Testimony from June 14, 1999

 

Prepared Testimony from Jim Barksdale, Barksdale Group

I. INTRODUCTION
Mr. Chairman and members of the Committee: it is an honor to appear before you to talk about the role
of high technology in the economy - indeed how high technology is transforming the economy and
creating an entirely new one - as well as the public policy implications of this transformation. I have
focused my remarks on the portion of high technology that I will refer to as the Internet economy or the
Net Economy.

II. THE NET ECONOMY. WHAT IS IT? HOW WILL IT IMPROVE OUR LIVES?
Mr. Chairman, let me first define the Net economy: what it is, and how it will improve commerce,
communications and our lives in general. The Internet's power as a tool for commerce and
communications is unprecedented. Over the past five years the Internet has become a commercial entity
and we've witnessed its explosion onto the global scene. Right now, articles about the Internet now
account for one- quarter of all news. Every advertisement today includes a web address. And once you
understand and have used the Internet, you cannot do without it. A recent AOL-Roper cyberstudy of
Internet users showed that if people were stranded on a desert island and had to choose between the
Internet, a telephone, and a television, the majority of them - 67% - said they would want to be connected
to the Internet. Only 23% would prefer a telephone, and only 9% a television.
Technology, particularly networking technology, has increasingly affected the way our lives are lived and
business is done. The telephone, fax machine, and cell phone, for example, have become indispensable,
helping us to meet business challenges more quickly and efficiently. Today, it is Internet technology that is
making a difference, causing profound changes in the way we conduct business and communicate. A
study just released by the University of Texas sized the Net Economy at $301 billion in 1998 and
potentially doubling each nine months. This is profound.

Currently, we're seeing enterprises and institutions use open- standards Internet technology to link their
entire supply chains together and create vertical trading communities online. These new real-time, online
vertical trading communities help to tightly connect enterprise to enterprise in a world where all commerce
is electronic - the Net Economy.

A. Virtual space vs. bricks and mortar.
It used to be that to build a business, you needed to think about bricks and mortar - in other words,
physical retail space. In the new world of the Net Economy, however, your showroom can exist solely in
virtual space. Amazon.com, a relative newcomer to the book business (and a business whose "store" is
solely online), now has a higher market capitalization than Barnes & Noble. Yet Barnes & Noble has been
in the business much longer and has about $1 billion in hard assets in retail stores.

B. New Marketing.
The ability to understand how this new Net Economy is going to change the business model and
everything we do every day is a critical part of making a company successful in the future.
The Internet has created a mass-market opportunity many businesses are very excited about. It's a new
way of meeting and interacting with customers - not like running a TV ad, which is the old way of
marketing to millions of people. In the new way of marketing to millions, via the Internet, customers can
respond immediately. In fact, the Internet is the only medium in which a customer can see, evaluate and
buy - virtually at once. Television is great for step 1, direct mail and other media work for step 2, but
getting the customer to the store to make the purchase is the hardest part. Online, customers flow
smoothly through all three steps. So it is not just hyperbole to say the Internet is a new medium. It
genuinely creates new kinds of interaction and transaction opportunities. Everything changes.

III. THE ROLE OF GOVERNMENT
As it looks at the future, the high-technology community should be united on at least one point: the
government has a role to play in insuring that these opportunities can continue to exist. We should do all
that we can to see that government does not over-regulate and stifle these industries. But that doesn't
mean government should have no role at all. It has, and it will.

A. The Internet itself.
As you all know, the current Internet traces its lineage to federally funded research. If it were not for the
work done by the Defense Advanced Research Project - especially in the area of packet switched and
other networking technologies - we might not have the Internet as we know it. Continued federal funding
throughout the 1980s through the National Science Foundation and other programs fueled the engine that
became the Internet. On behalf of many, I say thank you to the Congress and to both Republican and
Democratic Administrations for the foresight demonstrated in those prudent funding decisions.

B. Eliminating commercial restrictions.
So the Internet has been in existence since the 1960's, but we didn't hear much about it until the 90's.
Until Congress changed the law in 1992, the Internet was almost solely the province of researchers and
academicians. Then government, having served as mid-wife, wisely decided to get out of the way and to
open up the Internet to so many of the commercial possibilities. There are important lessons in that.

C. The Internet browser.
Marc Andreesen, the co-founder of Netscape Communications, was a participant in National Science
Foundation programs in the early 90s at the University of Illinois, where he and his team in 1993 wrote
the code that became the first easy to use browser. Even though the Internet and its ancestors had been
around since the 1960's, the graphical browser - which allowed non-computer scientists to navigate the
Internet - was the technological innovation we had been waiting for. This led to the creation of Netscape
in 1994. And from that point on, there was no looking back. A lift-off explosion of innovation was
triggered and the Internet achieved orbit -- and now the opportunity to improve the quality of life for all of
mankind is right here before us. I am very, very proud of the role Netscape had in changing the world for
the better.

There are two other laws that deserve mentioning, but not laws considered by Congress. D. Two other
laws - Moore's and Metcalfe's
For more than 30 years, we've all been excited about Moore's Law, which states that every 18 months or
so the speed of microprocessors doubles and the cost decreases proportionally.

Today, however, companies are no longer constrained by processor speed. Moore's Law is not going to
do a whole lot more for these companies.

The important law to pay attention to now is Metcalfe's Law. This is named after Bob Metcalfe, inventor
of Ethernet and founder of 3Com. Metcalfe's Law states that the value of a network grows exponentially.
Every endpoint that's added can then be connected to all the other endpoints. In other words, the number
of endpoints squared is an indicator of the value of a network. The network that doesn't reach
everywhere is of little value. Think about what a tough job the first telephone salesman had. Who was the
first customer going to talk to?

Companies today are driven more by the networking truths of Metcalfe's Law than by the hardware
truths of Moore's Law. That's one of the features of the Net Economy. Networks - whether they axe
physical distribution networks such as the one Federal Express built or electronic networks such as the
Internet and cellular phone networks have the same underlying principles and values. I've had the
privilege and opportunity to play a major role in all 3 of the network revolutions that have occurred over
the past 25 years. So I have seen firsthand, from several vantage points, how an open point-to-point
network grows in value exponentially as the number of endpoints grow. This is because new users create
new uses which create new users. You can't size a bridge by counting the swimmers - a bridge creates
traffic just as a network creates traffic. A network grows in value exponentially because every endpoint
that's added can then be connected to all the other endpoints. That's what makes networks great
economic engines - the Net Economy.

IV. IMPORTANT POLICY CONSIDERATIONS
Mr. Chairman, let me mention a few policy issues that must be addressed carefully, some by Congress
and some by business. First, privacy. Any firm doing business online must be sure to manage personal
data about its customers ethically. Customers fear that their personal information may be collected by
Web sites and shared with people or businesses they don't know. Customers demand to be informed
about data collection practices; many laws in Europe, Canada, Australia, and elsewhere require companies
to manage data in certain ways. It is in every business's best legal and financial interests to have a privacy
policy prominently placed on its Web site, to participate in industry self-regulatory efforts, to become
aware of applicable laws, and, most important, to listen to customers and their demands for privacy
protection. Industry self-regulation has made great progress in the past year, but there will be an ongoing
need for this to be monitored by government.

As part of our right to privacy, let me mention encryption, a critical and ubiquitous technology which
allows our communications to remain private and our electronic commerce transactions to remain safe. A
world without encryption for the Internet would be like a world without envelopes for letters. Every
communication would be like a postcard. I recognize that more dialogue between industry and
government is needed before we finally resolve this, which has been a particularly difficult issue for
Congress. But the fact that the Internet is truly a global medium has meant that this and many other issues
can no longer be looked at through just the prism of the U.S. government.

Much has been accomplished during the last two years on protecting our children from indecent material
on the Internet. The issue of decency requires self-regulation by the industry through the increasing
availability of effective and easy to use parental control software products. Recent events also indicate a
need for greater awareness on the part of parents of how their children are using the Internet. Free speech
has both positive and negative consequences.

This industry is a child of government research. It is now more important than ever that federal funding
be increased for information technology basic research, as recommended by the Presidential Information
and Technology Advisory Committee. The R&D tax credit should also be extended from annual to
permanent if you want it to cost less and do more. The capital gains taxes collected from just one Internet
startup pays for many years of federal funding of both programs.

A well educated work force is vital, and our education policies and assumptions must continually be
challenged and updated to address real world needs. Also, the Congress and Administration are making
strides in updating our immigration policies for high tech essential workers, but this will be a recurring
issue for Congress and industry.Similarly, there are a myriad of complicated telecommunications pricing
and subsidy issues that will need to be addressed if we are to ensure we do not have a great societal divide
between the information haves and the information have nots. We -- industry and government -- have
only started to scratch at the surface of this problem.

A special word of thanks to the Congress, and perhaps especially to Senator Bennett for his leadership, on
the Y2K legislation, which I understand is now ripe for consideration.

And there very important set of issues such as accounting, pooling, stock options, R&D tax treatment and
others which have played an enormous role in establishing the appropriate incentives which have driven
Net Economy companies. Congress must play the appropriate oversight role to insure that these uniquely
important economic incentives axe preserved or, if anything, increased.

The need for informed tax policies on Internet commerce are obvious, and I am confident the recently
formed Advisory Commission on Electronic Commerce will produce a set of recommendations that lead
to a simplified uniform system of taxation in the Net Economy.

V. LOOKING AHEAD
Looking ahead, there are many exciting developments yet to come in the development of the Net
Economy: enormous improvements in bandwidth and spectrum availability both wired and wireless - at
ever-decreasing prices; the convergence of voice, data, and video technologies and the new Internet
services that will be born of that convergence; new appliances that connect to the Internet with or without
wires, continually decreasing prices for PCs, which will provide greater opportunities for developing
countries and certain population groups to gain more Internet access; opportunities for the improvement
of medical research, the distribution of drugs and medicines, and the formation of communities focused
on a particular disease or medical topic; the spread of distance learning, which is increasing the number of
people who study, learn, and get degrees via a virtual classroom; new management practices for the
virtual company; the combination of DVD, Internet-enhanced television, and web content for almost
unlimited visual and auditory entertainment on demand.

The Internet is a powerful, interactive network that can span radio and television programming,
information exchange, and telephony. Obviously, there are miles to go before we sleep, but it is very
exciting to be a part of this.

VI. HOW WILL IT IMPROVE MANKIND?
Imagine the opportunity as we connect billions of information devices, such as PCs, Web-ready television
sets, telemetry devices, cellular phones, and telephones, in a global network where every point touches
every other point - the Net Economy. The enormity of this proposition is almost beyond human belief. It
actually holds out a promise for solving many of the seemingly insurmountable problems that our children
and grandchildren will face - problems ranging from global warming to poverty and world hunger to the
need for economies to continue to grow if we're going to continue to raise the standard of living
throughout the world. With both physical distribution networks and telecommunications networks working
together I believe we can provide solutions such as better education and training, better understanding of
others' needs and wants through improved communication, and new payment systems that will allow the
economies of the world to work together more smoothly.

Networks will enable non-industrialized parts of the world to receive, at affordable prices, the same kinds
of goods and services as the industrialized parts of the world. As we build these big networks, the
incremental costs become less. Businesses can pinpoint markets through these marvelous new
point-to-point networks and provision people with communications devices. As more people find it
affordable to be part of the network, a whole new networked economy will be created.

VII. ALL WORLD COMMERCE IS MAKING THE LEAP TO A VIRTUAL WORLD. IT IS ALL
ONE FUTURE.
When I see press stories about the Net Economy, there is sometimes the notion that one is either in the
Net Economy or the Old. If you go shopping at Wal-Mart in a small midwestern town, you might feel
isolated from the Net Economy and assume it is for a new breed of people from California or other
high-tech centers around the country.

But all world commerce is making the leap to a virtual world. All the real-world companies we know and
have grown up with - such as Wal-Mart or Ford Motor Company or Bank of America or NBC - all of
them will have new versions in the new virtual world.

The tremendous amount of capital flowing into the Net Economy, coupled with the relatively low barriers
to entry, mean there are almost unlimited opportunities for entrepreneurs. A truly open Net Economy can
create the next wave of opportunity so that today's dreamers and entrepreneurs can become the Sam
Waltons or the Henry Fords of the Internet? There are so many bright people working in this new
medium, and they're coming up with even more explosive ideas than anything we've imagined to date.
But the Net Economy - and all of us lucky enough to live in it - will only benefit from their genius if our
most important policy objective is met: To ensure that true competition is restored to the industry. The
engine of innovation has always been competition, and it is more important than ever that our economy is
driven by this fundamental principle.

In the Old Economy, the lines between steel and agriculture and banking and telephones were clear and
bright and the industries removed from one another. But in the Net Economy, much of this economic
activity will consist of electronic transmissions through the ether. This creates a greater opportunity for
one or more entities to gain control over the chokeholds in the Net Economy. As more and more
economic activity is conducted over the Internet, the harm to the economy from undue concentration of
power could be far greater than in the Old Economy.

Simply put, the Internet is too important to be disrupted by undue concentrations of power, either in the
public or private sector. There are several possible chokeholds in the Net Economy. It should be an
important public policy goal that neither the government or a single firm or alliance should be allowed to
acquire and use monopoly power with respect to these pathways to the Internet. No new laws are needed
for such policy objectives to be achieved. Bipartisan support for public servants entrusted with the
responsibility of enforcing current laws is surely not too much to ask. Indeed, if we do not have effective
enforcement of antitrust laws, then it is only a matter of time before Congress or some agency has to step
in and regulate, and that is surely not the way to go.

In closing, Mr. Chairman and members of the committee, let me express my profound appreciation to you
for hosting the first High-Tech Summit. I have recently retired from active business management. As I
near the next phase of my career as an observer, user and investor in the Net Economy, I am excited
about this age of opportunity. I plan to continue to work with policymakers in the months and years ahead
to expand the hope and promise of the open Net Economy.