[Senate Hearing 106-1062]
[From the U.S. Government Publishing Office]
S. Hrg. 106-1062
THE ROLE OF STANDARDS IN THE GROWTH OF GLOBAL ELECTRONIC COMMERCE
=======================================================================
HEARING
before the
SUBCOMMITTEE ON SCIENCE, TECHNOLOGY, AND SPACE
of the
COMMITTEE ON COMMERCE,
SCIENCE, AND TRANSPORTATION
UNITED STATES SENATE
ONE HUNDRED SIXTH CONGRESS
FIRST SESSION
__________
OCTOBER 28, 1999
__________
Printed for the use of the Committee on Commerce, Science, and
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SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION
ONE HUNDRED SIXTH CONGRESS
FIRST SESSION
JOHN McCAIN, Arizona, Chairman
TED STEVENS, Alaska ERNEST F. HOLLINGS, South Carolina
CONRAD BURNS, Montana DANIEL K. INOUYE, Hawaii
SLADE GORTON, Washington JOHN D. ROCKEFELLER IV, West
TRENT LOTT, Mississippi Virginia
KAY BAILEY HUTCHISON, Texas JOHN F. KERRY, Massachusetts
OLYMPIA J. SNOWE, Maine JOHN B. BREAUX, Louisiana
JOHN ASHCROFT, Missouri RICHARD H. BRYAN, Nevada
BILL FRIST, Tennessee BYRON L. DORGAN, North Dakota
SPENCER ABRAHAM, Michigan RON WYDEN, Oregon
SAM BROWNBACK, Kansas MAX CLELAND, Georgia
Mark Buse, Staff Director
Martha P. Allbright, General Counsel
Ivan A. Schlager, Democratic Chief Counsel and Staff Director
Kevin D. Kayes, Democratic General Counsel
------
Subcommittee on Science, Technology, and Space
BILL FRIST, Tennessee, Chairman
CONRAD BURNS, Montana JOHN B. BREAUX, Louisiana
KAY BAILEY HUTCHISON, Texas JOHN D. ROCKEFELLER IV, West
TED STEVENS, Alaska Virginia
SPENCER ABRAHAM, Michigan JOHN F. KERRY, Massachusetts
BYRON L. DORGAN, North Dakota
C O N T E N T S
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Page
Hearing held October 28, 1999.................................... 1
Statement of Senator Breaux...................................... 12
Statement of Senator Burns....................................... 4
Statement of Senator Frist....................................... 1
Prepared statement........................................... 3
Witnesses
Habern, Glenn, senior vice-president for New Business
Development, Wal-Mart Stores, Inc.............................. 25
Prepared statement........................................... 26
Pincus, Hon. Andrew J., general counsel, U.S. Department of
Commerce....................................................... 4
Prepared statement........................................... 6
Schutzer, Dan, Chairman of the Board of Financial Services
Technology Consortium, Vice-President and Director of External
Standards and Advanced Technologies, e-Citi, Citigroup......... 30
Prepared statement........................................... 33
Whinston, Andrew B., director, Center for Research in Electronic
Commerce, Department of Management Science and Information
Systems, College of Business Administration.................... 12
Prepared statement........................................... 15
Whiting, Randy, president and ceo, CommerceNet................... 21
Appendix
Response to Written Questions Submitted by Hon Bill Frist to:
Dan Schutzer................................................. 51
Andrew B.Whinston............................................ 52
THE ROLE OF STANDARDS IN THE GROWTH OF GLOBAL ELECTRONIC COMMERCE
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THURSDAY, OCTOBER 28, 1999
U.S. Senate,
Subcommittee on Science, Technology, and Space Committee on
Commerce, Science, and Transportation,
Washington, DC.
The subcommittee met, pursuant to notice, at 10:05 a.m., in
room SR-253, Russell Senate Office Building, Hon. Bill Frist,
chairman of the subcommittee, presiding.
Staff members assigned to this hearing: Floyd DesChamps and
Elizabeth Prostic, Republican professional staff; and Jean Toal
Eisen, Democratic professional staff.
OPENING STATEMENT OF HON. BILL FRIST,
U.S. SENATOR FROM TENNESSEE
Senator Frist. Good morning, and welcome to the Science,
Technology, and Space Subcommittee hearing on the role of
standards in the growth of global electronic commerce. E-
commerce, as we all know, has fundamentally changed how
businesses operate, how business-customer relationships are
cultivated, and how we ourselves; as well as businesses,
purchase goods.
E-commerce has been widely embraced both for its promise to
reduce the cost of doing business, as well as its potential to
provide businesses with greater reach to their customers.
Essentially nonexistent just a few years ago, e-commerce is
expected to top a staggering $1 trillion by the year 2003.
The market for e-commerce application software is expected
to grow almost 300 percent in 1999 alone, to $1.7 billion, and
projected to jump to $13.1 billion by the year 2003.
Today's hearing focuses on the importance of standards to
enable the growth of global economic commerce. E-commerce as an
application on the Internet is inherently global. There are no
geographic borders. As such, our discussion today will be
global in nature. If we define electronic commerce as the
electronic transactions involved in the purchase of goods and
services, then for e-commerce to reach its full potential,
these transactions must be completed in a seamless manner
regardless of regulatory or geographical borders.
Thus, an important enabler for global electronic commerce
is the ability of one system to communicate with another and be
able to exchange data, commonly referred to as system
interoperability. The continued growth of e-commerce depends on
a fundamental set of technical standards that enables essential
technologies to interoperate, and on a policy and a legal
framework that supports the development that the market
demands.
A lack of interoperability introduces inefficiency into the
e-commerce system, preventing it from reaching its maximum
potential. We are interested in hearing about this impact on
your current and future business operations. In discussing
standards, we can, and should consider the issues at two
different levels: (1) the development of technology-specific
specifications and (2) the establishment of technology neutral
frameworks.
Consider, for example, the technology neutral framework
being proposed for the use of electronic authentication, which
does not presuppose any technology-specific solutions.
Traditional standards organizations such as the International
Standards Organization are often slow to accommodate the
rapidly changing environment of the market of e-commerce.
Moreover, the perceived permanence and monopolistic nature of
formal standards often results in fierce competition between
companies struggling to protect their intellectual property
assets and investments.
In response to this situation, a proliferation of industry
consortia has been formed, usually by groups of companies who
are collaborating to develop interoperable systems that can
quickly address market needs. Both types of organizations, the
formal standards organizations and the new industry consortia
have roles to play in establishing interoperability of e-
commerce systems.
Through both formal standards bodies and industry
consortia, the private sector is aggressively building a suite
of standards to support both the global electronic commerce
infrastructure and the specific needs of global electronic
commerce services. However, to be effective, these industry-led
standards should eliminate barriers to trade and competition
while at the same time stimulating innovation. They must be
flexible, responsive, and directed toward nonproprietary
solutions.
Several of the witnesses today will address these issues.
Now, we are also interested in your recommendations on what, if
any, role the Government should play in establishing a
framework that will be conducive to achieving the objectives I
have just stated, and help facilitate the development of
relevant standards, thus ensuring continued growth of e-
commerce. Agreeing on such a framework establishes a common
foundation which we can use for future discussions.
Today's hearing represents our efforts at establishing a
three-way dialog on these subject matters between the private
sector, between the administration, and the U.S. Congress. The
administration position will be represented by the Department
of Commerce.
We have also invited a foremost academic expert who wrote
one of the first textbooks on e-commerce from the private
sector. Commerce Net and the Financial Services Technology
Consortium are representative of the mixture of both industrial
consortia and formal standards bodies collaboration. We are
interested in hearing how the financial sector is addressing
the interoperability issue, as it is the glue at the center of
e-commerce services.
As a larger retailer, Wal-Mart represents one of the most
innovative companies in industry today that has integrated e-
commerce into its current and future business operations.
As for procedure today, I have asked each witness to limit
their presentations to approximately 5 minutes in the oral
testimony, and the witnesses' entire written testimony will be
made a part of the official record. I will be in and out during
the hearing because I have to testify, due to a scheduling
conflict, myself at another hearing, where I will be leaving
for a few minutes.
Senator Breaux will be here shortly, and Senator Conrad
Burns, I am delighted to welcome you. I am just about to
introduce our first panel. Would you like to make any opening
comments as we go forward?
[The prepared statement of Senator Frist follows:]
Prepared Statement of Hon. Bill Frist,
U.S. Senator from Tennessee
Good morning and welcome to the Science, Technology, and Space
Subcommittee hearing on ``The Role of Standards in the Growth of Global
Electronic Commerce.''
Electronic commerce, or ``e-commerce,'' has fundamentally changed
the paradigm for how businesses operate, how business-customer
relationships are cultivated, and how we ourselves purchase goods.
E-commerce has been widely embraced, both for its promise to
significantly reduce the cost of doing business, and for its potential
to provide businesses with greater reach to potential customers. This
is evident in the growth of the electronic commerce market which,
though almost non-existent just a few years ago. is expected to top a
staggering $1 trillion by 2003, according to market research reports.
The market for e-commerce application software is expected to grow 280
percent in 1999 to $1.7 billion, and projected to jump to $13.1 billion
by 2003.
Today's hearing focuses on the importance of standards in enabling
the growth of global electronic commerce. Electronic commerce, as an
application on the Internet, is inherently global. As such, our
discussion must be global in nature.
If we define e-commerce as the electronic transactions involved in
the purchase of goods and services, then for e-commerce to reach its
full potential, these transactions must be able to be completed
seamlessly, regardless of geographical or regulatory borders.
Thus, an important enabler for global electronic commerce is the
ability of different systems to communicate and exchange data, commonly
referred to as ``system interoperability.'' The continued growth of e-
commerce depends on a fundamental set of technical standards that
enables essential technologies to interoperate, and on a policy and
legal framework that supports the development that the market demands.
A lack of interoperability introduces inefficiency into the e-commerce
system, preventing it from realizing its maximum potential. We are
interested in hearing about this impact on your current and future
business operations.
In discussing standards, we can consider - at a minimum - the
issues at two different levels:
(1) the development of technology-specific specifications, and
(2) the establishment of technology-neutral frameworks.
Consider, for example, the technology-neutral framework being
proposed for the use of electronic authentication, which does not
presuppose any technology-specific solutions.
Traditional standards organizations such as the International
Standards Organization are often slow to accommodate the rapidly
changing environment of a new market such as e-commerce. Moreover, the
perceived permanence and monopolistic nature of formal standards often
results in fierce competition between companies struggling to protect
their intellectual property assets and investments.
In response to this situation, a proliferation industry consortia
has been formed, usually by groups of companies who are collaborating
to develop interoperable systems that can quickly address market needs.
Both types of organizations - the formal standards organizations and
the new industry consortia - have roles to play in establishing
interoperability of e-commerce systems.
Through both formal standards bodies and industry consortia, the
private sector is aggressively building a suite of standards to support
both the global electronic commerce infrastructure and the specific
needs of global electronic commerce services.
However, to be effective, these industry-led standards should
eliminate barriers to trade and competition while stimulating
innovation. They must also be flexible, responsive, and directed toward
non-proprietary solutions. Several of the witnesses today will address
these issues.
We are also interested in your recommendations on what, if any,
role the government should play in establishing a framework that will
be conducive to achieving the objectives I have just stated, and help
facilitate the development of relevant standards, thus ensuring the
continued growth of electronic commerce. Agreeing on such a framework
establishes a common foundation which we can use for future
discussions.
Today's hearing represents our efforts at establishing a three-way
dialogue on these subject matters, between the private sector, the
Administration, and the Congress.
The Administration position will be well represented by the
Department of Commerce. We have also invited a foremost academic expert
who wrote one of the first textbooks on electronic commerce.
From the private sector, CommerceNet and the Financial Services
Technology Consortium are representative of the mixture of both
industrial consortia and formal standards bodies collaboration. We are
interested in hearing how the financial sector is addressing the
interoperability issue as it is the glue at the center of e-commerce
services.
As a large retailer, Wal-Mart represents one of the most innovative
companies in industry today that has integrated e-commerce into its
current and future business operations.
STATEMENT OF HON. CONRAD BURNS,
U.S. SENATOR FROM MONTANA
Senator Burns. Let me see if I have got any comments here.
I tell you what, Mr. Chairman, thank you, this is an important
hearing, although you know, we are down to the shank of this
first half of this Congress, but we know we have got work ahead
of us in order to really realize the full potential of e-
commerce on the Internet, and it continues to grow, because
Government has not figured out how to tax it or how to regulate
it, and then once we do so, I think some exciting things along
the lines of digital signatures, encryption security, privacy,
and these type things, it will grow even more.
So thank you for holding this hearing today.
Senator Frist. Thank you very much, and we will turn to our
first panel, Hon. Andrew Pincus, General Counsel, U.S.
Department of Commerce. Thank you so much for being with us,
and we will have some questioning right after your
presentation. Mr. Pincus.
STATEMENT OF HON. ANDREW J. PINCUS, GENERAL COUNSEL, U.S.
DEPARTMENT OF COMMERCE
Mr. Pincus. Thank you, Mr. Chairman, and thank you for the
invitation to testify on what we agree with you and Senator
Burns is a very, very important and timely topic. As you look
across the economy there is nothing more important, nothing
that is driving our economic growth more than information
technology and electronic commerce, and so we believe in the
administration that focusing on that question and making sure
that Government is doing everything it can to foster that
development is a very, very important topic.
As you said, Mr. Chairman, the essential genius of the
Internet is its interoperability, the fact that it allows
millions of users to connect with each other, and facilitates
what are fast becoming an infinite variety of applications from
e-commerce to telemedicine, to remote education--the list goes
on and on.
This interoperability is essential and so the question
really is, what do we do to preserve it, and protect it and
promote it? In the framework for global electronic commerce
that Vice President Clinton and Vice President Gore issued now
about 2\1/2\ years ago they identified the question of
standards as an important issue for the Administration to focus
on and tasked Secretary Daley with that mission.
In the framework, the President and Vice President
emphasized the private sector should lead generally with
respect to e-commerce. As Senator Burns said, we in the
Government do not know enough about what is going on, and do
not know enough about what is coming in the future to really
devise regulatory schemes that are going to work, and the risk
is that we will devise a scheme that will skew e-commerce's
development maybe in the wrong direction, rather than enabling
the market to carry those developments forward, and we believe
that is especially true in this area.
We believe that an open market-driven consensus-based
process is the best way to arrive at standards that ensure
interoperability. Government cannot drive this process, the
private sector must, but it has to be open, and it has to be
consensus-based, because we certainly do not want the standards
process to be used for anticompetitive or other improper ends.
We believe Government can play a supporting role, but
ultimately, as I said, cannot force the adoption of standards
that the market is not ready to recognize and cannot really
direct the process in any direction. That has to be something
that the private sector does.
Of course, that has been our policy not just with respect
to standards, not just in the e-commerce area, but across the
board, and we at the Commerce Department are proud that NIST
has played an important role in supporting the private sector
standard development process in our country in a way that we
believe has worked very well with respect to e-commerce.
As you said, Mr. Chairman, one look at our economy
indicates our system is working well. We are the leader in the
world in the development of the stuff that makes the Internet,
and in coming up with most of the applications, and figuring
out new ways to use this technology.
So we think domestically our system is working quite well.
Of course, as you said, e-commerce is global, so we have to
consider these issues on a global basis, and that means the
private sector standard development has to be global in nature,
and that has happened in the Internet context. As you
mentioned, organizations like the IATF and formal standards
have really played a very, very important role in its
development.
When one looks at the international scene, one concern, of
course, is that not all Governments share our view about how
the standard-setting process should work. Many of the most
important, what are important trading partners articulate a
view that has Government intervening much more aggressively in
setting standards, and one example of that situation you both
mentioned is the electronic signature situation, which we at
the Commerce Department are also working on on behalf of the
Administration.
As you know, the Administration and Congress and the
States, through the Uniform Electronic Transactions Act, have
been very strongly in favor of the technology-neutral standard
or process for electronic signatures, not wanting to specify a
particular technology that carries legal validity, but rather
enabling all technologies, and allowing the market to choose
among them.
Unfortunately, the European Union seems to be taking a
different approach, and is in the process of promulgating a
directive which, although it does leave room for the market to
operate, also has provisions that direct Governments to
identify specific technologies and specific standards that will
carry a legal presumption of validity, and we find that a very
troubling development.
We think that what this means for the Government is that in
addition to what I mentioned about playing a supporting role
with respect to standards development, we have to work around
the world to prevent other Governments from using a
standardization process to impose technical barriers to trade,
or special use requirements that will interfere with the
development of the Internet.
We also have to be sure the international standard-setting
process is market-driven and open and consensus-based, and
there are not Governments or Government surrogates trying to
put a finger on the scales and push for the development of
standards that will skew the international market in a way that
will hurt U.S. companies, so that is something that we and the
U.S. Trade Representatives are very focused on internationally.
We have a standard attache in Brussels that works on this
issue, and we are looking to place people in other parts of the
world to aggressively pursue an open, international standard-
setting process.
Thank you very much, Mr. Chairman. I would be happy to
answer your questions.
[The prepared statement of Mr. Pincus follows:]
Prepared Statement of Hon. Andrew J. Pincus, General Counsel,
U.S. Department of Commerce
Mr. Chairman and members of the Subcommittee, it is a pleasure to
appear before you today to discuss the importance of standards in the
growth of global Electronic Commerce.
Principles of Electronic Commerce
In the Framework for Global Electronic Commerce, President Clinton
outlined the key principles that the U.S. Government should apply in
this area to promote use of the Internet and to enhance global
electronic commerce:
First, the U.S. Government recognizes that timely and
appropriate standards are critical to the long-term commercial
success of the Internet, as they allow products and services
from different vendors--and different regions--to work
together, facilitate robust competition, and reduce uncertainty
in the global marketplace.
Second, the needs and dynamics of the marketplace,
and not governments, must guide standard development and
implementation activities. Governments should refrain from
issuing technical regulations and instead should rely, to the
maximum extent possible, on the private sector to self-
regulate, using standards developed by voluntary, industry-led,
open, consensus-based organizations at both the national and
international levels. Because interoperability and reliability
of the Internet are crucial for the success of e-commerce, the
private sector has a strong incentive to develop needed
standards and to self-regulate.
Third, the U.S. Government should advance private
sector leadership in the development of such standards in
bilateral, regional, and multilateral fora, and should strive
to reduce the abuse of standards by governments to create
technical barriers to global electronic trade.
Fourth, as indicated in the Framework, the Government
can play a useful, supportive role--working in partnership with
the private sector--to enhance the standard-setting processes
and achieve commercial and public policy goals.
In outlining these principles which are fundamental to our policy
to promote electronic commerce, it is important to realize that
``standards'' can mean many things in today's fast-paced, dynamic
information technology-driven economy. For example, there are technical
standards that are the products of traditional standard-setting
organizations, both at national and international levels. Similar to
these kinds of standards are the protocols and techniques developed by
groups like the Internet Engineering Task Force which form the
technical foundation for running this new global medium for electronic
commerce. There are also standards and related issues of
telecommunications networks where treaty-based organizations like the
International Telecommunications Union predominate.
But, more often than not, the standards we take for granted today
are in fact products and services that are broadly used and implemented
on a global and national basis. These so-called ``de facto'' standards
are driving the growth and use of applications of the Internet, and are
moving faster than both traditional and non-traditional standards-
setting organizations can keep pace with.
How to Encourage and Facilitate Standards?
Our challenge, then, is to recognize that no one forum or single
solution to standards can be achieved. In fact, the multitude and
diversity of ways in which standards are developed and implemented by
different regions and different commercial sectors makes it imperative
that the U.S. Government promote our principles outlined above
aggressively. But how best to do it?
Clearly, both businesses and users can participate more effectively
when systems work together, and the standardization process can
contribute mightily to achieving this success. Business-to-business e-
commerce demands the integration of many complex business and technical
interfaces across entire supply chains. And the participation by small
and medium-sized enterprises is enhanced when supply chains utilize
robust standards that interoperate properly and deliver on their
potential. Similarly, individual consumers will feel more confident
when systems operate seamlessly, efficiently, securely and effectively
through common approaches.
In October 1997, leaders of industry, along with representatives of
technical organizations and governments, met at the Global Standards
Conference on ``Building the Global Information Society for the 21st
Century.'' The challenge to those attending was how to shape a coherent
approach to this important issue of standards. Industry leaders
recognized the essential role of private sector leadership in the areas
of standards, and highlighted the most important areas where industry
standards efforts needed to be placed:
The key to e-commerce is interoperability. However,
interoperability need not mean single, uniform solutions to e-
commerce applications. Different implementations will likely be
needed to accommodate local requirements. The greater degree to
which these different approaches can interoperate, the more
likely e-commerce will be successful.
Standardization to promote e-commerce should focus on
making technologies work together--through so-called standard
``interfaces''--and not try to specify the technologies
themselves, which could severely hamper innovation.
In the view of the U.S. Government, it is the private sector that
should lead in this area. It is incumbent on the private sector to take
up the mantle of this issue. And, in our view, the best results are
achieved when the market--not governments--determine how best to
achieve the goal of different systems working together on a global
basis. Businesses have a strong incentive, and the necessary technical
expertise, to achieve this goal. Governments should, however, make
clear their needs so that standards support government responsibilities
to provide services and meet society's needs. We are able to do this
through participating directly in standards-development activities in
the United States and internationally. We all share the goal of having
electronic commerce be fast, inexpensive and easy to use. It is in the
interest of business and of consumers. Our experience tells us that
this vision will be accomplished more readily in a competitive, market-
driven environment.
This view is shared by industry in all corners of the world. I call
to the attention of the Committee the similar recommendations of
business groups such as the Global Business Dialogue, the US-Japan
Business Council, and the TransAtlantic Business Dialogue (which is
meeting tomorrow and Saturday).
Unfortunately, not all other governments share this view. Indeed,
many of the most important nations and regions of the world articulate
a view of global electronic commerce that has government intervening
more aggressively in setting standards. One example that I am
personally involved in is the area of electronic signatures. The United
States is taking a market-driven approach to ensuring that parties may
determine the appropriate technologies and rules for assuring the
confidence and validity of an electronic transaction. The role of
government, in this example, is to promote a technology-neutral legal
framework, and remove paper-based obstacles that are found in our laws
and which impede engaging in commerce electronically. By contrast, our
colleagues in Europe are in the final stages of adopting their
Directive on Electronic Signatures. One of the main concerns that we
and US industry have is that the proposal calls for adopting specific
technical standards for digital signatures--and having those
determinations ultimately made entirely by a committee of government
representatives.
U.S. Government Policy in Action
The U.S. Government is taking steps consistent with the principles
of the President's Framework and as directed by the President to carry
out our vision for standards in global electronic commerce.
Our Technology Administration's National Institute of Standards and
Technology (NIST) is working closely with U.S. industry to support
market-driven, voluntary e-commerce standards and deployment. As one of
the witnesses here today, Mr. Randall Whiting, recently wrote regarding
the role of NIST in e-commerce: ``It is essential that there be a close
partnership between industry and government to effectively address the
many infrastructure, technology and process issues that will face e-
commerce in the near future. Having an agency such as NIST in that role
will ensure industry has a partner that (1) understands the demands of
technology and business innovation, (2) is experienced in key
infrastructure standards, (3) is independent of political motivations,
and (4) has adequate resources to help keep the U.S. in the forefront
of e-commerce.''
An example of how NIST is currently working with industry to
improve interoperability at the interface level is the National
Wireless Electronic Systems Testbed (N-WEST) project that is working to
develop and define technical standards for broadband wireless access
technology. NIST's efforts are accelerating private sector-led
standardization, which is critical to making this alternative access
network affordable and widely available (potentially for high-speed
wireless Internet access). NIST involvement has also made the
difference in ensuring broad industry participation in the
standardization effort by serving as a neutral forum and facilitator of
industry dialogue.
NIST is also working with industry to create the new Advanced
Encryption Standard. This open, transparent and international
collaboration is unique, and the results will benefit not only U.S.
industry and users, but global participants in the Internet as well.
The global cryptographic community has been actively participating in
the process managed by NIST, and the process is on track to meet its
goal of having the standard completed by the summer of 2001.
The U.S. Government is also advocating for U.S.-developed standards
on a global basis as a partner with industry in international standards
organizations such as the ISO/IEC Joint Technical Committee which is
engaged in cutting-edge technology and communications standards with
applicability to global electronic commerce. The U.S. Government is
also supporting US industry by stationing standards experts in leading
capitals to monitor and track potential barriers, as well as ensuring
opportunities for U.S. businesses to participate and benefit from
standards activities world-wide.
And, finally, the U.S. Government is determined to prevent other
governments from using the standardization process to impose either
technical barriers to trade or special-use requirements that would
interfere with the unique nature of the Internet as a global
enterprise. As US-developed standards move into the global arena, we
are also concerned with assuring that the process for setting
international standards, however defined, is fair and open to all
interested parties. It must be market driven; technical and commercial
considerations, not political ones, should drive standards promulgation
in these bodies. In bilateral, regional, and multilateral forums, the
US Trade Representative and the Department of Commerce are working
aggressively to have our principles of the Framework for Global
Electronic Commerce adopted internationally.
Thank you again for the opportunity to testify and at this time I
would be happy to answer any questions that the Subcommittee might
have.
Senator Frist. Thank you, Mr. Pincus. Could you update us
on the efforts to develop an international framework for global
e-commerce?
Mr. Pincus. In general terms?
Senator Frist. Yes.
Mr. Pincus. One of the things the President and Vice
President directed in July 1997 was that we pursue the policy
issues that were identified, the nine policy issues that were
identified, not just domestically but globally.
As you said, Mr. Chairman, standards is one element of
that, but really there is a whole policy framework involving
privacy and consumer protection and security and intellectual
property that is relevant to the development of the Internet,
and one of the things that we have been doing as we pursue
those issues domestically is to talk about them
internationally.
For example, with respect to privacy, I know you are
familiar with the controversy that we have with the European
Union with respect to our approaches on how to protect privacy
in the electronic environment. The European Union has gone a
route that requires laws. We think that self-regulation can
work, and is now working in our country, that the private
sector has taken the leadership role and has formed the Online
Privacy Alliance, and has established good standards and
established privacy protection that is better, as good or
better than anywhere else in the world.
But we have a dispute or discussions ongoing with the
Europeans as to the status of their self-regulatory efforts
under that directive, and those discussions are still ongoing.
We are engaged in discussions about consumer protection. How do
we do that in the cross-border environment? It raises questions
on down the line.
The Administration is engaged not just with Europe but
Japan and other countries around the world on all of these
issues to be sure that rules that develop around the world are
ones that enable the cross-border nature of the Internet and do
not obstruct it.
Senator Frist. Would it be fair to characterize our
interaction or presence being a leadership presence, or when
these international discussions are ongoing are we another
player?
Mr. Pincus. No, we have taken the leadership on this issue
really when we started. The President focused on these issues
in July 1997. We were at the cutting edge and I think really
setting the agenda in a large sense for the rest of the world.
Right after that report was issued I was privileged to join
some of my colleagues from the interagency group in visiting
some capitals in Europe and then in Asia to discuss our report
and to urge them to focus on these issues because of the great
potential of e-commerce if we got it right.
So that really kicked off a global discussion that had not
really been on the agenda until then and since then, both
informally and in multilateral fora like the OECD, in a new
organization, the Transatlantic Business Dialogue, which is
meeting now in Berlin, which has really made e-commerce the
focus of its discussions, in the Global Business Dialogue, a
group that the private sector formed really largely under the
leadership of the U.S. and the European private sectors that
brought together private sector people from around the world
last September to discuss all of these very same issues and
talk about the private sector's needs and really present
Government, the U.S., Europeans and other Governments around
the world with an agenda of what the private sector thought it
needed to get things done.
In all of those places we have been taking a very up-front
role in pursuing our policies of private sector leadership, of
promoting self-regulation, and of avoiding barriers that would
prevent this medium from realizing its potential.
Senator Frist. Looking industry by industry I know is
difficult, but if you had to characterize the field of health
care in terms of progress being made in the standards field, is
it slower, faster, or about the same in terms of the success of
standards, standard development? Obviously, it has real
application from a Medicare-Medicaid standpoint, but also
private industry.
Mr. Pincus. I think I probably want to get back to you. I
do not know the specifics. I can give you one e-commerce-
related health care example that I think indicates that things
are moving ahead.
Secretary Daley led a trade mission a couple of weeks ago
to the Middle East, and one of the participants in that trade
mission was Cedars Sinai, a hospital from Los Angeles, because
they were interested in establishing telemedicine offices and
operations in the countries that we visited, in Israel, in
Egypt, in Saudi Arabia with respect to the Palestinian
authority and the United Arab Emirates.
So I think that at least told me something I really wasn't
familiar with on that intimate a basis, having a chance to
interact with the people from that entity that were on that
trip, that they were very focused on using the Internet to
bring U.S. medical expertise to other countries around the
world in a very active way. I mean, they were really talking
about setting up operations right now to start doing that.
Senator Frist. Thank you.
Senator Burns.
Senator Burns. Counselor, I wanted to ask you just a couple
of questions, and the announcement the other day of the
Administration on the movement of medical records and how we
want to do that electronically, and you said that in the
Administration is on the cutting edge of trying to do something
about privacy, and then you also put a note on it that the
industry has taken a step on this in the right direction, but
do you think that the industry has not aggressively gone as far
as it should, as far as ensuring privacy, as far as medical
records and the movement of such things?
Mr. Pincus. Yes. I think as a general matter we think we
have a good regulatory structure with respect to generally
personally identifiable information that might be transferred
in the context of a routine commercial transaction, but we
believe very strongly that with respect to certain highly
important and sensitive information like medical records, there
has to be a strong Government framework, because that
information is so sensitive to people and has to be very
strongly protected, and that is why the President moved forward
in the way he did in making the announcement he did, because we
think with respect to that issue there has got to be a
regulatory framework in place.
Senator Burns. We cannot really get together up here as far
as that is concerned, and I applaud the President for taking
this step forward. Maybe it will get us--I think we have been
high-centered here a little bit, and it may get us off of that.
Would the Administration be amenable to working with
Congress up here and making sure we can fashion that privacy
bill and maybe move it along, and that Senator Wyden and I
have, and maybe come to terms with some objections the
Administration might have?
Mr. Pincus. I think that--this is the medical privacy bill?
Senator Burns. Well, no. We have an e-privacy, period. It
is a bill that maybe we can move with special inclusions for
medical records to be handled in a different, maybe a different
manner than, say, general information or through e-commerce.
Mr. Pincus. We have been working--and it is not principally
our Department. It is principally HHS--with Congress on the
question of medical privacy. I think there are some bills up
here, and we have been working to try and move those along, and
I think it was the concern that that process wasn't moving that
led to the announcement.
I think with respect to privacy generally, the
Administration's view has been that we should take a sectoral
approach, and that the need for legislation--this committee was
a leader in the children's privacy bill last year, which we
felt was very important, because that is another sensitive kind
of information.
But with respect to privacy generally, our view has been--
--
Senator Burns. They were a little Johnny Come Lately on
that, by the way. Let's be fair.
Mr. Pincus. No, I was saying the committee, but with
respect to privacy generally our view has been in the
electronic environment that the self-regulatory process seems
to be working, and that we should give that a little bit of a
chance, because it does seem as if we have got good standards.
We are getting increasing participation. We have got a lot
of companies stepping up to the plate in terms of not only
joining themselves but saying we will not advertise, we will
not put our advertising dollars on a Web site that does not
have good privacy. We will not partner with companies that do
not have good privacy.
So we think that is really disseminating through the system
in a way that is beneficial, and so we think that we should
allow that process a chance to go forward and see it how it
develops and see whether and to what extent Government
intervention is needed if that begins to fall short.
Senator Burns. Are you supportive of S. 1494, the
Administration?
Mr. Pincus. Our view is--we have not taken a position on
the bill. Our view is it is very important to help do what the
Government can do to help small and medium-sized companies use
e-commerce.
We think that is incredibly important. We have been working
through the MEP's ourselves toward that end, and we would like
to work with the committee on something that builds on the
MEP's rather than create--I mean, we may not need a whole new
structure.
We have some very good manufacturing extension
partnerships, as you know, throughout the country that have
good relationships with the business community that we think
could be a launching pad for increased activity in the e-
commerce area.
Senator Burns. I guess the chairman wants to suspend the
hearing for about 15 minutes or so and wait for Senator Breaux,
who will be here at 10:45, and I shall honor the chairman's
wishes, so these hearings are suspended for 15 minutes.
[Recess.]
STATEMENT OF HON. JOHN B. BREAUX,
U.S. SENATOR FROM LOUISIANA
Senator Breaux. The committee will please resume order. The
guests will take their seats, and we are delighted to welcome
our second panel, and I am going to ask them to take their
seats as we call their name: Professor Andrew Whinston,
Director, Center for Research in Electronic Commerce,
Department of Management Science and Information Systems at the
University of Texas at Austin; Mr. Randy Whiting, president,
CEO of CommerceNet in Cupertino, California; Mr. Glenn Habern,
senior vice president, new business development at Wal-Mart,
Bentonville, Arkansas; and Mr. Dan Schutzer, who is chairman of
the board of the Financial Services Technology Consortium, vice
president and director of external standards and advanced
technologies at Citigroup. We welcome all of you for being with
us, and apologize for missing our first witness, but look
forward to the comments of the witnesses in our second panel,
and would ask our guest, Professor Whinston, we have you listed
first. If you would like to begin we would be pleased to have
your testimony.
STATEMENT OF PROFESSOR ANDREW B. WHINSTON, DIRECTOR, CENTER FOR
RESEARCH IN ELECTRONIC COMMERCE, DEPARTMENT OF MANAGEMENT
SCIENCE AND INFORMATION SYSTEMS, COLLEGE OF BUSINESS
ADMINISTRATION
Mr. Whinston. Thank you very much, Mr. Chairman. I am going
to try to summarize the material I submitted to the committee
that gives a somewhat academic overview to the economic and
technological issues involved with the interoperability
question.
In less than a decade the Internet and digital technologies
have changed the way we communicate, exchange information,
purchase products and services, educate and entertain
ourselves, and participate in the social and political
processes.
Electronic commerce, by revolutionizing business-to-
business and business-to-consumer transactions appears to be
the leading technological innovation of the 20th Century that
will determine the future of the global economy in the coming
years, and I just mention parenthetically that I have been in
Washington the last few days when we released the Cisco-
sponsored study.
Cisco sponsored a study at the University of Texas to look
at the growth of the Internet economy, and we announced that as
our projection for 1999 we have an estimate of $500 billion as
the total amount of revenue generated in the U.S. by U.S.
companies selling in the U.S. and selling overseas, and we have
roughly 2.3 million jobs created in the U.S. involved with
those companies.
Interestingly, one-third of the companies that we surveyed
did not exist 3 years ago, so it is an industry of many new
companies moving into an exciting arena that we think will
propel the U.S. economy at the high rates that it is at, and
even maybe higher levels of growth, without inflation.
So to maintain global competitiveness and our leadership in
this unprecedented economic prosperity, it is imperative to
understand how networks and computer technology impact commerce
and economic activities, and to act proactively to assure
continued progress. This hearing is an evidence of how
committed our Government leaders are toward each goal, and it
is my pleasure and honor to communicate to the subcommittee on
the subject of interoperability and global economic commerce.
So to look at the issues in terms of interoperability in
global electronic commerce, let me just bring up some points of
view that would emanate from the economics profession.
The most important idea behind electronic commerce is the
notion of network externalities, meaning that if we look at the
telephone, when we have a few telephones in existence, the
value of a telephone is fairly limited. As telephones have
expanded in the U.S. and around the world, we have tremendous
value from the innovation of telephones, but that innovation is
really maintained by the fact that lots of groups can introduce
telephone technology in local and regional areas, yet the
telephone system worldwide interoperates.
I can make phone calls all over the world, so I as a user
am not aware of the fact that there are many different
technologies that are used to support communications, and
certainly the innovations in the Internet are based on the idea
of IP, that is, Internet protocol, which allows different
networks with different technology to communicate with each
other, and therefore we have a worldwide network of computers,
many operating in different ways.
So that is a fundamental economic force that drives
electronic commerce which is built on this amazing worldwide
infrastructure.
Now, we see electronic commerce as having very special
features that differ from the traditional bricks and mortar
economy, and one is the ability to customize, to take different
components, put them together, and deliver them to the customer
in a way that the customer most desires it.
So for example, in the operating system area we have an
innovation that is referred to by the company as Red Hat, where
we have lots of different groups developing specific components
that can be put together and, in effect, eventually delivered
to customers, meaning corporate customers and user customers,
that give them an operating system that is oriented toward
their needs.
So a Red Hat company is an integrator of software
components, most of them developed by small software
developers, and in effect they can come up with a competitive
operating system to Microsoft, which has a standard, but it is
a de facto standard set by a particular company, versus an open
standard that we are looking for here in these hearings.
So we have in the development of the standards a tension
between the possibility of having a company-defined standard,
which in effect many people would say gives the company the
opportunity of having a monopoly in the area that they own the
standard in, versus an open standard that many companies can
then enter and compete, and their products can be combined with
other products that deliver what the customer is looking for.
So in looking at the horizon out there in terms of
standards and lack of standards, as I indicated, companies
would love to have an industry built around their standard,
while for competitive purposes we would like to have lots of
standards and interoperability, where companies can do what
they think is best from their point of view, and what they see
the consumers wanting, and then things can be transformed from
one representation to the other.
So for example, in the browser arena, and HTML, which is a
mark-up language, we have variations in these mark-up
languages, which are reflected in the different browsers, and
the inability of a company to produce one store-front that all
customers in the world with the browsers that are available can
have access to.
So companies, to the extent that there is not a common
standard that is adhered to for HTML, companies that are in the
business of providing commerce, that is, providing goods to
consumers, or business to business, have the extra cost of
trying to deal with multiple browsers because they want to
really appeal to all the customers in the world.
We have situations where there is this language standard,
Java, which is a language which would be used in providing
software environments that are essentially interoperable, that
is, everybody can get access to the basic Java environment, but
again we have variations of that that are introduced for
competitive purposes.
So again, there is this ideal world that we would like to
achieve, and lots of benefits for consumers and companies to be
in this world, the world of interoperability, where you do what
is best from your point of view, and then things can be
combined, they can be converted, a sort of Adam Smith
description of a world updated several hundred years to reflect
the developments in software, hardware, and communications.
But there is also a desire by companies to make a unique
position for them to make profits over and above what they
would in a purely idealistic world, and these things then
contribute to variations of standards, to alterations on the
edges, to what are called improvements, which can then cause
difficulties in maintaining standards.
So these are, I think, complex economic, political,
technological issues that will be resolved both in the private
sector and probably by some help from Government agencies that
ensure that standard-setting groups, when they get together,
are really acting on behalf of the consumers, and are not
ending up in some cases to really attempt to introduce monopoly
power into a particular industry.
So in summary, I think we have tremendous opportunity in
the next century. We believe in terms of our work that is
sponsored by Cisco that the Internet economy in the U.S. will
continue to grow at unprecedented levels, 50 to 100 percent a
year, compared with our red hot U.S. economy in primarily its
traditional form, which is growing at 4 percent and 4\1/2\
percent, which causes supposedly the Federal Reserve some
concern.
So we see a day where maybe the total U.S. economy is
growing at 8 or 10 percent a year, but it is more of an
Internet-based economy, more productive in its use of inputs,
more oriented to what the consumers are looking for, and much
more vigilant in its recognition that there is a collective
benefit by having standards and interoperability that allows
all companies to play on an even field.
Thank you very much.
[The prepared statement of Mr. Whinston follows:]
Prepared Statement of Andrew B. Whinston, Director, Center for Research
in Electronic Commerce, Department of Management Science and
Information Systems, College of Business Administration
Interoperability in Global Electronic Commerce
In less than a decade, the Internet and digital technologies have
changed the way we communicate, exchange information, purchase products
and services, educate and entertain ourselves and participate in the
social and political processes. Electronic commerce, by revolutionizing
business-to-business and business-to-consumer transactions, appears to
be the leading technological and economic innovation of the 20th
century that will determine the future of the global economy in the
coming years. To maintain global competitiveness and our leadership in
this unprecedented economic prosperity, it is imperative to understand
how network and computer technologies impact commerce and economic
activities and to act proactively to assure continued progress. This
hearing is an evidence of how committed our government leaders are
toward such goal and it is my pleasure and honor to communicate to this
Subcommittee on the subject of interoperability and the global
electronic commerce.
The Internet is by definition a global network. Any business or a
consumer with an access to a computer that is connected to the Internet
is a global economic player. But this global environment will be of
purely theoretical significance if these economic players are unable to
communicate and carry out transactions globally because of artificial
barriers of technological and commercial nature. An interoperable
global electronic commerce system is necessary if we are to maximize
potential benefits of digital networking and computing technologies.
There are three fundamental advantages of using a global network for
commercial transactions and other economic activities. The degree to
which we achieve interoperability in network protocols and commercial
applications will determine how different the digital economy of the
next century will be from the industrial economy of the past century.
Economic Benefits of Interoperability
Interoperability and standardization have played an important role
in lowering costs and prices, increasing competitiveness, and improving
consumer benefits in the physical economy based on industrial
production. But they will play an even more critical role in the
networked, digital economy which is built upon an interoperable network
infrastructure such as the Internet. Before we go into more detail, we
may present a list of economic benefits from interoperability:
Interoperability is one of the key ingredients that
allow consumers to substitute one product with another that is
manufactured by a different company. This substitutability
enhances competition among various manufacturers in the same
product market.
This substitutability and interchangeability implies
larger market size, lower unit costs, and lower consumer
prices.
In addition to larger market size, interoperability
and standardization enable new market entrants to tap into
existing product users. This translates into lowered barriers
to entry, further enhancing market competition.
Interoperability and standardization allow process
automation, lowering transaction costs.
The need for interoperability will increase as we focus on process
automation. In the Internet economy, businesses and consumers are
increasingly dependent on automated, interactive processes using real
time Web-based interactions, software agents, and market innovations
such as online auctions. An increasing level of personalization in
products and services rendered in the Internet economy also implies an
integrated economy where manufacturing, distribution, retailing and
consumption occur simultaneously in real time. If this vision is what
we intend to promote in the global Internet economy, interoperability
in products, services and business processes become a key component in
any e-commerce system.
Maximizing Benefits of the Networked Economy
Although the interoperability has played an important role in the
industrial economy, its need is magnified in an economy where
interactions and exchanges among firms and consumers occur constantly,
in real time, throughout the entire stage of the value chain, and with
an increasing number of partners. In the physical economy,
interoperability is often a simple matter of standards and
technological compatibility. For example, two interoperable computers
can establish a connection with each other; interoperable word
processors may exchange files with one another; interoperable VCRs can
read and play the same video tape; and most electric appliances can
operate regardless of who provides electric service or with peripheral
equipment produced by a wide range of manufacturers. Without
interoperability, computer users will find difficulties in performing
simple tasks such as swapping disks and files, or using third party
auxiliary equipment, macro programs and extensions.
The Internet-enabled economy goes further than compatibility
between manufactured goods. It is based on networks, and the
interoperability is a fundamental requirement for an efficient network.
From previous experience in telecommunications and transportation
economics, researchers are well aware of the economic benefit of
interoperability in a network. Through standardization and
interoperability, communications software and business applications
lower costs for producers and increase user benefits in the form of
network externality by which consumers benefit from having one standard
product. With network externality, the value of a product goes up as
more people have the same product. A typical example is a telephone
network where consumption benefits increase as more people join the
network (positive network externality). If there are two types of
telephone networks, we would be required to have two phones in order to
communicate with our friends who might use either of the two telephone
systems.
An externality is an effect on costs or benefits that is not
accounted for by market mechanisms such as price. For example, there is
no market mechanism to require a neighbor to pay for such benefit even
if the neighbor gets some benefit from the tree you plant. In this
sense, an externality distorts the resource allocation process and
creates market inefficiency. A network externality is an externality
related to the number of users (or networks) for a group of products. A
negative network externality exists when more users result in
congestion, thereby diminishing the amount of total benefits.
Network effects may be direct effects as in the case of telephone,
where the issue is whether competing products can be used together (a
horizontal interoperability). There are also indirect network effects
commonly found in hardware-software platforms in computer, video and
audio, and computer games industries, where the issue is whether a
complementary product can be used with competing products (a vertical
interoperability). Numerous studies have shown that the competition
among upstream products (e.g. VHS or Beta video players) critically
depends on how many downstream products (video tapes) there are (Katz
and Shapiro 1985; Chou and Shy 1990; Church and Gandal 1992).A
horizontal interoperability may be established through cooperation
among firms who recognize the benefit of having one standard. But
competing standards, although inefficient, often present more choices
to consumers than under a mandated standardization. In this case, the
market and consumers will determine which becomes the de facto
standard. Many components of the Internet communications standards such
as TCP/IP, domain name systems, e-mail standards and the World Wide
Web, have been developed through consensus and accepted by the
marketplace.
A vertical interoperability is somewhat more difficult to achieve
since vertically-related products are highly integrated or provided by
many vendors. In a typical setup to access the Internet, there may be
several layers of vertically related products and applications: PC
hardware, operating system software, applications such as an e-mail
client or a Web browser, and communication service including e-mail
servers and Internet access providers. All these components are needed
to send and receive an e-mail over the Internet. The interoperability
in terms of using an e-mail is established by the Internet standards on
electronic mail. This guarantees that one on a PC may communicate via
e-mail with someone on a Macintosh or a UNIX system. But as application
vendors add new features to existing e-mail software, some of these
features may not be available to users of different applications. The
interoperability will cease to exist.
Vertically integrated hardware-software firms are commonly
observed. For example, audio equipment manufacturers such as Sony are
selling musical CDs. However, Sony CDs have no inherent advantage over
non-Sony CDs in terms of operating (being played) in a Sony-produced CD
player. In the computer industry, however, such a seamless
interoperability is less common. For example, two competing Web browser
applications, Netscape's Navigator and Microsoft's Internet Explorer,
are implementing different sets of HTML standards and scripting
languages. As a result, Web storefront builders are forced to spend
enormous time and effort to accommodate users on different browsers.
Interoperability for Complex Organizations and Processes
The need for interoperability in the Internet economy is becoming
critical in order to support a growing list of business and social
applications of new technologies. A primary example is the use of the
Internet for managing supply chain and distribution which involve a
number of suppliers or distributors. An open, interoperable network
such as the Internet has provided a cost efficient tool to gain
tremendous efficiency in managing multi-partner transactions where
multiple trades occur among thousands of participants who may be widely
dispersed geographically.
An integrated business operation means more than minimizing
transaction costs through process automation. While the latter has been
a primary reason for the success of computer-assisted transactions such
as electronic data exchange (EDI), electronic fund transfer (EFT) and a
variety of initial applications of the Internet network, new Internet
applications that connect front-end with back-end operations are aimed
at more than simply reducing transactions costs. Their goal is to
improve efficiency in product design, manufacturing, and distribution,
and to increase choices and satisfaction offered to their customers.
Setting up a Web page for suppliers and customers may provide a firm
with a cost-efficient alternative to physical stores but, more
fundamentally, it enables flexible production methods as well as
innovative contracting and selling schemes. Unlike gains in
transactional efficiencies, these changes in basic organization and
operation of a firm are unique in a networked environment.
For these purposes, data collected from sales outlets can be fed
into product research and pricing as well as manufacturing, while
supply chain and inventory management activities are ready to respond
to changing demands and market conditions. Such a process presupposes
that demand data, product information, and transaction data must flow
seamlessly among manufacturers, suppliers, distributors, sellers, and
their customers. These players may rely on different hardware, software
and e-commerce applications, but they must be enabled within an
interoperable e-commerce system.
Interoperability Supporting Customized Goods and Services
E-commerce market is fundamentally global in the sense not only of
its global reach but also of its breaking down product market
boundaries. Internet technologies allow firms to overcome physical
constraints that often prevent them from doing business with someone
across a market boundary. As network and distributed computing
technologies advance, killer applications for consumers will be those
that allow mixing and matching products and services on a personal
basis and in real time. Agent technologies, smart cards and XML all
point to an increasing level of customization and integration of
products that bundle different products into a distinct item. An
interoperable e-commerce system is one that support seamless
transactions across product market boundaries as well as across
territorial boundaries. An integrated product is substantially
different from bundled products common in physical markets. Bundling
usually refers to a quantity bundle that offers a discount when
multiple units of a same product is purchased. For digital products,
software site licensing may be the closest form of quantity bundling.
But most digital products resist bundling as they have no normal wear
and tear which force consumers to buy multiple units. A second type of
bundling is when similar products are sold as a bundle as in portfolio
bundling. Portfolio bundling is common for content sellers. Information
buyers, for example, subscribe to a number of news articles which deal
with different topics and stock traders prefer a portfolio of
securities. Application software may be subject to portfolio bundling
as word processor, graphics program and other software may be bundled.
Another type of bundling is for a combination of products which may
be needed for a common task or related in the way we consume. These
products may be vertically related. For example, an OS and a Web
browser are an upstream and a downstream product which must work
together to accomplish a task. Other combinations may be a collection
of complementary goods and services. A combination of airline tickets,
hotel rooms, a rental car, meals and amusement park admission tickets
can be bundled as a packaged leisure product.
Products combined in this manner are often personalized and
constitute a distinct product or service taking on an enhanced value
from its components. For example, a browser-OS combination may be
considered as a new type of software. Stock brokers may integrate
market information, company reports, stock trading and financial
management into a distinct service. Finding, assembling and
personalizing various products for an individual customer would be
extremely costly and pose an enormous challenge in pricing and managing
in physical markets.
The need for interoperability in technologies is evident if we are
to facilitate transactions of goods and services that may involve firms
and consumers in traditionally separated markets. In order to support
production, trading and consumption of these products and services in
an integrated manner, computing and networking technologies must be
interoperable with other products, Web pages, payment systems and user
interfaces based on different computing platforms as well as different
needs and preferences of users. Developers of next generations of HTML,
agent software, mobile networks and smart card applications should also
be aware of how technologies change the characteristics of products and
consumption behaviors.
Global Electronic Commerce And Interoperability
Not many of the issues in electronic commerce and the digital
economy are local. The internationalization of the Internet goes far
beyond the expansion we witnessed in the last century. For most of the
20th century, corporations have operated as multinational entities
``knowing no national boundaries.'' Literally, now we see free trade
zones springing up in North America, Europe, and around the Pacific
Rim. While these large economic blocks of countries represent the most
recent achievement in fostering the free movement of goods, the
Internet was created from its inception without borders. For the goods
and services that can be ordered and delivered over the network, the
Internet is truly a global marketplace.
As political borders cease to be barriers to trade, global
electronic commerce has implications that reach far beyond mere
economic gains from trading. For example, can nations control the
movement of digital goods based on content or isolate themselves from
the rest of the Internet? Can governments exercise their regulatory
powers on the Internet? And how would the effort to set up a uniform
legal and commercial environment for the global electronic commerce
affect physical markets?
But these questions assume that the Internet indeed offers an
interoperable global economic market. However, the language barrier
itself poses serious challenge to such an open global market. English
speakers cannot access Web stores presented in Chinese or German
language. Some governments believe that communications on the Internet
can be controlled through legal and artificial barriers. For example,
through content and access control, minors are protected from obscene
and indecent materials (the Communications Decency Act of 1996 in the
U.S.); consumers in some countries are protected from
``misinformation'' and other harmful effects of uninhibited exchange of
information; and a nation can even prevent ``spiritual pollution'' by
denying access to Internet sites which contain politically sensitive
materials. In other cases, some European governments choose to be
isolated by insisting on local languages as the communications standard
instead of English, which has become the de facto language of the
Internet. In this case, languages, not communications protocols,
becomes the barrier to interoperability.
Thus interoperability on a global scale is more of a political or
cultural nature than a technological or an economic process.
Nevertheless, there is a need to have a global, not regional,
perspective in securing a workable commercial environment for
electronic commerce. Establishing some form of uniform commercial
environment is essential in promoting the global electronic commerce.
This will imply an interoperability in terms of setting ground rules
for commercial transactions over the Internet rather than technological
interoperability.
Interoperability in the E-Commerce Layer
The Internet economy can be divided into several layers in order to
categorize and quantify economic activities associated with particular
products and services. Barua et al (1999) have identified four layers
of the Internet economy in their measurement of the Internet Economy
Indicators. The first two--Internet infrastructure and Internet
applications layers--together represent the IP or Internet
communications network infrastructure. These layers provide the basic
technological foundation for Internet, intranet and extranet
applications. The intermediary/market maker layer facilitates the
meeting and interaction of buyers and sellers over the Internet.
Through this layer, investments in the infrastructure and applications
layers are transformed into business transactions. The Internet
commerce layer involves the sales of products and services to consumers
or businesses. The following table summarizes the four layers and gives
examples of firms in each layer.
According to their measurements, the Internet economy generated an
estimated $301 billion in US revenues and created 1.2 million jobs in
1998. Estimates of revenues and jobs contributions by each layer are
presented in the next table.
Technical standards and networking interoperability have been key
ingredients in the Internet's success as an information infrastructure.
Players in the Internet infrastructure layer, providing hardware and
software products and services, have demonstrated that the open
Internet can be maintained through voluntary efforts toward
establishing technical standards. The real challenge for assuring an
open, interoperable Internet economy will be in the applications and
Internet intermediary layers. These layers are the basis of business
processes and transactions carried out by firms in the Internet
commerce layer (i.e. e-business firms). For example, electronic
retailers such as Amazon.com rely on software and services to operate
their Web stores, and utilize auxiliary Internet services such as Web
search, online payment clearing, online auction services and real time
distribution support as an integral part of their daily business. Being
an Internet business goes far beyond having a Web-based storefront. It
means that all of the firm's business processes must be integrated and
connected with the rest of the online economy. Augmenting
interoperability in the applications and intermediary layers will be a
critical factor in achieving a truly digital economy.
E-commerce business interoperability is built upon technological
interoperability which provides an open computer and networking
infrastructure. However, technological standards at the infrastructure
level are relatively easier to reach than those at the applications and
business process levels. A few process-level standards have been
proposed and defined through worldwide industry players including Open
Buying on the Internet (OBI), trading protocols (OTP), and
CommerceNet's XML-based eCo e-commerce framework.
But as we move toward setting standards that deal not only with
information exchange, transaction and billing automation and payment
clearing services but also with trading practices, negotiation, pricing
and other market making activities, our effort to standardize and
codify these processes will become extremely difficult. Cultural and
practical differences are only one of many pitfalls in trying to
establish standards in the applications layer. In addition, time and
effort required to reach a consensus among international players and
governments may prove to be too slow to support rapidly changing
technologies and practices in the Internet economy.
Cooperation Toward Uniform Commerce Infrastructure
Standards and interoperability in the global e-commerce can be
implemented through standard setting efforts by market players. An
active role by a government is practically unwarranted primarily
because of the nature of the open, global Internet. However, such
efforts within the business applications and process layers must
account for economic, cultural and legal differences that are prevalent
in the physical markets. Corporations and industry groups alone may not
be able to overcome such barriers.
Thus, any effort toward global interoperability in electronic
commerce must walk the fine line between market-driven solutions and
government initiatives. According to the U.S. and the European Union,
the principal approach to achieve global electronic commerce is to rely
on the market itself (IITF 1996; European Council 1994). But the
primary role of governments is to provide a predictable international
legal and commercial environment upon which business processes can be
standardized and codified. A uniform commercial environment can only be
achieved through widespread international negotiation and cooperation.
Several exceptions exist in the areas of copyright, key encryption, and
electronic contract standards. Even in these areas, the uniformity
underlying these efforts is procedural rather than specific. That is,
the goal is to lay a framework within which governments can verify,
recognize, enforce, and promote international transactions. Businesses
are left to solve the problem of automating and facilitating online
transactions.
A uniform commercial environment for the global information
infrastructure (GII) must represent both international standardization
and national interests to promote economic well-being. The question is
whether a uniform law or regulation can avoid having differential
impacts on individual countries. For example, using a closed-economy
model of trade, countries leverage tariffs and income tax policies to
manipulate economic performance. However, a uniform import/export tax--
such as no tax, making all Internet transactions duty-free--implies an
open international economy which may result in the loss of policy
control over domestic economy. Domestic industries are often protected
by high tariffs, and a country's balance-of-payment position depends on
selectively controlling exports and imports. Simple uniformity may not
be acceptable to many countries if it means relinquishing this tool.
There is growing optimism at least in the beginning phase of the
international cooperation toward interoperability. For example, recent
agreements negotiated by the World Trade Organization lay a solid
foundation for global electronic commerce (see attached chapter for
details). The urgency to establish an international framework will grow
as digital products become the main commodity of the global information
infrastructure. Toward this goal, the World Intellectual Property
Organization and the Working Group on Electronic Commerce of the United
Nations Commission on International Trade Law (UNCITRAL) have worked
toward providing the basic framework to establish the copyrights and
legality of digital documents.
Market-Driven Interoperability and Governments' Role
Within the general and uniform international e-commerce
environment, specifics of technical and procedural standardization have
to rely on market players. Standardization may be achieved either
through standard-setting efforts--e.g. by defining and agreeing what
features need to be interoperable for everyone's benefit--or through
competition. However, leaving standardization entirely up to market
players will not guarantee that such an effort will not be
anticompetitive. For example, a standard-setting session among
competitors may be a disguised conference for collusion. Although
market-driven solutions often encourage competition and efficiency
without the follies of artificial government intervention, economists
and market analysts need to provide clearer definitions and analyses of
the effects of interoperability, standardization and dominance on
competition, efficiency and economic performance. Governments then need
to establish general guidelines as to what type of interoperability and
standardization are efficiency enhancing.
A vigorous enforcement to prevent industry collusion may in fact
discourage standard-setting activities (Lemley 1996). Alternatively,
through competition, one product becomes a de facto standard by
dominating the market and forcing all others to comply with the
product's standards. But, its producer is not obligated to reveal its
specifications unlike the case of industry-wide standard setting.
Should governments require that all de facto standard products reveal
their product specifications to competitors and producers of related
products? This will necessarily involve a complex process of
guaranteeing profits for the standard-setter, which is far from an
improvement over government regulations.
Our experience with the videocassette competition between Betamax
and VHS is often mentioned in order to illustrate the market's ability
to standardize products. Betamax vs. VHS is similar to having two
different sizes for floppy disks. When the VHS became the industry
standard, however, it didn't result in only one firm producing VCRs.
Under the interoperable standard (i.e. VHS), the healthy competitive
market supports numerous competitors and lower prices for VCRs.
Despite this success driven by markets, governments will need to
establish a set of regulatory principles. For example, the case of word
processing programs or computer operating system (OS) software is
fundamentally different from Betamax/VHS standards because the
competition in word processing programs or operating system software is
not about standards. Instead, it often involves a variety of products
that are vertically integrated--e.g. microprocessors, computer
hardware, OSs, application programs and contents. In fact, we witness
vertically integrated monopolists in a wide range of product markets in
the Internet economy because of the very fact that lowering costs often
implies integrating software and business processes vertically. Such an
integrated business and a dominance by a few integrated software and
service providers will become common in the globally networked economy,
especially under the assumed economic benefits of network effects and
interoperability. Traditional economic concerns on inefficient
monopolists should not simply be abandoned to promote interoperability.
Governments' role is to clearly establish a regulatory guideline which
promotes both technical and procedural standards and the market
efficiency inherent in the Internet-based economy.
Senator Breaux. Thank you very much.
Mr. Whiting, you are next, and we would ask the witnesses
to please try and summarize your statements.
STATEMENT OF MR. RANDY WHITING, PRESIDENT AND CEO, COMMERCENET
Mr. Whiting. Thank you. Good morning. It is my sincere
honor to be here to provide what I think will be a little bit
of a different background and a different perspective from
Professor Whinston on the issue of interoperability and
standards.
I am going to talk a little bit about what probably could
be termed as being nothing short of pursuing what might be
considered a free market architecture for the Internet, and
something that is much broader than just simply a discussion of
standards in this area, although standards are a critically
important component of this.
I would like to address probably something more
fundamental, and that would be the impact of what this
environment is going to have on overall business and how we
approach this in terms of the new economy.
I am here representing CommerceNet, an organization that
literally has been at the center of a lot of these emerging
Internet businesses. We are a nonprofit organization created
back in 1994 as a partnership with the Government and private
industry to start researching some of these new technologies
and some of the new business models that will grow out of the
commercialization of the Internet.
We currently have about 750 members worldwide that we do
next generation research and prototyping for in the area of
specifically new business models related to electronic
commerce, with a significant emphasis on interoperability.
Interoperability started a number of years ago from a
software industry where we were able to take different
components and plug them together in a much easier manner, and
that was at that time a very revolutionary concept in the idea
of designing software, and it changed the economies of it, and
what we are really now looking at is changing the economics of
e-commerce.
We have seen a revolution that has happened until now, but
what we are on the verge of is a second phase of that
revolution. It is something that is going to change, I think,
many of the economics of what we are doing today on the
Internet.
Whereas today we have been focusing on the concepts of
plugging pieces of software together on our own Web site, we or
most companies have focused on the idea of their Web site, the
Internet as applied to their specific company.
The concept of interoperability fundamentally is much
broader than that. It literally changes the concept from
looking at my Web site to being able to apply the power of the
Internet to the relationships that sit between organizations.
Now, as you can imagine, this could potentially have a very
profound impact, in that it lowers the barriers of the
connectivity, and the barriers that usually exist between two
organizations collaborating together on a variety of
activities.
This could change the dynamics and the economics of our
supply chain, literally moving from rigid supply chains to much
more dynamic, flexible supply Webs, giving the opportunity for
both small and large companies to dynamically and spontaneously
being able to respond to market requirements and market
changes.
I think this is something that is very different from what
we have seen in the past, and will challenge many of the most
fundamental concepts that we have about electronic commerce,
and even physical commerce.
It is going to challenge the ways we look at laws. I would
contend that many of the processes and approaches we are
currently looking at in terms of Government regulation,
standards, technology development, and business models are all
going to change very, very significantly over the next couple
of years, not just because of the Internet, but literally
because we have lowered the barriers to allowing companies to
work together and collaborate in new ways.
Now, from a standpoint of standards, which is one of the
things we wanted to look at in this committee today, I would
like to start off by quoting D. Hoeck, who was the founder and
CEO emeritus of Visa. Visa, as you might remember, was--or at
least the banking industry in the late 1960's and early
seventies was in a very similar situation, in many ways, that
we are today with the Internet. There was a proliferation of
different financial service organizations, all not necessarily
interoperating, and Visa was formed to be able to help develop
and manage some of that collaborative space.
Mr. Hoeck made I think a very profound statement in
describing some of the work that went on there, and he said
that everything has intended and unintended consequences.
Intended consequences may or may not happen, but the unintended
ones always will, and I think that that is a very telling
statement that reflects the current position we are with
standards and electronic commerce.
The concept of standards, we may find here in the next few
years is--I probably would suggest maybe even broken, but at
least not able to respond to the fast pace, the Internet time,
if you will, and the spontaneity of the marketplace that we are
finding ourselves.
We are going to have to approach this from a totally new
direction, one that does not set very structured standards or
structured laws that control the way that we do business, but
trying to find a more open framework that allows for
negotiation and interoperation between these organizations.
We a few years ago started looking at this issue, and we,
partially to our benefit from a funding grant from NIST, who I
think has been one of the leading Government organizations in
helping to look at some of the new technologies in this area,
went off with about 30 organizations and companies like
Hewlett-Packard, IBM. Sun Microsystems, Microsoft, and so on,
as well as a number of industry associations such as SFTC, and
we started to look at this from a totally different perspective
of trying to create a framework that was open that would
represent and recognize the unique contribution of specific
vertical markets.
Because we know that certain industries are going to
develop their way of doing business, but our challenge with the
Internet is being able to bridge those things, and being able
to interconnect them and link them together.
So we started on this project just a couple of years ago,
and just recently announced what may not be the solution to
this problem, but we think it is a very major step forward,
something we call the ecoframework.
This was an endeavor to build a semantic model and
framework that would allow negotiation and collaboration
between different technologies, different standards, and
different companies to be able to share information in a
different way that would encourage this level of
interoperability.
Luckily, and we are very proud to say that in a number of
prototypes, some of which have been with the Government, some
in private industry, we have seen both the test bed
implementation and actual commercial implementations of this
approach, very successfully to encourage this type of next
generation of interoperability.
Now, we also believe that there is a clear role for
Government in all of these efforts for interoperability, and
they fall into a couple of areas. Rather than simply stating
that Government should stay out of this area of the evolution
of e-commerce, like I think many industry associations might
state, we feel kind of that there is a mid-point here, that
Government can actively help accelerate the effective
utilization of interoperability in e-commerce, and I would like
to suggest a couple of very fundamental ways that that can
happen.
One, I think Government needs to continue to partner with
industry to move these things forward and to implement them
internally in the Government. I think there is an opportunity
for the U.S. Government to be a first mover, to use one of the
Internet concepts now that is often bantered about, that the
idea of taking a very strong advantage of a new technology in a
new direction to break new ground.
The Government has a huge amount of procurement, a large
number of e-commerce programs underway, and I would argue that
very few of them are on the leading edge. Many of them are, let
us take the very old business models and apply mediocre e-
commerce ideas to those, and we will try to be somewhat out on
the front.
I would suggest, though, that, on the other hand, there are
a few pockets within the U.S. Government that are on the
leading edge. One of these, I might suggest, is a project that
is an interagency activity called FinanceNet, and Auctions At
Your Disposal, which is a program that will allow agencies to
interoperate with one another as well as industry to increase
the effectiveness of disposing of Government surplus assets
over the Internet.
Another way I think that has been very successful to date,
and could be even more so in the future, is continued support
of research and development. Many of the issues that have been
brought up having to do with standards are starting to be
addressed from the standpoint of technology.
Privacy issues are being addressed by new technologies and
new technological approaches. We need to continue to research
and develop these new technologies that will take the place of
policy and regulation that we have today in the future.
NIST has done a wonderful job for this to date, and I think
should be congratulated on their success in helping fund
programs that have actually commercialized some of these
activities, although we have found in the private sector that
working with Government in funding and support in these
activities is often much too slow, and often too late, that
Internet speed and new commercialization projects runs at a
speed that I think many of the agencies in Washington here do
not understand or are able to cope with.
Next, I think that there is a significant issue having to
do with our current trade programs and legislation having to do
with laws regarding the Internet. There is clearly a role for
Government to play in the setting of laws in this area, but my
concern, and I think the concern of many of our members as we
start to look at this new world of interoperability, is that we
are building law and doing trade negotiation based on what the
model is today, at best, if not what the model was yesterday.
As I stated, we feel that interoperability is going to
dramatically change the way that we do business. Our new trade
negotiation, our legal development from new frameworks, laws,
and so on, need to start thinking about how interoperability is
going to change business models.
By the time these laws get put into place, by the time the
trade negotiations get done, we will be doing business in a
totally different way than we are today, and I think that is
one of the biggest challenges that Government has to do in
terms of understanding how this is going to impact.
Last, we continue to see in the marketplace concerns about
patent law, and I think in terms of interoperability in
creating new business processes, patent law has -- there is a
significant risk in terms of slowing down the adoption of these
new business processes. Today, you can patent business
processes and start to try to extract fees and other funds from
other companies that you are not even involved with, because
they have created or innovated in a business process that you
may have thought about somewhat before and had the foresight to
patent.
That is going to slow down these new business models. We
need to clarify and get the patent organization up to speed,
and again moving in Internet time.
Internet interoperability is going to have a profound and
extraordinary impact on how we do business, and Government and
industry has to work together to ensure these concepts pervade
everything we do, from research to procurement, trade
negotiation, and so on. The stakes are simply too high, I
think, for us to do anything but work together in that
environment.
So with that, I thank you for your kind consideration this
morning.
Senator Breaux. Thank you. Next is Mr. Habern.
STATEMENT OF MR. GLENN HABERN, SENIOR VICE-PRESIDENT FOR NEW
BUSINESS DEVELOPMENT, WAL-MART STORES, INC.
Mr. Habern. Thank you, Mr. Chairman, members of the
subcommittee. I am Glenn Habern, senior vice president of new
business development for Wal-Mart. I appreciate this
opportunity to present Wal-Mart's views on Internet standards
for e-commerce and compatibility, and enabling the growth of
global electronic commerce.
Wal-Mart was built on two simple principles, to provide
customers the best value and the best service in the industry.
What has set Wal-Mart apart, however, is its ability to deliver
on these promises every day. Wal-Mart is about commerce, not
just e-commerce. We are focusing on delivering the products to
our customers in a manner that they want to shop.
Wal-Mart.com's operations mirror our bricks and mortar
store systems, operational standards, and customer service. In
2000, Wal-Mart.com will bring Internet access to more than 90
million customers who currently shop with us on a weekly basis.
Through the implementation of an in-store kiosk system,
customers that may not have Internet access at home can shop
Wal-Mart.com via the kiosk in their local stores.
Technology is becoming available to everyone. The free
market is working and, as a result, the consumer is the winner.
We do not believe that regulations are needed in e-commerce
space to enable its growth. Allowing space for innovation has
propelled the technology industry to grow rapidly in the last 5
years. The evolution of technology is still in its infancy, and
to place an overriding structure on it in its current stage
would freeze progress.
We believe that the period of dynamic growth is just
beginning, and some conditions will hold true in the future,
namely that no standard-setting body can hope to replicate the
innovations that will be introduced accordingly as demands are
increased in the commerce industry itself.
Accordingly, we recommend the Government should not try to
force standards on industry artificially, but should continue
to permit the market to determine what standards should evolve
and at what pace.
One of the key reasons that Wal-Mart continues to lead the
retail industry is the company's commitment to applying the
latest technologies to improve our operations. Wal-Mart has
streamlined its supply chain and improved its in-store
operations.
One example of the technology that has propelled us is our
Retail LinkTM. This system enables Wal-Mart to
deliver every-day low prices and the best customer service in
the industry. Giving our customers the product they want, with
the value and low prices they expect and deserve.
Retail LinkTM allows our suppliers to make
better informed business decisions by having immediate access
to sales information. As customers' needs evolve and change, so
will their buying patterns. The successful retailers are the
ones that adjust their businesses in sync with these
transitions.
The standards important to retailers and suppliers can
exist on a number of technologies and platforms. Standards
needed in the retail industry are commerce-based, not
technology-based. For example, we interact with suppliers that
use UNIX-based systems, PC's, as well as traditional IBM
mainframes.
Already, various organizations are improving retail supply
relationships by focusing on improving the efficiency of the
entire supply chain.
In addition, Wal-Mart recently has joined a group of the
world's leading companies representing more than 800,000 small
and large companies to create the first organization dedicated
to simplifying worldwide commerce for the consumer goods
industry. Again, standards needed in the retail industry are
commerce-based, not technology-based.
I would like to thank you for this opportunity to speak
here today on behalf of Wal-Mart. Thank you, sir.
[The prepared statement of Mr. Habern follows:]
Prepared Statement of Glenn Habern, Senior Vice-President for New
Business Development, Wal-Mart Stores Inc.
Mr. Chairman and members of the Subcommittee, I am Glenn Habern,
Senior Vice President for New Business Development at Wal-Mart Stores,
Inc. I appreciate this opportunity to present Wal-Mart's views on
Internet standards for e-commerce and compatibility in enabling the
growth of global electronic commerce.
Wal-Mart was built on two simple principles: to provide customers
the best available value and the best service in the industry. What has
set Wal-Mart apart, however, is its ability to deliver on these
promises every day. Wal-Mart is about commerce, not just e-commerce. We
are focused on delivering the products that our customers want in the
manner that they want to shop. Wal-Mart.com operations mirror our brick
and mortar stores systems, operational standards and customer service.
In 2000, Wal-Mart.com will bring Internet access to the more than
90 million customers that currently shop our stores weekly. Through the
implementation of an in-store kiosk system, customers that may not have
Internet access at home can shop Wal-Mart.com via the kiosk in our
store locations. We are focused on delivering the products that our
customers want in the manner that they want to shop. Technology is
becoming available to everyone. The free market is working and we
expect prices will continue to fall with both innovation and
competition increasing. As a result, the consumer is the winner.
We do not believe that regulations are needed in the e-commerce
space to enable its growth. Allowing space for innovation has propelled
the technology field within the last five years. The evolution of
technology is still in its infancy, and to place an overriding
structure on it at its current stage would freeze progress.
In the following pages, I will describe at length Wal-Mart's
approach to e-commerce. However, let me pause to make one observation.
Wal-Mart's e-commerce program has evolved over a number of years. If
several years ago a standard setting body or a government agency had
sat down and tried to define e-commerce standards or structures, no
person, no matter how enlightened could have hoped to envision the
future and develop protocols to serve all the needs that have emerged.
We believe that this period of dynamic growth is just beginning,
and some conditions will hold true in the future, namely that no
standard setting body could hope to replicate the innovations that will
be introduced according to the demands of commerce itself.
Accordingly, we recommend that government should not try to force
standards on industry artificially but should continue to permit the
market to determine what standards should evolve and at what pace.
Providing the ultimate in value means keeping costs low, making the
supply chain as efficient as possible and ensuring that the right
products, offered in the right packages, are available when and where
customers want and need them. To maintain the highest levels of
service, Wal-Mart must ensure that proper levels of inventory are
maintained; that associates are available to assist customers; that
pricing is always up to date; and that customers can quickly find what
they need and move through the check-out area.
One of the key reasons that Wal-Mart continues to lead the retail
industry is the company's commitment to applying the latest networking,
information technology and Internet technology to improve operations.
By using innovative high-tech solutions to address each of the needs
outlined above, Wal-Mart has:
Streamlined its supply chain. Supplier relationships
have been largely automated. Computers in-store and at Wal-Mart
headquarters keep track of inventory as it is sold, and
purchase orders are sent to vendors automatically to ensure
each store is capable of meeting customer demand. And vendors
can access sales information and forecasts for the products
they provide, allowing them to adjust manufacturing levels in
sync with Wal-Mart sales. These automated, online systems help
Wal-Mart keep its overhead low, which translates to lower
prices for customers.
Improved in-store operations. Wal-Mart's in-store
computers are connected to corporate headquarters through a
powerful frame relay network, allowing near real-time tracking
of inventory, prices and purchase orders on a store-by-store
basis.
Retail LinkTM enables Wal-Mart to deliver Every Day Low
Prices and the best customer service in the industry.
retail linkTM
Wal-Mart works with more than 7,600 suppliers that manufacture the
range of products offered in its stores. To coordinate this massive
supply chain, Wal-Mart takes advantage of the latest Internet and
wireless communications technology to provide a constant
linkTM between its suppliers, its fleet and its stores.
One of the cornerstones of Wal-Mart's philosophy is making sure
that the products customers need are on the shelves whenever customers
need them. With the vast array of products available at Wal-Mart and
the fluctuating nature of customer demand, this is also one of Wal-
Mart's biggest challenges.
To meet customers' needs, Wal-Mart's suppliers often must be as
flexible and fleet-footed as Wal-Mart itself. To help suppliers meet
the challenge, Wal-Mart established Retail LinkTM, an
Internet-based resource that provides suppliers with a full range of
information on their business with Wal-Mart, updated on a daily basis.
Through Retail LinkTM, suppliers can:
Download purchase orders from Wal-Mart.
Check the status of their invoices to Wal-Mart.
Determine how many of their products were sold at
Wal-Mart stores the previous day.
Examine the effects of markdowns or returns on their
inventory.
Access reports on sales over a period of up to two
years, as well as sales forecasts for their products for up to
one year.
Upload reports and updates for Wal-Mart.
Invoices, purchase orders and other documentation is processed
through a system called Electronic Data Interchange. Suppliers use
standardized formats for a variety of forms, and can search for and
access specific information from the database at any time. The system
is used by about 5,000 suppliers to process purchase orders from Wal-
Mart, and about 2,600 suppliers use the system to send invoices to Wal-
Mart. This accounts for about 93 percent of purchase orders and 85
percent of invoices processed by Wal-Mart.
The constantly updated flow of information through the Retail
LinkTM and Electronic Data Interchange systems allows Wal-
Mart and its vendors to work together seamlessly to ensure that
inventories match consumer demand. It also allows suppliers to more
efficiently serve Wal-Mart, meaning lower costs and better prices for
customers.
Retail LinkTM is now the industry leader for
collaboration via the worldwide web. Suppliers access and share data
over the Internet and work hand-in-hand with Wal-Mart buyers to better
serve their mutual customer, the consumer. Retail LinkTM was
first implemented in 1991 as a limited-capacity, closed-network system
for suppliers. Initially the system required dedicated hardware, which
Wal-Mart provided to suppliers. In 1997, the system was transferred to
the Internet, allowing fast, secure access through nearly any personal
computer. The system now processes an average of 120,000 supplier
queries each week.
Wal-Mart maintains the Retail LinkTM system, trains
vendors on its use and maintains a technical support team to assist
suppliers. The Retail LinkTM system is composed of Windows
NT-based servers, which handle client requests, and UNIX-based servers
that handle applications processing. Many information queries from
suppliers are processed through Wal-Mart's massive NCR teradata data
warehouse, which stores 100 terabytes of information on all aspects of
the company's operations.
We recently announced a major expansion of our data warehouse
designed to expand the level of cooperation with our merchandise
suppliers. This expansion allows for significant growth in the amount
of sales history available for analysis. In the past, suppliers were
able to analyze up to five quarters of sales history. With this
expansion, they now have up to two years of data to examine, enhancing
their ability to spot and react to long term trends.
(``We have high expectations for our suppliers, and we provide a
great amount in terms of business systems capability,'' says Randy
Mott, Wal-Mart Sr. Vice President and CIO. ``Retail LinkTM
gives Wal-Mart buyers and suppliers the information they need to treat
each store as if it were the only one in the chain.'')
Wal-Mart's data warehouse, which is two times greater than the next
largest Fortune 500 data warehouse, was expanded to 101 terabytes from
44 terabytes. Previous day's information, through midnight, on over 10
million customer transactions is available for every store in every
country before 4 a.m. the following day. Today, over 7,000 suppliers
access Retail LinkTM and get answers to any question at any
time. Wal-Mart currently averages 120,000 of these complex trend
analysis questions each week.
(``It's really all about service to our customers,'' says Tom
Coughlin, President and CEO of the Wal-Mart Stores Division. ``Our
investment in this technology helps our supplier partners and Wal-Mart
buyers provide customers with what they want: the right product in the
right store at the right price.'')
These databases allow Wal-Mart to quickly and effectively predict
the needs of customers in different areas and from different
backgrounds. And by ensuring that each store receives products that
closely match its customers' needs, Wal-Mart keeps inventory costs
down.
privacy, trend analysis and consumer preference
As customers needs evolve and change, so will buying patterns. The
successful retailers are the ones that adjust their business in sync
with these transitions.
Wal-Mart uses its frame relay data network and the most expansive,
powerful teradata storage facility in the industry to keep its finger
on the pulse of customers' buying patterns. Every transaction every day
at every Wal-Mart store is cataloged and examined to find ways to
improve the product mix and customer service. While the system is used
to determine a full range of customers' preferences and buying
patterns, it is important to note that it is our corporate policy that
no information on individual customers is shared. Wal-Mart is committed
to making every effort to better serve its customers, but it also
respects customers' privacy.
Wal-Mart's website, Wal-Mart.com does not share personal data with
anyone outside the company.
Following are just a few examples of how this information is used:
Forecasts are used to help ensure that inventory
levels match customers' purchasing habits at different stores
and different times of year.
Purchasing patterns are used to determine item
affinity, or the relationships between purchases of multiple
items. For example, if Wal-Mart sees a pattern where many
customers purchase toothpaste and aspirin during the same trip,
the items will be placed closer to each other in Wal-Mart
stores, making it easier for customers to find what they're
looking for.
Wal-Mart provides feedback to suppliers on how
customers are purchasing their products. For instance, if many
customers were purchasing three of the same item, Wal-Mart
might suggest that the supplier provide the item in packages of
three. Information from the teradata system also is provided to
suppliers through the Retail LinkTM program.
By comparing sales data for the like items at varying
price points, Wal-Mart can determine whether increased sales
would allow the company to sell an item for a lower price
without affecting the bottom line.
Information for Wal-Mart's trend analysis efforts is gathered
automatically at each Wal-Mart store. Point-of-sale registers record
each item sold at every Wal-Mart store. This information is collected
by servers located in the stores' back offices, and transmitted to the
teradata facility at Wal-Mart's headquarters via high-speed frame relay
data connections. Information on a given day's transactions is
processed by the teradata system overnight and is available for
analysis the following morning.
The teradata storage facility holds 101 terabytes of information,
or 101 trillion bytes of information. This is enough storage to
maintain every Wal-Mart transaction record for a two-year period. The
system processes an average of 120,000 complex information requests per
week from Wal-Mart associates and suppliers.
Trend analysis and consumer preference efforts were launched in
1991, when a sales tracking system was implemented. Additional features
were added through the years to create today's industry-leading system,
and Wal-Mart will continue to develop new applications for the system.
global commerce initiative
The standards important to retailers and suppliers can exist upon a
number of technologies and platforms. Standards needed in the retail
industry are commerce-based not technology based. For example, we
interact with suppliers that are UNIX based and PC based as well as
those who operate on an IBM mainframe.
Already, various organizations are improving retailer supplier
relationships. Since 1986, VICS, the Voluntary Interindustry Commerce
Standards Association, has worked to improve the efficiency of the
entire supply chain. VICS establishes cross-industry standards that
simplify the flow of product and information in the general merchandise
retail industry for retailers and suppliers alike.
One of VICS current focuses is Direct to Consumer commerce (DTC).
This evolved from the interaction and development of trends both
surrounding and within the retail environment. These trends involve the
retailers and manufacturers interested in DTC, the consumers driving
the need for it, and the technology that has facilitated the
development and growth of this movement. Optimizing the shopping
experience has never been more important. Direct to Consumer Commerce
gives the retailer and manufacturer the opportunity to offer the
consumer a vast number of products in a small amount of real estate,
with consumer prompting as opposed to mandatory interaction with sales
associates. As consumer acceptance of this alternative grows, new
relationships between consumers, retailers, and manufacturers will
form. As retailers and manufacturers explore this form of Direct to
Consumer commerce, the need to standardize the information flow between
the interested parties will occur. The Voluntary Interindustry Commerce
Standards Association's (VICS) Direct to Consumer committee was formed
to address this issue. The retail industry will continue to experiment
and move forward adopting standards as they are created and approved.
Recently Wal-Mart joined a group of the world's leading companies
representing more than 800,000 large and small companies to create the
first organization dedicated to simplifying worldwide commerce for the
consumer goods industry. The newly formed board identified five initial
activities to streamline relationships between manufacturers and
retailers to better meet the needs and expectations of consumers across
the world.
This board is concentrating on key technologies and processes that
enable consumer goods to move more efficiently across the global supply
chain. Those include electronic data interchange, product numbering and
identification, standardized product tagging, global scorecard
development and unleashing the power of the Internet through Industry
Extranets.
The Global Commerce Initiative is the result of joint industry
efforts in North and South America, Europe and Asia that since the
early-nineties have been building strategic collaborations between
stakeholders large and small across the complex supply chain for modern
consumer goods. They include the Efficient Consumer Response (ECR)
movements in Europe, North and South America and Asia, together with
the Voluntary Interindustry Commerce Standards Association (VICS) in
North America, EAN International and UCC, CIES--The Food Business
Forum, FMI, AIM and GMA.
The board seeks to smooth out international variations in supply
chain standards. While much progress has been made locally within the
Americas, Europe and parts of Asia, there remain substantial process
barriers between continents. Simplifying international commerce
practices has become an immediate and pressing priority. Despite
technological advances, business processes, systems and standards that
will enable optimization of the supply chain across continental
boundaries have not been developed. These are needed to deliver better
consumer value.
Again, standards needed in the retail industry are commerce-based
not technology based.
supplier development
Wal-Mart is committed to purchasing products from local and
regional vendors and suppliers through its Vendor Development
Department. During the fiscal year ending January 31, 1999, Wal-Mart
spent $67 billion with some 96,000 U.S. suppliers. Wal-Mart has a
variety of vendor development programs, including:
minority & women-owned business development program
Wal-Mart believes that cultural diversity translates into customer
satisfaction. We are always looking for ways to better reflect the
communities in which we operate and the broad marketplace we serve. The
Minority & Women-Owned Business Development Program coordinates
services that encourage and support businesses owned by minorities and
women.
The program offers minority and women-owned businesses:
The opportunity to become Wal-Mart vendors and tap
into the company's huge retail potential.
The opportunity to provide services and non-resale
products to Wal-Mart Stores, Inc.
Start-up support through the Wal-Mart Innovation
Network (WIN), designed to nurture innovative products in
development and those that have sales histories of less than
six months.
win: wal-mart innovation network
The Wal-Mart Innovation Network encourages new products and ideas.
It offers inexperienced inventors and entrepreneurs the advice of
professionals to determine the commercial potential of products that
are still in development stage or have a sales history of less than six
months. The process also helps identify the risks involved with
bringing the product to market.
The program offers referrals to government or university economic
development organizations that may assist with further development,
production or marketing of new products.
Senator Breaux. Mr. Schutzer.
STATEMENT OF MR. DAN SCHUTZER, CHAIRMAN OF THE BOARD OF THE
FINANCIAL SERVICES TECHNOLOGY CONSORTIUM, VICE PRESIDENT AND
DIRECTOR OF EXTERNAL STANDARDS AND ADVANCED TECHNOLOGIES, e-
CITI, CITIGROUP
Mr. Schutzer. It gives me pleasure to be here today. I
represent the Financial Services Technology Consortium, which
is a consortia of financial service firms, technology
companies, Government bodies, and academia, and I have prepared
a written statement for the record, but I am going to spend
just a few minutes highlighting a few of the key points.
First, interoperability. We certainly support
interoperability. We see, as was discussed before, that the
ability to have interoperability, particularly in a network
technology like the Internet, just opens up the markets to the
greatest number of firms and consumers. It lowers the barriers
to entry in many different businesses, and it forces a lot of
competition and innovation, which is what we are seeing in the
Internet today in the field of electronic commerce.
It gives our customers greater choice, and the service
providers a much larger potential marketplace, which they can
engage in business.
One key component of which we are talking about here is
standards. Because we help achieve interoperability through
technical standards, I do want to mention that standards are
needed, but it is not the only thing needed to achieve
interoperability in commerce.
To achieve interoperability we need technical standards,
but we also need agreed-to business operating rules,
warranties, and other things such as that to accompany the
standards. We just do not achieve the interoperability in the
commerce sense.
FSTC supports the principle of open standards. By open
standards we mean standards that are available for everyone to
use, and not controlled by one party to the exclusion of
others. Of course, it does not mean that the standards could
not have been developed by a single company. They could be, but
provided those standards are then made available and controlled
or managed by many different organizations or companies, I
would deem that to be an open standard.
There is a lot happening in the standards area today.
Standards have been evolving for a period of time, but most
especially in this new era of the Internet, where we are driven
by the globality and internationalization of it, and by the
real pressing need for speed, time to market. Actually, through
the Internet, where standards are evolving in a more ad hoc,
market-driven manner, rather than legislated by any one body,
we are seeing a lot of change.
In fact, we are beginning to see a marketplace of standards
bodies as we are evolving to what will be a new model for
standards, and so we see many different standards bodies, the
old, more formal standards bodies, as well as the more ad hoc
ones. Even the existing standards bodies are evolving
themselves. The formal ones are restructuring themselves to
work more rapidly.
The more informal ones, like the IETF, the Internet
Engineering Task Force, have had to accommodate for the fact
that the growing popularity of the Internet has just made it
much, much larger, and therefore they have had to to adapt to
working in the face of that unwieldy large number.
So we are seeing those changes, and what that means is, we
are seeing a drive here where we will have many different
experiments, many different standards organizations, and it is
mostly going to be market-driven and ad hoc, and the standards
that evolve will be minimalist in nature to allow the greatest
amount of innovation around those standards to evolve.
I believe that it seems to be working, and sometime in this
new century we will probably see some new models evolve, and it
will be very market-place driven and very ad hoc in terms of
how these standards will evolve, and I would say we should let
that happen, because that will produce the best-of-the-breed
standards that really have been tested in the marketplace as
working.
For the moment the government should just keep a watchful
eye. We are going to have to watch. You certainly do not want
to get yourself in a situation, where you have one particular
company or organization that could dominate and control the
evolution of the standard, but I just do not see that happening
right now.
On the Internet there is just too many different players
involved, growing numbers, to keep that from occurring. So the
Government should just participate and support the various
standards process and let them evolve naturally. As was
mentioned, there has been a lot of exemplary examples for that,
and we should all watch as we see this thing evolve.
Of course, it is like commerce over the Internet. We do not
really know how it is going to evolve until it is over.
You wanted us to comment on what we see as the major
component of e-commerce systems, what really needs to
interoperate in order to support this.
From our point of view, we think it is those elements
necessary to support the confidential exchange of authenticated
electronic documents and information that could be readily
processed by both people and by machines. Included in that
reliable exchange is the exchange of things of value, such as
payments in a safe and trusted manner that is capable of
nonrepudiation. This is where FSTC has focused.
We have helped to develop many standards, and we support
many of other standards. For example we are active in
developing standards for digital wallets. We developed a
concept we now have operating with the U.S. Treasury called
electronic check. CommerceNet is working with us in this
regard. Electronic check moves the old checkbook into the
Internet era and actually makes use of digital signatures,
which is something that is very much in your attention. Most
recently are focusing in on the area of authentication in
electronic commerce.
We view authentication as a key linchpin. It is fundamental
to many of the issues we are talking about now. It is the
linchpin behind which you would be able to resolve information
topics such as privacy and security. I want to highlight that
when we talk about authentication, it is broader than a notion
of digital signature. It also involves the concept of an
identity, a person's attributes. People have lots of different
identities and attributes.
To give you an example of how it is broader, lets talk
about digital signatures. As a digital certificate issuer, one
of the main things I would have to do there is to issue people
digital certificates, that would linkTM people to
their digital signatures.
Well, the way in which I would have to issue those digital
certificates, if I want to do it in the spirit of the Internet,
is online. That means I somehow have to authenticate remotely
online who that person is that I am delivering that certificate
to, or who I am vouching for.
We think this is an important issue which we have not
really properly understood. We are working now to add to some
of the understanding of those issues, both the technical and
the other business aspects of it, and exploring the various
technologies that contribute to it, of which digital signatures
is just one piece.
We call this project FAST, for Financial Agents Secure
Transaction, and we welcome participation, and people to
participate in the dialog.
Thank you for your time. I am ready to answer any questions
you might have.
[The prepared statement of Mr. Schutzer follows:]
Prepared Statement of Dan Schutzer, Chairman of the Board of the
Financial Services Technology Consortium, Vice President and Director
of External Standards and Advanced Technologies, e-Citi, Citigroup
Interoperability is an important element that enables commerce. It
allows two or more systems, built and operated by different parties, to
successfully exchange and process information. Successful examples of
open standards that enable interoperability and commerce is the
Internet and the US telephone system. The Internet provides
interoperability of many important services built on top of its
information transport, email and web standards and the telephone
systems allows parties to make seamless connections and to converse
with each other globally across many different telephone systems run by
many different companies. The Credit Card System is another good
example. It enables customers of many different financial institutions
to purchase goods, conveniently and safely, at many different
merchants, both in the U.S. and abroad.
Interoperability opens up markets to the greatest number of firms,
lowers the barriers of entry and fosters competition and innovation. It
gives customers a greater choice and the service providers a much
larger potential marketplace.
Global electronic commerce advances has forced increasing reliance
on interoperability, in order to enable people to exchange many types
of information and perform many types of transactions seamlessly for
different business uses and across borders. Thus, Interoperability is
critical for the ``seamless'' interaction of users in the electronic
marketplace. The lack of interoperability translates to inefficiency,
loss in productivity, confusion, and failures.
One key component for achieving interoperability is through
standards. The word ``standard'' covers several different types of
specifications, including:
An API published by a software provider. One needs a
contract to use it, and it may change at any time;
A complete specification openly published by a
corporation (e.g., Sun's Java language or the Microsoft/Intel-
driven PC architecture). This gives rise to a ``club'' in which
members have some control over changes;
An open specification published by a neutral
institution, such as the Web consortium or the IETF. The
process enables multiple actors to control the standard without
running afoul of the antitrust laws;
A standard that is enforced by some regulation
authority, such as for example radio transmission standards
attached to the right to use a specific frequency.
The challenge is for these standards to be widely adopted, to be
clear and unambiguous, but minimal enough to allow for the introduction
of a rich array of competing and differentiated services.
FSTC activities support the principle of open standards, which
enable interoperability. Open standards basically mean that a standard
is available for everyone to use and not controlled by one party to the
exclusion of others. FSTC has found open standards, such as the
Internet protocols, foster an open marketplace where competition is
encouraged. Increased competition provides innovation in development of
new products and choices for end users. Innovation and competition
frequently results in lower costs and better products.
The Web has achieved rapid growth due to such a set of open
standards. Users from many countries can exchange information given
that they follow the Web's underlying standards (HTML, HTTP and other
Internet protocols). These standards are very clear and have few
interoperability issues. From the perspective of customers, an open
Internet maximizes the benefits that users obtain according to
Metcalfe's law. As long as everyone has the same service, then adding a
new user benefits everyone on the network (not just users on a single
ISP).
Generally closed systems do not have market share and do not
interoperate with other closed systems, and frequently do not
interoperate with open systems. And even when closed systems have great
market share, there are interoperability issues. For example, word
processing software applications that produce data in proprietary
formats pose particular interoperability issues for users, when the
formats or applications change. Many users have experienced that of
lack of interoperability when trying to share documents, with different
versions of the same software.
However open standards alone are not enough to produce
interoperability. The lack of interoperability within open standards
(or the implementations based on those standards) also causes failures
and impediments to global commerce. The more complex the system and the
standard, the harder it is to achieve interoperability. Also, in an
open marketplace there may be multiple approaches to accomplish a
similar function. Open standards are arrived at through a consensus
building process and this often takes time or does not always produce
the best standard. And standards may not interoperate between each
other and between different versions of the standard. Interoperability
issues are often a result of the complexity of the technology combined
with different business requirements. Also Interoperability issues are
not easy to solve once standards are implemented and in use.
FSTC recognizes the issues with interoperability and works in a
cooperative environment to resolve those issues, especially in the
formative stages of technologies and standards. Achieving
interoperability does require cooperation, industry debate, testing of
solutions, as well as vetting of solutions within the marketplace. FSTC
provides a forum for the financial and technology industries to come
together to work on these issues.
But there are many challenges to the open standards process. Chief
among these is that technical issues are becoming complicated by the
desire to optimize a competitive or proprietary advantage. People
frequently call for optimization, for reasons including performance
needs, lack of reliability, security issues, and poor control over
bandwidth or latency. On the other hand, today's optimization is
tomorrow's roadblock; design choices made to optimize a particular
application may or may not prove the right ones to make when a new
application emerges. And optimization in a decentralized network such
as the Internet is delimited by difficulties in reaching agreement to
deploy optimizations network-wide and could lead to vendor lock-in.
Customer requirements offer an argument against the likelihood of
such a lock-in. Chief among these is that anonymous rendezvous is an
essential capability. Business-to-business e-commerce is an important
application; it depends on the ability to establish connections between
two previously-non-corresponding companies; without this capability you
cannot get any new customers. In fact, there are many customers whose
requirements are characterized by the explicit need to work across
multiple organizational overlays without having to agree on a common
service provider. The automobile industry, for example, requires that
manufacturers and parts suppliers are able to interact with each other
absent agreement on a single network provider to serve them all.
Reflecting the fact that the Internet Commerce is today a major
commercial market, and growth in the financial interest, the growing
stakes involved in the standards process itself threaten to overwhelm
the traditional mechanisms. First, a wider market and more widespread
interest means that the number of participants has grown; it is
impossible for a working group of 100 or 200 people to do design work,
and the inevitable compromises often degrade quality and crispness.
Another factor is that the IETF does not hold the monopoly on Internet
standards development. A proliferation of groups affects standards in
the Internet, including the World Wide Web Consortium and the Wireless
Access Protocol Forum. These are more closed, narrow in scope, and more
industry-centered. Companies and industry groups, in developing
Internet standards, generally use whichever standards body they believe
to be the most effective avenue for their business plan. The same
company may pursue different standardization efforts in different
forums simultaneously, for this reason.
Institutions have reacted to these challenges in many different
ways. The IETF standard process underwent several revisions, which all
tended towards more formality in order to cope with the increased
attendance. The ITU and ANSI have tried to streamline its process, in
order to shorten the standard cycles. Various forums have arisen that
focus on specific subjects; they have adopted policies that expedite
the development of standards while coping with the antitrust
regulations.
Standards are currently being developed today in an active and very
mobile market space--a model that parallels the freewheeling creativity
of the Internet. There are two basic and conflicting attitudes toward
standards. One view is that there should be exactly one standard for
any function, and that this standard should be debated in an
environment that guarantees fair representation of all parties and fair
processing of all contributions. Another view is that there may well be
many competing specifications for the same function, and that market
competition will select which products serve best a given function. The
telecommunications world of the old CCITT and CCIR, now the
International Telecommunications Union (ITU), traditionally adopted the
first view. The reality of the Internet market, on the other hand,
points toward the second view. Today it can be argued that the market
impact of standards from treaty bodies such as ITU is essentially
indistinguishable from the impact of those of other bodies. The
acceptance and use of a standard has more to do with its applicability
to marketplace demand than who approved it. In fact, examples such as
Java, developed by Sun, or the initial Web protocols, which were
developed by an informal group of research institutions, show that the
market can also widely adopt solutions before they are blessed by any
standard group.
The right formula for standards evolution and maintenance is still
evolving and uncertain, but market forces are likely to produce the
right result. We believe that watchful waiting is the appropriate
course of action.
The major components of ecommerce systems, what needs to
interoperate for a global system of electronic commerce to operate
seamlessly, include those elements necessary to support the
confidential exchange of authenticated electronic documents and
information that can be readily processed by both humans and computer
systems. This includes the reliable exchange of value (e.g. payment) in
a safe, trusted manner, capable of non-repudiation. An example of such
a standards effort is the Electronic Commerce Modeling Language, an
effort which FSTC supports and belongs to that is developing standards
in the digital wallet area involving the exchange of payment, shipping
and billing information. Another FSTC secure payment initiative has
been its Electronic Check project; a secure means of paying by check
electronically over the Internet.
Besides working on the interoperabililty of open standards and
their implementations in the area of electronic payments, FSTC has
identified that the lack of trusted authentication in electronic
commerce may inhibit the growth of electronic commerce. Today it is not
possible for entities unknown to one another to authenticate each other
and/or validate information needed to securely complete transactions on
the Internet. Authentication is available only when the entities know
each other in some manner or share a common credential authority.
Existing solutions are not widely distributed to date and have been
technically difficult and expensive to implement. Most do not fully
address issues of attribute validation, privacy, anonymity, or
warranty. The growth in many areas of e-commerce is hindered by these
authentication/validation inadequacies.
To understand this problem more and what the issues are with
existing technology, FSTC has brought together organizations in the
financial and technology industries to explore issues, in a project it
calls Financial Agent Secure Transaction (FAST). Given the trust
relationships financial institutions have with their customers,
Financial Institutions are in a position to provide authentication
services to their customers on the Internet. FAST hopes to leverage
these trust relationships by creating a framework and protocol that
will allow financial institutions to provide the authentication/
validation services to each other on behalf of their respective
customers. This enables e-commerce to securely take place while
protecting anonymity of the parties, privacy of sensitive data, and
guarantee of any payment obligations.
Providing Authentication services needs to be understood in the
context of industry requirements, other initiatives, and technologies.
Issues with current technologies, including interoperability will be
identified. The goal of the project is to develop an interoperable
framework that leverages as much of the existing technology
infrastructure, but that also addresses gaps in the systems and
improves ease of use. FSTC is seeking participation from all market
segments to help define business requirements and to work together to
identify issues and solutions.
FSTC's main focus is on technology issues that face the Financial
Industry, and not on legal issues. However FSTC recognizes the
importance that business and legal requirements have upon the
implementation of technology and routinely seeks the advice and support
of others that are working in these areas.
FSTC is only now in the beginning of its FAST project formation and
discussion. It is not clear how to establish a legal or policy
framework that would be conducive to developing a framework for
authentication services. However, FSTC believes that by working
together, the project may be able to make some recommendations in this
area. Members of the government are invited and have come to some of
the FSTC FAST Project formation meetings. FSTC seeks participation and
input to the FAST project to help work through these questions.
FSTC is also eager to work with other organizations to share
results of its research, support the effort of other cooperative
initiatives, and/or to solve problems jointly within and across
industries. More information can be found about FSTC at www.fstc.org.
Senator Breaux. Thank you, Mr. Schutzer, and the rest of
the panel.
I take it I am hearing from Mr. Habern, I guess, an
expression that the Government really should not be directing
the standards and being the driving force in the implementation
of standardization and activities associated with it, and that
the marketplace will pretty much be able to develop these
standards themselves without involvement or interference by the
Government.
Mr. Whiting, Mr. Whinston, do you have any thoughts about
that, or should we just butt out and get out of the way?
Mr. Whinston. Well, I am certainly in favor of the free
enterprise system handling these things. As I was trying to
indicate, there are lots of examples in history where standards
are established and they inhibit innovation, and so standards
are in effect a way of drawing everybody to one approach to
something.
There may be then new innovations that come out after the
standards are set, and it is very hard for that new innovation,
if it were to upset that standard, to get adherence, so we have
to understand the tension between standards interoperability,
which lets us convert from one approach to another and the
whole----
Senator Breaux. Well, what is the proper role of Government
in trying to develop or set these standards?
Mr. Whinston. I think in terms of setting standards, as I
suggested, there has to be an understanding that there should
not be in any way an attempt to establish a monopolistic or
oligopolistic approach to that industry, and so I would suggest
that any standards meetings should be meetings which are open
to everyone.
There should not be a meeting to set standards which has
only a certain group involved, and does not take input from the
outside. All the standards that are established should be
published so everybody has access to those standards.
So I think there, it may be a role of the Government
because of the antitrust laws. That is, various companies
cannot just come together and meet. They have to have sanction
from people involved in antitrust enforcement.
So I think these ways of having open meetings, and
understanding that everything that comes out has to be
published and available to everyone, including newcomers in
industry, should be something that the Government should
enforce.
Senator Breaux. Mr. Whiting, do you have any comments?
Mr. Whiting. I think, simply stated, that Government should
not lead the standards efforts when and if there are standards
that need to be specifically stated broadly for electronic
commerce, although I think from the perspective of recognizing
that the U.S. Government at the Federal level as well as at the
State and local level plays an enormous role in terms of
commerce in our country as well as worldwide, the Government
should be an active participant and partner, and I would
encourage the Government to work as a member of industry in
participating in that.
I do not think Government should specify how we should be
doing business. I think we have discussed, it is going to limit
innovation. We run into a number of other concerns that have
been voiced today.
The other comment that I would make is that I think that
the concern about whether it is broad industry-driven standards
or even Government-specified standards of how to do business
with the Internet today, one thing we have learned is that the
innovation of the American business person will find a way
around standards that do not make sense.
So I think that if we spend a lot of time and effort and
Government resources to specify how we should be doing
business, quote-unquote, over the Internet, the business people
who are creating new entrepreneurial efforts and new startup
companies around our country will clearly find ways around
that, and will find ways to innovate, making all of our efforts
to specify how they should do business a less than worthwhile
activity.
Senator Breaux. Can anybody give me some discussion on how
do we interact globally in this whole area if the United States
has progressed probably further than other countries, at least
a majority of other countries, along the area of e-commerce,
and how we deal with it?
I mean, can we unilaterally decide what the standards in
this industry are going to be, and other countries will follow
us, or are we going to end up having two different sets of
rules and regulations when we deal globally and internationally
with electronic commerce?
How do we handle this on a worldwide basis? I mean, do we
go off and have our industry set standards and rules and level
playing fields for this country and then we are buying widgets
from Bangladesh?
I mean, how do we guarantee to consumers that everybody is
playing by the same rules internationally, unless the
Governments are going to do it separately from industry?
Mr. Whinston. Well, there are, of course, groups that are
by nature international. There are standards groups in the
communication field. There are groups that involve intellectual
property and patent which are international. The World Trade
Organization is getting much more involved in this area, as in
some sense electronic commerce is really a force for
liberalizing trade, and so electronic commerce is by nature
international.
Now from a practical point of view, many of the technology
developments in recent years in terms of electronic commerce
happen to be U.S.-based, and so you get these de facto
standards, ways of creating software that emanates from the
U.S., and in effect the standards, to the extent they make
sense on a global basis, get adopted globally.
Senator Breaux. Are other countries--I mean, you have
experience in these areas. Are other countries just going to
accept the standards of the United States, or are they going to
come up with their own, which may be different from ours, and
we will not be able to deal and communicate with them.
Mr. Whinston. I just was in Europe lecturing and talking
with people about electronic commerce. If you go on your own as
a country, and again, keep in mind that this is an
international business, you may be cutoff from commerce. If you
decide in your country you are going to do something on your
own, you may be cutoff.
Now, there are national laws that make life complicated,
for example, in many countries, and this affects, for example,
Amazon. Prices are set by the publisher.
We have in effect these laws that we have in the past where
the supplier can set the price, so Amazon has to adhere, in the
countries that it is doing business that have these laws, it
has to adhere to those laws, and it makes things very
complicated, because it is hard to tell where the customer is
coming from.
It is hard to know until at certain stages of the
transaction, that you are dealing with a person in a certain
country, and so you have to then change the way you are going
to do the billing. You have to keep up with all of these
national laws, which can be constantly changing, so countries
have laws that differ in terms of commerce from the way we
operate, and that causes a lot of cost and a lot of extra grief
to companies who are operating worldwide, but I think that is
something that may over time evolve.
Senator Breaux. Mr. Habern, I am a big Wal-Mart fan. I get
a Wal-Mart fix about every weekend.
Mr. Habern. We appreciate that, sir.
Senator Breaux. When I go running around your stores--you
spoke about having kiosks set up in the Wal-Mart stores. What
would the function of that be, just out of curiosity? If I am
already in the Wal-Mart store, I am just going to walk up and
down the aisles and pick things off the shelf and throw it in a
basket and leave. What would the purpose of this added feature
be?
Mr. Habern. There are two things we are trying to address
with the kiosk. Currently, the statistics are about 35 million
people have access to the Internet, and it grows daily. There
are still a large number of people who do not.
Many of our stores are in rural communities, and in those
communities we do not have the same assortment that we do in
some of our newer, larger stores, so we believe that it allows
the customer to have access to a larger assortment, perhaps,
than they would in that particular store.
Second, we believe it offers the consumer an opportunity to
buy something as a gift and have us worry about getting it to
their grandchildren in Green Bay, Wisconsin, even though they
may live in Florida.
Senator Breaux. So they would actually be able to do the
transaction over the Internet in your store, have your company,
wherever the product is, send it out?
Mr. Habern. Yes, sir. It is really the Wal-Mart.com site on
a kiosk, that they have access to all the goods and services
that we have in our entire assortment on Wal-Mart.com.
Senator Breaux. You talked about, Mr. Whiting, a supply
Web, and maybe along the lines of what Mr. Habern is talking
about, what were you talking about when you talked about the
supply Web concept?
Mr. Whiting. Well, the concept we have been looking at
relates to, if you think about the way that many supply chains
are built today, they are oftentimes built on existing
relationships with long-time suppliers, and they are oftentimes
very structured, defined by voluminous contracts and rules, and
oftentimes even the technology that has developed over time
that is proprietary within a company of how they manage their
supply chain.
I am going to do business with supplier A, because I have
always done business with them, and I have a 20-year-long
relationship with them, and by the way, I have a contract that
pretty much makes it real expensive for me to try to go to
anybody else.
What we are looking at is the Internet, and especially this
ability to improve the ease with which you can
linkTM with other companies. Wal-Mart, for example,
the linkTMing with a supplier of clothing, of being
able to reduce the barriers, the technological and the legacy
information technology barriers to adding or eliminating
current suppliers that they may not want to do business with.
So if you go in that direction and you start to lower those
barriers of interoperability between suppliers and vendors, you
have a greater degree of flexibility that is automatically
interjected into the system, so you literally can start to see
in some instances supply Webs, literally a very disconnected
kind of spontaneous model, where companies can go in and say, I
want to carry a new line of product, who is the best supplier
for this, and being able to go out on the Internet and
linkTM the two, the logistics and the supply line
together very quickly without historically the large degree of
negotiation and machinations that oftentimes have to go around
of adding a new supplier.
Senator Breaux. I was also intrigued by the FAST concept
you talked about, Mr. Schutzer, that stands for the Financial
Agents Secure Transactions, with the explosion of utilization
of e-commerce and buying everything and having everything sold
over the electronic network, obviously that creates incredible
opportunities for con men with great imaginations to try and
con the average buyer out of their dollars.
How does someone feel secure in buying something over the
Internet, particularly with a supplier that you have never had
dealings with in the past? How would the FAST program perhaps
help in that regard? How would it work?
Mr. Schutzer. Well, we feel that if we could evolve some
kind of a framework, both technology wise for interoperability
and businesswise, whereby organizations that you have a
relationship with and could trust could provide authentication
services regarding different individuals and corporations and
attributes thereof, this could then provide some of this kind
of needed glue to address the issue you noted. Of course this
information would only be provided with the consent of the
individual or corporation.
So that when you wandered somewhere where you were not
quite sure who you are dealing with, or you are not quite sure
what they were providing [for example, they had some promises
and guarantees, perhaps privacy warranties, but you were not
quite sure whether they would fulfill that promise], these
could be verifying by a trusted third party.
Senator Breaux. Do you mean like a screening service of
suppliers, perhaps?
Mr. Schutzer. Perhaps. For example, let us say I have a
wallet, and you are wanting to provide information to a Web
merchant via the wallet. This information can include shipping
information and financial information. You might be concerned
about that particular merchant, are they really who they say
they are, can I trust their privacy statement as to how they
will treat my information. Well then, we could be providing, or
we could be working with the agent of that merchant, to provide
some degree of assurance and recourse.
So how could we provide a framework that is neutral on the
technology--there are lots of different technologies we are
experimenting with--and still achieve the necessary
interoperability to allow those services to grow and prosper?
Senator Breaux. So this is still a developing system?
Mr. Schutzer. Right. Right now we are basically and mostly
at the issues stage. In other words, what is the concept? What
are the issues? What are the various technologies? Then we hope
to evolve into some piloting or prototyping, of a suitable
framework.
Senator Breaux. Would it be fair to call it some kind of a
clearinghouse type of operation?
Mr. Schutzer. Well, it might involve in a sense a
clearinghouse. That is where the business rules would come in.
In other words, how would I, indeed, know who that other agent
is that is doing the certification? How would I trust them, and
how would we share the liability?
In the business space there are some of those kinds of
certifying organizations cropping up. In fact, we participate
in one, Citigroup does, and it is a global organization, which
has large financial institutions from the U.S. and Europe and
Asia.
Senator Breaux. I take it all of you would agree that this
is something that the private sector should be allowed to
develop and Congress should not come in and pass a law
requiring it, is that right?
Mr. Whiting. Yes, sir.
Senator Breaux. I got that impression. Thank you all very
much. It has been very interesting. The chairman is going to
have some questions since he has returned.
Senator Frist. Again, I apologize for having to step out.
Coming back to some of the comments I made in my opening
statement about the interoperability aspect, could each of you
or any of you comment on the role of formal standards of
interoperability specifications from industry consortia, from
the de facto standards and establishing interoperability of e-
commerce systems, and help put that in perspective for me?
Then I also want to ask a followup question as a part of
that as to the small- and medium- and large-size businesses'
ability to participate equitably in all of these arenas, so let
me throw that out.
Again, it is fairly broad, but it really is trying to tie
all three together.
Mr. Whinston. The interoperability issue has been the main
basis for the growth of the infrastructure, for the Internet
infrastructure growth, and there you have lots of committees
looking at defining new protocols as the technology improves,
so that you maintain this interoperability.
So it is well established at the technological end of the
spectrum to develop standards, to recognize that technology is
constantly improving, and to make sure that those standards for
interoperability are updated so that the full benefits of the
new technology can be achieved.
Now, on the issue of small and medium, the examples that I
would give which relate to the issue would be things like eBay,
Amazon, Yahoo. What they have done is to define a marketplace
and to tell small business you are welcome to come to this
marketplace, and we are going to evaluate you.
So eBay has an evaluation procedure. They have got various
stars and thumbs up and thumbs down that come from looking at
the experience that customers have in dealing with that small
business, so my feeling is that the value, the stock market
value of eBay is not in the fact that they have auctions, per
se, or not in the auctions software, but in the fact that they
have established a worldwide marketplace and a recognized
system of evaluating customers of eBay, both buyers and
sellers, so that people who go to this site know that they have
some degree of trust.
Amazon, to compete with eBay, offers a certain amount of
guarantee, money-back guarantee. Now, I do not know the details
of that, and of course any of these guarantees, the devil is in
the detail, but you are seeing a competition to bring small
business, which is really the creative basis of the economy,
into the marketplace, but dealing with the trust issue on a
commercial basis by having these well-recognized brand names,
in effect monetizing their worldwide brand name through the
conveyance of trust to the participants in the marketplace.
Senator Frist. Mr. Schutzer.
Mr. Schutzer. I believe we are seeing a new ecology of
standards bodies evolving, and that is being driven by the need
for time to market.
What we have learned is that if you go through a formal
standards process, that oftentimes, (a) they overspecify, which
is bad, because then we stifle innovation, (b) they are
consensus-driven, which means we often do not get the best of
the breed, we get a compromise, and it takes a long time for it
to come out. (I do not really know how--and it is because it is
internationalized?)
Many times these bodies are very hierarchical in nature.
For example, we will do things in the U.S. under ANSI and then
will put it up to ISO, the international body. Many times we
have different organizations, and different Governments take
opposing positions, and they play that kind of game.
So those (standards) organizations are trying to come to
become more rapid and responsive. In the meantime what we are
starting to see another trend.
What we are seeing is groups of companies, and it could be
just one or two, that care the most about something, will
actually go out and develop a standard, and that standard will
be proven through the fact that it actually works. There may be
some competing standards, in which case we let the marketplace
sort of play that out.
Then what happens is, because we all want that network
externality, that network effect, we want to have the widest,
broadest market, it becomes in your best interest to then turn
theses standards over to a more formal standards process where
the standard can gain wider acceptance and participation in the
future evolution.
So I am not saying--we do not know exactly how it is going
to turn out, but it is beginning to look like that. Those of us
that care the most about something begin to develop it, we
rapidly produce some standard, we cooperate within a smaller
number, then we turn it over to some of the more formal
standards bodies, and the speed at which it goes from the U.S.
to the international is very rapid. Sometimes it is in
parallel.
Senator Frist. Thank you.
Mr. Whiting.
Mr. Whiting. There is a couple of very fundamental things
to remember when we talk about standards, and I think both of
the two previous comments bear this out. There will never be a
single standard for e-commerce, and we recognize that standards
change and evolve, and there is always innovation happening,
even in the standards area, and so our real challenge is not
necessarily to create the standard, but really is to figure out
how we can create an environment and operate in an environment
that companies can come in and find out how another company
does business.
For example, if I go out and I want to sell into a
particular marketplace, I want to go find out what standards
they may adhere to. There may be technology standards, there
may be business process standards, and I need to be able to go
to some place, almost like we had mentioned earlier, the idea
of a clearinghouse or clearinghouses that I can go and find out
how the potential partner does business, and I can use some
technologies--in fact, there are technologies being developed
today to facilitate negotiation between different ways of doing
businesses.
I can go out and say I do business this way, I support the
Rosetta Net standard for procurement, or I do business this
way, and I support a competing standard, and having technology
that negotiates the common basis between those two that allows
us to establish a trading relationship, and that is the really
fundamental part to it, and so we have to think about standards
as a way to interface and not to create common technology, or a
common piece of software that we all use. So that is, I think,
the first point.
In terms of the small- and medium-size enterprises, the
same concept plays out. If we have large companies building
standards and driving that, which is one of the down sides of
the historic standards process, is that large companies tended
to overly influence the development of those much oftentimes to
the detriment of small businesses.
The concept of building interfaces and having an
environment that allows software and e-commerce to literally
plug and play businesses, that I can create new value and new
entrepreneurial advantage by being able to plug in my business
lots of other places.
So if I have a set of interfaces that I know I can plug my
business into, or I know how companies work in that way, the
small and medium-sized enterprise actually I believe has a
significant opportunity. I think this is being borne out by the
new class of the Internet startups.
We really have two classes of small- and medium-sized
enterprises in this country. We have the old school that says,
I have kind of boundaries around my company, and I am going to
kind of maybe have a Web site.
There are other companies that come in and say, I have an
open interface as a philosophy and a culture in my company, I
will plug in and partner with anybody, small or large, in the
marketplace, and I am using the Internet as a way to enable
that.
That is really the nature of a lot of these new, very
aggressive fast-growth small companies that are being very,
very effective in the marketplace, and I think that is a model
many other small- and medium-sized enterprises can emulate and
gain a lot of success in the marketplace.
Mr. Habern. We operate, Senator, with a number of
standards. The mass merchandising business, which is our
original business, had one standard. When we got into the super
center business, and got into the food business, there was
another standard. We have elected to adopt the support of all
of those standards.
I think as has been pointed out earlier, these are
sometimes very specific, and to have one overriding, grand
standard I think would be so complicated to implement,
particularly for small- and medium-sized businesses, it would
be onerous. It would not help the growth of e-commerce.
So I think that the standards that are set by whether they
be industry groups, or more formal organizations, we are not
going to see them in this country or worldwide. I think the
fact that there are some out there today--and many of them,
quite frankly, allow small businesses to do business with us
today on an efficient basis, as well as some of our largest
suppliers who have a vast amount of technology and business
process expertise.
So I think the Internet has allowed us to have smaller
companies participate with us in the business-to-business
transactions and the startup and the .com industry. It is just
brand-new, and to see how fast that has grown, and the fact
that they have been able to innovate I think is, on its own it
gives us some indication of how fast things can happen in that
industry without specific standards.
Senator Frist. One of the barriers of integrating
electronic commerce into a business operation is the perceived,
and maybe it just may be perceived, and you can comment on
that, high startup costs.
You have a dynamic changing marketplace, and a marketplace
for standards out there very quickly, and this whole concept of
having a small- or a medium-sized business investing in
whatever startup costs there might be, could be comment on
that, the perception of high startup cost? Is it truly a
barrier, and could you comment on the effects of the different
types of standards, and the interoperability specifications on
those startup costs?
Mr. Habern. Well, I think 20 years ago certainly, the
startup costs were very large, to support some of these e-
commerce standards that are in place today. We have new
suppliers probably more so in our .com business, because we are
taking on some new suppliers, but also in our innovation area
of doing business with small and minority-owned companies, that
you can buy a PC and for a few hundred dollars, literally you
can get into the commerce business to do business-to-business
transactions very effectively, and keep costs down and yet
participate in e-commerce.
So I think that it may be a perceived issue more than it is
a real issue, Senator, in the cost of getting into that
business.
Senator Frist. Other comments.
Mr. Whinston. Well, the startup issue for small business, I
would agree, is not really that great. You can, if you are a
merchant you can decide to go on the Web, get somebody to, or
get some company to develop a Web site for you, get involved
with these companies that will give you the trust, or the trust
issue so people pay attention to you, and have access to your
site, and then you are in business, and to the extent you do
business, you pay transactions fees, and so there are more and
more small businesses that have abandoned their physical site.
I think there is a big startup for large companies. I think
that--and it is more of a culture issue. Large companies have a
tradition of operating in the bricks-and-mortar space. They
have huge investments in that.
They have got huge staff, and to the extent they go into
the .com area, it raises concerns about the direction of the
company, whether people who have training and jobs in the areas
that depend on the physical bricks-and-mortar to continue have
a concern, and so there is a strategy issue of making that
transition from a traditional, whether it is established bank
or brokerage firm that is doing traditional telephone business
and high commissions, or a traditional bricks-and-mortar
merchant, there is, I think, a significant challenge in
shifting over to this new, what we consider more efficient
economy.
So I think for small business, people just jump into it,
and people have unique ideas these days. You can walk to a
dozen venture capital companies and spend a week or two and
probably walk away with a couple of million dollars to finance,
so I think the U.S. economy is so vibrant in electronic
commerce because of the behavior and the initiative of people
who are starting businesses that 1 day and a year later they're
public companies with market values that rival companies that
have been in business for 100 years.
Mr. Whiting. The issue for small businesses in this area
is--I would agree with my panelist on this--is not the cost of
acquiring new technology. That has really been an opportunity
that service companies have stepped in and built a whole new
industry of application, service provider and commerce service
provider over the Internet, where small businesses can come in
and very quickly get online and do it.
The cost for small businesses today is probably more in the
area of having the right business expertise. It is a very
different thing of having an old time small business, mom and
pop type store moving to the Internet and thinking about the
right business models and the right value proposition that they
can bring to the Internet.
That is where the cost comes in, because I think they start
getting in and saying, they have these visions of glory on the
Internet, and not really know what they are doing, and/or try
to find people who can really advise them properly on the right
way to do business on the Internet. That is probably where the
expense comes from, is not getting the application of services
or the Web site up. It is finding out somebody that is actually
going to be honest with you to help those small businesses
understand how to bring their business onto the Web and into a
new environment.
The concern is, is that if you listen to the radio today,
how many advertisements do you hear saying, you need no
Internet experience, I will train you to be an Internet
consultant, you can make hundreds of thousands of dollars
because small business people will give you lots of money to
have you tell them how to do business.
This is a big concern, and it is not the technology side,
it is the expertise side, and that is the biggest challenge I
think that small business people have, is who to trust and how
to find best practices, and how really to do this.
If you have got a good idea, just as Professor Whinston
said, you will have venture capitalists coming after you
wanting to give you money, giving you systems, doing everything
for you to put you onto the Web, but you have to have that
basic understanding of a good business concept.
Mr. Schutzer. I would think the beauty of the Internet is
that because of the interoperability it has driven all of these
components down to commodity prices, and so you find that the
PC's, the communications, even the storage you can have is very
low, and your cost, your barrier of entry, is really low. This
makes it easier to succeed provided you have the insights and
the intuition on how to start up a business.
Just a case in point, there is a company called Blue
Mountain.com. Blue Mountain.com was a small, little card
company in Colorado that actually had more of a philosophy of
life in terms of how to communicate to people, rather than
trying to make money. Their son was somewhat knowledgeable
about the Web.
They got this notion that they would--(actually a notion
that came out of some work from MIT and other places), make
greeting cards electronically, and allow people to customize
them and send e-mails to their friends, allowing them to pick
up their customized greeting cards on the web site. These cards
had animation, and sound, and all sorts of neat things. When
you send your friends these electronic cards, you would also
let them know it came from Blue Mountain.com, and so Blue
Mountain's advertising was by word of mouth.
They became, I think, number 5 or number 6, correct me if I
am wrong, in terms of the most visited sites, and just recently
they were bought out by Excite@home, which was also another new
startup for, and I forget the exact number, but I think we are
looking at about $800 million or something, with zero revenue.
So that is the perfect case. Out of nothing, a small ma and
pa shop had a better idea, nice startup, and were successful.
Senator Frist. We will close down with this, but let me ask
you again, and I asked the first panel, as you heard, something
about health care, and it seems to me on this subcommittee,
which is Science, Technology, and Space, we do a lot in terms
of broadband Internet communication.
It is pretty amazing to me how inadequately applied is the
technology to the field of health care, yet it is the largest
industry in the aggregate that is in the United States of
America, and so I want you to help me with this in terms of the
standards, the interoperability, the specification for
standards, the private development of standards, what
Government does.
As a physician, I see a patient. I have my Palm VII, or
whatever the latest is, in my pocket, where I have just gotten
the news, the weather, the directions to wherever I am driving,
the score on the ongoing baseball game. It is in my pocket,
though, and I do not pull it out.
I see the patient, I spend, say, 30 minutes doing a
physical exam, and I order probably maybe $3,000 worth of
tests, a series of tests. That might be an MRI for a head ache,
or a CAT scan, or an electroencephalogram, or it might be an X-
ray. I write that down on a piece of paper, and give it to
somebody, a person who walks in the room, with my staff, and
they go to the telephone and call and order the tests.
I do the physical exam, and after that 30 minutes I pick up
the dictaphone and go and dictate that physical exam, history
of the present illness, past medical history, review of
systems, physical exam. It takes me probably 4 to 5 minutes to
dictate through that experience.
That is given to a transcriptionist who is in--typically if
it is four or five physicians she will have to hire a
transcriptionist. That transcriptionist puts a paper record
into a huge chart that sits in my office, but there is a chart
just like that over in the rheumatologist's office who she saw
2 weeks ago, and over in the neurologist's office when she
fell, and then a whole different one in the hospital.
In my own office, because of Federal regulations that are
constantly changing every 3 months to 6 months, we have several
thousand codes, not just for the tests, but also for the
interaction, how many minutes were spent, what the diagnosis
was.
Because of another series of regulations there are lawsuits
today where people will come in as to whether you upcode,
appropriately code, or down code, because we as policymakers
have got to get the waste, the fraud, and abuse out of the
system.
So the physician pays for a coder that does nothing but
look through these thousands of codes, trying to match how much
time you spent, what the presumptive diagnosis was, past
medical history, how complex, and pulls out a code that this
physician is paying for, or that office is paying for, because
he or she does not want to be sued or put in jail.
Then you start the billing process, which is a whole
different track that this coder does not talk to, and you have
somebody who is going through doing the same thing off the hard
record that has been dictated, transcripted, and in the chart,
reading through it to figure out how much you are actually
charging, either Medicare to send the claims, or the private
company, but you belong to 12 different managed care companies
today in the private sector, and all of them do not seem to be
communicating very well.
So you have to have somebody actually going through and
saying, how much will this particular company, managed care, or
HMO, or PPO, how much will they reimburse for a 15-minute
office visit, routine history, and physical exam, which is very
different.
The billing for that then is sent off, and if it is for
Medicare, the regulations vary among, I do not know, 15 or 16
different entities that the Government contracts with using
certain codes, but the 16 different agencies really do not
communicate.
They use different standards, and therefore the risk of
fraud and abuse is therefore even higher, because the Federal
Government will come in and say you billed too much, or too
little, and yet there is a lack of consistency among these
adjudicators, these 16 different--I do not know if it is 16,
maybe 12 entities chosen by the Medicare system.
Again, at-risk, because of the lack of standardization
among those.
The medical record, of course, is sitting as a hard copy
here, because there are no uniform standards there, and the
risk of privacy. The billing claim forms, there is a lack of
uniformity there.
Is that an interoperability problem? Is it the fact they
have not gotten together, or is it a competitive problem that
has kept them apart?
Now, clearly, what I envision is taking the Palm Pilot out,
just going through very quickly, or some equivalent of that,
where instantaneously you get rid of the code, or you get rid
of the transcriptionist, the medical record--you may have a
hard copy somewhere, but it can be shared among physicians and
hospitals appropriately.
Is that a problem--all of that that I just told you,
because clearly we have got the technology. Is the problem a
lack of standards? Is it industry? Is there a role for
Government?
We have got Medicare, which is the largest health care
entity in the United States. Do we have some responsibility for
accelerating that process by forcing some standards, maybe just
the framework in which it would give all of these small
companies and the managed care companies some sort of incentive
to come into and allow the innovation, the creativity, and the
dynamics that all of you are talking about, or do we stay away
and allow the system to work its way out, but recognize that we
are at this revolution which we may be only 20 percent through,
but health care is still in the dark ages as far as I am
concerned.
A big question, but there is a potential Federal role that
I do not want to start walking down that if it is going to put
clamps on innovation and creativity. I am looking for
efficiencies. I am looking for higher quality of care. I am
looking for eliminating this sphere of fraud and abuse that
physicians now are operating under in the daily practice of
medicine.
A big question, and I know all of you have thought about
part of that, but do not spend a long time on that, but it is
something I am struggling with.
Mr. Whiting. This is an area that is very close to my
heart, as well as, I am sure, yours, given your background. I
am actually kind of--separate from CommerceNet, one of my
secondary endeavors is, I sit on the board of one of the new
Internet health startup companies called Medecentric that is
dealing with some of these issues, and so I spend a lot of time
with my board of directors--primarily they are all doctors--
talking about these issues.
There are--and I think you hit on the one key word in this
in terms of incentive. Today, as you know, in medical practice,
doctors, to be able to be motivated to implement some of these
new technologies, there are a lot of doctors that they see it
in terms of singularly as reduction in cost, or avoidance of
costs, and that is why they are not doing it.
Standards, the HMO practices, the conformance with HPIC,
some of the other standards that are coming out, to them look
like additional cost and additional overhead in terms of their
practice.
Additionally, you have increasing legislation under the
start guidelines having to do with being able to sell
pharmaceuticals, or nutraceuticals. That fact is that doctors
again are being pushed on all sides to reduce the amount of
entrepreneurial activities, appropriate entrepreneurial
activities that they can engage in.
I think this is also one of the challenges even on the
Internet health care side, is that there are so many
regulations of what to do and what not to do that it has gone
beyond that of just defining what is the appropriate basis and
how you do business, or what you do, to how you do it.
We have--and I think this is kind of the dark side of the
whole standards effort. I would point possibly to some of the
down sides of HPIC. I think the basis of HPIC was to define a
certain way of making sure that the health care data records
flow from one organization to the next, but where it went wrong
was not defining what it should do, but how it should be done,
and starting to specify it so definitively that you cannot
innovate in process or in practice.
I think that that is the challenge with a lot of the health
care standards, and in our startup with Medecentric of looking
at where we can add value, particularly in the patient-doctor
relationship, and using the Internet to facilitate that, the
challenges with all of the regulation and standards that are
seemingly on the surface, more inhibiting than acting as a
watch-dog, an appropriate watch-dog in this, it is a very
daunting task.
So I would challenge the Government in this one particular
area. There is an enormous amount of revenue and an enormous
amount of commerce, and an enormous opportunity for innovation,
but because of the long-term structure that has been put in
place in this area, it makes it very, very difficult for
innovation to happen, and there is very little incentive, as I
am sure you know, from the physician's standpoint, to be able
to interoperate even with other physicians in sharing patient
data records and so on. It is very, very difficult.
Senator Frist. Thank you. Any other comments?
Mr. Whinston. I guess I would just make a suggestion that,
following along the way you were describing how things could be
altered, to set up demonstration programs, that is, to invest
with certain hospitals in introducing more powerful technology
that is, let us say, patientcentric, that tries to deal with
these organizational structural issues, and then to suggest
that reimbursement to hospitals in the future would be
calibrated based on these demonstration programs.
That is, there is a best effort, a best practice which is
possibly much better than what is going on in general, and to
start pushing those hospitals by calibrating reimbursement
based on your demonstration programs.
Senator Frist. That comes to the issue of how we might
incentivize.
Mr. Whiting. Particularly getting the HMO's involved. That
has always been one of the challenges, starting to tie the
HUDIS guideline compliance and the rankings of the HMO's, and
then provide a way that that incentive can flow back to
doctors, because today, again as you know, as I understand, it
is very difficult for a doctor to be incented to help the HMO's
to do efficient work.
I think kind of just as the professor had indicated of
tying things like the HUDIS guidelines, and HUDIS rankings I
guess is the appropriate term, or proper term, to things that
are more incentive-based, or technology developed test beds,
prototypes and so on, would be a great step.
Senator Frist. Any comments?
Mr. Schutzer. I agree with the comments that were made. I
do not have anything to add.
Senator Frist. Those of you who studied it, would you say
that health care--would you agree with my assessment, which is
really more just observational, that health care is lagging
behind other industries in the total integration, or not?
I know we are seeing a lot in terms of startups, but I can
tell you right today, if you go to the banking industry you do
not see thousands of ledgers and green papers and pencils
there, and you go into the doctor's office, and you see exactly
that, and where the call for information, I would argue, in
comprehensive health care is totally dependant on the exchange
of that information, and yet the exchange now is like a bunch
of silos that are sitting out there.
So that is just sort of an observation. I guess, Mr.
Whiting, you are in the middle of a startup, so you could say
there is a lot going on out there.
Mr. Whiting. There is a huge amount of investment. There
seems to be a lot of money flowing into IT and health care, but
there seems to be correspondingly a relatively low amount of
innovation.
Most of the innovation I think is happening to literally
disintermediate the physician. If you look at everything from
onhealth.com, myhealth.com, healthcenter.com, et cetera, et
cetera, all of those are in essence attempting to
disintermediate the doctor, because they can step out of that
space. That is kind of from the doctor upstream.
Hospitals, labs, HMO's, insurance company, Medicare and so
on is a morass that few of the innovative entrepreneurial
organizations want to even get close to. I have talked with a
number of software companies who have developed very good
patient management systems and technologies, and literally have
put it on the shelf because it is too difficult to market, and
there is not the innovation level of investment that is going
on kind of upstream.
Most of the investment you see, and the innovation, is
happening, again--go on to the Internet and find health care
information. I will just forget my doctor, and I will not go to
him. If I am worried about my cholesterol level and I want to
find out about Zocor or Provocol, I am not going to go to my
doctor. I am going to go to one of the Web sites and type in a
search engine and learn about this.
I think that is where all of the investment and
innovation--and there is a huge risk in that, because
disintermediating the doctor is not what we want to do. That is
absolutely the wrong thing that is happening, but the plan and
the program as it is set is incenting us to do that.
Senator Frist. Well, listen, thank you all very much. As
you can tell, I really view this as the start of an ongoing
dialog on an important issue that all of you have contributed
to greatly in terms of our understanding, our initial analysis
as we go forward, and I personally appreciate all of you taking
time from your very busy schedules to participate in that
dialog, and look forward to continuing that as we go forward.
Thank you very much.
[Whereupon, at 11:55 a.m., the subcommittee adjourned.]
A P P E N D I X
Response to Written Questions Submitted by Hon. Bill Frist
to Dan Schutzer
Question 1. Whereas the North American marketplace seems more
willing to accept non-standard solutions, this has not always been the
case internationally. This has led some governments to set and use
local standards as trade barriers. There have also been examples of
marketplace standards that have been usurped by more costly formal
standards due to local practices.
a. Can you comment on these practices in general, and then
specifically as it relates to e-commerce.
Answer. With respect to the Internet and Information Processing, we
have seen the reverse of this practice. TCP/IP, and other associated
IETF standards, has replaced the ISO standards in this area, even in
Europe. The IETF and W3C are global organizations which have active
participation and adoption of their standards in Europe, Asia, etc. as
well as the U.S. Also in the area of computers - first IBM's operating
systems and hardware interfaces became the de facto standard throughout
the world, now Microsoft operating systems and Intel-compatible PC's
have become a similar world-wide defacto standard. It seems in many
cases, a defacto marketplace standard that is in place because of a
combination of being a superior technology and/or has succeeded in
capturing a dominant marketshare, will succeed in making the more
formal standards obsolete. Of course there are exceptions to the
successful emergence of an industry-accepted de facto standard. A
recent example is the wireless digital cellular phones - but here much
of the outcome could be attributed more to the slow introduction of
digital wireless in the U.S. and the confusing array of non-compatible
standards being offered by competing companies in the U.S. than any
other reason.
b. Can you comment how these issues affect many of the small
businesses either involved in the e-commerce software application
market or contemplating using e-commerce technologies in their business
operations?
Answer. If anything, it encourages small businesses in the e-
commerce area, who think they have a superior technology, to try to
develop and set new standards based on their technology. They try to
gain acceptance for their standards by both actively promoting these
new technologies in the standards arena, and by moving quickly, with
sufficient partners, to gain a critical mass of customer acceptance
fast, so they can dominate in the marketplace. And market domination,
in the end, seems to be the major determinant as to which technology
standards will become widely adopted.
Question 2. What is e-Citi? Can you elaborate on some of
Citigroup's e-commerce practices and some of the interoperability
issues that it has faced in implementing its e-commerce strategies?
Answer. e-Citi is the part of Citigroup that is responsible for,
among other things, Citigroup's Internet strategy and for the creation
of Citigroup e-commerce and e-financial products and services, and
their delivery via the Internet, telephone access devices, and ATM
networks. Because we deliver services over the public networks (voice,
data, wireless and wired) and need to interface with many other
financial institutions and exchanges, interoperability is key to all
our e-commerce strategies. As a result, we are very active in the
standards arena, building our solutions to existing standards and
helping to define new standards where they are needed, as in the case
of electronic bill presentment and payment and remote authentication.
Question 3. You mentioned that the growing stakes in the standards
process threaten to overwhelm the traditional mechanisms. What can the
government do to ensure that the ``playing field'' is level throughout
this process?
Answer. This process currently seems to be proceeding well. It
could fail for many reasons, but for the moment does not seem to need
any special attention, other than watchful waiting - to see if any
unfair practices or imbalances occur. However, it is important that
government agencies, such as NIST, continue to participate in the new,
open standards processes, such as W3C, IETF, and other more informal
industry groups, as well as the more formal standards bodies, such as
ANSI. In this way, the government can encourage the standards
processes, express government user requirements and gain a better
understanding of the process in order to detect unfair practices.
______
Response to Written questions Submitted by Hon. Bill Frist
to Andrew B. Whinston
Question 1. You mentioned that augmenting interoperability in the
applications and intermediary layers of the Internet economy will be a
critical factor in achieving a truly digital economy. Can you elaborate
on why interoperability in these two layers are so important to the
overall Internet economy?
Answer. In the applications and intermediary layers of the Internet
economy, the key enabling factor is the network connectivity. By being
networked, firms and consumers can interact in a degree that couldn't
be imagined before the Internet and the World Wide Web came to dominate
information technology applications. Major business-to-business and
business-to-consumer applications such as supply chain management,
logistics applications, knowledge management within a corporation,
online retailing and auction markets take advantage of the networked
economy.
Interoperability is essential if these market participants must
communicate, exchange information, deliver and use products and
services in real time. In addition to the fact that these processes
have become much more sophisticated and dependent on third-party
technologies and products, many products and services themselves have
become portfolio or bundled products and involve multiple vendors and
users who must interact with each other. Interoperability and standards
must exist not only in communications networks and data types
transmitted over these networks but also in products and business
processes which are the basis of integrated, networked economy.
The effort to promote interoperability should be distinguished from
standardization. Interoperability is often equated with making products
and processes conform to the same standards, which may imply making
products the same. This would reduce the level of competition and
innovation by discouraging differentiation. However, interoperability
in the applications and intermediary layers means establishing a common
set of product specifications and procedures such that businesses and
consumers can interconnect to carry out economic activities. Such
interoperability will promote competition and create more
opportunities. For example, TCP/IP standard, the Internet protocol, is
behind this explosive growth of the Internet economy by assuring
interoperability among all business applications developed for the
Internet. Such interoperability at the basic communications networking
should be carried over, to the extent it is feasible, to other levels
of the networked economy.
Question 2. Can you elaborate further on the differentiation
between monopolistic behavior and cost-effective vertically integrated
product offerings?
Answer. Monopolistic behavior is usually analyzed within a product
market while vertically integrated firms will operated in two or more
product markets that are distinct. Mergers of two firms in the same
product market have direct effects on competition and consumer welfare.
However, mergers of two firms operating in different markets, for
example in upstream (e.g. Dell Computers who produces computer
hardware) and downstream (e.g. RedHat who produces operating system
software) markets, may or may not be anticompetitive.
When a firm can prove that it can save costs and improve efficiency
by vertically integrating, although it is seldom a matter that can be
verified, this by any means imply an anticompetitive behavior or create
a monopoly. However, if the vertical integration is used to influence
downstream or upstream market where the firm does not have market
power, it will have the potential to lower competition.
A firm may dominate a market and its status as a monopoly may set
the standards that have to be followed by other firms so that their
products can interoperate with that of the leader. Such behaviors are
not monopolistic by nature. However, if interoperability and standards
in one market are enforced by another firm whose primary market power
is in upstream or downstream market, that would pose serious doubt on
its legality. If that firm happens to be integrated vertically, there
is no doubt that any benefit from cost reduction will be negated by
anticompetitive behaviors.
Question 3. You have made the argument that electronic commerce is
a new market that should be treated differently. Are there any legal
ramifications and what is the effect on existing laws?
Answer. Electronic commerce and Internet-based economic activities
represent fundamental changes or improvements over those in the
physical economy. In this regard, online book seller Amazon.com is not
in the same market as those who sell books through physical stores.
This is true even though Amazon.com sells physical books like other
physical bookstores. Still, Amazon.com is able to expand into other
products and services more rapidly than a book store owner. This simple
fact indicates that Amazon.com is not simply a book seller but an
Internet-based firm which should be regarded differently from all firms
that operate in the physical economy.
Existing laws governing physical markets and firms have evolved
within the very context of market characteristics. For example, laws
governing sales taxes, shop lifting, copyrights and security presuppose
physical dimensions of a business or a store. Different laws apply to
different firms in each specific market and location. When these market
boundaries do not exist or are extremely fluid, such distinctions
cannot be enforced.
It is highly doubtful whether governments can revise existing laws
for the Internet expecting they can still fulfill their intended
purposes. Many laws stem from non-market considerations. Local sales
taxes, for example, are levied to raise educational and social
spending. These needs will persist in the Internet economy as they have
been for decades. The question is whether existing laws designed to
address physical market players and processes will be effective in the
Internet economy where markets and economic agents follow entirely
different sets of economic processes. Governments need to focus on new
laws governing electronic commerce and the Internet economy. These laws
may require new thinking and an entirely new way of raising revenues,
protecting privacy and security, and so on.