```

[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 
                             Transportation

                        U.S. GOVERNMENT PRINTING OFFICE
74-817                          WASHINGTON : 2002
_____________________________________________________________________________
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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

                              ----------                              
                                                                   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

                              ----------                              

                       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.

                                
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