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7 The Impact of Global E-Commerce on Local Values 7.1 INTRODUCTION Given the great potential that the Internet offers for commercial ap- plications, it is hardly a surprise that e-commerce has become a subject of intense interest. There is a growing literature on market opportunities, business strategies, transaction efficiency and security, electronic cur- rency, intellectual property, tax policy, trade policy, and other regulatory issues related to doing business electronically. Indeed, the National Re- search Council has itself produced a number of reports relevant to several aspects of e-commerce. This chapter does not aim to re-cover all this ground. What is of con- cern is the extent to which e-commerce affects the values of a society (and vice versa) a more limited task, but still no small challenge. Indeed, there are at least three ways in which interactions between e-commerce and local or regional values might come about: To the extent that e-commerce encourages new business models, changes the relationship between seller and buyer, and challenges exist- ing regulatory structures, it has the potential to alter certain traditional commercial values. Those values are often locally, regionally, and nation- ally specific, so that the effect of e-commerce on commerce itself can also be local, regional, or national. The continued growth of e-commerce raises the possibility that, either directly or through the institutions developed to regulate (or stimu- late) the commercial uses of the global network, e-commerce may alter 170

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THE IMPACT OF GLOBAL E-COMMERCE ON LOCAL VALUES 171 the structure and/or operation of the Internet. These changes may affect the Internet's noncommercial uses as well. For example, the control of portals, the organization of browsers, the legal protections afforded to operating-system and application software, and even the control over URLs can have significant implications for all users. Indeed, the changes can alter the culture and values that characterized the "network of net- works" during its formative stages. To the extent that commerce itself has a role in defining a local society, the changes brought about by e-commerce may affect some of the other local political and social values discussed in this report. 7.2 COMMERCE AND VALUES Economic activity is often assumed, particularly in neoclassical mod- els, to be largely or entirely driven by individual profit-maximizing be- havior. In this utilitarian view, commerce is essentially a value-free activ- ity. As long as institutions are properly designed to provide efficient markets with adequate property rights, freedom to enter into contracts, and strong protection against monopolies, competition and self-interest will do the rest. The utilitarian assumption is useful for many purposes, but most ob- servers (including economists) recognize that it is an incomplete descrip- tion. The individual and group values and attitudes that are the subject of this report manifest themselves in the rich network of informal social in- stitutions in which a market-oriented economic system is embedded. At the heart of these institutions is what might be called commercial values: personal motivation, the material dimensions of social status, and per- haps most important various aspects of trust. Buyers and sellers know the great value of trust and have developed ways of judging whom to trust. They understand that an untarnished reputation, credit rating, and reliability are essential to commercial success. Although these fundamental values are, on the surface, much the same in most successful market economies, they manifest themselves in different ways in different nation-states. For example, Germany and the United States have very different concepts of contract. When a German firm sells a complex piece of equipment or system to another, the contract is typically no more than a few pages in length. In the United States, the contract for the same transaction might run to hundreds of pages. This difference arises, as a legal matter, out of the distinction between the civil law rules in Germany and the common law rules in the United States. The former tend to be broad and abstract, the latter quite specific as they are derived from case analysis and precedent. However, the very preva- lence of those two different traditions reflects a profound value difference

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72 GLOBAL NETWORKS AND LOCAL VALUES in the two countries. Germans appear more willing to trust the courts to "fill in the gaps" in a contractual relationship. Americans may look to the courts for redress, but expect the entire contractual relationship to be ex- plicitly stated; what's written is what counts, and few would expect (or trust) the courts to go beyond a strict reading of the language of the con- tract. Another difference in the manifestation of values between the two countries lies in how they define intellectual property. In the United States, patents and copyrights are property rights granted by the society. In Ger- many, they are innate or moral rights earned by an individual as a reward and recognition for his or her creation. Moreover, because it views intel- lectual property rights primarily as an effective stimulus to economic ac- tivity, the United States has been more flexible in defining what kinds of creative ideas are worthy of protection and has tended to extend intellec- tual-property protection to more and more activities, such as business processes. German law has been more cautious in allowing such exten- sions, perhaps coupling the deeper respect and greater protection for in- dividual innovation with a narrower definition of what constitutes a cre- ative act. In effect, the German system may place somewhat less emphasis on intellectual-property protection as a stimulus to economic activity and approach the issue primarily as a balance between individual rights and the rights of the public to have access to new ideas. This governmental responsibility and concern for protecting the rights of the public is also evident in German attitudes and law concerning com- petitive practices. Germany places severe constraints on borderline mar- keting practices and exaggerated advertising claims, and competitors are quick to seek judicial relief when it appears that the line has been crossed. The consumer is assumed to be vulnerable and entitled to protection, and there are a host of default and mandatory rules in commercial law to pro- vide that protection. In the United States, there is much less interference with market transactions, per se, and the order of the day is caveat emp- tor. On the other hand, the United States has product-liability laws that are much more severe than in Germany, and liability suits leading to very large jury awards are much more common in the United States. These examples illustrate the values of commerce that relate to com- merce itself. But commerce also provides some of the glue for a society. Its form and dynamics shape a society as much as commerce is shaped by it. Exchanging goods and services is a means by which people connect. The suburban malls and chain restaurants of most U.S. cities build different kinds of community relationships than the pedestrian-oriented, city shops and cafes of most European cities. And businesses are not only commer- cial but also social organizations. The GE employee who carries a lami- nated card enunciating the company's principles and commitments has

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THE IMPACT OF GLOBAL E-COMMERCE ON LOCAL VALUES 173 not merely entered a business relationship but has become part of a defin- ing social system. The German worker who has built a relationship with a specific corporation since his or her apprenticeship days has developed a social structure as well as a stable employment situation. E-commerce enters the picture in two ways. First, network-related commercial values differ, at least in emphasis, from other commercial val- ues. Second, by competing with local commercial systems and wresting market share from them, e-commerce can weaken their embedded values. 7.3 THE IMPACT OF E-COMMERCE ON LOCAL COMMERCIAL VALUES 7.3.1 The Globalization of Markets Because global networks reduce the distance-related transaction costs of certain kinds of business, they may clearly increase the magnitude of international commerce and change the cast of participants. Electronic commerce may be of several kinds. Business-to-consumer traffic encom- passes the range of transactions between firms and end users, from pur- chase of goods to information and financial services. Business-to-business transactions offer opportunities to develop efficient auction-based plat- forms for procurement and supply-chain management systems that are very attractive to large corporations. Business-to-government exchanges make it practical for many new and smaller players to enter the interna- tional market. Commercial opportunities on the Internet both arise from and are lim- ited by the fact that only digitized information moves through the net- work. This makes it a natural medium for activities that depend on the movement or manipulation of information including words, numbers, symbols, and descriptors or digital representations of shape, color, and sound. Databases and the tools for using them, as well as many other kinds of software programs, obviously fit this description, and it is not surprising that a large fraction of Internet trade occurs in these "soft goods." But other kinds of digital content are fast catching up. Financial services are expanding and, as bandwidth increases, so is the flow of real- time audio and video files. Search engines have pioneered new ways of allowing interactive information retrieval. Furthermore, customized ad- vice and support are increasingly being provided through the Internet. Many kinds of tangible goods are also traded on the Internet, though still constituting a relatively small fraction of total activity. The advan- tages of the Net for hard goods come into play in different phases of the value chain: price-setting mechanisms, including auction formats, can be set up; procurement can be carried out electronically; and billing and

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174 GLOBAL NETWORKS AND LOCAL VALUES maintenance services can be executed. These services are becoming more attractive as technical and regulatory issues related to security and ano- nymity are resolved. The globalizing effect of networks on these types of commerce differs markedly. Trade in hard goods is less likely to be globalized than soft goods because the merchandise needs to be physically transported and is subject to the same delays and border controls as non-e-traded goods. Even for soft goods, globalization can be hindered by bandwidth capacity in different parts of the world. In this latter case, however, technical im- provements in physical networks and wireless communications, and po- litical developments that increase the openness of certain societies, will markedly reduce the barriers to global e-commerce. One of those barriers is the difficulty of establishing the level of trust that has always been an important part of commerce generally and that has been built up in particular ways within local regions and nations. Some have argued that the problem is exacerbated when information products are involved because of the lack of "transparency" of informa- tion. That is, it is difficult to judge a priori how well the product will serve the purpose for which it was purchased. In that sense, information goods can be categorized as "experience" or even "credence" goods. Experience goods are those whose quality can be judged only by use i.e., after the purchase has become binding. With credence goods, the purchaser can never really assess the quality of the good.2 Technical approaches to credit validation, seals of approval, and co- operation among national governments can help to develop new ap- proaches to trust building. Producers also spend a great deal on market- ing, providing free information about the good, as well as samples or demonstration versions. Large firms in business-to-business transactions can use initial face-to-face meetings to establish the trust basis for an on- going business relationship. Firms marketing branded goods or services over a long period of time will also have little trouble. But small busi- nesses will not necessarily have these and other mechanisms available for generating trust across large distances and national borders. Intermediar- ies such as eBay, that solicit and publish the ratings of buyers and sellers, will undoubtedly have a greater role. iSee Bradford DeLong and Michael Froomkin, 2000, "Speculative Microeconomics for Tomorrow's Economy," in Brian Kahin and Hal R. Varian, eds., Internet Publishing and Be- yond, Cambridge, MA: MIT Press. 2These concepts have been developed by G.A. Akerlof, 1970, "The Market for 'Lemons.' Quality Uncertainty and the Market Mechanism," Quarterly Journal of Economics 84:488-500. They have been applied to information in M. Kretschmer, G. Klimis, and J.C. Chong, 1999, "Increasing Returns and Social Contagion in Cultural Industries," British Journal of Manage- ment 10:61 ff.

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THE IMPACT OF GLOBAL E-COMMERCE ON LOCAL VALUES 7.3.2 Business on the Internet 175 There is an ongoing debate concerning the extent to which produc- tion and distribution decisions in the information economy differ from those in manufacturing industries.3 But the emerging consensus is that e- commerce leads to fundamentally different "business models." Network Effects The spread of a hardware or software standard is accompanied by an exponential increase in the usefulness of that standard for its users, as more and more elements can be connected to an interactive system. Ac- cording to "Metcalfe's Law," the value of a network increases in approxi- mate proportion to the square of its numbers of users or, to be more precise, the potential value, V, is proportional to n~n-1~.4 While some may disagree about the magnitude of the effect or the precise functional rela- tionship between number of users and value, the benefit of communica- tions technologies depends crucially on the number of those participating in their use. This effect has been observed in many consumer-product markets. Often, it leads to veritable "standards wars," as in the case of the two video recorder standards VHS and Betamax. It also applies in the production sector. In every case, we find a shift away from competitive equilibria, in which there are many suppliers, and toward single-firm equilibria. These monopolists have a strong interest in locking customers into network re- lationships. Concepts like trust, reputation, loyalty, and commitment play a key role in the business strategies of online companies.5 We also find new strategies for price setting, from giving away products to complex schemes of price discrimination.6 Although it can be argued that compe- tition remains intact because of a fierce contest for the maintenance and eventual replacement of such network monopolies the recent evidence 3Among the two leading contributions, Shapiro and Varian take a more conservative view, whereas Kelly foresees sweeping changes for fundamental concepts such as property and scarcity. See Kevin Kelly, 1998, New Rules for the New Economy. 10 Radical Strategies for a Connected World, Harmondsworth: Viking Penguin; and Carl Shapiro and Hal R. Varian, 1998, Information Rules: A Strategic Guide to the Network Economy, Cambridge, MA: Harvard Business School Press. 4For a survey of the literature, see Shapiro and Varian, 1998, p. 184. 5AOL, for instance, has launched a long-term campaign to increase customers' trust in its . . . provlcler services. 6Shapiro and Varian offer the most detailed advice to the aspiring information entrepre- neur, while at the same time demonstrating the economic logic behind the new strategies.

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76 GLOBAL NETWORKS AND LOCAL VALUES from the Microsoft case has shown that there is considerable potential for weakening the competitive process. Production by Copy In traditional markets, firm size is constrained by the ultimately in- creasing marginal cost of material resources. In markets for digital prod- ucts, few material resources are needed for reproduction which essen- tially consists of copying a file of binary digits. Once initial hardware costs are paid, digital copying costs are next to nothing. The largest supplier will have the lowest marginal cost and thus appear to be a "natural mo- nopoly." Obviously, the low cost of copying increases the incentive to com- mand the largest share of a digital good market. It also poses problems for the protection of information products. Though the cost of assembling the original good may be very high, as in the case of new operating-system software or a movie, its digital reproduction involves a simple operation that can be carried out with little technical skill and equipment. In conse- quence, there is an incentive to "trespass."7 Properties of Information Only information can be transformed into the digital signals that travel through global networks. Information makes its impact on users in a very specific manner: it does not change their physical state or modify their physical circumstances. Instead, it affects the users' thoughts, knowledge, or feelings. Users learn something new, or they gain pleasure, or they re- ceive instructions to behave in ways that make them more successful. The receipt of such signals by individuals does not destroy or alter the original message. In consequence, there is no rivalry in consuming an information good. This is the core reason why information is considered a public rather than a private good. In many cases, it is still easy to exclude those who do not pay for the consumption of the good, either through electronic walls, legal sanctions against unauthorized copying, or techni- cal copyright-management systems (see below). Such interventions may meet the goals of an individual producer, but from a social-welfare per- spective, there are inevitable losses in potential utility associated with them. That is the reason why patent and copyright statutes try to strike a tenuous balance between the temporary protection of exclusive property 7For a discussion of problems associated with a lack of excludability, see Bradford DeLong and Michael Froomkin, "Speculative Microeconomics for Tomorrow's Economy," 2000.

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THE IMPACT OF GLOBAL E-COMMERCE ON LOCAL VALUES 177 rights and the subsequent free use of new inventions, be they technical or artistic in nature. The particular nature of information also accounts for its lack of trans- parency.8 The qualities or potential defects of material goods are some- times immediately visible. In the case of information goods, nothing can be gleaned from the appearance of a CD-ROM or a pdf file. Producers react to this situation with a massive increase in the pro- portion of total expenses devoted to marketing. Prospective buyers re- ceive free information about the good, or samples, or even demo versions in order to decrease their perceived risk. This amount of free publicity poses a problem in itself the much-discussed "information overload"- when the entire public is exposed to these messages. On the other hand, the basic lack of transparency of information goods provides incentives to try out various schemes in order to reduce the likelihood of fraud or the delivery of inferior-quality products. 7.4 EFFECTS ON LOCAL COMMERCIAL VALUES To the extent that global networks lead to significant increases in e- commerce, some local business ventures will clearly be subjected to com- petitive pressures, particularly where the transactions involve tangible goods. Of greater concern for purposes of this report, however, is the value competition the degree to which Internet-based business creates ten- sions with local commercial values. Because business conducted through the Internet has such different characteristics from local commerce, it requires a somewhat different set of commercial values. This is as true of e-commerce conducted within a single nation as it is of global e-commerce. In principle, individuals can adapt to operating with two sets of values, one for local commerce and another for e-commerce. But the more that traditional values become a burden or disadvantage in e-commerce, the less likely the separation can be rigidly maintained. Globalization of e-commerce enters the picture in several ways. The degree of tension between Internet-commerce values and more traditional local ones is at least in part a function of the local value system which, of course, differs from nation to nation. In effect, each nation faces a differ- ent challenge in resolving the discrepancies between local and Internet values. Moreover, if e-commerce transactions are global that is, do bridge different nations there must be some harmonization between the accommodations adopted by each of the nations. 2000. See DeLong and Froomkin, "Speculative Microeconomics for Tomorrow's Economy,"

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178 GLOBAL NETWORKS AND LOCAL VALUES Commercial values, as noted earlier, are implicit in the design of the laws and the formal and informal institutions that give meaning and shape (and a regulatory framework) to such concepts as intellectual property, contracts, and competition. It is useful to examine how each of these is affected by e-commerce. 7.4.1 Intellectual Property The recognition of intellectual property provides a means for soci- eties to grant monopoly rights to an individual (or corporate entity) for some specified period of time. As pointed out earlier, these rights are granted to recognize and reward the inventor's creativity as well as to stimulate the creative process for the benefit of society at large. These two goals are balanced differently in each society, as a function of laws, formal and informal institutions, and other practical factors. The legal institutions that have been developed to protect intellectual property include patents, copyrights, and trademarks.9 Patents grant temporary rights to the inventor of a product or process that meets certain criteria of originality, usefulness, and non-obviousness. Copyrights grant temporary rights to the author or owner of a work of human expression. Traditionally, works of art, music, and literature were protected by copy- right. Today, both copyright and, increasingly, patent protection has been extended to software programs and databases. Patents for software in particular have been controversial, and the practice is also not followed in all countries. Trademarks protect a visual symbol or label used as an identifying mark. The growth of digital information and communications technologies has created a number of knotty intellectual-property problems, particu- larly with respect to copyright law.~ A comprehensive discussion of the issues is presented in a separate CSTB report. The comments that follow here are therefore quite brief and intended only as a summary and to touch on some recent developments. Information and communications technologies raise issues in copy- right law for several reasons. The technological capacity to manipulate, organize, and transmit information allows the generation of a large num- 9For completeness, one should include trade secrets in this group, as companies can take legal action against misappropriation of such secrets. But it is a category that is much less dependent on a specific legal structure than the others, and therefore is not treated here. iIn contrast, advances in molecular and cellular biology have had much greater impact on patent law. iiComputer Science and Telecommunications Board, National Research Council. 2000. The Digital Dilemma. Intellectual Property in the Information Age. Washington, D.C.: National Academy Press.

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THE IMPACT OF GLOBAL E-COMMERCE ON LOCAL VALUES 179 her of new information products whose producers need (and, in many cases, deserve) intellectual-property protection. However, these products do not easily fit into one or another of the traditional intellectual-property categories. Copyright is attractive to most producers because protection can be obtained much more quickly and easily than is the case with pat- enting, and this has been of great value to them in a rapidly changing environment. But copyright protects only the expression of an idea, not the idea itself, leaving producers rather vulnerable to misappropriation. For example, copyrighting the lines of code in a software program still leaves the program owner vulnerable; code can be altered to avoid copyright infringement, while the underlying design of the program is exploited. As another example, the organization of a database into a for- mat that is much more usable than the raw (often public) data on which it is based adds value worthy of protection. But again, if the protection comes through copyright, small reformations of the data would allow oth- ers to avoid copyright infringement. The problem is exacerbated in e-business because the same digital technologies that offer so many opportunities to create new information products and market them at very low marginal costs also make it ex- tremely easy for others to copy those products. Indeed, they could make copies in such numbers that it might seriously reduce the size of the origi- nal producer's market. The producer's vulnerability is thus all the greater. There are technical countermeasures, however. Copyright manage- ment systems technologies that enable copyright owners to regulate and automatically charge for access to digital works are now available. They make it considerably easier to control the distribution of informa- tion and to trace who uses it (as well as when and how often), who copies it (legally or illegally), and who redistributes it. Taken together, these factors are exerting pressure to change tradi- tional attitudes toward copyright and traditional strategies for protecting it. Although copyright is a well-established element in intellectual-prop- erty protection, legal institutions have provided for "fair-use exceptions " and "first-sale limitations." In adopting these provisions, society and the law have recognized the practical limitations on monitoring every pos- sible copyright violation and the relatively small damage to the value of intellectual property that limited and sporadic violations represent. In addition, by making the barrier to the public's unfettered use of informa- tion covered by copyright slightly porous, the system has achieved a somewhat better balance between private and public interests. i2See Julie E. Cohen, 1997, "Some Reflections on Copyright Management Systems and Laws Designed to Protect Them," Berkeley Technology Law Journal 12.

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80 GLOBAL NETWORKS AND LOCAL VALUES With the increased vulnerability that producers feel and the new tools available to them, copyright owners have generally become much less willing to tolerate the porosity that has, up until now, indirectly acknowl- edged and accommodated the communal property aspects of informa- tion. For example, source codes for programs are much more closely guarded than in the earlier days of information technology.~3 In addition, although database producers may only own the form of the data they market, they make efforts to restrict the easy availability of the (often) public data on which their information product is based. Major copyright holders, particularly the U.S. film industry, initially invoked provisions of international treaties in order to eliminate private copying, or fair use; these efforts were denounced as "copyright grab."~4 The issue is hardly settled, however, as the recent Napster controversy illustrates.~5 It has become clearer that illicit copying may not be as simple and inexpensive to monitor as originally thought; when such copying involves networks with several million users representing a considerable potential market for property such as music files copyright holders are aggressively seek- ing legal remedies. Thus, whether the solution ultimately lies in law or technical architecture remains to be seen. The suddenness of the changes has led to turbulence both in the dip- lomatic and judicial arenas. The Copyright Treaty adopted within the framework of the World Intellectual Property Organization (WIPO) by the Diplomatic Conference on December 20, 1996, requires contracting parties to provide "adequate legal protection and effective legal remedies against the circumvention of effective technological measures that are used by authors in connection with the exercise of their rights." This has given rise to a strong political reaction by groups committed to protecting i3A significant exception is the rise and continued growth of "open source" (OS) software development. OS development is a process in which many individual programmers collabo- rate to maintain, refine, and upgrade software. The primary example of OS development is LINUX, an operating system that is widely regarded as a highly robust operating platform. See, for example, Steve Weber, 2000, The Political Economy of Open Source Software, BRIE Working Paper 140. i4Pamela Samuelson. 1997. "Confab Clips Copyright Cartel," Wired 5.3, March. i5The Napster controversy concerned a service provided by Napster that the music re- cording industry believed operated in violation of copyright law. Napster did not copy copyrighted files; instead, it provided an index of titles, many of which were copyrighted, and enabled "matchmaking" between a person wanting a particular title and another per- son who already had that title. The latter would provide the former with the requested title, usually without compensation. In February 2001, the U.S. Court of Appeals for the Ninth Circuit upheld an injunction issued in the U.S. District Court for the Northern District of California that effectively shut down Napster. See A&M Records, Inc. v. Napster, Inc., 239 F.3d 1004 (9th Cir. 2001), available at . i6Lawrence Lessig, 2000, "Architecting for Control," preprint, Stanford University.

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THE IMPACT OF GLOBAL E-COMMERCE ON LOCAL VALUES 181 free access to ideas and preventing interference with the "flourishing of cultural life." The arguments have been joined in the discussions and debates sur- rounding the U.S. and EU legislation implementing the WIPO Treaty (the U.S. Congress has enacted the Digital Millennium Copyright Act (DMCA),~7 and the European Union promulgated Directive 2001/29/EC on the harmonization of certain aspects of copyright and related rights in the information society ). But these arguments have made clear that there are some significant differences between the European Union and the United States on some of the values underlying the current conflicts. The Europeans tend to emphasize the "moral rights" of the author. In contrast to pecuniary rights, moral rights are inalienable personal rights allowing an author to claim authorship and to prevent the mutilation or distortion of the work. Moral rights are rooted in natural law principles recognized by a number of European nations in civil law and in the Berne Treaty.~9 Although the United States signed the Berne Treaty in 1989, it has been quite reluctant to grant such sweeping moral rights to authors and artists.20 First (as the Napster case has shown), many in the U.S. public perceive that what is at issue is often the rights of owners rather than of authors or artists. Second, the United States has focused on the public value of information and the damage to research that excessive restric- tions on "fair use" might cause. The conflict is an excellent illustration of the challenge to local values that the new technologies represent. Moral rights are a component of con- tinental European law that, if compromised, would certainly be perceived as the destruction of an important value. Indeed, an artist or writer's moral rights to a voice in all transactions involving a work of art have been in- troduced into the EU code. On the other hand, freedom of information has always been extremely important in the United States, and laws that i7P.L. 105-304, 112 Stat. 2860 (October 28, 1998~. i8See , or Official Journal L 167, 22/06/2001 P. 0010-0019. i9Article 6 bison), Berne Convention for the Protection of Literary and Artistic Works, No. 11850, 828 U.N.T.S. 221 (September 9, 1886) (revised 1908, 1928, 1948, 1967, 1971~. 20As Howard B. Abrams puts it: "The fact of the matter is that the United States was anxious to join the Berne Union; and the Berne Union, and its governing body the World Intellectual Property Organization were quite anxious to have the United States as a mem- ber. Thus both parties have been more than willing to accept the fiction that the United States really has a right of respect, and the fact that the United States does not truly recog- nize moral rights will almost certainly be glossed over." See Howard B. Abrams, 1991, The Law of Copyright, New York, (Looseleaf) Vol. 2, 18.02 [C][2].

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82 GLOBAL NETWORKS AND LOCAL VALUES might compromise it would also be perceived as the destruction of an important value. Still, it now appears that e-commerce is leading to modifications in the underlying values of both the European Union and the United States. Where the final compromises will lead and what steps can be taken to ameliorate the perceived losses, however, are difficult to predict. 7.4.2 Contract and Consumer Protection Successful market economies have always recognized the need to "level the playing field" between seller and buyer, particularly where the buyer is an individual consumer at a great power disadvantage with respect to typi- cal producers and sellers. Governments have seen it as their role to provide this leveling by regulating advertising, contracts, and liability. In an online economy, the fundamental issue is much the same over- coming the power differential between seller and buyer but a number of circumstances make it a somewhat more challenging task. Internet trans- actions will increasingly involve buyers and sellers in different nations with different commercial-law regimes. Of course, international trade is not, in itself, a new concept, and mechanisms for resolving jurisdictional disputes have long been in place. What renders the Internet situation dif- ferent is that many of the buyers (and sometimes the sellers) are relatively unsophisticated, and they are not supported by the kind of legal structure that has allowed large commercial ventures to deal with such issues in the past. Thus it is likely that governments will be pressed to improve the transparency, efficiency, and reach of their mediation processes. More than process is at issue, however. As pointed out earlier in this chapter, there are considerable differences between the European Union and the United States regarding consumer protection and the role of con- tracts. Europeans are more severe in restraining false advertising claims than are Americans. For their part, Americans are more literal in inter- preting (and relying on) the specific wording of contracts to define and limit the obligations of seller and buyer. Yet Americans give consumers much more latitude to seek judicial relief and are more likely to hold pro- ducers financially liable for mishaps involving their products. Thus the resolution of the different contract and consumer-protection approaches is more than a procedural problem. It begins with the need to establish the extent to which the parties have voluntarily consented to the terms of the contract. In the Internet world, with hypertext or icon-linked Web pages, contract terms may not be obviously and explicitly apparent to the buyer. Moreover, certain actions far less conscious than an explicit signature (box or button clicks online, opening a shrink-wrapped soft- ware package offline) may be taken as constituting acceptance of contrac-

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THE IMPACT OF GLOBAL E-COMMERCE ON LOCAL VALUES 183 tual terms. In certain cases, these terms may create continuing obligations related to the use of the product that contravene other laws in one of the constituencies involved. The problem continues with the need to resolve differences in views about the appropriate role of government in enforcing or supplementing contracts to protect consumers, which would appear to make the issue more complicated than merely one of negotiating the proper application of commercial law. Furthermore, which nation's values should apply in determining what is appropriate advertising? Should one take into ac- count that a consumer in a country where advertising has previously been more constrained might be more vulnerable to exaggerated claims? Or, on the other hand, should a seller be expected to alter what amounts to a cultural standard by exhibiting more restraint when operating in the in- ternational setting? And should a seller be considered as "operating in an international setting" even before an actual transaction occurs? Finally, to what extent do competitors have standing to challenge, on the basis of laws (and their underlying values), the practices of sellers who are not in their country? The technology of the Internet also enables a number of practices re- lated to e-commerce that have no obvious equivalent in the non-Internet world. The practice of spamming, the use of cookies, the involuntary opening of other Web pages when one connects to a particular URL ad- dress, are all far more intrusive than sales and advertising practices offline. Therefore, each practice raises new challenges to governments in balanc- ing the rights of sellers and consumers. Although attempts can be made to extend present law to cover these new practices, they appear to be suffi- ciently different from existing situations that a deeper consideration of the underlying conflicting values should first take place. 7.4.3 Competition The Internet changes the competitive environment of commerce. Be- cause the information space is unlimited and the entry cost is low, small entrepreneurs can enter the marketplace easily. And because direct com- munication between customer and entrepreneur is enhanced, transaction costs are lower. For both these reasons, the Internet appears to facilitate greater variation and diversity. Most importantly, as new niches of prom- ising business activity are identified, large numbers of (initially) small business entities may occupy them. 2iSee Margaret J. Radin, 2000, "Humans, Computers and Binding Agreements," Indiana Law Review 75:1125.

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84 GLOBAL NETWORKS AND LOCAL VALUES On the other hand, the Internet especially facilitates enterprises whose success depends on network effects "winner-takes-all" situations for companies with significant market share which further facilitate their growth and market dominance. This effect leaves competition and antitrust policy in a quandary: can market domination continue to be viewed as a threat to competition if gaining a (temporary) monopoly is the central strategic guideline for com- petitors in information-goods markets? The only actions likely to continue to be viewed as violations will be "unacceptable practices" by the tempo- rary-monopoly holder to perpetuate that position. Even then, it may be difficult to agree on what is "unacceptable," given the long tradition of practices like tie-in sales and product bundling. The obvious illustrative case for such violations, U.S. v. Microsoft,22 is, of course, still not quite settled. However, it has already provided both the legal and the economic fields with a wealth of new insights. Among other issues, an important aspect of the case was Microsoft's behavior during the market introduction of its Web browser, Internet Ex- plorer. The techniques it used to push the then-incumbent standard browser, Netscape's Navigator, out of the market led to the claim that Microsoft extended its operating-system monopoly by unfair means. The trial proceedings have developed at length the arguments around "tem- poral natural monopolies," and the case illustrates two major controver- sies: whether, and how much, the use of market power should be limited; and the extent to which antitrust law should be restraining. The network nature of global communication gives rise to another major current issue. Because the networks of competing firms are con- nected into larger nets, interconnection can be successively leveraged in ways that effectively exclude specific competitors. Of course, such mea- sures can be billed (or even deliberately designed) as technical incompat- ibilities.23 Exclusion can also be practiced at the basic hardware level. For example, in the absence of regulation preventing the restriction of access to last-mile telephone lines and cable networks, companies can preserve monopoly positions despite fierce price and service competition.24 22United States Court of Appeals for the District of Columbia Circuit, June 28, 2001, United States of America v. Microsoft Corporation; appeal on District Court of Columbia Circuit, 97 F. Supp. 2nd 59 (D.D.C. 2000) Final Judgment; see also 84 F. Supp. 2nd 9 (D.D.C. 1999)- Findings of Fact and 87 F. Supp. 2nd 30 (D.D.C. 2000) Conclusions of Law. 23There is also an OECD report on various countries' responses to related questions: "Competition Issues in Electronic Commerce," DAFFE7CLP (2000~32, January 2001. 24See Francois Bar et al., 1999, "Defending the Internet Revolution in the Broadband Era: When Doing Nothing Is Doing Harm," Berkeley: BRIE Working Paper N. 0137, August.

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THE IMPACT OF GLOBAL E-COMMERCE ON LOCAL VALUES 185 In the United States, antitrust has in recent years focused on economic policy, and has been aimed at enhancing efficiency. Germany has always shared that goal, but influential politicians believed that antitrust policy should also serve to protect the political process from excessive economic influence and power.25 In the United States, on the other hand, there has been a great reticence to mix economic and political issues, as well as a greater willingness to let the market work. However, there are signs that the two systems may be converging, at least where the Internet is con- cerned. Still, given the track record on recent U.S.-European controver- sies concerning civil-aviation subsidies, airlines' landing-rights policies, and in the major differences between U.S. and European authorities on a proposed GE-Honeywell merger it would be a mistake to assume that the two systems are converging rapidly. 7.5 THE IMPACT OF E-COMMERCE ON GLOBAL NETWORKS The second chapter of this report reviewed the history of the Internet and emphasized how its growth and structure were influenced by the interests and attitudes of its developers and by the "Netizen" culture, which influenced the form of this network of networks and, in turn, was supported and reinforced by that network architecture. This history illus- trates the nature of technology development an interaction between technology's "push" and the "pull" exerted by its users and adapters of a technology, an example of both "soft determinism" and "path depen- dence." But the evolution of a technology does not stop at some arbitrary point. As the user community changes, the "pull" factors change, and the architecture and operating systems continue to evolve. One important current question is the extent to which the explosion of e-commerce will so shift the makeup of the user community, and so influence the structure and operation of global networks, that network values will be substan- tially affected. The commercial opportunities offered by the Internet are largely re- lated to the privatization of digitized information and, to a lesser extent, the means for obtaining and using it. On the other hand, one of the great strengths of the Internet is its ability to support and encourage public uses of information for a range of political, social, cultural, and personal pur- poses obtaining it, using it, sharing it, and being able to accomplish those functions quickly, unthreateningly, and inexpensively. These are not en- Law. 25For a comparative view, see several articles by David Gerber, Chicago-Kent School of

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86 GLOBAL NETWORKS AND LOCAL VALUES tirely conflicting goals (and they together explain, in part, why there are markets for information products). However, it certainly seems prudent to be alert to ways in which e-commerce could drive alterations in archi- tecture, hardware, software, and regulation that could inhibit other Internet activities and their related values. Some of these are outlined in the following paragraphs. One of the more obvious areas of potential conflict concerns privacy, the subject of Chapter 6. Many of the commercial opportunities offered by new technologies are based on obtaining and using more complete infor- mation about consumers their needs, tastes, and patterns. Having such information allows sellers to locate individuals who may want their ser- vices and to customize those services; developing databases that aggre- gate such information helps companies to plan marketing strategies. The motivation to acquire such data stimulates development of the requisite technologies cookies, analysis of purchase records, data mining and matching but their availability increases the potential threat to privacy. It is important to keep in mind that this is not merely a conflict be- tween the interests of information-product producers (or traders) and of individuals whose concern is protecting their own privacy. In fact, the individual may well realize that having the benefit of products and ser- vices customized to his or her needs depends on some other person or corporation gaining access to his or her personal information. For ex- ample, individuals may want the convenience of online booksellers call- ing certain new books to their attention, and they might appreciate the life-saving potential of a hospital's emergency room having easy access to records of their blood type and allergies. Given the recognized usefulness of these new commercial services and their enabling technologies, the response has been not so much to preclude the gathering of information as to regulate its misuse (or its use without an individual's permission). But there are those who argue that in the long run we may actually see a devaluation of privacy per se; that is, there may be an increased willingness to relinquish certain control over one's private data in return for the perceived value of services based on the easy availability of that data. Another area of potential conflict concerns freedom of information. It is, of course, the enormous growth in the availability of information through the Internet that has created many of the market opportunities for new kinds of Net-based intermediaries. The search engines, the de- rived databases, the rapid official-document publication services, and the news-scanning services all help users to sort through the information overload in order to find what they actually want. These products truly enhance the availability of information, and they reinforce one of the most significant values offered by a networked world.

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THE IMPACT OF GLOBAL E-COMMERCE ON LOCAL VALUES 187 But these products can also compromise freedom of information in two ways. First, there is a constant pressure on the system to protect and increase the value of a product that uses an underlying data set or open information source by extending intellectual-property protection to the underlying information, thereby making it less available to the public generally. The protests of many in the scientific community about the WIPO Copyright Treaty and the Digital Millennium Copyright Act stemmed from this kind of concern about restrictions on the availability of scientific data for use in research. Second, there is concern that the commercial availability of derived data products will reduce the incentive for public agencies to make the same data available in convenient alternative forms. For example, if pri- vate entities mine the census data in various ways and sell the resulting products, the raw data may still be available to the public; but the incen- tive for government agencies to develop intermediate products (which might be inferior to the private products but still a lot more useful than the raw data) will be much reduced. And if the full, searchable text of judicial decisions or legislative actions is available from a commercial firm for a fee, these texts may still be available to the public in hard copy, but there will be less incentive for the government to provide this information online or as quickly. Another area of potential conflict arises from the development of tech- nologies to monitor the distribution and use of commercial information products. The purpose of these technologies is to trace who accesses such products, how often they do so, and what they do with them for purposes of billing (and subsequent marketing). These technologies can also limit access to paying subscribers, and filter information to serve clients or to conform to the requirements of law. But technologies developed for one use are, of course, available for other uses. Filters used to block offensive material from reaching a user's computer can be used by governments to filter political information. Systems for monitoring how and when people access commercial data can be deployed by governments to keep track of whom citizens communicate with and what information they receive. Clearly, there are a number of countries in which these kinds of uses of the technology are common today. Many argue that, even though tech- nically feasible, it is unlikely that such practices will be politically sustain- able over an extended period of time. Nevertheless, it is clear that the continuing development of these and similar technologies has the poten- tial to create a network architecture whose inherent properties no longer promote the freedom and anonymity of the early days of the Internet. A final example relates to the practicalities of accessing and transmit- ting information. One of the most important characteristics of the Internet is the sheer volume of information that it permits users to access or com-

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88 GLOBAL NETWORKS AND LOCAL VALUES municate. The continual improvement in chip performance and band- width leads to ever-expanding capacity that, unlike the electromagnetic spectrum, is almost without limit. In principle, this should all but elimi- nate competition for a share of the communication space, a major issue in broadcasting and telecommunication. But in practice, the average user depends on intermediaries such as search engines to sort through the information overload of the Internet. At the very least, both users and providers need search engines to help them find each other. A smaller but still significant number of users rely on host providers. These intermediaries are commercial entities, and one rational business strategy for them is to offer information providers greater prominence in the information universe a first-page location in the list of "hits" for certain key words, for example, or more direct and convenient linkages from user to favored provider for a price. In effect, market forces can tilt the playing field for information. Whether or not this occurs on a grand scale will depend on whether the market rewards intermediaries more for the quality and breadth of their service to infor- mation users than for their service to information producers. 7.6 THE IMPACT OF E-COMMERCE ON LOCAL, SOCIAL, AND POLITICAL VALUES The impact of e-commerce on values is generally not separable from its impact on local values. Privacy, freedom of information, and the right of free speech, as discussed in earlier chapters of this report, are local values, though their precise interpretation may differ from one locality to another. Therefore many of the issues raised in this chapter can be inter- preted as potential impacts on local values. Over and above those issues, however, is what may be labeled the decoupling of commerce and community, which the expansion of e-com- merce may well provoke. Commerce, particularly local commerce, is a social activity that promotes community connections, reinforces commu- nity values, establishes community identity, and supports community development. Some kinds of market activity, of course, must always be local for example, the provision of food, housing, and much of health care. However, competition between local commerce and global e-com- merce is not only possible but already evidenced in a number of business arenas. Online booksellers such as amazon.com compete with local book- stores, for example, and mail-order retailing, once primarily a phenom- enon of rural areas, is now equally commonplace in large cities. As noted earlier, such activities are likely to remain a small part of the total value of e-commerce, but their local effects may be significant nonetheless. Because the United States has already seen the replacement of many

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THE IMPACT OF GLOBAL E-COMMERCE ON LOCAL VALUES 189 kinds of local businesses by large chains, the social change prompted by retail activity on the Internet may be less obvious than in Europe. On the other hand, the receptivity to online retailing in the United States may be greater than in Europe precisely because it is the continuation of a pattern that has already been accepted. Depending on how the tax consequences of e-commerce ultimately play out, there may be additional, and significant, impact on local politi- cal and social life. It is not our intention in this report to offer a compre- hensive analysis of Internet taxation. However, it should be noted that in the United States, with its many local tax authorities and its heavy depen- dence on sales tax to run local government, a significant shift from local to Internet commerce would have serious ramifications. On the face of it, this would put local businesses (which are taxed) at a competitive disad- vantage, and it would certainly reduce the funds available for local social services. One interesting possibility is that the United States may respond to these pressures by moving toward a European-style value-added tax. It would be a mistake to think that e-commerce inevitably leads to a weakening of local social and political structures. Many of the Internet's service functions, which comprise a far larger fraction of e-commerce ac- tivity than does brick-and-mortar retailing, may serve to stabilize com- munities by reducing the tight coupling of job and residence location. In the United States, for example, small rural communities whose ex- istences were threatened by the failure of family farms have been able to remain intact by creating employment in information-network services- e.g., airline-reservation centers and credit-card processing centers. In ad- dition, telecommuting has been growing in the United States, allowing families more choices with respect to child-rearing arrangements. Indeed, the virtual mobility of labor permitted by global networks can have sig- nificant effects on policies, institutions, and social patterns regional so- cial infrastructure (e.g., housing, health care, and transportation), immi- gration law, dress standards, eating habits, and others. In all these examples, locality is important because it determines whether the value set will be receptive or resistant to the opportunities of e-commerce. The attractiveness of telecommuting is likely to be relatively high in the United States, where commuting distances are getting longer and longer and the dearth of efficient, inexpensive public transportation is a growing problem. As noted above, the issue of Internet taxation may be much less important in Europe than in the United States. On the other hand, the threat to the local nature of commerce may be more serious in the European setting. What remains an interesting question is whether these various patterns of acceptance or tension will lead to changes in local values or to a pattern of e-commerce development that differs no- ticeably from the penetration pattern of global networks themselves.