Good morning. I'd like to like to thank the organizers and sponsors of this conference for the invitation to be here today.
I've been asked to speak on the relative roles of government and the private sector in the area of electronic commerce (or e-commerce). This is, in my mind, as big a task as summarizing the impact of the of the Industrial Revolution in a few minutes. And, in fact, the rise of Internet and e-commerce may have as profound an effect. It has enabled us to take part in a global economy and accelerated, beyond all previous dreams, the way we do business and communicate.
Before I discuss the government's role in this process, let me quickly describe the rapid development of this new commercial medium. Take, for example, the growth in Internet use, which has exceeded all expectations. Five years ago, Vint Cerf, widely known as the "father of Internet," projected that 100 million people would use Internet by 2003. We have already surpassed that projection: today, there are 120 million people estimated to be on-line. That's three times as many as were on-line two years ago.
As Internet use increases, both consumers and businesses are turning to the Internet to conduct commercial transactions. According to one expert, nearly one-third of all on-line households made an on-line purchase in the last six months. By the end of the year, U.S. and European consumers are expected to make $5.1 billion in on-line purchases, according to Forrester Research Inc. That's twice the amount consumers purchased last year.
The impact of e-commerce on business-to-business transactions is even more significant. Forrester expects that businesses will exchange about $17 billion in goods and services this year, more than double last year's figures. And by 2002, business-to-business transactions are expected to reach nearly $350 billion. Internet commerce, by some estimates, may account for 6% of our gross domestic product by 2005. This growth has caused Columbus, GA, traditionally a manufacturing town, to shift its focus to development in Internet technology and electronic commerce.
Why is the Internet such an appealing medium for conducting commerce? Well, for one thing, it can provide significant cost efficiencies. The costs of conducting a bank transaction, for example, drop significantly when they are conducted on-line. A simple transaction would cost $1.08 if it were conducted at the bank, $.54 if conducted over the telephone, $.26 using PC software, and only $.13 over the Internet. GTE reported that it was able to save 20% last year on materials costs by finding the lowest cost suppliers on-line.
Think about how Amazon.com operates: because it orders only the books a customer requests, it can keep a very low inventory. Its inventory last year turned over 42 times, while Barnes & Noble (before it went on-line) turned its inventory over only twice. And Amazon.com gets paid by the consumer 46 days before it pays the supplier - a profitable reversal of traditional retail marketing.
The flexibility of Internet is also enticing for consumers. Certainly, most of us would rather search for a new car in the comfort of our own home than travel from car-dealer to car-dealer. Last year, according to J.P. Powers, 21% of U.S. car buyers researched their car purchases on-line. One expert estimates that half the country will be doing so by year 2000.
The Internet also provides small and niche businesses with significant opportunities. It has made it possible for small, family-owned, basket-weaving companies in Ohio to attract buyers world-wide or for women in Ghana to sell their weavings without losing profits to middle men. With several clicks of the mouse, we can now view pictures of that hide-away hotel in the Bahamas that we'd love to visit. In fact, a colleague of mine asked the other 20 guests in a remote lodge in Costa Rica how they'd happened to find the place. All of them responded that they had found it on-line.
Given the tremendous growth of electronic commerce, what is the government's role in its continued development? We believe that the success of e-commerce to date is largely attributable to private sector efforts. Innovation, better services, and lower prices are more likely to arise in a market-driven environment than in a regulated environment.
The U.S. government has therefore adopted an approach intended to allow such private efforts to continue, unimpeded by government regulation. In July 1997, the Clinton Administration set forth principles in its Framework for Global Electronic Commerce intended to guide this market-driven approach. These principles include the following:
- The private sector should lead, and federal government should encourage industry self-regulation wherever appropriate.
- Governments should avoid undue restrictions on e-commerce and should refrain from adding any new taxes or regulations on Internet.
- And, finally, where government involvement is needed, its aim should be to support and enforce a predictable, consistent and simple legal environment for commerce.
That is not to say that government should play no role in promoting e-commerce, but our role should be limited to that of a facilitator for private initiatives. In certain areas, such as privacy and domain name registration, self-regulation by private industry is the preferred option. We recognize that self-regulation is not the first choice for most governments. If you think nature abhors a vacuum, you should try government. The Administration therefore views it as an important function to share its philosophy of self-regulation with other countries.
In other areas, we believe we can play a crucial role in generating or creating a climate for future growth and development of the Internet. Government is now playing a key role, for example, in promoting greater bandwidth to homes and offices and in working with the private sector to protect the nation's infrastructure.
I'd like to touch on each of these topics separately.
Privacy. First, privacy, an area that has received significant attention this year. The U.S. government has become increasingly concerned about privacy issues because of the potential for misuse of personal information on-line. Recent polls have shown that current and potential Internet users also have such concerns. A March 1998 poll in Business Week indicated, for example, that 61% of those who don't go on-line would be more likely to start using Internet if they thought their personal information would be protected. Of those who already use Internet, 52% won't make purchases for fear that their personal information would be used for other purposes.
We need to put these fears to rest. The Internet should be as safe a place to conduct transactions or share information as any other secure marketplace. The Clinton Administration is hoping, however, that the private sector will take the lead in creating privacy safeguards.
We have been working closely with private industry and privacy advocacy groups to develop and adopt effective codes of conduct, industry developed rules, and technological solutions to protect privacy on Internet.
The proof, of course, will be in the pudding. Self-regulation will work if the companies do, in fact, put these plans in place. If they don't, we will need to reconsider whether self-regulation is the best option. Consumers will demand an effective solution, as will our trading partners, particularly those in Europe.
Domain Names. Domain name registration is another area that we hope will be managed by the private sector. As most of you know, domain names are the names that are directly linked to a unique Internet site, such as "www.ecommerce.gov." Currently, the registration of domain names is conducted through contract with a U.S. agency. This is an area, however, that we believe should be governed by the private stakeholders with a significant interest in the Internet. As part of the Framework for Global Electronic Commerce, the President directed the Secretary of Commerce to privatize, increase competition in, and promote international participation in the registration process.
NTIA has taken the lead in this area and is working towards turning the domain name system into a private, international system. This past June, we released a White Paper inviting the international community of private sector Internet stakeholders to work together to form a new non-profit corporation to manage domain name functions. We are hopeful that the private sector can establish the new corporation by October 1998. At such time as the entity is operationally sound and stable, the Department of Commerce will transfer management of the functions over to the new entity. We expect that by October 1, 2000, the private sector will assume full responsibility for domain name management.
Taxes/Tariffs. The U.S. government has also tried to limit government regulation in the area of taxes and tariffs. Again, the theory is that an unfettered marketplace is most likely to promote growth and innovation in Internet use and e-commerce. With respect to taxes, the Clinton Administration endorsed a position of "no new taxes" in its Framework for Global Electronic Commerce. The Administration subsequently supported legislation that would impose a temporary ban on a state's authority to impose new Internet access or service taxes.
The Administration has also supported a position of tax neutrality. That is, we should tax items on-line the same way we do off-line. Taxes should not affect, in other words, whether a consumer or business chooses to use the Internet to buy a product.
Finally, the U.S. government has also declared that the Internet should be a customs duty-free environment. That is, all governments would be prohibited from imposing tariffs on products or services when they are delivered by Internet to foreign markets. We have made significant progress in reaching agreement in this area. On May 20, 1998, all 132 members of the World Trade Organization (WTO) endorsed a declaration agreeing to extend the current prohibition against such tariffs. The declaration also called for a comprehensive program to examine all trade-related issues relating to global economic commerce.
Broadband Initiatives. In certain areas, such as increasing broadband capacity, the U.S. government has taken a more active partnership role with private industry. Providing greater bandwidth to homes and offices is a primary goal for the U.S. government. According to a Department of Commerce report issued in April 1998, the number of Internet users is doubling every 100 days. We need to create the infrastructure to handle this rapid rise in data service use.
Examples of the U.S. government's efforts in this area are the Next Generation Internet and Internet 2 projects. These projects will partner hundreds of millions of dollars in private investments with federal investments to promote a faster and more reliable network. Internet 2, for example, is expected to transmit the entire Encyclopedia Britannica in under a second and the entire Library of Commerce in under a minute. Congress is now considering federal funding for technological standards to ensure the success of these projects.
We want to be sure that all American citizens can obtain the telecommunications services they want - whether cable, telephone, Internet, or wireless - and that will require extending bandwidth to homes and offices.
Critical Infrastructure and Year 2000 Initiatives. Finally, the last area I'd like to highlight is the Administration's initiatives in addressing the Year 2000 problem and critical infrastructure protection. The Year 2000 problem, otherwise known as the "millennium bug," refers to potential disruptions in our computer systems when the clock strikes January 1, 2000. The Administration is encouraging private companies, trade associations, foreign governments and other organizations to take specific actions to guard against disruptions of services. A Gallup survey reported, for example, that 5 million small businesses are at risk of a computer meltdown come Year 2000. Of those surveyed, 80% of these businesses were aware of the problem, but only half of them intend to do something about it. We need to reverse these trends. I encourage you to talk to your vendors, your sellers, your partners, and your collaborators about this issue.
The work we are doing to prevent crises in year 2000 can also be applied to the Administration's broader challenge of protecting our critical infrastructures. In May 1998, the President issued a directive requiring that various agencies take steps to protect the nation's critical infrastructures against potential outside attacks. Such attacks could wreak havoc, not only on our information systems, but also on our economy and defense capabilities.
NTIA has been designated as the lead agency for information and communication infrastructure protection. Our success in developing a plan to protect these systems depends, however, on our ability to collaborate with the private sector. We need the help of companies, such as yours, to identify critical information systems and gauge their vulnerabilities before we can determine how to defend these systems. I hope to work with many of you as we begin this collaborative process.
There are numerous other initiatives relating to e-commerce and Internet that I could touch on if we had more time. Nevertheless, the emphasis at this point should not be on government's role in the process, but on how you, as private industries, can take advantage of the new opportunities of e-commerce.
This new medium has, indeed, revolutionized the way we conduct commerce and share ideas. And, as Peter Drucker, the preeminent management theorist stated, "[t]he greatest danger in times of turbulence is not the turbulence. It is to act with yesterday's logic." I encourage you all to look at how e-commerce can benefit your businesses so that you will become participants in, rather than witnesses to, this revolution.