Testimony from June 15, 1999

Prepared Testimony from Jeff Papows, Lotus Development Corporation

Mr. Chairman, I commend you and your colleagues for the leadership you demonstrate in holding these
proceedings. The U.S. software industry has materialized as one of the fastest growing and most
innovative sectors of the U.S. Economy creating thousands of new jobs and unlimited opportunities for
entrepreneurs and small businesses. Since 1994 U.S. Soft-ware sales have grown at a continuous rate of
15.4% - in contrast to a continuous rate of 5.4% for overall Gross Domestic Product. In effect, the U.S.
Software industry is growing almost three times faster than the economy as a whole. It makes sense to
take stock of what we need to do as a nation to keep things on track. By working together, we can make
sure the right framework is in place for continued growth in the U.S. Software industry which paves the
way for a strong economy overall.

In my home state of Massachusetts, corporate headquarters for Lotus, there are over 2,348 software
companies with revenues of $8.4 billion and that number continues to grow each year. To keep this trend
moving in the right direction, Massachusetts is working to put policies in place that will foster an
Innovation Economy - an economy based on intellectual capital and the ability to translate new ideas into
competitive products and services fast than the competition. So what it happening at the Federal level, is
happening at the state level as well.

Corporate History and Community Involvement
I would like to give you some background on the products and corporate culture of our company. Lotus
Development Corporation, an independent subsidiary of the IBM Corporation, is based in Cambridge,
Massachusetts and has about 8,500 employees worldwide. Founded in 1982, Lotus popularized the
electronic spreadsheet and launched the personal computer business software industry with Lotus 1-2-3.
In more recent years, Lotus is the leading supplier of the software that lets you send e-mail around the
world, conduct electronic commerce over the Internet, and share Web based information across
networks. These software products, Lotus Notes and Lotus Domino, are referred to as messaging and
groupware solutions. These technologies represent the new foundation for our industry and the exploding
Electronic Commerce marketplace.

As we began the decade of the 90's - few people used e-mail as a means of communication. In 1999, 2.7
trillion e-mail messages will traverse the Internet in the United States alone, more than four times the
volume of traditional postal-delivered mail. Internet commerce is doubling every 100 days. The Internet,
like the railroads of the 1800's, has forever changed the way we communicate, conduct business, and
measure our economy.

The Internet also gives us the chance to make real a vision we have at Lotus: "Connected communities
that shrink the world; Access to ideas that expand the world." We try to live that vision in the market
place through the products we create, and in the many communities where we have a presence around the
globe. At Lotus, we believe in sustaining and supporting the communities in which we live and work
through a strong commitment to community service. The Lotus Philanthropy Program, founded in 1985,
facilitates the sharing of a portion of the company's profits (1% of pretax profits), products and people in
ways that assist individuals and communities, particularly those disadvantaged due to race or class status,
in achieving their highest potential in terms of social and economic development.

The following statements express the core values of Lotus Philanthropy: - The development of
community partnerships is a fundamental component of the company's overall business strategy.

- Individuals and communities have the inherent capacity to provide the most effective solutions to the
challenges they face.
- Civil societies are defined by the protection of civil rights, the defense of human rights, the preservation
of diversity, and the promotion of democracy.
- Equitable access to technology -- and the power of knowledge and open communication -- is
fundamental to a democratic society.

The company combines monetary contributions with employee time which allows us to get much more
directly involved in the human efforts behind philanthropy. Lotus is very proud of these efforts, and
pleased that we have been able to increase our community involvement in the wake of the IBM merger
with goods and services in kind. For example, in working with the Massachusetts Tech Corps to wire the
public schools to the Internet we were able to provide human capital for installation and training as well as
personal computers and software.

Many of our philanthropy programs are in force around the world reflecting the global nature of our
company.

U.S. Software Industry - A Global Business
As the engine that drives the Internet, the software industry is truly a global industry. 65% of Lotus'
revenues are generated off- shore and these are without a doubt our largest growing markets. The total
worldwide market for software alone is predicted to double between 1996 and the year 2001 from $105
billion to $203 billion. Our ability to continue to create innovative products and sell to these markets
overseas will be key to our success at sustaining economic growth, creating more jobs, improving wages,
and contributing to a better standard of living for all Americans.

A key indicator of the software industry's increasing importance to the U.S. economy is its contribution to
the U.S. Balance of trade. In 1997, the U.S. Software industry contributed a $13.0 billion surplus to the
U.S. goods, services and income trade balance. In contrast, the overall U.S. Economy registered a trade
deficit of $36.4 billion. The software industry's surplus reflects an historic trend of increasing export
activity. As our industry's sales have grown, an increasing proportion of those sales are made overseas.

Trade Barriers - Export Controls on Encryption Technology
Clearly, the U.S. Software industry must remain fully competitive in export markets to continue to
contribute this vital trade surplus to our overall economy. We need to be vigilant of trade barriers, both
within and outside our country, if we are to keep strong growth on track for the U.S. Software industry.
Our industry's competitiveness in foreign markets is becoming more and more dependent on the U.S.
Government easing restrictions on the export of soft-ware with strong encryption technology. Outdated
export restrictions increasingly cripple our industry's ability to supply secure, American-made systems to
foreign companies and are allowing competitors abroad to displace U.S. Software products.

If this continues, you will see a reduction in foreign sales by U.S Software companies, a reduction in the
industry's trade surplus, and an even greater U.S. Trade deficit.

Fortunately, Congress is making a serious effort to bring down this self-imposed "trade barrier" and bring
our export policies in line with market realities. Legislation has been introduced this year in both the
House and the Senate to liberalize export controls on encryption. In the House, H.R. 850, the Security
and Freedom through Encryption Act (SAFE), introduced by Representatives Bob Goodlatte (R- VA),
and Zoe Lofgren (D-CA) ensures that all Americans may use and sell any encryption domestically and
provides much needed export control relief. The bill, with over 250 cosponsors, passed the House
Judiciary Committee in March and is currently moving through the Permanent Select Committee on
Intelligence, Armed Services, International Relations, and Commerce.

In the Senate, The Commerce Committee completed hearings last week on the Promote Reliable On-line
Transactions to Encourage Commerce and Trade Act (PROTECT - S. 798). While this bill prohibits
domestic controls, it does not go as far as the SAFE Act in giving much needed export relief to technology
companies. It is encouraging, however, to see such strong leadership and momentum in both Houses of
Congress which gives me hope that this may be the year we see meaningful legislation go to the President
for signature.

The Executive Branch, over the last several years, has made a series of policy decisions that allow for
export of strong encryption to selected industry segments (banks, financial institutions, insurance
companies, health care providers, and subsidiaries of U.S. Corporations operating abroad). While we
welcome these changes, they fail to provide export relief worldwide consumers demand. We are still left
with a policy that provides the U.S. Software industry with market access to only 50% of the global
market outside the U.S. As the global leader in the Software market, we cannot afford to cede 50% of the
market place to foreign competitors.

I applaud the Administrations commitment to an ongoing dialogue with industry on this issue. While it has
been painful at times for everyone involved, the conversation has produced a better understanding on
both sides. I encourage the Congress to consider ways to continue to foster this dialogue between
government and the technology industry to find solutions to law enforcement's legitimate concerns and to
help legal authorities develop the technical means they need to address the problem. An example can be
found in the Senate PROTECT Act which calls for the National Institute of Standards' Information
Technology Laboratory to improve the government's technological capabilities. A joint NIST / Industry
advisory board is tasked with providing a forum for communication and coordination between industry
and the Federal government regarding information security issues and to keep Federal law enforcement
and national security agencies up to date on emerging technologies.
America's export policy should promote widespread deployment of American products with encryption
capabilities in the worldwide market. Resolution of this issue would eliminate one of the chief barriers to
our growth outside the United States.

Other impediments to our growth are dependent on more complicated and multifaceted solutions.
Our Industry's Biggest Trade Barrier - Software Theft Unlike many other major U.S. Industries, the
software industry does not face what would be considered traditional trade barriers. Most nations have
very low, if any, customs duties on software, and traditional market access barriers - such as quotas or
content restriction -- do not tend to apply to most software products.

This does not mean that the industry does not face trade barriers in overseas markets. On the contrary,
the industry faces a barrier that is massive and wholly unfamiliar to most other large export sectors of the
U.S. Economy: Widespread theft. The responsibility of the Federal Government to use all tools available
to combat piracy of intellectual property over the Internet extends to the global marketplace. Thankfully,
the United States Government is actively engaged in combating software piracy around the world. One
example is the top priority being given to full implementation of the WTO Agreement on Trade Related
Intellectual Property Rights (TRIPS) by January 1, 2000 - TRIPS is the bedrock of the software
industry's ability to fight piracy and continue to compete internationally.

The U.S. Congress answered this call to fight global piracy, and specifically Internet piracy, by enacting
the 1998 Digital Millennium Copyright Act (DMCA) during the last Congress. This allowed the U.S.
Government to be among the first countries to implement the WIPO Copyright Treaty - a critical step
towards recognizing the rights of copyright owners in the digital era and combating the theft of
copyrighted works globally. It gave the United States Government the standing it needs to encourage
other countries to follow suit.

LEADING BY EXAMPLE
Government agencies and public institutions are typically among the largest users of computer software.
In the United States, for example, the Federal Government is the single largest purchaser of computer-
related services and equipment with procurements valued at over $20 billion annually. As such,
government leaders have an obligation to establish legalization policies and procedures that both prevent
software piracy within the public sector and set an example for the private sector to follow.The U.S
Government has recently stepped up its efforts to promote government legalization first by implementing
its own "clean house" policy, and second by urging foreign governments to do the same. On September
30th of last year, President Clinton signed an Executive Order on Computer Software Piracy, which for
the first time clearly articulates legal software use and procurement requirements for federal agencies and
recipients of federal funds. The White House has directed the USTR to work with foreign governments to
adopt similar government legalization policies and Ambassador Barshefsky has undertaken this initiative
vigorously.

The software industry is working closely with the USTR and other U.S. Government agencies to comply
with this directive and ensure that foreign governments adopt adequate legalization policies. In recent
months, four government legalization decrees were issued, most notable was the issuance of the State
Council decree in the People's Republic of China (PRC). But much work remains to be done. In order for
these directives to be worth the paper they are written on, they must be implemented in a structured and
transparent manner. This is particularly important in the case of China.

We urge Congress to support these efforts to promote proper use and procurement of software among
governments throughout the world.

The economic impact of global software piracy extends beyond the world of the software industry.
According to a study by the economic consulting firm of Nathan Associates, Inc., software theft in 1996
cost the U.S. Economy 130,000 jobs and an additional $1 billion in tax revenues. If the United States
were to eliminate software piracy by the year 2005, our economy would gain (on top of projected growth)
an additional 216,000 jobs, $8.8 billion in wages, and $1.6 billion in tax revenue. Certainly something to
shoot for. What is at stake is the future of an industry that makes a major contribution to the U.S.
Economy, jobs and our global competitiveness.