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`Global Digital Economy
- The Inside Track`
By
Dr. COLIN THOMPSON
Proactive maintenance of an existing customer base to improve your `bottom-line`. This is the
future strategy for all to be successful in a global `Digital ` trading environment.
Marketing to existing customers and prospects, with the goal of retaining their business while
stimulating the marketers` sales. Also, the important of the retention of employees in this task.
Building and Communicating Value will be the single most valuable investment your organisation
makes on the road to delivering sustainable shareholder value.
The creation of shareholder value is the primary objective of any organisation, be it a plc or
privately funded company - and research indicates that the pressure senior managers already
face to deliver value will intensify significantly into the future with a global `Digital` economy.
Today, it is vital that all senior management builds and delivers superior long-term value to meet
and exceed the expectations of all its organisations shareholders.
Discover how this report will enable your organisation to deliver superior long-term value to its
shareholders and encompass the retention of its employees and customers.
Open your mind up to the `Challenges` we face in a global `Digital` trading environment to be
successful.
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`Global Digital Economy
- The Inside Track`
Contents
PAGE
Profile: Colin Thompson 5
Executive Summary 7
Defining the Digital Revolution 8
The Digital Economy 11
E Commerce 29
The Relationship between Information and Knowledge 40
Digital Entrepreneurship and Innovation 41
Strategies for a Global Digital Economy 55
Other Business Models 61
PROVIDING THE SOLUTIONS FOR SUCCESS
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Profile
Dr. Colin Thompson
Colin Thompson has over 30 years experience as Managing Director and Director. His
career to date has given him a complete exposure to business management and
management of people. He has wide experience in PLC and private company’s in top level
management of increasing sales/profit. Also, turnaround and re-engineering experience
linked to new corporate identities and successful mergers/take-overs. Plus, developed many
business models to increase profitability.
Technical skills/knowledge
Directorships
Managing Director
Director-Print Management and Workflow Solutions
Director-Operations/Customer Service and Marketing
Director-Financial and Administration
Non-Executive Director
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Professor-European Business School, Cambridge
Initiated New Corporate Identities, also Managing Director:
Datagraphic Inc. UK, division of USA Group
Forms UK plc (etrinsic plc) division of InnerWorks Inc.USA
WH Smith PLC-Print/Distribution and Workflow Systems
Kenrick & Jefferson Group Ltd
Mail Solutions Group Ltd, division of SSWH PLC
Able to successful bring new Products and Services to market i.e.
a) Set up new UK `green field` manufacturing/distribution/workflow systems
operations and market new Products and Services.
b) Research, development and design of a Print Management Service, including
writing a book `Print Management and Workflow Solutions`, plus many other
publications and business models on CD/Software.
c) Produced CD-ROM `Interpreting Accounts for the Non-Financial Manager`-
adapted from my two-day course for Anderson’s-Chartered Accountants for
their clients. Plus, CD-ROM on `Managing for Customer Care`.
My training and knowledge has enabled me to take an overall view of an organisation, its
operations and strategy. Also, to understand with a degree of competence in a wide variety
of business skills and functions. I have dealt with challenges at a high level of complexity,
especially those that cut across the common functional divisions of business. Developed
several business models to raise the `bottom-line`.
Education: BA, MBA, DBA, CPA, FFA, MCIPD, FIOP, MCIJ
My experiences and knowledge have enabled me to write and have published over 400
articles worldwide, several publications, research reports, guides, business and educational
models on CD’s/Software plus speaking at International Conferences, Seminars, Lectures
and a Visiting University Professor on the international circuit.
DDL: + 44 (0) 121 244 0306
Mobile: 07831 588310
email: colin@cavendish-mr.org
Website: www.cavendish-mr.org
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`Global Digital Economy
- The Inside Track`
Executive Summary
While customer retention and its goals have not changed, the entire customer retention business is busy
reinventing itself from what it was just a few short years ago. Whether new technologies drove new
thinking or vice versa, it's hard to say. But, one think is for sure, what retention is - is really different. New
reporting and tracking methods reveal how customers interact with content, not just, where they go and
what they open. Smaller, but highly qualified audience segments based on customer intelligence are
replacing broad, shallow pools derived solely from basic demographic information. Moreover, customers
are no longer sitting back and waiting for the next brand experience - they are finally having some say in
developing it.
Simply put, the goal structure is as shown below:
Distinctive Capability - The clutch of skills or competencies that distinguishes the company from the
competition and will enable it to seize the opportunities that arise in the future - whatever they may be.
Market/Product - The focus of application for the company's skills and competencies.
Identify - Communicating a clear, positive perception and image of the company to each of the
audiences who are important to its future wellbeing.
People - Organising the skills and competencies of the company to meet the needs of the customers
both now and in the future.
Profit/Performance - Defining the results expected.
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Defining the Digital Revolution
I am going to talk to you all today about this concept called the `Digital Revolution` and other innovation in
the `Thriving Global Digital Economy`.
This is the general assumption that:
- we are moving in an information society;
- there is a new paradigm in the economy;
- we are coming to the end of industrialism;
- the nation-state is in decline in developed countries;
- all the old beliefs will give way to something new; and
- we are moving in a world more hi-tech but more natural at the same time.
These theorists argue that we will have a break with the past, and that this break is redemption of the
problems from the industrial society. What interests me is that this new rhetoric is actually a very old idea
- net hype is the latest version of something one hundred years old: the technological revolution. Post-
industrialists claim that the reason we are moving from the past into the future is due to technological
convergence, advances in the media and telecommunications.
I find recent articles proclaiming the triumph of new values springing from rising ownership of personal
computers and presence on the internet interesting because this is exactly what Joseph Stalin said about
the industrial revolution. This new paradigm is more natural is what Herbert Spencer, the great English
liberal theorist of the19th century, said about the new society in his day.
As for globalization, lots of people are talking about it, but the economy has only recently become as
globalized as it was in 1914. In fact, if you read 19th century theorists or early 20th century theorists like
Max Weber, you find that globalization is not new.
On the rhetoric of the revolution
We need to understand that this rhetoric of the break is actually a very old rhetoric and hides continuities.
For example, in England, in the early 19th century, more than 50 percent of the population was living in
the city. This is only just happening in many parts of the world - huge populations still live in the
countryside where they are still `peasants` and not modern in the sense that we mean it.
The point is that traditional societies have been very successful historically speaking, and have produced
a steady state of agricultural society. Modernity is a recent phenomenon.
The new state of modernity is a process - it is not a constant state; it is forever changing. The
precondition of capitalism is that there are no preconditions. This is difficult for many people to accept
because it is both negative (creates insecurities) and positive (brings freedom and prosperity).
No such thing as the information society
We have to understand that there is not a break from industrialism - there is no such thing as the
information society or post-industrialization. Instead, there is an intensification of a long historical process;
an extension of a process from the heartlands of capitalism right out into the mass of population. The
rhetoric of the break tends to obscure this fact.
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Thinking about the system
We need to think about how the following elements are applied:
- Financial markets
- Global market coordination
- Production process intensifying the factory system (This is not a break from
Fordism, but a more efficient form of the Fordism.)
The major impacts of new technologies are to extend and intensify things that have already existed. One
of the major advantages of the net is that people can publish materials to the world. The struggle for
press freedom is essential to the modern state, but it has been a very long struggle. The Internet extends
in practice the formal rights asserted long ago by the French Revolution, the American Bill of Rights, and
other sources. Thus, the net is developing and extending these freedoms; it is creating a space for
discussion among the general population.
Media freedom allows extension of discussion of politics to the common man.
Technology and the state
The information revolution is promising a number of things for the state and the democratic process:
electronic voting will encourage participation, making state programmes more effective and enabling the
state actually to deliver what it promises.
What we see is not a shift away from the present - the Internet reinforces existing community and social
structures.
One of the great accomplishments of the net was to scuttle the Multilateral Agreement on Investment
(MAI) . Opposition, when organized through the net, can reach people on a global scale, thus building on
and intensifying things that happened in the past. Public campaigns become more effective.
Modern world an extension of industrialism
The digital revolution is not a revolution, except in a rhetorical sense. It is not a break from
industrialization but an intensification of modernity.
Although modernity offers greater wealth, personal freedom, and greater choices, it is a double edged
sword. There are evil tendencies contained within; modernity is not necessarily progressive. The last
century has been dominated by reactionary tendencies in many ways - Nazism, Stalinism, and the regime
in Serbia, for example.
Modernity (in the long term) can be progressive but within it come repression and reactionary ideas. The
digital revolution has become a substitute for the social revolution. We lack a vision of the future -
technology is a mechanical redeemer, because the social revolutions are no longer believable. Our
capacity to dream and imagine is being diminished.
We are looking for technological solutions for social problems, when practical solutions are needed. For
example, genetic modified food will not solve world hunger. We do not require new crops but rather land
reform and a cure for poverty. The digital revolution provides a way to avoid thinking about more profound
ideas. We need to think about what we can do with technology because at the end of the day, a computer
is just sand, plastic and metal. However, with these tools, we can create important relationships between
people.
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Key effects of intensification
One positive effect of the intensification of industrialism is that it has revived artisan work. Although the
factory system gave us greater wealth, the work itself was alienating and boring. Though the production
of media, software, and other high tech products, skilled labour has been revalueized. In the 19th century,
we took people off the land, and put them to work on intelligent machines. Now, the digital revolution has
made skilled labour important once again.
The second key factor is that workers want to control their own factors of production. A great advantage
today is that workers have control over not just pace but the technologies used in work. This creates a
stronger sense of self identification, and fosters pride in one's work. These are positive, optimistic results
from the digital revolution.
The gift economy - emergence of non-commercial labour
New ways of organizing collective labour are emerging. Traditionally, this has been the role of the market
and/or the state. However, over the last decade, the net has highlighted other methods of organizing
labour, particularly the gift economy. Strangely enough, there is a joke that the only working example of
communism was created in the US by the American military, because the Internet is based on the
circulation of free gifts, without copywrites or commodities. The most obvious example is the open source
movement, such as Linux. Apache, the most popular Internet server software, is also free.
Within the net, the music industry exemplifies the gift economy. MP3, which distributes music on the net
for free, is on the cutting edge of the music industry. The point is not that the music is distributed for free,
but that it is no longer passively consumed. MP3 distributes original music, which has never been
copyrighted and can be remixed by listeners. It is more efficient, like most of the open source products.
These are the flagships that people notice. However, what I find most interesting is that there is a general
assumption that the net is free. People who try to commodify things have problems - there is a general
assumption that you should not have to pay for list-servers, or other Internet services. The circulation of
gifts is the best way to organize labour. It is 20th century communism, with a small "c." The circulation of
gifts is benign now - even the most gung-ho neo-liberal does not pay for websites, and finds himself
contributing to list-servers and distributing his material for free. Most people take part in the gift economy
without even realizing it.
This concept does not function in the utopian sense, however. The reason that the net is non-commercial
is thanks to the American taxpayer, who subsidized the growth of the Internet and computer software
industry through university research. It is hybridized with the market, but does not represent a great break
with modernity either. The gift economy always existed - the net just makes it more explicit.
Conclusions
Rather than seeing the digital revolution as a break with industrialization, it should be viewed as an
intensification or speeding up of the process. It is something that we can make choices about - we can
choose to emphasis a more emancipatory opening up of the world or we can choose to narrow it down
and not realize these potentials within it.
Essentially, we are talking about a new vision of the mixed economy; however, instead of the narrow
interests of commerce or the state at the centre, the interests of labour are at the centre. This is best
viewed by both the revival of skilled labour and the emergence of non-commercial labour. The cutting
edge of new wealth is being created in non-commodified forms. This is not neo-liberal paradigm of the
future but a new, more advanced form of social democracy, where labour has the right to wealth and
work.
We have arrived at the stage where we cannot dream of a new utopia, but because labour is so
productive and creative, we can create a better future in practice, in a way that our ancestors could only
dream about.
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THE DIGITAL ECONOMY
The Net is now the iconic technology of our age. Wired magazine has achieved global notoriety through
its claims that the Net will create the sort of free market capitalism until now only found in neo-classical
economics textbooks.
Everyone will be able to buy and sell in cyberspace without restrictions. States will no longer be able to
control electronic commerce which can cross national borders without hinderance. The Net will allow the
whole world to realise the American dream of material riches. Coming from California, this neo-liberal
fantasy has even acquired a mystical dimension.
By releasing the supposed laws of nature immanent in unregulated capitalism, the information
technologies will allegedly lead to the birth of a new race of 'post- humans': cyborg capitalists freed of the
restrictions of the flesh. Like Victorian factory-owners, hi-tech neo-liberals believe that their narrow self-
interest represents the pinnacle of Darwinian evolution.
The Californian ideology is the fantasy of the 'virtual class': the West Coast entrepreneurs and engineers
who hope to make their fortunes out of the Net. Yet, Europeans are not immune from the influence of this
Californian dreaming. With the collapse of Stalinism, many intellectuals have adopted a stance of post-
modern nihilism which offers no alternative to neo-liberalism. Some on the Left even take a masochistic
pleasure in seeing all forms of technological innovation as the triumph of capitalist domination.
According to these pessimists, the cause of labour is lost in cyberspace. Yet, the hi-tech neo - liberalism
championed by the Californian ideologues is itself an attempt to control the Promethean power of human
creativity. As global communications have improved, the wider availability of capital and materials has
undermined social power based solely on the monopoly control of wealth. Above all, constant
technological innovation makes success in the marketplace increasingly dependant on the skills and
enthusiasm of the workforce. In the emerging digital economy, nothing is more precious than human
ingenuity.
For over two hundred years, the boredom and discipline of the factory system were accepted as the only
possible methods of increasing our material wealth. Under Fordism, workers could live better than
medieval aristocrats. However, once the consumer society was no longer a novelty, many people started
looking for something beyond money.
Ever since the '60s, workers have been seeking more autonomy in their jobs and more freedom in their
personal lives. Abandoning traditional conservatism, neo-liberals have used marketisation and
privatisation to recuperate these aspirations. For instance, talented workers within the hi-tech industries
are promised the possibility of running their own companies and enjoying the independence bought by
great wealth. If you have a good idea and lots of luck, you too can become a member of the 'virtual class'.
However, this hi-tech neo-liberalism is a false dream for most people. In the USA, average wages have
been falling for twenty years. In the EU, mass unemployment has become a permanent phenomenon.
Even the lucky few of the 'virtual class' cannot completely isolate themselves by hiding in their gated
suburbs and encrypted cyberspace from the social and ecological problems exacerbated by neo-
liberalism.
Above all, free market solutions cannot remove alienation within the workplace. Under neo-liberalism,
individual autonomy is only expressed through deal-making rather than making useful and beautiful
artifacts. The history of computing and hypermedia is filled with sad tales of engineers and artists who
have sacrificed their creativity to the demands of paper-shuffling.
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In place of the Californian ideology, what is now needed is a more profound understanding of the impact
of the Net on our society. For, instead of being the technological expression of neo-liberalism, the
emergence of the digital economy demonstrates the need to create a twenty-first century form of social
democracy.
The origins of the Net itself expose the fairy tale quality of the Californian ideology. Far from being the
product of the free market, it was created as one part of a huge military research programme funded by
American tax-payers to counter the threat posed by the launch of the Sputnik satellite by the Soviet
Union.
Like many Cold War inventions, the Net could have remained an official secret. However, when it was
being developed within the universities, academics and students hijacked the new technology for their
own purposes. From on-line discussion groups through electronic mail to the Web, the most popular
features of the Net were developed by enthusiasts.
This non- commercial ethos attracted others who began to develop the Net as a new form of community
media. Even today, the majority of the material available on the Net is made by amateurs. Although they
have produced much of the hardware, it is the entrepreneurs who were the last people to comprehend the
potential of the Net. The reason that Microsoft and other corporations are pouring billions of dollars into
cyberspace is precisely because they have to catch up with the widespread use of the Net by state-
funded institutions and by d.i.y. culture.
The Net, therefore, is not the harbinger of a globalised unregulated marketplace. On the contrary, its
profane history exemplifies the miscegenation of state, commercial and community interests within the
emerging digital economy. Each sector will have its part to play and each cannot exist without the other.
For example, public intervention is needed to ensure that a broadband network linking all households and
businesses is built. If left to unregulated market forces, universal access to the new information services
will be very slow in arriving. Yet, the commercial potential of the Net can only be fully realised through the
construction of the fibre-optic grid which covers the whole population. As with earlier types of utilities,
profitable on-line businesses will only flourish through state regulation - and even ownership - of the
digital infrastructure.
Similarly, the further development of d.i.y. culture is also necessary. As the history of the Net
demonstrates, hacking, piracy, shareware and open architecture systems all helped to overcome the
limitations of both state and commercial interests.
Whether for political or profit-making reasons, large institutions are still trying to impose their own
proprietary controls over cyberspace. Yet, one of the major attractions of the Net for its users is that it is
not tightly controlled by any major public or private bureaucracy. Already, a minority of the population can
use the Net to inform, educate and play together outside both the state and the market.
Once a broadband network is built, everyone will have the opportunity to join this hi-tech gift economy.
Most current Net users don't simply download other people's products. They also want to express
themselves through their own web sites or within on-line conferences. Unlike traditional media, the Net is
not a spectacle for passive consumption but a participatory activity.
Ironically, this d.i.y. culture is also one of the essential preconditions for the development of a successful
commercial sector within the Net. By allowing people to acquire some basic knowledge of making
hypermedia, the hi-tech gift economy is helping to create a skilled and innovative digital labour force.
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However, it is very difficult to adapt the traditional factory system to managing these new workers. The
rapid spread of personal computing and now the Net are the technological expressions of the desire of
many people to escape from the petty controls of the shop floor and the office. Despite the insecurity of
short-term contracts, they want to recover the independence of craft labour which was lost during the
process of industrialisation. Because of rapid technological innovation, skilled workers within the
hypermedia and computing industries are precisely those best able to assert this desire for autonomy.
While neo-liberals can only promise success to a privileged few, the re-emergence of artisan methods
offers a way of working within the commercial sector which most creative labourers can adopt. Already,
digital artisans are the people pushing the cultural and technical limits of hypermedia as far forward as
possible. Crucially, their virtual artefacts can be easily reproduced and distributed through the Net. For
the first time, artisans can take advantage of the economies of scale up to now only enjoyed by factory-
owners. Far from being a return to a low-tech and impoverished past, the contemporary revival of
artisanship is therefore at the 'cutting edge' of the development of post-Fordism.
The evolution of capitalism has been reflected through the process of technological advance. While
classical liberalism depended on coal-mining and metal-working, Fordism produced electro-magnetic and
chemical technologies.
At the end of the twentieth century, it is now claimed that the Net is creating a new economic paradigm.
However, the full benefit of an innovative technology can only be realised by changing the ways of
working.
The rise of Fordism didn't just depend on the invention of the motor car and other mass consumer goods.
Above all, this form of capitalism relied on the adoption of assembly-line methods of production. Even the
Californian ideologues argue that the expansion of the Net depends upon the subordination or cooption of
workers by unregulated markets. Despite their overt technological determinism, they implicitly accept that
the organisation of labour is at the centre of the emerging digital economy.
However, in practice, hi-tech neo-liberalism is hindering the development of a thriving digital economy.
For instance, only a small minority can be lucky enough to become members of the 'virtual class'. The
creative potential of most makers of hypermedia will still be limited by Fordist methods of production. This
is why we should not be intimidated by simple-minded slogans from California.
Instead, we need to comprehend the complexity of the mixed economy being produced by post-Fordism.
Above all, we have to recognise that human ingenuity is the most important feature of this emerging
digital economy. The state, commercial companies and d.i.y. culture are all different ways of realising the
Promethean spirit of human creativity.
Under Fordism, the factory worker was seen as a heroic figure - the embodiment of hope of a better
future. In contemporary society, the digital artisan has taken over this role. Whether producing inside the
public, money-commodity or gift economies, digital artisans represent a future centred on skilled, creative
and autonomous labour. The promise of the digital economy lies not just in the practical potential of the
new information technologies, but, more importantly, in the emergence of this new type of worker. This is
why the digital artisans are pioneers of a social democracy fit for the twenty-first century.
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Digital Economy: Issues and Challenges
Abstract
Globalization and technological change continue to profoundly affect economic growth and wealth
creation. Information and Communications Technologies (ICTs) have been a key enabler and driver of
globalization, which is likely to continue as trade and investment barriers continue to fall and
communications become ever cheaper, easier and more functional. "National" economies, created by the
Industrial Revolution in the 19th century, will continue to blend into a 21st century integrated, digital world
economy, with an increasingly global division of labour.
Every economy requires a physical, institutional and legal infrastructure, as well as understandable and
enforceable marketplace rules, in order to function smoothly.
In this paper I maintain that such an infrastructure must be developed for the new digital economy and
society, one which provides trust and confidence for all those who operate in or are affected by it. An
infrastructure that is an amalgam based on hardware, software, networks and a way of doing business
which offers predictability, dispute resolution, legal recourse, policing powers against fraud,
authentication, etc. The building of such an infrastructure is a necessary condition for the development
and efficient functioning of a global, digital economy.
Introduction and Context
"The crime of identity theft undermines the basic trust on which our economy depends". President George
W. Bush, as quoted by D. Scott Parsons, Deputy Assistant Secretary for Critical Infrastructure Protection,
at the FDIC Identity Theft Symposium, Los Angeles, June 17, 2005 [29].
"Everything on the Web is ultimately about Trust." Nicholas Negroponte
(http://www.blackhat.com/presentations/bh-usa-00/Edward-Schwartz/KellyandSchwartzPrivacy-1.ppt)
Globalization and technological change continue to drive economic growth and wealth creation. Over the
last 25 years there has been a huge increase in global trade in goods and services, and global
investment flows, and the pace of globalization is accelerating.
Technology has been a key enabler and driver of globalization, which is likely to continue as trade and
investment barriers continue to fall and communications become ever cheaper, easier and more
functional. Today's "national" economies, created by the Industrial Revolution in the 19th century, will
continue to blend into a 21st century integrated world economy, with an increasingly global division of
labour for the production of both goods and services.
Global electronic networks of increasing power and pervasiveness form the communications backbone of
this 21st century world economy, just as railroads, steamships, telegraphs and postal systems formed the
transportation and communications infrastructure for the 19th century industrial economies.
The foundation for the creation of the new digital economy, also referred to as the e-economy (the two
terms will be used interchangeably) is the rapid and effective deployment of information and
communication technologies (ICTs), in all sectors of the economy, and to consumers at large.
Widely available, high powered networks allow information exchange at very low cost, reduce the
negative role of distance and enormously increase the ability to coordinate geographically separated
economic activities (cf. "The World is Flat". The central role of ICTs is increasingly identified as the
fundamental factor in this economic transformation, which has also led to global supply chains and the
outsourcing and off-shoring of an increasing range of activities related to these supply chains.
The commercial emergence of the ubiquitous Internet and the growing importance of electronic
commerce and e-business in the global economy, are indicators of this transformation.
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As noted above, the growth and productivity of advanced economies has relied heavily on ICT-based
product and process innovation. The key factor driving the implementation of e-business throughout the
economy is the competitive advantage such technologies and applications offer to those who adopt them
fully.
E-business solutions allow organizations to streamline production, reduce operational costs, expand
markets, increase revenues, enhance collaborative business partnerships and strengthen customer and
supplier relationships. By enabling collaborative activities to be carried out at widely dispersed locations,
and by supporting process and product innovation through the application of e-business in all its various
forms, networks have become an indispensable platform for industrial productivity and growth.
Firms as disparate as Wal-Mart and Dell Computers represent outstanding examples of the use of ICTs
to transform business processes and operations. Similarly, the use of computerized reservations systems
has transformed the working of the huge travel and tourist industry. World-wide electronic credit
authorization and payment systems, deployed by consortia such as VISA and MasterCard and firms such
as American Express, have changed the way in which consumers shop and merchants do business.
Payments and financial transactions are the lifeblood of economies. Private sector joint ventures like Visa
and MasterCard, along with the large banks, have helped to create a global electronic payments network.
It is a dynamic, innovative system that spurs economic growth by providing fundamental benefits such as
a safe, sound and predictable international payments network connecting buyers and sellers; ever-
increasing levels of security and consumer empowerment; greater economic transparency; increased
economic stimulation; and widened participation in the banking system.
This global electronic payments network accrues benefits to economies and people around the world.
The widespread adoption of electronic payments has significantly expanded the sales volume of goods
and services, reduced the barriers to immediate credit and liquidity, and eased geographic restrictions to
trade and exchange. To a growing extent, the Internet is playing a key role both as an enabler and as the
infrastructure underpinning this transformation.
The Internet has become the central nervous system for the networked economy. As a global network of
loosely connected Internet Protocol (IP) based networks, many thousands in number and growing rapidly,
it reaches into every country in the world and provides businesses world-wide with a common platform for
communication and commerce.
In its various forms and functions, it has become an essential means of conducting and coordinating
business activities across the economy as a whole, linking business supply chains continent-wide and
globally, supplying and supporting financial services and creating a universal consumer marketplace.
Globally, the Internet is currently estimated to have almost 1.5 billion users, with very rapid growth
occurring in developing countries like China and India. China alone is now estimated to have some 100
million Internet users. As in many other developed countries, most Canadians and virtually every
business are now connected to the Internet. In 2004, some 82% of all firms in Canada, accounting for
some 97% of Canada's gross business income, were connected to the Internet.
Consumers benefit from the added convenience these technologies and applications offer, including
greater access to information and an expanded marketplace.
Since the Internet allows businesses to respond to consumers' inquiries, requests and transactions from
any location, buying and selling online requires an international set of rules, where citizens, institutions
and businesses can easily exchange information, products and services across borders and around the
world with predictable results and protection.
This makes conventional geographic borders less and less relevant. For example, personal information
collected for an online purchase, by a company located in Vancouver from a Quebec-based consumer,
could be stored on a server located in the United States or the Cayman Islands.
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As another illustration, information about the air travel movements of individuals who hold a membership
in an airline loyalty program can be collected at a destination in Europe or Asia, and transferred back to
Canada for inclusion in the program's database for later use.
The combined forces of technological change and globalization pose dramatic new challenges for public
policy. In some respects, the Internet is similar to other ubiquitous communications networks that came
before it.
Just like the postal system, the telegraph and the telephone, we have come to rely on the Internet as an
infrastructure that enables individuals and organizations to conduct commerce nationally and abroad,
through the transmission of information. Like these other trusted networks, as we grow to depend on the
Internet, a degree of safety and reliability is expected and needed.
But there is a key difference. Previous transportation and communications networks were birthed under
the watchful eyes of regulatory or legislative bodies, at the national level or through international
agreements.
Users of such networks could have a modicum of confidence that their mail would not be tampered with,
that railway lines would be inspected and maintained to ensure the safe running of trains, and that aircraft
would take off and land at airports in an orderly manner through the operation of an internationally
coordinated air traffic system.
However, the Internet has evolved at an unprecedented rate and since it consists of an agglomeration of
autonomous networks, it has characteristics quite unlike those of the earlier trusted networks. There are a
number of potential challenges that must be considered if we are to benefit fully from its existence.
The Problematique
"We will create a civilization of the Mind in Cyberspace". John Perry Barlow
"you must recognize that the Internet was set up largely by academicians for limited use, but has grown
beyond anyone's wildest expectations, with nearly one billion users today". Markus Kummer, Executive
Coordinator, Secretariat WGIG [36].
"The culture of the original Internet was one of trust". Leonard Kleinrock
The very success of the Internet as an economic tool and its ubiquity have lead to policy concerns and
challenges revolving around the vulnerability of the network and the economic consequences of misuse.
The Internet started as the creation of a small group of dedicated researchers and has now evolved into a
widespread commercial information infrastructure, with tremendous influence on economies and
societies. The Internet was never designed or intended for this kind of commercial use.
When the Internet was designed in the 1970s, its designers did not expect that the network would have to
be scaled to cover much of the world's population in over 180 countries, and security was not an
important consideration.
Concerns regarding security from hackers, congestion caused by spam, differentiated qualities of service,
charging schemes and interconnection and revenue sharing arrangements between Internet Service
Providers (ISPs) were not matters of major concern to the early designers and implementers of the
Internet.
These matters came to the fore as the Internet began to evolve into a ubiquitous commercial medium. It
is a profound challenge to retrofit these necessary features while the Internet continues to expand rapidly,
and its proponents try to accelerate its adoption and use by increasing numbers of unsophisticated users.
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Networks like the Internet and its enabled services, such as electronic mail and web-based services, are
inherently global in scope, operating across multiple jurisdictions to serve international clients and
marketplaces.
Their borderless nature creates the need to meet national policy goals through the design of new
marketplace rules that can help to establish the trust and confidence required for doing business in this
new environment. Over time, governments have played a crucial role by providing a positive legal and
policy framework for technology innovation, investment and diffusion.
As markets and technologies continue to evolve, the importance of a dynamic, responsive policy
environment that provides clear and consistent ground rules for the conduct of electronic business will
grow. The strengthening of business and consumer confidence in Internet applications and use,
especially measures to ensure a safe, secure and reliable Internet, warrants particular attention from
policy-makers.
Every economy requires a physical, institutional and legal infrastructure, as well as understandable and
enforceable marketplace rules, in order to function smoothly. For national industrial economies, national
and international infrastructures, as well as marketplace rules, were established through evolutionary
processes that took many decades to reach fruition.
The industrial economy achieved a stable institutional framework and communications infrastructure, built
on national postal, telegraph and telephone systems, linked together by international institutions such as
the International Postal Organization (IPO) and the International Telecommunications Union (ITU), to give
them global reach.
In a previous paper, I noted that a similar infrastructure must be created for the new economy. Such an
infrastructure is based on networks (physical, institutional, legal) and a way of doing business which
offers predictability, dispute resolution, legal recourse, policing powers against fraud, authentication, etc.
In short, what is needed is an environment which provides trust and confidence for all those who operate,
or are affected by the e-economy and society.
Also, I further contend that it is useful to examine the structures and study the experience of these past
successful systems, to see what lessons can be learned for the implementation of a robust cyber-
infrastructure to serve the needs of a digital economy.
This new infrastructure has been given many names; we have called it the cyber-infrastructure. Parts are
in place now, but more is needed. The authors contend that we must become more aware and
knowledgeable about the need for a cyber-infrastructure, how it comes into being and how extensive it
must be, to ensure the smooth functioning of global networks and the global digital economy they
support.
Only by understanding and acting on the need for a CI will markets function smoothly in a global, digital
economy. An important related question is whether this can best be done by transforming the existing
infrastructure and marketplace rules, or whether new institutional approaches and market mechanisms
are required which are more fully congruent with the characteristics of the Internet and other global digital
networks.
Public and Private Spaces
Much has been made of the uniqueness of the new world of information technology . It has been claimed
that the cyber-infrastructure will be new and novel and unlike anything that has come before.
This is only partially true.The technology is new but, as we have seen, the need for trust and confidence
is similar to that which was developed in previous eras for earlier trustworthy infrastructures. There are
other ways in which the cyber-infrastructure will have some characteristics that are quite familiar.
Consider the issue of public space and private space.
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In today's world we know that, for example, walking on a public sidewalk in any city carries with it certain
protections and certain responsibilities. The pedestrian will cross at the crosswalk; cross on the green
light; will try to be part of an orderly flow of other pedestrians; will not litter and will, in general, respect the
rights of others.
At the same time the pedestrian moves along with the knowledge that a variety of public authorities have
ensured that the sidewalk is in reasonably good repair; that the law and police authorities offer protection;
that there is legal protection regarding objects that might fall from buildings; legal protection vis-a-vis
automobiles jumping the curb; protection from other motorized vehicles, etc.
Similarly, when the pedestrian moves into another space, a private space, the range of rules and
responsibilities changes. The pedestrian might enter an office building, or a building that houses doctor's
offices, or a shopping mall, or a hotel, or a bank. In each case there is a different set of "rules" that govern
the protections and responsibilities that surround the pedestrian.
Perhaps the pedestrian can only get to the desk or a security guard and must present a pass or can enter
the shopping mall entirely or can enter the bank-only so far. To go further in the bank, say to the safety
deposit boxes, further information must be provided to the bank authority.
On the other side it is commonly known, but rarely considered, that the pedestrian's rights have also
changed as he/she moves seamlessly from public to private space. There is enhanced legal protection
from panhandlers but diminished legal protections for "free speech." In the public space the pedestrian is
free to go just about anywhere; in the private space the pedestrian's actions are circumscribed.
In the public space a public law offers protection to the individual; in the private space there are private
security guards and the public police are called usually only if a crime has been committed.
Or consider another familiar aspect of everyday life. We mail a letter or make a telephone call (especially
on a landline) and can safely assume that there is no one listening in to the call and equally safely
assume that letter has not been opened or read by others. In fact both actions are punishable by law.
By now the reader is probably asking: So what? What is new is that there is also a public space and a
private space in the cyber-infrastructure. There is the public Internet -- a kind of sidewalk -- that is in the
process of developing "rules of the road." And there are private spaces such as e-commerce sites, online
banking, etc.
Over the many hundreds of years of law regarding public and private spaces, the rights and
responsibilities of all parties have been well developed. They are so well understood that we don't give it
a second thought as we move seamlessly from public to private and back to public space (finally moving
to our own private space which is our home which offers its own set of protections and responsibilities.)
In the cyber world we are still in the process of delineating these boundaries and defining what happens
when the boundaries are crossed and who is responsible for enforcement.
When a bank is robbed it is clear where the enforcement takes place; when a keystroke spyware is
secretly or covertly installed on a personal computer to record bank transactions and theft is later made
from that account----who is responsible for enforcement? In the cyber world, citizens are constantly told to
review their credit reports, their bank balances, etc., to make sure that their accounts have not been
accessed and that their identities have not been stolen.
We know that authorities are trying to stop such cyber crimes but the question is: which authorities?
where? And how successful have been such authorities in stopping such cyber crimes and related
activities?
Emails can be intercepted and read by employers, by hackers and by the individual's own internet service
provider. It is a more open and less secure space. It seems to be a private communication but it is one
that can be read by others and there seems to be no body of law that protects the integrity of the
communication.
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We are slowly getting used to the fact that the public space of the internet can be a "dark and dangerous"
street with many unsavoury actors wanting to cheat us (with scams) or harass us (with spam) or
otherwise grab our attention.
Cyber citizens are traversing this public space with increasing care and some are deciding not to enter
this public space at all (see below). Some are choosing not to go online, even to go to a secure private
space. There is concern that the security of the private space in the cyber infrastructure does not bear the
same resemblance to the security of the private space in industrial infrastructure.
Online banking does not offer the same sort of trust and confidence as "bricks and mortar" banking.
Online shopping, while convenient, means giving up credit card information to the uncertainty of cyber
space. How certain is the shopper that the information has not been intercepted; that the web site is the
"real" web site and not a replica created specifically by criminals?
We contend that a sustainable cyber infrastructure cannot be achieved on such a shaky foundation of
trust, and that unless steps are taken to increase trust and confidence, then citizens are likely to eschew
the "convenience" of the online world for the "inconvenience" but increased security of the offline world.
Living in a world of distrust is costly. This will hold true for the online world, as it held true earlier and
holds true now for the offline world.
Going further to the home space of the cyber citizen, the home computer. We know that if a person's
house is broken into, the police are called. It is a crime. But what if some spyware, in the form of
unauthorized tracking software, has been unintentionally downloaded into the computer? Equivalent to a
break in or to the crime of trespass, it is unclear who is responsible and how the criminal act will be
addressed.
Can we reasonably expect that a secure cyber infrastructure can be run in a "wild west" fashion where
each person is individually responsible? It seems unlikely. More likely is that we are still in an "institution
building" period. A time when new institutional mechanisms in the public and private sectors will be
created to deal with rights and responsibilities of public and private space in the cyber infrastructure.
Steps taken today and tomorrow by public and private actors will determine the characteristics of the
online world. Perhaps the "dark and dangerous" public spaces will remain so and citizens will be willing to
pay extra to enter a sort of "gated community" in cyber space. A private network with rules and
regulations and methods of enforcement. Those who enter want and are willing to pay for the trust and
security that they associated with the trust and security of the earlier infra-structure.
Or perhaps an international body (such as the International Postal Union) will be created to oversee the
Internet and to provide rules of the road. Such a body would be one of member states who agree to
enforce and prosecute offenders who violate the rules of the road.
What ever course is taken it is clear that leadership is needed. To do nothing is to turn the playing field
over to the cyber pirates, thieves and extortionists. It is a council of despair and threatens to dramatically
lessen the value of the Internet as a most valuable technology.
Issues and Challenges: Establishing an Environment of Trust and Confidence
". . commerce dies the moment, and is sick in the degree in which men cannot trust each other". Henry
Ward Beecher (1813 - 1887) US clergyman, abolitionist In "Webster's Electronic Quotebase," ed. Keith
Mohler, 1994.
The exchanges that take place between buyers and sellers of goods and services are the lifeblood of an
economy, just as the exchanges that take place between citizens, their elected representatives and
providers of public services are the lifeblood of a polity.
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For an economy or polity to work well, the parties to these different kinds of exchanges must trust each
other and have confidence that the institutional framework within which they are operating is stable and
that it will yield consistent, reliable and predictable results.
Countries around the world, as well as international bodies such as the OECD are all trying to develop a
formula which will lead to an environment of trust and confidence in the electronic marketplace.
Canada has also developed a "shopping list" of what sorts of things are needed if trust and confidence is
to prevail in the electronic marketplace.
I offer the following as illustrative of one country's approach.
One of the key objectives of Canada's Electronic Commerce Strategy was to start the process of creating
an environment of trust in which individuals and businesses would have as much confidence in the
workings of the digital economy as they have in the workings of the traditional industrial economy.
Creating this environment is a complex, evolving and ongoing challenge. Among other things, it involves
measures to:
authenticate and authorize parties to transactions;
protect the privacy of personal information and the confidentiality of corporate information
communicated or stored electronically;
ensure that networks operate reliably;
protect intellectual property rights in electronic goods and services, including developing the
appropriate polices, practices and tools for digital rights management;
establish a legal framework for contracts to function electronically;
develop dispute resolution mechanisms that function effectively in an e-business environment;
and
protect individuals and businesses against annoying or abusive practices, such as unsolicited
bulk e-mail (spam).
It is clear that the cyber-infrastructure that is put in place has to be one that carries with it, at a minimum,
the same degree of trust and confidence as the current infrastructure (physical, legal, institutional)
developed for the industrial economy.
Creating Trust and Confidence
To a large extent, the creation of an environment of trust and confidence involves the application of
existing laws, regulations and commercial norms to the electronic environment, through the amendment
or extension of existing instruments or through judicial interpretation. In some areas however, new
instruments may be required. Given this context, made-in-Canada approaches should work in concert
with general international cooperative initiatives.
Creating an environment of trust is not only the responsibility of policy-makers, regulators and the courts.
As in any business environment, the private sector has a major role to play in its own right and in
cooperation with government, in developing business norms, standards and codes of conduct, as well as
in identifying and encouraging the adoption of best practices.
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In sum, the task of building an environment of trust in the digital economy is complex. It involves actions
to create an enabling legal and regulatory environment, to develop voluntary codes of practice, to educate
businesses, consumers and public service providers and to create tools that are easy to use.
This can only be done if all stakeholders work in partnership. What makes it particularly difficult is to try to
do it in "Internet time", as opposed to the slow, organic way in which the previous infrastructure was
developed. Added to this, we are trying to retrofit a host of security features into an open system, the
Internet, a system designed for convenience, research and ease of use.
It is like building a community without locks anywhere and suddenly learning that locks on doors, on
stores, on banks - locks and security are needed everywhere. Also that a retrofit is needed, as soon as
possible, and that all players should "more or less" agree on the nature of the retrofit.
Spam and its Consequences
"Spam is more than a growing nuisance. It is a public policy issue that challenges governments, Internet
Service Providers (ISPs), other network operators, commercial emailers and consumers to work together
in new ways - with each stakeholder group fully playing its part - to solve a problem that threatens the
interests of all." Report of the Task Force on Spam, May 2005.
As examples of the types of the problems currently besetting the Internet, let us consider spam and its
more virulent cousin like identity theft.
The problem of spam, or unsolicited commercial email, has become the Internet issue du jour because of
its impact on email-enabled applications, which still constitute perhaps the most important use of the
worldwide Internet.
Some 11 billion emails were sent daily worldwide in 2001; this number grew to over 36 billion in 2004. In
2006 the figure is nearly 100 billion! Spam has been called a "growing cancer" on the body of the Internet;
it has grown in volume to now place significant pressure on the Internet and its users.
Spam is an intrusive nuisance to consumers; it costs businesses money in the form of lost worker
productivity and their ability to market their products; and it harms Internet Service Providers (ISPs) and
large corporate networks, because it uses up large amounts of bandwidth capacity and adds to technical
support costs. These problems are worsening every day because the amount of spam is constantly rising.
MessageLabs' estimates of the amount of spam as a percentage of all e-mail traffic have increased from
8% of US emails in 2001 to some 80% of all emails by the end of 2004, with a monthly average of 73%.
Brightmail, a subsidiary of the leading Internet security firm Symantec, estimated that in June 2004 spam
accounted for 65% of all Internet email. More recent estimates suggest that unsolicited, junk email on the
Internet now represents some 80% of all emails sent.
Spam has become a significant worldwide problem that clogs networks, consumes resources and, due to
its implication in virus distribution, identity theft facilitation and other criminal activities, significantly erodes
trust in electronic commerce.
Estimates of the total cost of spam to the U.S. economy range from US$10 billion (Ferris Research) to
US$87 billion (Nucleus Research). The Radicati Group and MessageLabs have estimated the worldwide
cost of spam to businesses at US$30.5 billion in 2006.
Other industry analysts estimate that the global cost of spam to businesses in 2007 will be around US
$80 billion, in terms of lost productivity and increased network maintenance costs. Comparable figures for
Canada are not readily available. However, it is clear that from the point of view of the spammer, this can
be an extremely profitable business, with a relatively low cost of entry and rates of return that can be
staggeringly high.
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This is why some have argued that to effectively combat spam, one must significantly change the
economics of spamming through a variety of coordinated measures, transforming it from the current
profitable business model into a cost-prohibitive business model.
The biggest potential cost of spam, however, is the loss of public confidence in Internet communications.
At the macro level, spam is a direct threat to the viability of the Internet as an effective and trustworthy
means of communication. By providing a vehicle for illegal activities like identity theft, as well as for the
circulation of viruses and worms, spam undermines consumer confidence in e-commerce and electronic
transactions between citizens and their governments.
The atmosphere of distrust created by spam and its more virulent cousins imposes significant direct and
indirect costs throughout the economy. Consequently, spam is also a direct threat to continuing economic
prosperity, to more efficient public services and to the smooth functioning of a global, digital economy.
An analogy can be drawn to the start of the 20th century, when business practices were based on letters
carried by the postal systems and telegrams for urgent communications. Signed letters and telegrams
had standing in the courts of law. If every three or even four letters and telegrams out of five had been
fraudulent, could these business practices have continued?
A Pew Foundation study shows that some 52% of Internet users consider spam a big problem and some
22% of email users have curtailed their use of email because of spam. Some businesses are considering
abandoning the Internet altogether, in favour of private and closed user group networks, for operational
and internal communications.
Such networks could evolve to provide a premium tier of Internet access and services, with guaranteed
security and quality of service, for those willing to pay, thus leading to a two-tier Internet. Some have said
that, if left unchecked, spam will bring the public Internet to its knees.
Cyber-Crime: Phishing, Pharming and Identity Theft
"We can't go on business as usual, without risking the future of online commerce,?This is a watershed
year. Everyone you talk to understands that their data aren't safe." Avivah Litan, Gartner Analyst .
"The story that needs to be told is the larger, long-term threat to the American financial industry. It's a
cancer. It's not going to kill you now, but slowly, over time". Jim Melnick, Director of Threat Development
at iDefense, quoted in the New York Times .
Identity theft is the criminal activity of assuming and using another individual's identity by wrongfully
obtaining and using someone else's personal information, with a view to committing a forgery or a fraud
for financial gain. Identity theft is facilitated by technology, and is a crime that takes a heavy emotional
and financial toll on individuals as well as eroding consumer confidence.
In the age of the global Internet, identity theft is often associated with email "phishing", where emails
which appear genuine are used to lure consumers to look-alike web sites with the names and logos of
legitimate financial institutions, business and government agencies, for the purpose of stealing
confidential information which can then be used for financial frauds.
A nationwide US survey of 1,421 Internet users by the Pew Internet & American Life Project, conducted in
January-February 2005, found that some 35% of email users had received unsolicited email requesting
personal financial information.
Phishers often contract with spammers to send out millions of increasingly sophisticated phony emails
designed to lure victims to reveal personal and confidential information. A successful phishing operation
could bring in thousands of fresh account numbers, along with other identifying details: names,
addresses, phone numbers, passwords, PINs and mothers' maiden names. The richer the detail, the
greater is the value and the better the selling price.
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Similar in nature to email phishing, pharming seeks to obtain personal or private (usually financially
related) information through domain spoofing. Rather than a consumer being spammed with malicious
and mischievous email requests to visit spoof Web sites which appear legitimate, pharming 'poisons' a
Domain Name Server by infusing false information into the DNS server, resulting in a user's request being
redirected elsewhere.
The victim's browser, however will mistakenly show that he is at the correct Web site. This makes
pharming much more serious and more difficult to detect. Phishing attempts to scam people one at a time
with an email, while pharming allows the scammers to target large groups of people at one time through
domain spoofing.
According to the U.S. Federal Trade Commission (FTC), identity theft is the fastest growing crime in
North America that targets consumers. In 2004, some 246,000 consumer complaints were filed to the
FTC related to identity theft, and it was the fifth straight year that identity theft topped the list of consumer
concerns. More recently the FTC estimates that about 10 million Americans have their personal
information pilfered or misused in some way or another every year, costing consumers US$5 billion and
businesses US$48 billion annually.
PhoneBusters is an anti-fraud agency run by the Ontario Provincial Police (OPP), the Royal Canadian
Mounted Police (RCMP) and the Competition Bureau, Canada. In 2003, 13,359 Canadians reported
being victims of identity theft & direct losses totaled approximately $21 million. Statistics gathered by
PhoneBusters
in 2003 and the first half of 2004 indicate that the largest number of complaints surrounding identity theft
relate to credit cards or to false applications for credit cards (32%) and cell phones and false applications
for cell phones (10-12%).
The Canadian Council of Better Business Bureaus estimates that identity theft costs the Canadian
economy approximately $2.5 billion (Cdn.) per year.
A February 2005 Ipsos-Reid poll reported that some 9 per cent or 2.7 million Canadians have been
victims of identity theft at some point over their lifetime. Ann Cavoukian, Ontario's Privacy Commissioner,
observed recently that the crime had "exploded".
She urged the Ontario provincial government to become the first in Canada to require private-sector firms
to notify customers when files containing their personal information have been put at risk through loss or
theft. In the US, the federal "Fair and Accurate Credit Transaction Act of 2003 (FACT Act)" is intended to
address this problem. Eight US states have introduced similar legislation, while another 30 states have
bills pending.
Recently, there has been a spate of reports in the US about stolen credit card numbers and the existence
of a thriving black market on the Internet in the trafficking of stolen credit card data. Thus the Washington
Post reported that according to MasterCard International Inc., more than 40 million credit card numbers
belonging to US consumers might have been illegally accessed by a computer hacker and are at risk of
being used for fraud.
The breach occurred in late 2004 at a processing centre in Tucson, Arizona operated by CardSystems
Solutions Inc., one of several companies that handle transfers of payment between the bank of a credit-
card using consumer and the bank of the merchant where the purchase was made. While the banks
which operate the Visa and MasterCard consortia are subject to regulation by appropriate authorities in
different jurisdictions, the operations of 3rd party service providers like CardSystems Solutions are not
subject to any similar regulation or public scrutiny.
Their operations are only governed by their contractual agreements with the credit card companies.
Officials at MasterCard and Visa have accused CardSystems of not meeting agreed-upon computer
security standards, and Visa has suspended its contract with CardSystems.
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The information that criminals siphon through phishing, pharming and similar activities - credit card and
bank account numbers, as well as much raw consumer information such as Social Security numbers - is
boldly bought and sold on the Internet through a thriving black market or Web bazaar.
No one is willing to estimate how many cards and account numbers make it to the Internet auction block,
but law enforcement agents describe the market as "huge". The value of the data arises from its ready
conversion into online purchases, counterfeit card manufacture and more elaborate identity-theft
schemes. Stolen credit card numbers allow thieves to make quick, fraudulent purchases. The losses have
to be borne by the merchants, the credit card companies and ultimately the consumer.
A May 2005 survey of 5,000 U.S. online consumers by the Gartner Group, released on June 23, 2005
contains a disturbing message for online retailers and bankers. More than 42% of online shoppers and
28% of people who bank online are cutting back on their activity because of "phishing" attacks and other
assaults on sensitive data,.
About half of the US's 148 million Internet users believe they have received a phishing email, up 28%
from a year ago, according to Gartner estimates based on its survey. Some 2.4 million online users have
lost money to Internet scams, with total losses amounting to about $929 million in the 12 months ended in
May 2005, Gartner estimates.
According to the firm, Internet service providers and companies that serve consumers online now see 150
to 200 different phishing attacks each week, four times as many as they saw just six months ago.
More than 80% of those surveyed said concerns about Internet security have reduced their trust in email.
Of these, more than 85% delete suspect mail without opening it, suggesting that some businesses
sending legitimate email may be losing an efficient and low-cost method of communication with
customers.
But the more obvious economic toll comes in consumers' increasing distrust of e-commerce and online
banking. According to the survey, 33% of online shoppers concerned with Internet fraud are spending
less money than they would if they weren't concerned, and 77% of concerned online-banking customers
said they are using online banking services less frequently. More than 4% of those Internet banking
customers concerned with fraud have abandoned online banking altogether.
In a recent article the New York Times describes the workings of this Internet black market, through sites
like http://iaaca.com),whose name is a shorthand for International Association for the Advancement of
Criminal Activity (IAACA)! The online trade in credit card and bank account numbers, as well as raw
consumer information is highly structured.
There are buyers and sellers, intermediaries and even service industries. The players come from all over
the world, but many of the web sites where they meet are run from servers located in the former Soviet
Union, making them difficult to police.
At a symposium on cyber-crime on May 2005 Jody Westby, the Managing Director of security and privacy
practices at PricewaterhouseCoopers, claimed that based on FTC statistics and credit card theft, only
about 5% of cyber-criminals are ever caught ."We are not making an impact?
The criminals are too hard to track and trace, too hard to prosecute, and the information they steal is too
easy to use". If this view proves to be correct over time, then cyber-crime could become the Achilles heel
of the global electronic payments system.
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Technological and Business Solutions: Tiered Networks?
"Expanding premium business services and offering customers new applications requires an
infrastructure that removes the limitations of today's internet and that offers connectivity along with QoS
(Quality of Service), reliability and security assurances. Underlying open standards will make the power of
the IPsphere (the proposed premium networks) a reality."
Jochen Hagen |EVP, Product Management IP |T-Systems International
Although the Internet has changed all our lives, it was simply never built for commercial use. Discussions
about the future of the Internet seem to go in one of two ways: how to make the existing network more
secure; or, failing that, the inevitability of introducing a separate Internet---Internet Secure?--one which is
closed, with security features built in from the beginning.
In this context, it is useful to distinguish between two broadly different classes of electronic networks:
open networks and closed networks. In Annex 1 we will also deal in more detail with the concept of an
IPsphere, an IP-based public network that combines the ubiquitous connectivity of the Internet with the
assured performance, reliability and security of a private network, and its proponent the Psphere Forum.
Open networks, also referred to as public networks, have no restrictions on membership and are open to
use by anyone willing to pay the established tariffs and abide by certain Acceptable Use Policies (AUP).
They require the intervention of some sort of outside agency, usually a regulatory agency or policing
function of government. This is to create and enforce standards and to regulate the behaviour of those
using the network. The public Internet, a global network-of-networks consisting of over 50,000 loosely
connected, IP-based networks spanning every country, is currently the best known example of an open
network, but there are others which merit further study.
One characteristic of the public Internet as it is presently run is that it has no well defined policing
mechanism ( a "they"), which can impose and administer sanctions for improper use such as spamming
and phishing. In this sense the Internet differs from anything we currently know about in the "bricks and
mortar" world. In every venue in our current world, there is a "they" that can step in if there is
inappropriate or unlawful behaviour. In the Internet there is an absence of a "they".
Closed networks support the operation of a single entity (e.g. American Express, IBM, ATM networks
dedicated to a single bank) or an existing closed user group, such as an association of financial
institutions or airlines (e.g. SWIFT, Visa, MasterCard, SITA).
Closed networks such as SWIFTnet or the Reuters currency trading network, which handle well over $1
trillion of financial transactions daily, are designed to provide and guaranty the necessary operational
functionality, reliability and security for the members of the closed user group.
There is a well defined policing mechanism ( a "they") responsible for the design and operation, as well
as overseeing the appropriate use of the network. Such networks are usually self enforcing, governments
have a minimal or no role in their operation and the public is usually unaware of either the working of the
network or when sanctions are administered because of transgressions.
One business model, which could provide a solution to many of the problems currently plaguing the public
Internet, is a multi-tiered network. As stated earlier, some businesses are considering abandoning relying
on the public Internet altogether, in favour of secure private and closed user group networks for
operational and internal communications, with a secure gateway to the public Internet.
The proponents of this concept claim that such networks could evolve to provide a premium tier of
Internet access and services, with guaranteed security and quality of service, for those willing to pay. This
would lead to a two-tier Internet. As long as the new premium blended nets are IP-based, controlled
gateways between them and the public Internet could be designed with relative ease. This could be a
logical business and technological solution. Whether this is a desirable solution, from a public policy and
welfare point of view, needs to be debated further.
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It should be noted that the current "bricks and mortar" world consists of a broad and near infinite range of
security for businesses and consumers, customized for various needs. From open commerce on the
sidewalks to the security of the bank, there is a range of ways of buying and selling that carry more or
less security and carry more or less cost to ensure that security.
We may well be on the verge of witnessing a similar development in cyber-space. This would result in a
range of security enabled services, with protections customized to the requirements of applications and
paid for by various interested parties throughout the networks.
IPspheres, earlier referred to as infranets, are IP-based networks that combine the reach of the Internet
with the assured performance and security of a private network. They provide another variant of the multi-
tiered Internet business model, which is supported by a number of major service providers.
The IPsphere Forum, which formally came into existence on June 28, 2005, is an initiative of industry
leaders focused on driving the development and implementation of IPspheres.
This new approach is designed to overcome the current limitations of the Internet, delivering an enriched
experience for consumers, business-critical performance, and opening new markets for service providers.
It is expected that ultimately service providers will connect IPspheres together to create a single, global
meta-network capable of carrying ALL communications.
However, the IPsphere concept is still in its infancy, and a migration path from the current public Internet
to an IPsphere world would still have to be established and implemented.
The Role of Governments
"To say that governments and their law enforcers should stay out of cyberspace is as naive as saying
they should stay out of city centres ... The Internet may be the cleverest infrastructure the world has ever
known, but it is not a world apart." Editorial in the New Scientist, May 8, 1999.
"... Similarly, Government cannot simply regulate to achieve its aims in this new global economic
environment. This Report, therefore, recommends a light regulatory touch.
Enough to build confidence in the new way of doing business and to protect consumers, but not so much
that we stifle innovation, creativity and entrepreneurship and drive industry overseas." Prime Minister
Tony Blair, Foreword to the UK Cabinet Office report ecommerce@its.best.uk , September 1999.
Driven by the economic importance of networks and information technology, many governments are
reviewing their policy frameworks in areas as diverse as telecommunications policy, competition law,
Internet policies, intellectual property law and media regulation, broadband networking strategies, security
and public safety, and spectrum regulation.
The trend seems to be a movement toward frameworks that establish broad ground rules for investment
in modern networks and encourage network use within a competitive market environment, optimising their
application across technologies, industries and jurisdictional boundaries.
The historical role of governments in ensuring the orderly implementation of broad, general purpose
technologies which are enabling and transformative in nature, is well-known.
One need only consider the extensive frameworks of legislation and ways of behaving that surround
railroads, electricity, the telephone and the automobile. For the Internet to achieve its maximum social
and political potential there will have to agreed upon and effective rules of the road, both nationally and
globally
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Government can play a critical role in developing and determining marketplace rules for the digital
economy. Such rules can affect the pace of ICT based innovation as well as provide the foundation for
the development of a high level of trust and confidence which is necessary for the successful operation of
electronic marketplaces.
Data protection and privacy, electronic signatures and authentication, spam and cyber-crime, including
the threat of identity theft, have emerged as important areas where governments need to be either
directly or indirectly involved in establishing such rules of the road.
The Canadian government has played a significant role in fostering the development of network
infrastructure for today's information economy, as well as the ground rules that will be needed for an
increasingly network-based economy. Such rules must not only adapt to new technologies, but also
reflect the global, borderless nature of modern trade and commerce.
Future economic growth, moreover, relies on a set of rules which are consistent and apply marketplace-
wide. Accordingly, in order to maintain Canada's competitive position internationally, the government has
acted to make Canada a world leader in the adoption and use of electronic commerce, by creating a
predictable and supportive environment that would ensure consumers and businesses feel comfortable,
secure and confident in conducting commerce online.
Traditional policy and regulatory instruments are usually limited in their application to national or sub-
national jurisdictions. In the absence of complementary actions in other jurisdictions, however, domestic
rule-making for marketplaces which are defined by the conduct of Internet-based business, will have
limited effectiveness.
Thus, in order to meet national policy objectives effectively in areas such as data protection and privacy,
electronic signatures, the regulation of spam and other offensive Internet content, and consumer
protection measures, governments need to coordinate and align their domestic regimes with those in
force outside their own jurisdictions, both bilaterally and on a multilateral basis.
The public policy challenge for governments rests on their ability to redesign the ground rules for the
conduct of international business - first, by adapting the traditional trade rules and disciplines developed
through bodies such as the World Trade Organization (WTO) and in regional agreements such as the
FTAA, to the realities of a networked international economy dominated by e-business, and secondly, to
harmonize the operation of domestic legal, policy and regulatory frameworks with international norms.
The UN Working Group on Internet Governance (WGIG) has recently released a Report which will be
considered at the World Summit on the Information Society (WSIS). The document makes
recommendations in a number of policy areas related to Internet governance such as: administration of
the root zone files and system; allocation of domain names; IP addressing; interconnection costs and
multi-lingualism.
There are also recommendations relating to Internet stability, security and cyber-crime; spam or junk
emails; data protection and privacy rights; consumer rights; intellectual property rights; freedom of
expression; capacity building and meaningful participation in global policy development. The WGIG report
lays out four possible models for the conduct of global public policy and oversight of the Internet. Further
developments are expected at the WSIS.
Spam is currently the subject of legislative and regulatory action in the U.S., Europe and other
jurisdictions. It is an example of emerging issues which warrant rapid, flexible approaches from public
policy-makers. Rather than traditional regulatory approaches, Internet economy issues like spam require
concerted action by governments and the private sector aimed at establishing practical rules of the game,
and cooperative enforcement.
Business practices to protect customer information and prevent the theft of identification data are key to
meeting growing security problems. But business and consumer action is only one part of the solution.
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Governments must also take the necessary legislative steps to effectively address these issues, including
amending and strengthening existing legislation as necessary and working closely with businesses and
consumers. In Canada the Ministerial Task Force on Spam, in its report to the Minister of Industry, has
proposed a multi-faceted strategy for combating spam.
The implementation of its Recommendations will require a coordinated and concerted approach among
all stakeholders.
So serious is the threat of spam and cyber-crime that cooperative, multi-jurisdictional enforcement of civil
and criminal sanctions will most likely be required to stem the tide.
Ideally, due to the borderless nature of electronic markets and services, such marketplace rules should
work both domestically and across international boundaries and thus facilitate the seamless flow of
commerce across a networked business environment.
The economic interdependence resulting from globalization and the increasing prominence of information
and communications technologies in trade and commerce has magnified the importance of having
international legal, policy and regulatory ground rules which govern the working of the global information
economy.
Key Findings and Conclusions
The combined forces of technological change and globalization pose dramatic new challenges for public
policy. The widespread deployment and use of the Internet by businesses and consumers has lead to the
emergence of a borderless, international marketplace which operates across multiple borders and legal
jurisdictions.
While a major factor in stimulating productivity and economic growth, the emergence of an Internet-based
global economy poses important new challenges for governments everywhere. In the first instance, a
network-driven economy raises new policy concerns in areas like network access and availability, as well
as the protection and security of information.
Secondly, to reach its full economic potential, the networked economy relies on establishing a complete
set of consistent ground rules for the conduct of electronic trade and commerce that will apply seamlessly
across the entire marketplace, not only within but also between territories and jurisdictions.
In some respects, the Internet is similar to other ubiquitous and trusted communications networks of the
industrial era that came before it. But there is a key difference. Previous transportation and
communications networks were birthed under the watchful eyes of regulatory or legislative bodies, at the
national level or through international agreements.
The Internet has evolved at an unprecedented rate and it consists of an agglomeration of autonomous
and apparently self-regulating networks. However, there is no gatekeeper or "watchdog" person or
agency to oversee activities on the Internet: a "they" that can step in when governance or "policing" is
necessary to curb inappropriate or criminal use.
It is a profound challenge to retrofit this necessary functionality while the Internet continues to expand
rapidly and its proponents try to accelerate its adoption and use by increasing numbers of unsophisticated
users.
Although the Internet has changed all our lives, it was simply never designed and built for ubiquitous and
global commercial use. While the technology is new, the need for trust and confidence carries over from
an earlier era.
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A sustainable cyber infrastructure cannot be achieved on a shaky foundation of trust, and unless steps
are taken to increase trust and confidence, then citizens are likely to eschew the "convenience" of the
online Internet world for the "inconvenience" but increased security of the offline world and the private
networks.
Spam has become a significant worldwide problem that clogs networks, consumes resources and, due to
its implication in virus distribution, identity theft facilitation and other criminal activities, significantly erodes
trust in electronic commerce.
If left unchecked, spam will bring the public Internet to its knees. Cyber-crime, Internet fraud and identity
theft are likely to become even more serious problems. Cyber-crime could become the Achilles heel of
the global electronic payments system.
Living in a world of distrust is costly. This will hold true for the online world, as it held true earlier and
holds true now for the offline "bricks and mortar" world. It is clear that the cyber-infrastructure that is put in
place has to be one that carries with it, at a minimum, the same degree of trust and confidence as the
current infrastructure (physical, legal, institutional) developed for the industrial economy.
The task of building an environment of trust in the digital economy is complex. It involves concerted
actions among many stakeholders: to create the requisite legal and regulatory environment; to develop
voluntary codes of practice; to educate businesses, consumers and public service providers; and to
create tools that are easy to use.
For the Internet to achieve its maximum social and political potential there will have to be agreed upon
and effective rules of the road , both nationally and globally. This new technology will have its own unique
regulatory framework, but it will only flourish if there is some early agreement and acceptance of both
broad and specific governance approaches aimed at buttressing the vital areas of trust and confidence.
E Commerce
eBusiness - A New Digital Economy, Not a Passing Fad
“The new economy is not just a dot.com thing. It’s not just about high tech –
making computers or microchips. What it is about is new ways of doing things in
every industry, every government. It’s about speed, quality, flexibility, knowledge
and networks. It will affect everything.” (Collaborative Economics)
“The new economy organization is virtual and anti-bureaucratic, emphasizing
communication via networks, and near-real-time transactional speed.” (Rubin
Systems/Meta Group)
“Many firms embrace the Net as a new channel, while others shape entirely new
business models around it. But these steps are just the start of a profound
transformation, as the Net forces firms to rethink ingrained business practices.”
(Forrester)
“The Net will give rise to a new market structure. In this new environment, firms will form
relationships quickly, share information broadly, and create value by making assets fully
available online. To thrive in this dynamic setting, companies will single-mindedly focus on
their key strengths – actively plugging in partners to fill the gaps.” (Forrester)
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eBusiness - The New Digital Economy
eBusiness is a fundamental shift in the way that business is done – aided, abetted,
supported, and enabled by technology, data, process and organization; the Internet
has been the catalyst for the shift to a new Digital Economy
New Digital Economy – Next Wave of Change
Technology – Waves of Change and Business Value
First Era: Foundation (Efficiency and Effectiveness)
First Wave – Mainframe and Midrange Computing
Second Wave – Personal Computers and Client/Server Computing
Second Era: Innovation (Strategic and Transforming)
Third Wave – Internet/Network Computing
Fourth Wave – Pervasive Computing
Source: Assessing the strategic value of information technology,
The Economist Intelligence Unit
Digital Economy Characteristics
Characteristics of the new Digital Economy:
Technology is a given
Globalism is here to stay
Knowledge builds wealth
People are the most important raw materials
There’s no such thing as a “smooth ride”
Competition is relentless
Alliances are the way to get things done
Place still matters, but for different reasons
Source: The New Economy: A Guide for Arizona, Morrison Institute
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Digital Economy Indicators
Key Indicators for the New Digital Economy:
Knowledge Jobs
o Qualified engineers; availability of IT skills; availability of senior management;
higher education requirements
Globalization
o Reduce economic and trade barriers; embrace global capital market; English will
lose position of dominance as language of choice in favor of diversity of
languages
Economic Dynamism and Competition
o Worker innovation; process management; entrepreneurship; overall productivity;
companies’ financial health; venture capital
Transformation to a Digital Economy
o Connections to the internet; digital transactions; investment in
telecommunications; virtual relationships; innovative business environment
Technological Innovation Capacity
o Increase in knowledge and technological innovation; increase expenditures on
R&D
Source: The Global New E-Economy Index: A Cyber-Atlas, META Group
o e-business strategy that is integral and supports the overall business strategy
o strategic partnerships to outsource non-core processes, create new market opportunities,
build market share, or provide other products or services
o establishment of ebusiness networks that link business processes in real time, allow
processes to reconfigure dynamically to respond to changing market conditions and
opportunities --- allow to work with firms that are competitors, suppliers, customers, and
distributors
o speed to market - recognizes time is short; acts quickly and proactively
o strategic investment in technology to enable new business model
o reallocation of IT resources from maintenance to strategic focus
o straight-through processing (STP) enabled by data and transaction standard
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Financial Services and Insurance Readiness
The question is no longer whether technology and the Internet will change the insurance
industry, rather, the focus is on how rapidly the changes will occur and how other
financial services companies will take advantage of the lack of readiness of the insurance
industry. Companies positioned to “win” have the following strategic technical
capabilities:
Bo
eBusiness - Competitive Landscape
Insurance is besieged by new competitors including banks, securities, web startups,
foreign insurers, aggregators, e-marketplaces, and non-financial services companies
(LOMA)
Life insurers basis of competition has changed from product, distribution, pricing,
investment performance, and ratings to attractive, low-cost products and high ratings
with technology as the differentiator (LOMA)
In a LOMA survey in 2000, it indicates the Internet importance for insurance will grow as
customers increase use and experience of online banking and Internet sales of other
financial and consumer products
A survey of top executives indicates that 69% feel the top issue is how to effectively
exploit e-business strategies and new business models (The Conference Board)
eBusiness – Competitive Assessment - Examples of Insurance and Banking
Industries
The Insurance Industry Has a Short Window of Opportunity to Compete in a Fast-
changing and Consolidating Marketplace
Securities
70’s - began automation
Develop common industry data and transaction standards
By mid 90’s seamless integration and web-enabled transactions
Growth increased
Customer Base increased
Product innovation increased
Householding - brokerage account
Costs decreased
Profits increased
Cross/sell increased
Offering other non-securities (I.e. insurance and banking increased
Customer/external focus
Partnerships increased
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Extensive online sales, service and distribution capabilities
30+ years to get to this point
Banking
80s - began automation
Develop common industry data and
By mid 90’s seamless integration and web-enabled transactions
Growth increased
Customer Base increased
Cross/sell increased
Costs decreased
Profits increased
Householding - Accounts
Non-banking products increased
Customer/external focus
Partnerships increased
Extensive online sales, service and distribution capabilities
20+ years to get to this point
Window of opportunity
was 30 years
Window of opportunity
was 20 years
Insurance
Mid 90’s internal systems and begin sales force automation
No common industry data or transaction standards
Cannot do seamless integration
Growth flat or decreasing
Customer base flat or decreasing
Profits flat or decreasing
Minimal householding
Minimal cross/sell
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Minimal partnerships
Primarily insurance products only
Minimal product innovation
Product focus
Internal focus
Minimal online sales, service and distribution capabilities
Window of Opportunity
Is Only 3-5 yrs
eBusiness – Customer Expectations
Customer expectations are no longer simply a contract or a relationship,
they are a collection of services that are connected via technology –
any time, any place or any way they desire …
Consumer demographic changes – customers who control their financial services; consumers
who prefer electronic interactions; consumers who internalize the Internet to their life; consumers
who want information and interactions in their native language (LOMA and Forrester)
Massive wealth creation, wealth transfer, deregulation, and global demographics create huge
opportunities for those with vision, resolve and aggressiveness in the new e-marketplace
(Anderson Consulting)
Open Finance where consumers enjoy best-of-breed financial service combined with easy
electronic movement of money.
Consumers want their transaction-heavy accounts (checking, savings, and brokerage)
aggregated. They see benefits to centralizing their less active accounts: 73% of life insurance
owners say that they would aggregate that information (Forrester)
Average US household maintains 3.7 accounts across three+ financial institutions. With higher
incomes and more assets, online households have 1.4 more financial relationships, and own two
more financial products than offline consumers (Forrester)
Yodlee, a leading aggregation service, claims to consolidate more than $10 Billion in customer
accounts
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eBusiness - Customer Expectations
Emerging Market of Future Customers who will demand better information and choice, are
the future growth for financial services, and will represent an estimated 53% of
households (Forrester)
o Validators – Customers who do not delegate control, self-sufficient
o Digital Preferred – Customers who prefer electronic to physical interactions
o Young Consumers – Under 25 segment who internalize the Internet into their lives
Historic surge in customer competence places increasing strain on traditional business
models, which are optimized for a bygone era of information scarcity and are now ill-
suited to the information-driven market (IAB ….)
o There is a market shift in power from sellers to buyers
o Almost half of computer owners use a PC-accessed tool to monitor their finances
(Forrester)
o In a survey of 1000 users of account aggregation, one-third used an aggregator website
not run by a financial institution (Booz-Allen & Hamilton)
30 percent of U.S. insurers offer three or more distribution
B
eBusiness Success – Financial Services Network
Will you be positioned to add value to your customer through a network that will accommodate
the need for immediate transactions between financial services and other organizations?
Bo
eBusiness Success - Competitive Positioning
Few traditional providers are prepared to realise full potential of eBusiness
Insurance providers need an enterprise-wide approach
Spending on eBusiness technology per company will rise on average by 89% over the next three
years (from $12.3M to $23.2M) and will rise from 31% to 42% of total IT spending;
Deepening customer relationships and cutting costs are top priorities
Larger numbers will rely on outsourcing for eBusiness capabilities
Alliances will become increasingly important
Providers will offer more advanced customer services online
Agents and brokers will continue to dominant distribution; will choose to do business only with
carriers that can work with them online
Carriers will broaden distribution by developing multiple customer access points, will rely on a
widening distribution channels especially partner websites, e-marketplaces, affinity groups and
employers
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Distributors and financial services companies will offer a complete portfolio of financial services
online
The Economist Intelligence Unit
eBusiness Success - Critical IT Management Issues
How can IT align IT and business strategy and goals?
How can IT work more effectively with the business to identify and exploit IT to create or improve
the business model?
How should IT organize and manage resources?
When and what should be outsourced?
How does IT effectively monitor emerging technologies to evaluate which - and when - to apply
them?
How to determine the level of investment for eBusiness and optimize the returns?
eBusiness Success – 3 IT Management Components
People
Identify training, recruiting, retention, and organization needs and changes to support the new business
model. Determine how to compete for scarce talent.
Practices
Determine and implement relevant best practices in strategy, management, architecture, application
development, and security. Define a role for outsourcers and open source development.
Products
Identify appropriate products, tools, and standards for all phases of development and
management. Evaluate emerging technologies and standards.
eBusiness Success – IT Strategic Alignment
IT Leads, but Who Follows?
High internal IT eBusiness investment
Solution seeking problem
High risk positioning
Needs integration with business strategy
