10-02-1999

TECHNOLOGY: The New Conquerors

The high-technology industry has long cultivated an image of political
naivete, as if a freshly scrubbed Bill Gates had just arrived at Union
Station carrying little more than his innocent dreams in a cardboard
suitcase. The reality, of course, is far different: The industry has
notched one victory after another in Washington, advancing a long way
toward meeting its goal of a tax-free, regulation-free, borderless world
of business via the Internet. Although major strategic problems remain,
there's little doubt that, thus far at least, the industry has been
winning all of the significant fights.


Consider, for example, the White House announcement on Sept. 16 that it
would abolish nearly all controls on the export of data-scrambling
technology. At first blush, the issue might seem to be one that only geeks
would care about. But this was a dramatic and sudden end to a 60-year
policy fervently supported by the FBI and the national security
establishment. To understand why the decision was so significant, consider
the Battle of Midway, in early June 1942.


In a day of furious combat, 1,200 miles west of Hawaii, a small U.S. fleet
of three battered aircraft carriers ambushed the triumphant Japanese
fleet, sinking four of Japan's five carriers and thereby its hopes for a
Pacific empire. U.S. losses were painful--307 crewmen, the carrier USS
Yorktown, and 150 planes, including 42 out of 51 low-and-slow aircraft
carrying torpedoes. In accepting their own slaughter, the torpedo planes
absorbed a barrage of Japanese firepower, creating a momentary opportunity
for 37 high-flying U.S. dive-bombers to smash the Japanese
carriers.


Their generous self-sacrifice wouldn't even have been possible without the
secret U.S. advantage in data-scrambling technology. That technology
enabled the United States to eavesdrop on scrambled Japanese radio
messages, which allowed the U.S. fleet to find and surprise the Japanese
in the Pacific vastness. And throughout the war, it was encryption
technology--not nuclear weapons--that made it possible for the Allies to
destroy Nazi U-boats, panzer divisions, and the Imperial Navy.


Given that blood-soaked history, U.S. policy-makers have long assumed that
the federal government should hoard its data-scrambling technology, just
as it hoarded its nuclear weapons technology. This assumption was
unchallenged throughout the Cold War. Consequently, the United States hid
much of its data-scrambling technology, and even hindered the private
sector from researching or selling such technology. The United States
reaped great benefits from this policy. For decades, U.S. encryption
experts were able to unscramble foreign messages detailing missile
strengths, military deployments, diplomatic intentions,
technology-smuggling plans, and other secrets. They used the technology
recently, during the Persian Gulf War of 1991 and the Kosovo conflict in
1999.


But with the end of the Cold War, and the rapid development of computers
and the Internet, critics started to challenge the assumption that the
government should control data-scrambling technology. Although the
government could still defend the coastline and deter missile attacks,
these critics pointed out, it could not protect telephone networks, bank
data, or patient privacy from spies, hackers, or avaricious corporations.
And, they said, even if the government continued to restrict the export of
data-scrambling hardware and software, it couldn't stop their development
overseas, especially after the United States failed to forge an
international technology agreement in the face of industry opposition and
foreign suspicion. In the view of Administration critics, the only answer
that made sense was for U.S. companies and consumers to defend their own
information with the best data-scrambling technology possible, rather than
to rely on a government-managed defense--even if it meant that enemies
would be better able to hide their data from the United States.


That's the argument that the White House formally accepted on Sept. 16.
Regardless of whether it was wise or inevitable, the about-face
represented a watershed event for the industry. But it was only the latest
victory for a still-young sector that flickered to life 30 years ago in a
government-funded computer laboratory.


Why High Tech Wins


There are many reasons for Silicon Valley's policy successes, but four
stand out: the industry's technology, its wealth, its allies, and a
post-Sixties libertarian zeitgeist that has helped it flourish.


Technology. Pitted against the fast-paced development of the Internet,
slow-moving government has often seen its regulations become either
inefficient or irrelevant. For example, any out-of-state Internet business
can circumvent the laws governing the collection of sales taxes, and any
homeowner with a $1,000 computer and modem can duck the bans on interstate
gambling.


Wealth. The industry's money can be seen most clearly on Wall Street,
where many .com companies are valued at more than a billion dollars,
despite their lack of reliable products, faithful customers, or even
profits. This financial success has generated fervent supporters among the
public, the media, and politicians. And not without reason: The industry's
rise has produced millions of new jobs, many thousands of companies and
millionaires, and record stock prices on Wall Street, plus an amazing
array of useful gadgets and entertaining services. Indeed, the White House
credits high tech for one-third of the nation's current economic
boom.


Allies. The industry's allies include mainstream businesses and advocacy
groups on the left and right. The mainstream industries--including banks,
auto manufacturers, and Wall Street--desperately want to use the Internet
for business advantage before their rivals, domestic and foreign, use it
against them. Advocacy groups, such as the left-leaning American Civil
Liberties Union and the right-leaning Progress & Freedom Foundation,
ally periodically with the high-tech industry, largely because they share
a desire either for a culture of unrestricted freedom or for restricted
government.


Zeitgeist. The industry is also aided by public distrust of the federal
government and by the judiciary's intolerance of any laws curbing free
speech, a term that judges since the 1960s have expanded to include many
things, among them the technical details of encryption software. This
post-Sixties libertarian zeitgeist is critical for the industry--it helped
kill off the 1996 Communications Decency Act, whose restrictions on
pornography would have hurt the industry's revenues and increased its
legal liabilities. And when combined with the public's broad support for
high tech, it bolsters the industry's core claim--that in many areas, the
Internet economy can provide more benefits and is more trustworthy than
government.


Many pro-Internet legislators on the left and right echo this perspective.
"I am someone who believes in limited government, reducing taxes,
supporting free enterprise, and individual responsibility," said Rep.
Bob Goodlatte, a Republican from a rural Virginia district, who has led
the efforts in the House to deregulate encryption technology. "All of
those things are major opportunities--and challenges--of the
Internet." And on the other side of the aisle, Rep. James P. Moran,
D-Va., whose district includes many high-tech workers, succinctly sums up
his attitude: "The best program is a good job."


Together, this confluence of technological, business, cultural, and
ideological forces has resulted in one victory after another for the
industry. In 1995, and again in 1998, the industry overcame opposition
from the lawyers' lobby--and the White House--to persuade Congress to
restrict lawsuits against high-tech companies.


In 1997, President Clinton approved a free-market Internet plan midwifed
by Ira C. Magaziner, who had drafted the White House plan to regulate the
nation's health care sector. "It was a Democratic paper saying what a
Republican would have said, [and it] locks the Administration into that
position," said Jerry Berman, the executive director of an
industry-backed free-speech-advocacy group called the Center for Democracy
and Technology. Also in 1997, the industry won a Supreme Court ruling that
struck down a law aimed at restricting Internet pornography.


In 1998, the industry overpowered state opposition and won congressional
approval of legislation barring states from taxing Internet sales for the
next three years while a commission studies the issue. Also in 1998, it
overcame union opposition and won congressional approval of a law easing
the import of high-tech workers.


The high-tech industry's clout can also be seen in what has not happened.
Liberals have not proclaimed a "Decade of Greed," urged heavier
taxation of Internet billionaires, or made a big issue of the wealth gaps
widened by computer technology. Members of Congress have not held
klieg-lighted hearings to expose the fickleness and unreliability of
software products. Strong-on-crime conservative politicians have largely
ignored FBI warnings that criminals are increasingly using data-scrambling
technology. Out in the states, voters and feminists don't seem to care
that state officials refuse to prosecute people who offer raw pornography
via the Internet. And citizens who grumble about unfair taxes don't
protest when state officials levy property taxes on real estate,
factories, and machines but nix proposals to tax the high-tech companies'
increasingly valuable property--software programs, databases, patents, and
trademarks.


What's Ahead


In only a few areas has the industry run into firm opposition from
government; the most notable example is the prosecution of Microsoft Corp.
for possible antitrust violations. But Jeffrey A. Eisenach, the president
of the Progress & Freedom Foundation, a free-market think tank in
Washington, says that the Microsoft case is really the result of a bitter
dispute between coalitions of high-tech companies. These industry battles
are a strategic problem because they may prompt open-ended government
intervention, he said. For example, the expansion of AT&T Corp. into
the cable television business has triggered fierce lobbying from America
Online Inc. and several corporate allies, who fear that AT&T will use
its cable TV links to capture future Internet business. AOL's lobbying
campaign may end up increasing regulation of the communications network,
just as a government victory in the Microsoft trial may lead to federal
oversight of the software industry, Eisenach said.


And if bitter industry competition stains high tech's public image in
high-profile areas, such as data privacy or consumer protection, the
government will probably be even more inclined to boost
regulation.


Privacy is a big concern of executives who worry that Congress will curb
companies' collection, analysis, and resale of consumers' personal
data--from their underwear sizes to credit card receipts. Any such curb
would be a sharp blow to the industry, largely because many of the
Internet's advantages would be reduced if companies could not commingle
data to identify prospective customers, swiftly fill orders, or identify
pending problems. This is a particularly delicate issue because many
advocacy groups--and quite a few sympathetic legislators--want consumers
to have much more privacy than they now have. In this political
environment, a scandalous abuse of consumers' data by a company could
ignite a political firestorm that would overwhelm industry opposition to
strong legislation.


But, industry executives say, these problems are just aspects of the
industry's greatest strategic problem: getting the U.S. government to
accept that one-size-fits-all lawmaking--East Coast code, so to speak--is
less effective for many problems than the West Coast's software code.
"That's the big question: the role of government," said Berman.
For example, he said, the industry's software filters shield children from
Internet porn better than government bans; citizens' use of encryption is
more effective than government curbs; and technological compromises
between rival companies may prevent domination of the communications
networks by one company without government lawmaking.


Although the Magaziner report set the White House on a free-market course,
Congress has yet to accept the market's leading role, said Rhett B.
Dawson, the president of the Washington-based Information Technology
Industry Council. By drafting legislation on privacy, obscenity, and other
matters, Congress is trying to "preserve itself in an age when the
need for some of their paternalistic notions is not there," he
said.


Moreover, industry needs to make Congress understand that domestic
lawmaking can backfire when it's replicated overseas, said Robert
Holleyman, the president of the Business Software Alliance, a trade group
that includes IBM, Microsoft, and other prominent high-tech companies. He
cited the high-tech copyright act that Congress approved in 1998. It is
now serving as a model in many other countries. Holleyman said that if the
United States had approved a bad bill--one that curbed the sale of
copyrighted products via the Internet--that mistake would have been
replicated worldwide, thereby hurting U.S. exports.


European governments pose a sharper strategic problem for the U.S.
industry, which exports roughly 30 percent of its products to Europe.
Industry executives fear that European officials are tweaking trade, tax,
privacy, and other rules to benefit European-based companies, which lag
behind their high-tech counterparts in the United States. Still, European
executives and officials "have accepted our [free-market]
paradigm," but are just not ready to fully implement it, said
Holleyman. "For any observer, that is an amazing development,"
given Europe's history of government intervention, he said.


Similarly, Holleyman said, officials in many Asian countries are
increasingly ready to push back local regulations in exchange for a slice
of the growing high-tech pie--partly out of fear their neighbors will
leave them only the crumbs if they move too slowly. Industry leaders
embrace these free-market themes. "Business people used to think of
their companies on a national basis, but any company that thinks only of a
national market is a dinosaur at this point," Holleyman said.


Industry's vision of a borderless, free-trade world goes beyond the
removal of tariffs and trade barriers. Pretty soon, executives say,
technology will allow consumers to pick and choose the sovereignties they
do business within. For example, a consumer in Detroit could use the
Internet to choose the jurisdiction from which she buys a car or a digital
movie, or to which she transfers her savings and deposits her income. In
that context, national laws governing privacy, taxes, and consumer
protections would become one of several factors influencing a customer's
decision--just as consumers in high-tax New Jersey flood over to New York
City whenever it declares a tax holiday.


The Internet's challenge to national sovereignty is growing, said
Goodlatte. In Congress, "we're just beginning to figure that
out," but there will most likely be a continued, albeit smaller, role
for government in the future, he said.


On this international front, one watershed event may occur soon if
Congress and foreign governments formally back the Internet Corporation
for Assigned Names and Numbers. This industry-backed group is gradually
gaining the final legal authority over some critical Internet issues,
principally the protection of Internet addresses and the resolution of
trademark disputes that come up whenever companies or individuals with
similar names fight one another for control of the matching .com location.
But unlike the many international groups attached to the United Nations or
the World Trade Organization, ICANN is to be controlled not by government
representatives, but by delegates elected by companies and Internet users.
The White House firmly supports ICANN. "It is best to leave the
supervision of the Internet not to the government, but to the people that
know the Internet best," Vice President Al Gore said on May
25.


Of course, there is always the strategic danger of a political and
cultural backlash to globalization and harmonization, especially once an
economic recession strikes, say industry executives. Such political actors
as Pat Buchanan, the Reform Party, and various overseas groups could
provide the seed corn for a backlash, said Berman. But he and industry
officials are reasonably confident, partly because the opposition is at
war with itself and has yet to offer a practical alternative. "The
ideology that we are exporting is market individualism," Berman said.
"There is no collectivist alternative." 


Neil Munro

National Journal