Examination of Witness (Questions 680
THURSDAY 20 APRIL 2000
680. Good morning, Dr Shamos. It is good of
you to appear in person to give oral evidence. We have been struck
by the way in which the Internet has speeded up our lifethe
fact that you have already sent us your written response to the
questions we proposed to ask this morningso we have evidence
of this acceleration. We have circulated your answers to the Committee,
who may wish to return to some of the questions posed. May I ask
you first to tell us something about your central role at Carnegie
Mellon University. You were recommended to us by Warwick Business
School. Perhaps, being a little bit cheeky, we may ask why you
are currently in Europe, who you are seeing, and what you are
finding. The Stock Markets have been in a state of turbulence
over the past week but there appears to be a certain settling
down. In your opinion, do you think this is temporary? Can we
expect to see more turbulence possibly? Do these phenomena represent
a market adjustment or is there a downturn in the critical path
of e-commerce, perhaps as a pre-route to a further rise? In short,
where do we stand, and what is the market telling us? Could I
also ask you perhaps, maybe a little later, to speculate about
the shape, the size, and the pervasiveness of the electronic world,
say, in five or ten years' time. Maybe we will come to that a
little bit later.
(Dr Shamos) I wonder if we could take
the questions one at a time. I remember some large fraction of
them but certainly not all! Carnegie Mellon is a leading technological
university in the United States. It also happens to have a fairly
strong business school. Several years ago our customers, whom
we regard as the companies that hire our graduates, began asking
us whether we were training anyone capable of running an electronic
business. After brief critical reflection we realised that we
were not doing so. That the computer scientists that we were training
knew virtually nothing about business, and would not have acquired
any such knowledge during any of our courses. The business school
was not training technologically savvy people, although they seemed
to have substantial other quantitative skills in the business
industry. So we determined that the only way to train e-commerce
graduates would be to establish a joint venture between the School
of Computer Science and the School of Business. That was accomplished
in the summer of 1998, when we began a crash programme to develop
a 12-month curriculum, leading to a Master of Science degree in
electronic commerce. We believed that e-commerce was moving so
fast, that potential practitioners would not be willing to spend
more than one year obtaining education because of the opportunity
costs of doing so. So the two committees were created to develop
curricula on the business side and the technology side, all of
which could be crammed into 12 months, where we would feel comfortable
at the end in certifying to employers that these people could
be integrated directly into the company in beginning to establish
electronic businesses. One of our founding principles is that
the School of Computer Science and the School of Business are
co-equal in all of this. That required the nomination of a director
from the business school and a director from the computer science.
When the dean asked for volunteers, the rest of the members left
quickly. I was the last one sitting in the room and I was nominated
to be the Director of Computer Science, so I had responsibility
for the technology infrastructure of the programme, and also designing
and staffing all of the technology courses. The purpose of the
Institute principally is to grab master's degrees in e-commerce.
We will have 70 students entering a class within two weeks. It
is a May-to-May programme, so we are starting the second year
in a few weeks. Of those, more than half are from outside the
United States. Among the 70 students, 20 countries are represented.
The second objective of the Institute for eCommerce is to serve
as a focal point for all e-commerce activities at Carnegie Mellon,
including a PhD research programme. We have scientists who are
looking at what are the emerging technological difficulties that
might prove barriers to e-commerce, so that work can begin on
681. Is any other university doing this or have
you the leading edge on it?
A. There are many universities that offer various
kinds of e-commerce education. By far the most common is something
called the e-commerce track within an MBA programme at a business
school. In those programmes one takes a normal business education,
with concentration in e-commerce, consisting of some three or
four courses during that time. In our programme we teach the equivalent
of 11 and a half courses instead of the three or four. Furthermore,
since 50 per cent must be technologicaland these are serious
computer science courses, they are not an appreciation of naturethe
people who go through our programme are able to deal directly
with vendors. They understand the cries of programmers and other
technologists. They are able to critically evaluate one proposed
solution over another, which we felt was a skill that was missing
from the graduates of other programmes. So, in our own field,
which is 50/50 technology and business, there is no school that
we know of in the United States which is offering such a programme.
Baroness O'Cathain: Incredible.
682. And this is a basic level degree you are
A. It is a master's degree.
683. And the PhD programme is also structured
A. No. The PhD programmes, those will be administered
either by the School of Computer Science or by the Business School,
and they will be heavily focused on one or the other. At that
level, it is very difficult to find people with sufficient credentials
in both fields, to do genuine research in both and at the same
684. Of course. And, as a supplementary to that,
would you recommend (I guess the answer is yes) that other countries
should really look at this, in their higher education fields,
of having this type of structured course?
A. I am in conflict since, in my view, it is
the best thing to do; but it would be nice if we were the only
ones doing it for some substantial time. However, it is my recommendation,
everywhere I goincluding the United States, including Warwick
and our other schoolsthat they do such a thing. There are
administrative barriers, we understand. There are numerous universities,
such MIT, Stanford, Berkeley, who have excellent business schools
and have excellent schools of computer science but apparently,
for political or administrative reasons, they are unable to co-operate
to the degree that we are able to at CM.
685. Is that because you have two people at
the head who get on well with each other? The computer science
and the business people.
A. It has been a substantial benefit that the
co-director from the business school and I do tend to see eye-to-eye
on almost everything in the programme, so we have a very cordial
relationship, but that is partially because we are co-equal and
if we did not agree there would be deadlock. So we are forced
by the fact that there are only two on the committee to agree
more often than not.
686. Professor Targett is from Imperial College,
the Business School. He understands what you are saying about
those administrative barriers. Now, your European trip.
A. Everything I do these days, save for a brief
vacation in August, has to do with electronic commerce. Whenever
my body is in motion, it is going from one e-commerce thing to
another. This trip began in New York where I was doing consulting
work on electronic commerce for Bell Atlantic and Morgan Stanley
Dean Witter, electronic commerce strategies. Fortunately, they
did not require my services over the weekend, so I was able to
fly to Kitzbühel to McKinsey's Alpine University, where I
gave a training course to McKinsey consultants in the basics of
e-commerce technology. In between that, and flying to do such
another course in Paris, I have alighted in London for the day
to give testimony here. This cycle essentially repeats itself
every month. I go somewhere else to do these things: to talk to
companies and give training courses.
687. Perhaps you might care to speculate on
the market. We were out there in Washington last weekthe
week after we had seen the Microsoft decisionso we were
right there at the time. Then the market started falling.
A. My Lord Chairman, my belief is that part
of the fall can be ascribed to a certain awareness among the investors
that many or some of the business models that have been used by
companies currently selling stock are unrealistic and cannot possibly
bear fruit. An exampleI am not claiming at this moment
that Amazon is one of thesehowever, when Amazon was selling
only books, it was computed that every book sold in the world
would have to be purchased through Amazon.com to even come close
to justifying its market capitalisation. They have subsequently
branched out into other activities. What has happened is that
investment capital has been drawn in huge quantity to engineer
businesses, largely because the investors are unable to determine
in advance which of the businesses will be successful. When they
are successful, the capital gain is so huge that it is able to
pay for many failures. The expectation was that after investment
within some rational number of years, profits would ensue, and
everybody has been watching carefully. When the profits have not
materialised, that has resulted in a serious devaluation of the
businesses. There are some that remain healthy, and must remain
healthy, particularly the infrastructure providers. So, for example,
even before the recent Stock Market difficulties, Cisco had recently
passed Microsoft as the corporation with the highest market capitalisation.
I expect that to continue because right now one measure of expansion
of the Internet is the number of registered domain names. The
number of registered domain names passed 72 million in February.
It is expected to pass 100 million in January 2001. It is really
rationally expected to attain 1 billion registered domains in
August 2005. It is essentially impossible to build so many domains
without purchasing a huge amount of infrastructure equipment,
including radars and other things, which is precisely what Cisco
sells. An analogy is often made to the United States' Gold Rush
of the 1840s, in which many families lost their fortunes seeking
gold nuggets, but the people who made profits were the hoteliers
and the manufacturers of pick axes and shovels. So wherever there
is a boom, those who provide the tools for the boom are the winners.
688. What kind of mood do you sense in Europe
as you go round? We particularly picked up one of the differentiating
factors. Particularly the willingness of venture capital to go
into start-ups at the very early point; whereas, in Europe, there
is a tendency to see whether it looks as if it might be a good
bet before venture capital will come forward and take the risk.
A. This is my fourth trip to Europe within the
past four months. I have been to many cities and had discussions
with many parties about very similar issues. One problem with
attracting venture capital into e-commerce is that the investors
must believe that the company is facing a potentially huge market.
So as long as there remain barriers to market expansion, there
is no point in investing in even a potentially successful technological
enterprise if people are not able to access the website that is
created because of prohibitive telecommunications costs. Indeed,
it is true. We have noticed several phenomena. For example, the
total number of applicants to our programme at Carnegie Mellon
from Europe, the first year was zero and the second year was two;
whereas we have huge numbers of applicants from the areas of the
world that are the fastest growing in e-commerce, particularly
from Asia and the United States. In an almost self-defeating language,
Europe is constantly pointing out that it is behind the United
States in e-commerce. The e-Europe Report is laced through with
language of that kind, although the Europeans proudly point out
that they are ahead of the States in global telecommunications.
Both of those are true. I do not think they need to remain true
but they are true today.
689. What kind of a mood do you pick up when
you are going round meeting business people in Europe? Do they
feel they are in second place to the States?
A. The mood could be described as ebullient.
Everyone sees what is happening to e-commerce. They have a clear
focus on what is preventing it from expanding and would like to
see something done about that. They assume it will be done and
then the business will expand.
690. I suspect there is a slight touch of cynicism
about that. In other words, you do not actually believe it is
going to happen; that we are going to be caught short. Do you
A. I do not think that at all. It will happen
but it will not be easy. It is the job of legislators and Parliaments
to make it happen. I am not sceptical of the ultimate future.
691. But do you think the will is there? You
have made four trips to Europe in the last four months. Do you
think the will is present amongst legislators to do just that?
A. I do not have enough exposure to legislative
initiatives in Europe to know that. What I sense from businessmen
and consultants is that things are happening and they believe
that the climate will improve. The largest barrier has to do with
the cost of Internet access. I am reliably told in France that
it is possible, after one active night of surfing the Internet,
to run up a bill of £100 to £200. That is impossible
when you compare it to the zero marginal cost of Internet access
in the United States.
692. In reply to the question about the role
of government, which was in the notes we sent to you, we sent
a note that says: What is the role of government as a fundamental
peripheral? In your answer you make a point about governments
seeing e-commerce as a source of new tax revenues.
693. I think this whole question of tax is a
very interesting one. I wonder if you could just first talk around
the whole question of government tax and e-commerce for a moment.
A. It appears to be the desire of legislators
to raise taxes in as unobtrusive a fashion as possible. If they
can be made invisible, or if the taxes can be shunted off to those
who are not resident in their own jurisdiction, (as Florida successfully
does with its hotel taxes), then all the better for the politicians.
It is possible, on the Internet, to assess taxes that are essentially
invisible. One does not receive a bill. One does not receive an
itemised statement that says there is this much tax, because electronic
mechanisms make it possible to assess the tax even without informing
the taxpayer, at that moment, that the tax is being charged. So
it bears a tremendous attraction to taxation on the Internet.
That was largely responsible for United States Congress's response
to the Internet tax moratorium that said: "Wait. We have
to have a chance to study this before various jurisdictions all
over the country attempt to levy new taxes." The United States
is in a strange position with respect to sales and new taxes.
There are 50 states, all of which either have them or do not have
them, do not have or charge different rates; but there are constitutional
principles in the United States which forbid one jurisdiction
from being compelled to collect taxes for another jurisdiction.
So a very common mechanism legally to avoid sales taxes in the
United States is to make a purchase from a vendor in another state
and have the vendor ship the goods into one's own state. On the
Internet, however, it is possible to monitor all of this activity
and attempt to have some kind of negotiation, where there is some
kind of split of taxes between the two states, and levy such taxes.
Right now that is impossible. On the Internet, because there is
this moratorium, one cannot levy taxes until 2001. Now, there
has been discussion of what is the correct means, if any, to tax
activities on the Internet, including such proposals as a bid
tax, in which every bid that moves on the Internet would generate
a tax. That is a hard-line prospect because the number of bids
per day, which move on the Internet, is doubling approximately
every 98 days. Therefore, tax revenues from that would then double
every 98 days, producing a windfall of ludicrous proportions.
So the issue really is that we need to have a very efficient Internet
infrastructure, just in the same way as we have an efficient road
structure, public highways. One needs to raise taxes in order
to build and maintain highways. One needs to raise taxes in order
to build and maintain the Internet structure. The question is:
is the tax to be levied on the direct user or society, as a whole?
since society, as a whole, is the beneficiary of both the public
highway system and the Internet. So there can be effective tax
mechanisms but economists need to be called in to study this very
carefully because the burgeoning growth of the Internet makes
small things explode exponentially in a very short time.
Lord Chadlington: When you look at the systems
that are options available to us, what direction is your mind
going in? Is there not another side to this, which is lost revenue?
In some taxation systems, as things move on to the Internet, it
is probable that some countries will lose traditional methods
of raising capital.
Chairman: As, indeed, some states are losing
at the moment.
694. Yes, as some states are losing it.
A. Precisely. They are losing it because they
were not ready for electronic commerce. I see a future world in
which essentially all transactions are negotiated and concluded
over the Internet. It then may remain to engage in a physical
delivery of the goods. If all of the transactions are occurring
on the Internet, then details about the financial aspects of those
transactions will exist in digital form and will be processable.
It has always seemed to me that the right mechanism is essentially
an electronic value added tax, where every time there is a transaction,
a tax is levied between businesses or between consumers. It will
be scrupulously fair because everyone will be taxed. There will
be an Internet everywhere. All transactions will be part of the
695. And the technology will collect it.
A. Well, that is another issue we have to talk
about. The absence of effective handling.
Baroness O'Cathain: But who will get it?
696. This is a terribly important area. This
would be a variable value added tax, in your mind? It would be
a tax that was applied to certain goodsluxury goods would
have a higher level than other goods. Do you see that happening
or a straight level? Can we answer the question that Baroness
O'Cathain is asking? Who would get the money?
A. I have a radical proposal along those lines.
I have not discussed it in public anywhere until today because
I have not been asked the question! As to whether the tax should
be variable or not, this is an area certainly outside of my expertise.
I have always been uncomfortable with use of the taxation system
for selective incentives and disincentives. I have always viewed
taxation as a purely revenue raising matter. That is a personal
view. On the other hand, I have been both the beneficiary and
loser from selective taxes, so I might not be the one to comment
personally. As to the issue of who gets the tax, I will give an
example from the United States. Let us suppose that a transaction
is being engaged in between someone in Pennsylvania and someone
in New York. Pennsylvania taxes certain goods at 6 per cent. New
York taxes certain goods at 8 per cent. The proposal would be
that in that transaction the actual tax is the average of the
two taxes, so 7 per cent would be levied but it would not be split
equally. It would be split in ratio to eight to six, which is
the ratio that the States have determined by legislation and regulation
that they would like to see the tax from the transaction. So we
tax the transaction and we distribute it to the two jurisdictions
involved, assuming that there are only two, and assuming that
we can determine which the two jurisdictions are, which is another
very difficult issue. This is because if the Internet is global
and is abstracted away from geography, where is the authority
at all to do the taxation? Initially, at least in the United States,
everyone has a domicile. In general, the jurisdiction that geographically
controls their domicile has certain taxation rights. When someone
receives goods, the state in which the goods are received has
a right to levy a use tax on those goods. We always have ultimately
a recipient of goods or services, and a vendor of goods and services,
and if we can tie those down to which jurisdictions are entitled
to levy taxes, then we can get to the point where we can share
these revenues in the appropriate ratio.
697. The next one is the technology and compliance.
A. The technology is not a difficulty. The problem
is that in order to monitor all these transactions, one must engage
in very intrusive digital collection of information. So, for example,
the state will be entitled to know, and multiple states would
be entitled to know, details of every financial transaction. Now,
of course, in over-the-counter sales of goods, the merchant is
required by the state to levy taxes and to collect the taxes in
trust for the state. However, the state may not have detailed
information about what goods were purchased, although they can
certainly learn that through subsequent sales tax orders. I am
not sure that the digital situation is substantially different
from the real or physical situation that we have now.
698. Will it not result in tax competition with
mail order, for example?
A. Yes. In fact, the United States Federal Trade
Commission is examining right now the effect that the Internet
has had on mail order. They are considering revising their telephone
mail order regulations to make the Internet at least as regulated
a place as mail order and the telephone, so that there is not
such a lop-sided advantage to the Internet. The issue is one which
should genuinely have efficiency. If it is more efficient to purchase
goods over the Internet than to use mail and telephone order,
the world will gravitate towards that, whether we like it or not.
So if telephone and mail order cannot match those efficiencies,
which will be reflected in the prices that will have to be charged,
then they deserve to go out of business.
699. Is this not the fundamental point of the
whole operation? The Internet, e-commerce, and all the electronic
peripherals, are just another way of doing business? There are
a few add-on businesses like ISPs, which enable the whole operation
to work but, nonetheless, if you have not got a basic product
to sell, the Internet is not going to help you.
A. In my view, the Internet is a vast global
conduit with information, but it is important to remember that
the only thing that ever passes on the Internet is information.
So if there is an economy that is based on physical goods, then
the utility of the Internet is to enable people to learn about
those goods and their characteristics; to learn the reactions
of others who have previously purchased those goods from their
vendor; the availability of competitive goods at competitive prices;
the ability to negotiate and conclude a transaction. I think the
new enterprises that the Internet has given rise to are the information
vendors. Those whose only good, if you can call it a good, is
information; something that is requested and delivered directly
over the Internet instantaneously. In a sense, it is another way
of doing business, but it is a way of doing business that we have
never seen before because it is tremendously empowering to the
consumer. There is a visibility to make product comparisons. In
fact, companies are searching very hard for a way of recapturing
the advantage away from the consumer.