TUESDAY 2 FEBRUARY 1999

MR JOHN HIGGINS, MR ROBERT CAROLINA, MR DICK EMERY AND MR BOB SCOTT

  180. Why do you believe the UK software industry has not been as successful as its American counterparts? If we just look at one or two of the names—Microsoft, Sun, AOL, Netscape—why do you think we have not been as successful?
  (Mr Higgins) It is a much debated point but probably the first reason is the size of the local market that you have in the US compared to the UK. The second is probably the attitude, the entrepreneurial attitude, and all the systems to support that; the culture that is there to support that in the US, which is not there to support that so much in the UK, whether it is from incentives for investment in high tech firms or just the attitude and things which were taught in our schools. We just do not have that same entrepreneurial culture. It is changing but I think that is one of the fundamental reasons.

  181. Do you think we are too late, we have missed the boat?
  (Mr Higgins) I do not think we are too late. We should never take that attitude. What is the alternative? We must attempt to become more entrepreneurial. The vision of being a centre for electronic commerce is an opportunity. One does get with technology the opportunity to constantly leapfrog, so there is an opportunity for us here to take a lead as English speakers to exploit the fact a lot of electronic commerce is conducted in the English language; there is an opportunity for us to do that.
  (Mr Emery) I would contend that the UK software industry is not quite as bad you have painted it. Certainly there is very good evidence from, say, the games software industry that the UK can hold its head up against anyone in the world. However, there are some interesting behaviour patterns which establish themselves. I was investigating a company in the electronic commerce area recently which is called Taxi International, and this company was founded by two guys in London in 1996, and what they did as soon as they founded themselves was go over to Silicon Valley in California and open up an office there. It told me something about their attitude towards the UK as an environment in which they should grow their dynamic new business. I have no evidence for why they did it and I cannot explain it, but they are certainly not the first people who have been innovative, creative people who come from the UK who have quite quickly turned towards the US as the environment they preferred in which to work.

  182. Do you not feel it is a bit like actors in this country, that they feel unless they go to America and make a film in Hollywood they have not made it?
  (Mr Emery) No, I am not sure I do. There is an element of that, that is certain, but I remember when the Internet Bookshop was opened in Oxford by a guy called Daryl Mattock, he got there before amazon.com and he began his bookshop over some store in some back street in Oxford and before very long he found he was being overtaken by amazon.com. I went to a conference two years ago where he spoke and one of the people from the floor said, "Mr Mattock, if you had your time over again, where would you set up?" and he said, "I would set up in the States, I would not try it in Oxford in the UK", and he is not the rich man he should be, the guy who owns amazon.com is that rich man.

  183. You have said in your submission that you think the US could become the "out of town shopping mall that bankrupts the British high street" because people are going to be buying everything and all their services over the Internet in the future. How real is that? Do you think it is really very likely?
  (Mr Higgins) What we have got to do is encourage UK suppliers to get on-line and take advantage of the opportunities to compete in the global market place. I think if we do not do that, what we will find is that when we go on-line to buy our software, sports goods, computers, whatever it is, we will find there is a surfeit of US suppliers on there already all geared up to make those offers over the Internet and there is a limited choice in the UK to do that. So unless the UK really gets hold of the opportunity, whilst that may be an extreme statement, it clearly demonstrates what could happen.

  184. If we are talking about physical goods, things which you have to move physically from one country to another, people are going to have to realise that they are paying quite a lot of tax on those. If it is clothing, for example, you have a total of about 33 per cent added by the time you have paid VAT and import duty from the States. So is it not rather less likely that that will happen and more likely that it will be the sale of services which will be affected?
  (Mr Higgins) Physical goods below a certain value do not get taxed anyway. That is certainly true with things which are delivered electronically, where they do not actually cross any physical threshold, yes.

  185. That is really the area which is going to be most affected, your own line of business really. The other problem with that area of business, surely, is that it is very much open to piracy, is it not?
  (Mr Emery) Being the people who own a lot of this software, we obviously think piracy is extremely important. Piracy puts lots of our jobs at risk, so we are absolutely against it. However, we think by and large, if we were to enforce the current copyright patent provisions and introduce things like WIPO, the World Intellectual Property Organisation, that would be a very, very good start. So a universal crack-down on this would be excellent. We think electronic commerce itself however introduces little more risk than already exists. We do not expect there to be a massive increase in piracy because of electronic commerce. There is an increase in piracy because of the Internet, there is an increase in piracy because it is easier to copy things which are digital, for example, on CDs, but that is not electronic commerce per se, it is an effect of digitisation.

  186. So it is really the improvement in the hardware and the ability to actually copy these things which is the problem rather than the e-commerce itself? Is that what you are saying?
  (Mr Emery) That is correct.

  187. Nevertheless the greatest impact is going to be on information in one form or another?
  (Mr Emery) Yes. There are really two reasons why we pirate, I think. There is the one which says, "I want to cheat on the price", which is extremely bad, but there is also a temptation to cheat because of time, that is it is difficult to obtain this and my mate has a copy, therefore it is more convenient for me. However, with the universal, all-pervading Internet and the ability to get things off the Internet legitimately very easily, you eventually reduce piracy in some areas. So citizens who want to comply with the law may find it actually easier to do so because of electronic commerce, so we should welcome it in that way.

  188. But you imagine presumably, going back to the hardware goods, that those suppliers of washing machines who do not advertise their wares over the Internet in the future will lose out and that the existing retailers will increasingly have to offer their wares electronically?
  (Mr Higgins) Maybe do not pick on washing machines, but if you take sports clothing, for instance, buying from Canada is common practice now because it is inexpensive, good quality, and it is as easy to do as buying from other parts of the US. That is an easy thing to do now.
  (Mr Emery) The indicator to me that this is up and running and ripe for picking is the Consumer Association in their magazine, Which?, actually recommending that people go and do this. What better legitimisation can you have?

  189. You mention in your submission to us that telecom prices are a barrier to electronic commerce. How significant do you think this is? I do not know whether you heard BT giving evidence earlier, but effectively they were saying if you take a bundle of charges there is effectively no difference, and even where there was a difference evidence from the States shows it makes no difference if you are in a state which gives free local calls or charges for local calls. You cannot both be right, or can you?
  (Mr Higgins) I will ask Bob to answer this question specifically but I can give you an example from my own personal experience a couple of years ago setting up an Internet operation in San Francisco and in London. I paid over half as much again for a BT line that was six times as slow as I was able to get in San Francisco at that time. That was a couple of years ago and things have moved on but I am sure there are other practical examples. Entrepreneurs say, "Where shall I set my business up? I can be in San Francisco or I can be in London. Hang on, I will be in San Francisco." It is just so easy to do that these days.
  (Mr Scott) The evidence we have presented in our submission comes from a study we have recently undertaken for the European Commission called Condrinet, which showed a direct correlation between the cost of connection and Internet penetration in a bundle of countries. BT's evidence this morning (and I agree entirely with it) was that there has been a significant move to better prices within the UK market, and that is good, but what I would contest is, is good good enough? You cannot afford to accept what has been done is enough for us to compete in that world market. You have to look at two different aspects of electronic commerce in this regard. There is the cost of connection for the end consumer, the buyer. Initiatives like Dixons Freeserve, which makes it free to connect—you still have to pay for the telecoms costs but it is free to connect, I happen to be a consumer of Freeserve myself—are fine, you are making it easier for people to connect and buy. I forget who it was from my colleagues here who made a comment in a recent meeting that we had, "Do we want to be a nation of shoppers or do we want to be a nation of shopkeepers?" What we seem to be doing is making it easier for people to buy, but for the people who actually want to set up a business on the Internet the cost for them to connect, to be merchants, to be banks who trade over the Internet or whatever else, is actually significantly higher than our competitors in the States and in Europe. You mentioned France earlier, France has got the largest electronic commerce platform anywhere in the world to the domestic market, it is called Minitel and has been around since the early 1980s. In some respects that is actually holding back France going on to the Internet but there is already a society which is accustomed to trading electronically, the organisations which are trading their goods are used to trading them electronically, and therefore those organisations I think have a very significant opportunity to come into the UK market and offer their services to the UK population at large, and I think that is to the disadvantage of UK companies who find significantly increased costs over and above their competitors in other countries.

  190. So what do you think the Government or Oftel should be doing about this, apart from just telling BT to reduce their prices?
  (Mr Scott) Personally, I do not think it is the responsibility of the CSSA to be making recommendations to Oftel. I present our information, the research we have undertaken, it is clear from that evidence that there is a disparity in price, but I certainly am not in a position to advise Oftel.

  191. Have you given your evidence to Oftel?
  (Mr Scott) The information is present in a report which has gone to the European Commission, it is freely available in the UK, it has been made available to the DTI, so that information is free and is in the public domain.

  Mr Morgan: Good.

  192. You have made the point about social inclusion this morning and you were saying that the Government working with industry can shape a workforce ready to exploit the massive opportunities from electronic commerce. How do you see yourselves crossing this class barrier? At the moment it is a pre-occupation of white collar business, it is a hobby for middle-class families, how do you see this becoming accessible to the whole of our community, especially those people who are from so many things in our society excluded?
  (Mr Higgins) That is a very important issue. We recognise that with changes in technology we have the opportunity to address this. We have some thoughts on this.
  (Mr Emery) We represent the technology part of the industry and what we are helping to do, and are proud to do, is constantly to push down the cost of participation. This tumbles by what is called Moore's Law, where price tumbles almost daily. What we are looking at at the moment in the wings now is Web TV. We believe with Web TV we will find we have a cost of getting access to the Internet which will be about on par with getting satellite TV, both in terms of the entry cost, the up-front cost and the recurring costs on a monthly basis. We know that a large proportion of the population can afford satellite TV, we can hardly say there is great social exclusion from that, so we would contend we are within a very short period of access to the Internet being well within the reach of the majority of the population. Having said that, we believe that there are two clear things that will come out of this which will be beneficial. First of all, there will be reduced prices for many things and we can only conclude that will benefit everyone, so if the price of buying X goes down, the proportionate benefit to the poor is higher than the proportionate benefit to the rich, so we think the Government should try hard for this because citizens will benefit from this. Secondly, by having access from the home, we can see only benefit for the old, the disabled, who are locked into their houses. This is a way of them gaining access to the world which they would not otherwise have.

  193. Do you think having access to premier league football and news in Norwegian is necessarily what will make people switch over? You have mentioned Web TV, do you think that is likely to be more successful than the BIB package, for example?
  (Mr Emery) I think not. This is where the hard bit of the equation comes out. People have to be motivated to buy this. We have seen how the motivation has worked for satellite TV because you can only get to watch premier football on that. If we were to find, as we expect sometime in the future, that indeed you can obtain things at lower prices or obtain things at all which are through Web TV and through the Internet, then that will be the compelling driver for people to adopt it. One of the issues is getting the supply side of the industry to start making those great deals and offers available to attract people to take it up.

  194. Can I ask you about one point on this because I am interested? You are one of the few witnesses, or groups of witnesses, who have actually raised the question of social inclusion. There are other ways of doing it, for example the local authority access points which a number of local authorities have; the Post Office for example. I do not want to intrude on your private grief on matters relating to the Post Office at the moment, Mr Emery, but there are going to be opportunities outwith the home but within the capability of accessing by people who hitherto have been excluded. Would you be saying to Government, "Get the Post Office, get the local authorities to have their community access points also wired up for e-commerce as well"?
  (Mr Emery) I believe so. We are large suppliers of that equipment and it is in our self-interest in a sense to say, "What a good idea". But apart from that we think it should be in town halls, in post offices, in cyber cafes and these other good places. We are currently putting equipment in job centres and so on. So, yes. That is all foundation stuff and we think it is absolutely great. Yes, we are positively behind that but nevertheless you require a motivation to use it at all, and that is for us the key.
  (Mr Higgins) It does take us full circle back to what we were saying at the beginning about the Government taking the lead and providing not only e-commerce supplies in this way but also delivering its services in such a way that it is attractive for the citizen to want to use. That is the key thing.
  (Mr Scott) The gentlemen earlier mentioned the need for the Government to walk the walk, actually lead by example in doing electronic commerce itself. In many respects that will fuel and prime the pump, if you like, for industry at large to take and adopt e-commerce.

  195. In your report you have been arguing for fiscal incentives for the start up of information and communication technology and that this needs to be improved for companies. Is it not true that the Government is committed to supporting high tech firms? What are your prospects of securing further funds from them?
  (Mr Higgins) I would say it is not "further" funds particularly. The Williams Report, the recent Treasury report, had lots of fine suggestions in it for improving incentives for high tech start-ups, and we wanted to make sure those are driven through, and given the changes in the DTI leadership we want to make sure those continue to be driven through, because it is important those changes are made and that we do get the sort of culture and positive investment culture in high tech start-ups that we need in order to support this whole thing.

  196. So you are happy with the incentives which are in place?
  (Mr Higgins) We are happy with what we understand to be planned and we are happy with what we understand to be the recommendations which might be picked up from the Williams Report. We just want to make sure the pressure continues.

  197. You are quietly confident that it could come through and be given the green light?
  (Mr Higgins) Yes, I think so.

  Chairman: Thank you very much, gentlemen. There may be a couple of other points we would like to write to you about but we will be in touch about that. Thanks very much for your help this morning.