Record of meetings held in Washington,
10-12 April 2000
10 April 2000
Dr Robert Shapiro, Under Secretary for Economic
Affairs, Department of Commerce
REASONS FOR THE US LEAD
- The US lead in information technologies, primarily
resulting from defence expenditures in the 1960s and 1970s.
- Deregulation of telecoms in the 1980s and of
financial markets in the 1970s.
- The policies of successive administrations to
encourage business formation generally, even at the expense of
social welfare policies. In short, the policy of US government
had been to "get out of the way".
New analysis demonstrated that access was "almost
exclusively income-related": the findings were that there
was an 80 per cent take-up amongst people with incomes of over
$75,000. "Race was not an independent factor". "The
divide looks more like a lag"this could be partly
attributed to rapidly falling prices of PCs, as well as developments
such as encouragement by companies. Ford has decided to provide
all its employees with a PC.
He added that Government had to make a commitment
for universal access to the Internet and should set a goal for
this of, say, 2005.
Defence-related R&D had played an important part
in creating the IT on which the US lead in e-commerce was based
but R&D was not predominately a private sector function. There
was private sector work, particularly in the 1960s and 1970s at
the Bell Labs. There had also been tax breaks for R&D but
these had not singled out IT. Productivity gains in IT had averaged
10 a year for the past decade.
It is not clear whether there has been a spin-off
from "Star Wars" policies. They could have spurred the
development of certain technologies but IT is not now the leading
edge technology. The focus is on biotechnologies and nanotechnologies.
Web TV could develop as a major means of delivering
e-commerce, but Dr Shapiro remained sceptical. Microsoft had invested
in it but it had flopped. For example, entertainment had not been
particularly successful on the Web.
There are four fundamental areas for regulation by
4. Intellectual Property
Privacy regulation was difficult to achieve, and
there was political controversy about confidentiality. Much depended
on cultural acceptance; for example the criminal law on the census
was weaker than criminal law on the Internet, but there had been,
so far as he was aware, no breach of census confidentiality. A
company called MicroStrategies had been engaged in 'data mining',
which was considered an infringement of privacy. The US was at
the point of becoming aware of the problem, and the public was
now sensitive. This could lead to restrictions on the sale of
On taxation the most challenging issue was jurisdiction.
Taxation was determined by geography but the debate in the US
was about whether to apply offline taxes to online. He thought
that the US would ultimately apply a sales tax. The alternative
was to raise income and property taxes, and this would be politically
unacceptable. So it seemed that there would be an inexorable move
towards sales tax online, possibly replacing the Federal system
by a national systemDr Shapiro thought this was "several
years" away. Retail transactions on the Internet were a very
small proportion of GDP so there was time to decide. International
agreements were necessary to make such legislation effective.
With regard to corporation tax and offshore havens,
the major economies had too much invested in the status quo
to play the comparative advantage game. However, companies would
undoubtedly work the market. Dr Shapiro referred to an Israeli
firm operating in the UK which offered documentation handling
IPR is an important new issue. For example, Amazon.com
had taken a patent out for "one click operations", not
the kind of procedure that was normally patentable.
In Dr Shapiro's view (unsurprisingly), the Justice
Department was right. Microsoft had been a classic case of leveraging
a monopoly market into an adjacent market. Many IT markets had
a tendency to create dominant players, and were driven by a desire
to create a network effect. Virtual monopoly of systems was not
in itself a violation, but it was improper to use forms of coercion
to maintain monopoly.
US VIEW OF THE EU
The US did not see the EU as monolithic. Most commercial
relations between the two existed through investment and not direct
trade. The US approached Europe on a country-by-country basis.
It did not yet see Europe as a Union; the EU was moving towards
the state of union but in a rather inward-looking fashion.
With regard to the major problems between the US
and the EU, there were lots of issues but nothing fundamentally
difficult. There had been, after all, a 60-year trend towards
Asked whether this would lead to a change in US policies,
for example a more liberal regime on patenting, or how the US
would respond to, for example, the EU use of US patents, Dr Shapiro
did not answer the questions directly. He argued instead that
the spread of IT increased the value of information. He thought
there would be more conflicts over IP rather than bananas.
Jeanine Poltroneri, Director Telecoms Strategy
and Regulation, and Terri O'Connor, Director Global Regulatory
There was a short presentation of Motorola's business.
In the ensuing discussion, the following points arose.
Ms O'Connor referred to a recent report by the Legg
Mason Precursor Group, The Building Blocks of Growth in the
New Economy, a guide to global investment precursors in telecom,
Internet and e-commerce. She drew attention to the executive summary,
which categorised countries according to their e-commerce environments.
Only four countriesthe US, the UK, Canada and Ireland (the
"broadband four")had relatively high growth prospects
in the new economy, having created a very hospitable environment.
The report had a matrix incorporating 25 building blocks of growth
for the new economy, divided into three sections; the base being
telecom, the next stage being Internet, and the top electronic
US LEAD IN E-COMMERCE
Ms O'Connor and Ms Poltroneri repeated much of the
argumentation which Dr Shapiro had advanced.
- The kick-start provided by defence-related R&D
- A liberal view of Internet regulation
Self-regulation worked, for example privacy notices
on websites. The government had a role, and that was to apply
existing law. The Federal Trade Commission (FTC) had a range of
instruments and could regulate when cases were clearly in breach
Ms O'Connor did not think that additional protection
was needed: the private sector would act like a vigilante. The
situation was one of flux. The regulated telecommunications world
had crashed into the unregulated Internet world, and had thrown
up issues for regulation. Consultation on what to do about these
issues was only just beginning. The FTC was eager to understand
trends and technologies, not necessarily to regulate for change.
The big self-regulation issue was privacy. Other
issues were security and control which could be contracted out
to website auditors. This form of control would help global expansion.
The overriding theme was that regulation should be minimal and
Federal, leading thus to a common standard. Unfortunately, individual
States were beginning to introduce stage-by-stage regulation.
The prime principles for all regulation should be that it be predictable,
minimal, consistent and simple.
Ms O'Connor did not know whether there was a European
lead. Motorola, like most of the US players, simply wanted to
grow the market. They did not want mandated IP standards. Motorola
shared the European perception that WAP was the growth area, and
was convinced that the US would do as well as the EU because of
the incidence of high use plus mobility, and the fact that it
appeared to be an inevitable trend. But mobile telephony did not
exclude the continued growth of the PC Internet ("We'll have
The US had been held back by the lack of a common
standard. Also, US carriers did not understand how important number
portability was (Single Transferable Number). In the US, a rather
invidious position obtained, whereby airtime was paid for both
by the calling party and the party called. This inhibited widespread
use. Another factor was that the US land-based system was cheap
and universal. Conversely, the use of the PC was helped by the
flat fee rate. Manufacturers had not so far focused on price:
downloading on the Internet, it was a question of speed. There
were also other price variants such as the "buckets of minutes",
which provided considerable flexibility.
Both Ms Poltroneri and Ms O'Connor thought that regulation
in mobile telephony was now imperative because of the lack of
standards. But there was no need for regulatory mandate, simply
more consensus. There was also need for regulation on bandwidths.
Motorola was not a big fan of the spectrum auction because of
the pressure this imposed on price. Auctions were "the stop
gap of the Federal government".
There are different tax regimes in the different
States, in relation to e-commerce. This stimulated migration between
the States. Large companies have no choice but to adopt the highest
level of regulation because this governs the market standard.
Industry would therefore press government to introduce standards.
Lunchtime discussion at the residence of HM Ambassador
Towards the end of lunch, HM Ambassador invited the
Chairman to explain the aims of the current inquiry and the reason
for the visit to Washington. Lord Brooke did so, and HM Ambassador
then invited the American guests to comment.
DR PEPPER, CHIEF, OFFICE OF PLANS AND POLICY, FCC
He spoke of the digital divide and the importance
of mobile telephony in dealing with this and the problems of disabled
people. Help is need in many areas. For example, fewer than 50
per cent of native Americans are connected to the telephone system.
Nevertheless, the FCC believes it is right for the US to rely
on the market mechanism.
MR ELLIOT MAXWELL, SPECIAL ADVISOR TO THE SECRETARY
OF COMMERCE FOR ECOMMERCE
The attitude of US administrations has been "hands
off the Internet" but the issue is not that simple because
electronic contracts are enforceable as contracts - the law has
to be applied, offline and online. Telecommunications companies
have to be regulated and there have been different governmental
responses to each issue. What would be a sensible approach? Regulation
is essential for privacy, access, certainty and predictability.
The appropriate government response is increased consultation
between the private and public sectors.
The US regards the UK as an intermediary with the
EC. For the future, the situation is that experts have different
opinions and the best advice is to leave the Internet and e-commerce
alone. It is bound to develop differently in different parts of
the world, in response to different cultures. Standardisation
is not so important as interoperability.
MR CHRIS CAINE, VICE PRESIDENT, GOVERNMENT PROGRAMS,
There is a digital divide between government and
the private sector. The public sees governmental processes, which
had been designed to move slowly. There will be problems ahead.
The government will have to take a careful look at its own performance
and lead by example. It needs to re-engineer the process of government
- it is not sufficient merely to give everybody a PC and say,
"we are now e-government". IBM has had "a near
death experience" but has now seen the light. What does digital
trade policy look like? There are a number of essential elements:
market access, different framework for digital buyers and sellers,
and digital non-tariff barriers.
DR ROBERT SHAPIRO, UNDER SECRETARY FOR ECONOMIC AFFAIRS,
DEPARTMENT OF COMMERCE
Dr Shapiro picked up the theme of the previous speaker.
It is true that government has to lead by example but there are
plenty of areas where strange conventions still operate. For example
it is impossible to introduce a laptop into the Senate and the
Supreme Court has banned television. However, in his Department,
the census form is now online, as is the patent and trademark
office. Government should be a neutral platform but it has a social
contract with the people to protect certain values, such as privacy.
There followed a discussion of the role of consumer
power. Is it a "good thing" that the Internet empowers
consumers or can consumer power block development - for example,
the pressure for more regulation of GM crops. In Dr Pepper's
view, the pressure comes not so much from the consumer as from
incumbents who are not keen on competition. According to Mr
Maxwell it is also a question of localism versus internationalism.
For example South Carolina is currently introducing a Bill to
control e-commerce activity and Texas has already passed such
legislation. This is nothing short of "digital protectionism".
The question is really 'how can we achieve on the Internet what
we have already achieved in the physical world?'. The unique attribute
of the Internet is the rise of consumer power.
MR RON KEOHANE, WHITE HOUSE WORKING GROUP ON E-COMMERCE
It is important for Federal agencies to co-ordinate
their perspectives, to make the change from the physical to the
virtual, to bring about the education of Congress and government.
There are changes in the pipeline that will appear towards the
end of the current year, regardless of who wins the election.
But, at the end of the day, the Administration's view is that
the private sector has a better idea of what is necessary to promote
DR JEFF COOPER, CENTER FOR INFORMATION & STRATEGIC
The relationship between government and the country
it governs needs to be re-examined. The three elements of government
are: responsibility, authority, and capability. Historically,
governments have monopolised all three elements. Now, government
retains responsibility because that is what people want but at
the same time it lacks authority. In the US citizens are wary
of giving the government any more authority. It also lacks capability,
which has moved into private industry and the government has not
yet found a way of adjusting to the new elements. Two years after
the presidential address on 23 May, there has been no real progress.
As for leadership by government departments, they are extraordinarily
diverse. The State department in particular is Dickensian.
Dr Shapiro's response
was that the prime role of government is to measure the eeconomy.
His group has spent the past 18 months determining measures for
eretail and has also just completed work on B2B. This has
led to a revision of the GDP accounts in order to recognise software
as invested capital. Neither business nor government can make
intelligent policy unless they have the means to measure the effect
of policy. In Mr Maxwell's view, Federal agencies vary.
On the Department of Commerce website there is a picture of the
Secretary of State and a website address, but no real information.
This is rather as though Amazon.com had a picture of Jeff Bezos,
and its stock exchange listing, but no information about the business
MR JIM GRAF, PRESIDENT, BT NORTH AMERICA
e-Commerce rides on the back of the telecommunications
infrastructure, which has to be right if e-commerce is to flourish.
In the US patent law could be a restraint on the growth of the
Internet, and this was an area where Europe and parts of Asia
undoubtedly have an advantage.
MS LISA BARRY, VICE PRESIDENT OF INTERNATIONAL PUBLIC
The globalisation of the Internet depends on the
telecommunications infrastructure. On new policies of reward options
and of fulfilment, and a modern customs system, the US and industry
has to work with other governments.
The discussion was impressive, probably more articulate
and straightforward than would have been the case in a United
Kingdom setting. One of its benefits was to put opposing views,
particularly of the government and its role, alongside one another.
Later meetings in the visit seemed to reinforce the view that
Federal government is taking a back seat, especially in G2C, and
not leading by example, in contrast to the leading roles of state
Mr Bob Litan, Vice-President and Director of Economic
Studies, Brookings Institution
WHICH FACTORS HAVE BROUGHT ABOUT THE US LEAD IN E-COMMERCE?
"e-Commerce was an accident", resulting
from a combination of factors and led by Silicon Valley.
- The government invented an Internet browser (Netscape)
- AT&T was broken up in 1984. Until then copper
wire had been universal and cheap, and there was no incentive
for a monopoly to move to fibre-optics. The break-up "freed"
Bell Labs to compete with Corning. Thus the backbone was in place
when the browser arrived.
- The growth of clusters, for example at Austin,
Texas, Cambridge, Massachusetts, Seattle and in DC, where it had
been centred around the George Mason University.
- The most important factor was the parallel rise
of venture capital firms and the liquid securities market. $50
billion has been produced over the last 10 years. Membership of
the venture capital firms is by invitation, and confined largely
to universities, pension funds, and very rich people.
- The role of capital gains tax and the use of
stock options. However, e-commerce is not being driven by capital
- Regulation. The US government operated a hands-off
approach for a five-year period but is now moving towards the
- Taxation. There is a powerful anti-taxation feeling
in the US, which is unlikely to go for VAT. There is no pressure
to do anything about sales tax because individual states are currently
in surplus. If there were an economic downturn, the States would
either a) abandon sales tax and go for income tax or b) harmonise
sales tax with an appropriate re-allocation between states. Producing
a standard tax jurisdiction would be difficultthere are
over 30,000 separate taxing jurisdictions in the US.
- IPR is causing problems, particularly the latest
trend of taking out patents on business processes. Amazon and
its "one click" identification of customer, and Priceline
and its customer bidding for airline seats are examples. It seems
that if you have a bright idea and embed it in software, it becomes
a "business process" and thus able to be patented. The
government is being dragged in because the Internet is colliding
with the real world.
- Corporation tax is not a current problem apart
from the issue of money laundering. The US operates the "elephants
and mice" model. "Elephants", such as IBM or Microsoft,
can be controlled but "mice", such as the Cayman Islands,
cannot. The right policy is not to worry about the mice.
- Fraud. The FCC is concerned about stock fraud,
particularly emanating from the Internet "chat rooms".
In Mr Litan's view the US lags behind Europe in terms
of civil R&D spending on new technologies but is ahead on
defence R&D spend.
This is the future of the Internet. The EU has had
the advantage of the GSM standard whereas the US has no common
standard. Access is cheaper but usage is not. Costs are dropping.
In May Microsoft will roll out their new strategy
on Windows for the Internet. They will apply Windows to everythinghand-held
sets, refrigerators, cars. This is bad news for Symbian, who would
be swept aside by the Microsoft juggernaut.
With reference to the anti-trust dispute, the Justice
Department is insisting not only on separating the browser business
but also on continuing judicial supervision. Quite reasonably,
Microsoft will not accept this. There will be a hearing on about
24 May, followed by an appeal to the Supreme Court. There is no
guarantee that the Supreme Court will take the case, and if it
does, the outcome might be clear a year hence. The most likely
outcome is that there will be some controls on Microsoft and Microsoft
will not be able to discriminate ie sell at different prices to
different people. But it is not likely that the Supreme Court
will allow a judge to continue to supervise the company. In Mr
Litan's estimate there is only a 30-40 per cent chance that the
courts will rule on the break-up of Microsoft. His solution is
to separate Microsoft's operating systems from its other businesses
and then sub-divide the operating systems and make them compete
against each other. This could lead to the fragmentation of standards
but the technology will adapt to deal with this. In 1999 Microsoft
made $90 billion, of which 43 per cent came from Windows. "Linux
is for geeks."
WHAT IS THE EXTENT OF CYBER CRIME?
No one knows the extent but industry should be able
to handle the problem. The only blatant example is scams with
credit card numbers. With reference to "denial of service"
attacksflooding ISPs with messages which put them out of
action for a number of hoursthe company RSA has now introduced
a deflecting shield which can give protection but at the cost
of slower reaction times.
The Administration consults academia, largely informally.
There are a number of agencies, such as the Council of Economic
Advisers and the National Science Foundation. There is also the
ARPANet for defence-related research and the National Institute
of Health for biomedical research. Government funding is by competitive
grant with peer review panels. There is considerable choice in
No one really knows. The OECD has conducted a survey
but it was on the lines of "yes" and "no"
questions, in other words it was historical and did not give any
idea of future trends. The Brookings Institute will convene a
seminar in September to debate the future of e-commerceits
impact on the environment, employment, energy, transport and distribution
systems. The biggest problem is the lack of skilled workers. Mr
Litan's solution is an extension to the college loans system to
cover lifetime learning. There has been a case of a non-profit
foundation taking young people (150 so far) from inner city problem
areas, giving them two months intensive training in HTML (Hypertext
Markup Language) and feeding them. This is the sort of initiative
the government should support.
The Brookings Institute is a prestigious centre of
economic studies. Mr Litan's views on Microsoft may be the most
insightful we have received. The same applies to his views on