Openness and Innovation
On the business side, no one knows how the rule-making process and the jurisdictional claims of parties will affect this traditional openness and the development of commerce. The question of intellectual property protection has come to the forefront without resolution. Rules about copying are going to shape how businesses evolve. The technological capabilities here are both sword and shield.
He closed by reiterating several major points about innovation and openness. He suggested that innovation on the Internet depends both on the openness of the Internet and on the ability to exchange information freely. Openness itself can be seen in the kinds of devices, the modes of transport underlying the Internet, the freedom to connect to anybody else, and the ability to explore any content. Threats to openness constitute potential threats to innovation: You cannot communicate with certain parties, you do not have jurisdiction here, and you cannot enter these walled gardens of content.
“I think what we are striving to do in the government,” Mr. Maxwell concluded, “is to find ways to work together with the private sector, non-governmental organizations, consumers, and businesses. If we work together, we may find interoperative situations that allow and encourage this kind of growth instead of stifling it.”
INVESTMENTS IN INFORMATION TECHNOLOGY APPLICATIONS
Dr. Bresnahan returned to the theme discussed by Dr. Brynjolfsson—value creation using information technology. He began with business information systems, which “are among the most valuable human artifacts,” but “we don’t measure their value very well.” We know a great deal about business systems within companies or at their boundaries, which include such systems as accounts payable, accounts receivable, and automated teller machines, the ancestors of e-business. He said that we do not know a great deal about how they create value and about how much they cost, although that might now be changing.
As business information systems take advantage of the Internet they cut across the boundaries of countries, businesses, and individual households in radically different ways. One business information system that has changed is human resource management. He told of returning to Stanford after a year away and finding himself able to re-establish his benefits package from home, by himself. Working on the Internet, he could select among participating health insurance companies and then select the desired features of that company. One of the ways business information systems create value is by offering new kinds of service opportunities for employees and, more typically, for customers.
The Dark Area
The value of these opportunities, however, is difficult to measure. We have had more success at measuring how much business information systems cost. In the United States, general-purpose software represents about 10 percent of the cost of business information systems to the corporate sector. For custom software the cost of invention is about 20 percent. The remaining 70 percent is the “dark area” that Dr. Brynjolfsson mentioned earlier. He said that this unknown portion could be measured in various ways—by its value to successful companies, perhaps, or by examining the demand curve for large changes in hardware and software. He said that it ranged in size from 5 to 10 times the other expenditures in business systems cost.
A new information system might be installed, for example, to permit customers to check their bank balances at home. In addition to the hardware, however, people would be needed to answer the phone and enter information into a computer. Jobs and management tasks would have to be changed through extensive planning, retraining, and testing. These functions would take up roughly 70 percent of the invention costs of the system.
A major concern is to reduce the impact of bottlenecks that may jeopardize the business operation. Dr. Raduchel suggested earlier that 90 to 95 percent of the costs of a major re-engineering project were spent on training, testing, data conversion, and other expenses outside the categories of hardware and software. The business invention more than the technical invention is typically the bottleneck for creating new value. These processes are difficult to measure in cost or time, partly because they do not appear in the accounts of the inventing firm. Dr. Brynjolfsson estimated that a firm might need 5 to 10 years after initial adoption of the new technology to create value. This general rule applies to all upgrades in technology. It applied to new technical capability that came with the invention of the platform mainframe computer in 1964 as much as it applies to the capabilities that came with commercialization of the Internet in 1995.
Why It is Difficult and Expensive to Change Business Systems
The first reason it is expensive to change business systems is that it is conceptually more difficult. Typically it is more difficult to understand how to change people’s jobs, how organizations work, and to understand what customers might like than to understand hardware and systems software. The latter is cumulative and can be understood by young people in a deep way as they gain scientific or engineering knowledge. The business side of business information system invention draws on things we do not understand in an organized way—the psychology,
invention, and organization of work and the creation of value for the end user. What does a customer want from a bank? No one knows.
The second reason business systems are expensive to change is that they do not lend themselves to economies of scale. These economies are very effective for hardware, software, network, and platform technologies, with enormous reuse across thousands of firms or millions of end users. Business information systems, however, need fitting and adapting to the idiosyncrasies of individual companies.
The Effect on Markets and Supply Chains
In the future, markets and supply chains, rather than individual companies, will be automated. He said that he would be very pleasantly surprised if the economies of scale in the future equal those of the past. The markets will be different, not just in what is being bought and sold but also in the informational connection between buyers and sellers. Issues of reputations, belief, and trust will be paramount. He mentioned the fraud detection systems that the credit card industry has had to implement, such as those that track three gasoline purchases in the same day and other peculiar transaction patterns. Markets require time to build up such information-processing devices, and he predicted that such business inventions would create bottlenecks in the future. In addition, no one knows with precision the economic value of these systems, or what business information systems that cut across the boundaries of organizations can do.
One encouraging sign is that markets are flexible enough to experiment with different models. He cited the recent shift in the view that market automation would be done by a new form of organization: the dot-com company. That view was discouraged earlier this year but not because markets are not going to be automated. Instead, there was a broad shift toward the opinion that product and service firms, not new dot-coms, are going to perform that automation. He said that kind of experimentation—trying one model of organization, abandoning it cheaply, and going on another one—is in the end healthy for the markets.
Automating White-Collar Sales Functions
Dr. Bresnahan said, “There will be a lot of value here, depending on how you count it.” Between a quarter and a third of employment in the United States is held by people in white-collar bureaucracies who participate in buying or selling. This fraction includes not just sales people but many jobs that expedite, track, and fulfill transactions of all kinds. Much of this work is not creative or rewarding, and most of it can be automated, given the right systems. The present system is inherently wasteful and represents considerable money that is available for extending the business information systems across the boundaries of firms.
The Importance of the Browser
Referring to the earlier discussion of a possible point of inflection in 1995, he asked what had changed in the last five years. If there was indeed an increase in the pace of technical progress in hardware, could that have caused the upturn in productivity on the Internet? He thought this extraordinarily unlikely. There is too great a natural lag time between the application of new technology and realization of new value.
There were, however, important technical changes for business systems in 1995, notably the application of the Web browser. This permits the development of new applications. In particular, it solves what he and Dr. Greenstein have called the best of both worlds problem. That is, a browser permits the design of applications that are as easy to use as a personal computer but have the power of large systems. It allowed for the creation of a new class of applications for which the end user does not have to be technically trained. The application can be used only occasionally, and it can be distributed more broadly.
A second important development has been standard-space networking, which changes the environment for the development of business information systems. This is complementary to further advances in hardware, involving improved architectures and the openness and ubiquity that accompany cheaper hardware and permit the creation of more applications. A third change is a large increase in the volume of transactions and devices.
Policy Must Be Pro-Innovation
Turning to policy, he suggested strongly that infrastructure policy must be pro-innovation and, to the extent possible, supportive of change. It may be that intellectual property policy is now so protective of individual inventors as to be too protective and even anti-innovative. In addition, existing dominant firms should not be allowed to prevent innovation by blocking the entrance of new firms.
The last issue Dr. Bresnahan addressed was the tremendous increase in investment in business information systems, by which he meant primarily anything that is platforming, and an equally large increase in investment in application software. Are we sure, he asked, that macro-economic conditions played no role in those increases? The commonest explanation is that a technological boom set off a macro-economic boom, but it is difficult to determine which of those causes was primary. He closed by reminding his audience that the source of policy that may be most important for information technology industries is none other than the Federal Reserve in Washington.