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Document 25 of 27.

February 13, 1999

SECTION: TECHNOLOGY; Pg. 404; Vol. 31, No. 7

LENGTH: 4315 words

HEADLINE: Who Will Rule the Net?

BYLINE: Neil Munro

HIGHLIGHT:

As Internet commerce expands, the high-tech industry is working
to prevent individual nations from regulating the lucrative
electronic marketplace.

BODY:

Quietly, without any publicity or controversy, the U.S.
government took an unprecedented step last October. It invited 12
industry executives to join the 50-member delegation negotiating
a pan-American free-trade agreement. The invited companies and
trade associations, including the Motion Picture Association of
America, America Online Inc., and the Software Publishers
Association, were brought aboard because they
are creating the worldwide electronic-commerce marketplace, and
the U.S. government is happy to let them reshape trade agreements
to foster high-tech trade.

''Initially, there was some pushback (from other
countries), but I think that will quickly dissipate. . . . We are
the ones building this medium,'' said Bill Burrington, vice
president of global public policy for America Online, the
Internet access firm based in Dulles, Va.

The inclusion of the industry representatives was but one
move in the worldwide jockeying to establish the legal
foundations for the Internet economy. The stakes are very high.
At issue are such questions as whether national governments will
have the power to regulate Internet commerce as they see fit, and
which nations and companies will get to reap the most benefits
from the fast-growing electronic-commerce market, forecast to
climb to $ 3.2 trillion in 2003.

Backed by the U.S. government, the well-funded U.S.
industry has organized itself around a common goal: keeping
national governments out of Internet regulation. In contrast,
many of the other players with interests in the outcome--such as
consumer groups, privacy advocates, unions, nationalists, and
social conservatives--are scrounging for cash and arguing over
problems and solutions.

Meanwhile, most governments are torn between their desire
for what the industry offers--a chance for their countries to win
big in the Information Age--and their traditional role as
arbiters of societal conflicts. Indeed, industry executives say
that governments can have a great impact on the future Internet
economy, for good or ill, despite the uncontrolled rush of new
technology. ''Over the next five years, I believe the future of
this medium will be determined more by policy choices than by
technological choices,'' Stephen M. Case, chief executive officer
for America Online, declared last October.

The pot of gold is electronic commerce--the worldwide
sale of goods and services via the Internet. In 1997, Internet
sales reached $ 9 billion; in 1998, they tripled to about $ 30
billion. By 2003, Internet commerce will reach $ 3.2 trillion as
companies sell movies, autos, books, software, banking services,
insurance services, and medical expertise online, according to
Forrester Research Inc., an economic forecasting company based in
Cambridge, Mass.

Colossal fortunes are being made. The founder of Internet
bookseller amazon.com Inc. now has a paper fortune of roughly $ 4
billion, based on fourth-quarter 1998 revenues of just $ 250
million. More broadly, a significant portion of the U.S.
citizenry has profited from the staggering growth in Wall Street
stocks. And high-tech firms are providing about seven million
well-paying jobs, pushing millions of people into the upper
middle class. The White House estimates that the technology
sector upped the national growth rate by 40 percent between 1995
and 1997.

To expand Internet commerce worldwide, corporations and
entrepreneurs get their capital from Wall Street and their
technology from Silicon Valley and Northern Virginia. But they
also need governments' help to overcome the tangle of national
and local regulations that govern telecommunications and
commerce. Without help from governments, according to Forrester,
overseas electronic commerce will reach only $ 400 billion in
2003. With help, overseas e-commerce could more than quadruple--
to $ 1.8 trillion, somewhat more than the $ 1.4 trillion predicted
for U.S. Internet commerce in 2003.

International electronic commerce is very different from
over-the-counter retail. Once an Internet store is installed on a
powerful computer--dubbed an Internet server--customers can
arrive from all over the world, bringing with them not only money
but also a plethora of national, regional, and local laws.

European governments levy a value-added tax on
transactions and enforce a patchwork of consumer-protection laws.
Denmark curbs advertising to children. The United Kingdom
enforces tough libel laws. Canada enforces a strong ''hate-
speech'' law. The Chinese government tries to keep out political
and business material that might undermine its rulers. Japan and
France try to restrict the import of foreign movies. And even in
the United States, land of the First Amendment, the government
enforces tough disclosure and antifraud laws in its medical and
stock markets.

Industry officials say that the laws, even when crafted
by democratic governments, are impediments to Internet commerce
and should be leveled and largely replaced by contracts between
buyer and seller. ''It is nearly, if not actually, impossible for
me to comply with the laws of 180 countries, because the laws may
be contradictory,'' said Joseph H. Alhadeff, vice president for
electronic commerce and general counsel at the United States
Council for International Business, based in New York City.

Of course, computer technology might supply an answer to
this problem. After all, companies proudly cite their computers'
ability to track shifting exchange rates, delivery schedules of
packages, and the identities, addresses, and purchasing
preferences of millions of their customers. Perhaps the rapidly
improving computers could also offer Internet stores tailored for
each nation's laws. Already, at least two U.S. companies offer a
service in which they automatically inform U.S. businesses of
changes in the 50 states' tax laws.

But industry prefers a political solution. Witness last
year's passage in Congress of the Internet Tax Freedom Act, which
bars states from collecting taxes on sales by out-of-state
Internet merchants to in-state residents. The new law, enacted
over the bitter objections of governors and mayors, gives out-of-
state Internet merchants a price advantage of several percentage
points over Main Street firms, whose sales are taxed.

Meanwhile, high-tech companies are successfully lobbying
state officials to redraft their multistate Uniform Commercial
Code to reduce Internet merchants' risks and obligations--
correspondingly increasing consumers' risks and obligations--when
selling items that consumers can download via the Internet, such
as software, videos, and research data.

Given these and other lobbying successes, ''we have the
confidence and the track record of being able to do almost
anything,'' said John T. Chambers, chief executive officer of San
Jose, Calif.-based Cisco Systems Inc., a leading Internet
company.

From Brussels to Singapore

The global debate over electronic commerce isn't confined to a
few international organizations or trade negotiations. It's also
taking place in Washington, D.C., and other capitals around the
world, at the European Union's headquarters in Brussels, Belgium,
at the Organization for Economic Cooperation and Development in
Paris, the World Trade Organization in Geneva, the Asia-Pacific
Economic Cooperation group in Singapore, and the United Nations
in New York. Then there are relatively obscure technical-
standards bodies known by such acronyms as ICAAN, IETF, ANSI, and
ETSI. These groups meet periodically in Berlin, Singapore, and
other cities to draft legal and technical standards for the
Internet, a process that gives economic advantages to some
companies, while hurting others.

Keeping pace is next to impossible--at least for small
organizations and companies. Burrington, for instance, estimates
that he's logged 380,000 air miles for America Online over the
past two years.

Industry has several crucial advantages over governments
and outside advocates. First, high-tech firms have a common
agenda. Second, the bigger ones are recruiting allies among
foreign companies able to influence their national governments.
''If we try to do it by ourselves, they'll all bring up the old
Ugly American appellation again,'' said Richard M. Hammer,
international tax counsel at the U.S. Council for International
Business.

Most important, though, is the ability of industry to
hold out the promise of jobs, plus investment and stock-market
fortunes, for governments that accept its vision. ''Those who are
missing this will be losers,'' said Masanobu Katoh, who heads the
Washington office of Fujitsu Ltd., a Japanese electronics company
with revenues of $ 40 billion.

To press their case, industry leaders have organized
numerous groups and trade associations. For example, a group
called the Global Business Dialogue, an alliance of prestigious
industry leaders, held its first formal meeting in mid-January in
New York. Attendees included Gerald M. Levin, chief executive
officer of Time Warner Inc.; America Online's Case; Thomas
Middelhoff, chairman of the Bertelsmann A.G. publishing empire;
and Louis V. Gerstner Jr., chairman of IBM Corp.; as well as top
executives from France Telecom, Fujitsu, and Toshiba Corp.

The next step, said America Online's Burrington, is for
the Global Business Dialogue to recruit more foreign companies
and hold seminars and conferences to promote their priorities,
such as opposing the taxation of Internet commerce and persuading
governments to let industry solve data-privacy problems.

The Global Business Dialogue operates alongside a number
of other industry lobbying groups--such as the Washington-based
Electronic Commerce Forum, the Internet Law & Policy Forum, the
Global Information Infrastructure Commission, the Global Internet
Project, the World Information Technology and Services Alliance,
and the International Information Industry Congress--most of
which are run by company executives and have Web sites as their
main addresses.

These groups play different roles but usually complement
one another. For example, the policy forum consists of corporate
lawyers who draft legal papers that support industry's goals,
while the World Information Technology and Services Alliance
comprises several coalitions of trade associations. Industry's
clout was on display at the most recent meeting of the
Organization for Economic Cooperation and Development on
electronic commerce, held in Ottawa and attended by roughly 700
government officials, 200 industry lobbyists, and 50 outside
advocates. ''The industry people were 10 deep, and the consumer
groups were nowhere to be found,'' said Marc Rotenberg, director
of the Washington-based Electronic Privacy Information Center, a
nonprofit advocacy group.

Jim Murray, director of a Paris-based consumer group that
goes by the acronym BEUC, said that OECD officials ''see business
as providing the answer'' and relegate consumer advocates to side
meetings.

In Ottawa, industry's agenda was laid out in a 70-page
paper signed by the Alliance for Global Business, a mega-group
that includes the Business and Industry Advisory Committee to the
OECD as well as more than 200 national and international
associations and coalitions. The signatories came from more than
50 countries and from many sectors, including retail, leather
tanning, computer services, movies, manufacturing, freight, and
advertising. Their pitch: ''Business solutions such as self-
regulation and technology tools are the preferred and far more
effective means'' of regulating Internet commerce than government
laws and rules.

Industry executives say their pitch is not a power grab
but a reflection of the power of the global marketplace, where
everyone's dollar is equal. In that marketplace, said Walter B.
Wriston, a former chairman of New York's Citibank Corp., neither
governments nor corporations can control their own destinies;
they can only compete for the loyalty and spending of world
citizens. And governments will most likely lose, he said. Even if
citizens collectively vote for national marketplace regulations,
they will individually move their spending and pension funds--
worth en masse trillions of dollars--toward nations that spur
growth by deregulating. This exodus of their capital will hurt
their own economy and undercut public support for the regulations
they want, he said.

But industry does not always lobby for government to back
off. The U.S. and European software and movie industries strongly
supported the 1997 World Intellectual Property Organization
treaty, which requires all governments to crack down on piracy of
software and movies, even though it was a one-size-fits-all
regulation, in which ''the U.S. Army and Marines will bomb the
crap out of you if you don't follow the terms,'' jokes consumer
advocate James P. Love. The Business Software Alliance estimated
that in 1996, piracy cost U.S. businesses roughly $ 6.5 billion.

Thus far, industry's international campaign has been
extraordinarily successful, in no small measure because U.S.
companies have been aided by the White House. The U.S. government
helped create the World Intellectual Property Organization,
persuaded 43 governments in 1996 to eliminate tariffs on
computers and software by 2002, and convinced numerous
governments to deregulate their telecommunications sector.
Pressure from the U.S. government also helped to prod the
Japanese government and the European Commission, the executive
arm of the European Union, to declare that they will minimize
national regulation of their portions of the Internet economy.

Noses Against the Pane

Often aligned against industry are an eclectic group of
organizations, including consumer groups, privacy advocates,
economic protectionists, socialists, cultural nationalists, and
the European labor unions, which fear economic turbulence and
loss of jobs.

These groups have some clout, despite their great
disparities in ideology and interests. Fearing a flight of pre-
Internet jobs to low-wage countries, they derailed the fast-track
trade law in the U.S. Congress. In Europe, they helped narrow a
European Commission proposal to limit government regulation of
Internet transactions (See box, p. 408.) and torpedoed the
Multilateral Agreement on Investment, an industry-backed treaty
designed to remove government controls on the movement of
capital. Industry ''certainly believes we have some power, even
if only the power to spoil,'' said Murray.

But these groups, sometimes called Non-Governmental
Organizations (NGOs), don't pay much attention to the electronic-
commerce debates because they also deal with workplace safety,
pensions, wealth gaps, pollution, and many other issues. For
example, the U.S. unions that represent state and local
government workers played only a minor role in the debate over
the Internet Tax Freedom Act, which bars states from collecting
taxes from Internet sales. Now in force, the law threatens to
undercut state tax revenues and, eventually, the union workers'
wages and jobs. Unions ''are 10 years behind the learning curve
on this, or don't have time to be everywhere,'' said Kim Moody,
director of Labor Notes, a union advocacy organization based in
Detroit.

There is some spotty coordination among the groups. The
Global Internet Liberty Campaign, for instance, links free-speech
advocates around the world. But as more NGOs feel the impact of
electronic commerce, said an industry official, ''the light bulb
could go on, and these groups could make common cause.''

The groups often split on issues, and sometimes align
themselves with industry. For example, the Washington-based union
for telephone-industry workers--the Communications Workers of
America--is eager to see Internet commerce expand rapidly and
provide jobs for its members. Often, NGOs promoting free speech
become valuable media-friendly allies for industry in campaigns
against government curbs on encryption and Internet pornography.

Another problem is lack of resources. The NGOs say they
don't have the money and manpower to attend the various national
and international conferences where standards, procedures, and
agreements are hammered out. This imbalance of resources is seen
even within the United States, where industry representatives
outnumber NGO advocates roughly 10-to-1 at discussions on the new
Uniform Commercial Code, said Gail Hillebrand, an advocate for
Consumers Union. ''Us little groups do a good job,'' said
Rotenberg. ''But (we can't) compare our size and resources with
very sophisticated organizations that can produce color booklets,
meet with undersecretaries, and travel over the world at the drop
of a hat.''

While industry and outside groups spar, national
governments are struggling to keep pace with the changes wrought
by technology. They want to realize the kind of go-go economy
enjoyed in the United States, but they also want to maintain
their laws and protect their workers from a feared tsunami of
U.S. Internet sales. ''Electronic commerce is inevitable, and it
is not something that I can slow or accelerate greatly,'' said
John Manley, Canada's industry minister. ''I don't know (what its
impact will be), but I want to do the best for my citizens.''

Many governments are trying to jump-start local high-tech
investment--sometimes painfully--by deregulating government-
backed communications and banking cartels, eliminating tariffs
and other trade barriers, and reforming moribund education
systems.

The European strategy combines deregulation and
competition with modest regulation, such as laws protecting
consumers' data privacy and harmonizing the technology used to
electronically sign Internet contracts. ''We believe that by
implementing some sensible proposals, we will be able to get a
competitive advantage over the United States,'' said Gerard De
Graaf, who represents the European Commission in Washington D.C.
''We want to become the heartland of electronic commerce.''

Under the terms of the Europeans' new privacy directive,
which was put in force last October, all companies operating in
Europe--including U.S. companies--must prevent misuse of
Europeans' personal data, including their names, addresses,
health records, and credit card records. For example, a U.S.
credit card company is not allowed to sell data about the
spending preferences of European consumers to marketing firms.
The directive bars U.S. or European companies from exporting the
data to countries that don't have similarly protective laws--
meaning the United States. That provides European data-processing
firms with a useful economic advantage.

All of this gives heartburn to many U.S. firms and
associations, such as the New York City-based Direct Marketing
Association, that use U.S. facilities to process European payroll
and medical data or to direct data-intensive European advertising
campaigns. U.S. companies argue that the law will be expensive
for them to implement, increases liability risks, and sets a bad
example for Japan and other countries around the world. As an
alternative, U.S. companies say they can be trusted to adopt
privacy principles and regulate themselves under distant
oversight by government agencies.

In this tussle for advantage, European officials are
suspicious of the U.S. deregulatory fervor. ''It's a mantra, a
dogma,'' said De Graaf. The United States' deregulatory stance in
such areas as privacy or consumer protection, they say, is
intended to cement its dominant position. After all, if European
consumers don't have consumer-protection regulations to defend
them in disputes with Internet sellers, they will likely deal
with the largest brand-name firms--most of which are U.S. firms,
said a Paris-based official. If so, ''the whole thing will be
dominated by huge American multinationals,'' said Murray.

A Powerful Ally

In the international privacy debate, as in many other electronic-
commerce debates, U.S. industry expects the U.S. government to
act as a powerful ally. This expectation is understandable: the
White House, Congress, the courts, and such regulatory bodies as
the Federal Communications Commission all tend to see electronic
commerce as lucrative for companies and citizens. ''All of these
things redound to our benefit,'' said David L. Aaron,
undersecretary of commerce for international trade.

So far, the U.S. government has spurred electronic
commerce by rejecting regulations, except in a few areas,
including encryption, privacy, and Internet pornography. ''There
are many issues (raised by electronic commerce) which, in a
political world, raise emotions and debate--privacy, pornography,
domestic content requirements, fraud,'' said Rep. Thomas J.
Bliley Jr., R-Va., chairman of the Commerce Committee and a
social conservative. ''But we cannot let our desire to do
something about these problems in our economies or our societies
(result in) killing the goose that is laying the golden eggs.''
Aaron, likewise, is confident that most social and economic
problems can be solved by the marketplace. ''If business makes
wrong choices, the market will correct them,'' Aaron said.

Overall, the role of government is changing dramatically,
argue Aaron and industry officials. At forums such as the Trans-
Atlantic Business Dialogue and the Global Business Dialogue,
''businesses get together, identify the problems, identify the
solutions, and then governments go back and internalize these
solutions within their domestic regulations,'' after democratic
deliberation, said Aaron. ''The market is, in effect, telling
governments on an international level how to impact these
issues.''

Not surprisingly, such a dynamic leaves outside groups
feeling left out. The discussion ''is biased, because the fact of
the matter is that industry has more resources,'' argues Wolfgang
H. Reinicke, a former scholar at the Brookings Institution, a
Washington think tank, and now a senior economist at the World
Bank's Washington headquarters.

Reinicke argues that governments should seek more advice
from NGOs because they need their help to keep pace with the
rapidly changing industry and marketplace. If governments can't
keep pace, Reinicke predicted, the result will be an out-of-
control marketplace and an international crack-up akin to the
flight of electronic capital from South Asia that occurred last
year, thus precipitating a regional economic depression. One
defense against inevitable but unpredictable crises is for
governments to combine deregulation with greater oversight by
governments and NGOs, he said.

For example, industry could be forced to work alongside
NGOs and government officials to openly draft enforceable but
flexible global rules that would curb such abuses as the misuse
of personal data collected by Internet merchants, the growth of
wage gaps, and concentrations of economic power. Such
international rule making is already used to prevent the
disruptive flight of investment capital or the destruction of
local environments when hydroelectric dams are built, he said.

This view is gathering strength. In late January, U.N.
Secretary General Kofi Annan urged industry to voluntarily curb
capital flows and child labor and to work with unions. ''Unless
these values are really seen to be taking hold, I fear we may
find it increasingly difficult to make a persuasive case for the
open global market.'' The White House is supporting the creation
of--but is not funding--small panels of labor, environmental, and
consumer advocates to monitor electronic-commerce issues, said
Aaron, adding, ''we have keenly felt the lack of that kind of
institution.''

NGO advocates doubt the White House's willingness to
actually carry out its regulating threats, and are skeptical of
Aaron, citing the lack of any nonindustry groups on the free-
trade negotiating team. Also, the U.S. government, the World
Trade Organization, and the OECD have no plans to provide aid to
the NGOs as they try to take part in the debates. In contrast,
the European Commission is providing some funds for a Trans-
Atlantic Consumer Dialogue, and often listens to NGOs, say NGO
advocates.

For its part, industry says it welcomes partnership with
government but doesn't want the NGOs playing a significant role.
''They're just destructive,'' said Hammer. ''They make everything
a crusade.'' But industry can't monopolize the policy
marketplace.

''The NGO community is in the process of waking up and
saying, 'We have a world government,' '' said Love, who runs the
Washington-based Consumer Project on Technology, '' 'so we ought
to show up.' '' Even so, when they do get there, they'll most
likely find industry lobbyists occupying all the good seats.

LOAD-DATE: February 15, 1999

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