Select Committee on European Union Fourteenth Report


PART 3: THE CONTEXT IN WHICH E-COMMERCE OPERATES

Definitions

75. Our starting definition of e-commerce came from the Cabinet Office paper.[16] The paper describes e-commerce as enabling revolutionary change in two ways: "process e-commerce—managing the vital flows of information within industry supply chains" and "transaction e-commerce—selling products and services within industry and government or to consumers".

76. In the eEurope—An Information Society for All paper, e-commerce is described simply as "the buying and selling of goods and services using the Internet".

77. One witness offered a useful, if not necessarily comprehensive, definition:

    "e-Business is the whole process of enabling companies to trade electronically and to integrate those processes into their commercial operation; e-commerce is more specifically referring to the financial transaction process."[17]

78. Thus the scope of what constitutes "e-commerce" and the choice of the underlying technologies and infrastructure are subject to a great deal of debate. In some cases, e-commerce refers only to commercial transactions while in others it includes a variety of business processes. Sometimes it refers to activities conducted over various types of computer-mediated networks, while in some cases only those conducted over Internet Protocol (IP) based non-proprietary networks are counted.[18] We confine ourselves to regarding e-commerce as essentially the ghost in the machine of e-business.

e-Business

79. e-Business can be further split into:

  • business-to-business transactions (B2B);
  • business-to-consumer transactions (B2C);
  • government-to-citizen transactions (services) (G2C);
  • government-to-business transactions (G2B); and
  • co-ordination of governmental policy (G2G).

Current situation

80. It is difficult to measure a phenomenon growing as rapidly as e-commerce and it is equally difficult to forecast future growth. In January 1993 there were 1.3 million computers connected to the Internet world-wide. By February 2000, there were more than 56 million. Three years ago the amount of commerce conducted over the Internet totalled less than $10 billion. Private estimates today suggest that in 1999 it ranged from US$ 30 billion to US$ 180 billion, with the United States accounting for about two-thirds, most of it B2B transactions.[19] Surveys of secure servers and hosts provide key indicators of Internet development and may be used as one potential indicator of comparative e-commerce development between countries. The number of secure servers in the OECD area grew by 95 per cent between April 1999 and April 2000, reaching 74,000. By June 2000, the number of hosts world-wide exceeded 80 million.[20]

81. The United States has been trying to analyse the impact of this new economic activity on what is now sometimes called the "old economy", and argues that overall US inflation in 1997 and 1998 was reduced by an average of 0.7 percentage points directly attributable to this phenomenon through its effect on prices, primarily in B2B.[21] But as the US Under-Secretary of Commerce for Economic Affairs said, this almost certainly understates IT's full impact on prices, because IT changes the way many businesses and markets operate.

Stock Market

82. Stock markets have also found it difficult to accommodate the vagaries of e­commerce. Indeed, in the period during which this inquiry has proceeded, fortunes have been made and lost! In the early part of the year, stock valuations for new technology companies on the US NASDAQ and, to a lesser extent, on the German Neuer Markt, and the London techMARK exchanges resembled the irrational frenzy which had produced such classic historical disasters as the South Sea Bubble. The stocks of the "new economy" companies fell sharply in April and though some ground has been recovered, overall the value of such stocks is, on average, down 20 per cent since the beginning of the year.

83. In fact, what we were witnessing was one of the characteristics of the "new economy"—systemic volatility.[22] This volatility in the capital markets reflects the prime role played by capital in the rapid formation of "new economy" companies, and the impact of these companies in meshing with existing "old economy" companies. Capital formation has been stimulated by the need for venture capital to launch "new economy" companies where the existing rules appear not to apply. Stock options have become the preferred currency for remunerating the skilled and scarce manpower needed to build these companies. Increasing speed and the falling cost of information acquisition and exchange has increased the pace of globalisation and integration of economic and political institutions. Financial institutions are beginning to react in a radical fashion to the pull towards globalisation as can be seen with the proposed amalgamation of the New York stock exchange, and the Paris, Amsterdam and Brussels bourses—the EURONEXT—on the one hand, and the London Stock Exchange and the Deutsche Börse—IX—on the other.[23] This latter proposal to consolidate the two biggest European exchanges has been further enhanced by a proposed alliance between the NASDAQ, the Neuer Markt and the techMARK exchanges to create a new exchange for IT companies. The as yet unresolved difficulty in such alliances is supervision. Financial services supervision is still a nation state preserve. How long states will be able to resist the drive towards global, 24 hour markets is difficult to predict. The burgeoning effect of e-commerce is a new and significant contributing factor to the increasing globalisation of business and stock market volatility.

Microsoft

84. The United States Administration's anti-trust action against Microsoft has appeared to keep pace with this inquiry. When members of the Sub-Committee visited Washington in early April, we were struck by the way in which some users of the new technologies (though not the US Administration!) tended to sympathise with Microsoft.[24] The US Administration asked four questions: Did Microsoft have monopoly power in the market for operating systems for Intel-compatible desktop PCs? Did Microsoft maintain that monopoly position through anti-competitive conduct? Did it use its dominant position to attempt to dominate other markets? Did Microsoft engage in inappropriate restraints of trade? Microsoft's defenders claimed that it was being unfairly prosecuted, that the judicial process itself infringed the "freedom to innovate" assumptions which drove the new technologies, that competition was not excluded from the market, and that the consumers had not been harmed. On the contrary, the ubiquitousness of the Microsoft operating system (Windows) had enabled the new technologies to be applied on a wider scale more rapidly than would have been the case had the market been open to many competing products. The court has now found Microsoft guilty and has ruled that the corporation be broken up. The case has gone to the Supreme Court which may refer it to the Appeal Court (in the District of Columbia). For external observers, the moral of this anti-trust action is that it demonstrates that even in the allegedly unregulated environment of the United States, judicial rulings can be imposed on IT companies. It also demonstrates that universality of access is only one aspect of the new technologies; competition and transparency are equally important and desirable.

International Comparisons

85. The position in the United States is that of a maturing pioneer. In a sense, the EU and the United Kingdom are able to benefit from lessons learned in the American experience but, as mentioned above, there are cultural differences which suggest that the development in the European Union will not necessarily replicate the American model. The United States is, without doubt, the world's biggest user of the new technologies, and a persuasive case can be made for attributing the United States' recent unprecedented record of economic growth to the effect of these new technologies. The American experience is fragmented. The IT companies cluster in Silicon Valley, in North Virginia / Washington DC, and in Boston. From these centres of excellence, the new technologies radiate outwards into American industry as the drivers of change. The need for industry to change rapidly, without major disruption to society, has led the Administration to seek forms of regulation which supplement self-regulation. The United States also has a problem in that although it does not have Value Added Tax (VAT), many of the States depend heavily on sales tax. It is simplistic to describe the constitutional relationship between the Federal government and the States in the United States as similar to the relationship between Member States of the European Union and the EU institutions such as the Commission, the Council, and the Parliament, but while a solution to the problems of taxation in the Internet Age has so far eluded the United States Administration. In the European Union, it would appear that Member States are willing to apply the existing VAT Directives to online services. This could lead to problems between the United States and the EU. So far, goods bought in the EU over the Internet from American suppliers have not attracted VAT on entry into the EU, but the intention of the draft amendment to the Sixth VAT Directive[25] is that they should.

86. Regulation is futile in the absence of compliance. The Americans argue that they have low levels of regulation and that because they rely so much on self-regulation, they have high levels of compliance. They claim that in Europe we have high levels of regulation, low levels of compliance, and no real means of enforcement.[26]

87. In many applications of the new technology, within the European Union, the United Kingdom stands approximately mid-way between the Scandinavian Member States, who are, in some areas, ahead of the United States, and the major European Union countries. From some witnesses, we inferred concern that the publication of the PIU report [email protected], though admirable as an instrument for analysis and targeting, tended to convey the impression that the United Kingdom's position was better than it was in reality.[27] Most EU Member States are making strenuous efforts to engage in the new global economy, and inevitably economic weight—ie the predominance of the German economy in Europe—must count. In France, the state has traditionally led industry. The fear expressed elsewhere in the European Union that availability of the new technologies must not increase social inequality through "the digital divide" has, for example, caused the French to place emphasis and resources on universal access, though they also claim to be alert to market forces and the need for "light touch" regulation of e-commerce. The major stimuli in the United States experience were the initial public sector investment, a sense of freedom, an awareness of globalisation, a liberalised telecommunications infrastructure, venture capitalism available at the very earliest stages of new company formation, the willingness to regard stock options as capital rather than income, flexibility of labour, and a continental market. Compared to the American experience, the European Union presents a more ragged approach. Some Member States have made early and rapid strides, notably the Scandinavians; some have been slow to spot the advantages e-commerce confers; the larger EU economies form the centre of the span. In certain areas, the EU has made good progress—on electronic signatures, on the legal framework for e-commerce (the e-Commerce Directive), on data protection, and on intellectual property rights (IPR)—but often the EU has conveyed an impression of historical societies endeavouring to apply new technologies to rules designed for the previous industrial revolution. The new technologies, and the globalisation of markets, tend to exacerbate social inequality—at least, initially. The Member States of the EU see the role of government as necessary to mitigate this inequality.

Impact of emerging technologies

88. The United States experience has been built on the basis of low telecommunications access costs and the proliferation of personal computers (PCs). Competition in the United States has meant that there are many systems for mobile telephony and no standardisation. The situation in the EU is different. The application of the Global System for Mobile communication (GSM) has given the Europeans an advantage in the development of platforms dependent on mobile telephony. The vigour with which the recent broadband auctions were conducted in the United Kingdom is a powerful pointer to the way in which the industry in Europe sees commercial advantage accruing from this technology though there is no uniformity in the way broadband licences are granted. In addition, there has been a far wider uptake of digital TV, providing an additional and potentially widely accessible platform for the further application of Internet technologies. Around the corner is the vision of the convergence of communications, both audio and visual. The struggle in the market place will be between competing platforms and for content offered by the Internet Service Providers (ISPs) and Application Services Providers (ASPs). There are subsidiary problems such as the fear, in certain countries, of the dominance of English language content and the converging power of the communications and content companies in such a way as to produce quasi-monopolistic market dominance.

Methodology of inquiry

89. Sub-Committee B (Energy, Industry and Transport) received written and oral evidence from the witnesses listed in Appendix 4, to whom we express our thanks. A large amount of evidence was received, and it was classified and indexed by the Joint Honours students of the Imperial College Management School, under the leadership of the Specialist Adviser. Without their help it would have been impossible to complete the report in the time available, and we would like to record our appreciation of their work.

90. We are grateful for the assistance we received from the Department of Trade and Industry and, in particular, the Communications and Information Industries Directorate (CIID).

91. At the beginning of the inquiry, some members were able to take part in the conference held at Wilton Park on issues of e-governance. This provided a useful opportunity to come to grips at an early stage of the inquiry with the main issues, and to meet many of the key officials from both the United States and Europe. We are grateful to the Director and staff of Wilton Park.

92. The Sub-Committee felt it was important to establish a benchmark against which to judge the United Kingdom and EU performance. Members of the Sub-Committee visited Washington in early April, and met members of the US Administration, academia, the Commonwealth of Virginia, the Federal Communications Commission (FCC), the US Department of Commerce and a number of leading US companies. Members noted in particular the vigorous efforts of the Commonwealth of Virginia to bring citizens online and to deliver state services over the Internet. We are grateful for the support we received from the British Embassy in Washington.

93. Towards the end of the inquiry, members of the Sub-Committee visited Brussels for discussions with the European Commission, the Council Secretariat, and some members of the European Parliament. Discussions were also held in Paris with OECD and with a team from the French Ministry of Industry, Economics and Finance. We should like to acknowledge our gratitude to all interlocutors, to the United Kingdom's Permanent Representation to the EU in Brussels, to the United Kingdom Delegation to OECD, and to the British Embassy in Paris.


16  
[email protected], Performance and Innovation Unit, Cabinet Office, September 1999, paragraph 1.3. Back

17   Mr David Casey, Q 476. Back

18   Mr John Dryden, OECD, Q 1298. Back

19   OECD e-Commerce Policy Brief (work in progress). An updated version will appear in due course on the OECD website: http://www.oecd.org/dsti/sti/it/ec/index.htm. Back

20   ibidBack

21   Dr Robert Shapiro, Under Secretary for Economic Affairs, US Department of Commerce, "Information Technology, the Internet, and Influence on the World Economy", speech at the 593rd Wilton Park conference 'e-Commerce Governance', 21-23 February 2000. Back

22   Professor Manuel Castell, "Delivering the Virtual Promise", speech at the ESRC Conference, University of California, Berkeley, 19 June 2000. Back

23   Financial Services Authority, p 178. Back

24   The Honorable Donald Upson, Appendix 5. Back

25   COM(2000) 349 final, Council No. 9366/00-Proposal for a Regulation of the European Parliament and of the Council amending Regulation (EEC) No. 218/92 on administrative co-operation in the field of indirect taxation (VAT); and Proposal for a Council Directive amending Directive 77/388/EEC as regards the value added tax arrangements applicable to certain services supplied by electronic means. Back

26   Dr Robert Shapiro, Under Secretary for Economic Affairs, US Department of Commerce, Appendix 5. Back

27   European Informatics Market (EURIM), p 82. Back


 
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