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The Opportunity of Electronic Commerce

The Opportunity of Electronic Commerce

by / February 28, 1999
For most Americans today, life is good. In the waning months of this century, the economy is strong and optimism is high. "The New Economy," said a recent BusinessWeek article, "so far propelled mainly by information technology, may turn out to be only the initial stage of a much broader flowering of technological, business and financial creativity." Many business magazines have so far resisted the temptation to focus on the exceptions, such as the economic downturn in Asia, and have instead concluded that the current economic boom is the real thing -- that it has a sound foundation and will usher in a new era of prosperity built on innovation and information technology. As for the raw material of prosperity, a long string of inventions and patents -- from information technology to biotechnology -- is lined up in the technology pipeline.

President Clinton, who has called information technology "the engine of tomorrow's economy," even based many of his recent State of the Union initiatives on the continued existence of a budget surplus.

So what does this have to do with state and local governments? As Y2K activities wind down, new possibilities open up. Washington state CIO Steve Kolodney said in his January Government Technology editorial that many agencies have used the Y2K crisis as an opportunity to decommission old systems, rethink new ones and prepare to launch long pent-up systems and projects. When the Y2K war ends, its soldiers will be looking for work, and while the economy booms, they will find it in state and local government. Preeminent among those long pent-up demands is electronic commerce.

States Plan

In December, more than 300 state information executives met in Phoenix for the Conference on Electronic Commerce in the States, to take on electronic commerce issues, discuss the implications and plan technology campaigns. Some initial reports showed why electronic commerce has attracted so much interest. "We have a state purchasing card in place to eliminate paper," said George Banks of the Florida Department of Purchasing. "Our transaction analysis showed 4.4 million transactions, 90 percent of which are under $1,000. That's only 3 percent of the dollars, but a tremendous burden. [We dropped from] $150 per transaction to $25 using EDI."

Behind the promise of a significant return on investment lurked a long list of challenges, already encountered by private-sector electronic commerce programs. "Electronic commerce is an immature marketplace," said Chuck Shih of the Gartner Group. "For every dollar for software, $10 is spent for systems integration, and $10 to $20 on the buildout. You put up a storefront, you don't want people to get an e-mail 24 hours later saying, 'Sorry, we don't have that in stock.' You need to integrate inventory with the storefront."

In addition, electronic commerce has some economic and social effects yet to be calculated. Some are predicting that widespread e-business will have a larger impact on American business and society than anything since the advent of railroads. Most pundits think that's good -- but all acknowledge that widespread social and economic disruptions will result, as in any technological revolution.

"The retail impact of electronic commerce will be to eliminate weak distributors and middle people," explained Shih. "In the auto industry, weak and low-volume dealers will disappear. They will be 'disintermediated.'" Many white-collar professionals, such as real estate agents, stockbrokers and programmers, could find themselves "disintermediated," or their security shaken, by online competition from around the world.

According to Business Week, E-Loan of Palo Alto, Calif., processed $70 million in home loans in July, bypassing mortgage agents who charge around $1,500 for the service. The trend, like E-Loan, is growing. Customers with money to spend and a specific product in mind search the net for best prices, kicking off price wars in everything from automobiles to books. Even book publishing is changing, with additional books printed to meet the increasing demand of online shoppers. San Jose-based eBay, an online auction house started as a Web site to sell "stuff," went public and is now worth $8 billion.

Already, many jurisdictions are feeling the pinch. While many state and local budgets depend on substantial sales-tax revenues, an estimated $3 billion to $4 billion in taxes are lost annually to mail-order sales. And that is peanuts compared to what could occur with a booming electronic marketplace under the Internet Tax Freedom Act.

Barriers Drop

Limited access to computers will not long present a barrier to widespread electronic commerce. In October, the New York Times reported that voice recognition systems will soon allow easy telephone access to the Internet, opening it to those who have so far been shut out.

"Voice technology is going to lead to a massive extension of electronic commerce beyond those with PCs," Todd Chaffee of Visa told the Times.

In addition, ATM cards have become hybrid, and run on credit card networks as well as ATM systems, debiting a specific account instead of running up a tab.

Concern over the security of credit card numbers, long seen as a major obstacle to Internet purchases, is also fading somewhat as consumers try their first purchases, an act many did this past holiday season. William Harris of Intuit, speaking at the Phoenix conference, said that 18 months ago consumers didn't trust the Internet enough to submit a credit card number. However, Harris said, once consumers broke the ice and purchased something online with a credit card, the generalized fear disappeared.

Identity and Privacy

While consumer fears may have been somewhat allayed, major issues related to identity and privacy remain unresolved. In an online financial environment, identity verification is essential and privacy is necessary if consumers are to feel comfortable online. But ironclad identity documents stir up fears of government abuse. And mandatory privacy laws -- required by the European Union before doing business with other countries -- are contrary to U.S. policy, which advocates self-regulation of industry.

The Federal Trade Commission conducted a survey last year of 1,400 Web sites and reported that only 14 percent gave notice to visitors about their information-collection practices, and only 2 percent have an established information-privacy policy. The Department of Commerce and the Office of Management and Budget issued a report outlining self-regulatory guidelines for personal privacy protection.

Identity is likewise in dispute. In 1996, Congress passed a law mandating that drivers' licenses carry a Social Security number. Attacked as a "national ID card," the measure was not funded. A similar furor erupted over the move to create a national health identifier.

Recently, Rep. Ron Paul, R-Texas, sponsored in Congress the "Freedom and Privacy Restoration Act of 1999" (H.R. 220) "to prohibit the establishment in the federal government of any uniform national identifying number, and to prohibit federal agencies from imposing standards for identification of individuals on other agencies or persons." The bill would also restrict the use of the Social Security number.

And then there's the issue of encryption, which Ira Magaziner, former White House Internet expert, admitted was still unresolved as he left office. While some argue that strong encryption is the only sure way of achieving privacy and security, law enforcement agencies are concerned that they will lose the ability to wiretap.


Part of the privacy/identity issue may be a reaction to the public's lack of trust in government, which is at an all-time low. Part may result from the increase in junk e-mail, or spam.

Washington state's spam law makes it illegal to put misleading information on a bulk e-mail's subject line that disguises the fact that it is an ad, and makes it illegal to forge a return address or misidentify the point of origin or the transmission path. The law also prohibits sending those types of messages from a computer in Washington or to an e-mail address the sender knows is held by a Washington resident. The bill, admittedly a compromise, is an attempt to curb e-mail nuisances while not halting commercial speech. In December, Virginia's commission on information technology endorsed a proposed state law that would subject people who send unsolicited bulk e-mail to criminal prosecution.

Issues of commercial speech, and, in fact, free speech itself, are still far from settled, and solutions are all the more urgently needed with the growth of electronic commerce. The Internet, unfettered and vital, has contributed mightily to our economic growth. While that is broadly recognized by policy-makers, it is vital that those considerations survive the translation into this new era of the global economy.

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Wayne Hanson

Wayne E. Hanson served as a writer and editor with e.Republic from 1989 to 2013, having worked for several business units including Government Technology magazine, the Center for Digital Government, Governing, and Digital Communities. Hanson was a juror from 1999 to 2004 with the Stockholm Challenge and Global Junior Challenge competitions in information technology and education.

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