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f or m a nc ea n do nu n itCABINETOFFICErp ei nn ot iv ae-commerce@its.best.ukA PERFORMANCE AND INN OVA TION UNIT RE PORT – SEPTEMBER 1999

e-commerce@its.best.ukf orp er m a ni nn oc et iv aa n do nu n itFOREWORDby the prime ministerThere is no doubt that electronic commerce is going to have a profound effect onbusiness, Government and consumers and on the way people live and work. E-commercepresents enormous challenges. Countries that wholeheartedly embrace e-commerce willbenefit from improved national economic performance. Those that do not risk seeingtrade ebb away to low cost competitors elsewhere in the world.Conscious of the enormous opportunities and threats posed by e-commerce, I asked thePerformance and Innovation Unit to prepare a strategy to make the UK the world’s bestenvironment for electronic commerce, as announced in last Autumn’s CompetitivenessWhite Paper.The PIU Team has found that the UK is well placed to realise this goal. We have worldclass telecommunications firms and an open and competitive market. We lead the worldin mobile telecommunications technology. We have good levels of Internet penetrationin homes and in the workplace. And English is the language of the Web.But we must not be complacent. There are signs that we are not capitalising on ourstrengths and keeping up with the pace of change. For example, it is disappointingthat a recent survey of Directors in the UK showed that only 2% of UK Board Directorsbelieve that the Internet poses a serious competitive threat. That cannot be right andI hope the messages contained in this report will represent a wake-up call for manyin British business.The Team has identified three areas in which we need to make progress – we need tofacilitate access to the technology and networks, we need to enhance understanding ofthe potential of e-commerce and we need to create an environment where people canhave trust in the new medium. There are some things Government can do. For example,we need to ensure that all sections of society have the opportunity to share in the benefitsof the e-commerce revolution. We have also got to give a higher political priority toelectronic commerce and ensure that all parts of Government are pulling togethereffectively to improve the UK’s performance. That’s why I am delighted that PatriciaHewitt will be the Minister responsible for co-ordinating our e-commerce strategy acrossGovernment and for taking forward this report.But it is clear that the Government alone cannot drive forward the development ofe-commerce. What is needed is a sustained joint campaign between Government andbusiness to ensure that we reap the benefits. Similarly, Government cannot simplyregulate to achieve its aims in this new global electronic environment. This report,therefore, recommends a light regulatory touch. Enough to build confidence in thenew way of doing business and to protect consumers, but not so much that we stifleinnovation, creativity and entrepreneurship and drive industry overseas. I pledge thatwe will work with industry to get that balance right.Tony Blair

CONTENTS1. Executive Summary..............................................................12. Introduction .........................................................................73. Economic Importance of E-commerce ...............................104. Current UK Position ...........................................................165. Defining a Framework for UK Success...............................246. Vision..................................................................................287. Foundations........................................................................308. Understanding ...................................................................439. Access .................................................................................5310. Trust ...................................................................................6911. Government as Exemplar...................................................8812. Monitoring and Evaluating E-commerce ...........................9613. Actions by the Devolved Administrations.......................10814. Co-ordinating the Actions ...............................................11115. Action Plan.......................................................................116Glossary............................................................................123List of Sources Mentioned in the Report.........................127Appendices.......................................................................128E-commerce@its.best.ukii

1. EXECUTIVE SUMMARY1.1 Electronic commerce lies at the heart ofthe Government's vision for building amodern, knowledge-driven, economy in theUK. The Government's aim, set out in the1998 Competitiveness White Paper, is to"make the UK the best environment in theworld for e-commerce". This report providesthe culmination of a six-month study by theCabinet Office's Performance & InnovationUnit. It responds to a commission from thePrime Minister to identify the strategynecessary to achieve that goal.Key messages1.2 The report sets out three key prioritiesfor the UK:to overcome business inertia - UKbusiness is not yet fully switched on toe-commerce. The best UK companiesare world class, but many are laggingbehind. Small businesses especiallyneed to wake up to the challenges;to ensure that Government's ownactions drive the take-up ofe-commerce. Sustained progress mustbe made on electronic service deliveryand electronic procurement;andto ensure better co-ordination betweenGovernment and industry to gainmaximum benefit from existing andproposed programmes.E-Commerce isimportant...1.3 E-commerce is of increasing importanceto the UK economy. It enables revolutionarychange in two ways: 'process' e-commerce -managing the vital flows of informationwithin industry supply chains - and'transaction' e-commerce, selling productsand services within industry (andGovernment) or to consumers. It can result inreduced costs and the transformation ofGovernment, companies and markets as wellas bringing new opportunities andcapabilities to citizens.1.4 UK e-commerce transactions this year(1999) are expected to be worth around£2.8bn. 1 They have the potential to growtenfold over the next three years, reachingaround 4% of total UK Gross DomesticProduct (GDP) by 2002. Their contribution,however, is likely to be disproportionatelygreater than this relatively small percentagewould suggest. E-commerce tends to putdownward pressure on inflation and increaseseconomic growth. Figures published by theUS Department of Commerce 2 suggest thatin the years 1995 to 1998 the Informationand Communications Technologies (ICT)industries - key enablers of e-commerce -were responsible for 35% of US realeconomic growth, whilst representing only8% of US GDP. In 1996 and 1997, thesesame industries are believed to have loweredUS inflation by 0.7%.1.5 The overall impact of e-commerce onemployment is less clear. It will undoubtedlyremove jobs, particularly in intermediaryorganisations whose perceived 'added value'is undermined. At the same time it will createjobs, in new industries such as 'informationbrokering' and old industries such asdistribution and logistics. If the UK fails tocapitalise on the opportunities that e-commerce presents, then jobs and prosperitywill be eroded by e-commerce competitionfrom overseas.1Source: IDC research report 1998. Data is only available for part of the e-commerce scope defined in Chapter three. This marketfigure excludes purely telephone based services such as tele-banking2Source: Emerging Digital Economy II, US Department of Commerce, June 1999E-commerce@its.best.uk1

… but the UK is missingout1.6 Many good initiatives to promote e-commerce have been launched byGovernment 3 and industry 4 in recent years.The UK also has key underlying advantages inexploiting e-commerce, including:the English language - used on more than80% of Web sites world-wide;a liberalised and competitivetelecommunications market;a track record for early deployment of newtechnologies, soon to include interactivedigital television, multi-media mobilecommunications and pervasive computing;andmajor strength in the broadcasting andcontent industries.1.7 Despite all this, the UK lags behind themajor economies of USA, Canada andAustralia on measures of both business andconsumer e-commerce use. In Europe, theUK is also substantially behind the smallereconomies of Finland, Sweden and Norway.Germany may well overtake the UK this yearand France, after a slow start, (due to itsreluctance to transform its national 'MiniTel'service), is catching up fast.1.8 The UK's large and medium enterprises(with greater than 100 employees) areholding their own on the world stage interms of technology deployment, but manyhave been slow to grasp the opportunities forbusiness change. Small and micro companiesare falling badly behind. In Europe, the UK's'micro' companies are joint bottom of theleague table of major economies. 5A ‘Vision’ fore-commerce in the UK1.9 In the race for e-commerce the stakesare high. A powerful and innovative UK,leading in a strong Europe with a genuine'single market', is essential. E-commerce hasthe potential to drive a rapid redirection ofthat single market. This report defines avision for the characteristics of such UKleadership within Europe. The vision is basedaround the metaphor of a building withpillars and foundations as shown below infigure 1.1.ELEMENTS OF A SUCCESSFUL E-COMMERCE STRATEGYUK to be “the world’s best place totrade electronically by 2002”, based on:• demanding consumers;• excellent suppliers;• Government/industry partnershipUnderstandingAccessTrustA competitive and innovativeenvironmentMarket-led approachInternationally agreed taxand regulatory frameworksE-commerce@its.best.ukCo-ordination and focus across Government3For example the Information Age Partnership of Chief Executives established by DTI in 19984For example the UKCALS Industry Council5DTI Benchmarking study – Moving into the Information Age –1999Monitoring and evaluationFigure 1.12

1.10 To achieve this vision, the UK mustovercome the triple challenges depicted inthe 'pillars' of:Understanding - getting business,individuals and Government to appreciatein a timely way the opportunities availableand the actions to be taken;Access - giving businesses, individuals andGovernment access to all the elementsrequired for full participation in theInformation Age; andTrust - getting business, individuals andGovernment to accept the new tools of e-commerce and new styles of doingbusiness.1.11 As a 'foundation' for this vision, the UKwill have reinforced its commitment to openand competitive markets, striking a delicatebalance between a necessary degree of 'lighttouch' regulation and freedom to innovate. Itwill have demonstrated the power of industryself-regulation - backed by Government. Itwill have led the successful internationalresolution of key tax and regulatory issues. Itwill have put in place the mechanisms to coordinateindustry and Government actionsinto a single drive for success and the meansto measure and track that success.1.12 As a result, the UK will have achievedthe goal of becoming the best environmentin the world for e-commerce. Key indicatorsof success will be that, by 2002:For individuals:a higher percentage of people in the UKwill have access to e-commerce networksfrom home than in any other G7 country;total cost of Internet access will be lower inthe UK than in any other G7 country; anda higher percentage of the population willuse multi-function smartcards than in anyother G7 country.For business: a higher percentage ofbusiness-to-business and business-toconsumertransactions will be carried out one-commerce networks than in any other G7country.For Government: a higher percentage oftotal Government services may be transactedthrough e-commerce networks than in anyother G7 country.The barriers1.13 This report identifies the key barriers as:Foundations: the lack of a clear,internationally agreed, regulatoryframework and of clarity in some areas oftax policy. The sheer speed of developmentof e-commerce, within a competitive andinnovative environment that is rapidlychanging, has outstripped the normalinternational processes, despite significantleadership already shown by the UK.Understanding: at the heart of thechallenge of limited adoption is lowunderstanding of the potential benefits andchallenges at all levels. These range fromthe impact on company profitability to theability to create entirely new services andforms of market. Many small companies,for whom day-to-day survival is challengeenough, have little time or inclination toaddress issues that seem complex,technical and irrelevant. Many largercompanies appear 'frozen in the headlights'- aware of the likely impact, yet paralysedby the potential for reduced margins andunwilling to address a majortransformation of business practice. Thereare serious skill shortages, both in technicalareas and in the management of change inboth private and public sectors.Government is not fulfilling its potentialvital role as both purchaser and exemplar.Many individuals do not yet appreciate thescope for cost savings and improvementsin quality of life possible with e-commerce.Access: the challenges of access are multilayered,just like a Russian doll: when one issolved (and the doll opened) there is afurther one inside. The first challenge isaccess to communications and computingtechnology. Much has already beenachieved: by competition driving downpersonal computer and software prices; byOftel's 'Access to Bandwidth' plans to openthe BT local access system to competitiveuse with new technologies; by accesscentre initiatives from DTI, DfEE, Treasuryand DCMS; and through innovativecommunity programmes such as the BBC's'Web Wise'. However the challenge remainsof delivering local telecommunicationsaccess competition for new, high quality,high-bandwidth services and of fundingsuccessful local access centres in the longterm for those who cannot afford, or chosenot to have, access from home. The nextchallenge is access to electronic paymentE-commerce@its.best.uk3

E-commerce@its.best.uk4systems for the more than one millionadults without access to conventionalbanking services. Policy Action Team 14(PAT14) is addressing this issue as part ofthe Social Exclusion Unit's workprogramme. Finally, access for those whothrough disability or limited literacy willneed technological help such as pictogramor voice recognition and guidanceinterfaces.Trust: businesses and consumers must beable to use e-commerce systems withoutundue fear of fraud and with the same, ora greater, degree of confidence than theyassociate with physical transactions. Thereare also barriers related to the privacy ofpersonal and business data. The lifebloodof e-commerce is the ability to use detailedinformation about individuals' (andcompanies') purchasing patterns toachieved highly targeted and effectivefollow up marketing. This immediatelyraises a potential conflict between personalprivacy and existing business practice. Afurther barrier is that of redress. Simple andappropriate means of dispute resolutionneed to be established for transactions thatspan continents. Effective means must beavailable to avoid unpleasant or offensivecontent and to limit the potentiallyexpensive nuisance of unsolicitedcommercial e-mail ('spam').What actions need to betaken?1.14 A full list of the PIU team's sixty detailedrecommendations is contained in chapterfourteen, and the three key priorities set outin paragraph 1.2 above.1.15 Many of these recommendations willrequire industry's action as the prime mover,with Government in support. This summarybrigades the recommendations into fourgroups, as illustrated in figure 1.2:those that can be taken quickly and willhave an immediate impact;those that are also highly important, butwill take longer to bring to fruition and arethus longer-term priorities;those that can be taken quickly and willmaximise the profile of the e-commercemessage; and finallythe necessary longer term, but stillimportant, background actions.All these are detailed below:Immediate impact1.16 To have an immediate impact on e-commerce, it is important to galvanise andco-ordinate Government action, to inspirebusinesses to take up the challenges andopportunities and to get access right.Galvanise and co-ordinateGovernment. There needs to be strongerpolitical and managerial leadership at thecentre of Government - driving forward theUK's objectives and co-ordinating actions.This should be achieved through theimmediate appointment of an e-Ministerand e-envoy. There is great scope forGovernment to show leadership in e-commerce, both through earlyintroduction in Government's own servicedelivery, and through Government'spurchasing role at the head of a majorsupply chain. Whilst some early wins areessential for Government's credibility withIndustry, much work will need to continuein the longer term.Galvanise business. Launching aconcerted marketing campaign, inpartnership with industry, to generate an e-commerce 'buzz' in the UK is an immediatestep which will not only raise awareness ofthe threats and opportunities for UKbusiness, but also demonstrate theimportance the Government places on therole of e-commerce for the future of theUK economy.Get access right. This can be achieved,for example, by ensuring that thetelecommunications regulatory frameworkencourages tariff structures which reflectthe different usage patterns of e-commercecompared to traditional voice telephony,minimising the cost penalties of 'always on'access and encouraging the developmentof broadband services. OFTEL has alreadymade vital steps through its 'Access toBandwidth' proposals, but must beresourced to meet the major challenge ofindustry's rapid implementation of thesechanges.

Longer -term priorities1.17 Equally important will be to take actionon the longer-term programmes needed toachieve cultural and behavioural changes inunderstanding and trust.For instance, through a concerted effort toachieve recognition of the importance of e-commerce within business (especiallywithin the boardroom), through the use ofcase studies.Mentoring schemes for small businesses,where experience gained is cascaded, withthe credibility only achievable among peerswho have faced and overcome the samechallenges.Encouragement should be provided to theprivate sector for the swift introduction ofmulti-function smartcards, for use in e-commerce identification and for otherpurposes. Access to e-cash through suchcards would be one option for achievinggeunine social inclusion.Maximise the profile1.18 There are immediate actions that can betaken to maximise the profile of e-commercein the UK. These include:leveraging the UK's balance of theminimum necessary regulation andfreedom to innovate through thedevelopment of a 'based in the UK' brand(for example TrustUK), linking in to similarinitiatives in DCMS and British TradeInternational;providing greater visibility and quick actionon on-going measures, such as theElectronic Communications Bill;improving guidance on tax, responding tothe relatively poor levels of awareness ofthe steps already announced; andpublishing an annual 'state of e-commerce'report, detailing progress in theachievement of the goals and milestoneslaid out in this report.Background actions1.19 Finally, there are a number of actionsthat must be set in place in the background.These include:examining the new barriers to competitionthat electronic markets may create andassessing actions which might be takenbefore serious problems arise;driving forward the complex internationalwork on taxation, intellectual property andcopyright;establishing new targets in schools andacross the workforce for IT literacy andpromoting awareness of the role ofintellectual property in the newknowledge-driven economy; andmost importantly, setting up mechanismsto measure and monitor the developmentof e-commerce in the UK.1.20 Action in all these areas needs to beundertaken as a matter of urgency. E-commerce is remarkable not just for the scaleof change it is bringing about, but for therate of change. If the UK is to win in the racefor e-commerce success, Government andbusiness must act now.E-commerce@its.best.uk5

6E-commerce@its.best.ukPRIORITISATION OF RECOMMENDATIONSEase and speed ofimplementationMaximise ProfileImmediate ImpactFoundations7.5: Tax information paper7.12: SME tax guidanceFoundations7.3: Industry-led mentoring7.14: Tax implications of international gamblingGovernment as exemplar11.1: Procurement target publication11.5: Government pilot projectsHighUnderstanding8.6: IT literacy targetsTrust10.2: Hallmark10.4: Digital signatures10.10: Parents Web sitesMonitoring12.1: State of e-commerce reportAccess9.1: Tariff options9.2: Interconnect arrangements9.3: DSL roll out9.4: OFTEL resources9.5: Co-ordination of access initiatives9.7: Skills training + access provisionTrust10.1: National Government PKIAccessAll 14:Co-ordinate Government ActionsLowBackground ActionsFoundations7.6: International tax treatment7.7: Permanent establishment7.8: OECD transfer pricing work7.9: On-line consumer purchase VAT collection7.10: Vigilance against tax evasion7.13: Intl. E-commerce tax frameworkAccess9.6: Monitor target excluded groupsTrust10.5: Internet Crime Unit10.6: Industry co-operation10.7: Non-jury trialsGovernment as exemplar11.3: Government service benchmarkingMonitoring12.2-8: Monitor e-commerceFoundations7.1: OFT review7.2: Cluster barriers7.4: SME credit processing7.11: Streamline small packageimportation tax collection7.15: Review convergence7.16: Review regulatory regimes7.17 Joned-up international e-commerce7.18 International trade frameworkUnderstanding8.1: PR campaign8.2: Case studies8.3: Boardroom recognition8.4: SME marketing8.5: RDAsLonger-Term PrioritiesTrust10.3: Smartcards10.8: Co-regulation10.9: IPR protectionGovernment as exemplar11.2: SMEs in Government procurement11.4: Government e-commerce skills training11.6: Crown copyrightMediumHighPotential impactFigure 1.2

2. INTRODUCTIONContext for theE-Commerce Project2.1 Leading economic commentators,such as Alvin Toffler, 1 have predicted a third‘revolution’ – the ‘information’ revolution –carrying society forward in another majorleap equivalent to the earlier agrarian andindustrial advances. Economic historians maywell look back on the final five years of thiscentury as the defining period in thatrevolution. The explosive growth of thecommercial Internet, beyond its initial base inthe military and academic communities, hasbeen unprecedented (see figure 2.1 for USexperience). Europe, Japan and the otherdeveloped economies are on a similar growthcurve of adoption, some one to three yearsbehind the USA. In the US and Canada102 million people now have access to theInternet and world-wide usage exceeds179 million 2 (see figure 2.2).UNPRECEDENTED PACE OF CHANGE IN USINTERNET USEINTERNET ACCESS BY REGION – JULY 1999US andCanada100% = 179 million usersMiddle East and Africa57%3%1%15%24%Latin AmericaAsia PacificEuropeSource: NUA Figure 2.22.2 The following two quotations illustratethe scope of the unpredictable change nowunleashed:40353025201510Years to achieve 50 million users“The newest innovations, which we labelinformation technologies, have begun to alterthe manner in which we do business and createvalue, often in ways not readily foreseable evenfive years ago”Alan Greenspan – Chairman US Federal ReserveBoard 6 May 1999“The Internet changes everything”50BroadcastradioBroadcastTVPersonalComputers CommercialInternetSource: US Dept. of Commerce Figure 2.11The Third Wave – written by Alvin Toffler and published by Bantam Books2NUA Survey July 1999 (see http://www.nua.ie /surveys)Bill GatesBusiness @ the Speed of Thought – 1999E-commerce@its.best.uk7

E-commerce@its.best.ukWhy carry out a study?2.3 Extensive efforts are already underwayboth in Government and in industry toprepare the UK to take advantage of this newtechnological ‘revolution’, seeking to reapthe significant potential economic and socialbenefits. There remained a concern, however,that the various strands of activity inGovernment and industry were notnecessarily aligned to deliver optimal results.The UK was not assuming a leading positionin global e-commerce, even though it waswell placed to take such a role. Nor was theUK fully capitalising on its intrinsic strengthsin areas such as:the dominance of the English language;the quality of its liberalised andcompetitive telecommunicationsinfrastructure;world leadership in the deployment of keytechnologies, such as third generationmobile communications, interactive digitaltelevision and pervasive computing; andan historic strength in the content andbroadcasting sectors.2.4 At the end of 1998, the Governmenttherefore set itself the ambitious goal of“making the UK the world's best place totrade electronically by 2002”; 3 and the PrimeMinister directed the Performance andInnovation Unit (PIU) to carry out this study.Its primary purpose is to define the detailed,comprehensive and cross-departmentalstrategy needed to ensure that the UKachieves this objective. More informationon the PIU and its working methods can befound on the Unit’s Web-site atwww.cabinet-office.gov.uk/innovation andin Appendix one.2.5 By way of overarching structure, thereport seeks to address the following broadissues:why is e-commerce important;what is the UK’s current position;what does it mean to be the best placein the world for electronic commerce;what are the barriers to achievementof the UK’s goal; andhow can these be overcome?What the report doesnot do2.6 This report does not seek to challengethe role of individual Governmentdepartments, the devolved administrations,or private sector organisations in deliveringe-commerce. The PIU acknowledges theimportance of individual departmentalprogrammes that target specific client groups.It also recognises that, in the highly dynamicmarkets for e-commerce, industry-ledinitiatives and self-regulatory structures aremuch to be preferred. The PIU Team hasfocused its efforts on identifying overlaps orgaps in current activities and on means ofensuring careful co-ordination of these tomaximise effectiveness and streamline delivery.2.7 The devolved administrations havea vital role in delivering e-commerce.The PIU Team was greatly encouraged bythe commitment and enthusiasm it foundin Edinburgh, Cardiff and Belfast to addressthis urgent challenge. In preparing itsrecommendations, the Team has taken theviews of officials and businesses in thedevolved administrations. Therefore, theTeam is confident that its recommendationswill be well received where they impact ontheir responsibilities. A brief overview ofactivity in the devolved administrationsis given in chapter thirteen.Financial implicationsof the report as a whole2.8 The Team believes that for the mostpart, the recommendations within this reportcan be implemented within existing budgets.However, it is clear that additional activitywill be needed in some areas and this is likelyto require a re-prioritisation of resources. It isnot possible to estimate the scale of thisadditional activity with current information.Further, the Team believes that there isconsiderable scope for public/privatepartnership. Therefore, further work will beneeded to establish full resource implications,in many cases in conjunction with industry.Resource implications will need to beaddressed in the normal way.3DTI 1998 White Paper “Our competitive Future: Building the Knowledge-Driven Economy” CM41768

How was the projectcarried out?2.9 A multi-disciplinary Team, from both thepublic and private sectors, was drawn togetherto carry out the project. 4 Central to the Team’sapproach was openness and the need toinvolve industry practitioners in its work.Approaching its task in seven stages, the Team:defined a ‘vision’ for the future of UKe-commerce;developed a framework within which toanalyse barriers to the achievement of thisvision;explored and tested this framework inroundtable seminars with keyrepresentatives of government, industry,consumer bodies, trade associations andthe voluntary sector; 5proposed immediate action to theChancellor of the Exchequer for his 1999Budget and to the Secretary of State forTrade & Industry for inclusion in hispending Electronic Communicationslegislation;sought specific regional requirements ordifferences, through open consultationmeetings in Scotland, Wales and NorthernIreland;developed preliminary recommendations;andproduced this detailed final report andrecommendations.2.10 The study has been informed by theTrade and Industry Select Committee’senquiry into e-commerce, which wasconducted in parallel with the work ofthe PIU Team. The Team found evidencesubmitted to the Committee invaluable,and reviewed its own analysis andrecommendations in the light of theCommittee’s report before finalisingthis study.2.11 In producing its recommendations,the PIU Team has been mindful of theGovernment’s existing broadercommitments. These include those onpublic expenditure, the need to refrain fromunnecessarily burdensome regulation(particularly for small firms) and theimportance of understanding thedisproportionate impact policies can haveon some sectors of society, including women,ethnic minorities and the elderly.2.12 More details on the Team and on theapproach and methodologies used arecontained in Appendix two.Note: Appendices are not attachedto the printed version of this report.Copies may be obtained on-line atwww.cabinet-office.gov.uk/innovations.Appendices are included with theCD-ROM version of this report.4See Appendix Two for more details5Detailed reports available on the PIU website http://www.cabinet-office.gov.uk/Innovation and in Appendix ThreeE-commerce@its.best.uk9

3. THE ECONOMIC IMPORTANCEOF E-COMMERCEE-commerce@its.best.uk10Summary3.1 This chapter examines the wide rangeof definitions of e-commerce. It endorsesthe approach currently proposed in OECDof a very broad definition. This encompassesthe process activities of e-commerce, longrecognisedunder the label Electronic DataInterchange (EDI), and the more recentdevelopments of transactional e-commerce.3.2 The chapter moves on to establish theeconomic importance of e-commerce,outlining its dramatic growth and potential,the major impact it will have on barriers tomarket entry, its impact on the efficiency andits ability to enable transformation of existingbusiness models.3.3 The chapter closes by exploring theimpact of e-commerce on the macroeconomyand argues that the UK needs tomove now to capture opportunities, throughexamination of ‘first mover advantage’.What is E-Commerce?3.4 E-commerce is one of the buzz words ofthe late 1990s, attracting an increasingamount of hype and media attention. Butwhat is it? Most press coverage focuses onInternet shopping, such as the purchase ofbooks from Amazon.com – the world’s firstInternet book-shop. Such retail e-commerce,involving business-to-consmer purchases,is only the tip of the iceberg. Moste-commerce (some four-fifths) takes placebusiness-to-business. But e-commerce doesnot just involve financial transactions – it hassignificant implications for the whole of thebusiness process. In this report we haveadopted the broad definition of e-commercewhich the DTI has recommended to theOECD. This seeks to capture the wide impactwhich e-commerce can have on all aspects ofbusiness and society (the definition ofe-commerce is elaborated in chapter 12):“Electronic commerce is the exchange ofinformation across electronic networks, at anystage in the supply chain, whether within anorganisation, between businesses, betweenbusinesses and consumers, or between thepublic and private sectors, whether paid orunpaid”3.5 The Team expect the Internet (accessedvia the telephone networks) to remain thedominant core network for e-commerce,with interactive digital TV and new mobileservices providing different access options.Increasingly, private networks (such as‘Extranets’) will provide the improvedreliability required for process e-commerce,whilst continuing to use the common coreInternet technology.Why is E-Commerceimportant?3.6 The PIU Team believes that electroniccommerce is important, because of:its dramatic growth and potential;the major impact it will have on barriersto market entry;the way it enables increased efficiency andeffectiveness within existing businessmodels; and, most importantly,the way it enables transformation ofexisting business models.

Dramatic growth andpotential3.7 As already indicated, the speed ofadoption of e-commerce is unprecedented.Whilst Electronic Data Interchange betweenlarge companies has developed steadily overthe last fifteen years, there has been anexplosion of growth in retail e-commerce andin transactional use by small business.3.8 Industry forecasts have consistentlyunderestimated e-commerce growth. In theUS, business to business e-commerce is nowexpected to reach $1.3T by 2003. 1 Similarlybusiness to consumer e-commerce is thoughtto have reached $7bn in 1998 and to be ontrack to reach between $40bn and $80bn by2002. This suggests that the current pattern,where at least 80% of e-commerce revenuesfall in the business-to-business segment, isbeing maintained. In the UK, e-commercerevenues are expected to reach $4.5bn forcalendar year 1999, rising to $47bn by 2002. 2Major impact on barriersto market entry3.9 A key aspect of e-commerce is theextent to which it demolishes many existingmarket barriers. It is vital that UK businessesprepare for the impact e-commerce will haveon their markets. These historic barriers cantake several different forms. They may be:Geographic. Box 3.2 illustrates the US/UKdifferential on portable minidisc playerprices, now avoidable by electronicpurchasing;DIFFERENTIAL ON PORTABLE MINIDISCPLAYER PRICES UK V USSony MZ-R55:IMPACT ON INTERMEDIARIES876543210Typical US airline transaction cost ($)At travel agentthroughreservationsystemAt travelagent directto airlineE-ticket viaInternetSource: US Dept. of Commerce Figure 3.2Market separation. Box 3.3 illustratesCharles Schwab's entry into the Europeanmarket; orBusiness scale. Figure 3.3 illustrates thepotential cost saving on electronicpurchase of books, whilst Figure 3.4documents Amazon.com's revenue growth.CHARLES SCHWAB’S PROGRESS FROM USTO EUROPEAN MARKETSApril 1998: Launch of on-line investing servicesin UK (online trading, portfolioscreening, real time prices, marketand economic news...).April 1999: Launch of UK Individual SavingsAccount (ISA) on the Internet.May 1999: Offer US trades via UK web site.Now more than 14,000 registered users.Box 3.3• Not yet released in the UK market, currentlytargeted at the US and Japanese markets only.• Available for £208 from www.minidiscnow.com• Expected minimum price when launched inthe UK £249.Source: the net magazine July 1999Box 3.2Custom and practice. Figure 3.2 showsthe transaction cost saving throughavoiding the use of a travel agent;1Forrester Research Report December 19982IDC 1998E-commerce@its.best.uk11

E-COMMERCE REDUCES PRICES FOR THECONNECTED CONSUMERInternet and terrestrial book prices£, “Hannibal”, Thomas Harrisimproving the efficiency of existingstructures and supply chains; and in manycases moving on totransforming the nature of those industries.181614121016.99-17%12.9910.782.45Distributioncost3.11 Examples below (box 3.4), provided bythe United Kingdom CALS Industry Council,illustrate the gains already being made byUK industry, in terms of reduced costs andincreasing competitiveness within existingbusiness models.86420List price*8.33Dillons Amazon.co.ukDiscount*Cost of book*Excludes cost to consumer of travel to storeSource: Dillions; Amazon.co.uk Figure 3.3Increased efficiency ofexisting business models3.10 Electronic commerce is importantbecause of the way in which it is impactingthe structure of industries. Its effect tendsto proceed in two phases:3.12 In the US, the gains are even moredramatic. For example, an Extranet knownas ANX, which binds together all the stagesof the supply chain in the US automobileindustry, should lead to significantproductivity improvements, with annualcost savings approaching £1bn for the globalindustry.3.13 In the business to consumer area,it is clear that, by embracing e-commerce,industry is also achieving a remarkable“double win”. It is both outsourcing work(and thus cost) to its customers and at thesame time improving customer satisfaction.Examples have included Cisco, offeringon-line customer access to technical designand shipment information databases,improving the productivity of theircustomer service agents by some 200%.CHANGE IS FAST – EXAMPLE GROWTH IN INTERNET BOOK BUSINESSAmazon.com net sales$m300250200253• By 2002, the UKbook-selling market isexpected to grow upto 17%, totalling £2bn15010087116154• 1 million people inthe UK have made anon-line purchase inthe last 6 months,30% sales on books6650162838E-commerce@its.best.uk0Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q81997 1998Source: Amazon.com Figure 3.412

VSEL ... LPDUsing Electronic Product Definition andmaximising concurrency of activities in theVirtual Enterprise.Compared with similar-sized vessels, LPD hadto be achieved in 25% of the man-hours and50% of the project lead time.BOMBARDIER-SHORTSUsing Electronic Product Definition and andshared databases with suppliers.Delivered 50% reduction in development cycle,80% reduction in first article re-work and firsttime fit for wing to fuselage connections.ROVERUsing Electronic Product Definition and linkswith suppliers through the RED-X programme.Delivered 6 month reduction in productionintroduction time and 75% reduction in buildproblems, mainly attributed to supplierintegration through e-business.Box 3.4Transformation ofexisting business models3.14 As well as merely improving theefficiency of existing structures, e-commerceenables the transformation of thesestructures. Some examples of this can alreadybe seen. Wal-Mart, the major US discountchain, is already carrying more than tentimes as many product lines on its Web siteas in its largest store. In financial services,an estimated hundred-fold cost saving(see figure 3.5) is driving dramatic growth inInternet banking. When taken together withthe extensive move to telephone banking,this is already having a major impact on thenumber high street retail bank branches.3.15 By lowering traditional entry barriersand ignoring national boundaries,e-commerce also has the potential toenhance sharply the value of strong brands.It seems likely that brands that inspireconsumer confidence and trust in one sectorwill increasingly be leveraged into entirelynew sectors. An example is the move byCharles Schwab from on-line share tradingto selling insurance on-line.3.16 It seems likely that such major changemay occur in sectors as diverse as:travel – a reduction in the value, whichcan be added by conventional travelagents, as passengers increasingly purchasetickets direct from airlines. Easy jet, forexample, now sells all its seats over theE-commerce@its.best.uk13

telephone or Internet (70% and 30%respectively) – thus avoiding tickets,which are a significant area of costfor conventional airlines;IMPACT ON TRANSACTION COSTS1.21.00.80.60.40.20.0Cost to bank – typical US funds transfertransaction ($)At branch By telephone At ATM UsingInternetSource: US Dept. of Commerce Figure 3.5supermarkets – as an increasing volumeof non-perishable goods are purchasedelectronically and delivered overnight;entertainment – as with the advent ofmuch faster Internet access, it isincreasingly practical to download filmsand music directly;financial services – as the role of existingphysical intermediaries is supplanted bynetwork intermediaries; andmanufacturing – with small businessesable to replicate many of the economies ofscale previously enjoyed only by largecompanies, through collaborativepurchasing and joint marketing over theInternet.Research in the US, where evidence hasbeen gathered, has shown that ICT industries(for example, producers of computer andcommunications hardware, software andservices), have disproportionately boostedgrowth and lowered inflation. 3 Whilstaccounting for only 8% of US GDP, thesecontributed 35% of total real economicgrowth between 1995 and 1998. Similarly,between 1996 and 1997 (the latest years forwhich data are available), they brought downoverall US inflation by 0.7%. These industriesare the key facilitators of e-commerce.3.18 Such figures from the ICT industriesalone do not take into account the far widerpotential benefits flowing from the use ofe-commerce in all sectors of the economy.The extent to which ICTs bring increases inproductivity has in the past been the subjectof some debate among economists (seechapter twelve). Recently, however, a rangeof case studies and statistical analyses suggestthat investment in ICT, where this isaccompanied by appropriate changes inbusiness processes, can bring high rates ofreturn. One analysis, carried out across 17advanced industrial countries, suggested thatan investment of $1m in IT increased GDPby around an additional $700,000 a year. 43.19 It is also important to consider themacro-economic implications for the UKof failure to participate in e-commerce. IfUK businesses do not successfully embracethe opportunities presented both jobs andprosperity will be eroded by on-linecompetition from other markets. This wasreflected in recent evidence presented tothe Trade and Industry Select Committee’senquiry on e-commerce by the Computerand Software Services Association.E-commerce@its.best.ukThe impact of e-commerceon the macro-economy3.17 E-commerce is also important becausethe profound implications it will bring forindividual firms will have a knock-on impacton the UK economy as a whole, including onproductivity, employment and economicgrowth. At present we have nocomprehensive evidence of the net impactof e-commerce on the economy – andrecommendations to gather this are set outin chapter twelve. However, all indicationsare that its impact could be considerable.3The Emerging Digital Economy II, US Department of Commerce, June 19994Dewan & Kraemer: “International dimensions of the Productivity Paradox” August 1998“The US could become the ‘out-of-town shoppingmall’ that bankrupts our high streets…”3.20 The PIU Team believe that in principle,e-commerce ought to permit some reductionin inflationary pressures and improve theefficient functioning of the supply side, thusallowing an increase in the trend rate of noninflationarygrowth in the economy. Thereare certainly opportunities for the UK to usee-commerce to help catch up withinternational best practice productivityperformance.14

3.21 The proposals for a formal evaluationof the overall net impacts of e-commerceput forward in chapter twelve will go someway to establishing the importance of themacro-economic effects discussed here.The UK must act now3.22 E-commerce is not only of significanteconomic importance to the UK, but therate of change it brings about is likely to bedramatic. If the UK is to capture the benefitsthat e-commerce offers and play a leadingrole in global e-commerce markets, rapidaction is required.3.23 First, the Government needs to actnow in order to enable the efficiency gainsoutlined above to be captured as soon aspossible.companies. The role of Government is toclear the way swiftly for those that wish tomove and to raise levels of understanding ofthe opportunities and threats to e-commerceso that the decision to move or not is aninformed one.3.25 This chapter has shown the economicimportance of electronic commerce toindustry and to the UK’s macro economy.It has set out the urgent need to create anenabling environment by removing barriersfor business and consumers to capture thebenefits described. The following chapters setout how the UK is currently positioned, thenature of the enabling environment neededand how it can be achieved.3.24 Second, the PIU Team believes thatthere may be first mover advantages to begained for UK firms that use e-commerce toenable transformation of their markets aheadof rivals. 5 There are broadly two types of firstmoveradvantages – cost and demand based.E-commerce has potential elements of both(see box 3.6 below, which uses Amazon asan example). It should also be noted thatthere can also be first mover disadvantages. 6When to move is a decision for individualFIRST MOVER ADVANTAGE FOR E-COMMERCE FIRMSType Name Description Amazon ExampleCost Economies of Costs fall as output increases. Purchasing powerbased scale First mover has highest output,lowest costs.Cost Economies of Costs shared across new products Sells CDs as well asbased scope First mover has low costs over books to same customers.large rangeCost Control of Competitors do not have access Sites close to wholesalers.based scarce input to critical input.Cost Learning by doing Costs fall by being near Start near Siliconcomplementary producers.Valley.Early groupings have advantage.Demand Network Additional consumers add value More customers meanbased effects for total customer base. First better affinity marketing.mover has largest customer base.Demand Reputation Uncertain buyers value longevity. Buyers trust Amazon.based effects By definition first mover is longestlived firm.Box 3.65For example, Amazon, Yahoo, E-Bay are all leading e-commerce companies that had no particular advantage when they startedother than being first. The Internet took off first in the US and it is US companies that are capturing first mover advantages in manyof the new markets e-commerce offers6For example, followers might be able to ‘free-ride’ on a pioneering firm’s investment, and the development of standards mightmove against those who move first and offer standards to the marketE-commerce@its.best.uk15

4. CURRENT UK POSITIONE-commerce@its.best.ukSummary4.1 Whilst the UK has major strengths, theresponse of industry and Government to thechallenge of e-commerce has to date beenpiecemeal. The UK’s best large companiesare world class. However, too many seemdaunted by the potential of e-commerce tocannibalise their own markets and margins.The aggressive approach of US companies –setting up their own e-commerce subsidiariesto target their core business beforecompetitors do – seems alien to UK practice.4.2 The e-commerce performance of ‘small’and ‘micro’ UK companies gives rise toparticular concern. 1 The UK lags behind othermajor European economies as well the USCanada and Australia, in this area. Regionaldisparities in the adoption and diffusion ofe-commerce are a further concern. InNorthern Ireland, with its small base of largecompanies, performance is particularly weak,but Wales has also fallen behind. In bothcases, Government and developmentagencies are responding with goodprogrammes to stimulate local innovationand growth, (see chapter thirteen for details).4.3 UK sectors of historic strength, suchas retail financial services, may be especiallyvulnerable. The ‘weightless’ nature of theseservices offers scope for rapid, aggressive,competition from new entrants. These willoperate typically on a Europe-wide ratherthan a national basis. By the same token,exceptional opportunities exist for UK-basedcompanies to extend their operations as theEuropean Single Market in services isprogressively created. This chapter detailsthe wide range of actions UK Governmentis already taking place and benchmarks theUK's current position.The UK Government isalready taking a widerange of actions topromote e-commerce4.4 Over the last eighteen months, the UKGovernment has published a series of majorpolicy statements setting out a wide rangeof policies aimed at helping the growth ofelectronic commerce. These are summarisedin box 4.1.4.5 This policy agenda has been developed,and in many cases is being implemented,through close partnership with industry.Of central importance are:The Information Age Partnership(IAP) Bringing together the ChiefExecutives of over 35 major IT andcommunications companies, the IAP is thestrategic interface between Governmentand the e-commerce enabling industries.Established in May 1998, the IAP set up aseries of industry task groups to benchmarkUK performance and address priority areas.The resulting recommendations toGovernment in November 1998 have nownearly all been adopted as formalGovernment policy through theCompetitiveness and ModernisingGovernment White Papers and through thelast Budget. The IAP has set a continuingwork programme, focusing in particular onskills, electronic government, and raisinge-commerce awareness in SMEs.The Alliance for Electronic Business(AEB), created in 1998, brings together theCBI, the Federation of Electronic Industries,the Computer Software and ServicesAssociation, e-Centre UK and the Direct1For the purposes of this report, medium-sized enterprises are defined as those with 100-250 employees, small enterprises as thoseemploying 10-99 staff and micro firms as those employing 0-9 people (in addition to the owner)16

UK E-COMMERCE POLICY: THE STORY SO FAR…May 1998: “Our Information Age”Setting out the Prime Minister’s personal vision for achieving UK leadership in the Information Age, thisincluded key policies such as:• connecting all schools, libraries, colleges and universities to the National Grid for Learning by 2002;• launch of the University for Industry in 2000, using new technology to deliver lifelong learning at home,at work and in the community, with IT skills a key target area;• 25% of Government services to be available electronically by 2002;• creation of a national network of “IT for All” access centres in local communities; and• working with industry, Internet users and law enforcement agencies to provide a self-regulatory responseto illegal and harmful content, through the Internet Watch Foundation.October 1998: “Net Benefit: the electronic commerce agenda for the UK”Published to influence discussion at a major OECD e-commerce conference in Ottawa, Net Benefit set outthe Government’s position on all the key e-commerce issues under discussion internationally. In particular,it set out the Government’s proposals, following consultation with UK industry, to develop an internationaltaxation framework for e-commerce based around the principles of neutrality, certainty and transparency,effectiveness and efficiency.October 1998: “Electronic Commerce: UK Taxation Policy”Setting out the UK’s e-commerce taxation policy. Published by Inland Revenue and Customs & Excise on6 October 1998, as an input to the OECD Ottawa conference.December 1998: “Our Competitive Future: Building the Knowledge Driven Economy”The Competitiveness White Paper set the goal of making UK the “best place in world” for e-commerce.Key policies to help achieve that goal included:• early legislation to ensure legal equivalence between on-line and off-line ways of doing business, and seta framework to boost development of the market in trust service providers;• £20 million to expand Information Society Initiative to promote SME uptake of e-commerce technologies• electronic completion of import and export procedures;• Improving ICT content and applications (e.g. working with UK’s digital content sector to develop anaction plan for growth; helping UK businesses secure well over £300 million from EU content andapplications programmes);• an “IPR Action Plan” to modernise the framework of intellectual property rights for an e-commerceenvironment; and• 90% of routine Government procurement to be conducted electronically by 2001.March 1999: Chancellor of the Exchequer’s Budget StatementThe Chancellor presented a National IT Strategy designed to widen access to ICTs in the community, andto encourage small business up take of e-commerce technologies. New policies included:• the basic ICT understanding currently given by IT for All centres to be taken on a stage throughdevelopment of 800 more advanced IT Learning Centres, giving community-based access to the NationalGrid for Learning and the University for Industry;• subsidised PCs for teachers at home;• 80% tax breaks for Individual Learning Accounts when used for ICT training;• recycling computers for 200,000 most deprived families;• tax changes aimed at encouraging companies to provide home PCs to employees; and• tax rebate for on-line submission of tax returns by SMEs.March 1999: Modernising Government White Paper• Ambitious new targets for e-government, rising to 100% by 2008.July 1999: Modern Markets: Confident Consumers White PaperNew measures to help empower e-commerce consumers, including:• creation of “Trust UK”, an industry-led body aimed at boosting confidence in Internet shopping throughan on-line hallmark to identify best-practice web-sites committed to following a demanding code ofconduct; and• creation of a new Consumer Gateway site on the Internet (www.consumers.gov.uk), providing a one stopshop for public and private sector sources of consumer advice.July 1999: Electronic Communications BillGovernment publishes draft legislation to improve trust in electronic trading, including:• modernising law to recognise electronic signatures;• removing, wherever practical, existing laws which require the use of paper; and• a new approvals framework to encourage the development of the market for trust services.Box 4.1E-commerce@its.best.uk17

Marketing Association to promote UKleadership in e-commerce. The AEBprinciples in its White Paper one-commerce were influential in shapingGovernment thinking, for example as setout in “Net Benefit: an e-commerceagenda for the UK”, and the AEB has beenactive in helping Government implementspecific new policies.Much action is in handinternationally4.6 E-commerce is global. Many issues –such as developing compatible technicalspecifications and consumer protection forcross-border transactions – can only beresolved internationally. The UK co-operateswith a wide range of organisations, inparticular the OECD, the EC and the WTO,to ensure that international agreementreflects specific UK needs and concerns.Box 4.2 summarises current key GovernmentE-commerce@its.best.ukACTIONS BY THE INTERNATIONAL COMMUNITYConsumer protection:• OECD Guidelines on Consumer Protection to be completed by the end of 1999; and• EU Electronic Commerce Directive aims to promote a single market approach to e-commerce consumerprotectionIllegal and harmful content:• EU Internet Action Plan aims to promote safer use of the internet (hotlines, rating and filtering systems); and• UK Internet Watch Foundation (IWF) involved in establishing an Internet Content Rating Alliance (ICRA)dedicated to the development of an objective international rating system for Internet content.Liability of intermediaries:• EU Electronic Commerce Directive aims to clarify the liability of intermediaries for legality of content.Privacy:• OECD work programme (post Ottawa) includes developing practical guidance on the implementationof the 1980 OECD Privacy Guidelines on-line.Copyright:• Proposed Directive on Copyright and Related Issues in the Information Society will cover electronic copiesand on-line transmission; and• WIPO – negotiations underway on protection of databases and establishing an audio-visual protocolto the WIPO Performances and Phonograms Treaty.Data Protection:• Data Protection Act 1998 gives effect to the EC Data Protection Directive.Electronic Signatures:• Electronic Signatures Directive: working to establish recognition and legal admissibility of electronicsignatures;• OECD: International Conference on Authentication of Electronic Signatures (June 99) has stimulated furtherdebate in the UK on the need for OECD Principles on Electronic Signatures and Authentication; and• UNCITRAL working group drawing up Uniform Rules on Electronic Signatures and Certification Authorities.Domain Names:Internet Corporation for Assigned Names and Numbers established. UK was a member of the GovernmentAdvisory Committee, which met in Berlin 25 May.Taxation:• Extensive OECD work programme to flesh out Tax Framework document agreed at Ottawa Ministerial.Continuing work with the European Commission to encourage legislative proposals that reflect theconclusions of ECOFIN and the OECD Ottawa Ministerial meeting on VAT as soon as possible.Trade Related Issues:• WTO preparatory work programme examining multi-lateral trade policy aspects of e-commerce. A report,with appropriate recommendations for further work, will be made to the Seattle Ministerial by endNovember 1999; and• WTO Ministerial agreement that customs duties should not be applied to electronic transmissions to bereviewed by the Seattle Ministerial by end November 1999.Research, design and development• The EU Information Society RD&D programme is worth £3.6 bn, from which the UK is likely to secureover £300m over the next few years to help boost e-commerce technologies, content and services.Box 4.218

international actions. Major fora, such as the‘Global Business Dialogue’, also bringtogether key industry leaders.How does the UK standon the world stage?4.7 As illustrated in figure 4.1. the UK trailsthe major economies of USA, Canada andAustralia on the measure of the percentageof population with regular Internet access.It is also behind the innovative Scandinavianeconomies of Sweden, Norway and Finland.The chart is drawn from a range of differentsurveys documented by the Irish Web site‘NUA’. 2 Dates above each entry give thesurvey date for each country and so the olderFinnish, Canadian, Singaporean and Frenchsurvey data are likely to significantlyunderstate their relative performance. Formore specific business measures, such as useof Electronic Data Interchange (EDI) andexternal e-mail, the pattern is very similar,as shown in figure 4.2. Of particular notehere is the strong relative improvement inperformance over the last year shown byGerman and French companies. UK'sleadership among the major Europeaneconomies is clearly under threat.How does the UK compareagainst other Europeaneconomies?4.8 Figure 4.3 gives more detail on UKperformance against other Europeaneconomies for percentage of populationregularly accessing the Internet. Again thisdraws on a range of surveys collected on theNUA web-site. Not all countries have dataavailable for all the dates, but the strengthof Finland and the dramatic growth in Irelandin response to a programme of marketstimulation are notable.4.9 Figure 4.4 shows estimates of totale-commerce expenditure as a proportionof GDP in the UK and the other majoreconomies for 1998 and for 2003. It reflectsthe widely held view among industry expertsthat the next few years should see theWestern European e-commerce market catchup significantly with the US. Figure 4.5 showsthat the UK has a high share of that market,reflecting both a relatively high user base andalso the fact that those UK Internet users whodo buy on-line tend to spend more onaverage than those of any other Europeancountry.BENCHMARKING UK INTERNET USERS – WORLD% of population, dates of survey by country are indicated45 5/9941403530255/99375/99366/98356/98311/992420151012/9818 11/98169/97153/9914 10/98113/99106/98750SwedenUSANorwayFinlandCanadaAustraliaUKNew ZealandSingaporeNetherlandsJapanGermanyFranceSource: NUA drawing on multiple published studies Figure 4.12URL: www.nua.ieE-commerce@its.best.uk19

BASIC E-COMMERCE PERFORMANCE – MAJOR ECONOMIESStated percentage of employees that have their own Web sites, or make frequent use of Electronic DataInterchange, or external e-mail. (Data for Canada and Italy unavailable for 1997 & 1998)7060504030635445655249656056405941293926 2434199919981997201000 0UK US Canada Japan Germany France Italy0 0Source: Spectrum International Benchmarking study – 1999 Figure 4.2INTERNET USERS BY PERCENTAGE OF POPULATION – EUROPETime sequence of internet user growth based on a compendium of surveys(data is not available for all the countries on the dates shown)353025September 1997March 1998October 1998December 199835201510500181699 977 76655433110 0 019121150 0UK Germany France Italy Spain Ireland FinlandSource: NUA – Drawing on a range of other studies Figure 4.3E-commerce@its.best.uk20

E-COMMERCE AS A PROPORTION OF 1998 AND PREDICTED 2002 GDP61998520024%3210UK US GermanyJapan FranceSource: International Data Corporation, OECD Figure 4.4TOTAL INTERNET COMMERCE BY COUNTRY SHARE OF EUROPE, YEAR END 1998Finland 2% Sweden 5% Norway 2%UK 25%Denmark 2%Netherlands 6%Ireland 1%Greece 1%Portugal 1%Spain 3%Italy 7%France 7%Austria 3%Switzerland 3%Belgium 2%Germany 30%Source: International Data Corporation Figure 4.5How does the UK performby company size?4.10 The DTI Spectrum benchmarking studyprovides a helpful insight into e-commerceactivity by company size. Figure 4.6 illustratesan extract from this study. UK performanceworsens sharply as company size is reduced.Large and medium-sized UK companies are,on average, performing well, but small andmicro firms are lagging behind. Chapter nineexplores the particular impact of relativelyhigh, peak time, UK network access chargeson such small companies. The relativeweakness in small companies is a particularthreat as some 70 – 80% of e-commercerevenues are expected to involve such smallor micro companies either in business tobusiness or business to consumer roles.E-commerce@its.best.uk21

BASIC E-COMMERCE PERFORMANCE BY COMPANY SIZE – MAJOR ECONOMIESPercentage of companies that have their own Web sites, or make frequent use of ElectronicData Interchange, or external e-mail, by company size90807060504030201001542UKUSCanadaJapan3228 28GermanyFranceItaly82 81 82 8479767072666461 616150 54 4339 393628 3115 181–9 Employees 10–99 Employees 100–250 employees 251+ EmployeesSource: Spectrum International Benchmarking study – 1999 Figure 4.6How does the UK performby region?4.11 There are significant disparities in theperformance of various parts of the UK, asillustrated in figure 4.7. Clearly, there is a riskthat some parts of the UK will fall behind inthe development of e-commerce, with thepotential of further exacerbation of localisedeconomic problems. The regionaldevelopment agencies and devolvedadministrations are already addressing theseconcerns notably through the ‘Strategy 2010’programme in Northern Ireland, the ‘Winnersat the Web’ programme in Scotland and the‘Welsh Information Society’ programme.Chapter nine addresses the extent to whichlarge companies pull through e-commerce inTHE UK REGIONS AND DEVOLVED ADMINISTRATIONSPercentage of companies that have their own Web sites or make frequent use of ElectronicData Interchange by region807470605040656259 5854 54 5452 514843302010E-commerce@its.best.uk0LondonWest MidlandsSouth EastNorth WestEasternScotlandYorkshire & the HumberEast MidlandsSouth WestNorth EastWalesNorthern IrelandSource: Spectrum International Benchmarking study – 1999 Figure 4.722

their supply and distribution chains, and therelative dearth of such large companies inareas such as Northern Ireland.4.12 Therefore, although the PIU Teambelieves that the existing programme ofGovernment action on e-commerce involvesa very wide range of Governmentdepartments, and represents a significantstep towards the Government’s goal ofdeveloping the UK as the best place in theworld for trading electronically by 2002,much more needs to be done. The nextchapters will set out a structure for tacklingthe barriers to e-commerce success in theUK, and give a vision of what success willlook like.E-commerce@its.best.uk23

5. DEFINING A FRAMEWORK FORUK SUCCESSE-commerce@its.best.uk24Summary5.1 This chapter sets out the PIU Team’sview that success in e-commerce is a sharedenterprise between Government andindustry. A consistent message from industryhas been that Government should notintervene unnecessarily in developinge-commerce markets. Supporting this view,the chapter sets out the parameters of a rolefor Government and proposes a new form ofco-operative regulation, or ‘co-regulation’,between Government and industry.5.2 The chapter then goes on to define thestructure that has been used to analyse thebarriers to achieving e-commerce success inthe UK.The Respective Roles ofGovernment and theMarket5.3 The PIU Team strongly believes thatmuch of the action needed to drive forwarde-commerce in the UK will rest with industry,backed by Government support. Governmentand industry both have their part to play, buta market-led approach to e-commerce isessential if innovation, creativity andentrepreneurship are not to be stifled. Therole of Government, as illustrated in figure5.1, should therefore be restricted to:providing a light-touch regulatory andtax framework within which electronicmarkets can operate;acting as a catalyst for change, bytackling market inefficiencies (see Appendixfour for further details), but also byworking pro-actively to raise awareness ofe-commerce threats and opportunities andto ensure a supply of skilled people;ensuring that e-commerce developmentscontribute to the creation of a strongand fair society, by acting to address theequity and social inclusion issues raised bye-commerce, irrespective of the efficiencyor otherwise of market processes; andacting as an exemplar in its own useof e-commerce technologies in servicedelivery and procurement – both toincrease Government’s own efficiencyand effectiveness and to raise skills andexpectations among consumers andbusinesses.Co-regulation5.4 Consistent with the view that evencloser co-operation between Government andindustry is required, the PIU Team proposesthat new co-operative methods of achievingpolicy objectives will be needed. Therefore,a key theme throughout this report is theapproach known as ‘co-regulation’.5.5 Co-regulation recognises that alaissez-faire approach to the Internet byGovernments is not tenable in an era ofmass-market e-commerce. Consumers needconfidence that the transactions they makeelectronically will be secure, that the goodsthey order will turn up, and so on. Businessesneed to know that on-line transactions willbe honoured and need to understand theirliability in an on-line world. Originators ofcontent need to know that they will beproperly remunerated. To give consumersand business this trust and thus to facilitatethe growth of e-business, an underpinninglegal and regulatory framework is essential.

MARKET AND GOVERNMENT FAILURES AFFECTING E-COMMERCERoot causes Market and Government failures Barriers to e-commerceUncorrectedMarketFailureImperfect competition:eg control of gateways,access prices.Externalities: eg networkexternalities• New technologies• Globalisation• Business andindustrydiscontinuities(includingderegulation)– New businessforms– New ways ofdoing businessEFFICIENCYGovernmentFailureTransactor uncertainty:eg security, privacy.Failure in other marketseg labour marketsRent seeking behaviour:eg regulatory captureImperfectinformationImperfectanalysisOmmissioneg absence of legal,regulatory andtax frameworkExamples:– Access– Security– Copyright– Competition– Privacy– ConsumerprotectionEQUITYSocialExclusionErrorFigure 5.1However, traditional approaches to regulationare too slow and inflexible to cope with thepace of change in e-commerce markets.5.6 Co-regulation is a partnership betweengovernment and business designed to put inplace an overall framework for e-commerce.Government defines the public policyobjectives that need to be secured, but tasksindustry to design and operate self-regulatorysolutions and stands behind industry ready totake statutory action if necessary.5.7 The advantages of a co-regulatoryapproach are:flexibility and adaptability. Voluntarycodes and other self-regulatorymechanisms can more easily be adaptedto technological changes than statutoryregulation;timeliness. In contrast to the rate ofchange in the world of e-commerce,Government processes can be very slow.For example, the DTI Bill determining theallocation of radio frequency spectrum –critical to developing new mobile accesschannels, amongst other things – took5 years to reach the statute book. EUDirectives can take a minimum of 3 yearsto come into effect. Further, technologyspecific Government regulations can be1DTI White Paper ‘Modern Markets: Confident Consumers’ Cm 4410 July 1999outmoded by the time they are enacted.Self-regulatory regimes can be changedmore easily and quickly;appropriateness. Regarding potentialchallenges as often profitable new businessopportunities, for example requiring newstyles of intermediary, rather than asproblems for Government to resolve; andit will help create a distinctive “Basedin the UK” brand for UK e-business bygiving consumers here and overseas trustin e-businesses based in the UK andenhancing the attractiveness of the UKas a location for e-businesses.5.8 The main disadvantage of aco-regulatory approach is the risk thatself-regulation by existing firms will resultin barriers being erected to keep out newcompetitors. But this can be addressedthrough the vigilance of the competitionauthorities.5.9 Co-regulation has already been adoptedby the Government in many areas. Forexample, the Internet Watch Foundation is aself-regulating response to harmful and illegalcontent on the Internet. The recentlylaunchedTrustUK initiative 1 is an industry-ledon-line consumer protection scheme, whichwill accredit e-commerce codes of conductE-commerce@its.best.uk25

which accord with general principles forcodes plus specific principles for e-commercecodes. In addition, the Government isaddressing the security concerns raised bye-commerce encryption technology throughindustry co-operation rather then mandatory“key-escrow”.5.10 However, the Government has notformally adopted this approach as a matterof principle. The Team recommends thatthe advantages significantly outweighthe potential disadvantages and that aco-regulatory approach should therefore bethe first option for addressing regulatoryissues concerning e-commerce.A Structure for Analysingthe Barriersto E-Commerce Success5.11 In analysing the action needed byGovernment and Industry, the PIU Teamfound it helpful to define a structure forapproaching the barriers. The structurethey identified consists of:‘foundations’, i.e. the necessaryunderpinnings for e-commerce, includingthe general need to provide a competitiveand innovative environment fore-commerce, together with a soundunderpinning regulatory framework andclarity in all areas of tax policy; andsupporting ‘pillars’ of:– understanding. The need to createawareness of opportunities and threatsposed by e-commerce, overcominguncertainty and imperfect informationabout electronic markets, and breakingdown skill barriers;– access. Giving businesses andindividuals the ability to interact, therebyaccelerating the achievement of criticalmass in electronic markets; and– trust. Giving consumers (business anddomestic) confidence in electronic marketsand ensuring that they are willing exploitthe opportunities and react to the threats.5.12 This report structures the issues aroundthese themes, which the team believestogether cover the issues necessary to driveELEMENTS OF A SUCCESSFUL E-COMMERCE STRATEGYUK to be “the world’s best place totrade electronically by 2002”, based on:• demanding consumers;• excellent suppliers;• Government/industry partnershipUnderstandingAccessTrustA competitive and innovativeenvironmentMarket-led approachInternationally agreed taxand regulatory frameworksE-commerce@its.best.ukCo-ordination and focusacross GovernmentMonitoring and evaluationFigure 5.226

EXAMPLE AIMS WITHIN “FOUNDATIONS” AND “PILLARS”Foundation: existence ofregulatory disincentivesAccess: business pricesUnderstanding: recognitionof the strategic challengeTrust: clarity of liabilityEstablishedbusinesses able andwilling to take upopportunitiesEnd-usersableto interactAccess: consumer accessto pc/modemUnderstanding: consumerskills to interactTrust: availability ofsecure payment systemsSUPPLYMARKETDEMANDMARKETFoundation: availabilityof venture capitalUnderstanding: availabilityof management andtechnological skillsTrust: availability of securepayment systemsInnovative ableand willing tostart upbusinessesEnd-userswillingto interactAccess: consumer accesspricesUnderstanding: consumerrecognition of benefits ofe-commerceTrust: certainty of privacyand securitythe creation of the best environment fore-commerce in the UK (see figure 5.2).Figure 5.35.13 In broad terms, the foundations canbe thought of as the necessary underpinningsfor e-commerce. Based on these foundations,the pillar of understanding createsawareness of opportunities and threats,access gives businesses and individuals theability to interact and trust ensures that theyare willing exploit these opportunities andreact to threats. However, as described in thefollowing chapters, all of these themes havesome relevance to improving ability tointeract and promoting willingness asillustrated in figure 5.3.E-commerce@its.best.uk27

6. VISIONE-commerce@its.best.uk28Summary6.1 Previous chapters have shown whye-commerce is important, how the UK iscurrently performing and a structure foridentifying the remaining barriers. The Teamalso felt it was important to articulate whatsuccess in e-commerce would look like inthe UK. This chapter details such a ‘vision’.It is important as it brings the barriers thatneed to be addressed into sharp relief.The Vision6.2 The vision is for a country that has putin place the necessary foundations of openand competitive markets and stable fiscal andregulatory regimes. A country where businessand citizens alike understand, in a timely way,the opportunities offered by e-commerce ande-government and the actions to be taken.A country in which access is readily availableto all the elements required for fullparticipation in the ‘Information Age’ andwhere trust has been established to facilitateacceptance of new tools of commerce andnew styles of operating businesses. The Teamenvisages the UK as:a world class centre for e-commerce; andthe leading ‘hub’ for e-commerce activitywithin a successful single European market,building strategic links with other EUmember states.6.3 This UK leadership will be based on:demanding consumers, in a highlycompetitive domestic market;excellent suppliers;extensive Government/industrypartnership; anda recognition of a unique balance between‘light touch’ regulation and freedom toinnovative expressed through a ‘based inthe UK’ brand, such that:– Government intervention is only usedas a last resort;– co-regulation is the norm, with apresumption for industry self regulationwithin a Government backed frameworkof codes of good practice is the firstchoice;– disincentives to the use of electroniccommerce no longer exist (goodprogress is already in train through DTI’sElectronic Communications Bill); and– Government is truly ‘joined-up’, withclose co-ordination of both policy andits delivery.6.4 Figure 6.1 fleshes out the vision undereach of the pillars and the foundations. Thefollowing chapters will set out what needsto be done to make a reality of this vision.6.5 In addition to the detailed monitoringprogramme set out in chapter twelve, theteam recommends the following keyindicators as tests of whether, in 2002, theUK has succeeded in its bid to become thebest location for electronic commerce:For individuals:a higher percentage of people in the UKwill have access to e-commerce networksfrom home than in any other G7 country;total cost of e-commerce network accesswill be lower in the UK than in any otherG7 country; and

VISION FOR UK E-COMMERCEUnderstandingIndividuals…• are aware of the benefits that they can gain frome-commerce and feel confident that they have theskills to exploit them.• are able to routinely use electronic means forGovernment transactions (driving licence, passport,company registration, pensions, access to benefits,training, …) with only limited fallback to manualsystems.Business and Government…• use e-commerce as an integral part of strategicthinking in UK industry (and Government), at allmanagement levels, in all sectors and all regions.Business and Government have used the tools ofe-commerce to both reduce cost and create newon-line industries.• have embraced the tools of e-commerce todevelop skills. ‘Continuous education anddevelopment’ is routinely delivered to all employeeselectronically at work or at home by personal choice.A Competitive and Innovative EnvironmentActive competition and many successful new e-business start-upsThe UK is the leading centrefor E-Commerce activity within the SingleEuropean Market, based on openness and innovation by suppliersand customers, light touch regulation, and Government-Industry partnership.AccessIndividuals...• have ubiquitous, low cost, high bandwidth, fixedand mobile, access, with a widespread ‘alwayson’ capability, tariff structures geared to meet thefull range of users’ needs, and fierce competitionbetween suppliers using a range of accesstechnologies.• are not e-excluded. Almost all, including thedisadvantaged, have affordable access to e-government, e-commerce and payment systemseither from home or a multiplicity of local accesscentres.• are no longer barred by limited literacy. Throughthe creative use of pictogram and voice guidancesystems, we have managed to broaden inclusion.Business and Government…• have access through broadband networks whichare nearly ubiquitous throughout the UK. These areenhanced by strong competition and co-ordinatedregulation.Co-ordination and Focus across GovernmentA single Minister, backed by a strong team, is driving forward the e-commerce messageTrustIndividuals...• can use networks for e-commerce transactionswith minimal risk of being defrauded.• are able to use their personal data in making e-commerce transactions with minimal risk of being‘hacked’ or ‘spammed’.• have a means of redress in the event of disputesabout e-commerce transactions.• have the capability to limit, on a personal basis,the extent to which they are exposed to unwelcomecontent.Business and Government…• are able to use e-commerce transactions withthe same degree of confidence associated withphysical transactions.• have systems which intrinsically minimise therisk of successful hacking or malicious damage.• rely on simple and appropriate means for disputeresolution regarding transaction.• can use e-commerce with minimal risk that theirIntellectual Property Rights will be infringed.Internationally agreed fiscal and regulatory frameworksUK played leading role in balancing Government and self-regulationto ensure existing taxes efficiently and equitably collectedMonitoring and evaluationGovernment has a comprehensive understanding of the impact of e-commerceFigure 6.1For business: a higher percentage of businessto business and business to consumerFor Government: a higher percentage oftotal government services may be transactedthrough e-commerce networks than in anyother G7 country.a higher percentage of the population willuse multi-function smartcards,incorporating ‘E-Cash’, than in any otherG7 country.transactions are carried out on e-commercenetworks than in any other G7 country.29E-commerce@its.best.uk

7. FOUNDATIONSE-commerce@its.best.uk30Summary7.1 The previous chapter identified anumber of barriers to the UK becoming thebest place in the world to trade electronicallyby 2002. The policy changes needed toovercome these barriers fall into twocategories:changes that affect the overall framework,or “foundations”, within whiche-commerce is undertaken.changes specific to particular aspects ofe-commerce. These are covered under theheadings of understanding, access andtrust in later chapters.7.2 This chapter covers the first of these.Its purpose is to:define what is meant by the foundationsof e-commerce;analyse the main problems that needto be addressed; andmake recommendations.7.3 The recommendations put forward fallunder three headings: competition andinnovation; taxation; and regulation.Competition andinnovation:Recommendation 7.1: OFTEL and theOffice of Fair Trading should carryout a review by end March 2000 toidentify any emerging barriers tocompetition in electronic marketsand make recommendations forpreventing any such barriersbecoming serious problems.Recommendation 7.2: DTI shouldwork with industry to map emergingclusters of e-commerce businesses toexamine whether their developmentcan be facilitated.Recommendation 7.3: DTI shouldfacilitate an industry-ledmentoring/partnering initiativeto help new Internet service andcontent businesses start-up andgrow.Recommendation 7.4: theindependent Banking Review, headedby Don Cruickshank, should considercarefully the problems faced by SMEsin obtaining on-line credit-cardprocessing facilities for e-commercetransactions and should recommendaction as appropriate.Overall strategyTaxation:Recommendation 7.5: the InlandRevenue and Customs and Exciseshould publish a comprehensiveInformation Paper in the Autumn(1999) updating the Government’sstrategy for the tax treatment ofe-commerce.Safeguarding the tax baseRecommendation 7.6: the UK shouldcontinue to aim for internationalagreement on the direct taxtreatment of payments for electronicgoods and services by end 2000.

Recommendation 7.7: the UK shouldcontinue to seek internationalagreement on the application of the“permanent establishment” principleto Web sites by March 2000.Recommendation 7.8: the UK shouldcontinue to play a leading role inOECD work to review the applicationof transfer pricing rules to e-commerce and to develop rules forattributing income to permanentestablishments.Recommendation 7.9: the UK shouldidentify effective mechanisms forVAT collection in respect of consumerpurchases of on-line items fromoutside the EURecommendation 7.10: the taxauthorities need to remain vigilantin ensuring e-commerce does notlead to increased tax evasion andavoidance.Simplifying and thencommunicating the tax rulesfor e-commerce to businessRecommendation 7.11: the UK shouldwork with the EU, the WorldCustoms Organisation and otherinternational bodies to improve andstreamline procedures for thecollection of VAT and customs dutieson small consignments of imports.Recommendation 7.12: the InlandRevenue and Customs and Exciseshould publish improved guidancefor e-businesses, targeted at smalland medium sized enterprises,explaining their tax obligationsand how the tax system will treatcross-border transactions.International coherence andagreementRecommendation 7.13: the UK shouldcontinue to play a leading role in theOECD and in other internationalorganisations to achieve aninternationally agreedimplementation of the frameworkfor the taxation of e-commerceagreed at the 1998 OttawaMinisterial conference.Recommendation 7.14: the UK shouldseek an international examination ofthe implications of e-commercebetting and gaming for the tax yieldfrom this sector.Regulation:Recommendation 7.15: theimplications of the convergence oftelecommunications, broadcastingand information technologies forregulatory regimes and institutionsshould continue to be kept underreview by the DTI and DCMS.Recommendation 7.16: regulatoryregimes affecting other sectors ofthe economy need to be reviewedand reformed by the relevantdepartment responsible for eachsector to ensure they remain relevantto the changes in industrial andmarket structure and new businessopportunities brought about bye-commerce.Recommendation 7.17: the UK shouldpromote a co-ordinated and joinedupapproach to e-commerce acrossEurope and globally.Recommendation 7.18: the UK shouldcontinue to push for e-commerce tobe fully integrated within theframework of international trade.Background anddefinitions7.4 To exploit the opportunities and meetthe challenges offered by e-commerce, theUK needs a competitive and innovativeenvironment and to be part of aninternationally agreed tax and regulatoryenvironment.A competitive andinnovative environment7.5 A competitive and innovativeenvironment is defined in this report asan economic and social environmentcharacterised by:a stable macroeconomic frameworkdelivering sustained non-inflationarygrowth;E-commerce@its.best.uk31

E-commerce@its.best.ukan enterprise culture that encouragesentrepreneurship;a tax system that rewards enterprise andrisk-taking;efficient capital markets providing venturecapital and other funding for e-businesses;a flexible labour force with up-to-dateskills; andcompetitive markets that encourageinnovation and the adoption ofinternational best practice.7.6 These requirements are being addressedby the Government’s wider economic andindustrial policies and go beyond the scopeof this report. However, there are a numberof issues of particular relevance toe-commerce where the team believeschanges are necessary. Consistent with thethemes of the Competitiveness White Paper, 1these fall under the headings of:competition: early action is needed toidentify and tackle any emerging barriersto competition in electronic markets;collaboration: the need to make sure thereare no planning or other barriers to theemergence of clusters of e-commercebusinesses; andcapabilities: the need for industry-ledmentoring to raise the management skillsof start-up Internet businesses and forchanges to the employers’ nationalinsurance treatment of share options toensure they don’t drive start-up hightechnology businesses offshore.An internationallyagreed tax andregulatory environment7.7 E-commerce poses a number ofchallenges for tax policy and administration:updating the tax regime so it is relevant toa world of electronic as well as physicalmarkets. In the case of indirect taxes, suchas VAT, this means having internationallyagreed rules about, for example, the placeof taxation of products deliveredelectronically. In the case of direct taxes,it means having internationally agreedrules defining, for example, the taxjurisdiction in which income or profit hasbeen earned where the underlying activityconsists of services delivered on-line;designing a tax regime for e-commerce thatminimises losses of tax revenues whetherbecause transactions are more difficult totrace, particularly where the good orservice is delivered as well as orderedelectronically, or because it is difficult todetermine the country in which income orprofit has been earned and thus to assesswhich country should get the tax.ensuring tax rules do not act as a barrier toe-commerce and that their application toe-commerce is clear and understood bytaxpayers. The growth of e-commerce notonly requires an internationally agreed andenforceable tax regime but a regime thatcan be readily understood by taxpayers.7.8 There are three main requirements foraddressing the above challenges:a clear set of principles to underpin thetaxation of e-commerce;international agreement to theimplementation of those principles.Without international co-operation andagreement there is a risk of individualcountries taking unilateral action whichcould lead to double taxation orunintentional non-taxation. The resultingcompliance costs could damageinternational trade and UK business inparticular. This implies the UK should beplaying a leading role in securinginternational agreement. The keyinternational organisations are the OECDand, for VAT, the EU; andputting in place new arrangements forcollecting and enforcing taxes that keeppace with the change in technology.7.9 The principles the UK Government isapplying to the taxation of e-commerce 2 areshown in box 7.1. These principles are inaccord with principles agreed by Ministersfrom all OECD countries in Ottawa last year.7.10 Moving from taxation to regulation,chapter five made the case for co-regulationas the over-arching principle for theregulation of e-commerce. In a range ofother areas, e-commerce is already subject tothe existing body of legislation, such as thaton the sale of goods and services, advertisingand other consumer law. This contributes toconfidence in the market, but action must be1“Our Competitive Future Building the Knowledge Driven Economy”, Cm 4176, December 19982Set out in “Electronic Commerce: UK Taxation Policies”, Joint Policy Paper, Inland Revenue and H.M. Customs and Excise,6th October 199832

UK PRINCIPLES FOR TAXATION OF E-COMMERCE• neutrality – taxation should seek to be technology neutral so that no particular form of commerce isadvantaged or disadvantaged;• certainty and transparency – rules should be clear and simple so that businesses can anticipate, so far aspossible, the tax consequences of the transactions they enter into;• effectiveness – tax rules should not result in double taxation or unintentional non-taxation. The overridingaim should be to ensure the right amount of tax is paid at the right time and in the right country;• efficiency – the compliance cost to business and the administration costs to government should be kept tothe minimum compatible with effective tax administration; and• The Government does not believe it is necessary at this stage to make any major changes to existing taxlegislation and regulation, or to introduce new taxes.Box 7.1taken to ensure that the regulatoryframework is up to date and does not placeunnecessary barriers in the way ofe-commerce. And the regulatory regimefor e-commerce also needs to address anumber of other issues:whether the convergence oftelecommunications, broadcasting andinformation technologies requires reform ofthe regulatory regimes and institutionsoverseeing the information industries;whether the changes in industrial andmarket structure and new businessopportunities brought about bye-commerce require new regulatoryregimes in other sectors of the economy;andwhether changes are needed internationallyas well as nationally.Recommendations andAnalysisRecommendations oncompetition and innovationRecommendation 7.1: OFTEL and theOffice of Fair Trading should carry outa review by end March 2000 to identifywhether there are emerging barriers tocompetition in electronic markets andmake recommendations for preventingany such barriers becoming seriousproblems.7.11 It was noted in chapter five that, ingeneral, e-commerce could have significantbeneficial effects on the intensity ofcompetition in the economy. However,in some sectors, e-commerce may reducecompetitive intensity. For example where:a small number of firms achievedominance over gateways to the Internet;orthe scale and cost of advertising on keyportals and index sites allows somee-businesses to achieve market dominance.7.12 The “walled garden” is an example ofthe potential new threats to competitivemarkets that may be created by e-commerce.The walled garden emerged originally as ameans of giving consumers confidence thatthe e-businesses they were dealing with arelegitimate and will honour the transactionsthey make with them. However, as its nameimplies, a walled garden could allowconsumers only to shop within the garden.This is potentially anti-competitive.7.13 The issue of walled gardens is likelyto become more prominent with theimplementation of interactive digital TVin late 1999. This will allow the consumerto access on-line traders and order goodsthrough their television, using a conventionalremote control. A potential drawback is, aspresently envisaged, that users on someplatforms will not be able to access theInternet from their interactive digital TV.More generally, consumers of digital serviceswill often need to gain access to servicesthrough some form of electronic gateway –most obviously the set-top box in the caseof interactive digital TV. Similarly, serviceproviders wishing to communicate witha customer must often do so through agateway controlled by another company.“Bottlenecks” could arise where a serviceE-commerce@its.best.uk33

E-commerce@its.best.uk34provider must use a particular gatewayto gain access to certain customers andthe use of any alternative route wouldbe uneconomic.7.14 These problems remain largelyhypothetical at this stage. But the DTI andOFTEL will have achieved changes to theAccess Control Licence regime, under theTelecommunications Act, by autumn 1999.It is important to ensure that OFTEL haseffective tools for dealing with potentialanti-competitive practices in this area inany cases where its powers under theCompetition Act prove insufficient.They, the Office of Fair Trading, and theCompetition Commission, need to be vigilantin tackling quickly any anti-competitivepractices that emerge and in promoting newentry competition. A review by OFTEL andthe Office of Fair Trading of all possible anticompetitivethreats to e-commerce marketsare could usefully assist this process.Recommendation 7.2: DTI should workwith industry to map emergingclusters of e-commerce businesses toexamine whether their developmentcan be facilitated.7.15 Successful innovation requires: a flow ofcommercially valuable ideas from universitiesand elsewhere; venture capital and otherfunding to turn ideas into businesspropositions; and people with the skills tobring them successfully to the market. Asnoted above, these requirements are beingaddressed by a range of Governmentpolicies.7.16 However, there are concerns that theformation of clusters of new high-technologybusinesses, whether in e-commerce or othersectors, may be being held back. The reporttherefore recommends that DTI shouldcontinue to monitor the formation ofbusiness clusters, with a view to identifyingpotential barriers, and should reportpreliminary findings by the end of 1999.Recommendation 7.3: DTI shouldfacilitate an industry-ledmentoring/partnering initiative tohelp new Internet service and contentbusinesses start-up and grow.3Informed Sources, 19997.17 A new sector of Internet businessesis growing up around the Web, providingcontent, on-line market places or valueaddedservices such as best-buy sites,electronic signature and confidentialityservices, electronic payment systems,personal preference brokers etc.7.18 There is evidence that these businessesare not adequately served by the existingbusiness support infrastructure:the banks and the investment communityfind it difficult to assess risk and conductdue-diligence on new Internet businesses,since the businesses lack a track record andin many cases have a business modelwhich has never been proved elsewhere.In one survey, 3 28% of digital mediabusinesses cited difficulties in gettingaccess to capital as a key barrier to growth;there is considerable anecdotal evidencethat the UK lacks the wider supportnetwork of accountants, lawyers etc. whoseclose understanding of Internet businesshas been a significant factor in helpingSilicon Valley start-ups; andthere is a reluctance, born of anindependent, non-establishment culture inthese businesses, to approach and usepublic sector sources of advice and support(e.g. the Business Link).7.19 Action is already being taken in thisarea. The independent Banking Review team,established by the Chancellor under thechairmanship of Don Cruickshank, is focusingon, among other things, competition inlending to SMEs. Given the importance ofthis emerging sector to the wider economy,however, the PIU Team does not believe itright to deal with these problems throughgeneric programmes aimed at high-techSMEs more generally. It is recommended thatthe Government should work with industryto develop a self-help network for this sector,perhaps based on the successful model of theSoftware Business Network (a joint initiativebetween the CSSA, Computer SoftwareServices Association, and DTI), which alreadyaddresses the needs of parts of this sector.The focus should be on promoting businessto-businesslearning and networking, such asmentoring by successful entrepreneurs, and“marriage brokering” with providers offinance and professional services. Preliminarysuggestions should be detailed by the endof 1999.

Recommendation 7.4: the independentBanking Review, headed by DonCruickshank, should consider carefullythe problems faced by SMEs inobtaining on-line credit-cardprocessing facilities for e-commercetransactions and should recommendaction as appropriate.7.20 One of the key requirements for abusiness wishing to develop an e-commercecapability on its Web site is to secure a creditcard vendor account so that it can offer itscustomers on-line credit card processing.However, very few UK banks offere-commerce services. Those that dofrequently require a company to demonstrateup to two years’ off-line experience as acredit card vendor before they will giveon-line vendor facilities. In effect, this meansthat new e-commerce businesses in theUK are ignored by the UK banking system.7.21 This vacuum is currently being filledby off-shore banks, and by intermediarycompanies which have set up as clearinghouses providing software and processingsolutions that bridge the gap between theclient’s bank and the vendor’s bank. Highcharges are levied for these services, andvendors can have to wait up to sixty daysfor settlement. Anecdotal evidence (throughthe Team’s Seminars and interviews –see Appendices three and six) suggests thatthe absence of large, trusted UK financialinstitutions from this market, together withconcerns about the cost and potential riskof using small intermediaries, constitutesa significant bar to e-commerce adoptionby UK SMEs. However, consumer trust ine-commerce will be damaged if there isa belief that credit or debit cards will beabused by overcharging – either by mistakeor by fraudulent misuse. In this context,start-up companies will inevitably find itharder to demonstrate that they are able toreceive credit or debit card payments withoutsuch abuse.7.22 There is concern that there is a lackof competition in the market for processingcredit and debit cards in the UK, and this isbeing examined by the Banking Review team(see paragraph 7.19). It is recommended thatthe review team:assesses the extent to which banks’ currentpolicies reflect an accurate assessment of4Forrester Research Report, December 1998risk – or whether it represents a missedopportunity for the banks; andidentifies solutions to any genuine barriersthat may be preventing banks or othersfrom entering this potentially significantgrowth market.Recommendations ontaxation7.23 The recommendations on taxation inthis report fall under the following headings:the need for an updated statement of theGovernment’s overall strategy towards thetaxation of e-commerce;the importance of removing tax barriers tothe start-up of new e-businesses in the UK;the need to safeguard the tax base; andthe need to communicate effectively to smalland medium sized businesses what the taxrules for e-commerce are.Overall strategy:Recommendation 7.5: the InlandRevenue and Customs and Exciseshould publish a comprehensiveInformation Paper in the Autumn(1999) updating the Government’sstrategy for the tax treatment ofe-commerce.7.24 The Inland Revenue and H.M. Customs& Excise issued a joint policy paper last yearthat set out the Government’s strategy forthe taxation of e-commerce. There is alsoongoing co-operation through the ElectronicCommerce Consultation Forum. Considerablefurther work has been undertaken since lastyear both nationally and internationally.Therefore, the team recommend that anInformation Paper, updating the Government’sstrategy, should be published in Autumn1999 – alongside the Pre-Budget Report.Safeguarding the tax base:7.25 The issue of tax losses has attracted alot of publicity, mainly as a result of estimatesof potential tax losses in the US. Oneforecaster 4 has projected US tax revenuelosses of as much as $45bn annually by2003, due mainly to uncollected sales taxes.E-commerce@its.best.uk35

However, other analysts 5 suggest thisexaggerates the extent of the problemin the US because:most e-commerce is business-to-businessand not subject to sales taxes;e-commerce generally involves consumersales not subject to tax anyway; andvery few Internet businesses are makingprofits.7.26 The problems in the US arise largelyfrom the structure of the sales taxes inindividual states. Value Added Tax (VAT) inthe UK and EU is structured quite differentlyand does not therefore face the same riskof a declining revenue yield (see box 7.2) 6Where the EU does face a problem is in thesupply of products digitally to privateconsumers by suppliers outside the EU.There is currently no way of tracing thatthese supplies have taken place, nor are therethe mechanisms to collect tax in thesecircumstances. Although this represents asmall area of market activity at present, theadvent of high-bandwidth technology willmean that this may increase significantly overthe next few years. Customs and Excise areworking closely with other countries and withbusiness, principally through the OECD, inorder to seek solutions to this problem.USA SALES TAXESUSA sales taxes are based at state level and below.Suppliers selling goods to customers resident in astate other than that of the supplier do not haveto charge sales tax. The development of theInternet as a tool for ordering and paying for suchout-of-state transactions has led to a substantialincrease in the tax losses already being suffered asa result of a general increase in mail order sales.In the EU, VAT is based at the national level andimportations from outside EU are assessed for VATat entry into the member state. For goodssupplied to consumers from another EU memberstate, the VAT is charged by the supplier. Thethreats to VAT in the EU are therefore much lessthan the threats to sales tax in the USA.Box 7.2stimulated. The Team has five specificrecommendations (7.6-7.10) for safeguardingthe tax base.Recommendation 7.6: the UK shouldcontinue to aim for internationalagreement on the direct tax treatmentof payments for electronic goods andservices by end 2000.7.28 The UK, like many other countries,requires tax to be withheld from royaltypayments made to non-residents in respectof patents or copyrights. The current rules,which distinguish between such paymentsand payments for goods and services, fromwhich tax does not usually need to bewithheld, were developed in relationto physical goods and long predatee-commerce.7.29 It is increasingly possible for digitisedversions of certain products to be transmittedelectronically, including e.g. newspapers,magazines, books, photographs, music andsoftware. Consumers may have to pay a feebefore being allowed to view the digitisedversions; and will usually have to pay a feebefore being allowed to download a copyof the product. It is not clear whether apayment to view and download suchproducts is a payment for the use of acopyright or payment for the purchase of agood or service. If the former, practical issuesarise concerning whether, under UK law, theconsumer should deduct and account for taxwhen making the payment.7.30 An OECD working group is currentlylooking at these issues as part of the two-yearprogramme of work following the Ottawaconference. The UK is seeking an agreedoutcome by the end of 2000 which:treats electronic and equivalent traditionaltransactions in the same way for taxpurposes;avoids double taxation or unintentionalnon-taxation of income; andminimises compliance costs to businessand consumers.E-commerce@its.best.uk7.27 However, e-commerce offers theprospect of increased tax revenues as wellas threats to the tax yield. This is because,to the extent that e-commerce results in ahigher rate of non-inflationary growth inthe economy, tax revenues ought to beRecommendation 7.7: the UK shouldcontinue to seek internationalagreement on the application of the“permanent establishment” principleto Web sites by March 20005Ernst and Young report: “The sky is not falling”, 21 June 19996Though one recent report, by the Institute of Directors, suggested £10bn of annual VAT revenues in the UK were at risk(Financial Times, 30 August 1999)36

7.31 The UK taxes non-residents on their UKincome. But, where the UK has a treaty withthe person’s country of residence, it onlyexercises its right to tax if the person has apermanent establishment here as defined inthe tax treaty. Broadly speaking, “permanentestablishment” means a fixed place ofbusiness. The application of the permanentestablishment concept to e-commerce needsclarifying. In particular, there is uncertaintyabout whether a Web site on a server is apermanent establishment and, if so, in whatcircumstances.7.32 This issue affects both the foreign taxesUK businesses have to pay abroad and theUK taxes foreign businesses have to pay inthis country. It is therefore important toresolve both – to secure national tax revenuesand provide a clear tax framework withinwhich businesses can operate. And the UKis actively participating in the OECD workon this issue that is due to be completed byMarch 2000. The UK should continue to seekinternational agreement on the way forwardwithin this timescale.Recommendation 7.8: the UK shouldcontinue to play a leading role in OECDwork to review the application oftransfer pricing rules to e-commerceand to develop rules for attributingincome to permanent establishments.7.33 E-commerce is likely to increase thecomplexity of arrangements relevant to thedetermination of the appropriate prices fortransactions between associated persons indifferent jurisdictions for direct tax purposes.It could become more difficult to identifywhere relevant functions have beenperformed, to quantify the value added inrelation to business conducted over theInternet and to establish where any suchvalue has been added. Similar problems arisein relation to the attribution of profits topermanent establishments.7.34 The UK chairs an OECD working partyon transfer pricing and is activelycontributing to work being done by theOECD on the attribution of profits topermanent establishments. The OECD isclosely monitoring developments ine-commerce to ensure it can move swiftlyto update/modify guidance on transferpricing/attribution rules as and when thisbecomes appropriate.Recommendation 7.9: the UK shouldidentify effective mechanisms for VATcollection in respect of consumerpurchases of on-line items fromoutside the EU.7.35 Current VAT rules do not provide forcollection of tax on digital items purchasedby private consumers from outside the EU.Items such as software, CDs and videosdownloaded on-line therefore escape VAT.At present it is believed that the volume ofsuch consumption is not great. The goodsand services concerned account, in any case,for a relatively small proportion of consumers’expenditure. So the threat to the revenueyield from VAT is not presently large. It is,however, likely to grow, especially whenincreased bandwidth encourages this modelof distribution. Part of the work being carriedout in the OECD by the UK and othercountries is aimed at resolving this issue.7.36 The UK has encouraged the EuropeanCommission to bring forward legislativeproposals to bring the ‘place of taxation’rules up to date generally and to bring theminto line with the Ottawa conclusions onVAT (see box 7.3). By doing this, Europeantraders would be safeguarded from unfair taxcompetition such as that which adverselyaffected European telecoms companies untila similar legislative change was introducedin 1997.7.37 But even if the legislative gap is filled,there remain important practical questionsabout how the tax would actually becollected. One option is some form ofautomated revenue collection which Customsand Excise is exploring with interested partiessuch as infrastructure providers and softwaredevelopers. Customs and Excise need tocontinue to investigate, with EU memberstates and other countries, as well asbusiness, what would be the most effectivemechanisms for VAT collection on on-linepurchases from outside the EU by privateconsumers. It is important that thesemechanisms are developed alongside thebusiness models to ensure that they areeffective without being burdensome. This islikely to be a process which will extend atleast until the end of the OECD’s two-yearprogramme of work established at Ottawa.E-commerce@its.best.uk37

E-commerce@its.best.uk38Principles agreed for consumption taxes (VAT) atOECD Ottawa Conference in October 1998:• rules for the consumption taxation of crossbordertraders should result in taxation in thejurisdiction where consumption takes place;• for consumption purposes, the supply ofdigitised products (on line delivery thereof)should not be treated as a supply of goods (inthe UK this means treating them as services);• countries should consider using some selfassessmentmechanism where this would giveimmediate protection of their revenue baseand of the competitiveness of domesticsuppliers; and• countries should ensure that appropriatesystems are developed in co-operation with theWorld Customs Organisation and consultationwith carriers to collect tax on importedphysical goods.Box 7.3Recommendation 7.10: the taxauthorities need to remain vigilant inensuring e-commerce does not lead toincreased tax evasion and avoidance.7.38 E-commerce may lead to an increase innon-compliance with the tax regime. In orderto minimise the risk to the tax yield, the UKtax authorities are:reviewing the adequacy of current powersfor information gathering in an electronicenvironment;examining the extent to which existingor developing technologies, standardsand protocols can be used or modified toidentify taxpayers, trace or establish theirlocation, identify commercial or businesstransactions and those transactions onwhich consumption taxes are due;examining how developments intechnology might be used to trigger a billfor consumption taxes for on-line suppliesby a non-resident supplier to privatecustomers;monitoring the development of electronicpayment systems for any compliance risksthey present; andworking with other groups within OECDto improve the exchange of informationbetween jurisdictions and to improvemultilateral assistance with the collectionof taxes.7.39 The UK is playing a leading role in thework of the OECD on these issues, chairingthe working group that is looking at them aspart of the two-year work programme agreedat Ottawa last year. The group is aiming tomake significant progress by the end of2000.Simplifying and thencommunicating the tax rules fore-commerce to small business:Recommendation 7.11: the UK shouldwork with the EU, the World CustomsOrganisation and other internationalbodies to improve and streamlineprocedures for the collection of VATand customs duties on smallconsignments of imports.7.40 The use of the Internet for purchasinggoods is leading to a significant increase inthe number of small consignments enteringthe UK from outside the EU. For supplies ofphysical goods that cross the EU frontier,customs and VAT are due in the country thatreceives the goods.7.41 Currently, low value thresholds areallowed by EU legislation. In the UK, a deminimis limit of 22ECU (about £18) applies toall physical imports. Where the value for dutyof such imported goods is below this figure,customs duty and VAT do not have to bepaid. Goods ordered electronically using theInternet but delivered physically thus presentno additional risks to the UK’s revenue yield.There may however be an increase in themarginal “loss” that results from applicationof the de minimis limits as more smallconsignment purchases are made fromoverseas suppliers using the Internet as theordering and payment mechanism.7.42 The UK is currently reviewing thethresholds allowed under EU legislationwith a view to simplifying the processes.A number of options are under consideration,including raising the threshold, eliminating it,applying a single rate of duty, andmaintaining the status quo. Suggestions forconsideration by the European Commissionand other member states are likely to bebrought forward within the next few months.7.43 It is recommended that the UK shouldcontinue to work with the EU and other

international bodies to improve andstreamline procedures for the collectionof customs duties and VAT on smallconsignments of imports. Preliminaryfindings should be reported by the endof March 2000.Recommendation 7.12: the InlandRevenue and Customs and Exciseshould publish improved guidance fore-businesses, targeted at small andmedium sized enterprises, explainingtheir tax obligations and how thetax system will treat cross-bordertransactions.7.44 E-businesses, particularly small andmedium sized businesses, are unclear whatthe tax rules governing e-commerce are.The tax authorities need to produce clearguidance and publish it on the Web, perhapson DTI’s e-commerce resource centre on theWeb. This should be completed byNovember 1999.International coherence andagreement:Recommendation 7.13: the UK shouldcontinue to play a leading role in theOECD and in other internationalorganisations to achieve aninternationally agreed implementationof the framework for the taxation ofe-commerce agreed at the 1998Ottawa Ministerial conference.7.45 Unilateral action by the tax authoritiesin the UK or other countries would be likelyto result in different countries havingdifferent tax rules for e-commerce. Differenttax rules in different countries would be abarrier to businesses involved in internationaltrade and would increase their taxcompliance costs. And Governments needto keep pace with technologicaldevelopments to secure their tax base.7.46 Much has already been achievedinternationally. As a result, for example, ofthe Ministerial-level conference in Ottawalast October, the OECD has a two yearprogramme of work underway one-commerce tax issues (including royalties,VAT, the definition of “permanentestablishments” and transfer pricing, onwhich specific recommendations are madebelow). Similarly, in July last year EU FinanceMinisters agreed the following for VAT:existing VAT provisions should be adaptedto e-commerce on the basis of establishedinternational guidelines. There should beno new taxes;digitised products supplied by electronicmeans should be treated, for VAT purposes,as supplies of services (which means thatunlike physically supplied items such asbooks, CDs etc. they are not subject tocustoms duty); andthe place of taxation of services suppliedby electronic means should be the placeof consumption.7.47 The UK has been a driving force in theOECD and EU on the tax issues raised bye-commerce. It is vital that the UK not onlyplays a leading role in the OECD, which isthe best forum for agreement on theseissues, but also in other internationalorganisations – so progress continues to bemade towards an internationally agreedframework for the taxation of e-commerce.Recommendation 7.14: the UK shouldseek international examination of theimplications of e-commerce bettingand gaming for the tax yield fromthis sector.7.48 E-commerce has the potential tofacilitate the growth of Internet andtelephone-based betting and gaming, sothreatening the tax revenues raised in theUK from this sector. For example, “virtualcasinos” on the Internet currently escapeUK duties when not established here. Thisillustrates the need for internationalagreement in the OECD.7.49 There is currently no internationalframework for the taxation of betting andgaming. The UK is therefore seeking aninternational review of the implications ofInternet and telephone-based betting andgaming for the tax revenues raised fromthe sector. This should be initiated in theOECD by December 1999.E-commerce@its.best.uk39

Recommendations onregulation7.50 E-commerce raises fundamentalquestions about the regulatory regimein three key areas:the regulation of information age industries(telecommunications, broadcasting andinformation technology);the regulation of other sectors of theeconomy e.g. financial services; andthe need for internationally agreedregulatory frameworks.7.54 There is no merit in moving regulatoryresponsibilities around between differentbodies for the sake of doing so – whatmatters is the substance of regulation andeffective co-ordination between theregulators. The Team is satisfied that themeasures set out in RegulatingCommunications: the Way Ahead aresatisfactory for the time being, but DTI andDCMS will need to continue to keep thedevelopment of markets under close reviewto ensure that this remains the case.Other Sectors of the EconomyE-commerce@its.best.ukInformation Age IndustriesRecommendation 7.15: theimplications of the convergence oftelecommunications, broadcastingand information technologies forregulatory regimes and institutionsshould continue to be kept underreview by the DTI and DCMS.7.51 The convergence oftelecommunications, broadcasting andinformation technologies poses a significantregulatory challenge. It means consumers willeventually have the choice of accessing a fullrange of digital entertainment and otherservices over a wide range of networks andthrough a variety of different consumerelectronic devices. They will soon, forexample, be able to access the Internet overtheir TV set and may eventually watch TVprogrammes delivered over the Internet.7.52 However, telecommunications andbroadcasting are currently subject to differentregulatory regimes under the auspices ofdifferent regulators: OFTEL in the case oftelecommunications; the ITC and the BBCin the case of broadcasting. As technologiesconverge the case for a single regulator willbecome increasingly strong.7.53 The Government’s view, set out in itsJune 1999 statement 7 is that an evolutionaryapproach to regulation, based on improvedco-operation between the regulators and anumber of specific initiatives in particularareas, is the right way forward. This approachwas originally proposed in a 1998 GreenPaper, 8 and received support in thesubsequent public consultation.7Regulating Communications: The Way Ahead8“Regulating Communications Approaching Convergence in the Information Age” (Cm 4022)Recommendation 7.16: regulatoryregimes affecting other sectors of theeconomy need to be reviewed andreformed by the relevant departmentresponsible for each sector to ensurethey remain relevant to the changesin industrial and market structure andnew business opportunities broughtabout by e-commerce.7.55 Changes in industrial and marketstructure, as a consequence of e-commerce,may undermine current regulatory regimesthroughout the economy and may even be abarrier to the growth of e-commerce in somesectors. A good example of how this mightbe avoided is the Financial Services andMarkets Bill currently before Parliament.This provides for a more modern approachto the regulation of financial promotionssuch as advertisements for shares or financialproducts. In a consultation documentpublished in Spring 1999, the Treasuryproposed that secondary legislation shouldbe used to cut back the Bill’s basicprohibition on unauthorised persons makingfinancial promotions. The consultationdocument proposed that the basicprohibition should not apply to promotionsappearing on overseas Web sites which arenot “directed at” the UK. And, whilst thisapproach should lend much greater industrycertainty than the current legislation providesfor, it should equally allow sufficient flexibilityfor the regime to keep pace with developingtechnology and international regulatorypractice. The Treasury consultation documentalso set out ideas for making the scope of theFSA’s regulations technology-free –recognising that the development ofe-commerce has made the old distinctionbetween, for example, passive advertisementsand active letters, out-of-date.40

7.56 It is recommended that preliminaryassessments are completed by June 2000as part of the more general sectoral impactassessments, detailed withinrecommendation 8.2.International Agreement7.57 In a number of areas, particularly forinstance in the field of consumer protection,UK legislation stems from EU Directives.Regulatory regimes need therefore to bereviewed and reformed at the internationalas well as domestic level to ensure they takeaccount of the breakdown of geographicalbarriers brought about by changingtechnology. It is important to be aware thatno supplier is likely to be able to meet 15different sets of consumer, health and safetyor other requirements when exportingthroughout the EU. The EU e-commercedirective only tackles this issue in relation tocertain requirements. In other areas furtherharmonisation of EU legislation is required.For this reason, the UK, together with theEuropean Commission and Parliament,favours ‘high level’ harmonisation under thedraft directive for distance marketing offinancial services. Unfortunately, most otherEU member states are opposed.Recommendation 7.17: the UK shouldpromote a co-ordinated and joined-upapproach to e-commerce across Europeand globally.7.58 In order for the UK to take fulladvantage of the opportunities afforded bye-commerce, co-operation is required on aninternational basis, in particular within theEuropean Union. It is imperative to ensurethat regulation in the rest of the world is ofhigh quality and that the UK is in step withit. Failure to do this will lead to marketfailures (chapter five). The UK must ensurethat it plays a full part in EU regulatorydevelopment, and that the EU legalframework encourages rather thandiscourages the development of e-commerce.In a Council Resolution on the InformationSociety last year, the member states invitedthe European Commission to review theexisting consumer legislation in the light ofe-commerce developments. This work mustbe given priority.7.59 A number of EU initiatives dealspecifically with the Internet e.g. the draftE-Commerce and Copyright Directives, andthe Action Plan on safer use of the Internet.In addition, a large number of horizontalinitiatives also bear significantly one-commerce, including the TransparencyDirective, the Distance Selling Directive, thedraft Directive on the distance marketing offinancial services and the Data ProtectionDirective. The Distance Selling Directiveincludes provisions to protect consumersfrom unsolicited commercialcommunications, including e-mail or “spam”(see chapter ten). It allows member statesto adopt either an “opt-in” or an “opt-out”approach. As well as providing the effectiveprotection the Directive requires, theGovernment will need to ensure that itsapproach does not act as a disincentiveto e-commerce development.7.60 The UK should take a leading role one-commerce in Europe and should promotefull and effective co-ordination within theEuropean Commission. The UK should workto ensure that EU initiatives are compatiblewith co-regulatory principles and, in thoseareas where it is possible, carry throughimplementation at an early stage rather thanwaiting for a complete package to be agreed.7.61 The UK should push forward EU work toaddress the problems and uncertainties whichare likely to grow as cross-border transactionsincrease. The draft E-Commerce Directiveusefully proposes that traders should begoverned by the regulatory requirementsof the member state in which they are based,so that suppliers do not have to comply withfifteen different sets of rules. The Teamwelcomes the recent appointment of a newCommissioner for Enterprise and theInformation Society and recommends that thenew co-ordinating team in the UK shouldwork closely with the Commissioner to pushforward a EU-wide e-commerce strategy.7.62 Nevertheless, the workings ofinternational law will remain complex.Cross-border enforcement will be a challengeboth for regulatory bodies and for businessesand consumers who find themselves incontractual disputes. The field of privatelaw disputes between litigants is subject inEurope to governing conventions (theBrussels, Lugano and Rome Conventions).The draft E-Commerce Directive does notseek to go into this field of law, but proposesthat information should be made availableabout the contractual rights and obligationsE-commerce@its.best.uk41

of suppliers and their customers. This mustbe a priority. As we note in chapter ten,concern about obtaining redress is a keyissue to be overcome in building trust ine-commerce.Recommendation 7.17: the UK shouldcontinue to push for e-commerce to befully integrated within the frameworkof international trade.7.63 Internationally, the UK should continueto press for e-commerce to be fully integratedwithin the framework of multilateral tradepolicy as it has been developed over the lastfifty years. In particular the rules of the WorldTrade Organisation (WTO), which support thisframework, need to be developed furtherto maximise the benefits e-commerce hasto offer.7.64 The next WTO trade-round startingin Seattle in November 1999 will be animportant opportunity to secure internationalagreement on e-commerce strategy. Prioritiesshould be:maintenance of the present multilateralmoratorium giving customs duty-freetreatment;full endorsement of the principleof technological neutrality betweene-commerce and traditional commerce;agreement on the applicability of theGeneral Agreement of Trade in Services(GATS) rules to on-line delivered products;further liberalisation of services beyondthat already set out under GATS andfurther liberalisation of governmentprocurement;capacity building for developing countries,through appropriate financial, technicaland knowledge-building assistance to helpthem build, develop and exploit theire-commerce capability; andproper and balanced protection ofintellectual property rights so as tostimulate innovation, application andexploitation; and ensuring interoperabilityand interconnectivity.E-commerce@its.best.uk42

8. UNDERSTANDINGSummary8.1 It is critical that UK industry andGovernment should develop a greaterunderstanding of the opportunities andthreats resulting from e-commerce in orderto achieve the Vision set out in chapter six.8.2 This chapter argues that e-commercehas created new challenges for ourunderstanding and also for our associatedskills and goes on to detail solutions toaddress these. Recommendations fall intotwo main categories – promotingunderstanding and building skills:Recommendations to promoteunderstanding:– Reach the whole market:Recommendation 8.1: mount aconcerted PR campaign inpartnership with industry tocreate an e-commerce “buzz” inthe UK. Commission research toidentify the most appropriatebranding to support this campaign.– Ensure shared understanding withindustry sectors:Recommendation 8.2: carry outand communicate sharedindustry/Government sectorspecific“e-commerce impactassessments” to highlight theopportunities, threats and barriersin each sector, and in particular inthe audiovisual content industry.– Seek to influence particularbusiness groups:Recommendation 8.3: work withkey business influencers toincrease boardroom recognitionof the strategic challenges ofe-commerce;Recommendation 8.4: develop amulti-channel marketing strategyto influence small, medium andmicro businesses; andRecommendation 8.5: the newEnglish RDAs and devolvedauthorities in Scotland, Wales andNorthern Ireland should addresse-commerce as a priority in theireconomic development strategies,where they have not alreadydone so.Recommendations to build skills:Recommendation 8.6: set NationalTargets for IT literacy.8.3 The Government’s role as an exemplarwill be critical to driving both understandingand skills. Chapter eleven explores thisfurther. In addition, training programmes inlocal access centres, which will be necessaryto build skills in individuals, are discussed inchapter nine.Background anddefinitions8.4 E-commerce is creating new challengeswhich individuals and businesses need tounderstand and develop the skills to exploit.These challenges include:increasing globalisation – new businessvalue chains and technological uncertainty(for example over the development ofinteractive digital TV) require new strategicthinking from businesses;E-commerce@its.best.uk43

ever increasing numbers of new productsand services; andthe need for new skills to master newtechnologies.8.5 Understanding the opportunities andthreats and being able exploit them is criticalto all parts of the “dynamic loop” ofe-commerce. For example:business start-ups need to understand theopportunities and be able to recruit skilledmanagers and IT-enabled employees;established businesses need to understandthe opportunities and threats to theirbusinesses and have the skills to react tothem; andconsumers need to understand thepotential benefits that they may be ableto capture from e-commerce and have theconfidence and skills to capitalise on these.8.6 However, there is evidence that there isa lack of understanding and a skill gap at ageneral level in the population and in specificsectors of business. The recommendations inthis chapter seek to address this.Recommendations andanalysisRecommendations and analysis topromote understandingRecommendation 8.1: mount aconcerted PR campaign in partnershipwith industry to create an e-commerce“buzz” in the UK. Commission researchto identify the most appropriatebranding to support this campaign.8.7 Lack of understanding is a large barrierto the uptake of e-commerce in business.European market research suggests thatmany companies are deciding to “wait andsee” rather than act now: 24% of companiesargue that “wait and see” is their mainbarrier to taking up e-commerceopportunities. 1 While there may beadvantages to “following” in the market,“wait and see” can be a risky option giventhe potential for first-mover advantage. ThisEuropean finding is also apparent in the UK.8.8 Understanding e-commerce is also aproblem for consumers: 21% of consumersoverall cite lack of understanding as a keybarrier to uptake of e-commerce. 2SOURCES OF INFORMATION ABOUT ICTs USED BY COMPANIES (Micro, Small and Medium sized)8070microsmallmedium60Percentage5040302010E-commerce@its.best.uk0MediaICT suppliers1Romtec EITO/DG3 Study – 19982Consumers’ Association, 1999Experts in companySpecialist consultantsTrade associationsGovernment campaignsGovernment BSOsChambersFigure 8.144

PRELIMINARY RESULTS OF BBC’S WEBWISE CAMPAIGN, MAY/JUNE 1999Interested Action Progression728,560Hits towebsite578,560105,00094,72143%Plans toconnectTelephonecalls150,00050%Enrolledonto ITtraining coursesIndividualsshowing interestAttendees at Internet tastersessions with Web Wisepartner organisations*Planning toconnect/on acourse*including DTI’s IT for All centres Figure 8.2Source: DTIISI MARKETING ACTIVITIESAwarenessraising activityOutputSMEactionISIimplementationadvertising• press• radio• direct mailPR• national, regional,trade, press and radioMay to July 9930,000 responses1998–99450+ articlesISI infoline0345 15 2000– 450000+ calls98–99ISILocalSupportCentrenetworkE-CommerceAwards• annual regional andnational SMEcompetitionmedia coverageand case studies fordisseminationISI ‘howto’ guides,CD-Rom andother inforesourcesISI websitewww.isi.gov.ukrecently updated –acts as signpostcontact ICTsupplieror otherSource: ISI, DTI Figure 8.38.9 The media is consistently cited by allsizes of business (and by micro, small andmedium sized businesses in particular) asthe principle source of information one-commerce technologies (see figure 8.1).Moreover, the success of the Sun’scurrantbun.com free ISP service in reachinga wide cross-section of the populationdemonstrates the power of the media toinfluence behaviour in the consumer sector.So too does the BBC’s current WebWisecampaign, which is achieving dramaticE-commerce@its.best.uk45

E-commerce@its.best.uk46results both in generating interest in theInternet and in turning that interest intoaction (see figure 8.2).8.10 The Government media strategy fore-commerce is mainly dealt with by theInformation Society Initiative (ISI) in the DTIwhich focuses on increasing up-take of ICTsamongst SMEs (see figure 8.3). While the ISIawareness-raising activities seek to exploit theavailable opportunities, they are severelyconstrained by modest funding, which isapproved on a one-off, limited basis. Forexample, only £2m was available in 1999 forall the awareness-raising activity shown infigure 8.3. Moreover, there is no sustained,concerted campaign that would reach thebroader business community or consumers.8.11 At the same time, there are a large andgrowing number of public-sector brands inthe e-commerce area. The ISI and IT for All areprobably the best-established national brands,but there is a lot of promotional activity goingon at a local and regional level (oftenresourced with European funding), and morenational activity will emerge as, for example,the DfEE-funded IT Learning Centres andUniversity for Industry come on-stream.8.12 In order to reach the broadest audiencepossible, the PIU recommends a betterresourced, broader and cross-Governmentmedia strategy, building on, but significantlyextending, existing media work. The aimshould be to achieve a step-change inunderstanding, in all areas of business andsociety, of the opportunities opened up bye-commerce. Media coverage should includeUK business “success stories”, together withcommunication of the benefits (and threats)of e-commerce to established businessesand examples of the potential benefits ofe-commerce to consumers (e.g. via pricereductions). All media channels, including TVdocumentaries, soaps etc. should be exploited.8.13 This activity needs to be developedin partnership with industry and carefullyco-ordinated across Government, as it willinvolve marketing to all target groups acrossall sectors. It is recommended that a full-timePR role is created within the newe-commerce central co-ordinating team asproposed in chapter fourteen. In particular,this new post should be given responsibilityfor integrating Government activity with theBBC’s WebWise campaign and its plannedsuccessor for 2000.8.14 In the short-term, this activity shouldseek to leverage current DTI resourcesdevoted to this area. But these are notsufficient to carry out the breadth and scaleof activity envisaged in this recommendation.It is therefore recommended that an earlyaction for the e-envoy (see chapter fourteen)should be to commission professional advice– and subsequently present preliminaryfindings by June 2000 – on:the optimal marketing strategy forachieving a step change in e-commerceawareness at all levels of business andsociety – drawing on a review of thesuccess of previous campaigns;the best branding to support this strategy(the research should review the scope forexpanding existing brands, such as the ISI,but also look at potential new brands); andthe level of resource needed to deliver thestrategy, and the scope for leveraging inprivate-sector contributions to this.Recommendation 8.2: carry out andcommunicate shared industry/Government sector-specific “e-commerceimpact assessments” to highlight theopportunities, threats and barriers ineach sector, and in particular in theaudiovisual content industry.8.15 Some sectors are not taking upe-commerce as fast as others (see figure 8.4).A better understanding is needed of thereasons why. The PIU e-commerce Teambelieves that there is a role for thedevelopment of a shared understanding andvision of the impact of e-commerce in eachsector, of the kind that were conducted aspart of the PIU project (see Appendix twofor methodology).8.16 “Impact assessments” should beconducted by sectoral directorates within DTI(and other Government departments whichhave a responsibility for particular sectors),in conjunction with industry. Priority shouldbe given to key sectors (to be identified bythe co-ordinating team) , and these sectorsshould be completed for the June 2000Review recommended in chapter twelve.An example of one such sector is theaudiovisual content industry. DCMS isparticularly active in assisting SMEs in thisindustry to exploit the opportunities providedby digital technology and e-commerce. It isimportant that DCMS continues its work in

UK ICT CONNECTIVITY INDEX AND PERCEIVED IMPORTANCE OF ICTs, BY SELECTED SECTORS (%)AdvertisingUK ICT connectively index, by sector%UK companies who think ICTs will have a keyor important impact on competitivenesswithin the next 2 years, by sector%82 Advertising85Chemicals81Chemicals82VehiclecomponentsDefence75Vehiclecomponents7473 Defence72Insurance72Insurance85ClothingRetailingRoad haulage54 Clothing674543RetailingRoad haulage5954Source: Spectrum International Benchmarking Study, 1999 Figure 8.4this area. Assessments should be co-ordinatedwith the regulatory reviews suggested inrecommendation 7.16 and build upon theexcellent work of the DTI/OST ‘TechnologyForesight’ teams.8.17 The e-envoy (chapter fourteen), shouldmonitor the overall programme and facilitateexchange of best practice between thedifferent sectoral approaches. Lessons fromthese assessments can then be disseminatedthrough the PR campaign described inrecommendation 8.1.UK ATTITUDES TO E-COMMERCEGeneral UK business attitude is positive......but there seems to be a problem among senior managementCompanies that believe ICTs will have akey or important impact on their businessin the next two years%Germany72Quotations from UK business“It’s a communicationsmedium”“We understandthis trend, but ourbusiness is notaffected”UKJapan6866“We are experimenting,and the results aredue back at the endof the year”“This is US bubbletype”Canada65USItalyFrance505765“Only 2% of UK Board directorsbelieve that Internet poses a seriouscompetitive threat, compared with 23%in Norway, 17% in Germany and 14%in the US”IoD, 1999Source: Spectrum International Benchmarking Study, 1999, IoD; Richard Sharp, Goldman Sachs International (City conference Figure 8.5organised by Worshipful Company Information Technologists, June 1999)E-commerce@its.best.uk47

E-commerce@its.best.uk48Recommendation 8.3: work withkey business influencers to increaseboardroom recognition of the strategicchallenges of e-commerce.8.18 General UK attitudes to ICTs arepositive; for example 67% of businessesbelieve that ICTs will have a key impacton their businesses in the next two years,putting the UK second in the G7 on thismeasure. But for many businesses this beliefhas not resulted in a strategic level responseto the opportunities and threats posed bye-commerce. A study of UK manufacturing,distribution and retailing companies in 1998found that while 83% believed e-commerceto be crucial to competitiveness, only 21%were developing an e-business strategy. 3Research which focuses on business directorssuggests that this may be because UK topmanagement lags behind overseascompetitors in its understanding of thestrategic impact that e-commerce can haveon business competitiveness (see figure 8.5).8.19 One indication of this problem is thatUK businesses tend not to appoint seniordirectors to manage e-commerce activities.Research by the Institute of Directors last yearreported that only 8% of UK businesses havean IT Director on the board, compared with67% of US businesses. 4 And more recentresearch shows that whereas 62% of UKbusinesses believe it is vital to appoint anexecutive sponsor to manage theintroduction and adoption of e-commerce,76% of businesses have not done so. 58.20 While the DTI is taking actions to targetSMEs, there are currently no initiatives withinGovernment which are explicitly aimed ataddressing top management in largercompanies (although the ISI’s work on supplychains has some benefits in this area).8.21 A campaign should be initiatedimmediately to create an awareness of theopportunities and threats of e-commerceamong company directors, reporting findingsin June 2000. This campaign should involveall the key groups able to bring effectiveinfluence to bear on company directors,including:promoting awareness through nonexecutivedirectors as part of goodcorporate governance;3Durlacher Quarterly Internet Report, Quarter 3, 19984Institute of Directors/Oracle Blueprint for Business, 19985PFA, 1999, sample size = 183using the influence of the financialinstitutions (for example through thenew e-Minister convening a seminar one-commerce with City analysts, fundmanagers etc. to help them assess thepotential opportunities – and threats –of e-commerce and the need forDirector-level leadership); andapproaching the CBI (perhaps as partof their “Fit for the Future” campaign),and Chambers of Commerce to lead anawareness campaign focused on boarddirectors, working closely with thee-Minister.Recommendation 8.4: develop amulti-channel marketing strategyto influence SMEs/micro businesses.8.22 There is evidence that poorunderstanding is concentrated in certaingroups of businesses, notably SMEs (andmicro businesses in particular, i.e. thosewith 1-10 employees, see figure 8.6), whopotentially have the most to gain fromnew opportunities.8.23 To increase support for SMEs, theCompetitiveness White Paper in December1999 announced that the existingInformation Society Initiative would beextended, investing around £20m ofadditional funding over three years.Previously, the Initiative had focused onputting in place an infrastructure of LocalSupport Centres to which SMEs could turnto for advice. Under the new Initiative,greater emphasis is being given to a rangeof awareness and marketing activities and toimproving the environment of support fromall business advisors, in banks, accountancyfirms as well as ICT suppliers and ISI localsupport centres (through an advisor skillsinitiative). Other elements in the strategyare represented in figure 8.7. These areaimed at achieving a target of 1.5 millionSMEs making regular use of networkingtechnologies by 2002, with 1 millionactually trading on-line.

UK MICRO BUSINESS ATTITUDESMicro businesses which believe thattechnology will have “no” or “little”impact on their business (%)UKCanadaUSFranceGermanyJapanItaly%Source: Spectrum International Benchmarking Study, 1999 Figure 8.68.24 However, the most recent data fromthe ISI International benchmarking study,suggests even greater efforts are needed toaddress the under-performing small (with lessthan 100 employees) and micro (with lessthan 10 employees) businesses. The newtargets set by the Secretary of State for Tradeand Industry include bringing these smaller21262830333650businesses up to the level of the internationalbest by 2002. In order to meet this, a moretargeted approach is needed – clearlysegmenting the very different types ofbusinesses involved. This is underway throughan Information Age Partnership sub-groupand will be reporting in November 1999.8.25 This work should be taken forwardurgently, reporting preliminary findings inJune 2000, and should encompass thefollowing specific recommendations:uptake of ICTs among SMEs and microbusinesses should be monitored closely.As experience this year shows, it may benecessary to change significantly targetsand the direction of the ISI in the lightof new data on how world best practiceis moving on;a multi-channel communication strategyshould be developed, building on the workon segmentation by the IAP and otherindustry contacts, to ensure that allavenues are being exploited in reachingSMEs and micro businesses. For example,this should fully exploit trade associations,which have been shown to have relativelymore influence over smaller than largerbusinesses (see figure 8.1);the role of large organisations inencouraging and facilitating the uptakeELEMENTS OF ISI STRATEGYAwarenessChannelsImplementationISI advertisingcampaign£1.5m, launched May 99Local SupportCentres80 established: 100 by DecE-CommerceResource Centreto be developed withindustry; website forpractical supportKey: strengthof lines andshadingindicates howfar developedShowcasingbuilding on existingdemonstrators; newsectoral work to bedevelopedSupply ChainSupportunder developmentLocalPartnership Fundto be developed with SBS,RDAs and country agencies1.5mSMEsE-CommerceAwardshighlighting best practice,June 99Advisor SkillsInitiativewith BT, Compaq, Inteland Microsoft; pilotingBest practicematerialsongoing revision andproduction of guides etcBenchmarkingSource: ISI, DTI Figure 8.7E-commerce@its.best.uk49

UK ICT CONNECTIVITY INDEX AND PERCEIVED IMPORTANCE OF ICTs, BY REGION (%)UK ICT connectively index, by regionUK companies who think ICTs willbe essential for competitivenesswithin the next 2 years, by sector%%London74London77WestMidlands65WestMidlands65South East62South East66North West59North West61Eastern58Eastern62Yorkshire &the Humber54Yorkshire &the Humber65EastMidlands54EastMidlands63Scotland54Scotland62South West52South West59North East51North East61Wales48Wales52NorthernIreland41NorthernIreland59Source: Spectrum Benchmarking Study, 1999 Figure 8.8E-commerce@its.best.ukof new practices amongst their suppliersis one of the more powerful vehicles forchange and should not be neglected. Workis under development in DTI on leveragingthe power of supply chains: this should bea high priority, and closely informed by thesectoral e-commerce impact assessmentsdescribed in recommendation 8.2; andthe DTI’s current advertising budgetof £1.5 million in this year only fundedan eight-week advertising campaign,generating over 35,000 responses fromsmall businesses. No further campaigns ona similar scale are possible within this year’sbudget. It is recommended that the ISImake a more sustained commitmentto advertising within the scope ofrecommendation 8.1.Recommendation 8.5: the newEnglish RDAs and devolved authoritiesin Scotland, Wales and NorthernIreland should address e-commerceas a priority in their economicdevelopment strategies, wherethey have not already done so.8.26 Business attitudes to the potentialbenefits of e-commerce technologies varysignificantly across the UK (see figure 8.8).Strategies to promote business use ofe-commerce are well-developed in Scotland,Wales and Northern Ireland (see chapterthirteen); the advent of RegionalDevelopment Agencies in the Englishregions gives an opportunity to extend thisapproach nationally. As an integral part oftheir regional development strategies, RDAsshould systematically develop a strategy forintegrating local, national, and Europeanfundede-commerce activity at a regionallevel. Reporting should be in step with RDApublished dates.Recommendations tobuild skills8.27 While it is essential that understandingthe opportunities and threats created bye-commerce becomes more widespread, thismay not be sufficient for change to occur –people also need the skills to exploit thoseopportunities. The UK faces significant skillsshortages, both in terms of general levels ofIT literacy and in terms of the higher-levelprofessional skills required within the IT,electronic and communications sectors(see figure 8.9 6 ). Although the number ofIT graduates per capita in the UK compares6A recent OECD report estimated there were 20,000 unfilled jobs in the UK IT sector. IDC research on behalf of CISCO predicts a UKshortfall of over 80,000 by 2002, corresponding to nearly a quarter of available jobs. While this is less of a gap than predicted for someother countries, it means that there is likely to be a considerable constraint on the growth of the UK’s e-commerce enabling sectors50

IT PROFESSIONAL SKILLS GAPSOECD: IT jobs unfilled swing to skillsshortages (estimate)%IDC: Estimated percentage shortfall ofIT specialists with “networking skills” in 2002%World600000WesternEurope37US346000Netherlands48France43Germany60000Germany38Canada20000–30000Italy38UK20000UK23Source: OEDC Preliminary Findings and Research Agenda “The economic and social impact of electronic commerce”, 1998; Figure 8.9IDC Report to the European Council: “Strategies for job creation in the Information Society”favourably with that of the U.S., 7 the lack ofqualified IT professionals is also a constraint one-commerce implementation in industries thatuse e-commerce. A recent survey by NOP 8found that 34% of UK companies consideredtheir IT departments to lack the necessaryskills for managing and implementing theintroduction of e-commerce technologies.This compared with more than 60 % inFrance and just over 25% in Germany.8.28 The Government has asked theInformation Age Partnership and the NationalSkills Task Force to develop a national strategyto redress this skills gap. The group, chairedby Alan Stevens of EDS, is expected to reportin September 1999. The recommendations ofthis group should be properly resourced andimplemented. However, this group does notaddress general IT literacy problems acrossthe wider workforce. Recommendations inthis area are outlined below.Recommendation 8.6:Set new National Targetsfor IT literacy8.29 Although IT literacy has been improvingsteadily, 40% of UK companies questioned inthe 1999 Spectrum ICT Survey of Businesses 9said that their employees did not have a7McKinsey Productivity Report, 19988PEECCS 98 e-commerce survey9Spectrum ICT Survey of Businesses 1997/1998/1999 by NOP Research Group10The Skills Audit, DfEE and Cabinet Office, 1996.11Spectrum ICT Survey of Businesses, 1999sufficient understanding of IT. This was thehighest level of dissatisfaction registered inany G7 country (see figure 8.10). Thesefindings are consistent with a Skills Audit bythe UK Government, 10 in which a survey of75 multinationals operating in the UK, US,France, Germany, Japan and Singaporerated the IT skills of the UK workforce as theweakest of all six countries examined. TheIT National Training Organisation reportsthat although half the UK workforce usecomputers, no more than an estimated 5-8%have a Level 2 competence in the use of IT.8.30 Businesses are taking the initiativeto train employees at work, although thisvaries across the country. 42% of Londoncompanies are providing ICT training“frequently” or “quite often”, but thisdrops to 28% in Northern Ireland, where ICTuptake is lowest among business. 11 Moreover,those regions and countries which are mostconcerned about skills gaps tend to be thosewhere businesses provide least ICT trainingfor their employees.8.31 The Government’s strategy has beenfocused on the education system, whereby 2002 it aims to have:connected all schools, colleges, universities,libraries and as many Community Centresas possible to the National Grid forLearning;E-commerce@its.best.uk51

E-commerce@its.best.uk52BUSINESS ATTITUTES TO WORKFORCE SKILLSCompanies dissatisfied with IT skills ofgeneral workforceUKFranceItalyUSCanadaJapanGermany%12Source: Spectrum International Benchmarking Study, 1999 Figure 8.10ensured that all teachers feel confident andare competent to teach using ICT withinthe curriculum;ensured that librarians are similarly trained;andenabled school leavers to have a goodunderstanding of ICT, with measures inplace for assessing their competence in it(although no such measures have yet beendefined).8.32 Policy towards employer-based training,however, has not directly addressed IT skillsissues. Instead, it has focused on generic skillsissues such as promoting Investors in Peopleand Modern Apprenticeships/NationalTraineeships. (Modern Apprenticeships/National Traineeships do cover “Key Skills” –which include a Unit in IT – but these onlyreach a very small proportion of theworkforce.) This gap will be remedied, tosome extent, in the autumn of 2000 withlaunch of the University for Industry. IT skillswill be a priority area for the University forIndustry, which will provide distance-learningopportunities up to Level 3 in ICT. However,if we are to achieve the radical improvementin IT skills which are required in a moderneconomy, then providing the infrastructureis only an important first step. In addition,IT literacy has to become embedded innational, regional and local skills strategiesaimed at achieving quantifiable targets.Some Government departments too have233033363840been active in pursuing ICT training, notablythe MoD.8.33 The Team therefore recommends thatthe Government should express its current2002 target for school leaver competency inICT in more specific terms. The target shouldbe formally incorporated within the strategiesof DfEE, Regional Development Agencies andthe Learning and Skills Council. This targetshould be defined by March 2000, and – inrecognition of the vital nature of these skillsto a modern economy – should bestretching. The Team believes that anappropriate target would be:90% of all school leavers should beaccredited to Level 1 and 70% to Level 2in IT skills by 2002.This target also recognises the size of theGovernment’s investment in ICT in schoolswhich has helped move the pupil:computerratio in secondary schools from 9 pupils toeach computer to 8 pupils to each computerwithin the last year. The movement in primaryschools is even more significant from 18:1 to13:1 although the effect of this will clearlytake time to work through to school leavers.8.34 Further work will also need to be carriedout urgently to define a practicable way ofmeasuring performance against this target.This should also be completed by March2000. One option might be for IT to formpart of wider Key Skills Qualification targets,provided that these included a specific ITcomponent along the lines recommendedabove. Work is already in hand on this inDfEE and the Qualifications and CurriculumAuthority. It is suggested that this workshould examine the scope for promotingthe European Computer Driving Licence (apan-European accredited qualification whichis already used by many British organisations,particularly those with offices on theContinent) as a qualification demonstrating theLevel 2 standard in the proposed new target.8.35 In addition the Team feels that a targetshould be set for the workforce as a whole.However, it is apparent that much work willbe needed to determine baseline data forexisting IT skills in the workforce, therequirements of employers, the appropriatelevel for a target and an understanding ofhow it could be achieved and measured. It istherefore recommended that the Learningand Skills Council work towards establishingan IT target by the end of 2002.

9. ACCESSSummary9.1 The ability to access high qualityelectronic content at reasonable cost is aprerequisite to the UK competing effectivelywith its international rivals in e-commerce.The access challenge the UK faces is toachieve widespread low-cost, highbandwidth,competitive access – whilstensuring social inclusion.9.2 This chapter focuses on what access is,why it is critical, how well the UK competesand what can be done to improve thecountry’s position. The recommendationshave three main aims: to remove unnecessarybarriers to novel tariffs; to remove barriers tothe roll-out of high-bandwidth technology;and to ensure the success of inclusive accessinitiatives.Remove unnecessarybarriers to novel tariffs9.3 E-commerce telecommunications usageis different to voice traffic – calls tend to bemuch longer. UK tariff structures should notcreate inappropriate disincentives forspending time on-line relative to internationalrivals. The PIU recommend that the newe-Minister, working with OFTEL/DTI,remove unnecessary barriers and that:Recommendation 9.1:telecommunications operators shouldbe encouraged to offer a wider rangeof tariff structure options.Recommendation 9.2:telecommunications operators shouldbe encouraged to explore newcommercial interconnectarrangements with BT, allowingmore flexible retail tariffs.Remove barriers to rapidroll out of highbandwidthtechnology9.4 Many new e-commerce services requirehigh-bandwidth connections. Barriers shouldbe removed which hinder the competitiveroll-out of new high-bandwidth technologies,particularly Digital Subscriber Loop (DSL).OFTEL’s “Access to Bandwidth” programmeaims to achieve this. However, largely as awatching brief, PIU also recommend that:Recommendation 9.3: OFTEL ensureBT’s DSL roll out plans do not giveit unfair competitive advantage.Recommendation 9.4: e-Minister/DTIensure that OFTEL has sufficientresources to meet DSL roll-outtimetable.Ensure success ofinclusive accessinitiatives9.5 Various sections of society may not haveopportunities to access e-commerce markets.Government currently has many initiatives toremedy this. To maximise the chances ofsuccess, PIU recommend that the e-Ministerfacilitates:Recommendation 9.5: betterco-ordination and marketingof access initiatives.E-commerce@its.best.uk53

E-commerce@its.best.uk54Recommendation 9.6: the monitoringof priority excluded groups.Recommendation 9.7: thecombination of skills training withthe provision of access.Background anddefinitions9.6 This section describes what access is,the focus of the Team’s concerns withinaccess, why access is critical, and a costquality-choiceframework for assessingchange to the current situation. The mainpoints made are:access is critical to e-commerce success;andtelecommunications is the access priority,focusing on higher performance and moreappropriate local access technologies.Access is critical toe-commerce success9.7 Access is clearly critical to the successfuldevelopment of e-commerce in the UK. First,favourable access conditions will greatlyfacilitate the creation of “critical mass” forthe development of e-commerce. Second,access is the first step to engaging ine-commerce. Third, this pivotal role hasbeen recognised by leading e-commercenations and they are rapidly liberalisingtheir telecommunication regimes to graspthe opportunity, resulting in access becomingthe main axis of international e-commercecompetition. These points are exploredfurther below.9.8 In e-commerce there is a ‘chickenand egg’ problem: e-commerce businesseswill not be created if there is no perceiveddemand for services; there will be noperceived demand if buyers and supplierscannot successfully get on-line. It isimperative, therefore, that access does notbecome a barrier to the establishment ofe-commerce in the UK. Economists say thereare strong “network externalities” at playin e-commerce. This means that the moreparticipants there are on the network, thegreater the value to everyone involved. Morebuyers mean a greater customer base forpotential sellers; more sellers means morecompetition and hence keener prices andbetter service for consumers. This takesplace at both a global and UK level. Oncea “critical mass” of e-commerce participantsis achieved, a virtuous cycle of reinforcingbenefits takes place. If access is poor though,either through high costs or low quality, thenthere will be fewer participants in thenetwork. Part of the US’s lead in e-commerceis said to be due to the very low incrementalcosts of Internet access (based on unmeteredlocal calls – no per-minute charge) resultingin a more rapid creation of the “critical mass”required.9.9 Access is a main axis of internationale-commerce competition. The leadinge-commerce nations have all recognised theimportance of access and are racing toliberalise telecommunications markets in orderto deploy high bandwidth networks. Not onlydoes good access favour domestic buyers andsuppliers, but it also attracts internationale-commerce players. Given the instant globalpresence e-commerce commands, nationswith the most favourable access conditionsare likely to become the regional hub formany e-commerce businesses. If this is a rolethe UK aspires to, then competinginternationally on access is key.Telecommunications is theaccess priority9.10 When buyers and suppliers want tointeract with each other they do not justneed a telecommunications connection.To access e-commerce, users need to gofrom connection, through navigation totransaction. These stages are explored below.9.11 Domestic and small business connectionto the Internet usually involves use of acomputer and modem to “dial up” anInternet Service Provider (ISP) over standardtelephone lines. The ISP then connects theuser to the Internet. The speed of access canbe increased by converting the telephoneline to ISDN. Larger users tend to use leasedlines which connect directly to the Internet(although also usually via an ISP). These are“always on” connections supplied on a rentalbasis (i.e. there are no ‘time related’charges). There are currently three main costelements to ordinary dial up access:computer costs – the cost of buying acomputer and modem can be a significantbarrier for residential and some SME users;

telecommunications line rental andcall charges – these cover the cost of theusing the telecommunications network;andInternet Service Provider (ISP) costs –these cover the costs of the infrastructurebeyond the telecommunications networkneeded to access the Internet and theservices provided by the ISP. “Free” ISPssuch as Freeserve recoup their coststhrough the telecommunications charge,instead of a subscription charge.9.12 New, fast methods of accessing theInternet are also starting to grow (see nextsection). These overcome some of theexisting problems associated with the use ofthe ordinary telephone network for dial-upaccess, as their costs are not affected by theamount of time that users are connected.BT has announced its plans to roll-outtechnology that enables services includingfast Internet access, to be delivered overnormal telephone lines. Fast access via cablenetworks (which require a ‘cable modem’)has been started by one company and isexpected soon on the networks of the othertwo cable companies. Fast Internet access isalso being offered via satellite (with thereturn path via the telephone line) andterrestrial broadcast methods. Consumerswill, in the future, be able to access someInternet services via satellite through digitaltelevision set-top boxes or integrated digitaltelevision sets. Finally, high-bandwidthconnections via mobile phones will beginfrom 2002.9.13 Navigation is needed to search andfind your way around the Internet. Muchexperience in this area has already beengained in the (closed) ‘extranets’ used in‘process’ e-commerce (see chapter twelve) –especially within manufacturing industry. In‘open’ and business-to-consumer applications,navigation software, search engines andportals are dominated by US companies.Secure and safe transaction software andstandards are also needed (see chapter ten).To be able to transact usually means, in thecase of ordinary consumers, access to creditcards. In the case of suppliers it means theability to handle credit cards (an issue for newon-line businesses – see chapter seven)9.14 In analysing access, the PIU’s focus hasbeen on the telecommunications connectionend of the access equation. This is becausetelecommunications access:was consistently cited as a major barrier todoing e-commerce in the PIU’s interview,seminar and research programme;currently contains a major bottleneck inthe form of BT’s dominance (albeitregulated) over the final connection tomost consumers; andis where most technological and regulatorychange is currently taking place.“FREE” INTERNET ACCESSIn September 1998 Dixons launched Freeserve –an ISP service with no monthly subscriptioncharge. Instead, they get a share of the callrevenue paid by the consumer. Freeserve (andnumerous similar companies) have dramaticallyexpanded the number of new Internet users, aswell as capturing market share from rivals whichhave retained subscription charges. Some freeISPs, such as X-Stream, have now begun alsoto reduce call charges for using the Internet.X-Stream offers unmetered off-peak connectionthrough 0800 numbers. This type of competitionin the ISP sector has brought new, more pricesensitive consumers on-line.The UK leads in the provision of free ISPs.However, they are now appearing in otherEU countries such as France.Box 9.19.15 The Team did not focus on the otherelements of the cost to users of dial-up access(i.e. the cost of PCs and ISP charges) or thecost of leased lines for larger users. This doesnot mean that they are unimportant. Asnoted above, the cost of PCs can be animportant barrier to getting on-line and OFTand DTI are looking into the price of PCs aspart of their inquiry into “high price Britain”.The ISP end of the market is of less concern.It is extremely competitive and theintroduction of the “subscription free” ISP,such as Freeserve (see box 9.1), hassignificantly reduced the cost of using theInternet and boosted Internet use in the UK.As for leased lines, although OFTEL hasconcerns about charges in the UK, themarket for high capacity circuits is broadlycompetitive. OFTEL is currently investigatingwhether there is sufficient competition in themarket. The next section addresses theE-commerce@its.best.uk55

E-commerce@its.best.uk56specific recommendations the Team have putforward to improve access and thus achievethe Government’s e-commerce goals.Recommendations andanalyses9.16 The PIU’s overall pro-business,pro-market approach argues strongly thatcompetition is the best mechanism to quicklydevelop optimum access technologies andtariffs for the UK. Competition will ensurethat access costs are kept low. It should alsoensure the quickest roll-out of newtechnologies. There should not be excessintervention by Government. The role ofGovernment and OFTEL is to ensure thatmarket mechanisms are allowed to operateand remove barriers to competitive accessfor business and consumers.9.17 However, certain sections of societymay be excluded from the e-commercerevolution, despite competitiveimprovements. Government’s main aim oversuch distributional considerations should beto tackle the reasons for exclusion at source(e.g. poverty), rather than risk distortinge-commerce markets through inappropriate,general intervention. Government efforts toprovide access for excluded groups shouldbe co-ordinated to ensure the optimumallocation of resources.9.18 The remainder of this section explainsthe rationale behind the three main aims forthe access recommendations, namely to:remove unnecessary barriers to noveltariffs;remove barriers to rapid roll out of highbandwidthtechnology; andensure success of inclusive accessinitiatives.Remove unnecessarybarriers to noveltariffsRecommendation 9.1:telecommunications operators shouldbe encouraged to offer a wider rangeof tariff structure options.Recommendation 9.2:telecommunications operators shouldbe encouraged to explore newcommercial interconnect arrangementswith BT, allowing more flexible retailtariffs.9.19 The first challenge the UK faces isensuring that existing e-commerce accesstariffs and tariff structures are competitivewith international rivals. To support therecommendations in this area, the followingarguments are put forward and examinedfurther below:both structure and level of tariffs affecton-line behaviour;some UK tariffs are disadvantageous;action is being taken on tariffs; andremoving barriers to novel tariffs is a keyaccess challenge.9.20 To engage in e-commerce, buyersand suppliers need to spend time on-line –browsing, ordering, purchasing, and in somecases downloading electronic goods andservices. The amount of time they spend willdepend on both the level and structure oftelecommunications charges. It also dependson the speed of access, which is discussed inthe next section.9.21 Evidence from surveys of UK users(figure 9.1) shows the importance forindividuals of access costs in the decision togo on-line. However, in the business sector,DTI’s Information Age benchmarking studiesshow that access costs are not closelycorrelated with business uptake of theInternet across the G7, although smallercompanies are more price sensitive. It isimportant to remember that behaviour maybe affected not simply by the absolute levelof the charges, but also by the balancebetween fixed and usage charges. Casualempiricism supports this relationship. In theUS, which often has zero usage charges forlocal calls (including calls to the Internet) –but higher charges for other types of call andline rentals – the average time spent on anInternet call is two and a half hours. In theUK, which has time-based usage charges, itis 25 minutes. Again, in the US, in December1996, AOL changed from per-minute toflat-rate charges and saw connection timeincrease from 14 minutes to 35 minuteswithin three months. In contrast to the fixednetwork market, the mobile phone market

WHICH FACTOR WILL ENCOURAGE YOU TO START USING, OR INCREASING YOUR USAGEOF THE INTERNET?Internet Usage Motivators Total Use & intend Use &intend Don’t use but(n=4,944) to continue to stop intend to start(n=882) (n=99) (n=406)1. Lower cost of ISP subscription 10% 23% 24% 12%2. Cheaper PCs/Multimedia PCs 6% 10% 12% 9%3. Easier Access 7% 20% 18% 16%4. Free/No Access Restrictions at work 3% 8% 1% 6%5. Learn more about it (more familiar) 8% 11% 4% 29%6. More relevant/useful info 5% 11% 6% 14%7. No need/no use for it 25% 1% 15% 3%8. Don’t know enough about it 6% 1% 3% 4%9. Other 12% 27% 9% 27%10. Don’t know 33% 21% 32% 11%Base: All random omnibus respondents 15+ (recruitment waves 1–3 only. 14th October – 10th November n= 4.944 1998) Figure 9.1Source: NOPhas many different packages available forcustomers – depending on whether they arefrequent or occasional users. From this theTeam concludes that the structure of tariffs isa critical driver for e-commerce, not just theirabsolute level.9.22 The ideal levels of fixed and usage tariffsdepend on the cost structure of thetechnology and demand conditions. Thecosts of providing circuit switched telephonecalls (see paragraph 9.36) depend on theamount of switching capacity required andthe number of circuits needed at peak timesof the day. These in turn are driven by thenumber and duration of calls at particulartimes of the day. Line rentals, similarly,should reflect the costs of providing lines intoconsumer’s premises. These are not affectedby the number or duration of calls.9.23 However, there are a number of reasonswhy tariff levels and structures might not beideal at present. The first is market power.Where markets are not competitive, pricesare unlikely to be set at appropriate levels –although in principle this problem isaddressed by OFTEL’s regulation of BT’s retailprices and interconnection charges forservices which are not fully competitive.9.24 Second, BT’s tariffs are not balanced –the line rental set by BT is below cost and theretail price of calls is above cost. This regimeis a historical legacy. Although BT has thefreedom to rebalance charges, it is difficultfor it to do so – as increases in line rentalsgenerate bad publicity. Such increases wouldalso adversely affect certain groups of lowvolumeusers. In terms of e-commerce,however, the fact that call charges arenecessarily high, to cover costs, creates adisincentive to stay on-line for the typicallylonger connection times that e-commercerequires. A rebalanced tariff package, withhigher line rental and lower call charges,would be beneficial to users of e-commerce.9.25 Third, as noted above, with currenttechnology the cost of calls is driven by boththe number and duration of calls. Bycharging only by call duration, long durationcalls are overcharged. This is disadvantageousto e-commerce, which relies on long durationcalls. New tariff options might have a betterbalance between “per call” charges andduration charges, for example throughdiscounts for long duration calls.9.26 Finally, in mobile telecommunications –as opposed to fixed telecommunications –there are a wide variety of packages gearedto different usage profiles, in particular theseE-commerce@its.best.uk57

vary the balance between rental and usagetariffs. A wider variety of tariff options forfixed-link telecommunications too couldallow e-commerce participants to select apackage which better suited their longer calltime profile. Indeed, this is already startingto happen – for instance NTL have recentlyintroduced a charge of one pence per minutefor Internet access at all times.9.27 While there are reasons for consideringthat some tariffs are too high and that thereis an inadequate range of tariff packages,there are also disadvantages toinappropriately low charges. Congestion,cross-subsidisation and monopolisation arethe main risks. There have been a numberof instances cited, in the US, of networksbecoming congested with Internet traffic,particularly in heavy Internet usingcommunities. Where local-call charges arezero some users even leave the line opencontinuously, despite sending little or notraffic for long periods. For historical reasons,the UK has a closer balance between thesize of the network and demand. Very lowcharges could therefore create problems ofexcess demand. On the other hand, thedanger of a high fixed charges and lowusage charges is that short-duration users willsubsidise long-duration users. A menu oftariffs might prevent this. In the UK, BT isstill the originating operator for 85% ofresidential homes (despite 50% of homeshaving cable as an alternative and the optionof indirectly accessing another operator). IfBT were to offer unmetered services, albeitunder the guise of promoting e-commerce,this could further entrench their position –unless countervailing measures were takento ensure equal access for competitors andappropriate interconnection chargearrangements, such as charges that wereless related, or unrelated, to the durationof the call.9.28 It is clear that the level and structureof access tariffs affect customer and businessbehaviour and getting this right is criticalin achieving the UK’s e-commerceambitions. The remainder of this sectionaddresses the comparison between the UKand its international competitors in termsof access costs.9.29 In 1998, the UK had a middle rankingcompared to its international competitors interms of Internet penetration (see chapterfour). The UK also has a middle ranking interms of cost of access. It is possible that theUK IS EXPENSIVE FOR PEAK USAGE CHARGESPeak rate telephone and ISP charges, 1998France%Off peak telephone and ISP charges, 1998%72 Germany68UK70Japan51GermanyUK free ISP68 France4855 UK46Japan51US40ItalyUSCanada42 Italy3640 UK free ISP3131 Canada31E-commerce@its.best.ukBad for SMEsGood for residential usersSource: OECD Figure 9.258

UK HOLDS MIDDLE RANK IN ISDN PRICE AND PENETRATIONISDN/k populationISDN cost $/yrGermany37Germany49France36France124UK25UK424Japan19Japan880Italy16Italy113Canada2Canada912Source: OECD Figure 9.3latter may be a causal factor in the degreeof Internet penetration. On average UK costscompare favourably with other OECD nationswhen it comes to the standard access costs.However, as figure 9.2 shows, the pictureis somewhat more complex whendisaggregated. The daytime, or peak, callcharges for Internet access are higher thanaverage, if a free ISP is not used –disadvantaging SMEs who will wish to usethe Internet at this time. On the other hand,off-peak (evening and weekend) charges aregood value for individual users of the Internetin the UK. Those using a free ISP at this time,at the level of usage selected by the OECDstudy, in fact pay lower average charges thanusers in the US. However, at a higher levelof usage than that identified by the OECDstudy, the UK would be more expensive.Higher up the bandwidth spectrum, figure9.3 demonstrates that the UK also has amiddle ranking in terms of ISDN penetrationand access charges.9.30 As shown above, SMEs continue to besomewhat disadvantaged in the UK by thecontinued high cost of peak-time calls. SMEsare vital to the economy (half of UK workerswork for companies with less than 250employees) and they should undoubtedlyplay an important role in developinge-commerce in the UK. However, the findingsof a DTI study (figure 9.4) show that that thisbusiness sector is less engaged withe-commerce than many of its internationalcounterparts. It is possible that one cause ofthis may be the relatively high cost of peaktimeaccess. Any residual unnecessary tariffbarriers in this area should therefore beaddressed.9.31 The market and Government areresponding to the new demands ofe-commerce in terms of tariff structures.Competition has already resulted in manyISP’s costs being funded out of call revenueand consequently in reductions in Internetcall-charges by these companies. Fiercecompetition between ISPs is likely to result incontinued benefit to the consumer. OFTELhas commenced the next round of the PriceControl Review of telecommunications priceregulation in the UK. In this process it isconsidering, among other things, “tariffrebalancing”, interconnection charges andmany other factors which affect tariffs in theUK. Most importantly it is consideringwhether there is a continuing requirementfor price and charge controls. However, theprocess will not finish until 2002.9.32 It must also be noted that the sourceof many of the current difficulties over tariffsis the infrastructure over which mosttelecommunications are presently routed –the “Public Switched TelecommunicationsNetwork” (PSTN). Incumbenttelecommunications operators are workinghard both to introduce “IntelligentNetworks” (IN), that will enable them rapidlyto change tariffs in order to meet customerrequirements, and to use the same methodE-commerce@its.best.uk59

60E-commerce@its.best.ukIN PARTICULAR, UK SMES LAG INTERNATIONAL RIVALS IN WEB SITE USEMicro businessesSmall businessesUK10UK28US 27US 37Canada19Canada44Businesses using a web site% of all businessesGermany23Germany29UK51Japan20Japan25US 54Italy13Italy28Canada54France7France15Germany50Medium businessesLarge businessesJapan48UK57UK69Italy30US 66US 74France25Canada55Canada71Germany48Germany69Japan53Japan71Italy60Italy57France27France46Source: DTI Spectrum Benchmarking Study 1999 Figure 9.4

of routing calls as the Internet – “InternetProtocol”. This will greatly reduce the costof providing for ‘always on’ attachment toe-commerce Nets (see box 9.2).PSTN AND IPCurrently, telephone calls use the (circuitswitched)Public Switched Telephone Network(PSTN) – where a path is opened across thenetwork between the calling parties for theduration of the call. In an Internet Protocol (IP)communication, on the other hand, the call isdivided up into many small packets, which aresent individually by any number of differentroutes and reassembled at the other end. Bothcircuit switched telephony and IP data areconveyed in a digital form, and digitisation of thenetwork has allowed telecommunicationsoperators to offer many new services to users.And rationalisation of switching methods leadsto savings for operators.Source: PIU Report – ‘Encryption and Law Enforcement’Box 9.29.33 The PIU recommend that the newe-Minister, working with OFTEL/DTI,encourages the telecommunicationsoperators to offer a wider range of tariffoptions. BT too should be encouraged tooffer a broader range of tariff options whichallow both heavy e-commerce users and lightusers to choose the optimum package fortheir usage profile.9.34 In addition, telecommunicationsoperators should be encouraged to explorenew types of interconnection agreementswith BT with a view to offering differenttypes of retail tariffs to e-commercecustomers. These might include, for example,fixed-charge deals or differentinterconnection charges for Internet traffic(i.e. end-use charging). The only regulatorybarriers to such deals are BT’s licensingconditions which:require that deals do not undulydiscriminate between operators/ISPs; andimpose restraints on BT’s revenue frominterconnection services (under retail priceindex controls).Remove barriers torapid roll-out ofhigh-bandwidthtechnologyRecommendation 9.3: OFTEL ensureBT’s DSL roll out plans do not give itunfair competitive advantage.Recommendation 9.4: e-Minister/DTIensure that OFTEL has sufficientresources to meet DSL roll-outtimetable.9.35 The quality of Internet access is alsoa determinant of how much it will be used.High quality access in e-commerce usuallyimplies high-bandwidth, which means fasterdata transfer rates. The infrastructurerequirements for e-commerce are changingrapidly as new products and services develop.Typically this means more bandwidth isdemanded. Existing telecommunicationsnetworks were engineered for the demandstructures and usage patterns of voicetelephony, and do not adequately supportthe fast data transfer requirements ofe-commerce. Inadequate infrastructurewill create disincentives to the growthof e-commerce services. Although theseproblems are being addressed by theintroduction of IN and IP (see paragraph9.32), it will be necessary to ensure thatthe technology and infrastructure doesnot constrain effective demand andhinder business and. In support of therecommendations in this section it isargued that:technology determines access qualityand choice;there are barriers to broadband roll out;andrapid roll out of new technologies isneeded.9.36 Business and consumers wishing to fullyparticipate in e-commerce activities need fast,high-bandwidth access to complex text andgraphics, sound and video. For largerbusinesses, high-bandwidth data transfer isachieved by using, for example, leasedbroadband fibre-optic cables. However, suchcables are not economic for homes or smallbusinesses. In the UK more than 85% ofaccess lines are through BT’s “local loop”.This part of the network, also known asE-commerce@its.best.uk61

E-commerce@its.best.uk62“the last mile”, delivers “narrowband”services such as basic telephony and lowspeed data services (including ISDN). Thedemand for data services is increasing – inOctober 1998, for the first time in the UK,the volume of data traffic exceeded that ofvoice traffic. Although it is difficult to predictthe level of demand for high-bandwidth dataservices – because of the limited supply –new technologies are being developed.These include:Digital Subscriber Loop (DSL): whichenables the ‘local loop’ to be upgraded tooffer high-bandwidth data services – BThas now announced plans for the roll outof DSL technology;Cable Modems: which enable cable TVoperators to offer high-bandwidth Internetaccess;Radio Fixed Access (RFA): the failureof Ionica has damaged investor perceptionsof RFA. However, more advanced servicesare already available in some regions, andoperators (such as Tele2) have aggressiveroll-out plans. In July 1999 theRadiocommunications Agency allocatedfurther spectrum for a new generationof broadband (up to 155 Mbit persecond), RFA;Third Generation Mobile: which willoffer broadband services through mobilehandsets. The auction of spectrumnecessary to offer these services isexpected to take place in early 2000.The actual availability of such servicesis unlikely before 2002; andInteractive Digital TV: which has thepotential to host interactive e-commerceservices to a wide audience not necessarilyfamiliar with computer technology. Cablehas started offering these services already,other DTV interactive services begin thisautumn.9.37 Many of these technologies offer thepossibility of an “always on” connection.Together with the changes described inparagraph 9.36 they will have significantimplications for the way networks are used –dramatically affecting the development ofe-commerce services. Of these technologiesDSL is of particular interest, because it aloneprovides scope to provide high-bandwidth,“always on” access for residential and SMEcustomers in the near future; whereas cableonly passes 50% of homes and only 16%1(Source: OFTEL)2OFTEL: “Access to Bandwidth: Proposals for Action”, July 1999take the service. 1 However, DSL needs to beimplemented across the local loop where BTis dominant. This dominance creates barriersto the rapid roll out of competitively pricedDSL. First because BT may be reluctant tomove for fear of cannibalisation of its services– high-bandwidth access over the local loopcould jeopardise its position in leased lineand ISDN provision. Second, because BTcould employ first mover advantage byrolling-out DSL technology alone – thusgiving it a strong influence over the specifictechnology used, the pace and location ofservice introduction, and initial price levels.In other words, without some form ofintervention, demand might be determinedby BT – whose interests might not beperfectly aligned with consumers’, and thenational interest.9.38 However, there are risks connectedwith intervention. Distorted DSL investmentdecisions could result from interventionwhich prescribed the extent and speed ofroll-out. Similarly, competing technologiescould be adversely affected if roll-outdecisions are not market-led. Some formof competition needs to be introduced intothe technological upgrade of BT’s local loopto avoid these problems. This is beingaddressed by OFTEL, which has conducteda consultation process – “Access toBandwidth”.9.39 The “Access to Bandwidth” consultationexamined options to “encourage the supplyof higher bandwidth services to residentialand SME consumers in the UK”. 2 Variants oftwo broad alternatives were considered. Thefirst of these was local loop unbundling, inwhich BT “leases” local loop assets to rivalsuppliers who then perform the necessaryupgrade to provide high bandwidthconnections. The advantage of this option isthe introduction of competition into the localloop, with associated beneficial price andquality implications. The disadvantages arethe complexity of asset sharing both in termsof engineering standards and commercialagreements and the potential for delay and“game playing” (for example, appropriationtactics may be employed, such as obtainingthe best location for new equipment onswitch sites). The second option was anupgrade, carried out by BT, and then offeredas a wholesale product to other operatorsand service providers; enabling them toprovide high-bandwidth services to endusers. The advantage of this option is the

probability of a rapid roll-out. Thedisadvantage is that BT gains first moveradvantage and that it further entrenches BT’sposition – with the associated monopolyimplications.9.40 BT was in favour of the second optionand presented plans to OFTEL for a roll outof DSL technology across the UK tocommence in the near future. At this point inthe process, however, OFTEL considers “thatcompetition in the upgrade of the network isan essential complement to this roll out byBT.” 3 In other words that unbundling shouldproceed alongside any BT upgrade plans.9.41 OFTEL’s proposed timetable for localloop unbundling is demanding..Considerable effort will be needed to agreeengineering standards and commercialarrangements in this timescale:October 1999: final decision by OFTELarising from Access to Bandwidthconsultation.December 2000: latest date for initiallocal loop unbundling trial.July 2001: access to BT local loopby competing operators.9.42 It is not the place of this report topre-judge the outcome of the OFTEL “Accessto Bandwidth” consultation process. Therapid roll out of high-bandwidth technologyis clearly a prerequisite to a successful UKe-commerce sector and “Access toBandwidth” is aimed at achieving that goal.PIU recommendations in this area are,therefore, more of a watching brief. Theoverarching recommendation is to removebarriers to the rapid roll out of highbandwidthtechnology.9.43 Specifically, it is necessary to ensureBT’s DSL roll out plans do not give it unfairadvantage. A delicate balance needs to bestruck between rapid roll out andmaintaining competition in broadbandservices. As discussed, BT can gain firstmover advantages not only in terms of DSLtechnology and standards, but also in termsof enrolling the first wave of broadbandcustomers. Responsibility for this lies withOFTEL and is required within their statedtimetable.3ibid9.44 In addition, the e-Minister (chapterfourteen), together with DTI, should ensurethat OFTEL has sufficient resources to resolvethe disputes and conflicts that will inevitablyarise over asset sharing agreements betweenBT and other operators. These will involvemajor engineering and commercial issues andwill be required to be settled quickly. OFTELresources will be stretched to achieve this, asa major Price Control Review (see paragraph9.31) will be taking place concurrently.OFTEL need to determine the precise levelof the resources required to meet theseconcurrent commitments.Ensure co-ordinationof inclusive accessinitiativesRecommendation 9.5: betterco-ordination and marketingof access initiatives.Recommendation 9.6 the monitoringof priority excluded groups.Recommendation 9.7 the combinationof skills training combined withprovision of access.9.45 E-commerce will cause significanttransition in the economy. As has alreadybeen described, new goods and services willbe developed. Existing goods and servicesmay well be delivered more cheaplyelectronically. However, certain sections ofthe population may not benefit from thesechanges because they lack opportunities foraccess. The PIU approach is that, in general,the market will provide the appropriate leveland cost of access for the great majority ofthe population. For example, Freeserve,Dixon’s low cost Internet access provider, hasdramatically increased Internet penetrationrates within socio-economic groups CD andE. However, an element of the population islikely to remain excluded from theopportunities opened up by e-commercefor a range of social and economic reasons.Whilst a number of publically-fundedinitiatives, at local, regional and nationallevel, aim to improve the opportunities forthis ‘e-excluded’ group, the Team believesthat better co-ordination of these initiatives isneeded – with resources targeted at the mosteffective programmes – which must also beeffectively marketed.E-commerce@its.best.uk63

E-commerce@its.best.uk649.46 To support the recommendations in thissection, the following are briefly examined:target groups for inclusion;benefits and costs to inclusion;action taken on inclusive access; andrecommendations to ensure the successof inclusive access initiatives.9.47 There are many factors that maycontribute to individuals or groups beingexcluded from e-commerce in particular, andfrom information and communicationtechnologies in general. Socio-demographicdata highlight where some of thesedifferences arise: 4Gender – men tend to use the Internetmore than women. Despite an (almost)even split in the population, more menthan women use the Internet. Durlacher’sQuarterly Internet Report (January 1999)showed that the male female split was70%-30% for all Internet users and 81%-19% for heavy users. Yet in some areas ofhigh unemployment caused by structuraldecline of traditional industries, the reverseis true – as a result of a culturalidentification of work with computers asbeing unsuitable for men.Age – Internet penetration varies by age(see figure 9.5). The elderly are underrepresented,relative to young people.This probably reflects the fact that mostcommon routes to access are throughemployment and education – both ofwhich are less readily available to olderpeople.Social grade – according to FletcherResearch (May 1999) 45% of UK Internetusers are AB although they only represent22% of the population. (Durlacher’s reportquotes 50%) The cost of access, combinedwith skills and understanding are probablythe main drivers of these social gradedifferences. On using IT “not relevant tomy life”, “Don’t see a need for it” and “toodifficult to understand” were cited by 10%of DEs and unemployed (BMRB -IT for All;October 1998). This “technophobia” bysocial grade is highlighted in the figure 9.6which shows how PC penetration ratesdiffer to those of VCRs for differentoccupations.Income – related to social grade, incomeis another strong indicator of internetpenetration rates, with higher income5European Internet Strategies, November 19986E-commerce Seminar 4 – Social Exclusion (see Appendix three)groups disproportionately represented(Fletcher ibid). Lower income groups alsotend not to have credit card or indeedbanking facilities, both of which arecurrently needed to transact electronically.Jupiter Communications research 5 althoughnot specific to the UK, shows 42% ofrespondents with “non-existent”knowledge were in the lowest incomebracket (earning

OWNERSHIP BY ECONOMIC HEAD OF HOUSEHOLD, 1996 (%)Home ComputerVCRProfessional6491Employers and managers5095Intermediate non-manual4692Junior non-manualSkilled manual andown-accountnon-professionalSemi-skilled manualand personal serviceUnskilled manual1519282986899194Economically inactive1166Total3793Source: CITU – Electronic Government Figure 9.6adoption means that these statistics arechanging all the time.9.49 There are areas of exclusion other thanthose driven by socio-demographics. Peoplewith disabilities are one group, althoughthere is little comprehensive informationavailable about usage and e-commercetechnology penetration rates amongst thisgroup. This situation should be addressed,given the obvious economic and socialadvantages that e-commerce relatedtechnology can bring to such communities.9.50 There are both costs and benefitsassociated with government interventionto promote more inclusive access. Benefitsinclude those to the previously excluded –who potentially gain access to newe-commerce goods and services. As isdescribed elsewhere in this report – thesemay be completely novel services, whichdepend on the information gathering,processing and distributing advantages of theInternet, or they could simply be standardproducts delivered more cheaply. In addition,access to the Internet can improve socialcohesion and encourage communication,thereby reducing alienation. ICTs can alsoprovide good access-points to adult learingfor core skills such as numeracy and literacy.Government will also benefit from being ableto deliver services more cost effectively towelfare recipients. And, as has already beendescribed, there are “network externalities”in e-commerce – the larger the network ofusers the greater the benefit to individualusers.9.51 However, there are costs to providinginclusive access, in terms of delivery andpotential distortions. For instance, there maybe significant costs associated with deliveringbroadband access to rural areas – where itwill, for most technologies, be moreexpensive than to urban areas. And providingcheap or subsidised access may distortprivate sector behaviour, for example, byremoving volume from operations whichrequire a certain scale to operate. Clearlythese costs and benefits need to be weighedup carefully when considering inclusiveaccess initiatives.9.52 There are a number of solutions thatalready exist to remedy the problem ofinclusive access. Some of these have beenprovided by the market, some byGovernment, some by the voluntary sector.The example of “free” ISPs as a market-drivensolution has already been discussed (seequote below). Internet cafes and even multimediakiosks in photo-booths are furtherexamples in the UK of how the private sectorare reaching out to engage the generalpopulation in e-commerce. Initially in the US,E-commerce@its.best.uk65

66E-commerce@its.best.ukPENETRATION OF E-COMMERCE IN COMPANIES, BY UK REGIONPCs + modemsInternet accessWebsitesE-mailLondon82716583Eastern 80574669West Midlands80655273North East79504063East Midlands78554368Yorkshire74624461North West74554864Scotland 73564465South West 72564261South East 72625471Wales 68473454Northern Ireland 67433251Regional differences driven by:• regional wealth differencies • proximity to large urban markets • presence or absence of large companies • industry types within regionSource: DTI Spectrum Survey 1999 Figure 9.7

and now in the UK, companies are beginningto offer “free PCs” which are paid for byadvertising. When interactive digital TVbegins full operation later this year in the UK,it is expected that further new groups willbe given the opportunity to access certaine-commerce goods and services.“The free service providers are attracting a newtype of Internet user – generally older and fromC2DE social groups – where previously, users hadbeen from predominantly younger age groupsand ABC1”Source: NOP, 12/989.53 Leading examples of Governmentinitiatives to promote access are shown inbox 9.3. In addition, application of theDisabilities Discrimination Act (1995) shouldensure that providers of access technologiessuch as PCs and software, or access centres,take into consideration the needs of the lessable community. Local government and thevoluntary sector are also promoting Internetaccess through a variety of initiatives.9.54 There are benefits to society from aninclusive approach to e-commerce access,and despite the variety of access initiativesdescribed above, there appears to be littleoverarching control. A lack of centralco-ordination is evident. One of the policyaction teams set up to implement theagenda as a result of the Social ExclusionUnit’s report on “Bringing Britain Together”is addressing the problem in one importantrespect through initiatives aimed at tacklingsocial exclusion in deprived areas. But theTeam believes that this approach needs tobe applied in the broader context of allthe potentially ‘e-excluded’ groups listedat paragraph 9.47. The Team thereforerecommends that the e-Minister facilitatesbetter co-ordination of the numerous centraland initiatives promoting access. The inter-Ministerial group (see box 9.3) will be thekey vehicle for this action. In particular,mechanisms are needed to ensure that:the overall goals of Government’se-commerce programme are being met;all excluded groups are catered forappropriately;resources are allocated to the bestperforming initiatives. These shouldbe sufficient to cover not only accessinfrastructure, but also what is neededto provide continuing support for thatinfrastructure once in place – in termsof hardware, software and people. Andeffective marketing of these initiativesEXAMPLES OF GOVERNMENT INITIATIVES TO PROMOTE INCLUSIVE ACCESSAccess Initiative Description Lead DepartmentInfrastructureIT For AllNational network access centres in local communities setout in “Our Information Age” by the PM, May 1998DTIIT Learning CentresBudget 1999 announced support for up to 1,000 learningcentres. These will focus on reaching out to people who areneither engaged in ICT or other learning, and who also facesignificant obstacles in becoming so. There will also beopportunities for start-up SMEs to acquire certain ICT skills.DfEE, TreasuryNew Library Network Provision of broadband access in 4,000 UK libraries DCMSAnalysis and monitoringInter-Ministerial Group Resolution of potential overlap areas between access intitiatives.DTI, HMT, DfEE,DCMSPAT 15 – SocialExclusion Unit (SEU)Under the auspices of the SEU, PAT 15 is charged withexamining the provision of ICT in deprived areas.DTIUniversal ServiceObligationconsultationOFTEL have issued a consultation document on the costs andbenefits of universal service in telecommunicationsOFTELE-commerce@its.best.uk67

within the context of the overall marketingstrategy proposed in recommendation 8.1;access initiatives are not distorting marketmechanisms; andresponsibility for co-ordination should liewith the e-Minister and e-envoy.9.55 As shown in the statistics above(paragraph 9.47), certain groups seemespecially prone to e-exclusion. The elderly,less well educated and lower socio-economicgrades in particular. These groups should beboth targeted by access initiatives andclosely monitored to ensure the efficacy ofprogrammes. In addition, survey data shouldbe sought which provides better informationon Internet penetration for all potentiallyexcluded groups such as less able users andrural users. The responsibility for monitoringperformance should again lie with thee-Minister and e-envoy (chapter fourteen).The results of the survey should be publishedas part of the annual e-commerce report(detailed in chapter eight) and should betimed accordingly.9.56 Lack of understanding and confidencewith technology in excluded groups are bothapparent as problems from survey evidence.As well as providing pure access, trainingshould be incorporated into the accessinitiatives to overcome these barriers.E-commerce@its.best.uk68

10. TRUSTSummary10.1 Having achieved understanding andaccess to tools, users must be willing toengage in e-commerce. This chapter dealswith the significance of trust as a barrier tothat willingness, and what can be doneto overcome it. What is meant by trustin e-commerce is defined and the maincomponent issues are identified. These issuesare: fear of fraud; concerns about privacy;anxiety about content; doubt about legalliability and; worry about how redresscan be obtained when things go wrong.10.2 The chapter suggests how thecomponent issues can be addressed througha number of recommendations forGovernment and industry action. The PIUTeam identified three overarching areas inwhich action needs to be taken: implementstandards, supported by effectiveenforcement and provide appropriateeducation. The nine recommendations forGovernment action in this chapter thereforefall into these three categories.Implement Standards– Recommendation 10.1: implementa national, secure Public KeyInfrastructure (PKI) forGovernment purposes.– Recommendation 10.2: ensure thatthe industry-led Trust UK Hallmarkinitiative puts in place an Internetdispute arbitration service and amechanism for policing itsstandards.– Recommendation 10.3: encourageprivate providers to launch multifunctionsmartcard schemes forindividuals.Effective Enforcement– Recommendation 10.4: ensureGovernment departments quicklytake advantage of the equivalencebetween digital and writtendocuments.– Recommendation 10.5: improvetechnical capability of lawenforcementand regulators andestablish an Internet Crime Unit.– Recommendation 10.6: build onthe recommendations in thePIU report: ‘Encryption andLaw Enforcement’ onGovernment/industryco-operation.– Recommendation 10.7: the HomeOffice should re-consider the casefor using non-jury trials for seriousfraud (including e-commercefraud).– Recommendation 10.8: theGovernment to encourage theEU to achieve a co-regulatoryapproach to e-commerceenforcement and redress.Appropriate Education– Recommendation 10.9: ensureaction is taken to give protectionof Intellectual Property Rights(IPR) a higher profile in publicunderstanding and that DCMSwork with the creative industriesto put in place standards andinfrastructure to ensure thatcontent is protected in transmissionand that adequate remuneration isreceived for the exploitation ofintellectual property.E-commerce@its.best.uk69

E-commerce@its.best.uk– Recommendation 10.10: provide“parents’ Web sites” andencourage software companiesto supply free content-filteringsoftware.10.3 It is also acknowledged that marketledinitiatives have a crucial role to playin the development of trust.Background anddefinitions10.4 There is no agreed, simple definition oftrust in the e-commerce context. This reporttherefore defines trust as ‘the confidence touse e-commerce without fear of material lossor harm through interference with yourrights as an individual or a business’.“Consumers new to e-commerce sense a kind ofchaos in the Web, where information is vulnerableto hackers, technology is unreliable, and goodintentions may lead to unpredictable results.”E-Commerce Trust Study.Cheskin Research and Studio Archetype/Sapient.January 1999.10.5 A general survey of UK consumers inMay 1999 1 showed that only 7% felt securein submitting credit card details over theInternet. In the EU generally Visa found in1999 that only 5% of consumers trustede-commerce. Businesses too have significantconcerns about Internet security. A January1999 2 survey of 50 EU executives found that90% of them considered trust to be a criticalissue for e-commerce. Lack of trust istherefore an obvious and significant barrierto e-commerce for both consumers andbusinesses.10.6 The Team has identified five majorissues that lead to lack of confidence. Thefirst of these is the fear of fraud. The secondis concern that privacy will be violated –through the loss of control over personaldata. Third, there are worries about thecontent of the Internet. Fourth, areconcerns about who has liability. And fifththere are anxieties about obtaining redressin the case of disputes. These issues areexplored further below.Fraud10.7 There are as many types of Internet fraudas there are types of ‘scam’ in the ‘real world’.And new scams inevitably arise from thenature of the medium itself and particularlyfrom the anonymity it can afford (see box10.1). The problem is growing as the Internetis used increasingly for e-commerce. In 1997the number of instances of fraud reported tothe US National Consumers League (NCL)was 1,280; in 1998 it was 7,750 – a rise ofmore than 600%. The NCL estimates thatabout 7% of on-line consumers in the UShave been the victims of credit-card fraud onthe Internet. 3 In 1998, the UK the InternetWatch Foundation (IWF) 4 had only onereported case of a financial scam on theInternet. However, in a recent report 5 theUK’s National Criminal Intelligence Service(NCIS) assessed that Internet fraud is anemerging threat in the UK that will increasesignificantly in the coming years. There isno doubt that bad publicity surroundingsuccessful Internet scams contributessignificantly to poor confidence in the use ofthe Internet as a trading medium. Because ofthe generalised nature of the threat, fraud isof concern to both consumers and to thoseengaged in e-business. A prime requirementis to build confidence in the means ofauthenticating any data and each partyinvolved in an electronic transaction.‘SPOOFING’ ON THE INTERNETBy use of some clever software linked to a Webpage it is possible for an attacker to persuade avictim’s Internet browser to connect to a fakeserver that ‘spoofs’ the appearance of a secure site(such as a bank). The victim’s browser will presenthim with usual appearance of a ‘secure’ session.As a result, the user may be persuaded to revealinformation such as credit card numbers, PINs,insurance or bank details, or other privateinformation to the fake server.Source: Rainbow Diamond Internet SecurityBox 10.1Privacy10.8 For the purposes of this report, privacyis defined as the mechanism by whiche-commerce users ensure that they retaincontrol over their own data. Generalconsumer concerns about privacy in the UK1Gallop Survey for De La Rue2Forrester report “Braving EU Net Regulation”3Survey by Louis Harris & Assoicates for NCL. April-May 19994Internet Watch Foundation, statistics for 19985Project Trawler: Crime on the Information Highways. A major report from the UK National Criminal Intelligence Unit. Published June 199970

were expressed in the results of a surveyconducted by the Consumers’ Association in1999. These are shown in figure 10.1.Businesses too are concerned about privacyissues. A survey of EU executives 6 showedthat 80% of them believed that privacy is acritical issue for e-commerce.10.9 There are a number of problemsunderlying the concerns involving privacyfor both businesses and consumers. Theseessentially concern the use of junk e-mail(‘spam’) and ‘hacking’, which are examinedbelow.Spam10.10 The sending of unsolicited ‘junk’e-mail (‘spam’), by businesses that haveobtained personal details of consumerswithout their knowledge is a significantproblem. ‘Spam’ is quite distinct fromconventional junk mail or junk fax – in that,unlike these, the recipient has to pay for it.This is a result of the cost incurred throughbeing connected to a service provider whilethe junk e-mail is downloaded. A survey ofInternet users in the USA, conducted inNovember 1998 7 showed that at least 80%of consumers are very concerned aboutmaterial identifying them personally beingshared between businesses without theirknowledge ‘Spam’ has yet to become aserious problem in the UK although concernsabout it are growing (see box 10.2).ATTITUDES TO SPAM IN THE UKThe PIU e-commerce Team carried out an analysisof 208 public responses to the DTI consultationdocument on the Electronic Communications Bill.Only 30% (62) of respondents commented on‘spamming’. Of that 30%, 40% (25) were infavour of legislation or regulation and 53% (33)were against, 6% (4) were unclear.Some Comments:“spam causes annoyance to users, and can slowdown the service provided… service operatorsoperate less effectively…resulting in higher charges.”“these unsolicited messages are irritating but, moreimportantly, they incur direct and indirect costs forthe recipients.”“spamming is a significant problem that causescustomer annoyance, unnecessary traffic anddilution of messages that customers care about.”Box 10.210.11 Business concerns about ‘spam’centre around the need to balance consumerpressure to limit junk e-mail against alegitimate requirement to seek newconsumers through the use of e-marketingtechniques. Spam can also be used to‘swamp’ a Web site – denying service topotential customers (see box 10.3). Suchtactics can have a military as well as acommercial application – the Serbs used thismethod against the NATO Web site duringrecent NATO operations in Kosovo. Speaking“I AM WORRIED ABOUT HOW MY PERSONAL INFORMATION TRAVELLING OVER NEWTECHNOLOGIES MIGHT BE USED”35303330252015171410550Agree Strongly Agree Slightly Neither Agreenor Disagree7AT&T Labs – Research Technical Report. TR99 4 3 14 April 1999.Disagree SlightlyDisagree StronglySource: Consumers’ Association/IPSOS-RSL. May 1999 Figure 10.1E-commerce@its.best.uk71

of the negotiations between the US and theEU over the issue of privacy legislation, DavidAaron, the US emissary, said: "Blockage ofdata could threaten billions if not trillions ofdollars-or euros-in international trade andinvestment”.Hacking10.12 ‘Hacking’ is the process of gainingunauthorised access to a system and thus todata. ‘Hackers’ tend to maintain that they arecrusaders – performing a public good byexposing security flaws or by revealingconcealed information, which they believe,should be openly available. ‘Crackers’, are thedark side of ‘hackers’. They break into systemto either to steal data or to interfere with thesystem in some way that will cause damage.Hacking, or cracking, can, and does, causeserious problems – as when a virus isinfiltrated onto the Internet (the ‘Melissa’ and‘Explore.zip viruses are recent examples).Hacking can be used as a form of terrorism,as a way of stealing money, as way of‘stalking’ a victim or it can cause severedisruption to the infrastructure. All these areillustrated in box 10.3.Content10.13 Internet users are concerned aboutprotecting children and vulnerable peoplefrom illegal or immoral material. A May 1999survey of US parents showed that 78% haveconcerns about the content of Internetmaterial to which their children have access. 8In the UK the IWF handled 2,407 reportedcases of illegal content in 1998, comparedwith 898 in 1997 (see figure 10.2). Controlof content for consumers is thus a serious,and growing issue and a problem that mustbe solved.10.14 Businesses, unlike individuals, aremore concerned about defending theirIntellectual Property Rights (IPR) to thecontent of Internet Web sites. These concernsare based on the undeniable fact that theInternet is an excellent means of transferringintellectual property such as music, video orthe printed word. An example of currentconcerns in music publishing is contained inbox 10.4. Fear of loss of intellectual propertyis thus a real and growing problem thatmilitates against the use of the Internet bybusinesses and the question to be addressedE-commerce@its.best.ukHACKING DAMAGEIn the early 1980s:• members of a hacking ring in Milwaukee were accused of 60 computer break-ins ranging from theMemorial Sloan-Kettering Cancer Center to Los Alamos National Laboratory.In the late 1980s:• Kevin Mitnick was convicted of damaging computers belonging to MCI and Digital Equipment andstealing software.• The First National Bank of Chicago was victim of a $70-million computer heist perpetrated by a hacker.In the early 1990s:• hackers caused the AT&T long-distance service to crash.• The first UK hacker to be caught, a 16-year-old teenager, was accused of hacking into the Pentagon.• A Texas A&M professor received death threats after a hacker logged on to his computer from off-campusand sent 20,000 racist e-mail messages using his Internet address.In the late 1990s• A Canadian hacker group called the Brotherhood, angry at hackers being falsely accused of electronicallystalking a Canadian family, broke into the Canadian Broadcasting Corporation’s Web site and left a message:"The media are liars." The family's own 15-year-old son was eventually identified as the stalking culprit.• Popular Internet search engine Yahoo! was hit by hackers claiming that a "logic bomb" would go off inthe PCs of Yahoo!'s users on Christmas Day 1997 unless Kevin Mitnick was released from prison.In 1998:• The US Federal Bureau of Labor Statistics was ‘spammed’ for days with hundreds of thousands of fakeinformation requests.• Hackers claimed to have broken into a Pentagon network and stolen software for a military satellitesystem, which they threatened to sell to terrorists.Source: St. Petersburg Times. 1998 Box 10.38Roper Starch Worldwide Survey72

1998 INTERNET WATCH FOUNDATION REPORTSReported CasesActioned Cases24074304471242293 1Reports Actioned PreviouslyActionedChild Adultpornography pornographyOtherAdvisoryFinancialScansSource: http://www.iwf.org.uk/stats/stats.html Figure 10.2THE CHALLENGE OF MP3The most controversial topic in the music publishing industry at present is the use of MP3. This is a piece ofsoftware available over the Internet that compresses standard audio tracks into much smaller sizes withoutsignificantly compromising sound quality. Use of MP3 enables whole CDs to be transmitted over theInternet in minutes. Some companies are now selling equipment that enables users to download music inMP3 format from the Internet directly into a personal stereo system. This has huge potential implications forthe music industry, which is one of the UK’s strengths.• As an indication of the interest in MP3, it is consistently in the top ten of search terms used in Internetsearch engines!Box 10.4by the recommendations is: “will my IPR bechallenged if I put my intellectual propertyon the Internet?”Liability10.15 Both consumers and businesses areconcerned about matters of liability.Research 9 shows that consumers areconcerned about fulfilment of orders.Businesses “need to have a basic legalframework to enforce contracts.” 1010.16 Internet Service Providers (ISPs) haveparticular concerns over the matter of liabilityfor content. A current case involving an ISP,which has reached court, is highlighted inthe box 10.5. The outcome of this case hasled to public declarations by ISPs that beingmade liable in such cases will have a seriouslydeleterious effect on their function.9E-Commerce Trust Study. Cheskin Research and Studio Archetype/Sapient. January 199910Financial Times. 23/06/199911Second Roundtable on E-Commerce in AsiaRedress10.17 In March 1999 Visa Internationalreported finding that Internet transactionsgenerate 50% of credit card disputes, despitethe fact that such transactions account foronly 2% of Visa’s overall business. 11 Mostcommon disputes centre on charges forunordered goods, late delivery and additionalcharges. Such a finding highlights thenecessity to ensure that some form of redressis available in connection with e-commercetransactions. In the UK the small claims courtis a simple, tried and tested method forresolving disputes. However, it is not suitablefor very low value transactions. Moreoverobtaining legal redress in cross-border casescan be extremely hard for individualconsumers.10.18 The EU has therefore suggested thatdevelopment of the single market in financialservices in the EU, spurred by thedevelopment of e-commerce, shouldE-commerce@its.best.uk73

THE CASE OF GODFREY V DEMON INTERNETLaurence Godfrey, a physics, mathematics and computer science lecturer, served a writ on Demon Internetregarding an allegedly forged message posted on a Demon-hosted newsgroup in January 1997. Demon wasinformed about the defamatory message, but failed to remove it from its servers.A High Court judge in London made a preliminary ruling in March 1999 that Demon cannot claim that itbears no responsibility for material held on its servers.Despite their stated intention at the time of the ruling, Demon have failed to appeal – and can thereforenow be taken to court for carrying defamatory content on its servers.“…it is important to engage in debate about … the question of who has liability for contentbeing distributed over the Internet. By default, some ISPs could be considered to be publishers.”“…ISPs are sued regularly for matters over which they have no control. Nearly all these casesare settled out of court to avoid adverse publicity. As a result the matter receives very littlepublic attention and leaves the liability issue unresolved.”Participants at PIU E-Commerce SeminarBox 10.5be supported by the development of crossborderredress mechanisms for EUconsumers. All EU consumers would haveaccess to the UK financial ombudsmanscheme if they felt that they were the victimsof mis-selling or other problems as a result ofpurchasing a financial product from a UKsupplier. And UK consumers would similarlyhave access to the redress mechanisms inanother member state, if they had concernsabout a financial produst bought in thatstate. Access to redress of this nature is likelyto be a key aspect of building consumerconfidence in cross-border e-commerce, atleast for complex and/or high-valuepurchases.Trust Issues10.19 Underlying the five issues discussedabove are a number of questions, which aredetailed in box 10.6. figure 10.3 shows theeleven recommendations in this chaptertabulated against the five issues describedabove. The table shows howrecommendations address the issues bydescribing briefly how the questions posedin box 10.6 are answered.E-commerce@its.best.ukTRUST ISSUESFraud• For Consumers:– Is the seller authentic?– Will credit transfers be secure?• For Businesses:– Is the buyer genuine?– Is the credit transfer genuine?Privacy• For Consumers:– Can I be protected from ‘spam’ (junk e-mail)?• For Businesses:– Can I use information gathered from theInternet, for marketing purposes?• For Both:– Can I protect my information against‘hacking’?Content• For Consumers:– Can I control access to illegal/immoralmaterial?• For Businesses:– Will my IPR to the content of my Web site beinfringed?Liability• For Businesses:– Can liability for Internet content be clearlydetermined?• For Businesses and Consumers:– Can the contract I am entering into beenforced?Redress• For Businesses and Consumers:– Is there a clear means of resolving disputesabout e-commerce transactions?Box 10.674

MAIN ISSUES ADDRESSEDRecommendations FRAUD PRIVACY CONTENT LIABILITY REDRESSConsumer Business Consumer Business Consumer Consumer Business Business Consumer Consumer+Business +Business +Business10.1: PKI StandardAuthenticatesseller. Securescredit transferAuthenticatesbuyer. Securescredit transferAuthenticatescontracts.Helps resolvedisputes10.2: ‘TrustUK’Hallmark10.3: Smartcards10.4: Digital/writtenEquivalence10.5: Internet CrimeUnitAuthenticatesseller. Helpssecure credittransferHelpsauthenticatesellerHelpsauthenticsellers. Helpssecure credittransferAuthenticatesbuyer. Securescredit transferHelpsauthenticatebuyerHelpsauthenticbuyers. Helpssecure credittransferHelps protectagainst spamHelps protectagainstspammersClarifies use ofdataHelps protectfrom hackingHelps protectagainsthackersGivesassuranceabout contentHelps protectagainst illegalcontentHelps protectcopyrightClarifiescontractsAuthenticatescontractsHelpsauthenticatecontracts.Provides cleardisputeresolutionHelps resolvedisputesHelps resolvedisputes10.6: Encryption &Law EnforcementHelps securecredit transferHelps protectagainsthackersHelps protectagainst IPRpiracy10.7: InternetTribunalsHelpauthenticsellers. Helpssecure credittransferHelpauthenticbuyers. Helpssecure credittransferHelp resolvecontentliability issues10.8: EU Cross-borderenforcementHelps securecredit transferHelps securecredit transferHelps protectagainst IPRpiracyHelp resolvecontentliabilityHelps resolvedisputes10.9: IPR Education10.10: Parents’ WebsitesInfomediariesHelpauthenticsellersHelp protectagainst spamClarify use ofdataHelp protectagainst illegal/immoralcontentHelp protectagainst illegal/immoralcontentHelps protectIPRHelpauthenticatecontractsHelp toresolvedisputesFigure 10.375E-commerce@its.best.uk

Recommendations andanalysisImplement StandardsRecommendation 10.1: implementa national, secure Public KeyInfrastructure (PKI) for Governmentpurposes.10.20 E-commerce raises problems ofidentifying and authenticating remotetrading partners, and ensuring that credittransfers are secure, with data protected frominterference. Any solutions to these problemshave to inter-operate smoothly with tradingpartners around the world, and support anagreed set of services. In e-commerce therelevant services are:Integrity – to ensure that data has notbeen accidentally or deliberately corrupted;Authentication – to ensure that theoriginator or recipient of material is theperson they claim to be; andConfidentiality – to ensure that datacannot be read by anyone other than theintended recipients.In an electronic environment, the recognisedmeans of providing these three services isthrough the use of cryptography.10.21 The form of cryptography best suitedto e-commerce is ‘Public Key Cryptography’(PKC) (see box 10.7). In order to exchangePKC messages, users need an agreed way oflinking up to each other, and this is providedby what is called a Public Key Infrastructure(PKI).10.22 The use of PKC will address theproblems posed under ‘fraud’ because it:enables data to be sent securely, withoutbeing corrupted;allows both the sender and recipient to bepositively identified;goes some way to guard against hackingby permitting the integrity of data to betested;assists in determining liability by ensuringthat the parties to a contract can beconfidently identified; andcan help in the resolution of disputes.10.23 Worldwide there are many companiesoffering PKI technology. And the Alliance forElectronic Business (AEB), in co-operationwith partners in Europe, has established aproject to create standards for the effectiverealisation of a trust-services infrastructure –EMERITUS (see box 10.8). To bring PKI intoa wide use requires a partnership betweena company offering the technology and acompany with the infrastructure to providethe certification services. Such a companymust be able to validate the identity ofthose using the system and be prepared toact as an intermediary (or ‘trusted serviceprovider’). In the UK there are now twomajor private-sector trusted service providerinitiatives of this kind – BT’s ‘Trustwise’,initially launched in July 1998 and ‘Viacode’launched by the Post Office in March 1999.In addition, Identrus (formerly the GlobalTrust Organisation), a venture involvingeight major banks world wide, is due tobe implemented in the second quarterof 2000 (see box 10.9).10.24 Government has been developingan open PKI standard, under a programmecalled CLOUD COVER. This programmeaims to ensure that Government departmentshave access to the widest possible range ofsecure, interoperable and cost effective PKIE-commerce@its.best.ukPUBLIC KEY CRYPTOGRAPHYIn this system, users’ keys come in pairs, known as public and private keys. As the names suggest, privatekeys are known only to their owners, whereas public keys are available to anyone. A private key cannot bederived from the corresponding public key. Messages can be enciphered using the intended recipient’spublic key. The private key needed to decipher the message is known only to the recipient. Therefore, onlythe recipient can decipher the message content. It is obviously important for the sender of the message notonly to be able to gain access to the recipient’s public key but to be confident that it does indeed pertain tothe correct and intended recipient. Public keys are very often made accessible to all; they are bound to theidentity of their individual owner by ‘wrapping’ them in a digital certificate, signed by a recognised andtrusted certification authority (CA).Source: PIU Report ‘Encryption & Law Enforcement’ May 1999 Box 10.776

THE EMERITUS PROJECT:The E-business Model for the Effective realisation of a TrUst Services infrastructure (EMERITUS) is UK led.Driven by the Alliance for Electronic Business on a not-for-profit basis, the project enjoys the collaborationof partners in Belgium and Spain and support from the European Commission’s TEN-Telecom programme.The EMERITUS initiative establishes a voluntary policy framework implemented through an industry-ledGlobal Trust Services Federation and an industry led Trust Services Association in each nation.EMERITUS will allow trust service providers to compete aggressively for business in accordance with theseven policy principles:1. Industry must build a global Trust Services Infrastructure (TSI) that actively encourages innovation andthe development of electronic business.2. Industry must build a global TSI that does not, as an objective or in implementation, restrict in any waythe development of new ways of conducting electronic business, or of providing privacy and trust.3. Industry must build a global TSI that appears to the subscriber as an integrated, seamless whole.4. Industry must, working with governments, build a global TSI that conforms everywhere to internationaltrade principles and, in Europe, to community law.5. Industry must, working with governments, build a global TSI that does not threaten the sovereignty,security or economic well-being of any nation.6. Industry must acknowledge that problems are perceived by governments, must be proactive in thesearch for solutions and must drive the development of relevant new technologies.7. Industry in Europe must be among the first to address the policy principles, because the European caseis the most difficult to solve.Source: AEB Box 10.8solutions. Amongst the ways it is achievingthis is through the encouragement of PKIvendors to get their products assessed by theGovernment’s Communications-ElectronicsSecurity Group (CESG) and through theprovision of an HMG ‘root authority’ to linkdepartmental PKIs and to allowinteroperability with commercial TrustedService Providers (TSPs) and other nationalPKIs. Within Government, aninterdepartmental PKI working group hasbeen tracking developments and defining thebroad business case for a Government PKI.Progress towards the establishment of aGovernment-wide infrastructure would beaccelerated if there existed a central highlevelsponsor; and this must be addressed.It is recommended that the activity of the PKIworking group be broadened to include theAEB and other industry partners, to put finaltouches to the standard and bring about anearly Government implementation (forinstance for procurement), such as wouldseed national take-up of the PKI standard.Co-ordination of this activity should be theresponsibility of the new e-Minister. Thetarget should be to have to a standard inuse by 31 March 2000.10.25 Successful implementation of acommon PKI standard for Governmentprocurement could mean that as much asTRUSTED SERVICE PROVIDER PKI INITIATIVES:• Viacode offers a full PKI service involving certification and authentication as well as encryption software,it works to EMERITUS standards. The technology used is supplied by Entrust. To ensure that identificationis certain, users must identify themselves in person using three types of document, one of which mustinclude a photograph.Source: PIU Interview with Director Royal Mail Electronic Services. 31/03/1999.• Identrus is an alliance of: ABN AMRO; Bank of America; Bankers Trust; Barclays; Chase; Citibank; DeutscheBank; Hypo Vereinsbank. The infrastructure is designed as a non-proprietary network using openstandards. It will provide authentication, integrity, non-repudiation and confidentiality. Any bank mayparticipate in the enterprise and will act as a ‘trusted third party’ for businesses and consumers.Source: PIU Interview with Identrus Director, Participant Relations. 24/03/1999 Box 10.9E-commerce@its.best.uk77

E-commerce@its.best.uk78£29bn is spent annually (see chapter eleven)through a standard, secure e-commercesystem. In view of the size of the spend, andthe number of businesses that will beaffected, such a move will act as a significantdriver to the development of a critical massof UK businesses involved in e-commerce(see chapter eleven). Furthermore, it is likelythat the Government PKI standard willbecome the de-facto UK standard.Recommendation 10.2: ensure thatthe industry-led TrustUK Hallmarkinitiative puts in place an Internetdispute arbitration service and amechanism for policing its standard.10.26 Potential users of Internet sites fore-commerce have no way of checking thatthe Web site owner is genuine and has agood track-record of honesty and security.Addressing this problem will to a large extentbe a task for market players themselves.On-line retailers need to make customers feelsecure about using on-line payment methodsand confident that goods and servicespurchased on line will be delivered and willmeet their expectations. The rapiddevelopment of new trusted brands likeAmazon.com, and the extension onto theInternet of trusted brands such as Virgin andBarclays, show this happening in practice.10.27 The use of hallmarks (such as thehallmark on a piece of silver) is a way ofengendering trust in both consumers andbusinesses, particularly smaller businesses,which do not have the advantages of wellknownbrands. They can provide a guaranteethat certain standards have been met.In autumn 1998 the Information AgePartnership recommended to Governmentthat it take action to introduce a hallmarkfor e-commerce Web sites. In response theCompetitiveness White Paper included acommitment to work with industry todevelop an on-line digital hallmark to identifybest-practice Web sites. The concept was alsostrongly endorsed during the PIU Team’sworkshops and seminars, where businessesand consumer groups stressed the need foran e-commerce hallmark that must be:backed by clearly defined standards;well-regulated and policed;which businesses will use; andin which consumers will have confidence.“What is needed is a mark that will beinternationally recognised as trustworthy.”“There is a need to establish a single systemthat will be instantly recognisable, like the BSI‘kite-mark’.”PIU Seminar Participants10.28 The idea of a hallmark for Web sites isnot new. The Verisign mark is widely in use,particularly in the USA. This has atechnological underpinning, and is intendedprimarily to address matters of privacy anddata protection. Other US examples ofinclude: Digisign, Cybertrust, Entrust, TrustEand P3P (Privacy Preferences Project). Anumber of commercial and trade trust-marksare being developed in the UK. That of theDirect Marketing Association (DMA) has nowbeen subsumed into the DTI’s TrustUKproposal. There is also a scheme by theConsumers’ Association, which beganoperation on 24 June 1999 (box 10.10).The Institute of Chartered Accountants andthe British Chambers of Commerce also haveschemes that are shortly to becomeoperational. The Advertising StandardsAuthority has also proposed its own hallmark.THE CONSUMERS’ ASSOCIATION (CA)HALLMARK:The CA ‘Which? Web Trader’ scheme is an onlinebranding scheme to boost consumer confidencein e-commerce. Online traders wishing to displaythe Which? Web Trader logo have to agree toa stringent code of practice governing pricing,advertising and delivery of their goods.Applications are vetted by the CA’s lawyers.Traders must: display total prices (includingdelivery) prominently; agree a delivery date withconsumers and offer a refund if this is not met;offer security for personal data, and; clearly labelall third party advertising. The scheme, which isfree, will be rigorously policed by the CA andtraders failing to obey the code of practice willbe removed and publicly humiliated!Source: Silicon.com Box 10.1010.29 DTI has been working with theAlliance for Electronic Business to implementthe Competitiveness White Papercommitment, bringing these existing andplanned initiatives within a single framework.The results of this work were reported in therecent White Paper ‘Modern Markets:

Confident Consumers’, which announcedthe creation of a new, industry-led body –TrustUK. This body will ensure thate-commerce hallmarks meet a consistentstandard, those that do so will be identifiedby the TrustUK branding. The presence ofa TrustUK hallmark on a Web site will offerusers the re-assurance that they are dealingwith an authentic, trustworthy trader whowill respect the consumer’s privacy, followsgood information security practices, will notdisplay any illegal or immoral content andwill have a clear policy concerning itscontracts and dispute resolution.10.30 To be effective TrustUK must bebacked by a mechanism to police thestandards it sets. It is not clear whether theOffice of Fair Trading, which the Governmentproposes should oversee other industry codesof practice, will have a role in relation tothose elements in e-commerce codes whichare in fact common to all good codes, suchas effective redress systems. Theorganisations responsible for individualcodes, and the firms that are bound by them,need to know who will be responsible andthat there will be no duplication ofenforcement work.10.31 The Team therefore recommends that:DTI ensures that TrustUK puts in place clearmechanisms to police its standards; andTrustUK establishes an Internet disputesarbitration service allowing bothconsumers and businesses fast-track accessto arbitration for any dispute arising froman e-commerce transaction with a traderbearing a TrustUK hallmark.Recommendation 10.3: encourageprivate providers to launch multifunctionsmartcard schemes forindividuals.‘SIM’ card is, in fact, a form of smartcard.The advantages of a smartcard over atraditional credit card, which contains amagnetic stripe, is that they can contain farmore data, and can therefore be used tostore many more personal details (even,perhaps, a digitised photograph). They arealso able to support the kinds of processingneeded to secure transactions. Their greatercapacity also means that they can containmany more security measures than amagnetic stripe card. See box 10.12 for moredetails of their use. The ‘ModernisingGovernment’ White Paper committed theGovernment to publishing a framework forthe use of smartcards in support of servicedelivery across Government. Thisrecommendation proposes that theintroduction of such multi-functionalsmartcards should take place as quicklyas possible.TECHNOLOGY OF SMARTCARDSSmartcards can be either ‘contact’ or ‘contactless’.As the names imply, in the former case physicalcontact has to be made between the card and the‘fixed’ system with which it is interacting. In thelatter case the card does not have to come intocontact with the fixed system. In contact cards,power is transferred to it from the fixed system.Contactless cards can either contain their ownbattery or, more frequently, be supplied withenergy through an ‘inductive loop’. In both typesof card data can either be read from the card orwritten onto the card or both, depending on thetype of ‘memory chip’ that the card contains.Some cards contain more than one type ofmemory chip in order to perform differentfunctions. For example a ‘read only’ chip couldcontain security information and a programmablechip could contain information about transactions.Source: DB Everett: Smart Card Technology. Box 10.1110.32 Individual users of e-commerce haveproblems in identifying and authenticatingthemselves over the Internet. There is also aproblem for those without credit cards, orthose who see these as too vulnerable, inpaying for e-commerce transactions. Onepossible solution to these problems issmartcards (also known as ‘Chip cards’ or‘Integrated Circuit Cards’). These areessentially a computer chip on a plasticcard like a credit card. 12 (See box 10.11 formore details.) The most familiar use of asmartcard is in the mobile phone, where the12DB Everett: Smart Card Technology: Introduction to Smart Cards. Smart Card News Ltd. 199910.33 The advantages of smartcards are thatthey:provide a high level of security both interms of authenticating the card andverifying the cardholder;support the use of PKC;support multiple applications;function securely off-line, allowing the cardto be used where on-line communication iseither not feasible or cost-effective; andare a widely recognised technology.E-commerce@its.best.uk79

E-commerce@its.best.uk80SMARTCARD USESThe first patents on smartcard technology werefiled in 1969 and 1970. The concept wasexpanded by the French journalist Roland Morenoin 1974, who foresaw a time when the smartcardwould become a combination of a personalorganiser and electronic bank manager. He andothers promoted the ideas vigorously in Franceand it was there that the first banking trials werecarried out between 1982 and 1984. TheNorwegians then took up the technology as anoffline security solution for electronic payments.French and Norwegians banks launched theirsmartcard programmes in 1984 and now have2.1M and 1.2M cards in use respectively.Since then smartcard technology has been takenup around the world. Most smartcards are in useas telephone pre-payment cards. But they can beused as debit cards, access tokens, SIM cards incellular phones and for many other applications.Source: RC Townend. Kable Box 10.1210.34 Smartcards can operate in conjunctionwith in-built security systems to ensure thatthe individuals using them are positivelyidentified. Indeed, identification can be tiedeven more securely to an individual by theuse of biometrics (see box 10.13). Butsmartcards are able to do far more than carryidentification details; the potential formultifunctional applications means one cardmight substitute the many cards now carriedin wallets and handbags (see box 10.12).Another important function is as an‘electronic purse’, that can be ‘charged’ withsmall quantities of electronic cash. This isfunction is potentially of great importanceto e-commerce (see quote below).“We urgently need an e-cash system to enablethose without credit cards or bank accounts toengage in e-commerce – and to facilitate lowvaluetransactions. The urgency of this isillustrated by the recent meteoric rise in mobilephone connections, 95% of which are for prepaidmobiles. The pre-paid mobile is the way ofreaching the 5% of the population with no creditfacilities – essentially they are an e-cash system.”PIU E-Commerce Seminar Participant. May 199910.35 Smartcards will soon be in use in theUK instead of the current type of credit cards.In July 1998, UK Banks announced that theywill be moving from magnetic stripe cards tosmartcards starting from early 1999. E-cashhas not, so far been a success in the UK. In1995 NatWest, Midland Bank and BT jointlysponsored an e-cash system in Swindon,known as ‘Mondex’. The trials failed, mainlybecause a critical mass of small traders didnot adopt the system.BIOMETRICS“Biometrics” means measuring some aspect of aperson’s biological make-up in such a way that itcan be easily recorded. The most well-understoodbiometric system is finger-printing. Biometrictechnologies compare a person's uniquecharacteristics (such as a finger-print) against apreviously recorded image, for the purpose ofidentifying them. Biometric technologies are nowable to record and compare many characteristicsother than finger-prints: irises and retinas can bescanned, as can whole faces or whole hands.Individual voices, too, can be recognised.The technology is now approaching maturity, andfinger-print scanners (for example) can be cheaplymass-produced. The recording capacity ofsmartcards has now increased to the point wherethey are able to store sufficient information to holdfinger-print, iris, retina or facial characteristics.Biometrics can be used for both verification (amI who I claim I am?) and identity (who am I?).It has the advantage over a PIN in that itimpossible either to forget or steal!Source: Unforgettable Biometrics. PC WeekAn Overview of Biometrics Box 10.1310.36 In the rest of Europe, Governmentshave already begun issuing smartcards. InGermany the Social Security Authority andthe Sickness Fund Doctors Association beganissuing smartcards in 1993. The medicalauthorities see this ‘Health Card’ as aprecursor to a multi-function card –ultimately to include an e-cash facility.France and Spain have now begun tofollow Germany’s example. The Spanish cardcontains a finger-print identification system.10.37 The Government has an importantrole in the issue of certain types ofsmartcards. It is in a unique position to act ascertification authority for the identification ofindividuals, through the personal databasesit holds (such as the DVLA, electoral roll,passports, National Insurance (NI) numbers,NHS numbers etc.). Smartcards can be issuedto the population through channelsassociated with any or all of the databases

mentioned above; for instance through thelocal Health Authority (NHS number) or atthe Job Centre (NI numbers).10.38 Smartcards might be issued by privatesector partners, but used to gain access topublic, as well as private services. Theanalogy here is with credit cards – the issuersare different, but the technology and modeof use, is the same. By ensuring that cardsare ‘badged’ differently, and that they areissued voluntarily, such smartcards could notbe mistaken for identity cards. Further reassurancecan be given by a clear and opendata-protection policy that will allow thepublic to ‘opt-in’ only to those Governmentservices that they wish to receive in thismanner.10.39 There is potential for commerciallydeveloped smartcards to be used multifunctionallyin support of deliveringGovernment services – for instance allowingholders to pay tax and VAT, identifythemselves, and hold electronic cash. Thedanger here is that so much functionality onone card will be an invitation to fraud. Toprevent this biometric verification or otherforms of strong authentication systems needto be built in. The Government’s UKbiometrics working group should beencouraged to give firm guidance on thisissue as soon as possible.10.40 Significant Government activity isalready taking place:On 8 December 1998 an operationalpilot of the ‘Intelligent Form’ schemewas launched. This project involved InlandRevenue, HM Customs and Excise andthe Department of Social Security’sContributions Agency. It was co-ordinatedby CITU, with the co-operation ofMicrosoft, EDS and National WestminsterBank. Once completed the form is signedelectronically – and this can be done usinga smartcard. It is expected that commercialsystems for issuing and managing thesesmartcards will become available by theend of 1999 – thus supporting a widerroll-out of the ‘Intelligent Form’. Successfulcompletion of this project enabled theInland Revenue and HM Customs andExcise to launch the ‘Early Adopters’project in March 1999. Electronic VATreturns are being piloted in 1999. Andpeople completing self-assessment taxreturnswill be able to submit these on the13As in Modernising Government Action Plan (27 July 1999)14See the Modernising Government White Paper (Cm 4310, March 1999) chapter 5, paragraph 16Internet, using a smartcard and a digitalsignature authenticated by a bank, fromApril 2000.The possibility of patient smartcards hasbeen raised by the NHS’ seven-year ITstrategy. The issue of smartcards to someNHS staff for giving access to sensitiverecord systems and for identificationpurposes is currently also being considered,and a pilot trial is underway.In accordance with ModernisingGovernment White Paper commitments,CITU is currently chairing aninterdepartmental steering group oncard technology, which aims to developa framework for the use of smartcards forGovernment-Citizen e-business byAutumn 1999.10.41 The new e-Minister (see chapterfourteen) should support the work of thegroups on biometrics and card technologyand should ensure that all the interestedparties, in both the public and private sector,are brought together to move theseinitiatives forward. In view of the remarks in10.38, the Data Protection Registrar mustalso be involved at an early stage. The targetsshould be as follows:CITU to issue guidelines on the use ofsmartcards for Government/citizene-commerce by December 1999;as part of this, CITU to promote concerted,collective discussions with interestedparties within Government departmentsand agencies and industry;by July 2000, CITU to set up a prototypeGovernment ‘portal’ to facilitate paymentand act as a ‘one-stop-shop’ 13 with anauthentication system that is backedby a private sector smartcard; andCITU to monitor the ability of departmentsto provide services using private sectorsmartcards as part of the programme ofmonitoring targets for the electronicprovision of Government services: 14 25%,50% and 100% by, respectively, 2002,2005, and 2008.10.42 Smartcard schemes of this kind willprovide significant leverage to the whole ofthe UK economy to move to e-commerce.As a result smartcard readers could beinstalled in public places, and be routinelyattached to PCs and TV set-top boxes.They could also be used for public transportE-commerce@its.best.uk81

E-commerce@its.best.ukand in libraries and may even replacepassports.Effective EnforcementRecommendation 10.4: ensureGovernment departments quickly takeadvantage of the equivalence betweendigital and written documents10.43 At present there is no clear recognitionof the equivalence between written and digitaldocuments. As a result there are potentiallegal complications with disputes over e-commerce transactions. Part II of the draftElectronic Communications Bill containspowers that will allow Ministers to update thestatute book to ensure that, whereappropriate, electronic means can be used asan alternative to the traditional pen and paper.However, steps must be taken by Governmentdepartments to ensure that advantage is takenof this as swiftly as possible. The legalrecognition of electronic documents will helpto authenticate contracts – thus solving someof the problems of liability and redress.10.44 Departments will carry out actions toensure equivalence through the applicationof a ‘Henry VIII’ power that enables Ministersto modify any existing legislation to ensurethat it permits equivalence between digitaland written documents. Both national andinternational problems are associated withthis move. Nationally there must be concernat the potential volume and complexity ofthe legislation that needs to be modified.Internationally there is a need to ensure thatdigital contracts are afforded the samerecognition in other countries (see chapterseven).10.45 A significant degree of co-ordinationwill be needed to ensure that measures toacknowledge legal equivalence of written anddigital signatures marches in step betweendepartments. This could be accomplishedthrough the system of departmental‘Information Age Champions’ that hasalready been set up. However, it will alsoneed input from the e-Minister and e-envoy(chapter fourteen), and in particular from therecommended network of junior Ministers.It is important that work on this starts inparallel with the passage of the ElectronicCommunications Bill through Parliament.Recommendation 10.5: improvetechnical capability of lawenforcementand regulators andestablish an Internet Crime Unit10.46 Detection of fraud and Internet-relatedcrimes is currently a particular problembecause of the absence of any central, easilyidentifiable resource in this area. There are amany isolated sources of expertise on Internetcrime located within individual police forces,local authority trading standards offices, theOffice of Fair Trading and the NationalCriminal Intelligence Service (NCIS), as well asin the Internet Watch Foundation (IWF). Withthe growth in the use of the Internet forfraudulent purposes (see above) there is aneed for greater co-ordination of detectionand enforcement effort. And the technicalability to investigate such crimes must bemade available to those in the police andlocal authorities that are to investigate andprosecute offenders. A single Internet CrimeUnit was recommended in the NCIS report onProject Trawler. 15The PIU Team endorses thisrecommendation as a practical way of coordinatingexpertise and ensuring clear linesof responsibility.“The proposed national unit would have threebroad roles: to investigate the most serious ‘ITcrimes’; to act as a centre of excellence for‘cybercrime’ issues; and to support local forceswhich encounter offenders using sophisticated ITskills.”Project Trawler: Key Judgements. June 199910.47 A strengthened law-enforcementability will send a clear signal to potentialInternet criminals that Internet crime doesnot pay. It will help to boost the confidenceof both e-commerce buyers and sellers.Similarly, stronger detection and presentationeffort will deter hackers, spammers andthose, such as paedophiles and racists, whoplace illegal material on the Internet.“More people are online, and more people aregetting scammed. Consumers need to rememberthat con artists are everywhere – even incyberspace.”Susan Grant, Director of Internet Fraud Watch 199915Project Trawler: Crime on the Information Highways. A major report from the UK National Criminal Intelligence Unit. PublishedJune 199982

10.48 The new e-Minister (chapter fourteen)should put his or her authority behind theNCIS proposal for an Internet Crime Unit anda register of Internet expertise. Theserecommendations have been accepted by theAssociation of Chief Police Officers (ACPO)crime committee and discussed by the ACPOCouncil. The matter is currently beingconsidered by the Home Office. Werecommend that the Home Office initiatesaction as soon as possible to drive thisrecommendation forward.Recommendation 10.6: build on therecommendations in the PIU report:‘Encryption and Law Enforcement’ onGovernment/industry co-operation10.49 Law enforcement issues connectedwith the Internet are often hampered bylack of understanding. Among the mostsignificant of the PIU’s recommendationsin their report on ‘Encryption and LawEnforcement’ 16 is the recommendation thatthe approach to this problem should bebased on co-operation with industry, andthat a forum between Government andindustry should be established to discussencryption matters (see quote below).“A new Government/Industry joint forumshould be established to discuss the developmentof encryption technologies and to ensure that theneeds of law enforcement agencies are taken intoaccount by the market. This new co-operationshould also be promoted at the internationallevel. The forum should consist of a high levelgroup to discuss policy issues and be supportedby specialist technical and legal groups.”PIU Report on Encryption & Law Enforcement.May 199910.50 Industry has a distrust of regulatoryand legal frameworks, which they believemay unduly restrict their ability to tradefreely. In e-commerce there has been ahistory of distrust of Government motivesin connection with encryption. However,building on the framework of trust betweenGovernment and industry created during thePIU study, will lead to co-operative measuresto build secure, trusted frameworks for credittransfer and to protect systems againsthacking.16PIU Report ‘Encryption & Law Enforcement’ May 199910.51 There are a number of on-going, jointinitiatives on e-commerce betweenGovernment and industry – such as the DTI’sInformation Age Partnership, CITU’s IndustryConsultative Committee as well as theGovernment/industry forum on encryption,mentioned above. It is important that allthese are co-ordinated to ensure thatindustry recognises Government efforts inthe e-commerce arena are well focused.It is recommended that there should berepresentation from the e-envoy’s team(chapter fourteen) on the Government/industry forum on encryption.Recommendation 10.7: the HomeOffice should re-consider the case forusing non-jury trials for serious fraud(including e-commerce fraud)10.52 One enforcement problem concernsthe difficulty the authorities have in gettingconvictions in trials involving complex,technical matters (such as serious fraud), asa result of the UK’s jury system. One solutionfavoured by the PIU Team was to use nonjurytrials. These are not unknown in criminaltrials within the UK – stipendary magistratesfulfil that role in summary cases, and judgessitting alone have been used in NorthernIreland for terrorism-related offences. Suchtrials have also been proposed for casesinvolving serious fraud (see the quote below).The Internet is a complex place, bothtechnically and conceptually. Trading cantake place with equal ease between two usersin adjoining streets or in different continents.This makes it easy for a fraudster to cover hisor her tracks and makes it difficult for lawenforcement to prove the connectionbetween a real individual and a ‘virtual’crime. For all these reasons, which are similarto those put forward by advocates of nonjurytrials for other types of serious fraud,non-jury trials are a valid way forward.“A criminal tribunal, headed by a Judge andadvised by market professionals, has much torecommend it. The proceedings would certainlybe curtailed: no need to try and explain at greatlength what a stock option is, or a rights issue, ora butterfly straddle or even Lloyd's of London”Rosalind Wright, Director of the Serious Fraud Office1997E-commerce@its.best.uk83

10.53 In February 1998 the Home Officepublished a consultation document: “Juriesin Serious Fraud Trials”. 17 Response to theconsultation document was not large,and the matter is at present still underconsideration. It is recommended that theHome Office reconsider the issue of non-jurytrials for serious fraud, and should include theconcept of Internet fraud within the selectioncriteria set out in their consultationdocument. The e-envoy (chapter fourteen)should carry this forward with the HomeOffice for a decision on possible legislationas soon as possible.Recommendation 10.8: theGovernment to encourage the EU toachieve a co-regulatory approach toe-commerce enforcement and redress.10.54 As noted in chapter five, enforcementauthorities will face big challenges in crossborder cases within the EU and globally. Inview of the global nature of e-commerce, therecommendations made in this chapter willbe of limited value without internationalagreement. Co-operation between nationalauthorities is developing, for example amongthe major countries that belong to theInternational Market Supervision Network.The OECD is developing guidelines onconsumer protection in e-commerce.However, more needs to be done. In Europein particular there is scope to build on earlierinitiatives to promote consistent, effectiveenforcement. The draft Directive one-commerce proposes measures to facilitateenforcement co-operation. The Governmentshould make practical delivery of thisproposal a priority over the next six months,with the aim of achieving in each EU countrya source of e-commerce enforcement andredress following the co-regulatory principlesof TrustUK. And for these mechanisms tooperate in co-ordination across all memberStates, such that members of one State canexpect the same standards of redress andenforcement to operate in all other States.Appropriate EducationRecommendation 10.9: ensure actionis taken to give protection ofIntellectual Property Rights (IPR)a understandingand that DCMS workwith the creative industries to putin place standards and infrastructureto ensure that content is protectedin transmission and that adequateremuneration is received for theexploitation of intellectual property.10.55 It was demonstrated above that themusic industry is suffering serious problemsin relation to the proliferation of ‘free’ musicon the Internet. Intellectual Property Rights(IPR) are an important concept in relation toe-commerce because the Internet allowsanything that is ‘digitisable’ – such as music,design, research, creative writing,mathematical formulae, and computersoftware – to be spread world wide quicklyand easily. This has advantages in terms ofthe rapid diffusion of new ideas but ifcompanies cannot enforce their intellectualproperty rights it may seriously weaken theincentive to innovate.IMPRIMATURA ‘Creator’ delivers his ‘Creation’ to the ‘Creation Provider’. He may also assign exploitation rights to a‘Rights Holder’. Information about the contractual relationship between the Creation Provider and theRights Holder is stored and maintained in the ‘IPR Database’.The Creation Provider obtains a unique number for the Creation from the ‘Unique Number Issuer’. Thisnumber is imprinted onto the Creation for latter identification. A ‘Media Distributor’ may then distributeit in digital form after obtaining permission from the Rights Holder through a licence specifying terms.To obtain a Creation, a ‘Purchaser’ contacts the Media Distributor. The Media Distributor generates apersonalised copy of the Creation and allows the Purchaser to download it with terms and conditions of use.The Media Distributor then passes royalties to the Rights Holder. Payment details are stored in the IPRDatabase. Payment is performed online in an electronic form.E-commerce@its.best.ukAll Creation transfers are logged by means of a ‘Monitoring Service Provider’. This allows Rights Holders andCreators to verify the number of Creations sold and that they have received all corresponding royalties.Source: IMPRIMATUR paper submitted for PIU E-Commerce Seminar Box 10.1417Juries in Serious Fraud Trials. A Consultation Document. Home Office February 199884

“The general public feel that copying weightlessmaterial is not theft – because the owner is stillleft with the product. IPR is a very subtleeconomic concept, difficult for the public tograsp. However, intellectual property is a resourcein which the UK is particularly rich and it istherefore especially necessary to demonstrateits importance.”Participant at PIU E-Commerce Seminar. May 199910.56 The EC’s IMPRIMATUR project hasdevised a technologically-neutral businessmodel for the protection of IPR (see box10.14). However, technological and businessprocess solutions are not sufficient. There mustbe a fundamental change in attitude towardsintellectual property in society as a whole.10.57 The Government is already takingsome action on this issue. A sub-group ofthe inter-departmental Creative IndustriesTask Force (CITF) is examining IPR as itaffects the creative industries, includingdigitally produced and/or delivered products.Three working-groups have been set upwith rapporteurs from industry to examine:awareness and public attitudes;understanding and user awareness; andeducation and training.The groups will meet during summer 1999,and present proposals to the CITF byDecember 1999. It is likely such proposalswill include an awareness campaign, andencouraging right-owners to think aboutways in which they can make the systemmore user-friendly. However, DCMS inparticular will need to do more work withthe audiovisual industry in this area to ensurethat adoption of standards such asIMPRIMATUR.10.58 The e-envoy (chapter fourteen) mustraise the profile of IPR by ensuring that theprosecution of infringement cases receivesgreater publicity and that explanations of thesignificance and value of IPR are incorporatedinto the education process. By developing aculture in the UK where IPR is understoodand respected we will produce anatmosphere that will help business feel moresecure about engaging in e-commerce. TheDCMS work with the audiovisual industrymust be driven forward under the aegis ofthe e-Minister (chapter fourteen).18Roper Starch Worldwide Survey. May 199919Memorandum from John Battle. DTI 18 March 199820Our Information Age – the Government’s Vision. Central Office of Information URN 98/677; 4/98Recommendation 10.10: provide“parents’ Web sites” and encouragesoftware companies to supply freecontent-filtering software10.59 A May 1999 survey of US parentsshowed that 78% have concerns about thecontent of Internet material to which theirchildren have access. 18 Software is availableto filter the content of Internet (see box10.15) but the same survey also found thatsuch software is in use by only one-thirdof US parents whose children have accessto the Internet. In his speech to the House ofCommons on 18 March 1998, 19 the Ministerfor Science, Energy and Industry stressedthe importance of such filtering tools.Unfortunately, the availability of suchsoftware is not widely publicised in the UK,although AOL has a scheme whereby itssubscribers are offered content filteringsoftware at no extra charge.10.60 The Government has embarked onan ambitious programme (the National Gridfor Learning) to ensure that all schools areconnected to the Internet. 20 As part of thisscheme the Team recommend that theGovernment sets up ‘parents’ Web sites’.These would provide links to the NationalGrid for Learning to enable parents toparticipate in this excellent initiative. Thesesites should contain software for contentfiltering that can be downloaded freely byboth parents and schools. Such an initiativewill make it clear that the Government takesparents’ concerns seriously and is prepared totake active measures to meet those concerns.10.61 The e-envoy (chapter fourteen) shouldinvestigate the best way to set up parents’Web sites, with links to such software. Thee-Minister should approach softwarecompanies and ISPs about the provision ofthis software for free. The ability ofconcerned carers (parents and educators)to gain access to free filtering software willgo a long way to meeting their concernsabout the type of material that vulnerablegroups may access if they are allowedunrestrained interaction with the Internet.E-commerce@its.best.uk85

SOFTWARE FOR FILTERING INTERNET CONTENTFiltering Software Cyber Patrol Cyber Sitter Net Nanny Surf WashSoftwareCompany:MicrosystemsSoftware Inc.Solid Oak SoftwareNet NannySpyglass Inc.Price:$39.95$39.95$39.95$39.95Content Filtered:violence/profanity,partial/full nudity,sexual acts/text,intolerance,satanic/cult,drugs/drug culture,militant/extremist,sex education,questionable/illegal& gambling,alcohol/tobaccoadult, sexuallyoriented, violence,gay/lesbian,illegal/radicalactivities,hate/intolerance,cult/occult, sportsand leisure,advertisingcategories notnamed specificallybut include:sexually explicit,violence, hatespeech, drugs/alcoholsexually explicit,violence, hatespeech,drugs/alcohol,gamblingSource: http://www.familyguidebook.com/ Box 10.15Market-led initiatives10.62 Users are concerned that unrestricteduse of their personal data can be made byWeb sites as an inherent result of the way theInternet works. They also have problems indeciding when, and how to use theirpersonal data. The problems can be solvedby ‘Infomediaries’. These are Internet sitesthat facilitate improved data exchangebetween Web sites and users by helping toprotect their personal information andmaking their interaction with sites moreconvenient. An Infomediary can effectivelybecome the ‘trusted agent’ that standsbetween an Internet user and the rest of theWeb. For instance they can act on theconsumer’s behalf to look for bargains or paytaxes and VAT.10.63 An agent of this kind can also help to:protect the privacy of a user by preventinga user’s e-mail address from beingbroadcast;intercept spam;help other businesses by ensuring thatpersonal data is given to businesses whichmay be of interest to a consumer (with theconsumer’s permission);authenticate Internet traders on behalfof consumers;US INFOMEDIARIESP3P (privacy preferences project)PopulardemandPrivaSeekPlatform that enables users to exercise preferences over a website’sprivacy practices. Software applications that allow users to be informedabout website practices, delegate decisions to a computer agent ifthey wish and tailor relations with specific sites.Uses a proprietary technology to preserve the anonymity of memberswhile matching them with deals targeted to their interestsconsumer ‘infomediary’ using an information control tool thatlets consumers automatically safeguard & gain value from theirinformation on the WebE-commerce@its.best.ukLumeria‘personal knowledge management’ software helps individuals securelyorganise information & knowledge. This information can then beshared & published for ‘fun & profit’. ‘Identity management’ softwareenables the individual to securely maintain one or more identities onthe Net.86

protect consumers against content theydo not wish to see;negotiate contracts on a consumer’sbehalf; andhelp settle disputes between consumersand e-traders.10.64 A number of Infomediary companieshave become established in the USA recently(see box 10.16). The concept has not yettaken off in the UK with quite the samevigour. However, the Team has been able toidentify a few such companies in the UK, andtwo are described in box 10.17. The e-envoy(chapter fourteen) should publicise theadvantages of Infomediaries as significantenhancers of e-commerce trust.UK INFOMEDIARIESAce-quote.com: This is an e-commerce company that assists businesses to make purchases by enablingthem to post their IT requirements on the Internet and processing quotes from suppliers.Obongo: solves current problems experienced by users concerning: data protection and junk e-mail; slowand repetitive registration processes; forgotten user names and password; changing and updating personalprofiles; loss of e-mail contact with change of address.Solves current problems experienced by e-traders concerning: loss of potential users through failure toregister (40% fail at present); failure by users at log-in because of password problems; failure to reach usersbecause of change of address; poor marketing because of erroneous personal data; high cost of useracquisition.The Obongo solution is a centralised profile management system benefiting users by giving users a single:privacy control tool; registration for sites; log-in for sites; username and password for all sites; e-mail controlpoint. And sites by giving them: low cost source of new users; better returns on existing users; extendedreach to existing users.Box 10.17E-commerce@its.best.uk87

TITLE 11. GOVERNMENT ASEXEMPLARSummary11.1 As described in chapters eight to ten,the Government has a unique role to playin taking actions that will remove existingbarriers and further promote e-commerce.In both chapters eight and ten, instanceswere given of the Government’s role inpromoting e-commerce to business and thepublic – as head of a large supply chain andas an organisation with which everyone mustinteract. The Government therefore has thepotential to act both as an exemplar andan engine for change.11.2 Government can be seen as amechanism that interacts with business andpublic through inputs (procurement) andoutputs (service and information delivery).Between these two there is a process ofinternal Government operation (see figure11.1). All three areas are open to changethrough the action of e-commerce.11.3 This chapter is therefore divided intothree sections:transforming procurement;transforming the internal processesof Government; andtransforming information & servicedelivery.11.4 The main recommendations to exploitGovernment potential under each of theseheadings are below.Transforming procurement by:– Recommendation 11.1: publicationof departmental performanceagainst targets in electronicprocurement;– Recommendation 11.2: campaignto get SMEs more involved inGovernment procurement; andTransforming the internal processof Government by:– Recommendation 11.3:internationally benchmarkingGovernment e-commerce targets;and– Recommendation 11.4: initiatingan ‘Internet node’ programme,GOVERNMENT INTERACTION MECHANISMSGovernmentBusinessProcurementInternalprocessesInformation &ServiceDeliveryBusiness& PublicE-commerce@its.best.ukFigure 11.18888

enabling transfer of the humanand organisational skills that areneeded to take advantage ofe-commerce, from private- topublic-sector senior management.Transforming information & servicedelivery, encouraging the privatesector to challenge traditionalmethods of Government servicedelivery by:– Recommendation 11.5: using theInvest to Save Budget to buildalternative Government electronicdelivery mechanisms; and– Recommendation 11.6: extendingthe dialogue with the privatesector over use of the evolvingCrown copyright managementsystem with a view to wideningthe adoption of a class licensingsystem.Background anddefinitions11.5 The extent to which Government canact as an exemplar and driver of e-commercethrough its own supply and distributionchains has emerged as a key issue for thePIU E-Commerce project. The size of theGovernment procurement effort is enormous.It is estimated that central Governmentspends about £12bn annually onprocurement of goods and services (32%of the total budget of £37bn). This doesnot include the MoD’s spend on goodsand services, which could add a further £4bn(20% of £21bn). Nor that of the NHS which,assuming it to be 30% of its total budget of£44bn, could be as much as £13bn. Anestimated total of £29bn annually is thereforespent by Government on procurement ofgoods and services. These figures do notinclude those for local authorities, whichaccount for a further approximately £19bn.In all cases the principal objective should befor Government to get good value formoney, but there is huge capacity for aprocurement effort of this size to leveragebusiness in the UK and thus act as an engineof change.recommendation of this review was theestablishment of a central Office ofGovernment Commerce (OGC), under anOGC Supervisory Board, which wouldoversee all civil Government procurementactivities – thus addressing some of theproblems of co-ordination. The MoD too iscurrently also in the early stages of a separateproject to introduce electronic purchasing formilitary spending – the Defence ElectronicCommerce Service (DECS). But neither ofthese initiatives will involve the significantprocurement requirements of the NHS.11.7 These initiatives are taking placeseparately. As a result they are in dangerof not using the same standards or settingcoherent protocols. Co-ordinating actionshould be driven from the centre – possiblythrough e-envoy (chapter fourteen).If Government does all its e-commerceprocurement business according to consistentand coherent standards and protocols (suchas that for a PKI – see chapter ten), it willencourage business to adopt the samestandards and protocols for their own use.This will not only enhance general standardsin e-commerce, but will develop confidencein users – by giving the assurance of the same‘look-and-feel’ for e-commerce transactionswith a wide range of Web traders.11.8 The scale of Government electronicinteraction with the public is enormous, atapproximately 1.5bn transactions annually.The Government is committed to developinge-commerce by putting many of its ownservices on-line, and has set targets for theelectronic provision of Government servicesof 25%, 50% and 100% by, respectively,2002, 2005, and 2008. 2 CITU is responsiblefor measuring the success of departments inachieving these targets, and the first reportwas published in Spring 1999. 3 The summaryof the report findings is in box 11.1.However, despite the excellent efforts tomeet and exceed the targets, there issignificant concern in both industry andGovernment that these efforts may be lessthan fully effective without some change inthe culture of Government (see box 11.2).11.6 An extensive review of centralGovernment civil procurement was recentlyconducted and a report of its findings 1produced in July 1999. The main1Review of Civil Procurement in Central Government. London: July 19992‘Modernising Government’ White Paper. Cm 4310. March 19993http://www.citu.gov.uk/25percent/spring99.htmE-commerce@its.best.uk89

25% INITIATIVE: SPRING ‘99 PROGRESS TO DATE: OVERALL FINDINGSALL GOVERNMENT 1999 Capability 2002 Projectedtotal annual % projected total capability %volume (millions)annual volume(millions)All reports 582 38 632 71Excluding payments throughbanking system 480 32 518 70Excluding payments, andbusiness transactions ofInland Revenue & Customs 286 22 307 55Box 11.111.9 The Team has looked at the way thatthe White Paper targets are currently beingaddressed. They are happy that the targetsthemselves are correct for service delivery,and that the technology is being put inplace to meet them. However, there is someconcern that the targets are perhaps notambitious enough and that no element ofinternational comparison has been included.For procurement, the targets themselves arenot specific enough. CITU and the‘Information Age Group of Champions’,announced by the Public Service Minister on28 May 1999, are undertaking a programmeto address the behavioural and culturalchanges that are inherent in moves toperform Government business electronically.However, the Team believes that there isother action that can be taken.11.10 The following section provides analysisof some of these problems in the three areasdescribed above (procurement, intragovernmentaltransformation, and informationand service delivery). It describes the keyrecommendations in each area to addressthe concerns outlined above, and whereappropriate gives examples of how therecommendation might be developed.Recommendations andanalysisTransforming procurement11.11 The Treasury Procurement Groupis building on the report of the reviewof central Government civil procurementreferred to in paragraph 11.6. TheProcurement Group’s provisional targets areoutlined in box 11.3. This also contains theProcurement Group’s plans for an electronic‘supplier database’ and procurementrequirements Web site.Recommendation 11.1: Publication ofdepartmental performance againsttargets in electronic procurementQUOTATIONS RELATING TO GOVERNMENT’S ROLEQuotations from BusinessQuotations from GovernmentE-commerce@its.best.uk“E-commerce is best delivered as an alternativeto existing services by an entirely new unit,rather than as evolving from within existingservices. There is an obvious issue forGovernment here, as it moves from traditionalpatterns of interacting with the public into newelectronic services.”“It is vital for new channels of communicationsbetween Government and public to be put inplace.”Source: E-Commerce Seminars“It requires a huge effort of coordination andadequate resource are not usually available.There is no consistency to how differentDepartments receive or handle information”“Problems of lack of finance, lack of willingnessof Departmental staff to be involved, continuingchanges in technology”Source: E-Commerce SeminarsBox 11.290

TREASURY PROCUREMENT GROUP PROVISIONAL TARGETSby 31 December 1999:• to advertise 25% high value procurement requirements electronically & publish documentation on theInternet;by 31 March 2000:• advertise 90% high value procurement electronically & publish documentation on the Internet;• make 50% low value purchases electronically;• pay for high-value purchases by electronic funds transfer; and• to be able to interface with a central system to receive tenders electronically. (Note: this will depend onthe early implementation of the Electronic Communications Bill to establish parity for electronic anddigital signatures).by 31 March 2001:• to make 90% of low-value purchases electronicallyAlso proposed is the establishment of a central, cross-government database of suppliers, accessed from a Website on the Internet, holding basic information about suppliers. Information to be maintained by each supplier.Also a Web site ‘Government Prospects’ advertising 90% of all high-value procurement requirements.Box 11.311.12 The Team recommends that theexisting target, for 90% of routineprocurement to be conducted electronicallyby March 2001, should be closely monitoredas part of the CITU six-monthly report. Inaddition it is recommended that detailedtargets, along the lines of those in box 11.3,are agreed quickly by departments, drivenforward strongly and subjected tomonitoring, similar to the other electronicGovernment targets. The OGC should alsopublish a clear, concise definition of what ismeant by ‘low value transactions’.Recommendation 11.2: Campaign toget SMEs more involved inGovernment procurement11.13 One complaint by the DTI’sInformation Age Partnership is the absence ofa clear Government Procurement Frameworkto allow large corporations, and especiallySMEs to trade with Government on-line.The establishment of a ‘GovernmentProspects’ Web site (box 11.3), whichadvertises high-value procurementprogrammes, will go some way to answerthat complaint. However, there is someconcern that the adoption of e-commercein Government procurement may make itmore difficult for SMEs to become involved.A concerted campaign should therefore bemounted to get more SMEs engaged inGovernment procurement and pro-activehelp should also be given to SMEs on howthey can best present their products and/orservices in ways which meet Government’sneeds. Reviews should also be undertaken ofdepartments’ procedures to ensure they arenot biased against SMEs.Transforming the internalprocess of GovernmentRecommendation 11.3: Internationallybenchmarking Governmente-commerce targets11.14 The Government’s e-commercetargets, from the Modernising GovernmentWhite Paper, are set out in paragraph 11.8.Progress towards these is being monitoredby CITU. However, currently there is noequivalent, for Government e-commercetargets, of the DTI’s ‘Spectrum’ internationalbenchmarking studies of e-commerce inindustry. There is therefore no way ofmeasuring the Government’s own progresstowards making the UK the best place fore-commerce. The Team thereforerecommends that an annual internationalbenchmarking study be carried out onGovernment e-commerce targets.Recommendation 11.4: Initiating an‘Internet node’ programme, enablingtransfer of the human andorganisational skills that are neededto take advantage of e-commerce,from private- to public-sector seniormanagement11.15 The ‘Modernising Governmentinitiative’ sets out proposals for ‘joining up’public service to ensure effective decisionE-commerce@its.best.uk91

making and effective delivery. Technically,the Government is making good progresstowards this. With the advent of theGovernment Secure Intranet (GSI) it is nowtheoretically possible to initiate knowledgesharing by departments, using Internet toolssuch as search-engines, and CITU are takingthis forward as part of their commitmentto develop services on the GSI. There arealready some examples of the advantages ofknowledge-sharing (see box 11.4). But thereare many difficulties in using such toolseffectively and to the best advantage. Thesedifficulties are not primarily technical, but aresult of the human and organisational issuesconnected with the implementation of thenew technology.KNOWLEDGE-SHARING IN THE NHSBetter management of patient care is a cleartarget for knowledge-sharing technology. Leedshospitals are now connected so that digitisedX-ray images can be sent both internally andbetween hospitals. This system allows cliniciansto make the best decision on how to managepatients. It also enables resources to be usedmore efficiently.Ayrshire and Aran health board have connectedthe three local health trusts and all 64 GPpractices in their area through the Internet.Circulars and messages are now e-mailed,ensuring that they are up-to-date and prioritised.Lab reports can be sent more efficiently andwithout delay.Source: Public Finance. March 12 1999. Box 11.4Transforming information &service delivery,encouraging the privatesector to challengetraditional methods ofGovernment servicedeliveryRecommendation 11.5: Using the‘Invest to Save Budget’ to buildalternative Government electronicdelivery mechanisms11.17 There are already some goodexamples of electronic delivery withinGovernment (see box 11.5). However,departments have been free to define theirown basket of electronic services.Consequently, the basket generally includesan ad hoc mix of Internet Web sites beingdeveloped as extensions of the Government’sSecure Intranet (GSI), call centres anddedicated EDI links by GovernmentDepartments, agencies and industry actingon behalf of Government. A study byPricewaterhouseCoopers for the DTI 4 foundthat differentiation was often low and therewas little organisation of sites in terms ofbusiness processes (for instance, linkingdescriptions of regulatory requirements todescriptions of fulfilment procedures, grantapplications and form- filing possibilities).Furthermore, integration of local, nationaland European Union information andrequirements was virtually non-existent.E-commerce@its.best.uk11.16 The Government is not alone in facingthe problems of human and organisationalchange that accompany the technologicalchanges now taking place. Many largecorporations have already had extensiveexperience of similar problems. A programmeis needed to enable Government to takeadvantage of this experience. The Teamtherefore recommend the initiation of an‘Internet node’ programme that will enablesenior managers in Government to takeadvantage of this experience. Such trainingwill bring together senior managers inGovernment and senior managers frombusiness in a programme where they canpass on the ‘why’ and ‘how’ of the culturaland organisational changes that have beenbrought about in their sectors through theintroduction of e-commerce.11.18 A survey of Internet users in January1999 5 identified the presence of a clear andwell-known ‘brand’ and ease of being able tomove to and around a Web site (‘navigation’)as the two most important factors in givingusers confidence in e-commerce. Among thecurrent problems with the current deliveryof Government information and serviceselectronically are:lack of common look and feel (brand);difficult access (navigation); andcomplexity (navigation).11.19 Casual inspection of a range ofGovernment Web sites will demonstrate thatthere is generally a lack of common look andfeel or ‘UK Government brand image’. Thismust be viewed as a missed opportunity to4PriceWaterhouseCoopers, “Better Regulation Unit: Cabinet Office Electronic Delivery of Regulation,” London: 5 March 1999.5Cheskin Research and Studio Archetype/Sapient. January 1999.92

THREE TYPES OF EXISTING GOVERNMENT WEBSITES1. Offering general information about Government• Involve generally passive consumption (though usually with some e-mailing capability incorporated forcomments). Example: Number 10 website (http://www.number-10.gov.uk);2. Providing official forms and regulatory compliance information• Structured search and directory facilities allowing some limited interaction. Example: Direct AccessGovernment website (http://www.open.gov.uk);3. Offering document filing and payment systems• Provide a significant degree of highly structured interaction (extranet and internet applications beingdeveloped for SMEs and consumers as additions to Inland Revenue and Customs & Excise EDIconnections with large businesses).Example: cross-departmental pilots• INFOSHOP, which brings together in partnership 16 local authorities, the Cabinet Office, DETR, DH, andHSE, and the University of Salford to enable local government front-line staff resolve customer queries,including complex ones involving more than one local authority or Department;• Direct Access Government, managed by the CCTA on behalf of the DTI, which provides a centralisedsearch engine for documents on individual government departmental Web sites.Box 11.5promote user-confidence. Use of the sites(‘navigation’) is also a problem. As anexample, the difficulty of locating theModernising Government White Paper usingCCTA’s search facility 6 may be cited.The move to electronic forms by somedepartments (see box 11.5) is to bewelcomed, but many of these are toocomplex and lengthy to complete on-line(navigation). For an example of trulyinnovative and user- friendly treatment ofGovernment information it is necessary toturn to the private sector (see box 11.6).Acknowledgement of Government authorshipthrough the Crown copyright imprint,however, can be seen as meeting someof these concerns.11.20 Many of the issues raised inparagraphs 11.17 – 11.19 are beingaddressed by Government, following therecommendations in chapter five of theModernising Government White Paper.There are now specific commitments toguidelines for the look and feel, managementand development of Government Web sites.A relaunch of the CCTA open.gov site isplanned. CITU is discussing with the DTIUPMYSTREET.COMhttp://www.upmystreet.com is a Web site that was developed by a private sector company, working part-timeover a period of about three months. The total cost was about £10,000. The Web site employs Governmentinformation, presenting it in a novel and user-friendly way. The appearance of the site is shown below.6http://www.open.gov.uk/Box 11.6E-commerce@its.best.uk93

and HM Treasury the recommendations ongateways in the PriceWaterhouseCoopersstudy (11.17). The benefits of setting up aCentral Internet Strategy Unit (CISU) forGovernment are being considered. The Teamproposes that there is merit in building onthe CISU initiative by being more pro-activein the use of the ‘Invest to Save’ budget tobring into Government resources from theprivate sector. For example, CISU couldidentify those departments that would mostbenefit from the use of funds from thisbudget. These would be used to financeprivate/public sector partnership that willdevelop innovative pilot projects usinge-commerce. A potential project is identifiedin box 11.7.GUARANTEED ELECTRONIC MARKETS (GEMS) IN JOBSThe concept of ‘Guaranteed Electronic Markets’ (GEMs), put forward by Wingham Rowan in his book‘Net Benefit’ (Macmillan 1999), offers a secure infrastructure that will enable anyone to trade in goodsand services without fear of being defrauded. The system guarantees insurance cover for both sellers andbuyers, automatically allows risk to be set against cost and provides swift access to a Government-backedarbitration service.Taking the example of someone who wishes to have part-time employment as a babysitter. They wouldhave to obtain basic endorsement from the local police and local authority and would have to find a suitablysized ‘bond’, which could be obtained through a GEMs insurance scheme. After each job, the GEMs systemwould automatically update their employment record – thus giving prospective employers an indication oftheir reliability. The system would also indicate demand in their sector – allowing optimum work-planningand indicating where competitive advantage could be taken. Greater experience in a sector would enablea higher price to be charged. Once a track-record had been established as a babysitter, GEM would themallow the individual to go on to offer their services as a child-minder, with their previous job-record beingtaken into account. Such a system would enable the unemployed to develop a portfolio of work on theirown account – potentially turning everyone into an entrepreneur.Source: ‘Net Benefit’One possible use of such a system would be in connection with the DfEE’s ‘Learning and Workbank’ project.The “Learning and Workbank” project brings together ideas about internet based information and advisoryservices – developed within the Employment Service and in other parts of DfEE – importantly in theUniversity for Industry, which will mount its “Learning Direct” service via the Internet by next year.A number of other countries have already established similar Internet based services, notably the US,Australia and Sweden.The aim of the Learning and Workbank project is to provide, by Autumn 2000, an Internet Site which willact as a “portal” for access to all the key services relating to jobs and work-related learning. The keycomponents will be:• job vacancies held by the Employment Services – possibly with private sector agencies and mediaalso contributing;• a CV bank – to help people create CVs and log them for employers to search;• learning opportunities information – through direct access into UfI’s Learning Direct site; and• careers information and advice.Source: DfEE Box 11.7E-commerce@its.best.uk94

Recommendation 11.6: extending thedialogue with the private sector overuse of the evolving Crown copyrightmanagement system with a view towidening the adoption of a classlicensing system.11.21 The largest producer of information inthe UK is the Government. Much of thisinformation is protected by Crown copyright.For some time now, the information industryhas been pressing Government to movetowards the US approach, where allinformation produced by the federalgovernment is made freely available to theprivate-sector – to repackage and sell-on ininnovative ways which add value for thecustomer. The Government responded inMarch 1999 with the Crown CopyrightWhite paper 7 (see box 11.8). However, whilstseeking to meet concerns expressed aboutensuring integrity of Government data andthe ability for Government itself to trade inand add value to its information, theGovernment decided to continue thedelegations of authority given todepartments to handle publication of theirown generated information.11.22 The Team welcomes the movestowards liberalisation announced in the WhitePaper. However, the lack of a consistentapproach across Government placesunnecessary burdens on publishers wishing toresell Government data. While the concernsmentioned above are valid, and rule outapproaches such as full abolition of Crowncopyright as desired by some in industry, theteam advocates a much more liberalisedsystem which would reduce bureaucracy whilestill addressing the core concerns. It isrecommended that the Government shouldextend its dialogue with the private sectorover use of the evolving Crown copyrightmanagement system with a view to wideningthe adoption of a class licensing systemcovering anyone who republishes Crowncopyright information. The class licensingsystem should:set out the acceptable quality frameworkgoverning private sector republication ofany Crown copyright material;impose an obligation on departments tosupply publishers with the data behindGovernment publications; andenable the Government to withdrawauthorisation from any publisher whobreaches the terms of the class licence(thus meeting the concerns about dataintegrity).11.23 Anyone holding a class licencewould be able to publish any Governmentinformation covered by that licence,providing the agreed conditions ofpublication were met. More work will alsoneed to be done to determine the level ofcharges for class licences, and how the classlicences will be administered as part of theevolving Crown copyright managementsystem.CROWN COPYRIGHT WHITE PAPERThis set out a framework for waiving Crown Copyright over large segments of Government information.The Government made a firm commitment to provide greater transparency in relation to the range ofgovernment information which is available. The creation of a new cross-government Information AssetRegister listing the information holdings held at each department and the arrangements for access will helpachieve this aim.Direct income from licensing Crown copyright protected information was estimated at around £200m in1996-977The Future Management of Crown Copyright. Cm4300Box 11.8E-commerce@its.best.uk95

TITLE 12. MONITORING ANDEVALUATING E-COMMERCEE-commerce@its.best.ukSummary12.1 The Government’s stated objective is tomake the UK “the world’s best place to tradeelectronically by 2002”. To achieve thisobjective, it is essential that a framework isestablished to first define e-commerce andthen to:allow direct monitoring of the growthand diffusion of e-commerce activitiesacross the economy and determine theextent to which the UK is the bestenvironment for e-commerce; andallow evaluation of the net overallimpacts of e-commerce on the economy.12.2 This chapter details the suggestedframework, the tools and definitions neededto monitor and evaluate e-commerce andprovides background and analysis to supportthe main recommendations:Recommendation 12.1: produce anannual “state of e-commerce” report.As input into this report, the followingrecommendations must be adopted tomonitor e-commerce:– Recommendation 12.2: developand pilot changes to the industryclassifications used in official UKstatistics;– Recommendation 12.3: developand pilot changes to existing toolsfor gathering business statistics;– Recommendation 12.4: scope thepotential for the Internet itself tobe used to monitor e-commerce;– Recommendation 12.5:commission new e-commercemarket research; and– Recommendation 12.6: UK to takea lead internationally to achievecomparable statistics acrosscountries.Further input must include progress againstrecommendations to evaluate the overallimpacts of e-commerce effectively:– Recommendation 12.7:commission a methodologicalframework for evaluating theoverall net impact of e-commerceby end 1999; and– Recommendation 12.8:commission a formal evaluationof the overall net impacts ofe-commerce, starting 2002, andat 3-yearly intervals thereafter.Background anddefinitions12.3 Without an agreed definition ofe-commerce, there is an increasing risk thatthe UK will not correctly track retail salesmade across the Internet, particularly fromoutside the EU. Failure to recognise thesecould eventually mean that the UK economyappeared to be in recession, based on fallingrecorded retail sales, when in reality it wasgrowing, but a significant percentage of saleswent unrecorded. At present there is nogenerally agreed single definition ofe-commerce. Much of what Governmentsdescribe as e-commerce is recognised byIndustry as e-business. Some examples ofdefinitions are illustrated in box 12.112.4 The PIU Team’s definition ofe-commerce was given in chapter 3.This was a deliberately broad definition,96

EXAMPLES OF THE DIVERSE DEFINITIONS OF ‘ELECTRONIC COMMERCE’• UK Department of Trade & Industry (UKDTI) – ‘net benefit’ publication “using an electronic network tosimplify and speed up all stages of the business process, from design and making to buying selling anddelivery”;• The Alliance for Electronic Business – “the exchange of value across networks”;• Internet.com – “the process of two or more parties making business transactions via a computer or somekind of network”; and• Marks & Spencer Ltd – “the exchange of value between a customer and merchant (over the Internet) inexchange for goods and services”.Box 12.1seeking to capture the wide impacts whiche-commerce can have on all aspects ofbusiness and society. More narrow definitionsare also needed to make a distinctionbetween process e-commerce andtransactional e-commerce:Process e-commerce covers business-tobusinessactivity for intermediate goodsand a wide variety of process information.It has been in use for more than ten yearsin Europe, largely under the guise ofElectronic Data Interchange (EDI). It isclosely associated with the ComputerAssisted Logistics process and has alreadybrought about major reductions in costand improvements in quality/time tomarket, particularly in manufacturingindustry.Transactional electronic commercecovers both business-to-consumer andbusiness-to-business activity for finalproducts and services. It is taken to meanthe sale of goods or services over electronicnetworks, at any stage in the supply chain,whether between businesses, betweenbusinesses and consumers, or between thepublic and private sectors. The sale istransacted electronically, but ultimatedelivery of the good or service may beconducted on or off-line.12.5 Using agreed definitions of e-commerce,there are two requirements for capturingdata on it. The first is to establish whetherthe UK is meeting its stated objectives. Thesecond is to track overall economic changeand thus the ability to manage the macroeconomy(ICT industries are argued to havebrought down overall inflation in the US by0.7% in 1996 and 1997 1 ).12.6 However, the UK has no clearframework for monitoring or evaluatinge-commerce. Therefore, measures areproposed (see figure 12.1) that will enable:Monitoring of the growth and diffusionof e-commerce activities:– “Best environment” measures: to showhow successful the UK is at:putting in place the underlyingFRAMEWORK FOR MONITORING E-COMMERCE“Net impacts”analysisMeasures tomonitor thegrowth anddiffusion ofe-commerceactivities{ { Understanding1Emerging Digital Economy 2, US Department of Commerce‘Net impacts’ analysisi.e. impacts on UK nationaleconomic performance e.g.growth, employment,productivity‘Outcome’ measures:Measurement of e-commerce growth in the UKInternational benchmarking‘Best environment’ measures: Measurement of success against key barriersAccess TrustFoundationsFigure 12.1E-commerce@its.best.uk97

foundations for e-commerce (acompetitive and innovative environmentand an internationally agreed tax andregulatory framework); addressing thekey barriers to take-up of e-commercewithin the pillars of understanding,access and trust.– “Outcome” measures: to quantify thegrowth of e-commerce in the UK.Evaluation of the overall impact ofe-commerce on UK national economicperformance (output, growth, productivity,employment etc.).12.7 A number of existing statistical tools areavailable. These include:current industry classifications(International, European and for EUmember states), which underpin the toolsbelow (see box 12.2);tools for gathering statistics from business,such as the Annual Business Inquiry, whichasks 75,000 businesses, of which 8,000 areretailers, for basic business data and allowscalculation of sales, employment, valueaddeddata etc., by sector (see box 12.3);tools for gathering statistics fromconsumers, such as using the FamilyExpenditure Survey, a continuous annualsurvey of family expenditure and incomeacross the UK, asking respondents to keepa diary of their spend;market research, such as the DTIcommissionedSpectrum Consultingresearch, which monitors businessattitudes and uptake through sectoral,regional and international benchmarkingsurveys (see box 12.4); andsectoral impact assessment studies, suchas the retail financial services and telecomsstudies initiated by the PIU, referred toin chapter eight and detailed in Appendixthree.12.8 Officials within the UK Governmentand international organisations such as theOECD, 2 are currently engaged in discussionsabout how e-commerce should be definedto enable effective measurement and tofacilitate international comparisons. However,we believe that at least two definitions will beneeded (as stated in chapter three). The mostappropriate definition will depend on thepurpose and method of monitoring. Thenarrower definition will be more practicalfor monitoring via regular business surveys.The broader definition is more suitable forthe evaluation of impacts and for supportingsectoral impact assessments.CURRENT INDUSTRY CLASSIFICATIONSInternational classifications: ISIC (International Standard Industrial Classification)• Approved by the Statistical Commission of the United Nations.• As with other classifications, revisions are generally made approximately every ten years, to lend a degreeof stability to collection and to permit the compilation of comparable time series data.European classifications: NACE (Nomenclature générale des Activités économique dans lesCommunautés Européennes)• Adopted by Eurostat.• The lowest level of disaggregation in NACE is the 4-digit class.• The current version of NACE was devised in the late 1980s and is consistent with the current ISIC.E-commerce@its.best.ukClassifications for EU member states• All EU Member States have their own industrial classifications, each of which must conform with NACEdown to the 4-digit level.• However, each Member State is able to adopt a version of NACE for its own national statistics whichincorporates where necessary or helpful a fifth digit to form subclasses of selected 4-digit classes.• The UK’s version of NACE has many such subclasses and is known as SIC92.Box 12.22For example, the OECD workshop, 21 April 1999: “Defining and Measuring E-commerce”, organised by the ICCP Division of theDirectorate of Science, Technology and Industry.98

CURRENT TOOLS FOR GATHERING STATISTICS FROM BUSINESSThe Annual Business Inquiry (ABI)• 75,000 businesses asked for basic business data.• Allows sales, employment, value added etc. to be calculated in each SIC classification.Prodcom• Manufacturing businesses asked for detailed product sales.• Better equipped than ABI to tackle coding problems for infrastructure businesses, as it deals withproducts in fine detail.• There is currently no equivalent to Prodcom for service sectors.The Business & Enterprise R&D survey (BERD)• Captures research and development data.• Based on returns from 1,600 businesses.The Producer Price Inquiry• Measures price movements of manufactured goods.Overseas Trade Statistics (HM Customs and Excise)• Captures import and export of goods.Box 12.3EXAMPLE MARKET RESEARCH FUNDED BY GOVERNMENTSpectrum Strategy Consultants (DTI)• Covers business monitoring.• Most recent publications include a ‘Regional Benchmarking Study’, ‘Sectoral Benchmarking Study’, and‘International Benchmarking Study’, published in 1999.NOP survey of Internet Use (COI)• Bi-annual survey of Internet users.• Provides a demographic profile of the Internet user in Great Britain, examining behavioural patterns andattitudes, to monitor usage and attitudinal data, to build a panel of users and to provide tracking andmeasurement of other media.• Fieldwork was carried out in 1998; data is now available to Government.PFA Research (DTI)• Conducted across a number of European countries.• PFA is a UK-based company which has been conducting research into EDI usage and more recently,electronic commerce across a large number of European countries.• DTI has been subscribing to the service and agreed to co-sponsor a new survey in 1998, mainly focusingon business-to-business e-commerce market and revenue potential.• Its key objective is to understand the activities and intentions of larger companies towards trading web-sites.• The target population is businesses employing 100 people or more, with a sample size of 1400 acrossseven countries.IT for All SurveyView from the Queue (CITU)Box 12.4Recommendations andanalysis12.9 The following recommendations areproposed to enable monitoring andevaluation of the impact of e-commercewithin the framework described above.Within the UK, these recommendations havebeen developed in conjunction with ONS,the DTI and Treasury. At an internationallevel, recommendations are broadlyconsistent with emerging recommendationsfrom the OECD and other countries.Recommendation 12.1: produce anannual “state of e-commerce” report12.10 The UK has no existing way ofco-ordinating the reporting of its activitiesrelating to e-commerce. Therefore, an annualE-commerce@its.best.uk99

E-commerce@its.best.uk100“state of e-commerce” year-on-year,benchmarked report should be producedby the e-envoy (chapter fourteen) as a focusfor political efforts to raise the profile ofe-commerce.12.11 The report should analyse progresstowards making the UK the best place todo e-commerce, update strategy wherenecessary, set out targets and assign rolesand responsibilities for the next year. Progressshould also be reported on:changes to UK industry classifications, toolsfor gathering statistics from business, andmarket research; andevaluating, as far as possible, the overallnet impacts of e-commerce – bearing inmind the problems of quantifying theeffects of job displacement and spillovers.12.12 Clear indicators are needed to testwhether progress is being made towardsmaking the UK the best place to doe-commerce. These indicators should be keptto a minimum but should include thoseoutlined within the “vision”. More detailedmeasures will also be needed to checkprogress against specific “best place”measures. These are detailed in box 12.5later in this chapter. The first annual reportshould coincide with the usual timing of thepublication of the DTI’s businessbenchmarking data, around June/ July 2000.Recommendations tomonitor e-commerce12.13 Recommendations to monitore-commerce cover the following:Infrastructure businesses: i.e. businessesinvolved in the development of hardware(PCs, routers, servers etc.), network serviceproviders (e.g. Internet access), softwareand enabling services (e-payment, delivery,authentication etc.), which have beenmajor areas of e-commerce growth todate.Businesses which trade electronically.Consumer imports and exports: in order toverify business figures and ensure thatelectronic consumer purchases from othercountries are captured, it is necessary toknow how much consumers are buyingelectronically and what proportion of thesepurchases is being made from UKproducers rather than imports. We alsoneed to be aware of the trade balance ine-commerce and must therefore havesome measure of electronic exports.The public sector: it is necessary tounderstand the extent to whichGovernment is using e-commerce andtherefore acting as exemplar.Recommendation 12.2: develop andpilot changes to the industryclassifications used in official UKstatistics12.14 Existing industry classifications are thebasis for all national statistics and theircontributing surveys (as stated in paragraph12.5 and detailed in box 12.2). And ONS arein the early stages of work to compile amonthly index of services output. This mustbe co-ordinated with other schemes whichhave limitations for monitoring e-commerce:The current manufacturing 4 digit codes forboth manufacturing and service sectors donot properly reflect the recent changes ininformation-based industries and wouldbenefit from re-thinking. Most EU memberstates have indicated that they do not wishto see a major revision to NACE (theEuropean classification) until 2007.There is little disaggregation of servicesectors, needed to capture serviceinfrastructure areas such as software etc.Comparisons cannot currently be madewith the US as although 4-digit codes arealigned across Europe, they are notconsistent with the US and Canada. TheUS are currently looking at theirclassification from an informationtechnology perspective and have recentlyintroduced a new North AmericanIndustrial Classification System (NAICS),which they are using as a basis forcollecting data.12.15 In the ICT sector (which covers theinfrastructure businesses), the DTI havedeveloped proposals for new UK-only 5-digitSIC codes (see box 12.5). These have yet tobe tested for feasibility with the ONSBusiness Register and with UK business. Thisshould be done quickly, with a view to newcodes being adopted by the UK within thenext year. Similar codes should be developedfor the content and digital media industry.

PROPOSED DTI ADDITIONS TO SIC CODESTHE ICT SECTORExisting UK ICT SIC92 code DTI proposals30.00 Manufacture office machinery andcomputers31.30 Manufacture of insulated wire and cable32.10 Manufacture of electronic valvesand tubes and other electroniccomponents32.20 Manufacture of TV and radiotransmitters and telephone apparatus• 30.02 Manufacture of computers and other information processing equipment30.02/1 manufacture of computers30.02/2 manufacture of peripherals• 32.10 Manufacture of electronic valves and tubes and other electronic components32.10/1 manufacture of semi-conductors32.10/2 manufacture of cathode ray tubes and other tubes and valves32.10/3 manufacture of liquid crystal displays and other flat panel displays32.10/4 manufacture of sensors and actuators32.10/5 manufacture of printed circuit boards32.10/6 manufacture of capacitors, resistors and other passive components32.10/7 manufacture of connectors, switches and relays32.10/8 manufacture of optoelectronic components including subassemblies32.10/9 manufacture of other electronic components32.30 Manufacture of TV and radioreceivers and other consumerelectronic goods33.20 Manufacture of instrumentation33.30 Manufacture of industrial processcontrol equipment51.43, 51.64, 51.65Wholesale of ICT equipment andsupplies71.33 Renting of office machinery andequipment, including computers64.20 Telecommunications• 72.20• 72.40Software consultancy and supply split into:72.20/1 development, production and supply of custom software products72.20/2 development, production and supply of application software packages72.20/3 development, production and supply of application enabling tools72.20/4 development, production and supply of system level software72.20/5 development, production and supply of internet software72.20/6 other software activities not elsewhere specifiedDatabase activities, to be split into:72.40/1 aggregation of data/content from a range of sources72.40/2 other database activities72.00 Computer software and servicesBox 12.512.16 In the meantime, data on the size andgrowth of e-commerce-related infrastructurebusinesses should be constructed frompresent SIC codes. Although the resultingdefinition would have shortcomings becauseof the limitations outlined above, it wouldprovide sales, output, employment andcapital expenditure data, back to 1992/3,based on the Annual Business Inquiry.12.17 For service industries (e.g. software),specific service areas should be split out inthe ONS’ Annual Business Inquiry. Thiswould require agreement over which splitsmade most sense. The DTI and ONS,together with business, should agree on themost appropriate splits in time for the first“State of e-commerce” report.Recommendation 12.3: develop andpilot changes to existing tools forgathering business statistics12.18 Currently, none of the existing toolsfor gathering business statistics splitelectronic from non-electronic activities orenable international benchmarking (althoughmost countries conduct similar surveys).12.19 The Government should aim foran electronic/non-electronic split of salesin its Annual Business Inquiry and BusinessEnterprise R&D survey (BERD, which capturesresearch and development expenditure).Sales data are sought as business is unlikelyto be able to breakdown measures such asemployment between traditional ande-commerce activities, since employees willoften be engaged in both. The followingsteps should be taken by the first “Stateof E-commerce” report:clear definitions of e-commerce and thescope of the questions to be agreed withingovernment and with business. It ispossible that the scope should initially belimited to those sectors where e-commerceis already having significant impact inorder to limit compliance costs;collection and compliance costs (tobusiness) must be estimated (addingquestions in some sources, such as the ABI,will increase the burden on business andtherefore any additions may need to bebalanced by the removal of existingquestions); andE-commerce@its.best.uk101

as with all recommendations, pilot datacollection must be carried out acrosssample businesses.12.20 The Family Expenditure Survey (FES),which monitors consumer purchases, has arelatively small sample size (~6,500households in the UK), and a falling numberof respondents. In addition, it does not splitout domestically produced purchases fromimports. Therefore, it is recommended thatconsumer statistics are picked up in themarket research detailed in recommendation12.5 below rather than through changes tothe FES.Recommendation 12.4: scope thepotential for the Internet itself tobe used to monitor e-commerce12.21 In addition to using existing tools tomonitor e-commerce, there is potential forthe technology underpinning e-commerceitself to be used to monitor uptake (in asimilar way to TV audience monitoring).This is not currently being explored in theUK. Discussions need to be initiated with ITtechnology suppliers, covering alle-commerce channels (e.g. PC, DTV etc.) andthe potential for “self-monitoring” should bescoped in time for discussion within the first“State of e-commerce” report.12.22 Any scoping document should bedeveloped in conjunction with consumerassociations and should include acceptablesolutions to any privacy concerns, forexample, by using an “opt-in” scheme,although this could introduce a selection biasin the monitoring process.Recommendation 12.5: commissionnew e-commerce market research12.23 Market research statistics offer analternative to national statistics. Althoughthey are not an ideal long-term measurementtool (as noted by the OECD in their recentpaper, 3 see figure 12.2), they can beassembled quickly. Market research is alreadyused extensively by the UK Government tomonitor e-commerce (see box 12.4), butbenchmarked data are business-focused anddo not cover enabling businesses or thepublic sector. Consumer data are onlyavailable on a national basis.12.24 Therefore, current market researchneeds extending to cover enabling businessesand the public sector and needs to beinternationally benchmarked to enableGovernment to monitor e-commerce in theshort-term while other recommendations arebeing implemented. The research will alsoassist the ultimate evaluation of the overallnet impacts of e-commerce.ISSUES WITH MARKET RESEARCHE-commerce@its.best.ukPotential problems with market research• Estimates tend to vary significantly dueto sampling and non-sampling errors,possible double-counting of the outputsof different businesses (particularlybusiness-to-business) and differentdefinitions of e-commerce;• Estimates tend to be based on arelatively small sample of respondentsand may ignore the problem of non-response;• Moreover, if research is notcommissioned, there are the followingadditional concerns:– there is often no indication of impacton traditional industries;– figures offer no indication ofprofitability and so no indication ofimpact on GDP;– estimates are often not specific tothe UK or split by sector, are typicallyskewed towards US figures and maynot allow comparison of the UK withother countries;– estimates tend not to indicateindustry changes such as theconvergence between supermarketsand financial services.3The Economic and Social Impacts of E-commerceIDCINPUTVeriFoneData AnalysisYankeeE-landEITOAEA/AUHambrecht & QuestForresterMorgan StanleyMedianComparison of e-commerce estimatesUS $ millions, 1995–97Source: OECD: The Economic and Social Impacts of E-commerce, Chapter Three Figure 12.2703504504752001000850600725117028008000102

IDEAL “BEST ENVIRONMENT” MEASURESTo establish the foundations for e-commerce:• inward investment by overseas e-commerce businesses (£m);• new e-business start-ups: the total number of start-ups and as a percentage of all new business start-upsin, (a), user industries and, (b), enabling industries;• venture capital subscribed to e-businesses (£m) and as a percentage of all venture capital;• labour market flexibility.• availability of suitable skills.To ensure access to infrastructure and social inclusion:• Costs– the costs of Internet use for businesses and consumers: PC prices (£ per machine), telecommunicationscharges (fixed £ per quarter and variable £ per hour), ISP charges (split between telecoms fixedcharges and ISP charges) and the cost of producing a Web site. If possible lower and upper quartile ofrange of costs in each country are needed, as well as the median, to give some idea of the range ofpotential costs which businesses and consumers face;– the percentage of (a), consumers and, (b), businesses who perceive the following as a barrier toaccess/use: cost (PCs, telecommunications charges, other), poor reliability/slow speed of connections,lack of broadband access, lack of skills, other.• Technology– the number and percentage of individuals/households, businesses and public sector with: (a) a PC;(b) a PC and a modem (both with & without Internet access); and (c) interactive digital TV – in theirhome; by socio-economic group, age and sex;– for businesses/public sector, by sector/Department and size of firm;– the number and percentage of individuals and businesses with access via the following: standard fixedline, ISDN, ASDL, radio fixed access, mobile, mobile UMTS, interactive digital TV or leased lines; and– of those with Internet access: (1) the percentage breakdown of uses between information, e-mail,on-line purchasing, on-line sales and other; (2) the typical time spent on-line – (a), in work and, (b),in the home (median, upper quartile, lower quartile).• Inclusivity– the percentage schools, libraries, post offices with Internet access and the number and the percentageof individuals who regularly access the Internet at places outside their home and outside their place ofwork (e.g. through schools, libraries or other community facilities);– the percentage of the population without a bank account and a credit card; and the percentage of thepopulation with problems of, (a), literacy and, (b), numeracy (on standard OECD benchmark measures.To ensure that users develop an understanding of the opportunities and threats, including monitoringGovernment as exemplar:• the perceived benefits and disadvantages of e-commerce over traditional channels (cost savings,increased revenues, none etc.) along with their expected profitability now and in the future. Forbusinesses, these data should be split by CEOs/ board members and middle managers;• the percentage of businesses who see e-commerce as an important opportunity/threat to their business;• the percentage of businesses with a strategic plan/strategy for exploiting the opportunities offered bye-commerce and adapting to any threats;• estimated levels of IT literacy and for business, professional level skills;• the percentage of Government procurement conducted electronically;• the percentage of Government departments and agencies available through portals;• the percentage of MPs with e-mail and web-sites.To ensure that users trust e-commerce applications:• the percentage of (a), consumers and, (b), businesses who see the following as barriers to e-commerce:privacy, security, fraud, content liability, IPR, means of redress, other;• the percentage of consumers concerned about the quality/delivery of goods and services sold over theInternet;• Internet fraud and illegal content (number of cases). Internet fraud (£m), as a percentage of all e-commerce;• Percentage of individuals with smartcardsBox 12.6E-commerce@its.best.uk103

12.25 Increased use of e-commerce willinevitably mean that there will be an increasein the number of electronic transactions forthe public sector (including an increase in theproportion of taxes paid electronically).However, e-commerce sales, benefits tobusiness and the public sector will beoptimised if the UK is successful in creatingthe world’s best environment for e-commerce. In order to test whether this isthe case, some proxy outcome measuresshould also be included in surveys. Suggestedmeasures are given in box 12.6.12.26 To test whether the UK is the “bestenvironment” for e-commerce, the marketresearch surveys should include all “keyoutcome and net impact measures”described in box 12.7.12.27 In the short-term, a scoping studyshould immediately be commissioned by thee-envoy (chapter fourteen) to establish whatdata are currently available, where the gaps areand how they could be filled (it is likely to relyon telephone and personal interview surveys togather data). This should be reported in thefirst annual e-commerce review.12.28 All surveys should have a broadgeographical coverage. They should aim, asfar as possible, to cover the major developedeconomies and countries at the forefront of,or likely to play a key role in, the growth ofe-commerce. Such countries include the G7countries, the Scandinavian countries(Sweden, Norway, Denmark and Finland),Australia and Singapore/Malaysia/HongKong/South Korea.12.29 Subsequent to the scoping study,all market research should be coordinatedby the central e-envoy (see chapter fourteen).All questions should be aligned withemerging OECD research.Recommendation 12.6: UK to takea lead internationally to achievecomparable statistics across countries.12.30 The UK should aim for a review of SICcodes at an International level at the earliestopportunity to allow comparisons to bemade between the UK and other countries.In particular, it should seek EU agreement toa significantly shorter deadline for reviewingEuropean classifications than the currentKEY “OUTCOME” AND NET IMPACT” MEASURESSource of dataOutcome measures• Infrastructure businessesIdeal measurements• sales and output (£m);• value added (£m);• employment/self-employment (‘000);• capital expenditure (£m);• R&D spending (£m);• labour productivity• Businesses whichtrade electronically• Consumer purchases• Public sector• total volume of business conducted electronically – £m sales and £m output;• profitability of e-businesses compared to other sectors;• business investment in hardware/software (additional rather thanreplacement).• total volume of purchases made electronically, split between domestic salesand imports.• proportion of routine Government transactions handled electronically;• proportion of businesses paying tax over the Internet;• proportion of all taxes paid electronically.E-commerce@its.best.ukNet impact measures• % businesses which have found e-commerce has reduced costs/raisedproductivity, reduced/increased employment levels, improved productquality, improved customer service;• % consumers who have found e-commerce has lowered the prices they pay,improved product quality, improved customer service, reduced the timespent shopping, with resulting savings;• % growth in productivity of businesses adopting e-commerce.Box 12.7104

target of 2007. In addition, the possibilitiesfor informal change – which may be capableof implementation earlier than 2007 – shouldbe actively explored.12.31 The UK must also ensure that the EUStructural Business Statistics Regulation(which dictates what should be collected inthe ABI) is reconsidered as soon as possible.There may be some early opportunities as theEU is considering information technologies inits current update.Recommendations to evaluatethe impact ofe-commerce12.32 The net overall impact of e-commerceon the UK economy could be very significant.Any analysis of this impact on the macroeconomyis necessarily qualitative rather thanquantitative because:there will be both positive and negativeeffects and the magnitude of the netimpact is highly uncertain;there are numerous conceptual andpractical difficulties associated withmeasuring the economy-wide impacts ofe-commerce; andthe growth of e-commerce is in its infancyand there is little firm evidence on whichto base conclusions about its likely macroeconomicimpact.12.33 However, it is possible to point tosome concrete effects e-commerce is likely tohave, as set out in figure 12.3. These includemacro-economic effects on:productivity – e-commerce shouldincrease the efficiency of doing business,thereby increasing economy-wide labourand capital productivity (but see box 12.8);cost and price inflation – increases inefficiency brought about by e-commerceshould drive down costs. Provided marketsare competitive, lower costs will be passedon to consumers in lower prices.E-commerce should also raise theintensity of competition by improving pricetransparency, reducing the geographicalsegmentation of markets and increasingnew entry competition;employment – although there will bepositive and negative effects onemployment in the short term, the longtermprospects are net employment gainsbrought about by new opportunities forexisting industries, the emergence ofcompletely new e-commerce basedindustries and a rise in living standards dueto the increased real incomes generated bye-commerce;investment – e-commerce should make iteasier for businesses to forecast demandand thus to manage their stocks andinventories. This will reduce aggregatelevels of investment in stocks andinventories. In the short term, this couldhave negative effects on national incomebut in the medium to long term there willbe gains from having to devote fewerresources to storing and managing stocksand inventories;international trade – the UK, like othercountries, may be expected to see somerise in both exports and imports in relationto national income. This could lead toincreased demand for additionalinvestment in transport infrastructure; andimpacts on the demand for inputs –there is likely to be increased demand forIT professionals, particularly those withbusiness application skills, as a result ofe-commerce. Their wages and salariescould rise sharply as a consequence.Similarly the need for new distributionDOES E-COMMERCE IMPROVE PRODUCTIVITY?This is an issue of considerable controversy amongst economists. See, for example, the article on “The NewEconomy” in the The Economist 24 July 1999. It is pointed out, for example, that the rapid adoption ofinformation and communications technology from the mid-1970s onwards was accompanied by a slowdownin labour and capital productivity growth in most developed countries. This led the Nobel-prize winningeconomist, Robert Solow, to observe in 1987 that “you can see the computer age everywhere but in theproductivity statistics”. The reasons for this may include the substitution of investment in information andcommunications technology for other types of capital and learning effects. These may mean that it takestime for businesses to realise the full benefit of new technologies.Box 12.8E-commerce@its.best.uk105

106E-commerce@its.best.ukIMPACT OF E-COMMERCE ON THE MACRO ECONOMYMicro-economic changesIndustry sector outcomesMacro-economic impactNew productsand servicesEfficiency andproductivitygains resultingin new e-business formsReducedcosts andpricesIncreasedrealdisposableincomeIncreased outputof sector• Increase in output andemployment• Higher real disposal incomes• Changes in intensity ofcompetition• Downward pressure oncosts and prices• Improvements inproductivity/supply sideefficiency of the economyAdoption ofe-commerceopportunitiesIncreasedoutput in othersectorsIncreasedoutput inenabling servicesConditions forpositive impacts:• flexible labourmarkets• efficient capitalmarkets• an enterprisecultureImpact ontrend rateofeconomicgrowthDisplacementof traditionalbusinessesDecreasedoutput intraditional sectors• Reduction in output andemploymentFigure 12.3

centres may push up land and propertyprices in some parts of the country(though these may be offset by falls in theprice of traditional retail property etc.).12.34 As well as taking actions to put directmeasures in place, the Government needs touse statistics on the impacts outlined aboveto evaluate the overall, net impact of e-commerce on all aspects of UK nationaleconomic performance, including output,growth, productivity, employment, incomeand expenditure.Recommendation 12.7: commissiona methodological framework forevaluating the overall net impactsof e-commerce by end 199912.35 The DTI, supported by the Treasuryand ONS, should commission a frameworkfor evaluating the overall net impacts ofe-commerce by end 1999, drawing on anyexperience in the US.Recommendation 12.8: commission aformal evaluation of the overall netimpacts of e-commerce, starting 2002,and at 3 yearly intervals thereafter.12.36 Once the methodological frameworkis agreed, the DTI should commission anevaluation as a piece of independent,external commissioned research. It is likelythat a large part of the evaluation will haveto be in the form of case studies. Theseshould be co-ordinated withinrecommendation 8.2: carry out andcommunicate shared industry/Governmentsector-specific “e-commerce impactassessments” to highlight the opportunities,threats and barriers in each sector.12.37 The results of the evaluation shouldfeed into the annual “state of e-commercereview” described in recommendation 12.1.E-commerce@its.best.uk107

TITLE 13. ACTIONS BY THEDEVOLVED ADMINISTRATIONSE-commerce@its.best.ukIntroduction13.1 The Information Society Initiativeextends throughout the UK, and Scotland,Wales and Northern Ireland each have theirown programmes to drive the take-up ofe-commerce. The PIU Team was highlyimpressed by the quality of theseprogrammes and the enthusiasm it foundfor that implementation. Below is a shortsummary of the main activity underwayoutside England.Scotland13.2 In Scotland, the Scottish Executive’sEnterprise and Lifelong Learning Department,along with Scottish Enterprise and Highlandsand Islands Enterprise, provides help andencouragement to Scottish business to exploitthe opportunities of the information age.13.3 A nation-wide network of 12 LocalSupport Centres has been set up to assistlocal business with all their information andcommunication technology needs, providingimpartial advice tailored to companies’individual requirements.13.4 Scottish Enterprise is the economicdevelopment agency for lowland Scotlandcovering 93% of the Scottish population fromGrampian to the Borders. The e-commerceteam within Scottish Enterprise is responsiblefor a number of integrated programmes andprojects aimed at accelerating thedevelopment and usage of e-commercethrough the Internet and related technologies.13.5 The team has several activities tosupport the growth of an internationallyrobust e-commerce supply sector.These include:a Winners at the Web competition,rewarding companies throughout Scotlandwhich achieve tangible business benefitsthrough the use of Internet or Intranettechnologies;the ICT Solutions for Businessprogramme, involving the e-commerceteam and nine LECs – Dunbartonshire,Ayrshire, Fife, Forth Valley, Glasgow,Grampian, Lanarkshire, Renfrewshire, andTayside. The programme, which receivesEU funding, is midway through its activitiesand has so far assisted over 120 SMEs inlowland Scotland by the provision ofimpartial and independent advice on ICTstrategy and implementation;an E-Commerce Roadshow planned forautumn 1999, designed to inform a largenumber of SMEs about the benefits ofe-commerce and to persuade them toembrace these systems;seminars and conferences, organisedby the e-commerce team in partnershipwith the Local Enterprise Companynetwork, Highlands and Islands Enterpriseand other partners; andbanner projects the e-commerce teamencourages the development of practical,multi-partner projects, which demonstratethe benefits to business of integratinge-commerce strategies within theircompanies.13.6 Scottish Enterprise is currently workingon the development of an e-commercestrategy for Scotland. Further information onthe work of Scottish Enterprise’s e-commerce108

team can be found at http://www.ecommercescotland.org.13.7 As well as working with ScottishEnterprise as above, Highlands and IslandsEnterprise is looking at e-commerceparticularly for its potential to benefitperipheral areas.Wales13.8 The Welsh Information Societyinitiative is taken forward by the NationalAssembly for Wales, the Welsh DevelopmentAgency and the Development Board for RuralWales, supported by the EuropeanCommission. A strategy and action plandocument has been produced covering avision of an all Wales ‘Information Society’incorporating:‘Transforming Wales’;‘Transforming Welsh Business’;‘Transforming Education and Training’; and‘Transforming Public Services’.13.9 Projects underway include:The Lywybr Pathway project to ensurethat people and businesses in rural Walesare in a position to reap the benefits of theInformation Society, including:– supporting a geographical spread oftechnically appropriate access points;– ensuring cost-effective, high qualityaccess to a shared regionalnetwork/intranet; and– raising awareness of the InformationSociety.Business Connect IT Support Centres– eight main Business Connect IT SupportCentres throughout Wales, with associatedsatellite centres provide expertindependent advice on ICT issues andopportunities for small businesses.‘Joint Initiatives for GovernmentServices Around Wales’ (JIGSAW) –a National Assembly for Wales projectwith three strands:– improving administration of CommonAgricultural Policy payments to farmersin Wales;– developing joint working with otherpublic sector organisations in ruralWales to establish “first stop shops”at the Agricultural Department’snetwork of offices across Wales; and– Assembly front offices providing accessto the Assembly from the AgriculturalDepartment’s network of offices acrossWales.13.10 Other Initiatives include:E-Commerce Innovation Centre,(eCIC), Cardiff University – is involvedin several e-commerce initiatives throughout Wales, with public and private sectorpartners.South Wales E-Commerce Testbed –in conjunction with BT and providinga testbed of 15 SMEs in South Wales todemonstrate how e-commerce can helpcompanies improve their performanceand trade.Adviser Skills Initiative Pilot –a pan-Wales programme to assess andaccredit independent hybrid business/ITadvisers for SMEs. This is part of thenational ASI scheme.Electronic Commerce and EDIImplementation programme – aninitiative to provide information, adviceand assistance to Welsh businessmenin undertaking EDI and e-commercedevelopments and implementation.It is sponsored by the WelshDevelopment Agency.13.11 Further information on theInformation Society Initiative in Wales canbe found at http://www.wis.org.ukNorthern Ireland13.12 “Strategy 2010”, the March 1999report on Northern Ireland’s EconomicDevelopment Strategy, identified the ICTrevolution as a key priority area, andrecommended the establishment of anInformation Age Commission reportingdirectly to the First and Deputy First Ministerin the new Northern Ireland Assembly.13.13 Pending the establishment of theExecutive, and to prepare the way for theCommission, an Information Age Initiativehas been announced. A top level group,representing a wide range of private andpublic sector interests, has been formed todevelop a strategy framework andE-commerce@its.best.uk109

comprehensive action plan aimed at ensuringthat Northern Ireland takes maximumadvantage of opportunities for e-business.13.14 The Department of EconomicDevelopment is taking the lead in supportingthe Information Age Initiative and, throughan extensive range of programmes, isencouraging the development of theknowledge driven economy and e-commercethrough client companies and sectoralorganisations. For example, the LocalEnterprise and Development Unit hasinitiated a Connectivity Programme targeting1000 small companies to provide them withwebsite access and e-mail facilities. Thepackage also includes an element of trainingin website development.13.15 There are a number of majordevelopments underway across the educationsectors to enhance the ICT infrastructure, toincrease the application of ICT in teachingand learning and to improve the skills of staffand students. For example, the five Educationand Library Boards in Northern Ireland haveappointed specialist ICT trainers andlaunched a ‘Connecting Teachers’ initiativein January 1999. This programme aims toprovide teachers and librarians with basicICT skills. By the end of June 1999, all schoolshad a trained teacher whose function will beto train his/her colleagues on a cascademodel basis.13.16 Northern Ireland Governmentdepartments are actively pursuing knowledgedriven economy issues arising from theCompetitiveness White Paper and associatedinitiatives – Modernising Government;Electronic Government and the InformationSociety.13.17 Further information on theInformation Society Initiative in NorthernIreland can be found athttp://www.nics.gov.uk/irtuE-commerce@its.best.uk110

TITLE 14. CO-ORDINATING THEACTIONSSummary14.1 Chapter four set out the wide rangeof initiatives already being taken byGovernment and industry. This report hashighlighted the further actions required tocomplete the foundations for a supportivee-commerce environment and to meetthe triple challenge of promoting‘Understanding’, ‘Access’ and ‘Trust’.There will be resource and prioritisationimplications and considerable scope forpublic/ private partnership in theimplementation of these recommendations. Akey theme from both industry anddepartments has been the need for a strongerfocus and better co-ordination in drivingforward the Government strategy on the‘Information Age’ and ‘Knowledge-basedEconomy’. This applies both in terms of theneed for clear political leadership and formore vigorous managerial championship ofthe issues. This chapter details the Team’smain recommendations to achieve this:Recommendation 14.1: the PrimeMinister should appoint an e-Ministeron Information Age issues to providepolitical co-ordination of activities one-commerce and e-Government. Thee-Minister should work with anetwork of Ministers, in keydepartments with leadresponsibilities for e-commerce ande-Government policy delivery.Recommendation 14.2: theGovernment should appoint an‘e-envoy’ with a wider remit thanoriginally proposed, covering bothe-commerce and the IT elements ofthe Modernising Government WhitePaper. The e-envoy should be a highlevelchampion for Information Ageissues across Government, based inthe Cabinet Office with a direct lineto the Prime Minister.Recommendation 14.3: as part ofthe new arrangements to ensuremore effective cross-departmentalworking, an ‘Information AgeManagement Board’ should beestablished, chaired by the e-envoy,bringing together a small core groupof departments with majore-commerce and e-Governmentresponsibilities.Recommendation 14.4: where thesedo not already exist, officials shouldbe identified in each majordepartment as ‘e-commerceco-ordinators’.Recommendation 14.5: the e-Ministerand e-envoy should togetherchampion implementation of thisreport and should maintain a ‘living’programme of action in takingforward the overarching strategy.The need forco-ordination1DTI Spectrum International Benchmarking Study 1999 “Moving into the Information Age”14.2 Chapter four established that the UK issubstantially behind the USA, Japan, Canada,Australia and Germany in the percentage ofthe population making regular use of theInternet, either from home or office, and inbusiness use of Electronic Data Interchange(EDI). 1 France is also making up lost groundvery rapidly. Two defining features of thosemajor economies ahead of the UK are:the way in which they maximise the overallimpact of their programmes throughcareful and detailed co-ordination; andE-commerce@its.best.uk111

COUNTRYUnited StatesCO-ORDINATION MECHANISMPolitical sponsor: Al Gore, Vice-President.Co-ordination mechanism: A Federal Task Force, chaired jointly by Vice-President Gore’sChief Domestic Policy Adviser and the White House Deputy Chief Economist. Keydepartments of State all represented on the task force at senior level. Review meetingsheld every two weeks.AustraliaPolitical sponsor: Senator Richard Alston, Minister for Communications InformationTechnology and the Arts.Co-ordination mechanism: The National Office for the Information Economy (NOIE)driving forward a detailed programme of action across Federal and State Government inclose co-operation with Industry.CanadaPolitical sponsor: Deputy Minister Kevin Lynch – Industry Canada. Responsible for bothe-commerce and e-Government.Co-ordination mechanism: National Information Highway Commission driving forwarda detailed programme of action across Federal and Provincial Government in closeco-operation with Industry.Electronic Commerce Task Force Director General: Richard Simpson, implementing thestrategy published by the Canadian Prime MinisterBox 14.1E-commerce@its.best.ukthe political and managerial capital andpriority they accord to achieving successin e-commerce.14.3 Details of the co-ordination processesused in USA, Australia and Canada are givenin box 14.1.14.4 This ‘Task Force’ approach has workedbecause it ensures continuous attentionacross Government and an immediatepolitical focus on areas where targets arenot being achieved.“Co-ordination between central Governmentdepartments and local Government needs tobe strengthened in order to avoid duplication ofeffort.”PIU seminar participant“A channel strategy requires a clear overarchingroadmap for development, and budgets allocatedaccording to business processes (rather than ona departmental basis).”PIU seminar participant14.5 It is clear that a number of Ministershave given considerable priority toe-commerce and e-Government issues withintheir departments, for example work at theDepartment of Trade and Industry in theCompetitiveness White Paper. 214.6 However the work of the PIU projecthas demonstrated the need to:bring together the e-commerce ande-Government strategies, and ensure thatthe links between them are made in takingforward Government action;ensure better co-ordination ofcross-departmental activities; andprovide a stronger political and managerialchampionship in driving forward the UK’sobjectives.14.7 It is clear that other countries seekingto move ahead in the e-commerce race areadopting this approach. For example,through the role of the ‘Technical Councillorfor Information Technologies and Society’in the French Prime Minister’s office.Recommendations2DTI 1998 White Paper “Our competitive Future: Building the Knowledge-Driven Economy”.Recommendation 14.1: the PrimeMinister should appoint an e-Ministeron Information Age issues to providepolitical co-ordination of activities one-commerce and e-Government. Thee-Minister should work with a networkof Ministers in key departments with112

lead responsibilities for e-commerceand e-Government policy delivery.14.8 The e-Minister should report direct tothe Prime Minister on Information Age issues.The e-Minister’s role would involve politicalleadership and co-ordination of the range ofactivities in departments, in particularproviding a single point of contact withindustry and the media on Information Ageissues. Ministerial responsibility for particularpolicies would remain with the relevantSecretaries of State.14.9 A number of Ministers in keydepartments already have lead responsibilitiesin taking forward e-commerce ande-Government initiatives, in particular theMinister for e-Government in the CabinetOffice. The e-Minister will need to bringtogether a network of these Information AgeMinisters – together with Ministers in otherdepartments who take on such roles – incarrying forward the overall strategy. The e-Minister will need to work particularly closelywith the Minister for e-Government throughthis network.Recommendation 14.2: theGovernment should appoint an‘e-envoy’ with a wider remit thanoriginally proposed, covering bothe-commerce and the IT elements of theModernising Government White Paper.The e-envoy should be a high-levelchampion for Information Age issuesacross Government, based in theCabinet Office with a direct link tothe Prime Minister.14.10 The appointment of an e-Minister,covering Information Age issues, will help toensure effective political co-ordination ofe-commerce and e-Government activities.This role needs to be buttressed by effectivemanagerial and administrative arrangementsin driving forward the Government’smodernising objectives.14.11 To achieve this, the role of theproposed e-envoy should be re-defined.The DTI originally advertised the post ofe-envoy in November 1998. The initial viewwas that the post-holder would focus one-commerce activities. This remit should beextended so that the e-envoy covers bothe-commerce and the IT elements of theModernising Government White Paper.14.12 The breadth and importance of therole of the e-envoy, together with the needto achieve change across Government andindeed internationally, suggest that the postholdershould have a direct link to the PrimeMinister, whilst reporting on a day-to-daybasis through the e-Minister and the Ministerfor e-Government as appropriate. Thee-envoy should be located in the CabinetOffice.14.13 The Team recommends five keythemes that should provide the focus forthe work of the e-envoy:e-business – galvanising UK business, atall levels, to recognise the opportunitiesand threats implicit in e-commerce. Aparticular focus on under-performing smalland micro enterprises would be essential;e-Government – providing strategic inputto the development of the Information AgeGovernment agenda set out in theModernising Government White Paper.Developing synergies between private andpublic sectors, including the role ofGovernment as an exemplar of the use ofe-commerce through its own procurementand as the deliverer of e-Governmentservices at national, regional and locallevel;promoting the UK strategy abroad –providing the consistent drive in takingforward the UK’s Information Ageobjectives in international fora;e-inclusion – maintaining the push toensure that the benefits of e-commerceand e-Government are available to allsections of society, including those withdisabilities and the marginalised; andprogramme management – ensuringeffective co-ordination of Governmentactivities, including implementation of thefull programme of actions recommendedby this Report; monitoring progress againstthe overall objectives for e-commerce ande-Government, keeping strategies underregular and probing review in the light ofdevelopments (international, technological,commercial and legal); and identifying keymedium-term strategic challenges for theGovernment arising from new informationand communication technologies.Recommendation 14.3: as part of thenew arrangements to ensure moreeffective cross-departmental working,an ‘Information Age ManagementBoard’ should be established, chairedby the e-envoy, bringing together aE-commerce@its.best.uk113

small core group of departments withmajor e-commerce and e-Governmentresponsibilities.14.14 In general the e-envoy should workwith other departments in carrying forwardthe responsibilities set out above. Thee-envoy should be a high-level championfor Information Age issues, bringing astrong central drive to the developmentand implementation of the Government’sobjectives and effective co-ordinationof activities. The e-envoy should have asupport team to help deliver these functions,but should not seek to duplicate existingdepartmental activities.14.15 To help ensure effective joint workingin achieving change, an Information AgeManagement Board should be established tooversee the programme of work. This Boardshould be kept small so that it has aneffective managerial focus in bringingtogether the key departments withe-commerce and e-Governmentresponsibilities. The e-envoy should developthese arrangements on appointment, indiscussion with relevant departments.Considerations should be given to appointingexternal, non-executive members to thisboard, to bring in private sector, wider publicsector and consumer group input.14.16 In addition to the Information AgeManagement Board, the e-envoy shouldchair the new Information Age ChampionsGroup (made up of 26 departments,Agencies and the Local GovernmentAssociation) to ensure a fully coherent andco-ordinated approach right acrossGovernment.14.17 The e-envoy and support team willneed to work closely with departments, thewider public sector, industry, trade andconsumer bodies in delivering effectiveprogramme management. Arrangementswill need to be made to ensure that thereis continuity in taking forward therecommendations of the PIU project Team,particularly in contributing to an objectiveassessment of progress in the first annualreport on the ‘state of e-commerce in the UK’as recommended in chapter twelve.private sectors. It will include, for example,PR skills in taking forward the concertedcampaign referred to in chapter eight.Recommendation 14.4: where thesedo not already exist, officials shouldbe identified in each major departmentas ‘e-commerce co-ordinators’.14.19 The e-envoy will also want to considerapproaches to developing an effectivenetwork of innovators at middlemanagement level in the civil service andwider public sector. It will be vital to developa cadre middle ranking and senior publicservants who share a common vision for thedevelopment of e-commerce ande-Government, not constrained by the ‘silothinking’ which can sometimes be implied byorganisational boundaries. A team of fifteento twenty officials, from key departments,Agencies and public sector bodies, might beselected and taken swiftly through afacilitated programme of training. In manycases these individuals can already beidentified. Their training should develop:a strong shared vision for the developmentof e-commerce and e-Government in theUK;ownership of the initial programme ofactions recommended in this report; anda clear understanding of the detailedimplementation responsibilities.14.20 These officials would remain underdepartmental line management. They shouldhowever be given clear personalresponsibilities (and targets) to both lead theagreed change programmes in departmentsand provide a single point of departmentalcontact for the e-envoy and support team.They will need to work closely with the moresenior departmental ‘Information AgeChampions’ already identified as part of the‘Modernising Government’ agenda.Recommendation 14.5: the e-Ministerand e-envoy should together championimplementation of this report andshould maintain a ‘living’ programmeof action in taking forward theoverarching strategy.E-commerce@its.best.uk14.18 It is clear from this report that thee-envoy and support team will need to have,or be able to access, a range of skills andexperience covering both the public and114

14.21 Key elements would include:tracking progress against the milestonesand success indicators detailed in thisreport;monitoring the experiences of othercountries, learning from their successes andfailures;using the planned monitoring andevaluation framework (defined in chaptertwelve) to identify and then resource themost successful policy initiatives; andon behalf of the Prime Minister, adaptingthe programme in the light of practicalexperience and evolving internationalcompetition.14.22 In taking forward this role, thee-Minister and e-envoy, in co-ordination withthe Minister for e-Government, will need toput in place arrangements for private sector,wider public sector and consumer groupinput to the development of their workprogramme. The PIU e-commerce Team hasbenefited from the high-level Industryinvolvement in the ‘Steering Group’overseeing the project. This Group’s role waslimited to the duration of the PIU project andit has now been disbanded.14.23 It will be important to maintain anoutward looking focus and the sort of ‘jointownership’ which can be achieved throughan external Advisory Group as the PIU’srecommendations are implemented. Theexisting “Information Age Partnership”,chaired by the Secretary of State for Tradeand Industry may be one mechanism toachieve this. The e-Minister and e-envoy willalso need to consider whether to establishother sources of external advice.E-commerce@its.best.uk115

TITLE 15. ACTION PLAN15.1 This chapter summarises in tabular formthe recommendations contained in chaptersseven to twelve and fourteen of this report.The table shows the organisations taking leadresponsibility for implementation, togetherwith key supporting players. The time-framefor completion of either the entire action orpreliminary work on each recommendation isalso proposed. It should be noted that thee-Minister and e-envoy have overallresponsibility for co-ordinating the actions onall recommendations and championingimplementation of the report as a whole.E-commerce@its.best.uk116

TABLE LISTING RECOMMENDATIONS, LEAD RESPOSIBILITY, SUPPORT AND TIME-FRAME.NO. RECOMMENDATION LEAD RESPONSIBILITY IN SUPPORT BY WHEN…Chapter 7 Foundations1 7.1: OFTEL and OFT should carry out a review to identify any emerging barriers to OFTEL, OFT DTI, Competition 31 March 2000competition in electronic markets and make recommendations for preventing anyCommissionsuch barriers from becoming serious problems.2 7.2: DTI should work with industry to map emerging clusters of e-commerce DTI DETR, HMT, RDAs 31 December 1999businesses to examine whether their development can be facilitated.3 7.3: DTI should facilitate an industry-led mentoring/partnering initiative to help new DTI RDAs, DfEE 31 December 1999Internet service and content businesses start up and grow4 7.4: The independent Banking Review, headed by Don Cruickshank, should consider HMTcarefully the problems faced by SMEs in obtaining on-line credit-card processingfacilities for e-commerce transactions and should recommend action as appropriate5 7.5: The Inland Revenue and Customs and Excise should publish a comprehensive Inland Revenue, HMC&E November 1999Information Paper in the Autumn (1999) updating the Government’s strategy for thetax treatment of e-commerce6 7.6: The UK should continue to aim for international agreement on the direct tax Inland Revenue, HMC&E HMT 31 December 2000treatment of payments for electronic goods and services by end 2000.7 7.7: The UK should continue to seek international agreement on the application of Inland Revenue, HMC&E HMT 31 March 2000the “permanent establishment” principle to Web sites by March 2000.8 7.8: The UK should continue to play a leading role in OECD work to review the Inland Revenue HMT Ongoingapplication of transfer pricing rules to e-commerce and to develop rules forattributing income to permanent establishments.9 7.9: The UK should identify effective mechanisms for VAT collection in respect of HMC&E HMT Ongoingconsumer purchases of on-line items from outside the EU10 7.10: The tax authorities need to remain vigilant in ensuring e-commerce does not Inland Revenue, HMC&E HMT Ongoinglead to increased tax evasion and avoidance117E-commerce@its.best.uk

118E-commerce@its.best.ukNO. RECOMMENDATION LEAD RESPONSIBILITY IN SUPPORT BY WHEN…11 7.11: The UK should work with the EU, the World Customs Organisation and other HMC&E HMT 31 March 2000international bodies to improve and streamline procedures for the collection of VATand customs duties on small consignments of imports12 7.12: The Inland Revenue and Customs and Excise should publish improved guidance Inland Revenue, HMC&E HMT, DTI November 1999for e-businesses, targeted at small and medium sized enterprises, explaining their taxobligations and how the tax system will treat cross-border transactions.13 7.13: The UK should continue to play a leading role in the OECD and in other Inland Revenue, HMC&E HMT, DTI Ongoinginternational organisations to achieve an internationally agreed implementation ofthe framework for the taxation of e-commerce agreed at the 1998 Ottawa Ministerialconference.14 7.14: The UK should seek an international examination of the implications of HMC&E HO, HMT , DTI, DCMS Initiated by Decembere-commerce betting and gaming for the tax yield from this sector 199915 7.15: The implications of the convergence of telecommunications, broadcasting and DTI, DCMS OFTEL, ITC, BBC, RA, Check point at 30 Juneinformation technologies for regulatory regimes and institutions should continue to Rau 2000*be kept under review by DTI and DCMS16 7.16: Regulatory regimes affecting other sectors of the economy need to be reviewed All departments & agencies Preliminary Impactand reformed by the relevant department responsible for each sector to ensure theyAssessments by 30 Juneremain relevant to the changes in industrial and market structure and new business 2000opportunities brought about by e-commerce17 7.17: The UK should promote a co-ordinated and joined-up approach to DTI FCO Ongoinge-commerce across Europe and globally18 7.18: The UK should continue to push for e-commerce to be fully integrated within DTI FCO, HMT Within Seattle Roundthe framework of international trade (2003)Chapter 8: Understanding19 8.1: Mount a concerted PR campaign in partnership with industry, to create an DTI, e-envoy Preliminary findingse-commerce “buzz” in the UK. Commission research to identify the most by 30 June 2000*,appropriate branding to support this campaign.then Ongoing

NO. RECOMMENDATION LEAD RESPONSIBILITY IN SUPPORT BY WHEN…20 8.2: Carry out and communicate shared industry/Government sector-specific All departments & agencies 30 June 2000*“e-commerce impact assessments” to highlight the opportunities, threats andbarriers in each sector, and in particular the audiovisual content industry (linked torecommendation 7.15 above)21 8.3: Work with key business influencers to increase boardroom recognition of the DTI, e-envoy Business Organisations Start by September 1999strategic challenges of e-commerce; Milestone: 30 June 2000*22 8.4: Develop a multi-channel marketing strategy to influence SMEs/micro businesses DTI, e-envoy Business Organisations Start by September 1999Milestone: 30 June 2000*23 8.5: The new English RDAs and devolved authorities should address e-commerce as DETR, RDAs In step + agreed RDAa priority in their economic development strategies, where they have not already done so.publication dates.Milestone: 30 June 2000*24 8.6: Set new National Targets on IT literacy DfEE DTI Define targets end March2000. 90% school leaversLevel 1, 70% Level 2, ITskills by 2002, work forcetargets set by end 2002Chapter 9: Access25 9.1: Telecommunications operators should be encouraged to offer a wider range of OFTEL DTI Progress by 01 Januarytariff structure options 200026 9.2: Telecommunications operators should be encouraged to explore new commercial OFTEL DTI Ongoinginterconnect arrangements with BT, allowing more flexible retail tariffs27 9.3: OFTEL ensure BT’s DSL roll out plans do not give it unfair competitive advantage OFTEL OFTEL’s timetable:October 1999;December 2000; July 200128 9.4: E-Minister/DTI ensure that OFTEL has sufficient resources to meet DSL roll HMT, e-envoy DTI October 1999out timetable.29 9.5: Better co-ordination and marketing of access initiatives Inter-Ministerial Group Milestone: 30 June 2000*30 9.6: The monitoring of priority excluded groups DTI SEU 30 June 2000*31 9.7: the combination of skills training with the provision of access Inter-Ministerial Group DfEE 1 January 2000119E-commerce@its.best.uk

120E-commerce@its.best.ukNO. RECOMMENDATION LEAD RESPONSIBILITY IN SUPPORT BY WHEN…Chapter 10: Trust32 10.1: Implement a national, secure Public Key Infrastructure (PKI) for Government CITU OGC, MoD, DoH, 31 March 2000purposese-envoy, CESG33 10.2: Ensure that the industry-led TrustUK Hallmark initiative puts in place an Internet DTI Business Organisations 31 December 1999disputes arbitration service and a mechanism for policing its standards34 10.3: Encourage private providers to launch multi-function smartcard CITU DSS, DoH, DETR, HMT Publication ofschemes for individuals.framework policy forGovernment use ofsmartcards byDecember 199935 10.4: Ensure Government departments quickly take advantage of the equivalence All departments Start August 1999.between digital and written documentsIdentify areas by 31 March200036 10.5: Improve technical capability of law-enforcement and regulators and establish HO HMT, NCIS, SFO, FSA Start Sept. 1999.an Internet Crime Unit Complete July 200037 10.6: Build on recommendations in PIU report:‘Encryption and Law Enforcement’ HO, DTI Ongoingon Government/industry co-operation38 10.7: the Home Office should re-consider the case for using non-jury trials for serious HO LCD March 2000fraud (including e-commerce fraud)39 10.8: the Government to encourage the EU to achieve a co-regulatory approach to DTI March 2000e-commerce enforcement and redress.40 10.9: Ensure action is taken to give protection of Intellectual Property Rights (IPR) a DTI, e-envoy DfEE Ongoinghigher profile in public understanding and that DCMS work with the creativeindustries to put in place standards and infrastructure to ensure that content isprotected in transmission and that adequate remuneration is received for theexploitation of intellectual property41 1010: Provide “parents’ websites” and encourage software companies to supply free DTI DfEE, HO 30 June 2000*content-filtering software;

NO. RECOMMENDATION LEAD RESPONSIBILITY IN SUPPORT BY WHEN…Chapter 11: Government as Exemplar42 11.1: Publication of departmental performance against targets in electronic procurement OGC CITU September 199943 11.2: Campaign to get SMEs more involved in Government procurement All departments First review of departments30 June 2000*44 11.3: Internationally benchmarking Government e-commerce targets CITU DTI 30 June 2000*45 11.4: Initiating an ‘Internet node’ programme, enabling transfer of the human CSSC First course April 2000and organisational skills that are needed to take advantage of e-commerce, fromprivate- to public-sector senior management46 11.5: Using the Invest to Save Budget to build alternative Government electronic HMT CITU,GICS,CISU First projects started bydelivery mechanisms June 200047 11.6: Extending the dialogue with the private sector over use of the evolving Crown HMSO DTI System set up bycopyright management system with a view to widening the adoption of a class December 2000licensing systemChapter 12: Monitoring48 12.1: Produce an annual “state of e-commerce” report. e-envoy All departments 30 June 2000*49 12.2: Develop and pilot changes to the industry classifications used in official DTI, ONS Milestone: 30 JuneUK statistics 2000*50 12.3: Develop and pilot changes to existing tools for gathering business statistics DTI, ONS 30 June 2000*51 12.4: Scope the potential for the Internet itself to be used to monitor e-commerce DTI, ONS 30 June 2000*52 12.5: Commission new e-commerce market research. DTI, ONS Start Sept 1999Complete 30 June 200053 12.6: UK to take a lead in international fora to achieve comparable statistics across DTI Start ASAPcountries.54 12.7: Commission a methodological framework for evaluating the overall net DTI HMT 31 December 1999impact of e-commerce by end 199955 12.8: Commission a formal evaluation of the overall net impacts of e-commerce, DTI HMT 30 June 2000*121E-commerce@its.best.uk

122E-commerce@its.best.ukNO. RECOMMENDATION LEAD RESPONSIBILITY IN SUPPORT BY WHEN…starting 2002, and at 3-yearly intervals thereafter.Chapter 14: Co-ordination56 14.1: The Prime Minister should appoint an e-Minister on Information Age issues to PM August 1999provide political co-ordination of activities on e-commerce and e-Government.The e-Minister should work with a network of Ministers, in key departments with leadresponsibilities for e-commerce and e-Government policy delivery.57 14.2: The Government should appoint an ‘e-envoy’ with a wider remit than originally PM September 1999proposed, covering both e-commerce and the IT elements of the ModernisingGovernment White Paper. The e-envoy should be a high-level champion forInformation Age issues across Government, based in the Cabinet Office with a directline to the Prime Minister.58 14.3: As part of the new arrangements to ensure more effective cross-departmental e-envoy October 1999working, an ‘Information Age Management Board’ should be established, chaired bythe e-envoy, bringing together a small core group of departments with majore-commerce and e-Government responsibilities.59 14.4: Where these do not already exist, officials should be identified in each major e-envoy October 1999department as ‘e-commerce co-ordinators’.60 14.5: The e-Minister and e-envoy should together champion implementation of this e-Minister/e-envoy ongoingreport and should maintain a ‘living’ programme of action in taking forward theoverarching strategy.*Note: 30 June 2000 = date for first ‘state of e-commerce’ report.

TITLE GLOSSARY OF TERMSAND ACRONYMSABIADSLAEBAOLATMBandwidthBBCBroadbandBTCACable modemCCTACEOCESGCISUCITUCSSADCMSDETRAnnual Business Inquiry. EU (q.v.) business survey.Asymmetric Digital Subscriber Loop. A type of DSL (q.v.).Alliance for Electronic Business – an alliance of UK business andindustry organisations formed in 1998 to promote UK leadershipin e-commerce.America On Line. ISP (q.v.).Automatic Teller Machine. ‘Hole in the wall’ system for accessingcash.A measure of the amount of electronic data that can be transmitted,either down a Telephone line or through an individual radio channel.The broader the Bandwidth, the quicker the information can betransmitted.British Broadcasting Corporation. UK public service broadcaster.A class of transmission system which allows large amounts of data tobe transferred at high speed. See Bandwidth.British Telecommunications plc.Consumers’ Association. UK non-Governmental organisation.Means of connecting to the Internet (q.v.) using a cable TV network,rather than the conventional telephone line.Central Computer and Telecommunications Agency. (UK GovernmentAgency).Chief Executive Officer.Communications and Electronic Security Group. (UK Governmentbody).Central Internet Strategy Unit. Proposed Unit of UK GovernmentCabinet Office.Central IT (q.v.) Unit – part of the Cabinet Office of the UKGovernment.Computer and Software Services Association.Department of Culture, Media and Sport. (UK GovernmentDepartment).Department of Environment Transport and the Regions. (UKGovernment Department).E-commerce@its.best.uk123

E-commerce@its.best.uk124DfEEDigital TVDMADoHDSLDTIDTVDVLAECE-cashECUEDIE-mailEUExtranetFCOFixed-linkFSAG7GICSGSIHackingHMC&EHMTHOHSEIAPICTInland RevenueDepartment for Employment and Education. (UK GovernmentDepartment).Television broadcasts using digital technology. Far more efficient useof radio spectrum enables a larger number of channels andsupplementary data services to be broadcast.Direct Marketing Association. UK private sector organisation.Department of Health. (UK Government Department).Digital Subscriber Loop. A technology that enables higher bandwidth(qv) Communications to be passed through conventional telephonelines.Department of Trade and Industry (UK Government Department).See Digital TV.Driver and Vehicle Licensing Agency. (UK Government Agency).European Commission.Electronic cash. A system that allows cash to be stored on a smartcard(qv).European Currency Unit.Electronic Data Interchange. A series of industry standards for theexchange mainly of process (q.v.) information between companies insupply chains.Electronic mail – usually sent or received over the Internet.European Union.A ‘Closed’ network, accessible only to certain organisations orindividuals, that operates using Internet technology.Foreign and Commonwealth Office. (UK Government Department).Telecommunications (q.v.) using a cable, fibre or point-to-point radiolink, rather than mobile telephony.Financial Services Authority. (UK Government Agency regulating thefinancial Services sector).The Group of 7 most highly industrialised nations.Government Information and Communication Services. Unit of UKGovernment Cabinet Office.Government Secure Intranet. Private network connecting UKGovernment Departments and Agencies.The process of gaining access to private data or systems, withoutpermission from its owner, typically using the Internet.Her Majesty’s Customs and Excise. (UK Government Department).Her Majesty’s Treasury. (UK Government Department).Home Office. (UK Government Department).Health and Safety Executive. (UK Government Agency).Information Age Partnership: a DTI(q.v.) initiative bringing togetherthe main UK Industry players in ICT (q.v.).Information and Communications Technology.That part of HMT (q.v.) concerned with tax collection.

Internet The Internet is an ‘open’ network allowing anyone to exchange data –as opposed to a ‘closed’ system such as an Extranet (q.v.).IPRISDNISIISPITITCIWFLCDLocal loopMoDModemMPNCISNHSOECDOFTOFTELOGCONSPCPINPIUPKIPMPRProcess e-commercePSTNPublic KeyCryptographyRAIntellectual Property Rights. The right to get a return from theproducts of one’s own ingenuity.Integrated Services Digital Network. A digital telephone serviceoperating over the normal fixed-link network, giving higherBandwidth (q.v.) access.Information Society Initiative (ISI) of the DTI (q.v.).Internet Service Provider. A company providing access to the Internetfor individual and business users.Information Technology.Independent Television Commission. (UK Government statutory body).Internet Watch Foundation. Non-Governmental UK organisation setup to monitor Illegal and fraudulent use of the Internet (q.v.).Lord Chancellor’s Department. (UK Government Legal Department).The last part of a fixed-link (q.v.) telecommunications (q.v.) networkthat connects to a subscriber’s home or business.Ministry of Defence. UK Government Department.A device attached to a PC (q.v.) which enables it to communicateusing the Internet or other data network.Member of (UK) Parliament.National Criminal Intelligence Service. (UK Government Agency).National Health Service. (UK Government Agency).Organisation of Economic Co-operation and Development.Office of Fair Trading. (UK Government Agency).Office of Telecommunications Regulation. (UK Government statutorybody).Office of Government Commerce. (Proposed UK Government body).Office of National Statistics. (Part of HMT (q.v.)).Personal Computer.Personal Identification Number.Performance and Innovation Unit. Unit of UK Government CabinetOffice.Public Key Infrastructure. A system that allows individuals andbusinesses to Use Public Key Cryptography (q.v.).Prime Minister. Leader of UK Government.Public Relations.Managing flow of information about design, manufacturing, order,quality etc. within industry supply-chains.Public Switched Telecommunications Network.A system for encrypting material sent over the Internet by generating a‘pair’ of solutions (keys): one transmitted publicly, the other kept private.Radiocommunications Agency. UK Government agency responsible,amongst other things, for issuing licenses for exploitation of the radiospectrum.E-commerce@its.best.uk125

E-commerce@its.best.uk126RAuRDASEUSFOSICSIMSmartcardsSMESoftwareSpamSpectrum licensesTelcosTelecommunicationsThird generationmobileTransactione-commerceUMTSURLVATVCRVirus (electronic)Walled GardenWebWeb siteWhite PaperWTORadio Authority. UK Government statutory body which decides whocan broadcast.Regional Development Agencies in UK.Social Exclusion Unit. Unit in UK Government Cabinet Office.Serious Fraud Office. (UK Government Agency).Standard Industrial Classification – for goods and services.Systeme Internationale Mobile. Standard for digital mobilecommunication used in Europe.Plastic cards containing computer chips that can store data foridentification or Electronic cash purposes.Small and Medium EnterprisesComputer programsUnwanted ‘junk’ e-mail. Can be sent repeatedly, in enormousquantities, at very Little cost to the sender and some cost to thereceiver.Licenses given to businesses to exploit internationally agreed areas ofthe Radio-frequency spectrum. In UK licenses are issued by theRadiocommunications Agency (RA) (q.v.).Telecommunications (q.v.) companiesCommunication using the telephone infrastructure – either land-lineor mobile.See UMTSSelling products electronically – either business-to-business orbusiness-to-consumerThe Universal Mobile Telecommunication Service is a standard formobile telecommunications that will offer high bandwidth (q.v.)access from 2002.Universal Resource Locator. The ‘address’ of a Web site. (takes theform http://www.[name of organisation or business].[com or co orgov or net].[country uk, au etc])Value Added Tax. Tax on items purchased.Video Cassette RecorderSoftware (q.v.), usually originating in the Internet, that infiltrates a PC,making Something happen that the owner would rather not (e.g. lossof data).A ‘closed’ environment on the Internet allowing users access to arange of Electronic traders selected by the owner of the walledgarden.Another name for the Internet.A virtual location on the Internet that has been developed by anindividual, business or organisation for the purpose of givinginformation, advertising or selling its products. Accessed by using aURL (q.v.).Official UK Government document.World Trade Organisation.

LIST OF SOURCESMENTIONED IN THE REPORT1. IDC research report 19982. Emerging Digital Economy II, US Department of Commerce, June 19993. DTI Spectrum Benchmarking study – Moving into the Information Age – 19994. The Third Wave – written by Alvin Toffler and published by Bantam Books5. NUA Survey July 1999 http://www.nua.ie/surveys6. DTI 1998 White Paper “Our competitive Future: Building the Knowledge-Driven Economy”. CM41767. Forrester Research Report December 19988. IDC 19989. Dewan & Kraemer: “International Dimensions of the Productivity Paradox” August 199810. DTI White Paper ‘Modern Markets: Confident Consumers’ Cm4410 July 199911. “Our Competitive Future – Building the Knowledge Driven Economy”, Cm 4176, December 199812. “Electronic Commerce: UK Taxation Policies”, Joint Policy Paper, Inland Revenue and H.M. Customs and Excise, 6th October 199813. Informed Sources, 199914. Ernst and Young report: “The sky is not falling”, 21 June 199915. Financial Times, 30 August 199916. “Regulating Communications – Approaching Convergence in the Information Age” (Cm 4022)17. Romtec EITO/DG3 Study – 199818. Consumers’ Association/IPSOS-RSL. May 199919. Durlacher Quarterly Internet Report, Quarter 3, 199820. Institute of Directors/Oracle Blueprint for Business, 199821. PFA, 1999, sample size = 18322. McKinsey Productivity Report, 199823. PEECCS 98 e-commerce survey24. Spectrum ICT Survey of Businesses 1997/1998/1999 by NOP Research Group25. The Skills Audit, DfEE and Cabinet Office, 199626. OFTEL: “Access to Bandwidth: Proposals for Action”, July 199927. European Internet Strategies, November 199828. Gallop Survey for De La Rue 199929. Forrester report “Braving EU Net Regulation”30. Survey by Louis Harris & Associates for NCL. April-May 199931. Internet Watch Foundation, statistics for 1998. http://www.iwf.org.uk32. Project Trawler: Crime on the Information Highways. A major report from the UK National Criminal Intelligence Unit. Published June 199933. Forrester report “Braving EU Net Regulation”34. AT&T Labs-Research Technical Report TR 99.4.3 14 April 199935. Roper Starch Worldwide Survey. May 199936. E-Commerce Trust Study. Cheskin Research and Studio Archetype/Sapient. January 199937. Financial Times. 23/06/199938. Second Roundtable on E-Commerce in Asia39. DB Everett: Smart Card Technology: Introduction to Smart Cards. Smart Card News Ltd. 199940. Modernising Government Action Plan (27 July 1999)41. Modernising Government White Paper. Cm 4310, March 199942. PIU Report ‘Encryption & Law Enforcement’ May 199943. Juries in Serious Fraud Trials. A Consultation Document. Home Office February 199844. Memorandum from John Battle. DTI 18 March 199845. Our Information Age – the Government’s Vision. Central Office of Information URN 98/677; 4/9846. Review of Civil Procurement in Central Government. London: July 199947. http://www.citu.gov.uk/25percent/spring99.htm48. PriceWaterhouseCoopers, “Better Regulation Unit: Cabinet Office Electronic Delivery of Regulation,” London: 5 March 199949. Cheskin Research and Studio Archetype/Sapient. January 199950. The Future Management of Crown Copyright. Cm430051. OECD workshop, 21 April 1999: “Defining and Measuring E-commerce”, organised by the ICCP Division of theDirectorate of Science, Technology and Industry52. OECD: The Economic and Social Impacts of E-commerce. 1999E-commerce@its.best.uk127

APPENDICESA1. Role of the PIUA2. Project Team and Project ManagementA3. Roundtables and WorkshopsA4. Detailed Discussion of E-commerce Market FailuresA5. ‘Electronic Delivery of Government Services’A6. Key Contacts and IntervieweesNote: Appendices are not attached to the printedversion of this report. Copies may be obtainedon-line at www.cabinet-office.gov.uk/innovations.Appendices are included with the CD-ROM version of this report.E-commerce@its.best.uk128