merger decisions needto be speedier and more flexible to minimizethe drag that time-consuming reviews canhave on bringing new technologies to mar-ket. The following recommendations aredesigned to carry out these improvements.

Antitrust

In an economy characterized by rapidtechnological change, antitrust authoritiesshould not take preemptive actions to resolveprospective market dominance issues that arelikely to be resolved by market competition.CED believes that because of rapid changewithin the digital economy, antitrust authori-ties risk creating economic harm by takingpreemptive action. The economics ofInternet-based competition will sometimesproduce market leaders that have a competi-tive advantage over rivals. However, thatadvantage is likely to be relatively short lived.A firm with a technology at the leading edgeof competition may be able to dominate thefield only until leapfrogged by another withnext-generation technology. The potentialfor serial leadership is much more likely tobenefit consumers through improved tech-

15

Chapter 3: Competition Policy

nologies and falling prices than to harmthem. In addition, authorities should take awider view of the relevant market. Cross-mar-ket competition is greater today than at anyprevious time.

The antitrust process should be reformedto include a greater emphasis on prompt res-olution of issues and cases. The process ofenforcement and regulation needs to bemodified to meet new realities. Most impor-tant is the increasing speed of change. Slowresolution of antitrust cases can create prob-lems because the uncertainty of the outcomegenerates real economic costs in the form ofdelayed business decisions and deferred ben-efits to consumers. In addition, remedies maybe outdated by the time of implementation,which could distort markets and create ineffi-ciencies. Whenever possible, reforms thataccelerate the process should be institutional-ized.

Federal antitrust lawsuits should pre-emptstate actions.17 The existence of several statelawsuits, separate from federal action, makesit both more difficult and more expensive tobring antitrust actions to a conclusion. Suitsfrom multiple jurisdictions can lead to incon-sistent policy approaches, cast doubt on thetiming and outcome of cases, and make bothdefense and prosecution more expensive. Asdescribed by a leading judicial authority,“States do not have the resources to do morethan free ride on federal antitrust litigation,complicating its resolution. In addition, theyare too subject to influence by interestgroups that may represent a potentialantitrust defendant’s competitors.”18 We see

no overriding interest on the part of statesthat would justify their separate antitrustactions when there is a federal suit.19

Antitrust remedies should lean towardconduct-oriented penalties, rather than struc-tural ones; substantial monetary fines shouldalso be an option. Experience has shown thatstructural remedies—breaking up a compa-ny—can produce more harm than good,especially with respect to innovation. Neithergovernment regulators nor the courts canpredict well how technologies and marketswill develop. The use of structural remediespresupposes that one can. In our view, suchremedies should be used only in rare andextreme cases, such as the 1984 breakup ofAT&T, which was already operating undergovernment regulation. In that case, govern-ment regulation had created a structure thatinhibited some forms of innovation withinthe company, while simultaneously techno-logical change outside of the regulatedmonopoly made it difficult and counterpro-ductive to maintain the regulated structure.In some respects, market developments sincethe breakup of AT&T have shown the limitsof the government’s ability to contain compe-tition within a set structure. Market-drivenchanges, including technological innova-tions, have moved the current structure ofcompetition among telecommunication ser-vice providers a great distance from the oneimposed in 1984.

In competitive markets, conduct reme-dies, whereby antitrust authorities outlineand monitor acceptable conduct, are a moreappropriate policy. Very large monetarypenalties, used in part to compensate theinjured, would also be appropriate either as asupplement to conduct restrictions or in lieuof such restraints as a way to penalize anddeter bad conduct.

16

The Digital Economy

17. In general, differences in antitrust law and the prolifera-tion of antitrust suits at the state level create an inconsistentnational antitrust policy. Such policies as state carve-outs fromthe Illinois Brick doctrine, which limits liability from price-fix-ing to direct purchasers, allow indirect purchasers to sue andcreate greater expense for firms that operate nationally thanwould a uniform policy.

18. U.S. Circuit Court Judge Richard Posner, as quoted inWilke, John. “Microsoft Suit Mediator Rues State AntitrustRole.” The Wall Street Journal. 19 September 2000.

19. As described by Posner, one clear exception would be thata state should be allowed to bring suit when it has been direct-ly harmed in its role as consumer of a product or service, suchas price fixing of a good purchased by the state.

The comments of antitrust regulators on proposed business-to-business electronicexchanges are instructive with regard to how they view their role in the new economy. Ingeneral, their comments appear consistent with two findings of this report: current antitrustpolicy is appropriate and adequate for handling anti-competitive practices, should they occur; electronicbusiness exchanges have the potential to produce substantial economic gains through lowered transac-tion costs and increased competition, and therefore should not be discouraged.

One of the promises of the Internet is that it will enable consumers and businesses tomore easily compare prices of products and services, and in the case of business in particu-lar, to lower costs by improvement of their supply-chain and inventory management. A prin-cipal vehicle by which these promises may be realized is the “B2B exchange” — joint ven-tures to afford easier communication between businesses and their suppliers (the autoexchange is an example).

Although business exchanges, such as commodities and metals exchanges, have existedin the physical world for a long time, these Internet-based joint ventures have aroused criti-cisms by those who believe that they could be used to further anti-competitive objectives.Specifically, concerns have arisen that: (1) exchanges sponsored by competitors may pro-mote collusion in setting prices to the buyers; or (2) exchanges sponsored by buyers maybecome so important as a way of doing business that they could require all suppliers to tradeexclusively through the exchange and inhibit competition by excluding some buyers fromparticipating in the exchange. In addition, the “winner-take-all” tendency of Internet-basedcompetition could lead to single monopoly exchanges in individual markets, although atpresent competition among the nearly 1000 exchanges belies that concern.

A recent FTC staff report concluded that “the antitrust concerns B2Bs may raise are notnew and…B2Bs are amenable to traditional antitrust analysis.”a In the view of CED, toensure the competitive nature of exchanges two principles should be adhered to: (1) quotesoffered via exchanges must be genuine and firm, meaning that suppliers must be willing andable to deliver quoted goods or services at quoted prices, and (2) buyers and sellers musthave adequate access to each other, either through the electronic exchange or offline alter-native, since consumer benefits are directly related to the number of suppliers in anexchange.

Overall, we believe that non-competitive outcomes are no more likely to occur in elec-tronic exchanges than in other settings. Where such tactics as exclusion or price fixing areused, they are likely to be transparent and therefore manageable under antitrust law.However, as noted by the FTC report, the bottom line is that “B2B marketplaces have thepotential to generate significant efficiencies, winning lower prices, improved quality andgreater innovation for consumers.”b

a. Quoted from Robert Pitofsky, Chairman of the Federal Trade Commission, in press release, “FTC Staff IssuesReport on Competition Policy in the World of B2B Electronic Marketplaces.” 26 October 2000.http://www.ftc.gov./opa/2000/10/b2breport.ht. The FTC report is, Entering the 21st Century: Competition Policy in the Worldof B2B Electronic Marketplaces.

b. Federal Trade Commission. Entering the 21st Century: Competition Policy in the World of B2B ElectronicMarketplaces. October 2000. Executive Summary, p. 1. http://www.ftc.gov./os/2000/10/b2breport.pdf.

17


AN EXAMPLE OF ANTITRUST POLICY IN THE NEW ECONOMY: DIGITALLY-ENABLED EXCHANGES

Mergers

U.S. merger guidelines should raise thedollar threshold from $15 million to $100 mil-lion for reporting and adhere to a four to sixmonth limit on the time for review. Currently,

the U.S. merger review system is based on theprinciples of pre-merger notification and atwo-stage review process established by the1976 Hart-Scott-Rodino Act (HSR). In gener-al, transactions valued at over $15 million must be submitted to federal officials for

initial review. That figure captured only 868cases in 1979, the first full calendar year forfiling notifications under HSR.20 In 1999, itapplied to nearly 5000 cases, of which only113 were subject to second-stage review afterinitial screening. (Figure 1, “Hart-Scott-Rodino Pre-Merger Notifications,” shows thegrowth in pre-merger notifications.)21

Regulatory costs, in the form of paperworkand fees that are now set at $45,000 per filing,can be burdensome for smaller mergers thatare unlikely to result in monopolies, especial-ly when the merger is essentially a new busi-ness formation.22 Raising the threshold forpre-merger notification would most likelyhelp smaller innovative firms and speed tech-nological change. To capture the largest 200deals would require raising the filing require-ment to $1 billion.23 Since federal regulatorsgive only cursory review to 98 percent of the filings, lifting the filing level to at least $100million would seem a reasonable step.

U.S. authorities should work with otherjurisdictions, in particular the EuropeanUnion, to coordinate merger reviews and har-monize standards. Although the objectives ofmerger policies may differ from country tocountry, many of the procedures require sim-ilar efforts, including the production of vastquantities of information. Harmonizationwould lower costs and could raise the level ofcertainty in merger decisions. At presentnearly 90 countries have antitrust laws ofsome type and more than 60 have pre-merg-er notification requirements.24 Thus, largemergers and other transactions are subject tocostly review by many jurisdictions. Althoughsome progress has been made, at least infor-mally in coordinating US and EU mergerreviews, much more can be done in coopera-tion with both the EU and other countries. Arecent report on international competitionpolicy, which has been echoed by formerAssistant Attorney General Joel Klein, con-tains a number of valuable suggestions topromote greater harmonization.25 Among thereport’s proposals are:

• Improve the transparency of the review processesby clearly enunciating the principles employed.By publishing annual reports and guide-lines explaining their merger evaluationpolicy, each jurisdiction will have greateraccess to the other’s policies and developa better understanding of their common-alities and differences.

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20. Federal Trade Commission and US Department of Justice.Fourth Annual Report to Congress. 1981. Appendix A.

21. Data are on a fiscal year basis. Federal Trade Commissionand U.S. Department of Justice. Twenty-Second Annual Report toCongress: Fiscal Year 1999. 1999. Appendix A.

22. In cases where a venture capitalist buys into a small innov-ative group that has already incorporated as a company, thefees and filings act as a tax on new capital formation.

23. “Antitrust: The New Enforcers.” The Economist. 7 October2000. p. 82.

24. Melamed, A. Douglas. “Promoting Sound AntitrustEnforcement in the Global Economy.” Address before theFordham Corporate Law Institute, 27th Annual Conference onInternational Antitrust Law and Policy, New York, NY, October19, 2000. U.S. Department of Justice. http://www.usdoj.gov/atr/public/speeches/6785.htm.

25. U.S. Department of Justice. Antitrust Division. Final Reportof the International Competition Policy Advisory Committee to theAttorney General and Assistant Attorney General for Antitrust.Washington, D.C.:GPO, February 2000; and Klein, Joel. “Timefor A Global Competition Initiative?” Address at the ECMerger Control 10th Anniversary Conference, Brussels,Belgium, September 14, 2000. U.S. Department of Justice.http://www.usdoj.gov/atr/public/speeches/6486.htm.

Figure 1

Hart-Scott-Rodino Pre-MergerNotifications (FY 1979–1999)50004500

40003500

3000250020001500

1000

5000

1979 1982 1985 1988 1991 1994 1997

SOURCE: FTC/DOJ Annual Reports to Congress

• Develop agreed upon approaches (best practices)to guide reviews with significant internationalspillover. The establishment of an acceptedset of “best practices” will facilitate consis-tent and unbiased merger reviews andenforcement actions.

• Deepen work-sharing and information-sharingarrangements among jurisdictions.Cooperation in these areas will limit thepotential for duplication in review orinconsistency in evaluations and enforce-ment actions.

• Support a “Global Competition Initiative” topromote the solution of practical enforcement-related problems. A small internationalgroup would promote a common lan-guage and view of antitrust enforcement.It could also provide technical assistanceto competition authorities in emergingnations. If successful, this institution couldplay an important role in harmonizingantitrust actions and reducing costs bothfor firms and governments.

ECONOMIC REGULATION OF MARKET LEADERS

Economic regulation can slow technologi-cal change, deny consumers benefits, andcreate economic inefficiencies. Many of theseproblems are generated by regulating accord-ing to the boundaries of an industry, typicallydefined on the basis of a particular technolo-gy. In an economy where technologicalchange is occurring rapidly, such static regu-lation makes little sense. As discussed above,the new dynamic of competition is likely toafford most market leaders only temporarydominance based on technological leader-ship. In such an environment, economic reg-ulation should give way to greater reliance onopen market competition. The goal shouldbe competition based on prices that reflectmarket conditions rather than the distortionscreated by regulation.

Policy IssuesRegulation of an industry establishes its

boundaries and biases decisions about invest-ment and technological change, both insideand outside of the regulated industry. Forexample, innovative business ideas may bemore easily pursued outside of the regulatedindustry. Lenders and investors may be morewilling to provide financing for projects thatentail greater risk if pursued outside of a reg-ulated environment in which rewards fromrisk-taking may be limited. Thus, investmentand technological advancement are encour-aged to grow in the unregulated environ-ment. Inside regulated firms, growth is chan-neled along circumscribed paths.

In part, these distortions occur becauseregulation is typically built on static econom-ic and technological assumptions that may beshort-lived. The assumption of a static marketis especially questionable when networkeffects are present. The most common argu-ment offered in support of regulation is thenatural monopoly. Telephone, electricity, andother utilities were all sheltered from compe-tition under variants of this doctrine. Underthat justification, the regulator sanctions asingle supplier so that a scale of operationcan be achieved that permits output to beproduced at the lowest cost possible. At thesame time, the regulator also imposes con-trols on prices charged to consumers, so thatthe monopolist does not abuse its power. Therequirement to meet other social goals, suchas the subsidy of low-income or remotelylocated consumers, may also be imposed byregulation.

However, the assumption that a new tech-nology produces a natural monopoly mayprove false, as substitutes begin to emergeeither in the unregulated sector or betweenone regulated industry and another that is

19


regulated differently.26 Moreover, competitiontoday appears to pit several high fixed-cost,low marginal-cost technologies against eachother. In the past, viewed separately we mighthave seen each of these technologies as apotential natural monopoly. However, whenviewed as competitors across technologicalboundaries, the concern that one firm willdominate the competition dissipates, and therationale for regulation recedes. As we surveythe economy, it is hard to name a product orservice that is not threatened either by actualor potential competition.

Regulation in the telecommunicationsindustry and the growth of broadband ser-vices provide good examples of the problemsassociated with such regulation. Althoughless than in the past, telecommunicationsregulation sets prices and services that can beoffered, establishes rules to promote publicgoals such as universal service, and includesexcise taxes that take advantage of the poten-tial of a “must-have” service to raise revenuefor government programs. In this environ-ment, unregulated firms have been able toappear innovative by offering lower-pricedservices in specific market segments, usuallythe most lucrative ones. In most cases, suchfirms—typically telecommunicationsresellers—can provide service at lower prices,not because they are using an advanced tech-nology, but because they are able to maneu-ver strategically around the regulatory andtax systems.

Regulation currently plays a key role ineconomic decision-making in the competi-tion among providers of broadband Internetservice. The next phase of Internet develop-ment is tied to the spread of higher-speed,

“broadband” Internet services—at speedsexceeding 1 megabit per second, in contrastto most current modems, which operate at56K. Broadband technologies deliver datathrough coaxial cable lines, conventionalcopper wires upgraded through DigitalSubscriber Line (DSL) technology, wirelesssystems (especially once advanced third-gen-eration, 3G, standards are rolled out), orsatellites. By one count, as many as seven dif-ferent delivery services are currently capableof providing broadband connection to theInternet.

The two services that dominate the com-petitive field, however, are cable and DSL.Competition between these two services isstrongly affected by differences in how theyare regulated and taxed. Despite differencesin technologies and regulatory treatment,these two technologies now deliver nearly thesame capability. Most important to the cur-rent competitive landscape is the issue of“open access.” (Open access refers to thequestion of whether the owner of the com-munication connection—cable or telephonewire—must allow other providers to offer ser-vices over the connection.) Under currentregulations, local telephone companies mustallow other Internet service providers to leasefacilities, but cable companies are generallyunder no such restriction. Developments inthis area, however, are highly fluid. Changesin technology, rulings by local courts, policydevelopments in the Federal Communica-tions Commission, and negotiations betweenthe federal government and AOL/TimeWarner over the details of their merger andits effect on cable facilities owned by thecompany have left the question of accessunsettled. The question of regulatory treat-ment is affecting both the willingness of capital markets to finance new investment in each of these services and consumer choices about which service will best meettheir needs.

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26. Economists have come to believe that the market is reallythe appropriate test for determining what industries can betruly characterized as natural monopolies. Economists’ sup-port for deregulation and privatization suggests there are veryfew industries that are thought to be natural monopolies. Seefor example, Winston, Clifford. “U.S. Industry Adjustment toEconomic Deregulation.” The Journal of Economic Perspectives.Volume 12. Number 3 (Summer 1998). pp. 89-110.

Recommendations

Technologies should be able to competefairly, without regulatory distortions. Keepingcompetition open is particularly important inan era of rapid technological change.Government authorities cannot know howtechnologies will develop. Regulators shouldadopt a wait-and-see approach, rather thanact preemptively to regulate an industrybased on the view that a particular technolo-gy will confer an insurmountable competitiveadvantage. An open competitive environmentallows firms the opportunity to experimentwith different approaches to meet the con-sumer’s needs, including the introduction ofnewer technologies, variations in the mix ofproducts and services offered, and, of course,different pricing options to attract customers.Such an environment will produce much bet-ter results for consumers than one circum-scribed by regulation. Should competitiveproblems develop, regulation can beimposed as a last, rather than first, resort.

Within the context of a regulated monop-oly, regulators have used the rate structure toachieve social goals through “cross-subsidies.”When the goal of regulation is to achieve asocial objective, such as the subsidization ofservice to high-cost areas, that objectiveshould be addressed through direct spendingprograms rather than by mandated rate struc-tures. Thus, for example, a revolving fundprogram such as the Universal Service Fundfor telephone, which subsidizes throughdirect payments Internet access and basic ser-vices to high-cost rural areas and low-incomeconsumers, is an improvement over the impo-sition of a rate structure that forces cross-sub-sidization of service to achieve these socialends, but is still inferior to a conventionalappropriated spending program.27 One of the

consequences of such a structure is that firmsthat are not subject to the same high-costrequirements can out-compete regulatedfirms in the most lucrative markets. In thosemarkets new entrants can charge prices nearthe actual (low) cost of production, whileincumbent firms must charge the higherprices needed to support the subsidy of oper-ations in other market segments.

With respect to the question of openaccess requirements for broadbandproviders, views on the appropriate policyanswer tend to turn on two questions: first,whether government should preemptivelyinvolve itself in the prevention of a potentialabuse of market power; and second, whetherdifferent services that perform nearly identi-cal functions should be forced to competeunder different regulatory regimes. At pre-sent, broadband technologies such as cable,DSL, and satellite compete on unequal ter-rain. In some cases, these technologies com-pete directly against each other in local mar-kets. In others, one or the other may have alocal monopoly with no competition.

These circumstances create tension andoften a conflict between policy goals. Forexample, our view of pre-emptive action isthat policy makers should in general adopt await-and-see approach. That position wouldlead to the conclusion that regulators shouldnot pre-empt markets by forcing open accessin cable. However, our view of regulation andcompetition leads to the conclusion thatcompetition between cable and DSL shouldnot be biased by the regulatory regime. Thatview could support a demand for open accessin cable to “level the playing field.”

In the specific case of broadband cable,CED believes that further regulation to forceopen access is unnecessary because cableproviders will probably need to open compet-itive access to their lines to satisfy thedemands of their customers. If they do not,the solution is more likely to be found inremoving restrictions from the regional Bell

21


27. Our support for the USF is limited to the concept ofaccounting for direct outlays to pay for a social program. Asdiscussed in Chapter 6, CED does not support the revenueside of the USF, which draws on an excise tax rather than gen-eral funds. In general, a revolving fund is inferior to a directexpenditure program.

operating companies (RBOCs) than inimposing new restrictions on cable services.28

Either way, as telephone and cable emergefrom separate regulatory regimes to competewith one another, and with other technolo-gies, the task of regulatory authorities mustbe to move toward a common set of rules.The goal in broadband markets should be toallow separately regulated markets to con-verge toward common rules of competitionand taxation. The transition from the currentsystem of regulation, however, must be madecarefully to avoid creating disincentives toinvestment. Regulated firms’ investments in activities that are no longer required byregulators may quickly become obsolete. An appropriate exit strategy to minimizeuncertainty about the value of such invest-ments would require a clear timetable forderegulation.*

CONCLUSIONSCompetition policy is an important

feature of today’s economic landscape. Inpolicing anti-competitive practices, such aspredatory and collusive actions, it remains asrelevant in the new economy as it was in theold. In other respects, however, competitionpolicy and economic regulatory policy, whichare similarly motivated, are losing their rele-vance in an economy characterized by rapidtechnological change and the prominence ofnetworked products and services. These poli-cies must be reconsidered and reoriented toaccount for the lack of clear competitiveboundaries between many products and services. The goal must be to allow allproviders, including those with lowest costs, a chance to compete fairly in open markets.

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The Digital Economy

28. See, for example, Crandall, Robert W. “Competition is theKey to ‘Open Access’.” The Wall Street Journal. 13 December2000.

*See memorandum by CHARLES R. LEE (page 61).

The economy’s rapid growth followingthe commercialization of the Internetdemonstrates the importance of innovationand technological progress. A principal component of the system that supports innovation, and that receives special attention in this report, is protection of intellectual property, including copyrights,patents, and trademarks. The purpose of intellectual property protection is toensure that inventors and authors haveenough incentive to bring their innovationsand creations to market. In the “IndustrialAge,” this objective led to certain processesfor identifying, certifying, and protectingintellectual property. For the most part,these processes struck a workable balancebetween the protection of intellectual property and competing goals such as themaintenance of open competition and open access to scientific discoveries and cultural works of art. However, as we movetowards a digital economy powered by the Internet and low-cost information processing, storage, and communications,each of the components of the intellectualproperty system is being challenged and must be refreshed if not redefined in order to support and promote innovation.

Two aspects of the digital economy in particular are creating problems that

need to be resolved as soon as possible.29

One is that the movement of commerce fromphysical space to cyberspace is challengingthe traditional standards of invention andpatent protection. Specifically, what type ofintellectual property protection should beextended to business concepts implementedthrough the Internet, and how should inven-tions be evaluated in an era of rapid techno-logical change? The other is that the abilityto duplicate and transmit at near zero mar-ginal cost all types of information—data,images, voices, or other digital signals—changes the nature of the intellectual proper-ty protection problem by leaving the legalrights to creative property intact while mak-ing full enforcement of those rights nearlyimpossible. How will intellectual property beprotected in an environment of easy datatransmission and duplication? How theseissues are resolved will have important conse-quences for the economy’s growth.

PATENTSThe modern patent system can be traced

back as far as the Renaissance, when Italiancity-states sought to induce innovation in thebuilding of better ships for commerce and

23

Chapter 4

INNOVATION AND INTELLECTUAL PROPERTY

29. This chapter focuses on patents and copyrights. A thirdarea of intellectual property concerns trademarks. The broad-er dissemination of information allowed by e-commerce makestrademarks easier to pirate and raises questions as to what constitutes legitimate use. Even more important is whether therights conveyed through recognized trademarks extend to theselection of Internet keywords or domain names. Again, theissue turns on whether rights and processes generally respect-ed in the physical business world convey into the “virtual” one.

warfare. Patents were extended to inventorsin this area in the hope of directing theirattention to this problem. This early recogni-tion of the need to reward inventors reflectsa tension well understood within econom-ics–the asymmetry of risks and rewardsbetween innovators and imitators. Innovatorstake substantial risks with their time andmoney, often with little result. When theirefforts are successful, the gains they createcan be substantial. But, absent patent protec-tion that grants an exclusive property right,imitators can usurp those gains without com-pensating the original inventors for theireffort. By avoiding research and developmentcosts, the imitator can sell at a price farbelow that of the inventor.

Thus, the patent system is in place toaddress this imbalance and maintain incen-tives for inventors to perform their vital func-tion. The award of a monopoly right acts asan incentive to invent and invest, and knowl-edge of the invention diffuses more quicklybecause it must be made public. The systemamounts to a contract based on a calculationthat the cost to society of granting an exclu-sive right for a temporary period is smallcompared to the economic benefits providedby the innovation and its more rapid diffu-sion due to its registry and publication.

Absolute protection for all commerciallyvaluable discoveries, however, would createan economic chokehold that would under-mine a key part of the original purpose ofthat protection. Thus, for example, it hasbeen long-standing policy that basic con-cepts, such as mathematical algorithms andabstract ideas, cannot be patented. The dis-tinction between patentable and non-patentable ideas is important because apatent owner has the right to exclude othersfrom use of the invention, or to charge aprice for its use. The desire to restrict theability of imitators to capture innovators’ eco-nomic returns does not mean that the user ofinnovations should be restricted: indeed, the

overarching goal of protecting innovators isto keep the stream of innovations flowing totheir ultimate users. Nor does it mean thatimitators could not develop alternative, betteror cheaper, ways of producing the same, orsimilar, benefits.

Policy IssuesThe practice of granting patents for com-

puter-assisted business methods has generat-ed considerable controversy. Although thecourts have upheld the principle that such“innovations” can be patented, we see nooverriding justification for the grant of anexclusive property right when the socialreturn is negligible or nonexistent.30 Untilrecently, the patent system did not recognizeeither software or business concepts aspatentable inventions. Software is now thefastest growing patent category and, as shownin Figure 2, the category of patents thatincludes automated business methods hasgrown almost four-fold in the last three years.

While we do not doubt that from a com-mercial perspective the translation to theInternet of techniques or practices commonin the physical world is “innovative,” suchcommercial innovations do not merit patentprotection. Allowing patents for such wellunderstood processes as reverse auctions,payment for referrals, or expedited orderentry is inconsistent with the principles thatunderlie the patent system. If such businessprocesses were not patentable in the physicalworld, why should they be patentable in thevirtual one, particularly insofar as the soft-ware code that implements these methodscan be copyrighted?

The logic of the patent system does notapply to the development of business methodinnovations. The incentives to innovate andinvest in the fast growing field of e-commerceappear more than sufficient to induce innova-

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30. The case that sets precedent is State Street Bank & TrustCo., Inc. v. Signature Financial Corp., Inc., 149 F.3d 1368, 47U.S.P.Q. 2d 1596 (Fed Cir. 1998).

tion. This is particularly so since first-moveradvantages are magnified by economies ofscale and network externalities associatedwith the Internet. The nature of Internet-based innovation in business methods is thatit tends to be open to view, not hidden orsecretive as some industrial process innova-tions may have been in the past.

In addition, patents for new activities tendto channel commercial activity towardsobtaining similar patents, either to protectagainst future claims of infringement or toestablish a claim against others. The incen-tive to establish a claim is particularly strongin the absence of a long-standing record ofprevious patents in the area. Many analystsclaim that precisely this degenerative spiral isnow underway and that such “strategicpatenting” is distracting inventors, entrepre-neurs, and patent specialists from other,more socially valuable, pursuits. Granting apatent to an undeserving application can bea costly error, and a system that routinely

makes such errors is harming the economyrather than helping it.31

At a practical level, many observers haveexpressed doubts about the ability of thePatent and Trademark Office (PTO) to judgethe novelty and “nonobviousness” of a patentapplication when it lacks specific knowledgeof prior art in the relevant field.32 How canthe patent system identify “prior art” in afield such as software, where most innova-tions are not patented and therefore are notrecorded in patent registries? Absent thatrecord and given the existence of physicalcounterparts to many virtual “innovations,”what constitutes a legitimate innovativeadvance?

Critics have pointed out that patents forbusiness methods tend to be of poor quality,in part because they tend to overlook priorart.33 The number of references to prior artin business method patents is reported to bemuch lower than for other inventions. Thismay be due partly to the nature of a fieldthat has been growing rapidly through theapplication of technology in business and inwhich the literature on these applications haslagged significantly. In addition, the rapidincrease in the number of patent applica-tions in this field, combined with the openbias of the patent system to approve applica-tions, probably contributes to the grant ofpoorly justified patents.

25

Chapter 4: Innovation and Intellectual Property

Figure 2

Annual Number of Patents Issued inClass 705* (1980–2000)

1000

800

600

400

200

0

1980 1984 1988 1992 1996

* Class 705 is Automated Business Data ProcessingTechnologies, which includes business method patents.

NOTE: CY 2000 is an estimated annual value based onmid-year data.

SOURCE: USPTO Patent Counts By Class By Year: January1977–June 2000, August 2000

31. Merges, Robert. “As Many as Six Impossible Patents BeforeBreakfast: Property Rights for Business Concepts and PatentSystem Reform.” Berkeley Technology Law Journal. Vol. 14. Issue 21999. pp. 577-615.

32. To be patentable, an invention must satisfy the criteria ofbeing useful, nonobvious, and a novelty. An idea is considereduseful if it satisfies “the condition that the subject matter has auseful purpose”; nonobvious if not obvious to a “person havingordinary skill in the area of technology related to the indus-try”; and a novelty if the idea was not previously “known orused by others.” US Patent and Trademark Office. GeneralInformation Concerning Patents. 18 August 1999.http://www.uspto.gov/web/offices/pac/doc/general/index.htm.

33. Merges, “As Many as Six Impossible Patents BeforeBreakfast: Property Rights for Business Concepts and PatentSystem Reform,” p. 589.

2000

RecommendationsAutomated business methods should not

be subject to patenting when they merelyreplicate existing physical practice or areobvious. Copyright should be used as themore suitable protection for specific imple-mentation of a business process by a comput-er program. Patents for automated businessmethods provide too much protection for toolittle innovation; they may actually impede,rather than promote, the development andapplication of digital technologies. Patents onbroad and well-known business methods maydeter market entrance, compromising capitalformation and other factors that drive innova-tion. In addition, they encourage wastefulstrategic behavior to establish patent claimsand initiate legal procedures to determine apatent’s validity. Little would be lost, andmuch could be gained, by refusing to grantsuch patents. Software, however, can be copy-righted to protect the specific implementa-tion of a computer process. In our view, copy-right is the appropriate means of protectionfor the unique execution of an automatedbusiness method.

The patent application process should bemore open to public review and comment.The Patent and Trademark Office does notcurrently have sufficient knowledge of “priorart” to perform patent review for many of thenewest technologies and their applications.Recent changes in patent law through theAmerican Inventors Protection Act of 1999(AIPA) will help open some patent applica-tions to public review and challenge. It willmove the U.S. towards an open system, simi-lar to that used in Europe, and improve theevaluation of patent applications by bringingmore information to bear on prior art andobviousness.

Among the significant reforms made by theAIPA, are:

• The requirement that patent applicationsbe published 18 months after filing if an

application for patent is also filed inanother country.

• A re-examination procedure that expandsthe participation of third parties.

The AIPA, however, has too many loop-holes that allow for continued secrecy, and itwill continue to impose too long a waitingperiod before a patent becomes public. Ourpreference is for a faster and more transpar-ent system. Given the current pace of techno-logical change, especially in Internet-relatedactivities, a six to nine-month period for publication of a patent application and aprocess that allows greater opportunity for third parties to comment is more likely to produce the intended result than an 18-month period. In general, a faster processfor review and final determination of apatent application will be better for all par-ties concerned.

The patent system should not create newtypes of patents, differentiated by type ofinvention or number of years of protection.Some critics of recent trends in softwarepatents have called for the creation of a new,shorter-duration patent for such software.34

Our view is that setting up a differentialpatent system would be a mistake. The even-handed treatment of all innovative ideas is animportant hallmark of the patent system.Once the precedent has been established,the demand will arise for other special cate-gories of patents with either longer or short-er lives. Adjudication of patent categorieswould create a new and unnecessary burdenon the patent office. Such a system wouldbias research incentives and ultimately proveunworkable. The creation of differentpatents for different types of inventionswould put government officials in the impos-sible position of deciding the relative worth

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34. Bezos, Jeff. “An Open Letter from Jeff Bezos on theSubject of Patents.” About Amazon.com.http://www.amazon.com/exec/obidos/subst/misc/patents.html/105-5861237-1256720.

27


The AIPA establishes an 18-month period for the publication of patent applications andmoves the U.S. system closer to processes followed in Europe and Japan. The norm in theU.S. has been for applications to be published after the Patent and Trademark Office (PTO)grants a patent and the patentee pays the required fee. The new system also improves thereexamination procedure, which allows third parties to challenge the claims of a patent bybringing forward information about prior art. Before AIPA, third parties were excluded fromthe review process after filing a request for reexamination. The new procedure reduces theneed for lengthy and expensive litigation after a patent has been approved.

Significant Changes in Publication and HarmonizationThe primary motivation for publishing patent applications 18 months after submission is

to make patents filed in foreign countries available in an English language form in theUnited States. The AIPA does not require the publication of patents that are filed only inthe United States or subject to a secrecy order.

The 18-month early publication provision allows for faster dissemination of informationon patents filed in other countries and eliminates some duplication in the applicationprocess. U.S. companies are aided by having up-to-date information on the estimated 40 percent of U.S. patent applications that are of foreign origin. When firms are more rapidlyinformed of the patent office’s docket, they will waste less time and effort researching, devel-oping, and applying for previously established ideas and processes. Reduced duplication inpatent applications also reduces the workload for the PTO, which will not have to devoteresources to evaluating applications that lack innovative ideas, and hence, patentability.

The 18-month early publication would align the U.S. process with that under the recentPatent Cooperation Treaty (PCT). Under the PCT, applicants can submit a claim for apatent in an individual country, as well as to the International Bureau of the WorldIntellectual Property Organization (WIPO). Although application to the WIPO bureau does not provide an International patent, it protects the priority date of the applicant if later contested by allegedly prior art.

In addition, the PCT creates an international examination committee that can assess the chances of receiving a patent in particular PCT contracting states. The number of PCTcontracting states currently exceeds 100, including all of the world’s developed nations. Thecost of an international examination is much lower than the costs of applying for patents inseveral nations, and the process provides applicants more time and a better estimate of thechances of a patent being granted before funds and efforts are spent.

Changes to the Reexamination ProcedureAIPA creates a procedure that triggers review of a patent application based on informa-

tion provided on prior art. The primary motivation of the Inter Partes Reexamination procedure is to reduce the incidence of court cases following patent approval. By expandingthe grounds for reexamination, increasing the opportunities for third party involvementthroughout the process, and providing the right to appeal PTO decisions, third partiesshould be less inclined than at present to opt for litigation. Once the decision is made forthe reexamination process, third parties are limited in post-examination litigation, since they may not assert the “invalidity of any claim finally determined to be patentable on anyground that the third-party requester raised or could have raised during the inter partesreexamination.” Beyond being a less expensive and faster alternative to litigation, the PTOreexamination allows for the assessment of patentability to be made by patent experts ratherthan federal judges, who generally are less knowledgeable in the field.

a. The American Inventors Protection Act of 1999 became effective November 29, 2000.

AMERICAN INVENTORS PROTECTION ACT OF 1999 (AIPA)a

of various categories of invention. Our pref-erence is to define clearly the scope of allow-able patents—excluding automated businessmethod innovations, as discussed above—andto treat all allowed patents equally.

COPYRIGHTThe same motivations that underlie the

patent system underlie copyright. When theinvention of the printing press left authorsunable to protect their works against duplica-tion, they pressed sovereigns to establishexclusive rights of publication.35 Absent copy-right, many literary, artistic, commercial, orother types of works would not be produced.The purpose of providing protection toauthors and artists is to ensure that a healthystream of their creative works finds its way toconsumers. Thus, the exclusive rights grant-ed to authors and artists are properly viewedas a social cost of a policy to promote creativeworks.

Policy IssuesInternet technology has radically changed

the economics of publishing. A recent studyby the National Research Council points outthe nature of these changes.36 The costs ofreproducing digital information are close tozero for both copyright holders andinfringers, and digital copies are perfectcopies of the original. Thus physical barriersto reproduction, which once deterredinfringement, no longer exist. Similarly, high-speed computer networks have significantly

lowered the cost of distribution of informa-tion products, and the World Wide Web haschanged the nature of a “published docu-ment;” anyone with a computer and anInternet connection can now be a publisher.37

The result is that while individuals now havegreatly expanded access to information,including factual reporting, fiction, opinionarticles, music, and video entertainment, theyalso have the capacity (whether knowingly orunwittingly) to violate the intellectual proper-ty laws.

No one seriously challenges the principalvalues that underlie the copyright system.Thus, the overarching issue is enforcement.The new ways in which copyrighted informa-tion can be shared represent an unprece-dented challenge to the traditional system ofenforcement, and perhaps the very businessmodel of “for sale” musical and video enter-tainment itself. Of what value is it to holdlegal title to a song, television program,book, article, or movie, if your work can befreely copied and transmitted to anyone whowants it? The practical resolution of thisquestion will have important effects on bothhow copyrighted property is protected andhow e-commerce and Internet-related ser-vices develop. This is also an internationalissue, given the Web’s borderless purview andthe prospect of piracy “safe havens” if inter-national agreement is not reached on whatconstitutes intellectual property rights andhow they are to be enforced.

The forces that undermine the copyrightprotection of creative works also raise theissue of extending copyright protection todigital databases that are not now protectedin their physical form. A conventional exam-ple is the telephone directory. In its original,small-print form, the courts decades agoruled that it was not protected by copyrightbecause the fact-based nature of the worklacks creativity. But this decision reflected the

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The Digital Economy

35. Patterson, Alan and Stanley Lindberg. The Nature ofCopyright: A Law of Users’ Rights. Athens, GA: University ofGeorgia Press, 1991. pp. 19-46. Although copyright was initial-ly used by the sovereign to control content, author’s rightswere eventually recognized in the Statute of Anne (1710).

36. National Research Council, Committee on IntellectualProperty Rights and the Emerging Information Infrastructure,Computer Science and Telecommunications Board,Commission on Physical Sciences, Mathematics, andApplications. The Digital Dilemma: Intellectual Property in theInformation Age. Washington, D.C.: National Academy Press,2000.

37. Publication on a large scale, however, would require addi-tional computing resources.

circumstances of the moment. Telephony wasa regulated monopoly, so only one companyhad ready access to all phone numbers.Reproducing the phone book took substan-tial effort and cost because it had to be set intype and produced little reward because allusers already had one. But in the digital con-text, reproducing the phone book, or anyother information, is a simple matter of copy-ing a data set or scanning an image. The easeof copying or extracting information from adatabase and recompiling it into other for-mats can significantly impair the incentives ofproducers to compile such data in the firstplace. Examples of non-copyrightable data-bases in the private sector include internalbusiness records, records about customersand suppliers, research results, and compila-tions of facts from diverse sources. TheInternet has heightened concerns over thelack of protection for so-called non-creativedatabases in part because of competition withEuropeans who are protected by a databaseextraction right and because such databasescomprise a significant portion of digital elec-tronic commerce.38

RecommendationsExisting principles for establishing copy-

rights should apply regardless of whether thecontent is in digital or analog form. Formost forms of copyrighted material, the keyquestion is how to enforce rights. The ques-tion for databases is how to separate non-copyrightable content (facts) from format-ting, presentation, and other creative activi-ties that normally would qualify for copyrightprotection for the creator.*

Education and enforcement should beused in of both public and private efforts tocope with the new realities of copyright law.Private efforts should also emphasize techno-logical solutions and better business models.Education and enforcement are key elementsof a strategy to reaffirm the value of copy-right material. The logical consequence of afailure of that strategy is that either creativeworks will diminish in commercial value, andconsequently be produced in less quantity, orthey will become subject to contract andlicensing provisions that are potentially moresecure but less beneficial to society as a wholethan copyright.

Certainly, society would be better served ifusers of copyright material were betterinformed about acceptable practices withrespect to copying such material. In fact, pro-grams already exist to teach the ethical use oftechnology to children who are usingInternet technology in the classroom.39 Themore informed users become, the less likelythat problems will persist. While some mayprefer to surrender to the seeminglyintractable problems caused by the ease andcostless nature of copy and transmission, webelieve that the principle of copyright protec-tion is worth defending. An aggressiveenforcement strategy, which might producesome high-profile cases, could reverse thetrend that has made copyright infringementso common. In the current environment, aconsiderable number of private enforcementactions have been initiated against some ofthe prominent Internet-based technologiesthat have enabled users to copy music andother digital information. In our view, suchactions should be accompanied by govern-ment efforts to halt copyright infringement.A few high-profile enforcements against egre-gious piracy would help defend the legal

29


38. A related issue, which we do not examine here, is market-generated or event-generated information. Institutions such asthe New York Stock Exchange or, eBay, generate informationas a consequence of their trades, just as sporting events doscores as they are played. Do they have the right to requirepayment for the use of that data? The answer becomes all themore important as trading venues such as the stock exchangebecome more competitive and are less able to use listing andtrading fees as sources of revenue.

39. The Department of Justice and the Information Tech-nology Association of America have created the CybercitizenPartnership to develop curricula and promote cyber-ethics toschoolchildren. See Shuchman, Lisa. “Teach Your ChildrenWell.” The Industry Standard. 20 November 2000. p. 105.


rights of copyright holders. This will becomeespecially important as copying moves fromrelatively centralized sources (such asNapster) to more decentralized systems (suchas Gnutella). Such enforcement, however,should not be designed to protect a specifictechnology or business model. The point isto protect the principles of copyright. Thetechnologies and business models that havedeveloped to commercialize copyright workshave contributed substantially to the com-mon good. However, they are not sacrosanct.

Indeed, to the extent that they may hinderthe development of new, more efficient tech-nologies, change would be beneficial.

The primary alternatives to more effectiveeducation and stronger enforcement aregreater use of licensing and technical protec-tion measures, which use electronic technolo-gies to lock or open the content based onconditions set by the seller. (See box,“Technical Protection of Information.”) Bothalternatives are likely to diminish the tradi-tion built into copyright law of providing for

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The Digital Economy

Digital rights management (DRM) and “technical protection services” (TPSs) are recent-ly developed technologies that aim to secure content and let companies choose the termsand conditions of product use. DRM technology works in a variety of ways depending on thecompany that provides it, but in general relies on encryption.

An open question is whether DRM will protect digital content effectively and enable com-panies to distribute content on the Web securely. Many experts, including developers of soft-ware that provides free access to music files, believe DRM-secured files will be decrypted assoon as they reach the Internet. Microsoft, for one, admits that when the licensed user isaccessing a file, a hacker could divert the unencrypted file to another file on that machine.They argue, however, that the main point is not that hackers can find ways around theencryption, but that with encrypted systems only piracy involving malicious intent will occurand the widespread distribution of copyrighted files will stop.

One high-profile effort is being undertaken by the recording industry, which has teamedwith the consumer electronic and information technology industries to form the SecureDigital Music Initiative (SDMI) to protect future music releases. The first two phases of thisproject involve developing and marketing SDMI-compliant players that play both alreadyexisting files and new files with “digital watermarks” encrypted into the music. If the newmusic lacks or has a damaged watermark, the compliant player will not play it. The aim is toprovide new music in the encrypted watermarked format available to download for a nomi-nal price so that consumers can access music and artists and companies can receive compen-sation for their work.a However, hackers responding to an industry challenge to break thecode may have already done so.b

Aside from questions about the ability of DRM and TPS to protect fully electronic infor-mation, critics have argued that such systems have important implications for public access.cEncrypted products are typically offered to the user through a license, which operates underdifferent legal rules from copyright. Concerns focus in particular on the ability of libraries tocontinue to serve their function as permanent repositories of material that constitutes a cul-tural heritage and, more generally, on the notion that material distributed by license maynot become part of the long-term public record. Individual users have also expressed con-cerns about the erosion of their long-held ability to copy material they own, such as audio orvideocassette recording, for personal use.

a. “Justin Frankel.” Time Digital. http://www.time.com/time/digital/reports/mp3/frankel4.html and “Frequently AskedQuestions.” Secure Digital Music Initiative (SDMI). http://www.sdmi.org/FAQ.htm.

b. “Hackers Insist They Beat Audio Technology.” The New York Times. 24 October 2000.c. Samuelson, Pamela. “The Digital Dilemma: A Perspective on Intellectual Property in the Information Age.”

Paper for the 28th Annual Telecommunications Policy Research Conference, Alexandria, VA, September 23-25, 2000.

TECHNICAL PROTECTION OF INFORMATION

a limited degree of public access and “fairuse.” Although not our preferred approach,the use of technical protection measuresseems a reasonable second best solution. Itcould at least preserve the value of creativeworks and provide sufficient incentive fortheir development. The loss of some publicaccess through restrictive contracts andlicenses could be offset in other ways, such asthrough legislation that would establish anexplicit right for public libraries of access tosuch works.40

Finally, the United States must engage theinternational community in standard-settingprocesses, while maintaining the highest possible standards of intellectual propertyprotection. It has long been recognized thatprotection of intellectual property must be aninternational effort since ideas know no geo-graphical boundaries. Together, the ParisConvention for the Protection of Industrial Propertyand the Berne Convention for the Protection ofLiterary and Artistic Works, ratified in 1883 and1886 respectively, established the basic systemof international cooperation. Those treatieshave been frequently updated and extended,most recently through the Copyright Treaty andTreaty on Performances and Phonograms of theWorld Intellectual Property Organization(WIPO).41 In addition, intellectual propertynow receives special attention in internationaltrade under the agreement on Trade RelatedIntellectual Property (TRIPS) of the WorldTrade Organization (WTO).

WIPO, in particular, is now consideringmany of the same questions raised for domes-tic policy regarding the assignment and pro-tection of intellectual property rights. It is inthe process of trying to bring the recentlynegotiated treaties regarding copyright and

the rights to recordings into force by the endof 2001. The goals include establishing proce-dures for promoting consistency between“domain” and “real” names, for protectingdata bases, and for extending existing protec-tions for recordings to audiovisual products;developing principles for determining the liability of online service providers; and manyother fundamental activities. Business leadersshould be aware of this process and provideinput to make it consistent with the primaryobjective of reconciling the assignment ofintellectual property rights and economicgrowth.

CONCLUSIONSThe foundation that underlies intellectual

property policy is strong. The application ofthat policy, however, has created problems insome specific cases.

In some instances, such as automatedbusiness method patents, current intellectualproperty policy undermines the very thing itmeans to protect—the long-term flow ofinnovation and creative works. The issuanceof patents for automated business methodshas the potential to overstimulate unproduc-tive “innovations.” In addition, for partiesthat gather and generate data, current law isunclear as to the copyright protections thatthey retain and unhelpful in terms of provid-ing the appropriate incentives to the develop-ment of electronic information. Blatantcopyright violations, especially for text andmedia, are a significant concern. A balanceneeds to be found between compensation forthe contributions of producers and “fairuses,” such as in educational and library set-tings. A combination of technological solu-tions and competitive market-based outcomesoffers the most likely path out of currentproblems.

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40. The National Research Council has suggested rethinkingwhether “copying” should remain a benchmark concept. Inthe context of libraries, it suggests that a new legal frameworkmay be needed. See National Research Council, The DigitalDilemma: Intellectual Property in the Information Age, pp. 140-145.

41. Ratified in 1996.

Concerns about privacy, security, anonymi-ty, fraud, and the difficulty of obtainingredress, especially across jurisdictionalboundaries, when using the Internet hinderthe growth and development of e-commercebecause they discourage consumers fromengaging in commercial transactions via theWeb. Businesses also have concerns related tothe costs of guaranteeing the privacy of con-sumer data, theft of proprietary businessinformation, infection by computer viruses,computer hacking, and “denial of service”attacks. Many companies find it difficult toprovide the privacy and security that con-sumers want while making their websites convenient to use, protecting their own com-mercial interests, and obtaining an adequatereturn on their investment in Internetresources.

Many of these consumer concerns are notunique to the Internet. For example, theInternet has for the most part not changedthe nature of fraud; it has simply provided anew arena for old crimes. With regard to pri-vacy, however, the Internet brings several newdimensions to existing concerns. Amongthese are a new ability to monitor, undetect-ed, the specific mouse clicks and habits of ashopper and the enhanced ability to store,process, and exchange vast quantities of data.For businesses, making consumer informa-tion held in computers secure is a dauntingand expensive task. The open architecture ofthe Internet makes it very difficult to ensureprivacy and security and leaves businesses vul-nerable to new forms of risk. In addition,some forms of privacy protection can inter-

fere with the delivery of services that con-sumers demand, especially in the areas ofhealth and finance. In many ways, these arenew, complicated, and evolving issues, andany analysis of them must necessarily be limit-ed and evolving as well.

While a consensus appears to be emergingon the need for greater online privacy pro-tection, no agreement exists on the properapproach. Disagreement tends to focus onwhere the balance lies between consumerand commercial interests and whether self-regulation or a mandatory legal requirementis the better means to the goal. Our view isthat business-to-consumer (B2C) e-commercewill not achieve its true potential until privacyconcerns are put to rest.42 Thus, businessesneed to actively reassure customers that theirprivacy will be respected and that informa-tion held by a business will only be used inan appropriate manner.

Business attitudes towards security issuesare also beginning to take shape. On theseissues, government mandates to force busi-nesses to enhance security are probably notneeded. Competition and self-preservationare providing sufficient motivation for busi-nesses to improve online security practices.That point was made forcefully at a recentconference on privacy and security hosted byMicrosoft, where chairman Bill Gates remind-ed privacy and security leaders that the con-tinued growth of online shopping depends

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Chapter 5

PRIVACY AND SECURITY

42. Similarly, the adoption of the Fair Credit Billing Act (15 U.S.C. § 1666) paved the way for widespread use of creditcards by limiting consumer liability and placing other require-ments on lenders.

largely on the confidence of consumers andother users that their personal information issecure.43

PRIVACYPrivacy concerns stem from several

sources, but in general they start with infor-mation gathering methods that are unique tothe Internet or at least qualitatively differentfrom anything that preceded it. “Cookies”and “Web bugs” are examples of some ofthese controversial new techniques. Cookiesare small text files stored on the user’s com-puter when he or she visits a website that can be accessed only by that website or someone affiliated with that site. Cookies arewidely used to personalize a user’s experi-ence on a website and to enhance user con-venience, for example, by recording his orher password, address, or credit card infor-mation. Users can set their browsers so thatthey will not accept cookies or will do so onlyafter asking user permission. However, thedefault setting on most browsers is to permitcookies to be stored without informing theuser. A newer method for collecting informa-tion about Web users is the “Web bug,” whichcan report to its home server (belonging tothe host site, a network advertiser, or someother third party) detailed information onthe Internet-viewing habits of the computeruser.44

Three conclusions emerge from a reviewof the major policy issues concerning theinteraction of consumers and commercialwebsites. First, many consumers (as well as

legislators and others) lack an accurateunderstanding of the risks posed by, and theprotections applicable to, online commerce.Second, whether or not this lack of under-standing contributes to a hesitancy to engagein commerce online, it is clearly creatingpressure for governmental action. Third, thisheightens the urgency for businesses both toimprove their efforts to educate consumersand to provide consumers with policy-based,contractual, and technological protections.Consumer education would focus on therisks, opportunities, and protections applica-ble to B2C e-commerce. Consumer protec-tions would reduce the need for regulationof e-commerce and provide an opportunityfor businesses to distinguish themselves inthe marketplace by the clarity and quality oftheir responses to consumer concerns.

Policy IssuesSurvey after survey about online privacy

indicate that consumers would use the Webmore if privacy were better protected andthat many want the government to pass lawsnow to regulate how personal data are collected and used on the Internet.45 The following list, although incomplete, makes itclear that a wide variety of issues are includedunder the “privacy” rubric (see also Figure 3,Internet Users’ Fears): surreptitious collec-tion of personal information, such as undis-closed monitoring of browsing habits; reuseof personal information for purposes otherthan those for which it was collected, such asusing e-mail addresses collected for one pur-pose to market other products or services;combining or matching personal informationcollected from disparate sources (profiling);transfer of personal information to third par-ties through sale, rental, or exchange, includ-

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Chapter 5: Privacy and Security

43. “SafeNet 2000: Security and Privacy Leaders Gather atMicrosoft Campus to Seek Solutions to Challenges FacingInternet Users.” Microsoft PressPass. 7 December 2000.http://www.microsoft.com/presspass/features/2000/Dec00/12-07safenet.asp.

44. A Web bug is also known as a “clear GIF” or “1-by-1 GIF.”Web bugs are graphic image files embedded in a Web page oran e-mail; they are invisible to the user because they are thesame color as the background on which they are displayed;they can be detected only by looking at the source code of aWeb page.

45. In October 2000, two-thirds of respondents in a survey ofonline privacy said that their biggest worry is that websites willprovide their personal information to others without theirknowledge. “Online Americans More Concerned about Privacythan Health Care, Crime and Taxes, New Survey Reveals.”National Consumers League Press Release. 4 October 2000.

ing the use of personal information by onecompany to market the products or servicesof another company; interception or misap-propriation of personal information, whetherthrough third-party “hacking” or the misap-propriation by employees or contractors; useof personal information to commit fraud orphysical or emotional harm, such as fraudu-lent charges on credit cards, identity theft,and stalking; maintenance and use of inaccu-rate personal information, thereby denyingthe consumer benefits to which he or she is otherwise entitled or marketing products orservices to a consumer in which he or she isunlikely to be interested; and indefiniteretention of personal information, so that anindividual is hard-pressed to move beyondpast mistakes.

Several states are considering privacylaws, and the FTC recently recommended toCongress that it enact online privacy legisla-

tion—thereby reversing the Commission’sposition of the past four years.46 TheCommission recommends that such legisla-tion build on four key principles: clear andconspicuous notice of how a consumer’sinformation will be used; choice as towhether and how personal information isused; access to personal information collect-ed online and the ability to contest its accura-cy; and assurance that the information issecure from unauthorized use.47

In response to consumer concerns, theprivate sector has developed a variety of privacy solutions, although none completelysolves all problems. Some companies, such as

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Figure 3

Internet Users’ Fears*

0 10 20 30 40 50 60 70 80 90

Percentage Concerned

SOURCE: Pew Internet & American Life Project May-June 2000 Poll*Internet users equaled nearly 50 percent of survey sample of 2117 adults

Unauthorized access to personal and family information (84%)

Hackers stealing credit card numbers (68%)

Unqualified individuals providing medical (54%)information online

Computer Viruses (54%)

False or inaccurate news reports online (49%)

Spreading false rumors online to affect (47%)stock prices

People lying about their identities online (39%)

Business tracking online (31%)movementUnauthorized access (27%)to email

46. The National Association of Attorneys General is develop-ing legislative recommendations for state privacy laws. SeePerine, Keith. “The Persuader.” The Industry Standard. 13November 2000. pp. 155-170.

47. Federal Trade Commission. Privacy Online: Fair InformationPractices in the Electronic Marketplace. May 2000.http://www.ftc.gov/reports/privacy2000/privacy2000text.pdf.

IBM, have appointed a “chief privacy officer,”who will be responsible for the establishmentand maintenance of privacy policies.48 Severalbusiness associations, notably the OnlinePrivacy Alliance (OPA) and the GlobalBusiness Dialogue on E-Commerce (GBDe),have called for standards to safeguard per-sonal information online. The OPA websitealso highlights privacy initiatives taken by itsmember companies, which others may wantto follow.49 In January 2001, the AeA (for-merly the American Electronics Association)proposed principles to guide policy makersin the creation of a federal privacy law.50

Several private groups, including TRUSTe and the Better Business Bureau(BBBOnLine), offer a privacy seal ofapproval that businesses can use to show thattheir policy complies with the establishedrequirements.51 However, the lack of bothconsumer awareness and voluntary businessparticipation, as well as a failure to requirenotification of policy changes, diminishslightly the effectiveness of these seals. Theseals also do not identify the policies of adagencies when they act as third-party profilerson other companies’ Web pages. To remedythat problem, the FTC has worked withonline ad agencies to develop the NetworkAdvertising Initiative Principles, whichaddress the key issues of consumer notice,choice, access, and security.

In the international arena, the OECD hastaken steps to help firms develop adequateprivacy practices. The OECD PrivacyGuidelines represent an international con-sensus on how best to balance effective priva-cy protection with the free flow of personal

data.52 The guidelines allow for various meansof compliance. To help implement them, theOECD has developed an online computerprogram called the OECD Policy StatementGenerator.53 The program offers free assis-tance on compliance with the guidelines.The hope is that the program will raiseawareness of privacy issues and private orga-nizations will use the generator to developprivacy policies and statements for display ontheir websites.

Technology holds several potential solu-tions to privacy issues. Anonymizers are onepotential privacy solution. They hide a per-sonal computer’s unique IP address so anindividual can browse the Web anonymously.Consumers can purchase any one of a varietyof anonymizers for about $50 per year.Another recently developed solution is theautomated privacy provided by World WideWeb Consortium’s Platform for PrivacyPreferences Project (P3P). The P3P requireswebsites to use a standardized privacy policyformat and allows the consumer to set per-sonal privacy preferences. If the consumervisits a site that meets his or her preset mini-mum privacy preference level, the computerautomatically gives information to the site; ifthe site does not meet the minimum level, noinformation transfer occurs. The WhiteHouse, AOL, and Microsoft have backed theproject. Internet Explorer 6.0 will incorpo-rate P3P technology and allow users to down-load default settings created by privacygroups or other organizations. In the workplace, Microsoft is also backing the use ofsmartcards to ensure authentication of theuser and to limit access to secure files.54

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48. Wilcox, Joe. “IBM Appoints Chief Privacy Officer.” TheNew York Times. 29 November 2000.

49. http://www.privacyalliance.org/.

50. “AeA Unveils Federal Privacy Principles.” AeA NewsRelease. 18 January 2001.http://www.aeanet.org/public/press/index.html.

51. http://www.bbbonline.com/ and http://www.truste.com/.

52. The OECD Privacy Guidelines are available athttp://www.oecd.org/dsti/sti/it/secur/prod/priv-en.htm.

53. http://cs3-hq.oecd.org/scripts/pwv3/pwhome.htm.

54. “SafeNet 2000: Security and Privacy Leaders Gather atMicrosoft Campus to Seek Solutions to Challenges FacingInternet Users.”

RecommendationsA federal privacy law should establish

online privacy standards. Specifically, busi-nesses, governments, and other parties thatprovide content through digital interfacesshould be required to disclose fully theirpractices and policies concerning privacy.The federal law should allow and encouragethe use of voluntary trust marks such asBBBOnline and TRUSTe. The Federal TradeCommission should be responsible forenforcement of privacy claims.* Two factorsjustify a federal law that sets minimum stan-dards of online privacy protection. First, afederal privacy law would preempt multiplestate laws and supersede private lawsuitsbased on federal wiretapping statutes; thecosts and inefficiencies created by having tocomply with inconsistent requirements wouldhinder the development of e-commerce.Second, federal law would go some distancetoward reassuring reluctant consumers, whomay be unable to make their concernsknown to business effectively. One way ofdoing that would be to affirm the authorityof the FTC to enforce privacy policies postedby businesses. While we would like to seebusinesses retain sufficient flexibility to estab-lish their own policies within minimumguidelines from the law, we believe that forconsumers to view those policies as crediblethe standards must be reasonably stringentand subject to enforcement.

However, a federal privacy law should bewritten in a manner that allows the use andappropriate disclosure of information need-ed for the delivery of services in areas suchas health and finance, which depend heavilyon the use of such data. In considering feder-al legislation, lawmakers should take care torecognize the legitimate use of private infor-mation under various circumstances. Whilesafeguarding consumer privacy is important,some data are routinely needed by business

not only to deliver important services direct-ly, but also to improve the delivery of thoseservices through indirect means. In healthcare, for example, patient medical data areroutinely needed for outcomes analysis, med-ical research, and health education purposes,including care management itself.55

In general, markets should be allowed sufficient leeway to mediate privacy concernsbetween consumers and businesses. While arole exists for government policy to set mini-mum standards and enforce private contracts(as discussed above), the primary focusshould be on actions that consumers andbusinesses can take to protect consumer pri-vacy. In both cases, technological solutionshold substantial promise. With respect tobusiness, privacy options should be one ofthe dimensions in which firms compete. Ifprivacy concerns are an important factor inconsumer preferences, online suppliers willbegin to offer more privacy options. That, ofcourse, will only occur if markets can ade-quately convey such information betweenconsumers and businesses.

Businesses and consumers share responsibility for educating consumers about the benefits and costs of privacyrestrictions, options for protection, and waysto express their preferences. Education isessential for consumers to make sound choic-es about their policy preferences. Educationshould include information about why a cer-tain level of privacy is necessary, why toomuch privacy may inhibit markets, and how

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55. In December 2000, the outgoing Clinton Administrationannounced new privacy standards for patient medical records.Those rules, which cover both paper and electronic records,would be effective in 2003, if allowed to stand by PresidentBush. In general, health care providers would be restrictedfrom using patients’ data without their permission, andpatients would be granted further rights for copies, correc-tions, and notifications. See, “HHS Announces FinalRegulation Establishing First-Ever National Standards toProtect Patients’ Personal Medical Records.” U.S. Departmentof Health and Human Services Press Release. 20 December2000. http://www.hhs.gov/news/press/2000pres/20001220.htm.


technology can be used to exercise their pref-erences. For example, a consumer can set theInternet browser to encrypt information anddisallow cookies that track browsing habits.Consumers can also use one of several creditcard services that generate a unique autho-rization number for each online transaction.

To make consumers more aware of theimplications of shopping or gathering infor-mation online, providers of digital interfacesmust make their policies available and under-standable. While consumers bear primaryresponsibility for their own actions, includinguse of the Internet, we expect businesses thathave commercial interests in consumer priva-cy issues, which includes almost all retail busi-nesses, to actively take steps to help informconsumers of their choices. Businesses needto build the confidence of consumers by pro-viding safe and secure websites, which helpovercome fears of doing business online.Once trust is built between consumers andsuppliers, applications of digital technologieswill proceed more smoothly.

SECURITYConsumer concerns about commercial

websites, even when identified as relating to privacy, often relate to security. Securityissues include concerns about both datainterception and unauthorized access tostored data. Businesses offer a variety of valu-able information in one place, making themeasy targets and forcing them to spend timeand money protecting against the theft oftrade secrets, proprietary business informa-tion, and customer information. Surveys indicate that 80 percent of companies identi-fy security as the leading barrier to expand-ing e-commerce with their customers andpartners.56

To protect the confidentiality and reliabili-ty of data and maintain continuous service,Internet-based operations must limit theirexposure to such factors as environmentaldisruption, human operational errors, designand implementation errors, and maliciousattacks. Environmental disruptions vary fromnatural disasters such as earthquakes andfloods to construction crews digging inimproper places and accidentally cutting connection lines. Operational errors includemistakes made by human workers because of poor training, poor judgment, and inade-quate staffing, or just the ordinary, unpre-dictable mistakes people often make. Designand implementation errors result from theconvergence of many different software programs and computer systems over theInternet. With so many different systems andprograms being used together, it is nearlyimpossible for a programmer to eliminate all potential conflicts. Malicious attacks areintentional, man-made assaults directed atparticular computer systems.

Policy IssuesAs the Internet has connected computers,

it has become easier and less dangerous forattackers to gain unauthorized access to acomputer and its programs; physical access is not needed. In addition, as both the quan-tity and quality of data stored on networkedcomputers has increased, the incentives ofattackers have also increased. According tothe recent “Computer Crime and SecuritySurvey,” 85 percent of responding corpora-tions and government agencies reportedsome type of security breach in the last year.57

Losses can be difficult to quantify. Estimatesthat aggregate total losses are especially poorbecause many crimes and security breachesare not reported. Nevertheless, quantifiedlosses, for firms that reported crimes, rose

37


56. Mann, Catherine, et. al. Global Economic Commerce. p. 106;and Ho, David. “U.S. Public Worried about Hackers, PollIndicates.” The Seattle Times. 20 June 2000.

57. Hatcher, Thurston. “Survey: Costs of computer securitybreaches soar.” CNN.com. 12 March 2001. http://www.cnn.com.

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The Digital Economy

Attacks on computer systems have become more sophisticated and more frequent.Reported breaches include attacks both by insiders and outsiders, employees and formeremployees who access information without permission and hackers who gain unauthorizedaccess to the network through the Internet. These attacks can further be broken downaccording to the intention of the attack, whether to prevent the availability of services or toattack the integrity or confidentiality of stored data.

Insiders vs. OutsidersUnauthorized access to stored data typically takes place in one of two ways. The first is

third-party access (“hacking”) that exploits some defect in the security measures surround-ing the data. Anecdotal reports suggest that this occurs relatively infrequently, but a numberof well-publicized reports of hackers obtaining access to stored lists of credit card numbersand Social Security numbers have heightened consumer concerns about such risks. Tools toaccess vulnerable systems externally are becoming more sophisticated, widespread, and userfriendly. Hackers can now attack a large number of sites simultaneously, denying service orstealing information.

The other and reportedly more common form of unauthorized access to stored data isthrough an employee or contractor who acts outside the scope of his or her employment orcontract. This type of access is more difficult to prevent. It is also more difficult to assuagecustomer concerns about such access. Employees constitute one of the greatest threats tocompany information systems, and attacks by employees cause the most damage. The aver-age insider attack costs a company $2.7 million in damages, the average outsider attack only$57,000. Employees have intimate knowledge of a company’s computer system and can moreeasily exploit its vulnerabilities.a

AvailabilityThe loss of access to computer services can be extremely costly for any business. When

their computer systems are down, businesses lose both access to their files and their ability toconduct e-business. A loss of either one eliminates a company’s ability to do business.

While businesses are constantly subject to the possibility of loss of service as a result of anenvironmental problem or human or software error, man-made denial-of-service attacks arethe major threat to computer systems’ availability. Denial-of-service attacks aim to denyaccess to a particular resource by “flooding” the network, disrupting connections betweentwo machines, preventing a user from accessing a service, or disrupting service to a specificsystem or person.b

Denial-of-service attacks waste memory and generate traffic at particular sites, andbecause attackers can coordinate computers in the process, such attacks can interrupt ser-vices from the most sophisticated sites. Although many attacks do not inflict any permanentharm on sites, they can create costly interruptions of service for extended periods of time.The denial-of-service attacks that temporarily halted traffic to major websites in February2000 are estimated to have cost as much as $1.2 billion.c

SOURCES OF ATTACK ON COMPUTER SYSTEMS

39


IntegrityA second major security concern is to ensure that attackers cannot alter or erase stored

information. The major threat to maintaining the integrity of stored data is the computervirus. Viruses are based on programming code that infects a computer, reproduces itself, andspreads to others via email. In addition to self-replication, viruses can erase data, infect harddrives, and overwhelm networks. Between 1996 and 1999, virus infection increased 800 per-cent.d

Currently, anti-virus software is available to prevent infection. Because they are generallysmall files that try to remain hidden, most viruses can be easily eliminated once exposed.Unfortunately, viruses can inflict much damage before their existence is well known. TheMay 2000 “I Love You” bug, for example, caused an estimated $6.7 billion in damage anddowntime.e In addition, the potential for new polymorphic viruses “designed to rewritetheir code every time they infect a new computer”f poses new challenges to anti-virus soft-ware producers.

Confidentiality Threats to Internet confidentially are among the greatest concerns to the digital econo-

my. Currently, two-thirds of Americans are concerned about crime on the Internet.g If confi-dentiality cannot be assured, consumers will fear the spread of the confidential informationincluding social security numbers, addresses, and credit card numbers over the Web andavoid e-commerce.

Attacks that jeopardize the confidentiality of protected information are the most lucra-tive for hackers. While attacks limiting service availability or altering data integrity can hin-der business on the Web, information retrieved from websites has value. The most commononline thefts involve credit card databases, trade secrets, and other confidential files.

In addition to the traditional attacks in which unauthorized personnel or hackers ille-gally retrieve confidential and valuable personal data, Internet confidentiality is threatenedby “sniffer” devices, which allow outsiders to receive copies of email or other files that mayinclude private information or passwords.

a. Shaw, Eric, Jerrold Post and Kevin Ruby. “Managing the Threat from Within.” Information Security. July 2000.http://www.infosecuritymag.com/articles/july00/features2.shtml.

b. “Denial of Service Attacks.” CERT Coordination Center. 12 February 1999.http://www.cert.org/tech_tips/denial_of_service.html

c. Abreu, Elinor. “Insurers Rush in When Security Fails.” The Industry Standard. 17 July 2000d. Grossman, Lev. “The New Hot Zone.” Time Digital. July 2000. http://www.time.com/time/digital/

feature/0,2955,49120,00.htmle. Grossman, “The New Hot Zone.”f. Grossman, “The New Hot Zone.”g. Burton, Tinabeth. “New Nationwide Poll Shows Two-Thirds of Americans Worry About Cybercrime.”

Information Technology Association of America Press Release. 19 June 2000.http://www.itaa.org/news/pr/PressRelease.cfm?ReleaseID=96144345.

from $265 million in 1999 to $378 million in 2000 (see Figure 4).58

Technological means of improving security. Firewalls are computer programsthat regulate access to computer systemsaccording to whether an outsider is autho-rized by possession of the password, or key.Firewalls are based on the military concept of perimeter security, where access to anentire base is limited by allowing very fewentrances. Essentially, firewalls serve as thelocks on entrances.

In general, firewalls are effective atdefending against outside “hackers.”However, they tend to be ineffective at eliminating insider attacks, which constitutethe bulk of current attacks. Newer programscalled “distributed firewalls” may improvesecurity against both types of threat.59

Without a single chokepoint, “there is nolonger a single point of failure” that canexpose the entire network to outsidehackers.60 They may also be used to limitinsider attacks by restricting employees from gaining access to files that they are not authorized to view.

Encryption is the transformation of databy means of a mathematical algorithm thatallows it to be understood only by individualswho have the key necessary for decryption.Unlike firewalls, encryption does not focuson controlling who gains access to particularfiles. Instead, security is maintained by limit-ing the ability of unauthorized individuals todecrypt the file. Encryption of confidentialmessages makes intercepted transmissionsindecipherable without the appropriate key.For this reason, encryption serves to protect

both stored data within a database and transmissions, such as electronic mail, thatare transferred from network to network.61

Government programs to improve security. The federal government has takenseveral steps to improve the security of com-puter systems and the Internet. Among themost prominent is the Computer EmergencyResponse Team (CERT) Coordinated Centerat Carnegie Mellon University, which is devot-ed to insuring the survivability of computernetworks. (See box on the CERT Coordi-nated Center.) CERT both responds to spe-cific security problems and works to preventsuch problems by increasing awareness ofsecurity issues.

In 1997, following the report by thePresident’s Commission on Critical Infra-structure Protection, the Administrationissued Presidential Decision Directive No. 63(PDD-63), which outlined a strategy to assessand minimize the potential vulnerabilities of

40

The Digital Economy

Figure 4

Annual Reported Losses from Computer Crime and Security Breaches(In Millions of Dollars)

$400

$300

$200

$100

$0

1996 1997 1998 1999 2000

NOTE: Totals are based on surveys of Computer SecurityPractitioners in U.S. Corporations, Government Agencies,Financial Institutions, Medical Institutions, and Universities.

SOURCE: CSI/FBI 2001 Computer Crime and Security Survey

58. This figure undoubtedly understates the true level of losses, but by how much is unknown. The figure cited,although the most authoritative available, includes only reported and quantified losses from surveyed firms.

59. Messmer, Ellen. “New firewalls defend the interior.”Federal Computer Week. 20 June 2000. http://www.fcw.com/fcw/articles/2000/0619/web-fire-06-20-00.asp.

60. Bellovin, Steven. “Distributed Firewalls.” November 1999.http://www.research.att.com/~smb/papers/distfw.html.

61. Nunno, Richard M. “Encryption Technology:Congressional Issues.” CRS Issue Brief: IB96039. 14 July 2000.

the U.S. critical infrastructure by the year 2003.62 (See box on the President’s Commis-sion and PDD-63.) Through increased coop-eration and communication between federalagencies and private businesses, PDD-63 hasfacilitated the creation of a national plan toimprove security information sharing andreduce the vulnerabilities of the critical infrastructure. The plan was released inJanuary 2000, and is known as the NationalPlan for Information Systems Protection,Version 1.0.

Most recently, the FTC has recommendedthe enactment of a legal requirement con-cerning online security, based on the findingof the Advisory Committee on Online Access and Security.63 Although the advisory commit-tee did not specify an exact recommenda-tion, it clearly leans towards the imposition ofgovernment standards of security. To supple-ment any security standards the committee

also supported the development of programsto educate consumers on security issues. Thecommittee’s recommendations included thefollowing principles:

• “Each commercial Web site should main-tain a security program that applies topersonal data it holds.

• The elements of the security programshould be specified (e.g., risk assessment,planning and implementation, internalreviews, training, reassessment).

• The security program should be appropri-ate to the circumstances. This standard,which must be defined case by case, is sufficiently flexible to take into accountchanging security needs over time as wellas the particular circumstances of the Web site—including the risks it faces, thecosts of protection, and the data it mustprotect.”64

41


62. The President’s Commission on Critical InfrastructureProtection. Critical Foundations: Protecting America’sInfrastructures. Critical Infrastructure Assurance Office.October 1997. http://www.ciao.gov/CIAO_Document_Library/PCCIP_Report.pdf.

63. Federal Trade Commission, Privacy Online: Fair InformationPractices in the Electronic Marketplace.

The CERT program was created by the Defense Advanced Research Projects Agency inresponse to the 1988 “Morris Worm” computer virus that crippled nearly 10 percent of allcomputers connected to the Internet.a

In the past decade, CERT’s growth has paralleled that of the Internet. While the CERTonly handled six computer security incidents in its first year, the center responded to near-ly 10,000 incidents in 1999.b The scope of CERT’s functions has also expanded. The centernow provides alerts on its Web page of current viruses and offers a program, the Opera-tionally Critical Threat, Asset, and Vulnerability Evaluation (OCTAVE), which allows indi-viduals to assess the value of their network and decide on necessary security measures. Thecenter also provides courses and training to increase public knowledge of computer securi-ty issues and serves as a model for additional security centers.

a. “About CERT/CC.” CERT Coordination Center. 27 November 2000. http://www.cert.org/nav/aboutcert.html.b. “CERT/CC Statistics 1988-2000.” CERT Coordination Center. 11 January 2001. http://www.cert.org/stats/

cert_stats.html.

THE COMPUTER EMERGENCY RESPONSE TEAM (CERT) COORDINATED CENTER

64. Federal Trade Commission. Final Report of the FTC AdvisoryCommittee on Online Access and Security. May 2000. ExecutiveSummary. p. 25. http://www.ftc.gov/acoas/papers/acoasfinal1.pdf.

RecommendationsBusinesses should make greater use of

encryption, electronic firewalls, and similartechniques to ensure privacy and security.Likewise, consumers should take responsibili-ty for their online activities and educatethemselves about the steps they can take toimprove their security. Technical means existto reduce significantly the exposure of indi-vidual consumers and businesses to externalthreats. Yet, businesspeople, consumers, andeven some network managers rarely under-stand or give high priority to security issues,and security practices are typically not state

of the art.65 All users and providers ofInternet service must educate themselvesabout the ways in which they can improvesecurity. Consumers in particular should beaware that no public policy can substitute forthe need to take responsible actions for selfprotection. In general, those actions includethe use of home firewalls and the privacymeasures noted above.

Security also means secure communica-tions and protection against disruption. Wesupport strong encryption and wish to avoid

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The Digital Economy

President’s Commission on Critical Infrastructure ProtectionThe President’s Commission on Critical Infrastructure Protection was established in 1996

to determine the vulnerabilities of the nation’s critical infrastructure and develop a plan forprotecting it. The Commission was established because of the recognition that many parts ofthe nation’s crucial infrastructure had become both more automated and more intertwined.With concerns being raised about the potential effects of the upcoming Y2K computer prob-lem, the Commission provided an evaluation of the government’s ability to ensure that thedistribution of essential goods and services would not be disrupted by the potential effects ofthat problem or any cyber threat.

The Commission recommended the implementation of a program based on industrycooperation and information sharing, including proposals to create information centers foran attack warning system, as well as an organization to determine a national plan for assess-ing and eliminating critical infrastructure vulnerabilities. The recommended plan and organization structure was adopted in PDD-63.

PDD-63 Proposed StructurePDD-63 was designed with goals of significantly increasing the security of government sys-

tems by 2000 and creating a secure and reliable infrastructure by 2003. PDD-63 also createdtwo major bodies. First, the National Infrastructure Protection Center (NIPC) was designedto link federal and state agencies with private businesses for threat assessment and response.Second, it assigned the Critical Infrastructure Coordination Group (CICG) of governmentand business leaders the task of continuing the assessment of the critical infrastructure’s vul-nerabilities and providing plans to remedy them.

NIPC is designed to assess and respond to network threats. It began operation inDecember 1998 and is located within the FBI’s headquarters. It joins the efforts of leadingcomputer security experts from the FBI, Department of Defense, and other governmentagencies, as well as those from private businesses. NIPC is linked to the computer systemsthroughout the federal government, and is intended to provide “timely warnings of inten-

THE PRESIDENT’S COMMISSION ON CRITICAL INFRASTRUCTURE PROTECTIONAND PRESIDENTIAL DECISION DIRECTIVE NO. 63

65. Schneider, Fred B., Ed. Trust in Cyberspace. Washington,D.C.: National Academy Press, 1999. p. 240.

a return to policies that restrict encryptiontechnology or limit it to the United States.Over the past ten years, the government’sposition on the regulation of encrypted datahas been caught between concerns over theprotection of national security and the pro-tection of privacy rights and encouragementof the growth of business through electroniccommerce. While we recognize the legitimateinterests of the government in national secu-rity and law enforcement, past governmentregulations have had an unnecessarily nega-tive effect on business activity. Our hope isthat past mistakes such as promotion of the“clipper chip” that allowed for easy decryp-

tion of encrypted messages and export con-trols on strong encryption programs, will besupplanted by policies that recognize boththe limits of the government’s reach and therealities of the borderless Internet and aglobally integrated market. One of those real-ities, as spelled out by the National ResearchCouncil, is the positive role that encryptioncan play in protecting connected businessesand individuals.66

We encourage further development of security reporting systems that allow

43


tional threats, comprehensive analyses, and law enforcement investigation and response.”a

Private Sector Information Sharing Analysis Centers (PSISAC’s) are the private sector NIPCcounterparts in specific sectors. Currently, PSISAC’s exist in banking, telecommunications,and electric power.b

PDD-63 deemed several critical sectors necessary to maintain minimum operation of thegovernment and economy and created a Sector Liaison Official (SLO) to analyze andreduce the network vulnerabilities of each sector in coordination with private business lead-ers. After completing sectional reviews and evaluations, the SLOs convened as the CICG,which combined the sector reports and released the National Plan for Information SystemsProtection, Version 1.0, January 10, 2000.

National Plan for Information Systems Protection, Version 1.0The national plan focuses on three major objectives. First, the plan emphasizes the con-

tinued efforts of critical infrastructure asset and vulnerability analysis to prevent successfulcyber attacks. Second, the plan proposes increased efforts towards detection of and responseto, attacks and unauthorized network entries. This included efforts to improve informationsharing abilities to spread attack warnings and enhance response capabilities. Third, theplan suggests building a strong foundation against cyber attacks by training more securityspecialists, heightening public awareness of the issue, and encouraging new legislation andfunding to support other programs.c

a. “Presidential Decision Directive 63.” Critical Infrastructure Assurance Office. 22 May 1998.http://www.ciao.gov/CIAO_Document_ Library/paper598.pdf.

b. Moteff, John D. “Critical Infrastructures: Background and Early Implementation of PDD-63.” CRS Report:RL30153. 12 September 2000.

c. “National Plan for Information Systems Protection.” Critical Infrastructure Assurance Office. January 2000.Executive Summary. http://www.ciao.gov/National_Plan/executive_summary_01-11-00.pdf.

66. Dam, Kenneth W. and Herbert S. Lin, Eds. Cryptography’sRole in Securing the Information Society. Washington, D.C.:National Academy Press, 1996.

businesses to report hacking, breaking in,viruses, and other security breaches anony-mously, without fear of possible legal orfinancial repercussions. Although some stepshave been taken to encourage private organi-zations to report electronic intrusions, gov-ernment and industry experts must be ableto work more closely together to combatsecurity problems. Their interests overlap onissues of incident reporting, investigation, lawenforcement, legal reform, and critical infra-structure. However, a recent survey showedthat businesses only report about 32 percentof serious hacker attacks to law enforcementagencies because they want to avoid embar-rassment and doubt the government’s abilityto track down criminals.67 In response, theAdministration and industry leaders haveformed the Partnership for CriticalInfrastructure Security to share security infor-mation, and the FBI has announced a newprogram, InfraGard, to allow companies toshare sensitive information about cyber-attacks.68 Nevertheless, more needs to bedone. The FBI has acknowledged that it hashad difficulty persuading businesses thatinvolvement with FBI programs is more bene-ficial than harmful. Legislation introduced in the 106th Congress would encourage thedisclosure and exchange of information onnetworked information systems by protecting

the party providing such information againstpublic disclosure, civil action, and antitrustprosecution.69 Legislation to remove barriersto sharing information about computer secu-rity violations, threats, and vulnerabilitieswould be a useful step towards making thesystem more secure.

CONCLUSIONSWhile there is some room to improve gov-

ernment policies in the areas of privacy andsecurity, the most important need for addi-tional action lies with the private sector.Consumers and businesses should becomebetter educated and more active participantsin efforts to protect the privacy of data gath-ered online and the security of the networkand its components. All should recognizethat while threats can be diminished, the sys-tem can never be made totally secure. As con-sumers and businesses gain greater experi-ence with network technologies, includingtechnologies to protect personal data andguard against other security threats, they willfind that the benefits of the system greatlyoutweigh the risks.

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The Digital Economy

67. Piller, Charles. “Internet Industry Wary of U.S. CyberCrime Unit.” The Seattle Times. 6 March 2000.

68. “FBI Takes Aim at Cyber-Crime.” The Washington Post. 6January 2001. p. A2 and “Strengthening Cybersecurity throughPublic-Private Partnership.” The White House Press Releases.15 February 2000. http://www.whitehouse.gov.

69. See, for example, H.R. 4246, “The Cyber SecurityInformation Act.”

The gap between the haves and have-notsof the digital age, termed the digital divide,reflects a lack of Internet access and literacyamong low-income populations. Businessleaders have a particularly strong interest insupporting steps to close this divide. To thebusiness community, the digital divide pre-sents a barrier to greater economic prosperi-ty, a larger potential customer base, and ahigher-skilled and more productive work-force. In those respects, the digital dividedoes not present business or society with significantly new issues than those alreadyencompassed in efforts to raise the educa-tion, skills, and economic potential of low-income individuals. CED therefore viewsit as critically important that new digitaldivide programs not become a short-term fadthat siphons resources and energy from coreprograms aimed at economic advancement.Instead, such efforts should be integratedwith current programs and sustained over a long period to raise skills and incomes, andthose programs can achieve better results by using the new technologies.

Whether the gap is domestic or interna-tional, three factors are likely to interactstrongly with efforts to bridge the digitaldivide. First, the divide is primarily a functionof more deeply rooted factors associated withpoverty such as inadequate education, dis-rupted families, decaying communities, and,in developing countries, a lack of necessaryinfrastructure. Efforts to bridge the divideshould be viewed within this broader context.Second, to some degree, the divide betweenthe haves and have-nots should narrow in

time if those who lack access are motivated toprovide themselves with the necessary basicequipment, services, and training, and busi-nesses are motivated to reach lower-incomemarket segments. The potential for higherearnings and the attractiveness of the prod-ucts and services available through the Webwill undoubtedly be a powerful incentive forindividuals to get online. Similarly, businessesmay find more profit opportunity in broadermarkets. Third, markets are not stagnant,and the technologies deemed essential forproductive access will keep changing. Even ifthe current gap closes, another will surelyopen as those with higher incomes move upthe technology ladder to more powerful andsophisticated devices. Thus, efforts to bridgethe divide will need to be ongoing.

POLICY ISSUESThe inability to participate in new forms

of networked interaction may have bothimmediate and long-lasting economic andsocial impacts. The primary concern is thatthe digital divide “could lead to a two-tiereconomy in which those with inadequateaccess to information technology would berelegated to a lifetime of low-skill jobs andlow wages.”70 Specifically, the same networkeffects that make the Internet so valuable tothose who use it could work as strongly in theopposite direction to disadvantage those whodo not. These elements of the digital econo-

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Chapter 6

OVERCOMING THE DIGITAL DIVIDE

70. Peterson, Molly M. “Net Dreams.” National Journal. 11March 2000. p. 767.

my could increase inequalities. As important,however, the Internet also provides newmeans to address some of the sources ofthose inequalities.

In response to such potential negativeconsequences, leaders of business, education-al institutions, civic organizations, and gov-ernment have all expressed concern. It servesboth narrow and broad self-interest for busi-nesses to bridge the divide. As expressed atthe World Economic Forum by CarletonFiorina, chairman of Hewlett-Packard, com-panies should seek to tackle the divide intheir own self-interest rather than as philan-thropy, because today’s poor countries arethe potential growth markets of tomorrow.71

Businesses may profit in a narrow sense bylowering their unit costs, expanding theircustomer base, and reaching new markets,even as competition intensifies and limitstheir pricing power. More broadly, the widersocial benefits associated with new informa-tion technologies should also benefit busi-ness. Widespread Internet access and usehelps improve the quality of the labor force,customer relationships, and communities ingeneral. From the education and prepared-ness of its workforce to public opinion on thevalue of its services, business has a significantstake in the general improvement of thesocial environment. The more extensive thereach of the digital economy, the greater willbe the opportunity for individual firms togrow and profit within a healthy, prosperous,and well-functioning society.

Internationally, the greatest danger is thatthe gulf between developed and developingcountries will widen. Differences in the eco-nomic and business capabilities between theUnited States and developing countriesappear magnified by the increased economicintegration commonly referred to as “global-ization.” On the positive side, the Internet

provides businesses in poor countries an easi-er route to tap into global markets, and theymay also be able to leapfrog costly and out-dated technologies. On the other side, how-ever, unless developing countries can quicklyupgrade basic infrastructures, such as tele-phone service, energy, and transportation,and the national institutions necessary forthe growth of all commerce, they risk fallingfurther behind.

Finally, the realization of network benefitsis limited by the size, accessibility, and perva-siveness of the network. The more importantthe Internet becomes as a primary channel togoods at reduced cost and access to informa-tion of all kinds, as well as a conduit for polit-ical and cultural expression, the greater willbe the opportunity for low-income popula-tions and their businesses to gain by obtain-ing access to the Internet. For business ingeneral, this network effect provides a moti-vation beyond mere charity to invest in itsown future prosperity by providing resourcesto help others gain the access and skills theyneed to cross the digital divide. Such invest-ments may pay dividends in unexpected ways,for example, through increasing the futuresupply of engineering and scientific talent.

RECOMMENDATIONSCED believes that closing the digital

divide is an important national and interna-tional goal. We applaud the many existingpublic and private initiatives to address thisissue. However, there is danger that digitaldivide programs will become a faddishdetour on the road to economic opportunityunless integrated with more traditional edu-cation, training, and other skills-developmentprograms. Below, we provide a series of rec-ommendations (including illustrative exam-ples) that policymakers should consider inthe construction and implementation of pro-grams in three areas: access and literacy, con-tent, and global issues. In general, our rec-

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The Digital Economy

71. As reported in Buerkle, Tom. “Rich Ask Themselves How to Help the Poor.” International Herald Tribune. 31 January 2001.

ommendations attempt to insert Internetconcerns into traditional domestic anti-pover-ty and international economic developmentprograms. Programs to close the digitaldivide should not substitute for sustainedefforts to lift people from poverty.Computer- and Internet-oriented goalsshould be integrated into programs that concentrate on development of basic skills,education, and social and physical infrastruc-ture. New digital technologies should beapplied to enhance the performance of those programs.*

Access and LiteracyBefore people can fully benefit from the

digital economy, they must have physicalaccess to computers and the Internet, andthey must be literate in both the traditionalsense of knowing how to read and write andthe sense of knowing how to use a computerand navigate the World Wide Web. As a start-ing point, individuals and communities needcomputers or other Internet-enabled devicesto access the digital network. Access, which isprimarily an issue of infrastructure and physi-cal capital, appears to be the most immediatebarrier to participation in the online world.Thus, accessibility has become a key criterionfor evaluating the digital divide.

Recent data show that computers aresteadily becoming more common withinAmerican homes. In 2000, computer penetra-tion reached 51 percent, a sharp rise from 42percent in 1998.72 In addition to an increasednumber of computers in our homes, comput-ers are also more common in workplaces,public libraries, schools, and community centers. The number of households withInternet access has also been increasing.Further, the margin is shrinking betweenthose with computers but not Internet, and

those with access to both (see Figure 5). Astime passes, fewer people are off the networkfor reasons other than choice.

Although the overall number of house-holds with computers and Internet access isrising, penetration across demographicgroups is uneven. For instance, householdswith lower incomes and less education are,on average, less likely to be online. In Augustof 2000, nearly 78 percent of the 17 millionhouseholds with annual incomes of $75,000or higher had Internet access, compared toonly 13 percent of the 16 million householdswith incomes below $15,000.73 Location isalso an important variable, as householdswithin central cities or rural areas are lesslikely to have Internet access.74

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Chapter 6: Overcoming the Digital Divide

Figure 5

U.S. Households with Computersand Internet Access, Selected Years

� —Households with Computers

� —Households with Internet Access60%

50%

40%

30%

20%

10%

0%

1988 1990 1992 1994 1996 1998 2000

SOURCE: U.S. Department of Commerce, Economics andStatistics Administration, National Telecommunications andInformation Administration. Falling Through the Net: TowardsDigital Inclusion. Washington, D.C., October 2000.

72. U.S. Department of Commerce, Economics and StatisticsAdministration, National Telecommunications andInformation Administration. Falling Through the Net: TowardsDigital Inclusion. October 2000. p. xv. http://www.esa.doc.gov/.

73. U.S. Department of Labor, Bureau of Labor Statistics.“Current Population Survey, Internet and Computer UseSupplement.” August 2000. http://ferret.bls.census.gov/. Each ofthese household groups, those with annual incomes above$75,000 and those with annual incomes below $15,000, repre-sent about 15 percent of all households.

74. U.S. Department of Commerce, Economics and StatisticsAdministration, National Telecommunications and Informa-tion Administration. Falling Through the Net: Towards DigitalInclusion. p. 4.

*See memorandum by JAMES Q. RIORDAN (page 62).

Based upon the demographic trendsabove, it is not surprising that penetrationdiffers among racial and ethnic groups. AsianAmericans and Pacific Islanders (59 percent)surpass other groups in terms of Internetaccess and Whites (47 percent) have a pene-tration rate slightly above the national aver-age of 42 percent. Well below the nationalaverage, however, are African-Americanhouseholds and those of Hispanic origin,both with penetration rates of about 23 percent. Estimates by the National Telecommunications and InformationAdministration suggest that differences inincome and education account for approxi-mately one-half of the difference between the races. After adjustment, the gap betweenthe national average (all races) and African-Americans is about 10 percent, and forHispanics it is nearly 7 percent.75 The remain-ing margin shows that income and educationlevels do not account for all the differencesin Internet access.

Despite the differences outlined above,Internet use is increasing across all demo-graphic groups. Further, any snapshot of cur-rent use in a nascent market like the Internetis likely to misjudge longer-term outcomes.As with many technologies of the past, adop-tion and use gradually increase over time.The factors affecting adoption include aware-ness of a technology and attraction to use it,in addition to affordability.76 For purposes ofillustration, it may be helpful to compare theInternet and cable television. During cabletelevision’s earliest years of expansion, from1970 to 1980, use among TV owners grewfrom 6.7 to 19.9 percent. In contrast, in thesix years since the Internet was introduced to

the public in 1994, the number of house-holds with access has already reached 42 percent. A longer-term look at cable televi-sion also shows that between 1970 and 1997,household subscribers grew almost tenfold to66.5 percent. Based on its remarkable pene-tration thus far, we expect the number ofInternet users to continue to grow to levelssimilar to basic television (98 percent) andtelephone service (94 percent).77

Nevertheless, even if Internet use eventu-ally reaches near 100 percent, sufficient justi-fication exists to speed up that process. Mostimportant, because of continuing technologi-cal advances, delay puts excluded popula-tions further behind and makes it more diffi-cult for them to catch up. An example canalready be found in the gap in access to high-speed broadband service, which is more like-ly to be available in high-income and denselypopulated communities than in low-incomeand low-density areas.78 In addition, an indi-vidual’s investment in computer equipmentand appliances, even at lower costs, can stillbe expensive, especially considering the veryrapid rate of obsolescence. Thus, we believepublic and private programs should promotewidespread access to the Internet as rapidlyas possible.

Short-term public and private initiativesshould focus on providing access to basic digital applications (for example, e-mail andthe Web). Some of the most important basicservices and tools of the digital economy canbe provided at relatively low cost throughalternative Internet appliances. Businessesshould not overlook the profit opportunity insupplying a potentially high-volume marketfor simple Internet devices. For example,

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The Digital Economy

75. U.S. Department of Commerce, Economics and StatisticsAdministration, National Telecommunications andInformation Administration. Falling Through the Net: TowardsDigital Inclusion. p. 15.

76. U.S. Department of Commerce, Economics and StatisticsAdministration, National Telecommunications andInformation Administration. Falling Through the Net: TowardsDigital Inclusion. pp. 3-4.

77. U.S. Department of Commerce, Economics and StatisticsAdministration, Census Bureau. Statistical Abstract of the UnitedStates. 119th Edition. Washington, D.C., 1999. p. 581, TableNo. 921.

78. U.S. General Accounting Office. Telecommunications:Characteristics and Choices of Internet Users. GAO-01-345.Washington, D.C., February 2001.

WebTV, a relatively inexpensive device thatprovides Web access and e-mail may be easierto promote among low-income consumersthan full-function personal computers. Also,basic public pay-per-use systems, such as sim-ple e-mail or Web-browsing devices, mayprove as valuable and profitable as publictelephones were in an earlier period.

The development of community accesspoints should be a priority. The developmentof pubic access points, such as communitycenters and public libraries, is important,and a variety of public and private efforts arealready underway to remedy gaps in physicalaccess. Community access centers (CACs)have become especially useful in the provi-sion of access to groups with lower incomesand education levels, minorities, and theunemployed (see box, “Federal Action and

Neighborhood Networks”).79 In addition,CACs are commonly bundled with educationresources and therefore simultaneouslyaddress literacy issues.

Probably the most widely known and best-funded effort by the federal government topromote widespread access to the Internet isthe so-called e-rate program, which directlysubsidizes Internet access for schools,libraries, and rural hospitals. (See box,“The E-Rate Program.”) While the programhas been judged by many to be successful inhelping to bring schools and libraries online,it has also been subject to significant criti-

49


79. U.S. Department of Commerce, Economics and StatisticsAdministration, National Telecommunications andInformation Administration. Falling Through the Net: Definingthe Digital Divide. Washington, D.C. November 1999. ExecutiveSummary. http://www.ntia.doc.gov/ntiahome/fttn99/contents.html.

The Clinton administration’s stated goals were to make every child technologically liter-ate and connect every classroom and library to the Internet. To accomplish these goals, thefederal government has initiated programs that range across an array of agencies, includingthe Department of Agriculture, the Department of Commerce, the Department ofEducation, and the Department of Housing and Urban Development (HUD). Within theseagencies, efforts are concentrated in the areas of education, housing, and community devel-opment.

HUD’s Neighborhood Networks initiative is an example of how the federal government ispromoting access to the Internet through community centers. Launched in 1995,Neighborhood Networks supports the provision of technology-based resources for residentsof HUD-assisted and –insured housing. As of December 2000, 644 centers were in operationand an additional 727 HUD properties were in the planning process.a The initiative focuseson providing computer, job and microenterprise training as well as job search assistancethrough public-private partnership.

HUD’s primary role is to act as an information provider, but it provides only limiteddirect financial assistance for the centers. HUD teaches communities how to develop theircenters and cultivate partners, and it shares the experiences of existing centers with develop-ing ones. While exact Neighborhood Networks programming and operations vary across cen-ters, the general model is reasonably consistent. The centers rely on donations for equip-ment and staff support and typically provide GED classes, literacy programs, and other edu-cational programs. Importantly, the centers are being used to supplement ongoing commu-nity activities and social services. For example, some centers enhance their communityhealth efforts by helping senior citizens explore Internet-based health-care resources.

a. “About Neighborhood Networks: A Neighborhood’s Economic Engine”. U.S. Department of Housing andUrban Development, Office of Housing—Multifamily. December 2000. http://www.hud.gov/nnw/.

FEDERAL ACTION AND NEIGHBORHOOD NETWORKS

cisms. As currently configured, e-rate subsi-dies can only be used for telecommunica-tions hardware and services. This has led to underfunding of software applications and teacher training in the use of digitaltechnologies.

In addition, funding for the program was built on an existing subsidy of universalaccess to telephone service and channeledthrough the Universal Service Fund, anaccounting device that resembles a trustfund. This funding mechanism has guaran-teed sufficient resources for its purpose. But, because it lacks integration with otherfunding for educational purposes, it can distort decision-making in local school districts and put an added burden on schooladministrators. It also distorts communica-

tions markets, because it taxes some servicesbut not others.80

Elimination of the universal service fundtax and placement of the schools and librariesprogram in the discretionary portion of thebudget for the Department of Educationwould eliminate distortions in both publicand private decision-making. In addition, itwould create more appropriate links betweenpayment and financing of public goods andservices and among competing educationalpriorities, including computer equipmentand training. CED supports the objective ofequipping schools and libraries for the digital

50

The Digital Economy

The Federal government subsidizes public and private schools, libraries, and consortia intheir purchase of telecommunications services, Internet access, and internal networkingequipment through the e-rate program. Depending upon the income level of a community,program discounts range from 20 to 90 percent.a E-Rate has been noted as an important ele-ment in encouraging communities to invest in technology and address digital literacy. Inaddition, the program, by essentially enlarging the potential market for services, provides anincentive for companies to build out broadband infrastructure to traditionally underservedregions.b

As more schools and libraries have begun to take advantage of the e-rate program, someare worried that communities will be excluded due to insufficient program funding. Theprogram is limited to outlays of $2.25 billion annually, yet was expected to receive requestsfor funding of $4.7 billion in 2000.c The program has also been criticized for the confusingand burdensome nature of the application process.d Despite these concerns, a large numberof beneficiaries have successfully used e-rate funds to address the digital divide.

Use of e-rate funds has differed across districts and generally reflects the unique situationof a community. For instance, the large, primarily poor, urban school district of SanBernardino, California has used $33,000,000 of e-rate funds to help connect 97 percent of itsclassrooms to the Internet. In contrast, the small, agriculturally based town of Rembrandt,Iowa used just $684 worth of funds to make its public library the town’s first public point ofInternet access.e

a. U.S. Department of Education, Planning and Evaluation Service. E-Rate and the Digital Divide: A PreliminaryAnalysis From the Integrated Studies of Educational Technology. DOC #00-17. September 2000. p. vii.http://www.ed.gov/offices/OUS/PES/elem.html#technology.

b. The Education and Libraries Networks Coalition (EdLiNC). E-rate: Keeping the Promise to Connect Kids andCommunities to the Future. 10 July 2000. http://www.edlinc.org/pubs/eratereport2.html.

c. Peterson, “Net Dreams,” p. 770.d. EdLiNC. E-rate: Keeping the Promise to Connect Kids and Communities to the Future and Trotter, Andrew. “Rating

the E-Rate.” Education Week. 20 September 2000. p. 9e. EdLiNC. E-rate: Keeping the Promise to Connect Kids and Communities to the Future.

THE E-RATE PROGRAM: CONNECTING SCHOOLS AND LIBRARIES

80. The Universal Service Fund has had the unrelated benefitof making telecommunications subsidies explicit rather thanimplicit, as they were previously.

age, but equipment must be accompanied bytraining. Sufficient funds should be madeavailable to support a wider array of technolo-gy-related needs, including professional devel-opment and classroom software. In addition,such programs should be funded in ways thatallow integration of decision-making for theseand other educational purposes.

Access cannot be the only goal; it is use-less without knowledge of how to use theequipment. To reap the advantages that thenew digital technologies promise, peoplemust be sufficiently computer and Internetliterate. The rapid computerization of societysuggests that computer and Internet literacymay be as important to individual success inthe future as fundamental reading and writ-ing skills have been in the past. One studysuggests that up to 40 percent of the U.S.adult population is “illiterate” in terms of theskills necessary for a “knowledge economy.”81

As CED has shown in previous reports, thenew economy is based on skills.82 The wagepremium paid to highly skilled informationtechnology workers is evidence of their pro-ductivity, and it is likely to be a long-lastingfeature of the economy. It is crucial, there-fore, that computer-oriented education andworkforce programs be extended, even forcareer paths that do not focus on mathemat-ics, science, or engineering.

Computer and Internet literacy should befundamental components of basic publiceducation and workforce training programs.Individuals who enter the workforce withouta basic familiarity with computers and at leastrudimentary skill in navigation of theInternet will find themselves at a disadvan-tage similar to not being able to read orwrite.* Because an education should, among

other goals, prepare students for work, K-12curricula should emphasize not only thebasic skills of reading, writing, and mathe-matics, but also computer competence.

The idea that our youth should be skilledcomputer users brings to the forefront issuesabout our current education system. TheInternet seems certain to play a significantrole in improving the delivery and assess-ment of education. A considerable amountof evidence suggests that today’s teachershave insufficient training with computersand therefore are unsuited to supply sucheducation. CED recommends that both newand continuing teachers receive comprehen-sive professional training in the use of com-puters and the Internet for education. Whilea majority of teachers have some facilityusing computers, nearly two-thirds feelunprepared to use technology in their teach-ing. Unfortunately, simple competence withtechnologies does not translate into effectiveclassroom use. A recent report of the Web-based Education Commission noted severaldeficiencies in the training of today’s teach-ers. Both initial teacher training with com-puters and the Internet and continuing edu-cation (to parallel continuing innovation)are lacking. In addition, schools are neglect-ing professional development needs whenassigning resources from their technologybudgets. The result is training that is farfrom comprehensive, too basic, and toogeneric. The Commission also highlighteddifferences in training practices favored byprivate businesses and educational institu-tions. Unlike employees of many privatefirms, teachers are given little paid training,are not rewarded or reimbursed for training,and are given insufficient on-site technicalsupport.83

State and local communities are alsoaddressing issues posed by the movement

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81. Pont, Beatriz, and Patrick Werquin. “Literacy in aThousand Words.” OECD Observer. 2 November 2000.

82. CED, New Opportunities for Older Workers, 1999 andReforming Immigration: Helping Meet America’s Need for a SkilledWorkforce, 2001. 83. Web-based Education Commission. The Power of

the Internet for Learning: Moving from Promise to Practice.December 2000. pp. 41-43. http://www.webcommission.org.

*See memorandum by THOMAS J. BUCKHOLTZ(page 63).

towards a digital economy, independent offederal initiatives. Across the country, numer-ous communities have developed programsto increase digital literacy, provide access,and promote use of new technologies.LaGrange, Georgia and Blacksburg, Virginiaare two of the many communities carryingout interesting experiments (see box,“Bridging the Divide Community byCommunity”). These and other towns havefound ways to make the Internet more acces-sible, user-friendly, and often part of everydaylife. We encourage state and local communi-

ties to experiment with Internet-based pro-grams and integrate digital technologies intoprograms that meet traditional economic andsocial objectives.

Non-government entities are also heavilyinvolved in digital divide initiatives. Privatefoundations and nonprofit organizations areacting as information clearinghouses, philan-thropic groups are making substantial finan-cial contributions, and grass-roots groups arebringing plans into action. Many private cor-porations are involved in initiatives to extendInternet access and computer training to

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The Digital Economy

Many communities have taken on large-scale efforts to bridge the digital divide. The following are illustrative examples of how two communities have approached the issues.

LaGrange, Georgia. The city was among the first in the United States to bridge the digi-tal divide by offering free Internet access to all of its cable subscribers. With a population of27,000, the city has approximately 11,000 household cable subscribers that are eligible forLaGrange Internet TV (LITV). LaGrange even provides financial support for citizens whocannot afford the $8.95 monthly cable fee.a LITV includes five e-mail accounts per house-hold and “Surf Watch,” a parental control feature that filters violence, sex, or other objec-tionable material. The city plans to use the widespread access to help citizens learn key-boarding, e-mail and surfing skills, complement the local school curriculum, establish acommunity network, enhance dialogue between citizens and government, and support locale-commerce.b

Blacksburg, Virginia. Through a unique public-private partnership and several years ofconcerted effort, the town of Blacksburg has achieved the highest per capita use of theInternet in the world—about 87% of its 38,000 residents use the Internet on a regular basis.The integration of a digital network into the community began with an experiment in 1993when the Blacksburg Electronic Village (BEV)—a partnership consisting of VirginiaPolytechnic Institute and State University, the Town of Blacksburg, and Bell Atlantic-Virginia—made the Internet widely accessible via no-charge dial-up connections and provid-ed free email accounts. After developing the town’s market, BEV turned over many of itstechnical operations to the private sector. These efforts provided momentum for expansionof the town’s network, resulting in high-speed connections for all 21 Blacksburg schools anduse of the Internet for commercial purposes by nearly 75 percent of local businesses.c

a. Lukken, Jeff, Mayor of LaGrange, GA. Speech at CED luncheon, New York City, NY, October 6, 2000.b. Lukken, Jeff. “LaGrange Internet TV Initiative Announcement.” City of Lagrange. 22 March 2000.

http://www.lagrange.net/.c. Kongshem, Lars. “Wired Village.” Electronic School. September 1997. http://www.electronic-school.com/ ;

“Smart Communities Profiles: Blacksburg, Virginia.” Government of Cananda. 1999.http://collectivitesingenieuses.ic.gc.ca/; and “Blacksburg Electronic Village – About the BEV.” Virginia PolytechnicInstitute and State University. 1999. www.bev.net/project/brochures/about.html.

BRIDGING THE DIVIDE COMMUNITY BY COMMUNITY

communities.84 In April 2000, PresidentClinton announced that over 400 companiesand nonprofit organizations had signed a“National Call to Action” to bring digitalopportunities to youth, families and commu-nities. In addition to highlighting efforts ofthe Corporation for National Services(AmeriCorps) to provide technical supportand other services through volunteers, theadministration noted efforts by:

• Yahoo!, which invested $1 million to helpenlist volunteers with high-tech skills towork on technology-related projects;

• 3Com, which partnered with the YWCA tolaunch TechGYRLS, a program that willoffer training to girls aged 14-16; and

• The American Library Association, whichis working to expand “information litera-cy” in communities across the country.

Among the numerous private-sector pro-grams that fund digital divide initiatives,some of the most interesting are using themodel introduced to the United States byFord Motor Co. and Delta Airlines. Theseand other companies have instituted intra-company programs that offer PCs andInternet service to all employees at zero orsignificantly reduced cost. (See box,“Empowering Employees with PCs andInternet Access.”) The roots of these policiesand programs appear in the Swedish HomePC Initiative, which involves both public andprivate subsidies of personal computer own-ership. In Sweden, payments towards PCs arepublicly subsidized by allowing workers tolease computers from their employers withpre-tax earnings. An employer can furthersubsidize a worker’s computer payments bycontributing additional funds on the worker’sbehalf. Overall, participating firms offer PCsto employees at 30-50 percent below market

rates. In 1998, the program contributed tothe supply of 550,000 company-providedcomputers and raised Sweden’s computerpenetration rate to 48.5 percent.85

Because numerous digital divide programsalready exist, while others are being pro-posed and developed, it is important thatappropriate resources be devoted to theirsynthesis and evaluation. The proliferation ofpublic and private programs to increaseaccess and Internet literacy can provide manybenefits. In this early phase of the develop-ment of networked technologies, such diver-sity brings results more rapidly and suppliesvaluable experimentation. However, as theInternet, access and literacy programs, andeven the target population mature, itbecomes important to find out what worksand to make adjustments in program goals.For example, as individual ownership ofInternet-enabled devices grows, fewerresources may be needed for publiclyfinanced community centers. Most impor-tant, programs should be evaluated to estab-lish their effectiveness so that others can copyeffective programs and drop ineffective ones.In some instances, programs may need to bemodified to meet the unique needs of indi-vidual communities or eliminated when theyno longer serve a useful purpose. Over time,priorities may shift from initial installation ofequipment or establishment of basic trainingprograms to equipment maintenance andupgrade and the development of more com-plex training programs.

Content to Attract UsersClosing the digital divide depends in part

on the existence of valuable content on theInternet, such as job notices, government ser-vices, low-priced goods, other important

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84. The number of initiatives is too large to recount here.Some prominent examples can be found at www.digitaldivi-dend.org, www.digitaldividenetwork.org, and www.powerup.org.

85. “Government Case Studies: Swedish Government, Swedenopens the home PC market, and closes the skill gap”.Microsoft Industry Solutions, 13 April 1999. http://www.microsoft.com/europe/industry/government/casestudies/1390.htmand “Gates Praises Swedish Home PC Initiative.” MicrosoftPressPass. 5 February 1999. http://www.microsoft.com/PressPass.

information, and even entertainment. Suchcontent motivates private efforts among allincome classes to gain access, either by pur-chasing a personal computer or using publicfacilities.

Developments in the personal computer,communications, and Internet serviceprovider markets all lead to lower prices andto the conclusion that in the near future costmay not be the primary cause of limitedaccess. The availability of entry-level equip-ment and low-priced Internet connection ser-vices indicate that in many cases the lack ofaccess may in part be a conscious choice bythe consumer. Certainly, low-income con-sumers, no less than high-income ones, makechoices in what they purchase based on the

perceived utility of products and services. Atpresent, other electronic appliances, such asVCRs have vastly higher penetration rates(84.2 percent) among all households than dopersonal computers. And, while the rate oftelevision viewing is fairly uniform among allhouseholds regardless of income, Internetaccess is highly skewed towards upperincome households.86

Useful applications, whether professional,personal, educational, governmental, or com-mercial, are key to generating demand thatwill motivate people to gain Internet accessand training. Market forces will ultimately

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The Digital Economy

Throughout 2000, several companies announced that they would begin offering PCs andInternet access to their employees at subsidized rates. Ford Motor Co., Delta and AmericanAirlines, and Compaq have all introduced such programs. Ford, the first in a unionizedindustry to announce such a large-scale program, is making fully equipped PCs as well asInternet access (ISP subscription) available to all of its 350,000+ employees for only $5 permonth. Using a somewhat different model, Compaq’s Employee Purchase Program allows itsemployees to buy significantly discounted computers and promotes ISP subscriptionsthrough a $15 monthly paycheck subsidy.

As it becomes increasingly difficult for employers to retain workers, a personal computerprogram can be helpful, just as gym memberships and free lunches have been in the past.However, employee retention is only a portion of why companies are instituting these pro-grams. Providing workers with continual access to new technologies in their homes is also, ifnot more importantly, a tactic in workforce development. Research shows that employees arelikely to train themselves on personal computer applications, consequently making themmore productive workers.a CEO of Ford, Jac Nasser, noted that, “Having a computer andInternet access in the home will accelerate the development of these [technology] skills,provide information across our business and offer opportunities to streamline processes.”b

When viewed as an investment in the workforce, a company’s program costs are substan-tially reduced. Ford, for instance, is making the program possible through a partnershipwith PeoplePC. PeoplePC offers similar packages to private consumers at $25 per month,and has likely reduced its price to some corporations to as little as $10 per employee permonth.c After deducting the small fee paid by employees from program costs, and thenadding gains from a more productive worker, the company’s cost approaches zero, if notyielding a positive return.

a. “Employees Increasingly Being Offered Free Home PCs.” The Associated Press. 8 March 2000.b. “Ford Unleashes Power of the Internet for Employees Around the World.” Ford Motor Company Press

Room. 3 February 2000. http://www.ford.com.c. Dix, John. “Ford and Delta see the Light.” Network World Fusion. 14 February 2000. www.nwfusion.com.

EMPOWERING EMPLOYEES WITH PCS AND INTERNET ACCESS

86. U.S. Department of Commerce, Economics and StatisticsAdministration, Census Bureau. Statistical Abstract of the UnitedStates. P. 581, Table No. 921-922.

provide much of the impetus to generatecontent. But as noted above, delays can becostly. CED encourages private and govern-ment providers of Internet content toaddress the interests of the low-income popu-lation that thus far have been excluded fromthe Web.

Low-income individuals do not use theInternet in part because they do not thinkthat its content is worth investigating. Severalbusinesses have responded and are alreadypursuing the markets of ethnic groups thathave significant low-income populations. Forexample, BET Holdings Inc., StarMedia, andCommunity Connect have all had reasonablesuccess in the African-American, Latino, andAsian-American markets, respectively. Theirsites, and those of similar firms, provideminority-oriented content that is often“underplayed” by mainstream media.87

However, some sites have also alienatedpotential users because the content and tech-nologies of their sites have surpassed theequipment capabilities of their users.88 Whilesome of the newest and most exciting con-tent can only be delivered via broadband,only a very small proportion of disadvantagedpopulations actually have access to this levelof equipment and service.89 Continued exper-imentation and a wider array of offeringsmay be necessary to engage and serve thesepopulations.

Federal, state, and local governmentsshould provide their internal and externalservices electronically and promote their use.While we expect the private sector to investheavily to provide content, it will also be nec-essary for government to do more to pro-mote Internet access to public services.

Greater use of Internet technology by gov-ernments can play the dual role of improvingexisting anti-poverty strategies and providingmotivation to get online. The existence ofgovernment services online can be a power-ful draw. At the very least, government ser-vices, both those that address poverty andthose that do not, can be made more accessi-ble through digital networks. Recently issuedregulations also require federal governmentsites to be more accessible to disabled users.90

Some efforts along these lines are alreadyunder way within the United States. TheFederal government and most state govern-ments already have a great deal of contentonline; there are 27 million Federal agencyWeb pages alone. 91 (See box, “FirstGovMakes Sense of Government.”) Informationalcontent, such as the address of a governmentoffice or description of an after-school pro-gram, is common. Also, materials that in thepast could be obtained only in print, fromstatistical reports to various applicationforms, are now often available through gov-ernment websites. While such electronic services are important advances, they onlybegin to take advantage of the Internet’s fullcapacity.

In select areas of government, theInternet allows almost complete electronicservice delivery. For instance, the PostalService allows customers to purchase stampsvia its website and the Internal RevenueService encourages taxpayers to file theirreturns electronically. Providing these elec-tronic services reduces government costs andcan increase convenience for users. InArizona for example, a driver’s registrationrenewal takes only two minutes to completeonline and saves about $4 per electronictransaction. Although only 15 percent of

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87. Cha, Ariana Eunjung. “Ethnic Sites Grow in Popularity.”The Washington Post. 28 December 2000, p. E6.

88. Li, Kenneth. “Harsh Urban Realities.” The IndustryStandard. 11 August 2000.

89. Only about 4 percent of all residential Internet connections are through broadband. See Crandall, Robert W.“Bridging the Divide Naturally.” Brookings Review. Winter 2001. p. 41.

90. Delio, Michelle. “Fed Opens Web to Disabled.” Wired. 21 December 2000. http://www.wired.com.

91. “President Clinton Launches FirstGov: A Single, Easy-to-Use Website for Government Services and Information.”The White House Press Releases. 22 September 2000.http://www.whitehouse.gov.

its renewals are currently processed online,the state’s motor vehicle department is savingabout $1.7 million per year.92 Of all govern-ment services, however, only a fraction isavailable by electronic means. Undoubtedly,additional services could be offered electron-ically and existing services can be promoted.Governments should also continue toimprove their internal operations by applyingnew information technologies. In some areas,governments may be justifiably hesitant tobring a service online because of privacy orsecurity concerns. In other areas, though,such expansion simply needs to be given pri-ority and agencies need reasonable room forexperimentation.

Global IssuesA global divide, perhaps more significant

than the domestic digital divide, is formingbetween developed and developing nations.This divide is primarily a byproduct of poverty.

For poor nations, the digital divide standsalongside an array of other economic andsocial concerns. For many developing coun-tries, the obtacles to closing the digital dividebegin with a lack of basic infrastructure tosupport digital electronic networks and of suf-ficiently strong institutions to foster the devel-opment of Internet-based communication andcommerce. The Internet’s potential rewardsare greater inclusion in global commerce andhigher incomes; the penalty for failure is con-tinued poverty and further isolation.93

In recognition of these obstacles, the July2000 G-8 Summit in Okinawa focused on theglobal digital divide. On the basis of an analy-sis of the problem and action recommenda-tions developed by a task force of the WorldEconomic Forum, the Summit adopted aprogram entitled, the “Okinawa Charter on

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The U.S. Government has millions of Web pages and thousands of websites. For the aver-age citizen, who may not be familiar with government’s institutional framework, navigationthrough seemingly endless numbers of independent websites can be extremely arduous. Inresponse to these concerns, the U.S. Government launched FirstGov (www.firstgov.gov), a“one-stop” online portal to all government sites. FirstGov effectively removes boundariesbetween agencies and the need for users to understand institutional frameworks; it allowsusers to search all of government’s online resources from a single site and navigate by topicrather than agency.

FirstGov is a remarkable improvement to a system that once held great potential for frus-trating citizens and alienating users. It has even been suggested that improvements in theapplication of government information technology like FirstGov may eventually reveal possi-bilities for improving government in the offline world. For instance, by providing a unifiedportal to government services and content, the opportunity for identifying governmentalinefficiencies (redundancy or overlap) should be more apparent. Further, objectives that cutacross jurisdictional agency boundaries could be rendered more effective and manageable.a

a. It should be noted that while FirstGov does remove surface boundaries, it does not actually consolidate anyfunctions of government. The term portal, as it is used, means that it acts as an initial starting point for locatinggovernment resources and helps users identify appropriate agencies or offices.

FIRSTGOV MAKES SENSE OF GOVERNMENT

92. “Government and The Internet: The Next Revolution.”The Economist. 24 June 2000.

93. One analysis estimates the potential gains from effectivenew policies to yield GDP increases of $100 billion for develop-ing countries in Asia, $45 billion in Latin America and a simi-lar amount for Africa. See, Mann, Catherine, Sue Eckert, andSarah Cleeland Knight, Global Economic Commerce, p. x.

Global Information Society.” This programincludes:

• A coordinated G-8 effort to assist develop-ing nations;

• Fostering policies that will facilitate theexpansion of the Internet in developingcountries;

• Improving connectivity and access to digital networks;

• Building human capacity; and

• Participation in global e-commerce.94

In our view, the priorities of the OkinawaSummit are correct; developing countriesshould proceed along several fronts simulta-neously to expand their access and use of theInternet. Global efforts should proceed witha three-pronged strategy. First, developingcountries should help themselves by estab-lishing the basic institutional groundwork forsustained economic growth. Second, alongwith international aid organizations, theyshould address the same access and literacyissues that are being pursued in the UnitedStates. Third, they should improve the tech-nological capabilities of medium and smallerbusinesses to engage in international elec-tronic commerce.

Basic institutions. The Digital OpportunityTaskforce (DOT Force), created at the G-8Summit in July 2000, provides a comprehen-sive view of the many actions that developingcountries need to take to become active par-ticipants in the new digital economy. Asemphasized in the DOT Force program,developing countries face the task of improv-ing the basic institutions of society to pro-mote both a strong economy and good gov-ernment. In essence, this task is no differentthan the steps they would need to take even

if there were no Internet. We emphasized ina past policy statement that those steps startwith good governance and pro-competitiveeconomic policies.95

Access and literacy. The attainment ofaccess to the Internet and technological liter-acy is as important for developing countrypopulations as for disadvantaged populationsin the United States. Many initiatives are cur-rently underway to spread up-to-date comput-er and Internet knowledge and hardwarearound the world. (See box, “Private Effortsto Support Access and Training inDeveloping Countries.”) As recommendedfor domestic efforts, global programs shouldfocus on basic digital applications, publicaccess points, and literacy.

International e-commerce. Just as importantas the promotion of basic technological liter-acy is the need for programs to help smallerbusinesses get online and participate in theglobal economy. E-commerce allows vendorsof isolated communities to develop new customer bases and business contacts. For example, the website of the Robib village inCambodia allows one not only to order hand-made scarves, but also to view scenes of thevillage, receive news of the village school andtelemedicine projects, and get other informa-tion on village activities.96 Such village ven-dors, however, are still rare. Most lack theability, either because of insufficient equip-ment, training, or other support, to connectto potential global customers.

Although the Peace Corps and Ameri-Corps are both exploring ways to integratetechnology into their agendas, little emphasishas thus far been placed on facilitatingefforts by smaller businesses to get online.CED believes there is an opportunity formany communities and skilled individuals to

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94. Okinawa Communique. The Government of Japan. 23 July2000. http://www.g8kyushu-okinawa.go.jp/e/documents/index.html.

95. See CED, Improving Global Financial Stability, 2000.

96. The Robib village (www.villageleap.com) was featured in thearticle Markoff, John. “Fast-Changing Genie Alters the World.”The New York Times. 11 December 2000.

benefit from a program that would help toprovide technical assistance to e-commerceenterprises in developing nations. Such a“Digital Corps” could rely on volunteers from high-technology companies to servebrief tours in developing country sites.Because the Internet allows continued dis-tanced communication and support, suchtours can be of relatively short duration.Support for a “Digital Corps” program couldhelp U.S. corporations recruit U.S.-basedstaff who have an interest in such volunteerefforts. The Volunteer Service Organization(VSO), an international development charityof British origin, is currently pursuing

opportunities to partner with global compa-nies such as McKinsey and Accenture (for-merly Andersen Consulting).97 Another vol-unteer-based organization, Geekcorps, iscommitted to building businesses on the Web for communities around the world. CEDurges larger businesses to consider the imple-mentation of volunteer-based “Digital Corps”programs to support small business develop-ment in developing nations.

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97. Heuer, Steffan. “A New Lease on Work.” The IndustryStandard. 4 December 2000.

The following descriptions highlight just a few of the many efforts currently underway tobridge the global digital divide. The initiatives, like domestic ones, often address multipleissues such as access, literacy and even Internet commerce.

Cisco Systems Networking Academies are designed to teach high school and college studentshow to design, build, and maintain computers. The venture, which initially started as a U.S.domestic program, is based upon a cooperative between Cisco Systems and educational insti-tutions throughout the world. Cisco provides lab equipment to regional academies, which inturn support local academies with program delivery and recruitment. Local academies pur-chase equipment from Cisco resellers for approximately $10,000.

Academy programs provide students with 280 hours of hands-on Internet and technologyliteracy in education in over 6000 locations worldwide. As of February 2001, there were acad-emies in 110 countries including El Salvador, Rwanda, Bosnia, and Vietnam.a

Hewlett-Packard’s World e-Inclusion is a new business strategy that extends HP’s businessfocus to low-income markets by establishing partnerships with nonprofit, health, finance and other community organizations. For 2001, HP has a goal to sell, lease, or donate $1 billion worth of products and services to as many as 1000 villages throughout Africa, Asia,Central and Eastern Europe, and Latin America. It hopes that the effort will broaden devel-oping countries’ access to social and economic opportunities, including sustainable businessventures, through the application of digital technologies and global collaboration.

StarMedia Foundation’s IT Training Program teaches youth in Latin American countriesbasic Internet and computer maintenance skills in a 3-month course. Star Media also oper-ates one of the leading websites geared towards the interests of Hispanics.

a. “Cisco Education Ecosystem: Networking Academy – Statistics.” Cisco Systems. 14 February 2001.http://www.cisco.com.

PRIVATE EFFORTS TO SUPPORT ACCESS AND TRAINING IN DEVELOPING COUNTRIES

CONCLUSIONSA gap in Internet use between higher and

lower income populations will always exist.We expect, however, that over time the cur-rent gap will narrow due to the combinationof less costly equipment and services, simpleruser operation, more attractive content(including the provision of government ser-vices), and the success of numerous public,private, and nonprofit programs to provideaccess to the Internet and training in basiccomputer and Internet navigational skills. Tobe successful, these programs must notbecome a faddish diversion from core effortsto raise education, skills, and incomes of thetarget populations. Digital divide programsshould be integrated with traditional anti-poverty efforts and digital technologiesshould be employed to improve the perfor-mance of those programs. The same holdstrue for international efforts. Developingcountry governments should redouble effortsto improve local institutions, physical infra-structure, and market incentives; they canuse digital tools to help them do so.

59


, JOHN DIEBOLD, with which JAMESQ. RIORDAN has asked to be associated

In proposing policy structures relevant toa digital age, it is important that the changesbeginning to take place all about us not beviewed in isolation from either of the twoother technologies already driving change—biotechnology and materials technology—nor from the role of the user in applying digital and other technology, and in so doingrecasting older business models and even the definition of industries.

The Internet is a good example of theeconomic importance of technologies oftenbeing determined by the older industrieschanging themselves in the application anduse of new technologies. In many ways, theseapplications are even more important to ourfuture than the technologies themselves. Butthe Internet is neither the beginning nor theend form of information technology (IT). It is one important step ahead.

Thus, public policies for a digital ageshould be developed in a wider perspectivethan purely IT and not on the assumptionthat the United States is going to remain the driving force in digital or any other technology.

We must understand that while theUnited States today leads in all three of these fields that our leadership is not Godgiven and will depend upon our ability topursue imaginative policies that develop our human resources and produce and maintain an environment supportive of risk and rewarding of change.

We can already see a new internationalpattern developing, in the case of India forexample—both in the estimated 200,000Indians at work in Silicon Valley, many in keyexecutive positions contributing to U.S. GNP,and in the extensive development of newcompanies in the subcontinent itself, con-tributing to India’s GNP. This is only a fore-taste of what we can expect as China beginsseriously to address its potential in a knowl-edge-based age. The United States must lookhard at an increasingly competitive situationfor leadership in these new fields.

We must do all we can to determine whatconditions have led to today’s U.S. leadershipand to do all possible to strengthen theseconditions and to correct negative condi-tions. Better understanding of future condi-tions necessary to continue leadership isattainable but not receiving as importantattention as it should. Imagination and drivein the application of invention is often ofequal importance to the technology itself.

The meaning of all of this to U.S. policymust surely be to focus on the developmentof public policy to be aggressive in under-standing and in maintaining the conditionsnecessary to stay ahead. Direct targeting oftechnologies is rarely rewarding. Technologymoves faster than policy. What we can do is to create a supportive environment forentrepreneurs and to focus on education,not only of high-level scientists but for work-ers with appropriate mathematical and com-putational skills, so that immigration will not always be a limitation on science-basedgrowth. Development of our own human talent must be more extensive than to date.

60

MEMORANDA OF COMMENT, RESERVATION, OR DISSENT

, EDMUND B. FITZGERALD

With respect to privacy and security mat-ters, I believe the statement could go further.While we should support the ability of busi-ness, conditional on appropriate disclosuresto the public, to develop and own valuablemarketing data which undoubtedly con-tributes to economic efficiency, I suggest thatit is time to review the dramatic growth inthe commercial use of social security num-bers as individual identifiers. The details ofany remedies or policy changes, such as pro-hibiting the denial of a commercial relation-ship based on a refusal to reveal the number,a prohibition on further disclosure of suchnumbers, or a minimum security standard fornumbers thus obtained, are not for this state-ment. However, this issue should be kept insight as the issue of individual privacy andsecurity is addressed.

Page 5, EDMUND B. FITZGERALD

I strongly support this policy statementand commend the CED for its recommenda-tions regarding competition, innovation, theprotection of intellectual property, and priva-cy and security in the digital age. However, Iam concerned by the discussion of the digitaldivide which seems intent in carving outunique solutions for a single facet of theglobal income gap resulting from factorsrooted in poverty such as inadequate educa-tion, poor skill training, disrupted families,decaying communities, and in the case ofpoor counties, inadequate economic infra-structure. The CED has a long history of rec-ommending solutions to these broaderissues, and I am concerned that high-lightingjust this one economic outcome couldsiphon resources and energy away from coreprograms aimed at the underlying economicissues. As Ms. Carly Fiorina, chairman ofHewlett-Packard, so aptly expressed at theWorld Economic Forum meeting in Davosrecently, “companies should seek to tackle

the divide in their own self-interests…because today’s poor countries are the potential growth markets of tomorrow.”

Page 22, CHARLES R. LEE, with whichIRWIN DORROS has asked to be associated

The Statement correctly notes that regulation of broadband is deterring invest-ment and adversely affecting consumerchoices. The Statement urges that cable andtelephone technologies should be allowed tocompete “without regulatory distortions”.The Statement concludes, however, that“[r]egulators should adopt a wait-and-seeapproach, rather than act preemptively” toequalize the regulations applicable to cableand telephone technologies. The Statementrecommends “removing restrictions” thatapply most strictly to telephone companies asa goal to “move toward” but with no particu-lar urgency.

With capital fleeing our markets, we can-not “wait and see” how things develop underdistorted regulation. We must act now toeliminate regulatory barriers to broadbanddeployment. George Gilder argued recentlythat broadband deployment requires imme-diate deregulation:

“The problem is that DSL is risky andhard. Some studies have reported that50% of DSL hook-ups fail on the first try.Even amicable relationships betweenCLECs and Bells are a software night-mare, with a different billing and provi-sioning system for each service provider.Such difficulties render DSL not a matterof will and politics but of technical andentrepreneurial risks. Companies areforced to invest heavily in research and engineering personnel, but have fewopportunities for outsized rewards.

That’s because Congress and the FCC setup an awkward scheme in which everyonegot a piece of the action but no one could

61

make any money. Often barred from car-rying signals across long-distance bound-aries, the Bell hand off traffic to otherlong-distance carriers. CLECs rent linesfrom Bells. And Internet service providersend up doing costly customer service andmarketing to get people signed up in thefirst place. In short, as many as four par-ties routinely battle for low- or negative-margin chunks of $40-monthy bills.

By summoning new competition and thenmandating the rivals cooperate in openaccess, the government effectively priva-tized the risks and socialized the profits.By December, the Bells had signed up 1.8million users and the CLECs 600,000,combining for just 2.4 million DSL sub-scribers among the 120 million or so cop-per-connected U.S. homes and businesses.

Cable modems, with 4.9 million sub-scribers at year-end, have done better, butAOL Time Warner and AT&T, America’stwo cable behemoths, are bogged down by the same open-access nonsense thatplagues DSL. Over the past two years,AT&T CEO Michael Armstrong acquired$140 billion in cable assets while watchinghis company’s $184 billion market capital-ization plummet to $81 billion.

…This regulatory morass treats the mostdynamic, technically creative, and trans-formative industry in the world economyas if it were some static commodity marketfor corn or pork bellies.

…No Internet advantage can last morethan a couple of years. In 1999 and 2000,over 150 million kilometers of opticalfiber were laid worldwide, enough tostretch to the sun. …But none of these

deployments, including fiber to the home,can flourish under a regime of forcedsharing of entrepreneurial assets and profits.1


In the discussion of intellectual property,the Statement calls for promotion of copy-right law but omits any reference to theDigital Millennium Copyright Act, which balances the interests of copyright owners,service providers, and users. There is no reason for deviating from this industry-agreed compromise.


In the discussion of privacy, the Statementshould make explicit that creation of a feder-al privacy law should preempt conflictingstate laws.

Page 47, JAMES Q. RIORDAN

I agree that we should address the povertyeducation gap. In addition, we face a genera-tional gap that needs to be addressed. We will likely continue to face that gap as techno-logical change continues at a rapid pace andlife expectancy increases. We should call forinitiatives to provide suitable lifetime educa-tion that will maintain the productivity of our citizens for the decades that they will liveand work beyond the traditional formal education of their youth.

62

1. Gilder, George and Bret Swanson. “The Broadway EconomyNeeds a Hero.” Wall Street Journal. 23 February 2001. p. A14.

, THOMAS J. BUCKHOLTZ, withwhich JAMES Q. RIORDAN has asked to beassociated

The digital divide recommendationsaddress the desirability for people to acquirecomputer literacy and other, generallyunspecified skills. The report also discussesneeds to improve technology. The first of thefollowing two lists more completely identifiesskills required for success in business-likeactivities.2 The second list provides a road-map for technology suppliers to improvetheir products and services. The two listsshould be viewed in parallel. The first repre-sents the demand side of the information-proficiency marketplace; the second represents the supply side. For both lists, success at any step depends on strength atlower steps.

Demand-side skills

• Making, communicating, and implement-ing decisions.

• Collaborating and coaching.

• Creating, evaluating, and using insight.

• Finding, filtering, and assessing the trustworthiness of information.

• Creating and working with routine dataand transactions.

• Working with technology (“computer literacy”).

Supply-side technologies

• Provide products and services that makedecisions for people.

• Provide tools that help people collaborateand coach each other.

• Provide tools that help people create and understand the applicability of newconcepts.

• Make available information that peopleneed and can use easily and successfully.

• Make available data that people need, canuse easily and successfully, and can inte-grate across dissimilar sources.

• Produce platform technology that servespeople’s needs, is easy to learn and use,and is widely affordable.

63

2. These lists are drawn from Thomas J. Buckholtz,Information Proficiency: Your Key to the Information Age, John Wileyand Sons, and Thomas J. Buckholtz, “Current and FutureValue,” Today’s Engineer, Volume 3, Number 3, 3rd Quarter2000, IEEE-USA.

64

OBJECTIVES OF THE COMMITTEE FOR ECONOMIC DEVELOPMENT

For nearly 60 years, the Committee for Eco-nomic Development has been a respectedinfluence on the formation of business andpublic policy. CED is devoted to these two ob-jectives:

To develop, through objective research andinformed discussion, findings and recommenda-tions for private and public policy that will contrib-ute to preserving and strengthening our free society,achieving steady economic growth at high employ-ment and reasonably stable prices, increasing pro-ductivity and living standards, providing greaterand more equal opportunity for every citizen, andimproving the quality of life for all.

To bring about increasing understanding bypresent and future leaders in business, government,and education, and among concerned citizens, of theimportance of these objectives and the ways in whichthey can be achieved.

CED’s work is supported by private volun-tary contributions from business and industry,

foundations, and individuals. It is independent,nonprofit, nonpartisan, and nonpolitical.

Through this business-academic partner-ship, CED endeavors to develop policy state-ments and other research materials thatcommend themselves as guides to public andbusiness policy; that can be used as texts incollege economics and political science coursesand in management training courses; thatwill be considered and discussed by newspaperand magazine editors, columnists, and com-mentators; and that are distributed abroad topromote better understanding of the Ameri-can economic system.

CED believes that by enabling businessleaders to demonstrate constructively their con-cern for the general welfare, it is helping busi-ness to earn and maintain the national andcommunity respect essential to the successfulfunctioning of the free enterprise capitalistsystem.

*Life Trustee

ChairmanFRANK P. DOYLE, Retired Executive Vice PresidentGE

Vice ChairmenROY J. BOSTOCK, ChairmanB/com3 Group, Inc.JOHN H. BRYAN, Chairman of the BoardSara Lee CorporationDONALD R. CALDWELL, Chairman and Chief

Executive OfficerCross Atlantic Capital PartnersRAYMOND V. GILMARTIN, Chairman, President

and Chief Executive OfficerMerck & Co., Inc.

TreasurerREGINA DOLANExecutive Vice President, Chief Financial Officer and

Chief Administrative OfficerPaineWebber Group, Inc.

ROGER G. ACKERMAN, Chairman and ChiefExecutive Officer

Corning IncorporatedREX D. ADAMS, DeanThe Fuqua School of BusinessDuke UniversityPAUL A. ALLAIRE, ChairmanXerox CorporationIAN ARNOF, Retired ChairmanBank One, Louisiana, N.A.JAMES S. BEARD, PresidentCaterpillar Financial Services Corp.HENRY P. BECTON, JR., President and

General ManagerWGBH Educational FoundationTHOMAS D. BELL, JR., Special Limited PartnerForstmann Little & Co.ALAN BELZER, Retired President and Chief

Operating OfficerAlliedSignal Inc.PETER A. BENOLIEL, Chairman, Executive

CommitteeQuaker Chemical CorporationMELVYN E. BERGSTEIN, Chairman and Chief

Executive OfficerDiamond Cluster International, Inc.DEREK BOK, President EmeritusHarvard UniversityROY J. BOSTOCK, ChairmanB/com3 Group, Inc.JOHN BRADEMAS, President EmeritusNew York University

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WILLIAM E. BROCK, ChairmanBridges LearningSystems, Inc.STEPHEN L. BROWN, Chairman and Chief

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Executive OfficerCross Atlantic Capital PartnersFRANK C. CARLUCCIWashington, D.C.MARSHALL N. CARTER, Retired Chairman and Chief

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Manager, Economics & Energy DivisionExxon Mobil CorporationJAMES P. CORCORAN, Executive Vice President,

Government & Industry RelationsAmerican General CorporationGARY L. COUNTRYMAN, Chairman EmeritusLiberty Mutual Insurance Company

*

*

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Stirling Cooke Brown Holdings LimitedRONALD R. DAVENPORT, Chairman of the BoardSheridan Broadcasting CorporationJOHN T. DEE, Chairman and Chief Executive OfficerVolume Services AmericaROBERT M. DEVLIN, Chairman and Chief

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Financial Officer and Chief Administrative OfficerPaineWebber Group, Inc.IRWIN DORROS, PresidentDorros AssociatesFRANK P. DOYLE, Retired Executive Vice PresidentGEE. LINN DRAPER, JR., Chairman, President and

Chief Executive OfficerAmerican Electric Power CompanyT. J. DERMOT DUNPHY, ChairmanKildare Enterprises, LLCCHRISTOPHER D. EARL, Managing DirectorPerseus Capital, LLCW. D. EBERLE, ChairmanManchester Associates, Ltd.JAMES D. ERICSON, Chairman and Chief

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*

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*Life Trustee

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Executive OfficerThe Chief Executive GroupS. LAWRENCE PRENDERGAST, Executive Vice

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*

*Life Trustee

ALAIR A. TOWNSEND, PublisherCrain’s New York BusinessSTEPHEN JOEL TRACHTENBERG, PresidentGeorge Washington UniversityJAMES L. VINCENT, Chairman of the BoardBiogen, Inc.ROBERT C. WAGGONER, Chief Executive OfficerBurrelle’s Information Services LLCDONALD C. WAITE, III, DirectorMcKinsey & Company, Inc.HERMINE WARREN, PresidentHermine Warren Associates, Inc.ARNOLD R. WEBER, President EmeritusNorthwestern UniversityJOHN F. WELCH, JR., Chairman and Chief

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R. STEWART RAUCH, Former ChairmanThe Philadelphia Savings Fund SocietyJAMES J. RENIERRenier & AssociatesIAN M. ROLLAND, Former Chairman and Chief

Executive OfficerLincoln National CorporationAXEL G. ROSIN, Retired ChairmanBook-of-the-Month Club, Inc.WILLIAM M. ROTHPrinceton, New JerseyRALPH S. SAUL, Former Chairman of the BoardCIGNA CompaniesGEORGE A. SCHAEFER, Retired Chairman of the BoardCaterpillar, Inc.ROBERT G. SCHWARTZNew York, New YorkMARK SHEPHERD, JR., Retired ChairmanTexas Instruments, Inc.ROCCO C. SICILIANOBeverly Hills, CaliforniaDAVIDSON SOMMERSWashington, D.C.ELMER B. STAATS, Former Controller

General of the United StatesFRANK STANTON, Former PresidentCBS, Inc.EDGAR B. STERN, JR., Chairman of the BoardRoyal Street CorporationALEXANDER L. STOTTFairfield, ConnecticutWAYNE E. THOMPSON, Past ChairmanMerritt Peralta Medical CenterHOWARD S. TURNER, Retired ChairmanTurner Construction CompanyL. S. TURNER, JR.Dallas, TexasTHOMAS A. VANDERSLICETAV AssociatesJAMES E. WEBBWashington, D.C.SIDNEY J. WEINBERG, JR., Senior PartnerThe Goldman Sachs Group, L.P.ROBERT C. WINTERS, Chairman EmeritusPrudential Insurance Company of AmericaARTHUR M. WOODChicago, IllinoisRICHARD D. WOOD, DirectorEli Lilly and CompanyCHARLES J. ZWICKCoral Gables, Florida

STANLEY MARCUS, ConsultantStanley Marcus ConsultancyAUGUSTINE R. MARUSILake Wales, FloridaWILLIAM F. MAY, Chairman and Chief

Executive OfficerStatue of Liberty-Ellis Island Foundation, Inc.OSCAR G. MAYER, Retired ChairmanOscar Mayer & Co.GEORGE C. MCGHEE, Former U.S. Ambassador

and Under Secretary of StateJOHN F. MCGILLICUDDY, Retired Chairman

and Chief Executive OfficerChemical Banking CorporationJAMES W. MCKEE, JR., Retired ChairmanCPC International, Inc.CHAMPNEY A. MCNAIR, Retired Vice ChairmanTrust Company of GeorgiaJ. W. MCSWINEY, Retired Chairman of the BoardThe Mead CorporationROBERT E. MERCER, Retired ChairmanThe Goodyear Tire & Rubber Co.RUBEN F. METTLER, Retired Chairman and

Chief Executive OfficerTRW Inc.LEE L. MORGAN, Former Chairman of the BoardCaterpillar, Inc.ROBERT R. NATHAN, ChairmanNathan Associates, Inc.J. WILSON NEWMAN, Retired ChairmanDun & Bradstreet CorporationJAMES J. O’CONNOR, Former Chairman and Chief

Executive OfficerUnicom CorporationLEIF H. OLSEN, PresidentLHO GroupNORMA PACE, PresidentPaper Analytics AssociatesCHARLES W. PARRY, Retired ChairmanALCOAWILLIAM R. PEARCE, DirectorAmerican Express Mutual FundsJOHN H. PERKINS, Former PresidentContinental Illinois National Bank and Trust CompanyRUDOLPH A. PETERSON, President and Chief

Executive Officer (Emeritus)BankAmerica CorporationDEAN P. PHYPERSNew Canaan, ConnecticutEDMUND T. PRATT, JR., Retired Chairman and

Chief Executive OfficerPfizer Inc.ROBERT M. PRICE, Retired Chairman and

Chief Executive OfficerControl Data Corporation

CED RESEARCH ADVISORY BOARD

ChairmanJOHN P. WHITEProfessorHarvard UniversityJohn F. Kennedy School of Government

JAGDISH BHAGWATIArthur Lehman Professor of EconomicsColumbia University

RALPH D. CHRISTYJ. Thomas Clark ProfessorDepartment of Agricultural, Resource, and Managerial EconomicsCornell University

JOHN COGANSenior FellowThe Hoover InstitutionStanford University

ALAIN C. ENTHOVENMarriner S. Eccles Professor of Public

and Private ManagementStanford UniversityGraduate School of Business

RONALD F. FERGUSONProfessorHarvard UniversityJohn F. Kennedy School of Government

BENJAMIN M. FRIEDMANWilliam Joseph Maier Professor of Political EconomyHarvard University

ROBERT W. HAHNResident ScholarAmerican Enterprise Institute

HELEN F. LADDProfessor of Public Policy Studies and

EconomicsSanford Institute of Public PolicyDuke University

LINDA YUEN-CHING LIMProfessorUniversity of Michigan Business School

ROBERT LITANVice President, Director of Economic

StudiesThe Brookings Institution

PAUL ROMERSTANCO 25 Professor of EconomicsStanford UniversityGraduate School of Business

CECILIA E. ROUSEAssociate Professor of Economics

and Public AffairsPrinceton UniversityWoodrow Wilson School

DAVID WESSELAssistant Bureau Chief/ColumnistThe Wall Street Journal

CHARLES E.M. KOLBPresident

CED PROFESSIONAL AND ADMINISTRATIVE STAFF

Communications/Government RelationsCLAUDIA P. FEUREYVice President for Communications

and Corporate Affairs

MICHAEL J. PETROVice President and Director of Business and Government Policy

and Chief of Staff

CHRIS DREIBELBISBusiness and Government Policy

Associate

JIM KAPSISPublic Affairs Associate

VALERIE MENDELSOHNConference Manager and Secretary of

the Research and Policy Committee

ROBIN SAMERSPublic Affairs Associate

DENISE SMITHPublic Affairs and Development Assistant

HELENA ZYBLIKEWYCZManager of Business and Public Affairs

DevelopmentMARTHA E. HOULEVice President for Development and

Secretary of the Board of Trustees

GLORIA Y. CALHOUNDevelopment Assistant

SANDRA L. MARTINEZDevelopment Associate

RICHARD M. RODEROAssistant Director of Development

Finance and AdministrationKAREN CASTRODirector of Finance and Administration

PETER E. COXOperations Manager

SHARON A. FOWKESExecutive Assistant to the President

ARLENE M. MURPHYExecutive Assistant to the President and Office Manager

AMANDA TURNEROffice Manager

ResearchVAN DOORN OOMSSenior Vice President and

Director of Research

JANET HANSENVice President and Director

of Education Studies

ELLIOT SCHWARTZVice President and Director

of Economic Studies

TAREK ANANDANResearch Associate

MICHAEL BERGResearch Associate

SETH TUROFFResearch Associate

Advisor on InternationalEconomic PolicyISAIAH FRANKWilliam L. Clayton Professor

of International EconomicsThe Johns Hopkins University

*Statements issued in association with CED counterpart organizations in foreign countries.

STATEMENTS ON NATIONAL POLICY ISSUED BY THECOMMITTEE FOR ECONOMIC DEVELOPMENT

SELECTED PUBLICATIONS:

Reforming Immigration: Helping Meet America's Need for a Skilled Workforce (2001)Measuring What Matters: Using Assessment and Accountability to Improve Student Learning (2001)Improving Global Financial Stability (2000)The Case for Permanent Normal Trade Relations with China (2000)Welfare Reform and Beyond: Making Work Work (2000)Breaking the Litigation Habit: Economic Incentives for Legal Reform (2000)New Opportunities for Older Workers (1999)Investing in the People's Business: A Business Proposal for Campaign Finance Reform (1999)The Employer’s Role in Linking School and Work (1998)Employer Roles in Linking School and Work: Lessons from Four Urban Communities (1998)America’s Basic Research: Prosperity Through Discovery (1998)Modernizing Government Regulation: The Need For Action (1998)U.S. Economic Policy Toward The Asia-Pacific Region (1997)Connecting Inner-City Youth To The World of Work (1997)Fixing Social Security (1997)Growth With Opportunity (1997)American Workers and Economic Change (1996)Connecting Students to a Changing World: A Technology Strategy for Improving Mathematics and

Science Education (1995)Cut Spending First: Tax Cuts Should Be Deferred to Ensure a Balanced Budget (1995)Rebuilding Inner-City Communities: A New Approach to the Nation’s Urban Crisis (1995)Who Will Pay For Your Retirement? The Looming Crisis (1995)Putting Learning First: Governing and Managing the Schools for High Achievement (1994)Prescription for Progress: The Uruguay Round in the New Global Economy (1994)*From Promise to Progress: Towards a New Stage in U.S.-Japan Economic Relations (1994)U.S. Trade Policy Beyond The Uruguay Round (1994)In Our Best Interest: NAFTA and the New American Economy (1993)What Price Clean Air? A Market Approach to Energy and Environmental Policy (1993)Why Child Care Matters: Preparing Young Children For A More Productive America (1993)Restoring Prosperity: Budget Choices for Economic Growth (1992)The United States in the New Global Economy: A Rallier of Nations (1992)The Economy and National Defense: Adjusting to Cutbacks in the Post-Cold War Era (1991)Politics, Tax Cuts and the Peace Dividend (1991)The Unfinished Agenda: A New Vision for Child Development and Education (1991)

Foreign Investment in the United States: What Does It Signal? (1990)An America That Works: The Life-Cycle Approach to a Competitive Work Force (1990)Breaking New Ground in U.S. Trade Policy (1990)Battling America's Budget Deficits (1989)*Strengthening U.S.-Japan Economic Relations (1989)Who Should Be Liable? A Guide to Policy for Dealing with Risk (1989)Investing in America's Future: Challenges and Opportunities for Public Sector Economic

Policies (1988)Children in Need: Investment Strategies for the Educationally Disadvantaged (1987)Finance and Third World Economic Growth (1987)Reforming Health Care: A Market Prescription (1987)Work and Change: Labor Market Adjustment Policies in a Competitive World (1987)Leadership for Dynamic State Economies (1986)Investing in Our Children: Business and the Public Schools (1985)Fighting Federal Deficits: The Time for Hard Choices (1985)Strategy for U.S. Industrial Competitiveness (1984)Productivity Policy: Key to the Nation's Economic Future (1983)Energy Prices and Public Policy (1982)Public-Private Partnership: An Opportunity for Urban Communities (1982)Reforming Retirement Policies (1981)Transnational Corporations and Developing Countries: New Policies for a Changing

World Economy (1981)Stimulating Technological Progress (1980)Redefining Government's Role in the Market System (1979)Jobs for the Hard-to-Employ: New Directions for a Public-Private Partnership (1978)

CE Circulo de Empresarios

Madrid, Spain

CEDA Committee for Economic Development of Australia

Sydney, Australia

EVA Centre for Finnish Business and Policy Studies

Helsinki, Finland

FAE Forum de Administradores de Empresas

Lisbon, Portugal

FDE Belgian Enterprise Foundation

Brussels, Belgium

IDEP Institut de l’Entreprise

Paris, France

IW Institut der Deutschen Wirtschaft

Cologne, Germany

Keizai Doyukai

Tokyo, Japan

SMO Stichting Maatschappij en Onderneming

The Netherlands

SNS Studieförbundet Naringsliv och Samhälle

Stockholm, Sweden

CED COUNTERPART ORGANIZATIONS

Close relations exist between the Committee for Economic Development andindependent, nonpolitical research organizations in other countries. Such counter-part groups are composed of business executives and scholars and have objec-tives similar to those of CED, which they pursue by similarly objective methods.CED cooperates with these organizations on research and study projects ofcommon interest to the various countries concerned. This program has resultedin a number of joint policy statements involving such international matters asenergy, East-West trade, assistance to developing countries, and the reductionof nontariff barriers to trade.

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CED

COMMITTEE FOR ECONOMIC DEVELOPMENT

477 MADISON AVENUE

NEW YORK, NEW YORK 10022

TELEPHONE: (212) 688-2063

FAX: (212) 758-9068

2000 L STREET, N.W., SUITE 700

WASHINGTON, D.C. 20036

TELEPHONE: (202) 296-5860

FAX: (202) 223-0776

WWW.CED.ORG

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