Testimony from June 14, 1999

 

Prepared Testimony from Louis Gerstner Jr., IBM

Mr. Chairman, I would like to thank you, Senate Majority Leader Lott and Senator Bennett for providing
this forum and for the opportunity to participate in this important discussion. I am here, we are all here, to
talk about a revolution. It emanates from the relentless advance of information technology. And it draws
sustenance from a new development -- the long-awaited merger of computing and communications to
create what we hear called a networked economy, or networked society.

But my message today is that the real revolution is not about technology. It is not about a new model of
computing based on the Internet. We are witnessing nothing less than the rise of a digital economy and a
new global medium that will be the single most important driver of business, economic and social change
in the coming century. It will alter the way we teach our sons and daughters, care for our aged, reach out
to the disabled and homebound, and enlighten the isolated and disenfranchised. It is our best hope to close
the "digital divide" that exists today between the rich and the poor. And it will exert new pressures on
existing geopolitical structures... and all their underlying economic assumptions.

A world connected by global networks has more fluid borders. It will challenge the very notion of the
nation-state, shift the ways democracies behave, fundamentally alter the challenges of national security,
and create the first global venue for debate and decisions on issues that affect all the world's people. You
might think of it as elevating the concept of the town meeting to a world stage.

Five years ago, using the Net to buy a car, or trade a stock, or earn college credits was revolutionary. So
why not envision a day when we vote with much greater convenience -- from our home or workplace. Or
a day when issues are presented to all the people of the world and we vote as a global statement of
individual preference without regard for conventions like political parties, or national borders?
I am completely convinced that all this is possible. It is not inevitable, but it is certainly possible and
attainable, provided we make smart decisions, and importantly, benefit from thoughtful, insightful
leadership in the public and private sectors. Because this is one of those transformations that comes along
once every hundred years or more and changes all existing models in profound, and permanent ways.
We've seen this before. The printing press: the proliferation of knowledge and the subsequent end of the
Middle Ages. The automobile, a redefinition of the concept of distance, the restructuring of metropolitan
communities, and the relationship between the workplace and the home.As with all world-altering
technologies, this will take a while. We're probably about 5 years into a 30-year cycle of transformation.
But there is simply no doubt that 25 years from now, when people reflect on the seminal changes of the
early days of the century we are about to begin, the impact of networked computing will stand in relief.
I think I can safely assume that most members of this committee have a view of this networked world
that begins with its impact on the consumer. On the home user. With applications for news,
entertainment, or chat. That's understandable. Because that's where the bulk of the interest and attention
has been concentrated.

Let me try to frame the economic, social and governmental implications of what's happening. We're
headed for a day when we'll have hundreds of millions of people -perhaps a billion -- connected to one
another and to all of the world's leading institutions and enterprises. Next, and in the not too distant
future, we'll add to this mosaic of connections, computing and communications perhaps a trillion
intelligent devices -- from intelligent cell phones and smart cards, to cars, household appliances, medical
devices, or vending machines. The technology will literally become pervasive -disappearing into the
infrastructure of the home, the workplace, the world. Today, most estimates say there are around 150
million people using the Net worldwide, and the growth rates are astounding. One projection says 62,000
new users will come online every day over the next few in the U.S alone. Even at that rate, most of the
growth is occurring outside the U.S.

To date, the U.S. has been the beneficiary of most of the economic growth generated by e-business. But
the rest of the world is moving fast to close the gap. At the end of last year, 11 nations other than the
U.S. had at least 10 percent of their populations using the Web. China, a country that's just now joining
the world economy, already has one-and-a-half million people on the Net. And sometime this year -- it
may have already happened -- we'll hit the crossover point. The majority of Internet users will be outside
North America.

What are all these people doing? At first, they were doing what the conventional wisdom said they were
doing: chatting, reading and playing games. More recently, they've been buying things. Lots of things.
Most estimates say global e-commerce totaled around $50 billion in 1998 and that this marketplace will
crack the $1 trillion mark in the next few years. That's roughly 10 percent of all business transactions in
the U.S. -- and about 5 percent worldwide.

But again, the impact and implications are far more encompassing than just Net-based buying and selling.
IBM uses the term "e-business" to talk about the broader, more powerful aspects of this change: The way
it allows institutions of all sizes, in all industries, public and private sector, to redefine what they do, and
reinvent who they are. These applications redefine the rules of market access, unify trading partners in a
supply chain, and transform models of distribution. They transform internal operations, from product
development to the way work gets done and employees share ideas. We believe the transformation of all
these core processes is -- and will continue to be -- a powerful source of real productivity gains for
companies and for countries.

And as Exhibit A, I'll submit IBM, and I'll cite just two applications that would apply in either the private
or public sector. About one- third of all our internal training will be done this year via distributed learning,
with savings and productivity gains of $100 million. And we'll procure $12 billion in goods and services
over the Web this year.

As I said, the benefits transcend the commercial world. Governments are finding that the Net is a tangible
way to demonstrate efficient use of taxpayer dollars. Arizona enables citizens to renew their driver's
licenses over the Net. The convenience alone probably justifies the investment. But the state has also
learned that processing an online renewal costs 75 percent less than an over-the- counter transaction.
Singapore is deploying networked applications in its bid for primacy among Asian shipping pods. They've
slashed the time for governmental approval of cargo manifests from days, to as little as 30 minutes. We're
working with many governmental entities to help kick start this transformation. But for the most part,
government has not embraced the networked world. We estimate that 90 percent of all government
services are still delivered "over the counter" in face-to-face transactions.

Think about the opportunities to invest in new areas or re-deploy capital or tax dollars if you could reduce
the cost of some of those physical operations by 75 percent the way Arizona has done.

I'll turn now to implications for the U.S. economy, and then offer my perspective on key issues facing
policy makers and regulators. There's obviously not time today to detail every issue. But I'll offer a few
observations, because we're in the ultimate high stakes game.

In the economy of the 21st Century, this technology will underpin our nation's -- and every nation's --
ability to drive production, productivity, profitable growth, and ensure the prosperity of its citizens. There
is an absolute correlation between U.S. industry's investments in information technology and the
ever-lengthening cycle of American economic growth.

Perhaps the most profound impact of these investments will be with smaller businesses, which we all
know are the greatest source of job creation and economic expansion in America today. Networked
technology is a great leveler. It allows these small and medium-sized enterprises to redefine their market
presence and go global, virtually overnight. One of our small business customers is a family-owned
nursery called Hawaiian Greenhouse. They sell tropical flowers. When they started to feel the squeeze of
big international growers -- the Goliaths of their industry -- they found their edge on the Net. 10 percent
of all their new orders come to them via the Web, and they now refer to themselves as David-dot-com.
The U.S. can be proud of the economic leadership it enjoys today. But leadership is not a birthright.
Information technology spending as a percent of GDP will remain higher inthe U.S. than Europe or Asia
this year, but the gap is expected to narrow. Governments around the world are building strategies to
compete for investment or jobs -- not based on traditional incentives like tax structures -- but on their
electronic readiness and capability.

Earlier I said that while networked computing can drive economic expansion and societal change, those
things are not inevitable. One critical dependency is development of a workable public policy framework
for electronic commerce. I am predisposed to believe that government, working with industry, can create
an environment that nurtures e-business for economic, competitive and societal advantage. Building this
kind of market-based environment implies that we will allow our respect for free market economics to
work wherever possible.

We have to remember that this transformation is fundamentally about the urgent search for new models.
It's a grave error to think the Internet and e-business will develop under the kind of regulation we could
apply, say, to the phone system back in the days when coal and steel were determinants of a nation's
greatness, and economic models based on information were simply un-imaginable.
That means we have to be patient, and thoughtful before rushing to enact new legislation. That's often
hard to do when all of our experience, training and instincts tell us that there is change afoot, so it's time
to act. However, in many instances today we simply haven't collected enough data points to have the
basis of an informed decision. Policies hastily put in place today could be obsolete tomorrow; or worse,
ruin this nascent economic engine.

Protecting online privacy is one area where we're already seeing the positive effects of a market-driven
approach -- one that builds on many U.S. privacy laws. A recent Georgetown University survey shows
that a clear majority of commercial Web sites now have their privacy statements visible to the consumer.
The situation is not perfect, but it shows that the marketplace is responding to the desires of customers
and consumers. IBM, as an example, refuses to advertise on sites that don't inform visitors of their
privacy policy.

I am not suggesting -- as some in my industry have -- that government is merely a bystander. There are
areas where governments must lead. Tax policy is a good example. Congress took an important step last
year with the passage of the Internet Tax Freedom Act. The commission formed by that act will begin
meeting later this month, and we look forward to a considered debate on the issues.

The issue of information security is a case study in the importance of government/industry cooperation.
We have to push for a sensible encryption policy in this country -- one that recognizes the commercial
demand for secure information systems and transactions, and also recognizes the legitimate needs of law
enforcement and national security.

Finally, we need policies that will promote the continued build-out of broadband systems, and we need
government to continue its traditional role in support of R&D and as a source of fundamental new ideas
and knowledge, often developed in cooperation with industry.

I'll close with this, because it is the source of my fondest hopes -- and also my most profound concern --
as a I think about the opportunities and the threats of a networked world. If there is one factor that can
dead-end this new world of economic opportunity and prosperity, it's the deplorable condition of our
system of public education. Just as surely as a high quality education -- or the lack of one -- can separate
people, it will also separate winners and losers in the global, networked economy that's coming to life
around us. And right now, American public schools are in a race with the rest of the developed world.
Sadly, it's a race we have been losing -- consistently and relentlessly -- for decades.

I have been passionate about this subject for 20 years. Looking ahead, that passion is turning to fear.
Unless we arrest the wasting decline of our public schools -- and do it now -- America is destined to be an
also-ran in the emerging digital economy. The issue here is leadership -- from elected officials,
administrators, educators, and parents. No American can opt-out on this one. It's one more reminder that
in every era, the most important challenges, and the resources to meet them, are intensely human.
I hope we all recognize that we are facing the leadership challenge of a lifetime. Our ability to exploit this
magnificent opportunity and make it real for the benefit of all people rests squarely on the quality of
leadership we'll get across the board -- in industry and in government. The leadership enterprises in every
industry are starting to emerge -- in every case behind the vision of individuals who have the will to go
first, and make fundamental changes to the way things are currently done.

If we are going to nurture and exploit these technologies to really change things in the world and make it a
richer, more understanding, and more secure place, we'll need the same kind of leadership in government.
Leaders with the will to step forward and aggressively embrace e-business as a tool for economic and
social change, and the confidence to trust the dynamics of the marketplace.
This forum is a very positive sign that we agree this work must be grounded in communications,
cooperation and a lot of thought.