House of Commons - Trade and Industry

Select Committee on Trade and Industry Tenth Report

TENTH REPORT

The Trade and Industry Committee has agreed to the following Report:—

ELECTRONIC COMMERCE

I INTRODUCTION

1. Electronic commerce, and its economic, social and other implications for the UK, have been an increasing concern of Government in recent years. The Government set out its broad ideas on "how to enable people to take advantage of the new information age" in April 1998. Its coordinated strategy is intended to focus on "transforming education, widening access, promoting competition and competitiveness, fostering quality and modernising government".[1] Several strands of this strategy are being taken forward by the Department of Trade and Industry (DTI). Measures relating to electronic commerce feature prominently in the December 1998 Competitiveness White Paper. DTI and its executive agencies are working to ensure that all of its services are capable of electronic delivery by 2008.[2] DTI also announced in April 1998 its intention to legislate to promote the legal recognition of electronic signatures and to create a voluntary licensing regime for firms offering cryptographic services including electronic signatures and encryption, following consultation of interested parties.[3] This legislation was announced in the Queen's Speech in November 1998.[4]

2. We decided on 3 December 1998 to launch a wide-ranging inquiry into electronic commerce, focusing on those aspects of policy within DTI's remit, but also considering broader issues of relevance to UK consumers and firms. We heard evidence from e centre^UK, the Confederation of British Industry (CBI) and the Federation of Small Businesses on 26 January 1999; British Telecommunications plc (BT), the Federation of the Electronics Industry, the Computing Software and Services Association and the Internet Service Providers' Association on 2 February; the National Consumer Council, Mr. Chris Reed, Head of the Information Technology Law Unit and Deputy Director of the Centre for Commercial Law Studies, Queen Mary and Westfield College, University of London, and the Association of Payment and Clearing Services (APACS) on 23 February; the National Criminal Intelligence Service and HM Customs and Excise, the Office of Telecommunications (OFTEL), the Post Office and Dr. Ross Anderson, Leader, Computer Security Group, University of Cambridge Computer Laboratory on 2 March; the Data Protection Registrar and Cyber-Rights and Cyber-Liberties (UK) on 9 March; and from DTI on 17 March. We visited British Telecommunications plc and the National Criminal Intelligence Service and also benefited from other informal briefings. We are grateful for all of the oral and written evidence we have received, including that submitted after the publication of our previous Report on electronic commerce and published with this Report,[5] and for the expert advice and assistance afforded to us by our specialist adviser for this inquiry, Mr. Peter Sommer, Research Fellow of the Computer Security Research Centre, London School of Economics.

3. We published a Report on the contents of the DTI consultation document "Building Confidence in Electronic Commerce" on 19 May 1999.[6] The Report dealt with the issues of electronic authentication and encryption, which were to be the subject of the legislation promised in the Queen's Speech. DTI said in March 1999 that the Electronic Commerce Bill would be introduced to Parliament in May 1999.[7] When we published our Report we expected the Bill, and the Government's reply to our Report, to be published shortly after the Whitsun recess. We were still awaiting both the Bill and the Government's reply to us when we agreed this Report, on 15 July 1999, and we have therefore been unable to respond to either of them.

4. This Report deals with many of the issues other than authentication and encryption raised with us by witnesses, not least the need to ensure that the potential benefits of electronic commerce can be shared by all members of society. We noted that many of the issues raised with us — particularly in relation to taxation, consumer protection, privacy and intellectual property rights — were not entirely unfamiliar and that electronic commerce had introduced new dimensions to existing debates. The question of how, if at all, Government should respond to these new challenges is one we have examined in some detail. Our focus has been primarily on electronic commerce conducted over the internet, which has raised many new public policy questions, rather than on issues associated with often long-established closed networks such as the Electronic Data Interchange (EDI) system.[8] One significant issue that we did not consider during the course of our inquiry was the question of the regulation of the content of internet websites, or related on-line material. The Culture, Media and Sport Committee recently reported on this issue;[9] a statement of Government policy on this issue has also recently been published.[10]

5. We gleaned many new insights which have informed the preparation of this Report during our visit to the United States between 23-28 May. We met with representatives of the US Department of Commerce, America On-Line and others at a round table on electronic commerce at the British Embassy in Washington DC on 24 May; with the US internet service provider Earthlink on 25 May; with the mobile telephone firm Qualcomm on 26 May; with a range of electronic commerce participants and experts during a day's visit to Silicon Valley on 27 May, including the on-line auction firm eBay and Hewlett Packard; and with mobile telephone firm Airtouch Communications and Wells Fargo Bank, a major internet banking firm, in San Francisco on 28 May. We also benefited from several informal discussions with policy makers, opinion formers and business leaders. During the inquiry we also discussed electronic commerce issues with officials from both DGXIII of the European Commission and the United Nations Economic Commission for Europe.

Opportunities and Threats

6. We indicated in our first Report on electronic commerce that we consider three broad sets of transactions, which rely directly on computers, to comprise electronic commerce, namely:

business to consumer transactions
business to business transactions
citizen to Government transactions.

Most electronic commerce is conducted between businesses. In 1998 it is estimated that $43 billion of business to business electronic commerce was transacted worldwide and it is currently predicted that this will increase to $300 billion by 2002.[11] Much of this trade is well-established, making use of closed networks such as the EDI system rather than open-networks such as the internet.[12] Electronic commerce between businesses and consumers is currently less significant — perhaps worth $7 billion worldwide in 1998 — but is growing rapidly and is expected to total as much as $80 billion in 2002.[13] Business to consumer electronic commerce has been the source of considerable comment and speculation, much of it exaggerated.[14] Citizen to Government electronic commerce encompasses a wide range of transactions, from Government procurement to the electronic submission of tax returns, electronic voting and the communication of information between citizens and Government departments. The Government's Central Information Technology Unit has recently published a summary of the progress made by each Whitehall department in permitting its transactions with the public to be carried out electronically, which can be compared with the targets set out in the Modernising Government White Paper.[15] In the US we were made aware of a fourth form of electronic commerce, consumer to consumer transactions, including on-line auctions facilitated by firms such as eBay.[16]

7. Also in our first Report on this subject, we outlined some of the potential benefits of electronic commerce including:[17]

increased competition, choice and convenience for consumers
a new way of overcoming barriers to social inclusion
low cost access to global markets and productivity gains for firms
more efficient and convenient transactions between Government and citizens
greater efficiency and coordination within Government
productivity and competitiveness gains for the UK economy as a whole.

The possibility of these benefits being enjoyed within a few years from now, as a result of the rapid take-up of computer technology, particularly the internet, throughout society have excited policy makers and commentators. The Government has frequently referred to the revolutionary nature of the "knowledge driven economy", heralded by the internet, which will fundamentally alter economic inter-relationships.[18] There has been speculation that increased global competition will drive UK prices down;[19] that homeworking will increasingly replace traditional work patterns, obviating the need for workers to live within commuting distance of their employers;[20] and that Government will become more closely in touch with its electors.[21]

8. There has been less attention paid to the potential disadvantages of electronic commerce, although their existence is recognised by the Government.[22] The Computing Services and Software Association warned that "the US could become the "out of town shopping mall" that bankrupts our high street."[23] We received a useful memorandum from Age Concern on the ways in which older people might be disadvantaged as a result of the increased significance of electronic commerce.[24] The Institute of Chartered Accountants in England and Wales raised the problem of "data overload" caused by the amount of information which can be made immediately available by electronic mail and the internet.[25] We discussed with several witnesses the problems posed by electronic commerce to various sectors of the economy, including intermediaries such as travel agents and sectors reliant on intellectual property rights, such as copyright, which might be more easily infringed on-line.[26] e centre^UKwarned us that "many UK companies, especially small and medium sized enterprises, are still complacent about the threats to their businesses if they do not take up the opportunities offered by electronic commerce".[27] Some of the activities which are likely to thrive on-line may raise moral questions. In the US we were informed that internet gambling revenues were expected to total $100 billion by 2006 and that over two thirds of the revenue currently derived from the content of websites was generated by pornography.

9. It is important that, when considering how best the Government should respond to the growth of electronic commerce, potential advantages and disadvantages of the phenomenon are kept in perspective. Most electronic transactions involve ordering physical goods which are then delivered by traditional means. While electronic ordering might be convenient for some, the costs and time delays caused by physical delivery, particularly from abroad, means that electronic commerce does not necessarily represent a revolutionary step forward from conventional mail-order. Use of the internet is, at least at present, dependent upon the use of computer equipment and software which many people might find challenging in themselves. The internet is itself a bewildering and disorganised array of interlinked pages of information, much of it obscure and trivial mostly produced by and for Americans, on which it can be fiendishly difficult to find specific items of information. We were struck by the comment of the Federation of Small Businesses that "one of the single biggest complaints that we have had from people once they get on the web is "yes, loads of information, where is the index?"[28] Finally as we will discuss later, although the Government may be able to make many of its services available electronically, that is no guarantee that the targets of these services will wish to or be able to abandon traditional forms of communication.[29]

10. Electronic commerce is but one aspect of a number of social and economic trends of the twentieth century, including the diminution of distance as an impediment to effective communication and the replacement of manufacturing industry by knowledge or skills based service industries in developed countries. Like the telephone, radio and television before it, electronic commerce is likely to become an important part of everyday life in the twenty-first century. But although it may revolutionize some aspects of life, other areas are likely to be largely unaffected. Some of the more ambitious claims made about electronic commerce, including that it might overcome social exclusion and eliminate international price differences, seem to us to be unduly ambitious. Policy makers must be careful not to be carried away by the hyperbole and exaggeration which has, at times, come to characterise the debate on the future development of electronic commerce. Nor should their focus stray from those aspects of society which are unlikely to be touched by electronic commerce or which may be in some way damaged by it. Electronic commerce must not be regarded as a panacea for every difficult issue facing politicians today nor as the issue which most firms and individuals will believe to be most relevant to their daily lives. Nevertheless, DTI, perhaps more than any other Government department, must increasingly seek to promote the positive benefits of electronic commerce, particularly in terms of its potential impact on UK competitiveness, and at the same time seek to alleviate its drawbacks.

Where does the UK stand?

DEFINING ELECTRONIC COMMERCE

11. The Government has "set out the ambitious goal of developing the UK as the world's best environment for electronic trading by the end of this Parliament".[30] In order to achieve this aim it is necessary to consider where the UK stands at the moment in relation to its international competitors. It was clear to us during our inquiry that, although a number of broad estimates of the value of global electronic commerce today and in the next five years have been made, reliable, detailed statistics about electronic commerce are hard to come by. One difficulty with measuring electronic commerce has been the lack of consistency in the definition of the activity, something to which we drew attention in our previous Report.[31] We recommend that the Government consider how electronic commerce should be defined, in order to facilitate comparison between the growth of electronic commerce in the UK and abroad.

ELECTRONIC COMMERCE STATISTICS

12. The DTI published an "initial snapshot" of where the UK stood in relation to a handful of major economies in December 1998 and has since published a more detailed analysis of the use made of information and communications technologies by businesses in the UK, US, Canada, Japan, France, Germany and Italy.[32] This represents welcome progress but the Minister admitted in oral evidence that more needed to be done. He argued that international benchmarking would be one of the functions of the e-envoy, when appointed.[33]

13. A whole range of statistical measures taking account of electronic commerce, in a national as well as an international context, need to be developed. We were alerted to the possibility that retail sales figures, which currently do not include on-line purchases, might give misleading signals to economic policy makers as electronic commerce becomes more popular, similar to the recent problems associated with the impact of the Average Earnings Index on monetary policy.[34] The US Secretary of Commerce recently stated that, although his Department had "begun to systematically collect data on electronic commerce, specifically on retail sales using the internet, we are still studying how to ensure that the statistical information provided by the government takes into account the stunning upheavals brought about by the internet".[35] We recommend that the Government Statistical Service consider how best to develop new statistical measures relating to electronic commerce and to adopt its existing measures to the phenomenon.

BENCHMARKING

14. In December 1998, along with the Competitiveness White Paper, DTI published a comparison of the UK's performance with that of other leading industrial nations on several aspects of electronic commerce.[36] This pulled together various recent published research, including the 1998 Benchmarking Study commissioned by DTI, and a subjective assessment by the business-led Information Age Partnership of where the UK stood in relation to other major industrial countries on a range of variables. The Report showed that:

on-line trading in the UK in 1998 amounted to around 0.05% of GDP, comparable with Germany and Japan, but well behind the US[37]
15% of the UK's adult population had visited the World Wide Web, compared to 37% of US adults, 10% of German adults and 8% of French adults.[38] More recent research has suggested that 3 million people began to use the internet between December 1998 and June 1999 and that 21% of the UK adult population has now been on-line[39]
UK firms were on a par with their foreign counterparts in terms of the ownership of information and communications technology equipment, but did not necessarily use it to its best advantage[40]
the UK's strengths were its information and communications technology infrastructure, relatively low telecommunications prices and pro-competition regulatory structure; its weaknesses were high prices in some key sectors, below-par user skills and disappointing macroeconomic performance.[41]

15. The 1999 Benchmarking Study, published in April, gave fresh details about the commitment of UK firms to electronic commerce, in relation to firms in other G7 countries. Key findings included that:

250,000 firms had begun to use external communications technologies, such as the internet, electronic mail and EDI, regularly during the preceding year.[42] Firms representing 63% of the UK workforce — 600,000 in total — now use such technologies regularly, on a par with usage in most other G7 countries, except for France and Italy which lag some way behind
while large firms in the UK use external communications technologies as much as their international competitors, small and medium sized firms, particularly those with less than nine employees, perform relatively badly
firms representing only 9% of the UK workforce use their websites to sell goods, compared to 16% in Canada; 0.09% of UK retail sales currently occur over the internet, predicted to grow to 0.8% by 2001.

16. Separate reports were issued on the electronic commerce performance of different sectors of the UK economy, and of different regions.[43] These showed that:

technology-intensive manufacturing industries (such as chemicals and aerospace) and service industries (such as insurance) made far more use of external communications technologies than traditional business sectors (such as retailing and textiles). Traditional sectors were also more sceptical about the relevance of electronic commerce to their industries[44]
skills shortages emerged as a significant factor affecting firms wishing to develop their use of information and communications technologies
74% of London firms made regular use of external communications technologies, more than the average figure in any G7 country, but usage in the regions, particularly Northern Ireland and Wales, was much lower.

17. The international benchmarking exercises broadly bear out the Minister's comments to us that, in terms of the usage of information and communications technologies, the UK is "in the lead in Europe...[but] probably still somewhat behind the United States".[45] This assessment was shared by several witnesses and by many of the people we met in the United States, who perceived the UK as the best environment for electronic commerce in the EU.[46] The 1999 survey suggested that the UK has made some progress in narrowing the gap with the US and Canada but is now being challenged within Europe by Germany, perhaps due to recent telecommunications liberalisation there.[47] It must also not be forgotten that several countries beyond the G7 have wholeheartedly embraced new information and communications technologies, not least the Scandinavian nations, which lead the world in terms of mobile telephone usage, and Australia.[48]

18. DTI are to be congratulated for the efforts they have made to ensure that the performance of UK businesses, in terms of information and communications technology usage, can be measured alongside that of other major economies. The results show that the UK is in a strong position to be at the forefront of the development of electronic commerce. There can be no room for complacency, however, and clear problems have been shown up. Very small businesses and some 'traditional' industrial sectors have not kept pace with their international competitors in this area and this may have a detrimental impact on the competitiveness of the UK economy in the years ahead. Government policy must focus on these firms and on those regions in which take-up of new information and communications technologies has been sluggish. The Regional Development Agencies and devolved bodies may have an important role to play in this regard.[49]

19. It is not altogether clear what the Government means by its aim for the UK to be the best environment for electronic trading by 2002. The Government has not defined the terms "environment" and "electronic trading" in this context and, as we noted above, the Minister wishes this to be one of the tasks of the e-Envoy, the appointment of which has still not been made. Although the Minister argued that 2002 was a "considerable time" away,[50] the clock is ticking and the Government's aim needs to be defined before the hour at which its achievement or otherwise must be judged is reached. DTI has indicated that it is considering using a basket of indicators to help assess the UK's environment for electronic trading.[51] It seems unlikely, however, that, by 2002, there will be proportionately more firms or individuals on-line in the UK than in the US; nor does it seem likely that the UK will lead the world in all, or even most, of the factors relating to electronic commerce identified by the Information Age Partnership. Numerical indicators, for instance of the number of firms on-line, are not necessarily the best or only measures of the quality of the UK's environment for electronic trading. We suggest that the UK's legislative and regulatory framework, which the Information Age Partnership highlighted as an area of relative strength, should be taken into account when measuring the merits of that environment. The conclusions and recommendations we make in this Report, and those from our previous Report on electronic commerce, are intended to strengthen that framework and to help the Government achieve its ambitious aim for the UK to become the best environment for electronic trading by 2002.

1 Our Information Age, URN 98/768 - on the internet at www.number-10.gov.uk Back

2 Our Competitive Future: Building the Knowledge Driven Economy, DTI, Dec 98, Cm 4176 (hereafter CWP); and for various recent DTI electronic commerce initiatives see the following press notices - 98/854, 98/920, 98/942, 98/970, 98/1035, 99/63, 99/171, 99/174, 99/312, 99/376, 99/441, 99/524, 99/539 Back

3 DTI Press Notice 98/320, 27 Apr 98 Back

4 HC Deb, 24 Nov 98, c4 Back

5 References to evidence printed with the previous Report are made in italics - for instance Q55, Ev, p200 paragraph 2.5. References to evidence printed with this volume are made in the usual way, without italics Back

6 Trade and Industry Committee, Seventh Report, 1998/99, "Building Confidence in Electronic Commerce": The Government's Proposals, HC187 Back

7 Competitiveness White Paper Implementation Plan, DTI, Mar 99, URN99/665 (hereafter CWP Implementation), section D9 Back

8 For issues associated with closed networks see, for instance, Qq81-2; Ev, pp1-20, p53 annex 1 paragraph A1.8, p255 paragraph 3.22, pp275-6 section 5, p287 Back

9 Culture, Media and Sport Committee, Fourth Report, Session 1997/98, The Multi-Media Revolution, HC520 Back

10 Regulating Communications: the way ahead, DTI and DCMS, Jun 99, URN 99/898, paragraphs 3.20-3.23 Back

11 Q13 and see Ev, p259 Back

12 Paragraph 7 Back