Law, Policy, and The Convergence
of Telecommunications
and Computing Technologies

March 7-9, 2001


March 8, 2001 PROCEEDINGS

Personal Privacy in a Connected World

DEAN JEFFREY S. LEHMAN: . . . . Two in the morning and then a lunch speaker and then another panel this afternoon. I'd like to, without further ado turn the microphone over to the Dean of our School of Information, John King, who will be the moderator for the first panel this morning. One of the great things about technology is that we can't do a thing about the fact that there's a light switch at the back of the room right where people are inclined to stand and lean. And yes, that's the head of Information Technology at the law school who, in fact, leaned against the light switch and is turning several shades of crimson this morning. Okay, here's John King.


JOHN KING: Thank you very much. If our panel could come to the foreground we could really get going here. While they're getting seated I'll just make a few introductory remarks. I am John King. I am the Dean of the School of Information here at the University of Michigan. Welcome, thank you for coming out. This is very exciting. I can tell you all that you should take advantage of minor technology marvel. Yesterday I was tied up in many things but I just could not miss the keynote address. So I looked at it on the webcast and the quality was very high. There's a website you can go to if you can get it from the law website here if you're missing any of these events and just click on the webcast links and you'll be able to see this entire affair which is really very exciting.

Okay, before we do the introductions I just want to give you a couple of protocol observations. We're going to run this fairly tight schedule because we do have constrained time so I'm going to ask the Attorney General to speak for 30 minutes and the panelists for 10 minutes each. We've got a little wiggle room there but not a lot. I'll be tough and hold them to it because we need some time for the questions. That's a crucial part of this enterprise. The protocol for questions is to write them down, there will be some cards passed out. You simply hand your card to them and they come up here and we take the questions from the cards. There's also a yellow sheet for you for this panel. As the question session is going, if you would write down on this yellow sheet what you think crucial questions are and turn them in on the tables out in back afterwards. This is going to be a very important part of the product of the conference because we're going to try and synthesize the key observations, insights that arise out of this open questions, if you will, remaining to be settled.

Okay, without further ado, I'd like to introduce our panelists. Our key speaker is Attorney General Jennifer Granholm. She's a Phi Beta Kappa graduate of the University of California, Berkeley and an honors graduate of the Harvard Law School. She clerked in the sixth circuit and became head of Wayne County's law department in 1994. In 1998 she was elected Attorney General of the state of Michigan, and she's focused her prosecutorial sights on child and senior citizen's rights and consumer and environmental protection. As Attorney General, she has introduced a new high-tech crime unit, which has enabled her office to be the nation's first to bring criminal charges against a company selling illegal drugs using the Internet. As a result of this, her office has become a resource for law enforcement agencies seeking to learn more about Internet crimes.

Our first panelist is Jeffrey Rosen, an associate professor at George Washington University Law School where he teaches Constitutional Law, Criminal Procedure and the Law of Privacy, and he's author of a book called The Unwanted Gaze: The Destruction of Privacy in America. And our other panelist is Jonah Seiger, co-founder and chief strategist of mindshare Internet Campaigns, a leading online political strategies firm in Washington. The firm helps issue coalitions, non-profit organizations, corporations and trade associations use the Internet for political organizing, outreach and advocacy.


ATTORNEY GENERAL JENNIFER M. GRANHOLM: Well, I appreciate the invitation, Dean Lehman to come here because this is an area that my office has been operating in and going where no man has gone before and so I really enjoy the topic and I love the fact that, of course, the University of Michigan here is on the cutting edge, as usual, and we like to think that our office is on the cutting edge. The notion of converging academia and government and business is a great concept in the new economy because we've got to borrow from one another. We've got to link; we have to forge unusual partnerships to be able to address some of these issues. So, glad to be here.

Now as my hat is a pragmatic one, being the Attorney General of the state of Michigan and I love to steal as much as I can from academia, I look forward to seeing the results of this conference. And hopefully we'll be able to borrow some for even our Lansing legislature if such results come about. Well, let me say first of all that privacy is really not my favorite subject. And for folks that followed a lot of the actions that we've taken in this realm, it may be difficult to believe because we really have been on the forefront in our office in going after the privacy rights of individuals on line. Medical privacy in addition to that which I'll talk more about in a minute.

But, in reality privacy is not my favorite subject because I don't think in the bigger scheme of things that's really what we should be talking about. I don't know if any of you know Robert Putnam's book Bowling Alone. It's a great book I was introduced to not long ago, and I think about it every time we talk about privacy in my office. And if you haven't read it, Putnam argues that we are suffering from a serious diminution in civic culture in our society, or civic engagement with one another, our need and our propensity to connect with other human beings as some sort of community is suffering. Even if it's as small a community as a bowling league it's dwindling rapidly. Forget about civic involvement in terms of the voting rate, which is sickeningly low. Just look at the trust rate, which is also alarmingly low. Social networks are deteriorating, we are a society now of leaders and of consultants, certainly consultants and of managers, but not of joiners. The percent of people who now attend any public meeting continues to fall. There's a 50 percent drop in the last 25 years. My guess is folks in this room wouldn't be here were it not related to your job in some way. So the question really is what's to blame for that loss of togetherness, this surreptitious unraveling of the social fabric, the community. And I think there are lots of things. We're mobile, we have much less free time, there's no war, there's no depression to force us to bond together. There's no rich, collective experience anymore. Technology certainly has made our lives so much more convenient and efficient and it's certainly played some role in that isolation of society. So what I really care about, what I really care about as Attorney General is to find out if there are ways to promote social and civic interaction and community engagement. That's what I love to talk about. But what I'm asked to talk about more often is privacy. And so I have a different spin on this issue. Are the two connected? I think that they really are and I think it depends on how you define privacy.

Jim Tierney, who's the former Attorney General of Maine, and I talk about this all the time. He's a real privacy guy as well. If you believe the most extreme privacy advocates one would think that privacy is all about being left alone. You're sort of reminded of Ebenezer Scrooge in Dickens' A Christmas Carol. The extreme privacy advocates, no one here, the extreme ones want nobody in their lives, they don't want anybody knocking on the door, they don't want anybody coming to collect for the poor, they don't want anybody, no nephew inviting them anyplace. They're so concerned about privacy, and their rage often is so intense that they don't care about any of the good things about interaction. When they talk about business, the extreme folks, they neglect to mention that there are some positive sides of marketing, positive sides of a customized Internet experience. When they talk about their real opponent, which of course is government, they seem not to care about deadbeat dads and the collection of child support or Medicaid and insurance fraud, or tracking child molesters, or sexual harassment in the work place. The extreme privacy zealots seem kind of joyless. They don't want to use a debit card at the grocery store. They want to pay cash to avoid leaving a trail. They'd rather die than buy a pair of pants at EddieBauer.com and for the true privacy diehards, therefore, it is all about separation and about not coming together. So if being a privacy advocate means being left alone completely, I am no privacy advocate.

But what if privacy really means something else? What if it means, just a different spin, what if it means for the ability for us and for the private sector to create a safe space. Turn again to fiction and It's a Wonderful Life, one of my favorites. George Bailey, Jimmy Stewart, in most ways he is the least private guy in the world. Everybody knows everything about him and his family. He runs a bank; he knows how much his neighbors have in the bank. He worries about them so much that he can't even sleep at night. George Bailey makes the world better. He's our hero. He lives in a safe and connected place, in Bellows Falls, Vermont, where the grocery clerks say, "Morning, George" and the police officers are named Bert and Ernie. Now, what's that got to do with privacy? I think it's got a lot to do. If the goal is to create a safe place. Now what I'm talking about is not a place of isolation but a place where we can be open with ourselves. Where we can have trust in the companies with which we do business. Then privacy, therefore, is a good thing. This is a market response. Companies who deal online need to create an environment where people trust the online world, where they trust the ability of giving their information away. The safe spaces, of course, can be geographical, can be bricks and mortar spaces, like doctors offices or insurance companies, and they can be cyber communities like an online mall or a medical information site. But they've got to be safe. They've got to enable people to trust them. So when anyone uses personal information to destroy our ability to live in a safe place, then I care a great deal about privacy protections. So where does this go? This is where, as my grandmother used to say, this is where the cheese gets more binding. Don't ask what that means but it's a really great line, don't you think?

On the one hand, the Internet is a relatively easy thing in terms of law enforcement and government regulation at least as I see it. We set up a high-tech crime unit, as was mentioned, a year ago to make the online world a safe place for kids in particular. And in terms of businesses, especially in terms of consumer issues, the Internet cannot be known as an enforcement-free zone where any new economy business can go and avoid the law to get a foothold, a competitive foothold, over their competitors by fraudulently or deceptive advertising or luring people in. And of course it goes without saying that purely criminal activities like child pornography online and drug sales on line or criminal wherever they occur whether it's in the bricks and mortar world or on a website. But in terms of privacy, in terms of privacy, well it may not be spelled out explicitly, I think the right of privacy, I know it's been discussed in more than 700 Supreme Court opinions and countless lower court decisions across the country. As many of you may know the Supreme Court has concluded already in several cases that the concept of privacy is already imbedded in the fine mesh that is the Constitution and the Bill of Rights from Lloyd vs. U.S. in 1894 where Justice Harlan in 1894 wrote that "of all the rights of the citizen few are of greater importance or more essential to his peace and happiness than the right to personal security." In 1946 Justice Douglas in Griswold vs. Connecticut writes, "we deal with the right of privacy older than the Bill of Rights, older than our political parties, older than our school system. Privacy has been part of the legal landscape of our country for over a century."

So the question of protecting that penumbra of a right in the face of technological change is what's upon us. Change that's not envisioned by Justice Douglas in the '40s, certainly not by Justice Harlan two centuries, at least in 1894. So as the technology evolves so has got, the common law has to evolve as well. And notice I didn't say regulating. The common law I believe has to evolve. I think there are some areas, areas where people cannot protect themselves, where they don't know how to protect themselves, where newer expanded law or regulation law has got to be part of the answer. Child protection, the children's online privacy protection act etc. puts the onus on websites and tech companies to help protect children because children cannot be expected to know what is going to happen to their information and be able to protect themselves. Financial information, insurance information, when we give that kind of information over to a bank or an insurer. That information certainly ought to be protected by law. Medical records should absolutely be protected from invasions of privacy. When you entrust that information to a health care provider any health care provider whether it's your doctor, your dentist, your pharmacist, or your optometrist, whatever, that information should not be sold off or disclosed to a third party without your permission. Last month in Michigan we introduced a bill that would provide a framework, language framework, for protection of one's medical privacy rights here. And Michigan's hot topic.

But in terms of privacy generally, what is and what can be the legal baseline? Where do we go? Where is the place where government's role is not too hot not too cold but just right? Where creativity blossoms and yet no one is harmed? There's never a perfect solution, but I have run the gamut in my thinking on this from a perspective that would insist, when I first got into this, on a strict opt-in basis to a perspective now where I think we've got to set forth a basic privacy right, which is articulated in law, for sensitive, personally identifiable information and allow the market in its creativity to respond to that right. By the time the government starts getting around to regulating ISPs (Internet Service Providers) or regulating at the level of code, or regulating the browsers, or regulating the language in a privacy policy, Moore's Law has rendered the regulation obsolete. So I don't want to be talking about the technology. That's the business of many of those who are in this room. What I want to talk about is the law that the technology may respond to. So I prefer a basic right that rings true in the online world and the bricks and mortar world and that's where we started with our medical privacy bill and that's where I think we've got to be headed.

The National Association for Attorneys General, acronym NAAG, is working on, has issued some privacy principles. Many of you are aware of the basic privacy principles that many people have talked about the fair information practices, principles, notice, access, correction, opt-in for sensitive information, opt-out for non-sensitive PII (Personally Identifiable Information), those are the basics of what the NAAG principles have offered. Those are good but they really beg the question. The question is what is the legal right that those principles are seeking to protect? What is it that's articulated in law that those principles seek to protect?

When I first started looking at this. In fact, in January of last year there was a conference at Stanford where all of the attorneys general met and we began to explore this issue of privacy, especially in light of the technology. And many of us started out with the notion that personal information, data collection, should be a property right. And that property right the individual can negotiate away with a website in exchange for a discount. But the problem with the property right is that as all property rights, it's alienable. And so once it's gone, it's gone. It's sold off continued down the line. It's the same problem I have with these medical waiver, the release forms for medical records. Once you sign this blanket release it's gone. You can't get it back. You can't be an Indian giver with respect to your own sensitive information, your own data stream, your click stream. So privacy as a property right, I have a problem with that.

But what if, what if we took a look at the torts. Now as an attorney general I run the largest defense law firm in the state so I'm not real excited about expanding torts, however, it's going to happen. One way or another we're going to see privacy protected. And I really think a tort-based invasion of privacy spectrum where somebody's personal information cannot be released if it brings somebody harm might just be the way to go. Let me just expand on this a little bit.

Justices Warren and Brandeis in 1890 gave us the original notions of a right of privacy tort in a Harvard Law Review article. And those original torts, which still exist in the common law, the invasion of privacy torts they are as old as the hills. You know they talk about intrusion into seclusion, they talk about appropriation of an image, they talk about publication of private facts, they talk about false light and you know any of you who are lawyers and have gotten Prosser's book on torts you know it's all in there. And all of the states have some judicially recognized or statutorily created right of privacy of those kinds of torts. What I'm proposing is a refinement of those for the release of personal information. So clarifying or evolving that existing privacy tort makes sense to me in the common law for a number of reasons. One, the courts can be much better suited to carve an issue with a scalpel and not with an axe on an individual basis to determining what constitutes a particular privacy offense. They might be better than an elected body that is often subject to background noise of lobbyists and election campaigns and interest groups. Courts might be in the best place and they have the ability, courts do, of being more fluid than either legislative or a regulatory response. The courts are, it's their job to be well adapted to balancing the reasonable expectations, in this case the reasonable expectations of privacy and society's expectations as technology changes. So this is what I'm thinking of. Clearly there are limitations to a right of privacy that people willingly give up by living in society. Do you have the right to expect that your phone number is going to be kept private when you've allowed it to be published in the phone book? Obviously not. Where do you draw the line? So the courts have got to fashion, or the legislature can fashion, an appropriate standard to govern the ability of someone to bring a tort action under a right of privacy, an invasion of privacy, tort. And legally for purposes of a personal information tort remedy, I think there needs to be sort of four threshold questions that would need to be asked.

One, the person who's bringing the action has to have a reasonable expectation of privacy, that's clear and we can talk about how that's evolved through the law over the course of time. The second, the basis of the transfer of the information, the personal information, in order to bring an action, I think has to be for commercial purposes. You're not going to bring an action because somebody transferred your Christmas list as long as it's not for commercial purposes. Three, the information has to not be a matter of legitimate public concern. And four, the invasion of privacy has got to be serious enough to warrant judicial intervention. These are all subject to a court's determination on a case by case basis. But it's a reasonable threshold. The biggest question is what is a reasonable expectation of privacy? The right of privacy, like all other rights, should be a culmination of what society deems socially important enough to protect against abuses. The law should seek to redress the invasion of the sanctity of a person's dignity or right of privacy, but people should expect some loss of privacy as they interact with the world around them. So in the context of the Internet, businesses obviously need a base level of information about the people they are interacting with. The consumer who's shopping at an online retailer should expect that if she makes a purchase that information is going to be conveyed to a shipper like UPS (United Parcel Service) who's going to deliver the item to your home. That's a reasonable expectation about where these transactions would go. Without any information telling her otherwise though, that same consumer does not have a reasonable expectation that her home address is going to be shared with another party. Or potentially her shopping preferences are going to be shared with another party that has not been, that she's not been told about.

In Michigan we don't have a good law yet that protects people's information or click stream. So we have taken action under the Michigan Consumer Protection Act, and this is not a tort, but we have taken action against DoubleClick and sites like Procrit.com and Itsmybody.com and Stockpoint.com and Ifriends.com, one is a porn website, one is a medical website, one is a website directed at adolescent girls, DoubleClick most people know about. The point we were making is that people who interact with these websites were not being told that third parties were on the website tracking. And all I'm saying is that in a proposed tort scenario a person does have a reasonable expectation of privacy unless the website does something to defeat that reasonable expectation of privacy like a well-articulated, visible privacy policy which lets people know. That's just an example but the technology can respond. You have a box that pops up, how do you let people know that their information may be tracked? The problem is now people get onto websites and before they even have a chance to checkout the privacy policy, whether the privacy policy tells you it up front or not that they're being tracked by third parties, but before the consumer receives any information they're already tagged with tracking technology, whether it's a web bug, whether a third party cookie, whatever it is. Therefore the websites, the companies have a tremendous advantage over your average Internet user who doesn't know what the heck is going on. And surveys show that even the more frequent users, the more sophisticated users of the technology still are not aware, fully, of what is going on. Many people, you know this, most people when they pull their computers out of the box they have no idea where the defaults are set. They have no idea that automatically the cookies are being attached. And the market has not responded effectively, I think, to combating the placement of third-party cookies. I think that people should have a choice about that. About turning off third-party cookies, leaving first-party cookies, I think the defaults should be set differently, but those are technological issues. I think consumers need to be informed but they do have a reasonable expectation of privacy and it's up to the technology to respond and figure out if they're going to defeat that reasonable expectation of privacy, how they do it. Whether it's a well-publicized privacy policy, whether it's some other means, they can defeat that threshold question but the technology needs to respond. And if they fail to defeat the expectation, then a consumer might be able to bring an action under the theory that I'm proposing.

A couple of other sort of threshold limitations that might need to happen in terms of the purpose of the transfer of information. Obviously a tort would not be allowed to prevent me from sharing as I mentioned the names of my Christmas card list with my brother in Vancouver. The tort is intended to prevent companies from profiting off the sale of personally identifiable information without the consent of the person being identified without their expectation. When they've defeated their expectation of privacy, when they haven't defeated it. Similarly, if the information is not, if the information is newsgathering information, has a legitimate public concern that would defeat a privacy scheme because there is a legitimate public concern. For example as personal as the development of a contagious disease is, there are certainly legitimate reasons to inform the public to prevent the spread of the disease, the news gathering function I think would be exempt under that kind of prong.

And fourth, the fourth sort of threshold question that would need to be answered before a successful invasion of privacy tort might be allowed is as with other torts there has got to be some element of intent and it's not just mere negligence in order to trigger it. It's got to be a serious breach. Those are issues that a court can look at. Is it less serious, a court may differ on this but somebody might say that the sale of non-PII in bulk to be able to target ads is a less serious breach certainly than the sale of somebody's home address, the sharing of data about visiting a medical website, etc. Those are all in the spectrum we're all familiar with the spectrum and a court might be able to look at that and draw some lines. So the bottom line for me is something's going to happen. You have seen all of this activity in Washington. Everybody is moving down this path. The question is who is going to win? Which lobbying arm is going to be stronger? Perhaps a safer route would be to allow the judicial branch to weigh in on this without crushing the creativity of the economy and allowing a case by case intervention.

In 1890 Warren and Brandeis they were responding to the camera, which was the newfangled innovation at the time that all of their privacy concerns were centered around that piece of technology. And today of course we have the 'net. But in 1890 they wrote, and it's true today, "the individual shall have the full protection in person and in property. That the individual will have this is the principle as old as the common law. But it has been found necessary from time to time to define anew the exact nature and extent of such protection. Political, social and economic changes entail the recognition of new rights and the common law in its eternal youth grows to meet the demands of society."

So what makes this whole realm so great is that we are, we're on the front, this is one of the chapters that's still waiting to be written, which is why this kind of conference is tremendous. We're still standing at the beginning holding the pen writing the new words instead of being on the back side flipping back to erase or to rewrite or to recalibrate. It's our chance to forge a new partnership, to get some different kinds of views out there, to change the minds of and the perspectives of those who might be regulating, of those who might be making rules here that are set in stone that we don't want to hinder creativity down the road. But it's the best time, too, to create a safe place, a trusted space for consumers to go without them feeling like they are going to be taken advantage of and their information sold off to the highest bidder without their permission. We need to create a place where people can comfortably go online and interact. Jeffrey, you wrote in your great Eroded Self article that, I don't mean to steal your quote if you're going to give it, but it's such a great quote. "There's nothing inevitable about the erosion of privacy in cyberspace just as there is nothing inevitable about its reconstruction." I know there was a famous quote from the CEO of Sun Microsystems that, "There is no privacy get over it." That's not the kind of world that I think any of us want to live in. And so we can reconstruct it. We do have the ability to rebuild some of those private spaces that we've lost. And all we need, as Jeff Rosen says, is the will. So hopefully a conference like this will demonstrate that we have the will and the ability to balance both sides. Thank you.


JOHN KING: Well I can't help but make a little bit of a segue with an anecdote. One of my doctoral students, Laship Halen, when I was at the University of California at Irvine did her doctoral dissertation on the setting of defaults and shared calendar systems as they are shipped by the manufacturer and her research site was Sun. And on all the Sun Microsystems products that are shipped that contain a shareable calendar infrastructure the defaults are set for universal read access to everybody's calendar. But when you go to Sun and try to get to Scott McNealy's calendar that default has been changed and apparently he hasn't gotten over it. Okay, we're going to turn now to Mr. Seiger. He's going to follow with his comments.


JONAH SEIGER: Thanks, John and good morning everyone. When I was a student here, an undergrad at the University of Michigan I made a policy to never have a class before 11 a.m. so this is a new experience for me to be in a classroom at a quarter to 10.

Thank you Dean Lehman and all of you who organized this for inviting me to be here today. It's a great privilege. It's also a great privilege to be able to follow the Attorney General who's been a tremendous leader in the field of privacy and has really done tremendous work in raising the profile of this issue here in Michigan and putting pressure on the folks I work with in Washington to do the right thing.

I come at this with a sort of a unique perspective. I have a foot in a lot of different worlds in the privacy debate. As John mentioned in his introduction I am the co-founder and chief strategist of mindshare Internet Campaigns. We're an online public affairs consulting firm that develops Internet communications strategies for issue advocacy organizations. A number of my clients are Internet policy organizations that are working on the issues of privacy. I started my career working on Capitol Hill working for Congressman Ed Markey who is, as many of you know, a leader on the privacy issues. And then from there went to work for a couple of public interest groups including the Center for Democracy and Technology, which I helped to start and which has been a very aggressive advocate of privacy. And in my current life as essentially a media consultant that develops Internet campaigns, we are in the business of, on behalf of our clients, building and maintaining constituencies, which includes the collection of personally identifiable information. So from a very real basic perspective I touch this issue every day both from a practitioners role but also from the standpoint of the policy debate to which I have a front row seat.

I think, just as the Attorney General talked about, definitions of privacy are very important. I'd like to just follow on some of the points that she made there. Our case law and our constitution talks about privacy as a right to be left alone, or has been interpreted that way and it's been applied mostly in terms of electronic surveillance. And the rights of citizens with respect to government access to their private communications. And there's a very rich protection under the fourth amendment. Battles are constantly fought there. I spent a number of years fighting the government's attempts to create guaranteed access to encryption. Some of you have probably heard about the key escrow and the clipper chip and those issues. But in the area of data privacy it's a lot more muddled, the state of law and expectations. And we have sort of different expectations for financial information and medical information.

In my mind the definition of privacy that's relevant to this discussion is a question of control. And I think that we, the Attorney General and I, would agree that the core issue is that consumers should have control over how their identities are managed online. I mean that's a fundamental point and I think that it underlines the entire debate over this issue and I think it's a very basic principle on which we can all agree. And that this can be accomplished through a combination of technology and law. But at the end of the day it's about giving users, individual consumers and users, control. To empower them to take control over their identities.

The issues that are raised at the federal level here come down to how do we provide that control to consumers? The Attorney General talked a little bit about the NAAG, the National Association of Attorneys General, principles. And this has caused quite a stir in Washington as the Internet industry tries to come to terms with how privacy might be regulated. And there are a couple of key issues that I want to dive into in little more detail.

The first goes to and in response to the comment about a judicial approach to protecting privacy, is the issue of federal preemption. If states are enabled to develop different standards to treat personally identifiable or even non-personally identifiable information differently, then we're going to have a really hard time doing business on the Internet nationally. Not to even talk about the global challenges there and we've already run into this with the European Union. But if we have 50 different state standards for privacy, it's going to be extremely difficult for anybody to do business in this medium. And so while I think it's appropriate for states to have a significant role in enforcement of privacy laws and to give deference to states in that area, it's also, I think, one of the core issues that we're going to have to confront if we're ever going to have a federal privacy standard, and I would posit that if we believe that a federal privacy standard is necessary then we must address the balance of state preemption.

Bill Lockyer, the Attorney General of California, who's been leading the National Association of Attorneys General draft principles process, has compared the state's rights in this area to their rights to set clean air standards. Now I think that states should have a very important role in setting clean air standards. If you're living in California and there's a smokestack in California that's going to affect you much more than the smokestack in Nevada. But when it comes to a medium that really knows no borders, where you can be doing business from Washington, D.C. on a server in Seattle and in San Francisco simultaneously, it gets very hard to understand how to actually in practice respond to differing standards for privacy. So I think it's fair to say that as we look out at the legislative landscape in Washington that the big issue we need to confront is the question of federal preemption.

Another issue that's very important when we get into this understanding of privacy as being control or consumer choice is what exactly does choice mean? The Attorney General talked about third-party cookies and a concern that sites collect a cookie even in some cases before an individual can find a privacy policy. But there's a difference I think in kind between the collection and use of personally identifiable information and non-personally identifiable information. Setting a cookie on a website when you first visit that just identifies as a unique user but doesn't have any personally identifiable characteristics I think is a difference in kind than personally identifiable information like your name, your address, your email address etc. And in terms of giving control, there's a difference I think also in kind between opt-in and opt-out. The National Association of Attorneys General principles have two things that are real concerns to a lot of people in the industry. The first is as I mentioned the preemption issue. The second is that in effect many people read these draft principles to create a national opt-in standard. A requirement that in order to collect any sort of information sites would need to have people opt-in. That's a much more restrictive standard than exists today in the brick and mortar world. And in my mind is unnecessary for the basic non-personally identifiable information that's collected.

Looking at the state of play in Washington, we've spent the last couple of years working in the area of self-regulation. The industry has invested a great deal of energy in trying to develop practices for self-regulation and these have worked fairly well. According to a sweep of the FTC, The Federal Trade Commission did an analysis last year or actually now almost two years ago, in May of 1999. The top 100 sites on the net they found that 66 percent of them gave consumers notice. A privately funded study found that 95 percent of the top 100 sites had some form of privacy policy and that that was up from 71 percent in 1998. We don't have numbers for 2000, but I think that that's a positive trend.

Some of the groups that I represent, I should say the groups that I represent have a broad range on this issue and I want to make very clear that what I'm about to say is my own opinion and I'm not here to speak on behalf of any of my clients. But I think that we're ready now to have federal legislation establishing national standards for privacy. I think that in order to, as the Attorney General talked about, foster trust in the medium and continue the growth of this medium we need to establish some basic standards that consumers can rely on that their information is going to be protected and used. And I think that a reflection of the fair information practice enshrined in law makes some sense. Notice and disclosure: privacy policies need to be easy to find and say what a site is doing with information that they're collecting. Choice and consent: consumers, individuals must have choice regarding how information is collected and used. Data security: they should have confidence that the information that's collected is going to be secure. They should have an assurance of the quality of the data and access to the data to change records and correct mistakes. And finally, I think another as I mentioned critical component is federal preemption. I think that we must have a uniform standard that enables states to enforce the laws but a general expectation for somebody doing business in the United States that they don't have to comply with as many as 50 different standards.

There are a bunch of bills that have been introduced in Congress that sort of cross the spectrum. There are the privacy extremists as the Attorney General mentioned who are seeking to create very restrictive standards. There are those who still argue for no legislation to let the industry self-regulation practices work. And then there are those like Senator McCain, Congressman Eshoo from California, Senator Wyden, Conrad Burns from Montana who are talking about legislation along the lines that I just discussed. And I think that in the next 12 months, once we get through the budget fight and probably campaign finance reform and the education bill that this issue is likely to be teed up. And I think it's fairly likely that some form of legislation stands a good chance of passing. But it's very important to understand that the balance of power in Washington is such that it's very easy, or I should say, it's easier to stop legislation than it is to pass legislation. A 50-50 split in the Senate and a six-vote majority in the House means that consensus is a vital component. And, again, these issues regarding opt-in, opt-out and preemption make for a very important place where consensus can be found. Again, just to sum up here, I think what the Attorney General has done, her leadership here in going after sites that are bad actors, in drawing attention to sites that aren't living up to the privacy policies that they post, is very important and plays a critical role in the enforcement of privacy rights and in pushing the issue along. But I think as we look forward to and understand how to best address these issues we need to be very careful about the distinction between opt-in ad opt-out and we also need to be very conscious of the need for a uniform national standard. Thank you very much and I look forward to your questions.


JOHN KING: The blue question cards are on their way to you now so you can start preparing them now. Mr. Rosen.

JEFFREY ROSEN: Declined to have his remarks published.


JOHN KING: Okay, I have seven questions and rather than go through them serially, I'm going to batch them and I've used my moderator's prerogative to cluster them in descending order of abstraction. Well it looks like I have eight now. I'll see if I can find where this one goes. Okay, I know where that goes.


There's two at the highest level. The first one is, is personal information so ephemeral that there would be an undue burden in proving a tort action? Could this problem be addressed through individual controls such as opt-in?

Another one is, with regard to the tort approach on privacy what about the death of a thousand cuts in which each individual's loss of privacy is too small to meet the threshold but the overall cost to society is large, who will file suit? So that's one question.

Second, there seems to be disagreement between those who believe current laws cannot be stretched to apply to the Internet and those who want to let the common law evolve. Do you believe that allowing the common law to reinterpret current laws is a wiser way of proceeding than new legislation? Would new legislation perhaps prove counterproductive? And in the same vein. Is it reasonable to expect that the current U.S. Supreme Court or a new court with George W. Bush appointees to further define, or permit courts to define, privacy rights in the absence of explicit new legislation, which may in turn thwart Internet development?

Okay, then in a different vein. If we have privacy policy on websites, won't the policies become so onerous that users will not take the time to read them? It's like any license agreement that users don't read but instead hastily click "I Agree" and move on.

Do you think privacy rights should limit law enforcement's use and exchange of personally identifiable information such as DNA databases? How would law protect the individual from use of information gathered by marketers, by the government, for instance to enforce the use tax in Michigan? There's one more here. How are local governments managing resident-based privacy issues? Information from transactional exchanges, what are the key issues for municipal privacy policies and can you recommend readings?

And the final one, which is explicitly intended for the Attorney General, what are your views on personal privacy for public officials?


ATTORNEY GENERAL JENNIFER M. GRANHOLM: Those are a lot of great questions. And let me just clump some responses and I'd love to hear from you in particular, Jeffrey, because I'm so intrigued by your great remarks. So profound and poetic and yet I still want to know what's the answer. As a pragmatist I want to know how to fix this problem. And I have, I have and I hate to say this as an elected person myself but I have just this great cynicism about the ability of a legislature to craft a solution that is effective. And that's really where I come down because of the influence of great organizations like yours who are pushing them; that's democracy at its greatest, you get lobbyists on one side and on another who are pushing. But I worry about things like the Gramm-Leach-Bliley Act passed last year, which I think did not provide the kind of protections that were needed basically because there was a very powerful lobbying group, the financial institutions, who were there on the federal level to prevent any curbing of their ability to share information and to gather it. And so they say, the Gramm-Leach-Bliley Act says we're going to, if you're a financial holding company you can share information, if you own as a holding company a bank or an insurance company or a mortgage company you can share all that data among yourselves without having to get the consent of those who are under your rubric, your customers etc. And if the states want to enact something greater, the legislatures of the states want to enact some greater protection, then let the states do it. Well, the reality is, every state that has tried to enact something in the wake of Gramm-Leach-Bliley has had a herd of lobbyists descend upon the state to prevent just that from happening. So I just worry myself about the thresholds that federal legislation would be able to successfully enact and. therefore, that's why I was left with the courts. Now I'm intrigued by the political piece of it, Jeffrey, and the ability of consumers to rise up in outrage. I just worry, the average consumer is just not aware of what is going on and there may not collectively be enough will. There may be some sophisticated folks who are willing to stand up and say things but it gets tiring after a while to have to do it at every piece. Talk about a death by a thousand cuts, every time some invasion occurs if we are to rally and you know get people exercised about this and get the shareholders excited. That's a lot of effort unless you've got some recourse, some ability to go to some forum that will address your concerns. Which is why I ended up going the circular route back to the judiciary because I think that of all entities, and my cynicism hat is still on, but of all entities in the system the judiciary is arguably, should be anyway, the least biased and the most able to redress problems on an individual level. And yes there is the potential of a death by a thousand cuts on that, but, it's less, at least there's individual opportunity for redress and then the specter of law being made that is able to guide companies as they go forward. So I don't think there's a great solution anywhere but I do think there are possibilities in these different realms. And I just think there has to be some threshold articulated somewhere, which gives people some comfort that they are able to go online.

Who will file suit? This is why this issue of preemption is such a critical issue for the attorneys general. If an individual doesn't meet a particular threshold, the Attorneys General should have the ability to go forward and enforce and potentially argue that their state law should be raised to a different level than perhaps what was in the federal law. I just don't like these hybrids that we are seeing in the wake of Gramm-Leach-Bliley because there's nothing that is happening on the state side that is able to follow up. So, I just want to know politics, is that enough? Is that going to get us where we need to be?

JEFFREY ROSEN: Declined to have his remarks published.

JOHN KING: Here's the politics.

JEFFREY ROSEN: Declined to have his remarks published.

ATTORNEY GENERAL JENNIFER M. GRANHOLM: No, there aren't because the law is not there yet. There's no individual redress in these yet because you know it's just not. That's why our Consumer Protection Act in Michigan, we did this sort of creative spin on it. Our Consumer Protection Act is the greatest act in the world because it allows for the Attorney General to come in and negotiate with a business before filing a lawsuit. It gives you 10 days in which to respond. And under our act the failure to disclose a material fact that would lend to completion of the transaction is a violation of our act. And so it was my belief that the failure to disclose the presence of third-party cookies or tracking devices on a website was a material fact that people needed to be told about, which is why we went after the websites, the failure to have privacy policies on a select number of websites. So did any individuals get redressed? No, although the websites have all come around.

And, there was one question about what reading can be done or if there's any suggestions regarding privacy policies. In fact, as a tool we posted a couple of model privacy policies on our website that we thought might be useful for those who might be looking at this. Our website is www.ag.state.mi.us. People can go and see if there's anything there that might fit your particular entity. But, there is nothing right now that gives an individual an ability to do that unless it reaches that highly offensive threshold under the tort law, which I think should not be there. My proposal is to take away that highly offensive threshold and allow people to be able to file for the release of personal information but not have it get to that, it has to be serious violation, but does not have to be highly offensive. But I just am somebody who's not just a thinker but a doer and I want to be able to get results. I want to be able to move this dialogue forward, which is why we've taken action in the way we have against all of these websites. We've gone after 13 now, companies, online companies, and we've selected the ones that are in sensitive areas that we believe people would be alarmed if their information were compiled onto. To push the federal dialogue forward, too.

JONAH SEIGER: There are a couple of things . . .

JEFFREY ROSEN: Declined to have his remarks published.

ATTORNEY GENERAL JENNIFER M. GRANHOLM: Sure, every move you make does.

JONAH SEIGER: Couple of thoughts in response to the Attorney General's comments. I think that going after sites that have privacy policies that don't disclose that they're setting third-party cookies is perfectly appropriate. And I think that one of the solutions to that is a standard, again, for notice and disclosure. If you're setting third-party cookies your privacy policy should say so. If it doesn't, then if enshrining that standard, for example, in federal law would give a right there. So I think there are ways to suppress this.

Another thing when you talk about the role of the courts or the judiciary there are also, and I don't want to overemphasize this especially in light of Joel Klein's comments yesterday, but there is a market force here too. There is a competitive advantage for privacy. And you start to see this, Earthlink is now advertising in its attempts to cut into AOL's (America On-Line) marketshare that they don't track you, that they're just the pure Internet. And that's actually true, although it's sort of misleading because the other sites that you're accessing through Earthlink still might. But the fact is that you're starting to see companies differentiating themselves, major access providers, differentiating themselves, on the issue of privacy. So, there are other forces here. And, again, I think to bring it down to the practical level, which I think is very important, is that if we want to continue to foster the growth of this medium and all of its benefits for commerce, for education, for democracy we need to have a way for information to flow and transactions to work smoothly and seamlessly across all 50 states let alone the entire globe, which is a whole other mess of yarn that we're not going to talk about.

ATTORNEY GENERAL JENNIFER M. GRANHOLM: Let me just respond quickly to the market based issue because I think the market has responded to a certain extent but certainly not as much as you would want it to in light of the very few people who are talking about this. The average person out there has just no idea about their activity online being tracked. We see this as we go around the state. As I tell people you know that Richard Smith testified in Congress that DoubleClick has reserved enough space for the equivalent of 300 single spaced pages about the people who have been online. Now that is a pretty darn detailed profile even if you assume that they're not putting the name and address with it, at some point if you've got my IP (Internet Protocol) address and you've got where I've been with 15 different transactions, it is one person, just one person who can do that, that triangulation of data becomes personally identifiable after a while. But the market has not responded effectively and that's the problem. If the market were to respond effectively then we wouldn't really be having this conversation.

JONAH SEIGER: There is a model for this, though, in that there's a group called the Network Advertising Initiative that was a coalition of network advertisers including DoubleClick and they have put forward an even more aggressive position and it's controversial on both sides. The privacy advocates think it doesn't go far enough and the privacy moderates think it goes too far. But it gets to this point that the Attorney General just mentioned about the linkage of personally identifiable information with non-personally identifiable information. And Jeffrey talked about this too. This was the most egregious thing that DoubleClick did and they rightly got slammed for it. Because they were going to combine information collected for one purpose with information collected for another purpose without any knowledge or notice or consent. And so if you take the NAI (Network Advertising Initiative) model and think about a different standard--not for the collection of information where you ask for consent, but the merger of information that's personally identifiable with information that's not personally identifiable-- create that detailed profile, that is another area where there might be some places . . . .

ATTORNEY GENERAL JENNIFER M. GRANHOLM: Now, here's my cynical hat that I wear. The NAI ended up, the attorneys general had a meeting with Microsoft to talk about their browser, their Internet explorer browser and how the defaults were set. It's so difficult to find so that you can't turn off your cookies or you can't distinguish between first-party cookies and third-party cookies. That to me is a critical distinction that the market should respond to. Microsoft said, "We will do a patch for our Internet explorer browser and enable users as a market response to have--to pull up on your default systems--the ability to turn off your third-party cookies but keep your first-party cookies so you can interact online and have a meaningful web experience without feeling like you're being tracked." They proposed the solution and NAI went nuts because this, of course, would turn off the ability of these third-party advertisers to be able to gather data especially with the 800-pound gorilla that Microsoft is. So I'm just a little cynical about the third-party advertisers and their sincerity in offering a market solution.

JONAH SEIGER: I think that's justified cynicism but look at the example of DoubleClick. I think, unfortunately, the political goodwill and political capital of that community, some people refer to those companies as the tobacco companies part of the Internet industry. But I think that we have to ask in that context: what is the difference in kind between a first-party cookie and a third-party cookie? Is it the fact that I've clicked on a page and anonymously identified myself as reading an article about the Michigan Attorney General's activities or I'm looking for a new car? With the linkage of that information to a personally identifiable activity, it's not necessarily the case that a third-party cookie is any different from a first-party cookie except that it's the way that the infrastructure has been set up. So if we demonize third-party cookies just for the sake of being a third-party cookie, I think it sort of obscures the essential issue which is the personally identifiable information and the non-personally identifiable information and the linkage of that with respect to the consumer's control of that linkage or choice for that linkage.


JOHN KING: I'm going to have to call this to a close. It's extremely interesting. We haven't really touched on all of the questions we received and we've got four more. Let me just tell you quickly what they were.

One has to do with whether or not the technology has had the effect of changing people's expectations of privacy so that itself is a moving front. Another one has to do with problems of maintaining privacy about DNA and gene information and so forth in the face of the ability to patent such information now, and is there a conflict arising with patent law there?

Another one has to do with legal literacy. Can people really understand what the privacy legislation regulations are as everyday consumers?

And finally, what happens when privacy policy can be changed unilaterally by other kinds of policies, for example, decisions of bankruptcy courts and so forth?

Please fill out the yellow form if you haven't already done so and leave it behind. This has been an extremely interesting session I'm very grateful for the opportunity to moderate it and I'd like to thank, all of us thank the Attorney General and our two discussants. Thank you very much.

(APPLAUSE)


Bridging the Digital Divide

DEAN JEFFREY S. LEHMAN: We're going to go without a break so if the next panel could just come right up and we'll move right along, thank you.


MIKE TRAUGOTT: Bridging the Digital Divide. My name is Mike Traugott. I'm the chair of the Communications Studies Department at the University of Michigan, and it's a pleasure for me to be here to moderate this session. The digital divide is an important concept that is commonly invoked to describe the differential access that people have to technology or the differential skills or ability to use this technology effectively. In my own area of research involving the study of campaigns and elections there's currently a great deal of interest in electoral reform especially in the use of computers for voting. Here, the digital divide becomes a serious issue that's linked to ballot access and ultimately to the representational function of government.

We have a very interesting panel this morning to discuss this particular issue and to comment on the presentation by our featured speaker. Let me tell you what our plan is for the conduct of this session. I'm going to introduce everyone first and I'm going to start by introducing the discussants in the order in which they will make their presentation. Then I'm going to introduce our primary presenter, Steve Gorosh. Then I'm going to get off the podium and the panelists, the discussants are going to slide slightly to the right so that Steve can make use of a PowerPoint presentation and then they're going to come back up in the order in which they're going to present and then to give their comments. We're going to see whether or not we can do this with 30 minutes allocated to Steve and then 10 minutes to each of the discussants so that we'll have plenty of time available for your questions and for them to respond to them.

So let me begin by introducing, as I said, the discussants in the order in which they will present. The first is Russell Neuman who is a professor at the Annenberg School at the University of Pennsylvania and is also a visiting professor of Communications Studies at the University of Michigan. He's held several academic appointments in his career including at Yale, MIT, Tufts and at Harvard. His main research interests follow two paths political communication and communication technology and public policy. He's the author of the Gordian Knot: Political Gridlock on the Information Highway, published by the MIT press in 1997.

The second presenter will be Jim Fishkin who is the director of the Deliberative Polls and who holds the Darryl K. Royal Regents chair at the University of Texas at Austin where he is also the chair of the Department of Government. His most recent book, The Voice of the People, presents the full case for Deliberative Polling. Jim has been a Guggenheim Fellow, a Fellow for the Center for Advance Study in Behavioral Sciences at Stanford, a Fellow of the Woodrow Wilson International Center for Scholars at the Smithsonian Institution and a visiting Fellow Commoner at Trinity College in Cambridge.

Our third discussant will be Paul Resnick who is an associate professor at the University of Michigan School of Information. Paul has previously worked as a researcher at AT&T Labs and AT&T Bell Labs, and as an assistant professor at the MIT Sloan School of Management. Paul's research focuses on sociotechnical capital, productive social relations that are enabled by the ongoing use of information and communication technology. His current projects include analyzing and designing reputation systems that help maintain trust among strangers online and using photo directories and email lists to increase social ties in neighborhoods.

We're very pleased that our speaker this morning is Steven Gorosh, the former Executive Vice President, General Counsel and a founder of NorthPoint Communications. Steve has over 15 years of communications law experience in industry, government and private practice. He graduated cum laude from the University of Michigan Law School in 1985 and began his legal career at Crowell and Moring in Washington, D.C. where he practiced communications law and litigation. He also spent three years at the Federal Communications Commission Common Carrier and General Counsel's Bureau working on a number of key policy initiatives with federal and state regulators throughout the country.

Steve has held a number of corporate positions with Bay Area companies. In June 1997, he was one of the five founders of NorthPoint Communications, a pioneer in providing digital subscriber line or DSL service. He has led the successful fight to establish a myriad of regulatory protections to spur the development of a vital competitive carrier industry for DSL and negotiated many of the industry's first DSL interconnection agreements. In addition, he established NorthPoint's digital divide program, the NorthPoint Community Connectivity Initiative, which offers free DSL service to more than 600 HUD low-income community housing developments nationwide. Please join me in welcoming Steve Gorosh.


STEVEN GOROSH: Thank you for the introduction. Thank you Dean Lehman and the organizers of this event who were kind enough to invite me. I was born in the Detroit area, grew up and went to undergrad and law school here. The last time I was in this room I was on the other side of the lectern as a young and somewhat intimidated law school student and I'm fighting this somewhat irresistible urge to begin firing out intimidating questions to people in the audience. But I will try to repress that and talk about the topic, which is truly an interesting one, and one that I think will continue to capture our attention as we move further along the information age.

The Digital Divide is a newish concept for a relatively new technological phenomena and there's not a clear or specific definition that's associated with the divide. In it's broadest sense, what links the discussions and the literature on the topic, is the sense that there are technological "haves" and "have-nots." But what people specifically mean in access to technology has differed over time, and I think will differ as the technological opportunities increase.

The Digital Divide used to refer to access to a computer. At this time, increasingly people are talking about a combination of computer access and Internet access in the form of narrowband, i.e., dial up access (under 200 kb (kilobytes) speed), in which you can access the Internet and the capabilities that that unleashes. But already we're seeing, for instance at the FCC, talk about the divide in terms of computers plus broadband Internet access, that is, those technologies like DSL and cable modem, so called broadband, above 200-kb technologies. And I'm sure if I was here in a few years there'd be two or three new additions to the list because the technology will continue to improve over time.

So the big question that we begin with is: Is there a Digital Divide? I'm going to show a few slides with data from the National Telecommunications Information Association, that's housed in the Department of Commerce. It's the administration's telecommunications group. The FCC has also looked at Internet access, and there was also a study released just a few weeks ago from the General Accounting Office. The data is somewhat similar.

The data consistently shows that income and education levels are a dramatic predictor of Internet access. And as we'll see in the ensuing graphs, race or ethnic heritage and also disability status are also indicators.

First of all, though, before we talk about the remaining gaps, it's very important in this area to talk about the progress in closing certain gaps. I remember when we had started NorthPoint three or four years ago, I would go to regulatory forums and there would be a lot of discussion regarding what we were doing for the divide, and we hadn't yet deployed any equipment or connected a single customer. And I always thought how the early computer manufacturers would have felt 20 years ago if someone said to them, "Why aren't you providing computers to low-income areas?" And they'd say, "Well, give me a chance to build a business before you expect ubiquity." And the good news here, is that there has been a dramatic increase in the connectivity of Americans to new technology over time. Just over half of the nation's households now have computers. This is double the rate only five years ago. Again, as I mentioned, it took 20 to 30 years for the PC revolution.

By contrast, narrowband Internet access is growing at truly a remarkable pace. I think Donn from AOL mentioned it. In the last four or five years, half of Americans already have Internet access, and that itself is up 58 percent from a previous 17-month period. If you compare, as Donn suggested, some of the historical deployment of key technologies from the color TV to the radio, this represents unprecedented growth. So some people are skeptical of the concept of a digital divide, because they say, "This glass is more than half full, let the market do it's magic, before you begin with government controls."

NTIA pegs high-speed broadband access at 4 percent (it's one-tenth of dialup access). GAO (United States General Accounting Office) sees it at 12 percent. I assume it's somewhere in the middle. It's a very new phenomena and the technical network isn't even very well developed to service a lot of Americans.

In talking about the divide, or more accurately as some people call it, the "divides," there's actually a number of different demographic material we can look at. One interesting thing is that on a geographical basis, or depending on what type of community you live in, the divide is not that great. A remarkable amount of discussion about the divide has been led by some of the rural legislators talking about the gap between urban and rural. At least if you're looking at narrowband access, you don't see much of a divide. On the left is the U.S. average, for internet access, about 41.5 percent of households; urban areas are slightly higher, rural areas have almost caught up. You will see that on most of these graphs. So the gap has narrowed on rural, which is good. Now central cities lag, but not by that much.

It starts getting interesting when you start considering racial or ethnic factors. And here we're looking at black and Hispanic access rates compared to white and Asian-American access rates, and as you can see on the left, white Americans have an access rate of 46 percent. It goes up as high as 57 percent for Asian-Americans. But blacks and Hispanics which are the second and fourth ones, respectively, are stuck around 23.5 percent and 23.6 percent. They have actually been growing at a faster rate, but only because they're building on a smaller base. So the gap has actually been slightly increasing since the last period.

Where the dramatic differences come in is when you begin considering income levels. And here it shows various income levels. The far right, the larger bars, are for households earning more than $75,000/year, and the graph on the far left is the lowest income level, under $15,000. And you can see a pretty straight progression. In fact you have access rates above three-quarters for American households earning above $75,000 and you have access rates down to 13 percent for households earning under $15,000. And, in fact, there's even a further disparity if you combine income and some of the racial and ethnic characteristics. So now a divide, I think, arguably is a gulf, where Asian-Americans earning more than $75,000 have Internet connectivity of above 80 percent and black and Hispanics in the lowest income level are stuck below 5 percent. So I think the evidence is compelling.

I think the question becomes should we care? And I think there are a lot of persuasive arguments for why we should care.

Two arguments I tend to see or hear most often with regard to differing access rates have an economic basis. The first one deals with individuals. It's this idea that we already have individuals in an under-class of sorts and that the technological break-throughs of the information age and the Internet will increasingly be the currency of success. And if you take this disadvantaged community and you deprive them of the only tools that they can use to really be successful, then you will be reinforcing the existing disparities in the country, which is obviously a very troubling concept. A variant of this concern is a broad economic development concern which basically says access-deprived areas, such as certain central cities, will never achieve economic success because, in the absence of skilled workers, jobs and industries will stay out. Alan Greenspan has been continually quoted over the last few years as attributing the remarkable economic success of the country over the last decade primarily to the increased productivity associated with the new information age. If we have a group that cannot participate in the new economy, then the current disparities worsen over time.

Another argument that you see advanced is the same argument that was advanced in favor of "Universal Service" in telephony voice service. That is, in 1934, when Congress passed the first Telecommunications Act creating the Federal Communications Commission. Language in that Act requiring the Commission to promote the rapid deployment of telephone service for all Americans turned into a "Universal Service" concept. One of the ways the Universal Service was viewed is that by subsidizing voice service or regulating prices in a way that enables economically disadvantaged users to obtain telephone service, you are also helping non-disadvantaged users who will now enjoy more people to talk to. The idea is that all of society is enhanced where all people are on a network which allows them to communicate with each other.

Also, there is an increasing discussion about the idea of the impact on a vigorous democracy where citizens have such disparate access to certain kinds of information. One of the panelists will be focusing on that argument. And there's also an equal access/civil rights theory. A previous administrator of the NTIA called Internet access a civil right and I'm sure we'll hear more of that dialogue as time goes on.

So, we have some disturbing numbers and some implications that are disturbing to the economic future of the country and to certain individuals. So what do we do about this?

I think the first thing you want to do is promote pro-competition policies and let, to some extent, the market do its magic. It's very early in this period to write off the ability of the market to close the gap over time. As I said the so-called rural gap is closed or closing. There used to be a gender gap with computer access. That is now closed. But I very much agree with Joel Klein, who I've worked with in the regulatory arenas, on the idea that even at best the market may make the pie bigger but it doesn't necessarily allocate those resources in society's best interests. And we'll talk about that in a minute.

So the next solution is look to the government to do something. The biggest program that the government has had in this regard is the so-called "E-rate" program for schools and libraries. The E-rate program came about as a result of the 1996 Telecommunications Act, which provided for discounts to schools and libraries in telecommunications services up to 90 percent including funds for high-speed access. Internet access connectivity can be subsidized, whether it's narrowband or broadband service, some of the inside wiring, etc. It's funded through a charge on the telephone bills. There's been a couple of funding rounds, it's meant to be an annual thing, and the rounds are creeping up above $2 billion a round. However, taxes are very controversial and there has been intense political and legal opposition to this measure. It's been fought vigorously at every stage, it's almost been dead several times, it was almost dead after it started. However, once it got off the ground, some polls recently showed that as much as 85 percent of Americans supported the idea that they would pay a monthly surcharge on their phone bills to ensure additional connectivity in the schools and libraries.

There are other things that the government is doing with targeted subsidies, too. Rural health care for instance. As everyone knows there is a limit to doctors in rural areas and there's even a greater limit of specialists. So you can hook up high-speed broadband, you can move digital and x-ray imagery over the net, and you can provide services in outlying communities that wouldn't be possible. So there are a lot of little steps. Community grants for particularly successful programs can and should play an important role in moving us along.

Private and non-profit donations and support are of course critical. A lot of companies are donating computers these days, they're providing tech support and training.

I wanted to talk for a second about something that I established at NorthPoint, our community connectivity initiative. We partnered with HUD (Housing & Urban Development). NorthPoint faced at the outset a barrier in the sense that we could put a high-speed access line into somebody's home or school but unless they had a computer, the line wasn't going to do much help. So HUD, it turns out, has 600 community centers with computers to serve the residents. HUD is increasingly obligated to build these in any of their major housing units. However, these computer centers in most cases lacked high-speed access, and they often lacked any Internet access. So it was great for us. We simply added the high-speed access lines. And since the Centers were often in urban areas where we had deployed our service, we could donate as a startup without killing our bottom line. And we leveraged other partner donations.

In fact, one of the most encouraging things I found about helping to narrow the digital divide, is that almost no one says no when asked to help. There is an increasing number of people who believe that the Internet will change the way we live and work over time. And they're excited about this mission and they want to make sure that everyone enjoys it. And it was one of those rare win-win-win situations. Employees felt good about the company, we gave something back to the community, and we received some great PR that you can't purchase. So there are a lot of solutions--even if you don't believe in government subsidies, and there's a lot of ways to move the ball forward in a positive area.

This is one of many slides that we took when we opened these new Computer Centers with new Broadband Internet Access capability. The gentleman in the wheelchair, had a troubled youth. When he was 15 he was on his way to purchase drugs, and had an accident and ended up in the chair. He's been there ever since. He went through a very dark period in his life and ultimately turned himself around. He's now a motivational speaker and he's head of this Tacoma Washington Network Neighborhood Center, which is HUD-subsidized. He has found that despite his positive attitude, his injuries keep him in the house a disturbing amount of time. He's fallen in love with his DSL line because it's sort of enables him to remain connected to the outside world and be a productive member. I didn't show the graph, but frankly the disabled community has half the Internet access than the American community in general and that's an example of a divide.

Another reason to show the slide is it's easy to get caught up in the numbers, you know, millions of Americans this and that. But at the bottom, it's truly been remarkable to see the effect that these services have on individual people. Whether we go to a low-income community in south central LA or a high-rise old-fashioned development in New York City. When the kids are there; they're laughing, they're learning, they're enjoying themselves. They do educational software, they learn the web. What we found, and what everyone else has found who has been in this area, is that the parents also start getting involved with the computer to help the kids. Suddenly, the parents are gaining skills and then the parents are getting jobs as well. It's just a nice overall experience.

In summary, I think the digital divide clearly exists. The longer it exists, then we run the prospect of these great new tools becoming another measure of holding back and entrenching the disadvantaged members of the society. And the quicker we are able to find whatever combination of mechanisms to help narrow this gap, the country as a whole can leverage these tools to everyone's advantage. And again, if you don't believe in government programs, there's still a lot to do. The Attorney General talked about the lack of connectivity to society. This is another way to get involved. Go volunteer at one of these centers, tutor some kids on Internet stuff. There's an inordinate amount that can be done and it's often a very positive experience. Thank you.


W. RUSSELL NEUMAN: I have only a few minutes so I'll try to focus my remarks on one central idea and it's an idea that I hope will be provocative and stimulate a little bit of a debate among the panelists and among the participants here. And what I wanted to do is to say that the digital divide concept is simplistic and misleading. Unless we dig a little deeper, the kind of throw-computers-at-schools policy response won't help much and may hurt. I agree with Steve's general sense that we need to pay attention to the growth and diffusion of the Internet. But I feel that the digital divide in its simplism tends to focus on the question of whether there's a computer sitting there and not what's done with it. And as a social scientist I wanted to raise some questions about the deeper and longer-term impact of this most amazing technology, the Internet, and emphasize as well the importance of broadband, which I'm sure Steve would agree with.

So what I'm drawing us toward I hope is a broader definition of what access means. And I have three questions about access. Where, what and what for.

You'll notice that there were a couple of different percentages that Steve used from the NTIA report which is access to the Internet which includes at home, at school and at work, or whether there's a computer in the home. By the way, the most recent statistics, the NTIA report is a year old now, coming from the Pew Internet and American Life Project estimates access among Americans at 56 percent and that was released last month. And Nielsen released a report the same week, which indicated their measurements at 60 percent penetration of the Internet. So we're moving past the half, getting towards three-fifths probably but before the end of the year something closer to two-thirds with access that means at home or at school or both. So if you start talking about where you have to understand the difference about what it means when you've got three people waiting behind you or four kids at school watching you as you're using the net. It changes very much the experience, the sense of time and the kinds of things you might do on the net. So I think we need to continue to take a look at the issue of where. And something that will foreshadow a policy concern is increasingly the Internet will be accessed by wireless technologies and understanding that the question of where will increasingly become home, work, school, community access center for people unable to access the Internet otherwise, and a wireless connection with the Internet.

By 'what' I mean 'what kind of connection.' That's the narrowband, broadband distinction. I want to emphasize that broadband is going to be not just a faster Internet it's going to be necessary for the primary functions of the Internet, which will include audio and video. When we study the social impact of the Internet we ask: what's the difference between the Internet and television? Right now there is a difference but five and eight years from now there will be so much video on the Internet that making the distinction between the impact of television, and the Internet will be meaningless. In fact there will be a broadband digital connection to many, many homes and whether you happen to be getting a TCP/IP (Transmission Control Protocol/Internet Protocol) video signal or an analog signal would be something that doesn't matter much to you, they're both high-quality and you're not really sure where the video is coming from or how that little button you pressed in your hand generated the video stream you're watching. So as that becomes clearer and video becomes less of a novelty but a central element of digital communications to the home the 'what' question will become increasingly important and we'll go through this whole cycle again. I'm sure digital divide is too sexy to drop despite my complaints and we'll be talking about the broadband divide.

Point number two, the fundamental issue here, is understanding the underlying characteristics of inequality. If you just throw a computer in front of two people, one person's going to say, "Oh, it's a video game," and another person's going to say, "It's a way for me to learn things and enhance my career." Until we start to understand the sociodynamics of how the web is socially constructed and defined, we're not going to get very far with the inequality motivations that drew our attention to the digital divide in the first place.

The notion of the Matthew Effect, that those who already have will be given more, actually has fundamental supporting mechanisms in the social sciences. The example in the diffusion literature is Pakistani rice growing where if you generate a new, more efficient genetically improved rice crop, the richer Pakistani who had 50 hectares generates twice the income across all 50 hectares and the poor farmer generates twice the income as well using the same rice. But only over two or three hectares. So the relative difference between the rich and the poor gets greater. And until we start to pay attention to the software, substance, availability and training I think we, just counting the numbers of computers in front of people will be misleading. The other element of that Matthew Effect was some early research on Sesame Street where it was found that although many had designed at Children's Television Workshop Sesame Street to help urban kids catch up, it was shown that suburban kids would generate more learning per number of hours of watching Sesame Street than the urban kids would. Generating again this sociodynamics that might increase rather than decrease a gap in learning between two social groups.

Point number three. Once the Internet gets to virtually full penetration in one form or another the question of polarization arises. We have in the print and broadcast world a cultural, political commons. Where what was on TV last night is legitimate discussion around the water cooler and we all pretty much watch the same things. Less the same now that there's cable than when we just had three broadcast networks. But there is still a commons. And even if you don't subscribe to HBO you're supposed to know at least something about the Sopranos. On the Internet the dynamics of this reinforcement of the bandwidth constraint of television disappears. And an African-American who uses the Internet may see a completely different and non-overlapping cultural Internet than suburban white kids might see. And until we understand where people go and how they define the Internet I think we won't fully understand the issue of divide, inequality, polarization and fragmentation that this technology challenges us with.

Given a broader definition of the digital divide, what kinds of policy would you promote? And the first question, the e-rate and the TOP program of the NTIA and the department of education's community access center funding all have the same character and Steve's company's funding, which is you throw a little technology into a place that might not have otherwise had it, you increase the diffusion, and I've got no beef with that approach. My only question is whether that's enough? And it needs to be supported with training and there's a whole other area where public sector and non-profit sector people could start investing which is generating content on the net, which would draw Hispanic and other communities into the net world. If computers, because of the miracle of the marketplace, get really cheap the penetration of the Internet starts to look like the penetration of radio or television or even telephone. Telephone penetration is 93 percent, television is 99 percent. The question is: will there be sufficient resources there for education? The marketplace will generate a lot of e-commerce and a fair amount of entertainment. But it may be up to non-profit and public sector enterprises to generate an educational component that would not otherwise be there.


JAMES S. FISHKIN: I was charged with the task of raising a somewhat broader set of questions. Basically, what can the Internet do for democracy and this fits in the sense that my concern is how could we somehow incorporate everyone meaningfully in the democratic processes. So obviously this is relevant to the digital divide. And also some of my speculations are key to the kind of prognosis that Russ just offered about how the Internet is going to be involved much more in video and audio and the convergence between television and the Internet. Now with that said, I'm also going to approach this question from the perspective of a distinctive set of experiments that I've been involved with for a number of years called Deliberative Polling, which basically attempt to assess what the public would think if it were really engaged seriously to think about questions rather than offer top-of-the-head impressions of sound bytes. I've done this kind of thing using two older technologies, that is, television and public opinion polling combined in a distinctive way. We've done about 19 of these projects on television in various countries around the world and I will come back to that because it offers a vision of one thing that might be more easily realizable on the Internet. But let me first put this problem, since I've only got a short time I'm going to capsulize this, not with a fancy PowerPoint presentation, but a little chart of six forms of public consultation that could be implemented (and indeed some are implemented) on the Internet. I'll explain this rather strange-looking chart. I was embarrassed at the sophistication of all the PowerPoint presentations and this is just taken from a paper that I wrote. But consider two things. What kind of public opinion is involved in some kind of democratic consultation? That's one. And two, whose opinions are being consulted? That is, how are the people being selected? For the "what" dimension we can take public opinion as it is or when I say "refined" I'm really using a kind of Madisonian language that representatives for example "refine and enlarge the public views by passing through a chosen body of citizens." Suppose people went through some process where they were exposed to competing points of view and they really thought about an issue and they could get their questions answered and they could discuss it with other people. That's the "refinement" process of deliberation. So we have top of the head opinion or raw opinion and deliberate opinion or refined opinion, two kinds of opinion and three kinds of selection. Self-selection, random sampling or somehow everybody. Now, one of the main forms of democracy now found on the Internet fostered by media organizations all over the world are what my colleague who I've worked with, Norman Bradburn, at the University of Chicago, called SLOPS, "Self Selected Listener Opinion Polls." They're everywhere; newspapers have them.

People vote on the Internet for various things and these enter the public dialogue. But there's a problem with SLOPS, self-selected people, the more intensely interested, sometimes organized, put themselves forward. TIME magazine had a world consultation involving SLOPS for the person of the century. And they wanted to know who the greatest thinker of the century was, (this is the 20th century), the greatest thinker, the greatest entrepreneur, the greatest entertainer. And for some reason in one press report I could never figure out, the best dresser. And it turned out the same person was voted by millions of votes ahead of everybody else who was simultaneously the greatest thinker, the greatest leader, the greatest entertainer and the best dresser. And it turned out to be, you'd never guess who it was, before they cancelled this part of the competition, it was Ataturk. Because the Turkish people mobilized as a matter of national pride and millions of school children over and over were voting. Ataturk greatest thinker, yeah, best dresser, yeah, greatest entertainer. And so the people of Greece decided that this was not appropriate so they mobilized behind Winston Churchill who was the next, the only person who could catch Ataturk and it still fell short by millions of votes. There were some articles in the British press about how this had turned out and then the world consultation was cancelled. But this shows that if you just allow for public voting, public consultation you're going to get something. You may think you're getting grassroots but you may actually be getting something more synthetic, which Washington lobbyists call Astroturf. The same conclusion came from Internet polls that showed Alan Keyes as the leading presidential candidate because they were organized groups. So that's the problem with SLOPS.

Now we can have discussion groups on the Internet. Those are self-selected groups and very often involve people who are like-minded and the rest. In any case they don't represent, I'm interested in something that will represent everyone under conditions where they can think. Now, of course, we have public opinion polls; they represent everyone but not under conditions where people are necessarily motivated to think. Very often top-of-the-head opinion. In fact as you know many of the opinions, there's a lot of evidence about how the public is not well-informed and may even be offering what Converse here at this university famously termed "non-attitudes," or basically non-existent opinions in response to questions when people never like to say they "don't know." So they pick one of the alternatives and it may represent very top-of-the-head thought or maybe no thought at all. You know the famous study of the public affairs act of 1975 where people offered responses but it was fictional. Then the Washington Post celebrated the "20th unanniversary" of the non-existent public affairs act of 1975 by asking people what they thought of the repeal. Half the people were told the Republican Congress wanted it repealed and half were told Clinton wanted the repeal of this act. Depending on the way the question was worded they got entirely different views. But it never existed in the first place.

Of course some of the opinions offered in polls represent well-formed opinion, some of them at least opinions that are top-of-the-head and sometimes non-opinions that don't exist at all. So I became concerned with the question what would the public think if it really had a good chance, if it really had a good chance to think about it? So in this process I call Deliberative Polling we take a national random sample of the public, we give them a survey and then we transport them face-to-face physically to a single place. We pay them, we give them a free trip, we tell them they're going to be on national television, three, four, five hundred people. We just did this two weeks ago in Australia on a national level, we did it in Denmark before the referendum on Euro, we did it last year in Australia, we have one in Canada now going on environmental issues. We've done 19 of these. We did one on PBS in January of 1996 hosted by Jim Lehrer with presidential candidates, it was called the National Issues Convention, broadcast on PBS from Austin, Texas.

Now, these people come together face-to-face. In effect we put the whole country in one room. They come to a great deal of additional information and mutual understanding and we've shown their opinions change sometimes quite dramatically. It's a representation of more informed public opinion. Sometimes the changes are perfectly explicable and rational. It's amazing what the public comes in with. They came into the National Issues Convention wanting to get rid of foreign aid as in other polls at the time, but also thinking that foreign aid was one of the biggest parts of the U.S. budget. When they discovered that foreign aid was less than 1 percent of the budget they didn't want to get rid of it anymore. Even though one of the presidential candidates who didn't come was Pat Buchanan who was running around at the time saying, "Balance the budget, get rid of foreign aid." If he had come to our event as most of the other candidates did, this informed microcosm of the public could have told him, "You can't say that, it doesn't make any sense." When we did the National Issues Convention we had to have an official airline, American Airlines, to fly everyone in. Well, if we did this on the Internet, we wouldn't need an official airline. But we'd have to keep people's attention. One of the problems now is the Internet is text-based, a lot of the connections are slow. To do it right we'd have to give people computers who didn't have computers to get over the digital divide. But, more importantly, we'd also have to have serious discussion, it's not just information it's some degree of mutual understanding and discussion. So the fact that, eventually, someday, the Internet will involve high-speed connections with video where we could have serious small-group discussions and large-group discussions is a vision of democratic possibilities.

Now, the Deliberative Poll has its limitations. It's only a microcosm. It's only a quasi-experiment that shows what the public would think if it had a chance to think about it and were motivated to do so. Well it would be much better to get the whole public thinking or the whole public involved.

The last two categories aspire to include everyone. Referendum democracy in theory involves everybody but similarly has the same problem as the public opinion poll in that we're not necessarily motivating people to become informed. They become a little bit more informed, there's some material available and indeed we've done two Deliberative Polls before national referendums, one in Denmark and one in Australia, where we then disseminated the materials, disseminated the broadcast. And the Deliberative Poll is something that provides cues for other voters. But it is also the case that the public doesn't get very well informed. Even in Australia where they have compulsory voting it's clear the mass public that was voting on the referendum held last year was not well informed or any more informed than publics in other such cases. Even though they all had to vote or pay a fine.

Bruce Ackerman and I have a manuscript, a book in the works, for something called "Deliberation Day," which is available on a website that we have. But the book, when it's done, offers a "realistically utopian proposal." Enormously expensive proposal, preposterously expensive proposal but a way that you could think through how with a national holiday and a lot of expense you might get "everybody" deliberating in a way like the microcosm does in the Deliberative Poll. And how that might completely alter the public discussion.

Right now one of the problems with the Internet is people don't like to stay on it very long. The people doing Intersurvey with polls online, they have trouble getting the people to stay on. It's like people with attention deficit disorder in a public dialogue where people are exchanging messages worthy of fortune cookies. But if we can get people actually engaged seriously maybe with video and interpersonal dialogue it may be possible to more greatly engage the entire mass public, that's the goal. But in the mean time processes that might engage a statistical microcosm of the public under conditions where they can get good information, which is the Deliberative Polling model, could usefully be adopted. In the mean time, until the issue of the digital divide is solved, I'm probably going to have to do Deliberative Polls with the old-fashioned technologies of television and random sampling via telephone to recruit the sample. But eventually, we could do national public consultations on the Internet.

Anyway, these are six democratic possibilities. Some of them take off all by themselves. There are all kinds of discussion groups on the Internet that help people get information but they don't represent the entire country under conditions where it can think. The SLOPS just proliferate because media organizations love them in order to get people to come to their website and to feel some sense of participation. But they give a distorted picture of public opinion and a distorted picture of public dialogue. In fact I think they're a disservice to democracy and indeed the fight against SLOPS had almost been won until the Internet came along. And then they just proliferate. Everyone talks about how "more democracy" is a great thing. We need to think about what kind of democracy we want to implement. These six possibilities differentiate different kinds of institutions that could be implemented and I think that only some of them are especially worthy. I'll wrap it up at that point. Thank you.


PAUL J. RESNICK: So I want to comment mostly on the digital divide issues and I'm going to tie it in a little bit with some of these deliberative democracy questions. So inequality in general in our society is rampant by income, education, racial divides. But we do tolerate inequalities of some kinds in our society. So I think if we're going to make an argument that this digital divide is an important public problem that needs to be remedied more so than just the general kind of inequality, it's going to be helpful to be more clear about why we think that this particular kind of inequality is more important than some others. And I think the, I actually think that it is. And the reason is compounding of privilege or what Russ called the Matthew Effect. The claim is that being on the right side of the digital divide is a matter of your productive ability not just your consumption. That if you are on the right side of this you'll be able to learn, to earn and to influence. It's a matter of wisdom, wealth and power. And if that's the case, then if you're on the wrong side then you're going to be more and more disadvantaged as your life goes on. And we do have an important principle of equal opportunity in our society and hence, this is something we should care about.

If that's the basis of the argument I think we have to be clear about what it is that people are going to do with their access to the Internet once they have it and why it is that it's going to give them the ability to learn, to earn and to influence. And what skills they're going to have to have. Russ talked about you get the computer access and then what? I don't think it's sufficient, it's certainly a barrier. If you don't have it you're not going to be able to do these things. But merely having access doesn't mean that you'll be able to take advantage of these opportunities to learn, earn and influence. I'm going to suggest what I think are some of the primary or the fundamental skills that are going to be needed in order to be able to take advantage of those opportunities.

A baseline for these is regular literacy. If you wanted to be a powerful person in our society and be able to do well economically, for the most part you've had to be able to read and write. And I think the barrier is just raised because you're going to have to have some information literacy or information fluency in addition to regular literacy. I'll call it fluency with information flows. The basics of that is being able to find information. It used to be that information was power but now everybody can get everything except you can't find anything. There are very important skills that I think have to be part of the basic education process on how do you search for things, how do you know if you're making progress towards what you're looking for, how do you get stuff. So that's on the receiving end.

And then there's the other direction, the information-organizing skills. How do you organize information so that other people will be able to get to it? People are going to pay for that in various ways and that's one way that you're going to be influential. So I think those are kind of the basics and pretty clear. I'm going to propose two others that I haven't quite worked out as well for myself yet so maybe I haven't quite gotten them.

I think a third fundamental skill is something I'll call peripheral participation. The ability to spend a little bit of time in monitoring some social groupings, some content areas without being fully immersed, and yet being able to take something out of that group. So in some sense it's an ability to cross boundaries to be a little bit part of some groups or a little bit paying attention to certain kinds of information. I think that's going to be an increasingly important skill.

And the last one is convening. I think being able to use this medium as a place to bring people together, especially if you're going to try to be influential, that's going to be important. Jim doesn't like the online discussion groups as a reflection of the general population but they are a pretty good means of having influence. And that, of course, is what Seiger does, kind of organize people online so that they can be influential. So those are the four things; information finding and search skills, information organizing, peripheral participation, and the ability to convene and build community through these information technologies.

In some sense the argument is that the fundamental skills are about communication and not so much about content. And as we look at what's most critical to enable in terms of uses of the Internet it's going to be things around communication more than around content. So I'm not that worried if there's some cable channels that people won't be able to get to but I'm very worried if they can't participate in the next round of the Deliberative Polls.

So when that turns us to remedies, one thing it suggests is we should probably be thinking of ways to subsidize uses and not general access. If you subsidize general access we're going to be subsidizing a lot of entertainment things and I think there's not such a good argument for public investment in that. Second, we should focus on this education especially on the key things of information fluency. I took my stab at what those four things are. Certainly we need research to establish whether those are really the right four. But we should articulate what it is we want to educate people about. I don't think it's word processing. I think it's some more fundamental skills. And the third thing I'd like to suggest in the realm of remedies is that we should think about public and communal activities not just things that people will do at home. We've heard the horror stories of the computer labs that have been set up that no one's using. But there are also some really great things that are happening in public spaces. I see Mike Tenbusch is here from Think Detroit and he's got one of these community technology centers and kids are engaged in communal activities. They're learning stuff but they're also doing things together. I think it's important that we maintain this idea that if we're going to have some public investment it might want to be in these communal spaces not just in things that people would do at home.

I want to be controversial on a couple of things. I'm skeptical on broadband. I am convinced that it's crucial for everyone to have access to some kind of Internet access in order to participate in things; I'm not convinced that broadband is so critical. I do think that always on access is important: if it takes five minutes to get on versus being able to just flip something on. I think that's going to matter. I'm not convinced that you need to be able to get streaming video in order to make good use of the things. Research has been done in the field of computer-supported cooperative work with teams trying to do work together, you have people do various tasks and you try it with having a video connection or you just have an audio connection and it doesn't matter. The video doesn't help except the only studies they showed that it matters was where you have people from different countries where you had language barriers then video seemed to make a difference. So I don't think that video is going to turn out to be critical. In the distance learning things, having my face on the screen turns out not to be very crucial. Everything's moving towards you see my slides and we have various texts going back and forth and maybe pictures but the actual person talking doesn't turn out to be so crucial.

The one argument I can see where the broadband will turn out to be crucial is if all the rich people get it and all the services get designed assuming that people have it then, even though they didn't have to be designed that way, everything's got flash and everything's got streaming video, and even though those aren't crucial to the services, they could have been designed some other way they will get designed with that, and then everybody will need to have broadband. And I worry that we're sort of as a society about to throw away a lot of money by making everyone get broadband unnecessarily.

On the Deliberative Polling the one thing I want to raise is perhaps raise some controversy there, too. I really like this idea of not just thinking about people self-selecting and trying to have some other process for selecting. I'm not convinced that the very strong version you've talked about is possible though. That even if we do the selection that it will somehow be truly representative of the nation at large or whatever grouping at large. There's still going to be differences in people's ability and willingness to participate. There's going to be the literacy barriers, some people are a lot better at convincing other people to change their mind, and that's not, some people are more willing to participate in this kind of thing. I don't think, again, I don't think video's going to solve this problem. It's true that there may be some things that will help, if you can have text to speech so that people can participate even if they're not great at reading but a lot of kind of the deliberation that's going to go on, there are going to be differences in skill levels and I don't think you're going to get something that is truly representative. I think it would be worthwhile to do some theorizing about what would a normative theory be of who we want to participate in these things if this Utopian ideal of truly representative is impossible? Maybe there's something else that would still be something we would be really excited about. Those are my comments. Thank you.

(APPLAUSE)


MIKE TRAUGOTT: I want to thank all of the participants both for their interesting comments and also for sticking to the schedule so that we have time to take these questions that have come up from the floor. I've sifted through these cards and I've organized them in a way that I thought I would present them one at a time and give all of the panelists and Steve, in particular, a chance to discuss them. And so I've selected as the first question one that is directed exclusively to Steve but on which the others could comment.

Mr. Gorosh's presentation nicely demonstrates the schizophrenic way in which we conceptualize the possibilities of the Internet. We laud the democratic potential of the Internet and the access argument typically follows. At the same time we see virtual space increasingly colonized by commercial content and interests. Is there a conflict of long-term interests at play here? It is not only access for whom but the question of what content and for what purpose?

STEVEN GOROSH: Sure. Obviously that question is often raised and it's been commented here in terms of the panel. Let me start by stepping back a bit and talking real briefly about what I think of when I think of the Internet.

Above all, I think of the Internet as a platform, as an enabling technology. If you think of electricity lines that were laid at the beginning of the last century, no one had a clue that within a short period of time that we would have everything from record players to TVs, microwaves, and all the other gadgets that flood our market. When the early computer was built, and this also goes to Paul's skepticism on broadband which I don't share, the only people who had computers before the software was written were the "techies" that played with the operating systems. I never understood what they were doing at that point, and I never will. But once these nifty software applications from wordprocessing to spreadsheets were developed, we have found important uses for the personal computer that were never imagined.

I think the same process has started as the information age goes along. The more visionary inventors in our world will use the bandwidth now available from broadband Internet access to develop new applications and content. Because of that, I'm not particularly troubled by the fact that there is a lot of junk. I don't see how that is different in a material way from any other issue in society. We don't close down grocery stores because they sell a lot of Pop Tarts, it's just a fact of living in this country. And to the extent that we believe in a marketplace, I suppose we have the right to reject those websites or applications that we feel come with an unwanted amount of junk. But I do not think that the alternative is not to exploit the Internet at all.

MIKE TRAUGOTT: Any of the other panelists like to add any comments to that or should I go on to the next question?

W. RUSSELL NEUMAN: I like Pop Tarts.

PAUL J. RESNICK: But we shouldn't subsidize them.

MIKE TRAUGOTT: But we shouldn't subsidize them. I have three questions that I think touch on the same topic. I'll read all three of the questions first and then we'll see who wants to give an answer. One of them is: what about the digital divide between the modern industrialized world and the developing world? The second question is: this sounds like rich nation, poor nation, or the north-south dialogue, the digital divide is a more global problem, how can the U.S. lead and help the third world? Don't define society as the U.S.A. And on a global scene, what are other countries doing to bridge the digital divide connecting homes, schools, and libraries? Who would like to start?

W. RUSSELL NEUMAN: Let me make a few comments on the global digital divide, which is much more dramatic than the internal, domestic digital divide. Half the world's population has yet to make its first phone call. Access to the telephone is measured in how many hours you have to walk before you can get access to a phone. And if you think about the need for medical care, the need to get medical care fast, if it's two hours to the nearest telephone imagine how long it takes after that to get the medical care. So that the notion of throwing computers into, for example, sub-Saharan Africa changes a whole lot of things. You get penetrations of the telephone network in Africa and Asia averaging three telephones per 100 so at those kinds of rates talking about Internet penetrations is premature. So there's a lot and also there's all per unit time charging for telephone access, which means if you do have a computer and a telephone and an ISP you're paying very large costs per minute to get access over and above the ISP access itself so that the challenges are very, very great.

PAUL J. RESNICK: I agree with Russ that one of the big challenges in developing countries is the telecom monopolies that are charging high rates and not allowing other vendors to come in. I think one of the promising things is again these public solutions. When people have a phone it's often not just their own phone--other people use it. Similarly, people are setting up these community computing centers and telecommunication sites that are I think the promising thing for what's going on in the developing world.

W. RUSSELL NEUMAN: It takes a village to have an Internet connection.

STEVEN GOROSH: One comment on the technological underpinnings of the question. And then one other remark. The panelists are exactly right. It's almost silly to try to talk about the digital divide with developing countries who don't have phone service. Interestingly, however, technology is beginning to be of service there because developing countries that had never built a telecommunications plant that we laid so carefully a hundred years ago, are finding that wireless technologies can leapfrog the need to invest in an expensive wireline infrastructure. And wireless Internet will be more available once the technology increases.

The other thing I want to say about globalization is, again, I'm an optimist on the future and the significant role that broadband will play. There's a strong argument that globalization and the connectivity that the Internet will bring will have dramatic long-term human rights implications. Everyone knows that during the crackdown in China, one of the key mechanisms for communication was the Internet. The internet has also helped disclose other human rights violations. I doubt in a thousand years that you would see what you're seeing last week with the Taliban destroying Buddhist statues. If you are forced into a world where you get more familiar with different cultures--it seems to me, it's gotta be a good thing. In any event, it's inevitable. It is not going to be overnight, however.

I happen to enjoy DSL service to the home because my company does that. And for those of you who've never had a high-speed connection, I do not think it's a "slight" difference. I'm at the point now where I will not use dial-up access under any circumstances--I'll just wait until I get access to one of my broadband connections. Because with dial up access, you make a query and something usually starts to happen and God forbid you want to download a picture or something, you wait for 3 lines to come in, and then 8 lines, then 14 lines. Even with a DSL connection, and this is just the beginning of this development, you push the query button and the thing is there. It becomes for those of us impatient people a tool of productivity at its best that I think is unmatchable and again I think it's a taste of what's to come. So I'm a big optimist on the capabilities of broadband eventually to go around the world, but it'll take some time.


MIKE TRAUGOTT: I'm going to ask part of this question again because I don't think that one part of the question was answered. Most of the responses had to do with the appropriate state of current technology especially in the United States but I'm going to ask part of this question again. That is, is there anything to learn from other countries in their treatment of the digital divide that would be useful in the United States?

STEVEN GOROSH: To some extent, the reason why we're so far ahead in broadband deployment as to some countries is that is unlike other models, we haven't tried to pick a winner, and we've tried to break up our monopolies and, therefore we've had the innovation that's made possible by those approaches. It's still early in this debate, the Europeans are sticking behind a clear standard on the next wireless generation, 3-G, which is a standard that will support broadband wireless, but that's an unproven winner. Some current technologies--satellite broadband, wireless broadband, they just haven't taken off. They maybe will, but there's been a lot of vaporware and hype. When I graduated law school fifteen years ago cable telephony was imminent we were told, and every year since. So I'm a little skeptical of picking a winner, I sure as hell couldn't do it. The key is to build a climate of relentless competition and innovation.

MIKE TRAUGOTT: Well how about from the policy dimension in terms of regulation or policy to try to reduce or eliminate the divide. Is there anything to learn from. . .

W. RUSSELL NEUMAN: I think most of the lessons are negative. The French Minitel case, which was a heavily federally subsidized attempt to develop a highly controlled and non-open Internet is a counterexample of how to go. I think the Chinese case of trying to filter and censor the Internet and use it as a means of tracking what people are doing. I think the Burmese example which makes Internet access criminally punishable aren't very good models for opening up internal and international communication.

MIKE TRAUGOTT: Great. The next question is when people discuss the digital divide, they often say it will have negative economic consequences for the unconnected; yet, when discussing the Internet, people say it might help democracy--it's good for online shopping and entertainment. Where are the economic benefits for individuals?

STEVEN GOROSH: Yes, I at least tried to hint at that. If you want to be a secretary these days, and you only work on a typewriter, your skills are going to be less valuable. Your value as a productive economic entity going forward will be more and more dependant on, what Paul said, at least basic literacy (which we've never solved) and then, more important now, the bar's going to be raised to include computer literacy. And computer literacy can solve some problems. For instance, we participated in a telecommunications commuting study with low income people in Newark, New Jersey. One of the fundamental problems of our society is low income people often live where the jobs haven't been developed, so they set up a center in the center of Newark equipped with broadband, and people work for suburban companies effectively by having remote access to those suburban companies. If the problem is that you couldn't read, it is now going to be broader than that; now you will need to read and do basic word processing skills.

PAUL J. RESNICK: So there is the skills argument; there is also a social networks argument that you can get connected to other people. This is part of why being able to peripherally participate to monitor different groups is valuable to people; certainly we know from studies of how people get jobs that social networks are very important. It's also the case that productivity in the job turns out to be highly correlated. The people who get promotions are, you can sort of look at the graph of who they know and if you know 6 people really well versus you've managed to develop a wider network of weak ties, those people are more successful in business. I think actually the access to computer networks is critical to being able to develop these wider social networks.

MICHAEL TRAUGOTT: I have two questions again that are very closely related, so I'll read them both before we get responses. Why are we more concerned with the digital divide than with the print and media divide? Isn't this a problem of literacy and school or library access? The second question is: to what extent is the bigger problem of the education divide useful to give computers to illiterate high school students? What if the teachers don't even know how to use the computers?

W. RUSSELL NEUMAN: I see this question as very supportive of the argument I was trying to make. I would hope they were written while I was speaking to reinforce the importance. If you think about some young man or woman who spends seventeen years of their lives and finds themselves graduating from twelfth grade with third or fourth grade reading skills and nonexistent mathematical skills and very limited social and language communication skills. And this is somebody who attended classes probably at the average attendance for the community. The capacity of well trained teachers and reasonably well funded schools to get that person past third or fourth grade reading level indicates that it ain't easy and just saying well there's schools and opportunities turns out to be a very small part of the program to deal with the cultural definition of what school is for and why people go to school. And if you look at those repeated patterns in the curves where the Asian-Americans exceed, sometimes dramatically, higher scores in achievement and educational attendance than the average Americans or the white American sub-sample, you see that dramatic importance of cultural norms and the use of technology which I think is got to be the next step we address as we work through the digital divide itself.

STEVE GOROSH: One comment, it's an important question. There's no doubt that we have not succeeded as a nation to educate all our youth or solve literacy. So that's a given and it's an unfortunate reality. Russell is exactly right that you can throw a computer at someone who can't read and you're not doing a lot of good. However, I don't find that issue very interesting. If you look at the early examples of when we threw computers into schools, there was little training and little funds for maintenance. I'm not sure if that was a failure or a success but it was a start.

How do we keep that issue resonating? Well I think you have to give it a title even if it's a little sloppily defined, like the digital divide. You have to make a national commitment that this is of concern, unlike a ton of disparities that we tolerate for better or for worse every day, and you have to start throwing some action and some imagination at it. As the E-rate program, for instance, has gone on in time, there was a Benton foundation study just a few weeks ago, and they found that things have gotten better. They now have some rigorous requirements. They found that now the school districts are doing extensive planning before they get the computers, they've learned some of these lessons about training and access, they're drawing on companies for the technical assistance and maintenance. This experience exists in the country, it just needs to be brought into the schools. Yeah, there are some really stupid ways to do this, but people have already with some help, some financial assistance, learned to do it. I think that's the only way forward out of this thing.

MIKE TRAUGOTT: I'm going to ask one final question and then we will talk a little bit about other administrative arrangements. Largely rural states seem to have benefited from the FCC's universal service policies. Sometimes at the expense of ratepayers including low-income people in urban states. Would you comment on the proposal to use block grants to states for e-rates and universal service provision? Did you write this question, too?

W. RUSSELL NEUMAN: Yes. In the American political context, because of the structure of the U.S. Senate, you will find a lot of power from rural America represented in Senate-initiated federal policy and you see the Senate Communications Subcommittee headed by Senator Conrad Burns from Montana, which by the way has a very high Internet penetration rate. Just an aside. When we were talking about the other countries and the U.S. I was thinking that half the people in this room assume that the highest Internet penetration rate is the U.S. It's not. The U.S. is fifth. Most of the other countries ahead are Scandinavian countries, by the way. You will see a thumbprint on American policy, which will subsidize developments in rural areas because of the density disadvantage in any infrastructural telecommunications area like the rural electrification administration, a tradition going back many many years. I think it's just a political reality here and it's a subsidy, perhaps an unfairness to the rate payers in urban areas, but indeed a political reality that came with the creation of the United States at the very beginning.

STEVEN GOROSH: I had an interesting discussion with John Young on this issue last night. He's a panelist tomorrow and was very active in Bell Atlantic regulatory affairs for a long time. And the question was if we had to do it over again would we have universal service for telephony. Because the way we accomplished Universal Service was to establish a subsidized monopoly with an elaborate, arguably horrific, set of hidden subsidies. And where it really started to break down is when we tried to move into a competitive world. Because if you subsidize business by charging them for residential calls, and then you allow long-distance competition for MCI then MCI can come in and "cream skim" those businesses being charged "artificially" high rates that include subsidies that only the Bell Company has to charge. And we're going through a tortured period now where we're trying to unwind those subsidies so that we can move to a truly competitive era and we obviously haven't figured it all out. But in any event, I think everyone now agrees that if you want to subsidize, don't mess up the rate base, do it as a targeted subsidy to end users. It's the idea that you should give the end-user, like we do, the lifeline service that promotes universal telephony service. We give money to the end-user so they have enough to afford basic service, don't give it to some designated incumbent, because then you basically create an environment where competition and innovation can't flourish. People now see broadband access dangling in front of them and like the idea that they can live anywhere and be active members of the global economy. They really see this need, and they're reaching out. The question at the end of the day is how much money are we talking about and whatever we do let's provide it in a way that doesn't mess up competition.

MIKE TRAUGOTT: Thank you, Steve. I want to remind you first of all that you've been listening to the third panel in the conference program and that in your folder there's a yellow sheet for evaluation of the panel. It says number three on the top and we would appreciate it if you would complete that. Secondly, I'd like you to join me in thanking Steve Gorosh and the other participants, the discussants on the panel, for a very interesting and stimulating set of comments. And, finally, maybe the Dean has a word to say about lunch.

DEAN JEFFREY S. LEHMAN: Are there any Pop Tarts? For you, Russ, we have Pop Tarts. For everyone else there's something a little bit more elaborate in the Michigan Ballroom right now. We will have an opportunity to listen to a wonderful speaker, Rick Snyder. So if everyone can pack up and we'll head over to the Michigan Ballroom. Yes in the Michigan Union. And then we have one panel this afternoon back here at 2:00. Thank you.


Luncheon

DEAN JEFFREY S. LEHMAN: He returned to Ann Arbor to found Avalon Investments, a technology-oriented venture capital company and Ardesta LLC, a venture firm that is focused on the microsystems industry. I should say that Rick has been a real powerhouse in Michigan's business community ever since he returned and he has really single-handedly changed the environment for entrepreneurship in Southeastern Michigan. Please join me in welcoming Rick Snyder to the conference.


RICK SNYDER: Well, thanks for that nice introduction Jeff I'm very happy to be here today. One positive was actually getting a chance to come talk here. Because every time I still go back to Hutchins Hall I have this flashback of the night before that I have to study or I have to do something. So this was a little bit less stressful by not having to think about those things even though it was almost 20 years ago. What I'd like to talk about today is tech transfer and investing, tech investing.

Why two topics? I thought it would be interesting, they actually tie together. First of all, I'd like to spend a few minutes talking about tech investing, the current environment, and what's going on. And then I'd like to talk about tech transfer. And to put it into perspective, why talk about tech investing. Well, everybody wants to talk about tech investing. In a lot of ways it's a fun topic now that I can socialize with people because it's right up there with the weather, sports and technology. For those of us from the Detroit area, the way the sports teams work, other than the football team, tech investing is usually a much more upbeat thing to talk about believe it or not, even in this market environment. So I'd like to cover a few comments and thoughts there and then I'd like to get into tech transfer. And why tech transfer when you talk about tech investing? Well, you talk about the long-term, of tech investing and when you talk about technology investing over the long term, you have two issues. You have supply and demand. In tech investing, the demand drivers are a couple of things--one, productivity and two, quality of life. In terms of productivity, we've seen what happened to the economy over the last dozen years or so. In large part productivity was a major driver of that and it was in terms of people's knowledge base but also technology. The other piece is quality of life. In some ways that's a tough question. It's a value judgement to make whether this technology has actually improved our quality of life very much. In many respects I think it has, but if I took a poll and asked for all the hardware to go in a pile here on the floor I think we could make a big stack of phones, pagers, other kinds of electronic devices, which in many respects are great things but you can't escape them in today's world.

On the supply side, that's the side I really would like to talk about tech transfer in that context. You have to ask, where does the supply of technology really come from? And in terms of there are many sources of that, but terms of the largest single source of technology being developed, that would be our universities and research that takes place in those environments. So when you talk about technology in the long term, you have the demand side and the supply side. And on the supply side the majority of that, in large part, at the core is coming from universities, national laboratories, and other research facilities around the world. So I think that's the relevance of tying those worlds together.

Let me jump into tech investing. The year 2000--talk about going up a roller coaster and coming back down. Clearly that was the peak of the cycle we were in and that phase of the environment. 2001, the way I describe it, we're in search of the bottom and I think we're still looking. In terms of seeing companies going out of business, last year in the technology industry I think we're going to see a multiple of that this year in terms of who won't survive. Why did this happen? A lot of it, if you get to it, is we finally came up to looking at the greater pool theory about who's the next buyer at the next wildest price and saying this system doesn't work anymore. Because the prices were truly outrageous. If you get to it, it's really economic reality returned. Things were so good; there was a lot of great things going on, but at the same time things clearly got out of whack. So economics means something. That old thing about, P-to-P is a new hot term in technology. How many people know what P-to-P is? Fair number. It means path to profitability. Did you ever think that should be kind of a hot buzzword? Most of us would have thought that should have been common sense. So if you think about it, good things are going on.

The other piece is tougher economic times and you have to wonder how much the two interrelate. But the economy is slowing down; times are a little bit tougher than what people are used to. And it's really interesting to see young people in the technology industry that have never been through tougher times or a recession. It's really an interesting experience. If I go back to when I graduated from law school from here, it was 1982 and I took my first job in Detroit. The next closest thing would have been going to work in 1929. So some of us have a different perspective, and it's interesting to watch people react to their first tough times in terms of an economy. The flip side of it all, I wouldn't underestimate all the great things that took place and the crazy valuations. There were a lot of really fabulous, terrific opportunities created. Really paradigm-shifting companies that are going to do great things. The real question was what were all the wannabes created around it that managed to get funded, supported and put in the public market place.

What's the current investing climate like? Let me switch into that in terms of getting pragmatic. Say you're out there trying to look in the equity markets today. First of all, obtaining VC is really tough these days. If you want venture capital to fund your company, good luck. In terms of why this is happening, I would describe that as the food chain is fundamentally damaged at this point in time. And there is a food chain out there. And the food chain sort of works like this. It goes from entrepreneurs to angels to seed capitalists to first or early-stage investors to later-stage investors to mezzanine investors to the public market place. And to the extent that food chain gets broken somewhere, it has real ramifications on everyone. If you look at now and think about the public market place, the public market place is really not supporting a lot of new technology investment. There's not a lot of IPOs (Initial Public Offerings) coming out, so what happens is that food chain gets jammed up and all those people that were supporting the earlier stage of that path are taking most of their funds to reinvest in the companies they had already supported. So there's quite a bit of investing going on, but a lot of that investing is people looking at their own portfolios instead of saying, "I can count on someone else investing in my companies," "I need to save my funds," and write those checks to the companies I've already backed. And as that happens at each tier, it creates a starving off effect going right down to the entrepreneurial level in terms of who can obtain funding. The other part that's interesting is just watching companies that actually got out and made it to the public market place. Everyone always thought that was the brass ring. Once you're a public company, you've made it. I think this is a unique time when you can look out and actually watch companies literally die because they're public companies. There are a number of companies that I've seen that if they were private they would probably survive. They would actually get some capital. But because their stock market values are so low they're down to the point of literally getting delisted from exchanges. And you're finding groups spring up now to literally make a business out of how to take those companies private again. So it is a very very tough environment.

In terms of how I see that going, I think it's going to continue for some time. I don't see a real quick turnaround coming. Obviously I wouldn't take my advice too far to the bank. If I had the right answer I probably would be retiring in the next six or 12 months. But in terms of looking at the future my guess is that it could be as far out as the later part of 2002. One thing in the technology industry I'll tell you is it tends to follow seasonal trends, believe it or not. And the best times tend to be as you go into the holiday seasons and right after the turn of the year. And I don't see a lot of dramatic things happening this year. I see improvement coming, but I think it could be another year after that before we see significant changes.

And what's going to make that happen? There are a couple drivers, which will eventually get me back to the concept of tech transfer. One of the things that will change is, obviously, the macro economic environment. As we find where the bottom really is and people start regaining some degree of confidence that they know where the bottom is, things start improving. So the macro trends will make a difference in deciding when tech investing becomes popular again. The other corollary of that, the other thing that traditionally makes things pop, is people identifying what they think is the next really hot thing. Because generally it's not tech coming back as a wave; when it's been down it's really leadership in two or three industries or sectors that really stand out as the really cool, neat next thing. I'm thinking about the Internet. The Internet took off, there were a lot of other sectors that were in technology that didn't follow at first, but followed later. So I think a lot of people will be looking around to say, "What's the next hot thing?" Examples people would already look at but are having their own issues would be in the telecom area. Either it be the optical side or the wireless side. Biotechnology is always a good one to look at. I like to joke that biotechnology goes in five-year cycles. It will come back every few years because there's always people and people always need solutions.

And then are there new things that we haven't identified yet. Just to tell you a personal bias, I've structured a whole company around microsystems of all things. Most people don't even know what a microsystem, is but just to give you an idea, there are new things being created out there all the time that could be one of the next things popping up. And as those things come about, that will be one of the key drivers in deciding when tech comes back.

So you really get to the question of tech transfer now and tying this back together. When I talk about the next hot things being the drivers, where would those come from? Those next hot things, in large part, will come from a tech transfer environment. Again they're not going to be things that came right out of a university. But the next hot things that show up in 2003 may be things coming out of a university today or things that came out two years ago or four years ago. Those seeds were planted then and they're starting to flourish in the background behind these tougher times, and their moment will come where people will realize their fundamental value and you'll watch them take off.

Let me give you a little background on tech transfer because I think that can be useful and that's where I have a fair amount of experience over the last few years. When I define tech transfer, I really talk about taking technology in terms of either licensing or starting up a company out of either a university or laboratory and some non-profit environment, and create a new entity. And I'm just curious how many people here have ever been involved in that kind of tech transfer? If you look around it's clearly a minority group. I wasn't sure if I'd have to ask if you ever licensed or done a startup. But it's a very small number. And that's the one thing I'd mention to you. When you talk about tech investing, there are extremely talented tech investors out there, but when you really ask who can take technology or people that know how to do tech transfer out of a university, you're probably talking at a subset that's probably less than 5 percent of experienced tech investors. So that's an even more challenging environment. I think that number is growing pretty quickly, but it is a pretty small crew.

Again, who cares about tech transfer? I've talked about the macro side, let me talk about some of the constituents and why they're interested in tech transfer. The first group would be the universities. Why do they care? Two or three reasons, there's multiple reasons. One of which is they get some revenue out of it. In many respects I would say that's not the major reason they're doing it. Again, universities are always pressured to come up with new revenue sources and they're important. They need to be supported. So they make money off royalty streams, equity interests, and things like that. More importantly though, doing tech transfer really is a magnet for the future franchise of that institution. It's really the key to attracting the best faculty, the best students, finding positions for those students to go into the long term, and really creating a relationship where the university can grow and flourish by being partners with its neighbors in its community.

In terms of the private sector, why does the private sector really care? Well as a practical matter, if you look at our economy today, most of our basic research is taking place in the university environment. Companies can't survive; again profit is a drive, they're pushed to achieve. And they can't be profitable if they have to do all that basic research. They can take it, they can make it into products, but they can't afford that basic level. So they really are dependent on the universities in large part for, again, I would describe as the majority of the true innovations at the basic science level. The other part is, where's the talent coming from? Where are the future scientists, the engineers, the management talent? They're coming out of the universities. And by building those relationships, that's a core use there.

And the other piece I would throw out to you is that I think the communities, government, and the public sector in general really cares about tech transfer. I think the evidence is still growing, but if you talk to most people that are involved in economic development, they'll tell you over the long term, tech transfer is one of the greatest single drivers of future economic development. And it won't be the only single source, but again it's that spark, that seed that really creates the nucleus for later things. And the most obvious example is the valley. There's really a case of Stanford, different universities like that, and the seeds that were planted there and what came out of those places really evolved into what everyone just calls the Valley today. But it went back to educational institutions at its core.

The other one is the general public starting to learn what tech transfer can really mean and what universities can do. Most people still don't think about, did the university come up with this initial technology, where did it come from? There is a great obvious one that's sitting out there that I think most people finally did appreciate the universities as developing. And that's the one we're so excited about and it has changed our life in the last few years and that's obviously the Internet. First and foremost, if the universities hadn't gone out and done it, the Internet would not exist the way it does today. In fact, the universities are the key driver on Internet Two, which is headquartered right here in town. So you can see there's a lot of needs besides just the investing cycle that's important. There are a lot of players in this that have key concerns and issues, but good drivers to say, "Let's do this really well."

Let me talk about the size of tech transfer because I'm not sure most people would realize that either. How big is tech transfer out there? In terms of the research done by universities, in terms of sponsored research by a segment of the universities that actually report this number, the number in 1999 was about $23.5 billion of research. That's a staggering number if you think about the investment in one year in research. And again when I give you a research number like that, that includes everything from the humanities to engineering to law, all the different fields of sponsored research. But it's an incredibly large number. If you think about it, the stats also show in terms of patents issued and licenses given, they're both over 3,000 a year. So in terms of new things going on, commercial relationships being started with licenses and different things, over 3,000. The number that did surprise me when I looked at the stats, is that they showed 275 startups. I actually expected the number to be several times that. So I would describe this as an industry when you talk about tech transfer that's got a tremendous core, but if you think about it, we really shouldn't be surprised to see that startup number grow into the thousands over the next few years. And I'll talk about how I think some of that's going to happen next in terms of some of the issues that are out there that you'll face if you're doing tech transfer and what I think some of the kickers are to make that number go up significantly more than it is today.

What are some of the key issues? Because, again, this is a group, from a legal perspective, a lot of lawyers in this group, and you always want to know what are the kind of contract issues you'd get into if you're trying to get something out of a university and into a commercial enterprise. Let me just walk through a few because I don't think most people would have thought of these in terms of key concerns. One of the first issues you face is the issue of publication versus secrecy. When you talk about universities, they're there to disseminate information to the public, is one of their key drivers. If you think about building a profitable business, do you want to go give away your best secrets? No, so you really get into this issue about striking a fair balance between publication and secrecy. Again this isn't a binary thing, there are ways to strike that balance. But in terms of issues you'd normally face you really have to address the issue of fundamental knowledge that needs to go to everyone versus key pieces that really are key drivers to make a business successful that if everyone had you'd be a commodity.

A second issue that I throw out to you is the thing of cash versus equity and fair compensation; valuation. It's really amazing, I have found, and again you're getting kind of a biased perspective because I'm on the private side, but you'll see technologies come about and sit there for several years and no one will put a value on them in terms of the university, no outside party. But all of a sudden when the phone call comes in to say, "We'd like to license it," to watch that value change very dramatically in the course of one phone call. The funny part is, if two parties happen to call it doesn't double, it can go up exponentially. And again I'm not trying to pick on the universities. I think they do a good job of making a tough evaluation. The main point I'd make out to you is there's not a good benchmark or place to get information to say what's the history of fair value. Again when you talk about 275 startups in a big year, you don't have 20 years of experience or thousands of data points to say "when we do this next time here's the normal range." So it's almost a one-off negotiation out of the gate when you start these discussions about what is fair value. And then what should be paid in cash and royalties or what should be given in equity.

The next one is exclusive versus non-exclusive. This is always a challenging one because a university, particularly a public institution, has an interest in non-exclusive arrangements. Again disseminating information to the public. If you're a business, in large part, obviously you want an exclusive arrangement. In some fields fundamentally the technology won't have any real value, even a patent, if it's on a non-exclusive basis. If you look at areas like pharmaceuticals, think about the pharmaceutical business, they live and die whether a particular product is under patent coverage or not. Because the day the patent runs out it goes generic. And these can be worked through, too. The universities do a good job, but the way you normally solve that problem is through what I would describe as a system of milestones. The university is not going to give an exclusive right to a company or an organization without actually believing they could get out in the public good in terms of having things happen. So you get over the barrier of saying how do you strike that balance by negotiating in milestones. To say the company has to do certain things with this technology over a set period in terms of either investing so much money in it, in terms of achieving so much in sales or revenue, in terms of getting it out to so many people within a set timeframe, and if they don't, it can revert back to a non-exclusive license or they could lose the entire license.

And then, finally, one of my favorites is the cultural side of negotiations. This is a personal favorite because again there is no set answer but this is where experience is key. Think about people in the university environment. What's the normal timeframe for decision making in the decision-making process in a university? I don't know if I need to say anything more. That's probably the safest answer for me other than hearing some of the humor. Typically it's a multi-part discussion where it involves group decisions, multiple layers going through this thing. For example, licenses here have to go through the Regents in terms of ultimate approval. But you're used to private companies that quite often can have the person sitting there saying, "Where do I sign, where do I sign?" And then you get the other fun, cultural issue, again no value judgements, that because of the decision-making cycle, universities are very deliberate and thoughtful about it where in the private sector, I'll admit it, we're fairly ADD (Attention Deficit Disorder). So it's like watching the tortoise and hare in a box go at it, in terms of picking on both sides. But you can work through those issues.

And then finally, another of my favorite ones that you get into, is in terms of the companies themselves. Usually there is a scientist, a technologist, and an engineer involved with the technology. And you have to ask the fundamental question, in many cases in startup, what's the role of that person? I can tell you from the private sector side, I usually want that person to remain being a great faculty member, but be available to be a consultant or advisor, something like that. The university, typically, wants this person to stay and be a great faculty member. A strange thing happens, it's much like that phone call I mentioned, things happen when that phone call comes. When the scientist learns that they can be part of a startup, they're now Jack Welch in terms of thinking who they are. They think they can manage the largest multi-billion dollar corporation out there. Or they're Bill Gates in terms of being CEO. And it's one of these things, and I often joke, and I'm really going to get it done, I think they need to rewrite the stages of greeting for the stages of entrepreneurship. For faculty people in particular, where they go through this whole thing believing they can be CEO, then they deny it, then acceptance comes, and you go through those things. I will tell you if you're going into that business, you literally need to build in about a six-month to year-long window for them to work through that process in most cases. So just to give you some fun background, those are some of the key issues.

What are some of the key trends in terms of looking at tech transfer? One of the things I think you can tell from my comments about key issues I would describe in this field, and it's kind of interesting because we're talking about typically science and technology. This is an art, not a science, in terms of doing technology transfer. This is a case where it's building people relationships and it's very much analog where it's fuzzy and you have to tune the dial versus being digital. So the funny part about this is, we're working hard to get out exciting technology that people think is digital; it's true science, it's hard science and the only way to make that really happen is being fuzzy, and thoughtful, and people oriented. In terms of what else is out there, I think over the last three or four years there's been a realization about how important this field is. This was a sleeper in terms of the missions of universities, in terms of how the private sector viewed tech transfer. Most people from the private side didn't believe it was that necessary and I think that view's changing. So a lot more importance, a lot more quality is going into this. And I think if you look at it, where's that happening? The quality and quantity of stuff going on and what's taking place at the leading institutions has gone up exponentially in my view over the last three or four years. And I would use the university here as an example. I mean if you look at the sponsored research dollars, they've exploded. There's nearly $600 million in sponsored research at this institution. If you look at the number of startups, licenses and patents, they've gone up dramatically here. In terms of the staff and the support from the technology transfer side, that's gone up dramatically. And also what they've done, is they've brought in people from the private sector and that experience base to be on their side, which has helped tremendously. So I think we're seeing vast improvements in terms of what's going on at the leading institutions. The tough part, like I said, there are not thousands of data points out there for institutions who don't have large budgets or huge expenditures in these areas. It is still really tough and there are still islands that need tremendous help. The hard part is there are not a lot of groups that can reach out and help them. So that is a challenge that I think we're going to have to address collectively. Because I view it as one of those things people think about, the top institutions, and I would put to you in some context that virtually every large major research institution in some ways is the world's best in at least one thing. So when you hear about the top 10 or 20 schools they may be the top thing at two or three things, but even those other schools quite often may be the world's best at some field that could really revolutionize things.

What else is out there? We need to create this symbiotic relationship. If you look at where the universities are going and the private sector, we want to really create more centers of tech excellence. It's a community thing. The universities cannot make this happen in terms of driving tech transfer by themselves. The private sector can't make them happen by themselves. People want economic development so what I think we need to do in terms of this country is figure out how to continually create new and flourishing clusters of technology, these real tech centers. And to give you a few thoughts. If you look around the country, it's fairly bifurcated in terms of where the country's at in terms of technology centers. Clearly there's the Valley. I would actually not call it just the Valley, but the Bay Area. If you had to create a tier one, that's tier one. And I would actually suggest to you, after that, you're in tier two. There are some areas that have done very well and are flourishing. Two or three examples there; Austin, Boston has done it for many years, Seattle is flourishing because of the software industry and different things up there, and telecom in Washington, D.C. is very strong. There's a lot of places trying to emerge and join this second group. I don't know how big the second group might get, but there's more to be brought into the fold. I would argue Ann Arbor's on the cusp. It has a lot of the aspects in terms of the field but we have to get more belief in ourselves and a little better organized. But there are things that are happening to say how can we push this so we really can create these centers around the country. And it's funny, you may not think about it very often, I actually made that joke when I first came back in '97 and created Avalon. People asked me what I was doing, and I used to joke with them. I called it, I said I was doing venture capital in the hinterlands. And the point is, I didn't view that as a value judgement; it's really outside of two or three of these spots in the U.S. Virtually every place is the hinterlands. That will change, it has to change, and the question is where are those few spots?

Instead of just speculating as to where those few spots are, I would near the end of wrapping this up. I would like to share with you the five key criteria I think a community and area needs to have to be viewed as a tech center. It's really a balance of these five key criteria that need to be pulled together if you want to be one of the outstanding places. The list of five goes like this. The first thing on the list and, again, they're not in order of importance. The first thing on the list would be technology. Again, that's one of the critical aspects of having a university, and you'll find virtually all of these centers are centered around universities in some fashion. The second piece is capital. Where is there a cluster of capital? And I was joking about this, they came up at lunch and one of the people I was saying, was joking about how the attention span of a venture capitalist, if it's not 20 minutes away they're not going to look at it. And in the valley that's true. So you need to create a center of capital. To give you some idea just in terms of stats, when I came back to Michigan, Michigan was ranked 38th in the nation in venture capital. I haven't seen the most recent number. My guess is we're probably about 12th to 10th now. In three years it's changed that much, and it's made a tremendous difference in the environment here. Next is infrastructure. You need an infrastructure of attorneys, accountants, and bankers. Real estate isn't the key driver. It's really creating that society of people who know how to get things done and create that buzz. People would be the fourth point. And clearly you can see it's not in order of importance when I put people fourth. In terms of the people you need, one we've talked about is the technologists. The biggest missing link in most of these communities that you find are the CEOs, and probably the VPs of marketing. I would argue that in most places to create a real tech cluster you don't need hundreds of these people. You probably need a dozen or so to get you kicked off. Typically it's not a long-term problem because over the longer term the institutions, the very schools that are creating the research, are probably turning out outstanding business candidates or candidates that can go work in businesses. And the last one is culture. It's really having that culture to say, "How do you think out of the box? How do you push things along? How do you challenge the norm?" In some ways I would postulate to you that the success of the last decade or so is not a positive in making that happen. If you think about it and look at most people, most people were very happy, very content over the last decade or so. The best time to change your culture to get that buzz, to get that fire going, is when times are tougher. So in some ways, to the extent the economy's slowing down, this is a good chance to address that cultural issue to see if you can get people to say, "What new do we have to do? How can we think about things a new way? How can we challenge the norms? Are we content as we should be? How can we get out and cross some new bridges?"

So those are the five points I would throw out to you and again, it's like linear programming. You almost have to strike them up in some balance and always go against the one you're doing the worst on. Let me just summarize the things that I've covered today and hopefully you've found them to be of some value.

The first thing is, we're waiting for tech investment to bottom out. Not a fun adventure if you're a big tech investor or you're a venture capitalist like I am in some fashion. At the same time it creates new opportunities. The other thing to remember though, is the next cycle will start. This is a cyclical thing. This is the way it always works. In terms of what's going to make that happen though, I would really be looking for what are some of the next hot things? Because, again, the macro thing is an issue that we can all address. You'll read about it in the paper or you'll see just from your own life or talking to people. But helping pick out what could be some of the next hot items to really go after. The other thing is tech transfer is growing in importance. And people are starting to realize how important it really is. In terms of the number I mentioned before, the $23.5 billion and the startups and all that, I think you're going to see that number go into the $30-plus billion range with the investment in the future, but I hope to see that startup number go up several fold. So we're making great progress there.

And the final point I'll leave you with is that I admire the Valley. I think they've accomplished just incredible things. I mean, this is something we'll be talking about the rest of our lives and our kids will be reading about in history books. But for the long-term benefit of society, our economy and the world, other clusters need to develop and evolve. And the real challenge will be how can we take tech transfer, how can we take that basic demand question that people are looking for--change--how can we create some new additional centers for innovation where we can create that bonded relationship; not saying it's a university, not saying it's the private sector, but how do you create a public-private partnership where you can have students, business people, faculty going back and forth on a daily basis and an hourly basis talking about the great things that can happen in our future. Thank you.

(APPLAUSE)

DEAN JEFFREY S. LEHMAN: Thanks very much, Rick. That was wonderful. We have a half-hour of break time now before we reconvene with this afternoon's panel on the maturing of the new economy, which we're back in room 100. So please finish up, enjoy your conversation and we'll see you back in Hutchins Hall.


The Maturing of the New Economy

DEAN JEFFREY S. LEHMAN: Maturing of the New Economy and the leader of the discussion is Jim Davidson. Jim is a graduate of the University of Nebraska and the University of Michigan Law School. He began his career as a corporate and securities lawyer for Pillsbury, Madison and Sutrow and then became managing director at Hembeck and Quist where he first headed up the mergers and acquisitions business and then technology investment banking. In 1999 he cofounded Silver Lake Partners, which is an investment firm that specializes in large-scale leveraged acquisitions of technology and related growth companies such as Seagate.

The commentators in order of their comments will be Jeff Mackie-Mason and Ronald Mann. Professor Mackie-Mason is a professor of information and computer science at the School of Information, a professor of public policy and a professor of economics at the University of Michigan. He is published widely about the economics of the Internet, the economics of other information technologies and competition in high-technology markets. Ronald Mann is a professor at the University of Michigan Law School where he teaches various courses related to real estate transactions, commercial transactions and intellectual property. His current research focuses on software development, letters of credit and payment systems used in electronic commerce. So we'll begin with Jim Davidson.


JIM DAVIDSON: Great. Thanks a lot, Jeff, for the introduction and what I'm going to try to do is pick up a little bit of the themes that Rick talked about at lunch today. After attending law school I ended up basically spending most of my career after a few years practicing, being an investor. So the new fund we have really focuses on opportunities that this tech environment creates for putting capital to work and so my comments will probably describe what's happening in the market, is this normal and rational. Actually my conclusions will say this is actually a healthy thing that's going on in technology. We'll go through and hopefully be reasonably concise.

First of all put some of the background and ground rules together. The new economy from my perspective is really electronics related mostly digital and all information based. So the computers, communications, the content that gets delivered that way through the enabling platforms. Let's take a little historical, I kind of like to walk through memory lane if you will: the happy days of technology investing. If you focus to the left of the crash, when technology in the course of the 90s really had a tremendous bull run. And it started to be so popular that the popular press picked up on it and the average American started thinking they were expert technology investors. And it used to be a joke in Silicon Valley that people would say, "Well how did you make so much money investing in technology?" And they said, "They invested." It was totally indiscriminate. You could buy any company that had any kind of tech-sounding name and the stock would go up. Everybody would go home at night thinking that they were brilliant. Well, unfortunately, at some point near the end of the decade that all changed. So if you look at what's happening lately, the peak in '99 obviously, the best of times and the worst of times. '99 was the best single performance in history for a U.S. market index. NASDAQ as an index appreciated 86 percent. It peaked in March of 2000 and then people started wondering how is this happening. What's actually kind of funny about this, is that during the period of time that the market was going up and you saw the extraordinary multiples being paid for technology stocks, people would literally walk around saying, "These are the good old days." You didn't have to be nostalgic about it at all. You could wake up in the morning and feel great about yourself because your self-worth was reinforced by the fact that your stocks were going up consistently. I'll talk about why that happened a little later. But then, and there were critics all along the way. The press could not understand how stocks were trading at 100 times revenues. And the press wrote about it all the time, and yet the stocks would go up. Why was that? Rational people would sit around and declare this is impossible. Laws of economics are not being followed here, what's going on? And yet the stocks would go up.

Well in 2000, you saw this happening, people were talking about the death of the dot.com, the death of Internet, the death of technology and actually what's happened is really healthy. Historically, 70 percent of venture companies fail. They don't do poorly, they don't struggle, they fail. In the last couple of years, a lot of those companies as Rick said, they just got public. The unfortunate thing is that by going public they will fail. They might have had a chance as a private company, they might have been able to raise capital and yet, today, in the glare of the public spotlight with the extra cost and the associated risk, they are going to fail.

It's actually uglier than that last chart looked. If you really look at what's happened in technology and you go through some of the subsectors, it's frightening. The real economy, the new economy all these things they talked about that got the front page of Fortune and Forbes and The Wall Street Journal, read all those wonderful columns, six articles about, and the B-section. The Wall Street Journal changed into a red herring surrogate. Everyone wanted to be a tech-centric financial publication. CNBC spends most of its time talking about tech companies. These things didn't exist 10 years ago and yet the bull market created this market. But if you look at this, the best performing major segment of technology is electronic manufacturing services, which really isn't a tech company at all. It's a contract manufacturer that builds things for tech companies and it was down 2 percent.

So what did we learn? Was there a mania? You bet! And it brings to mind that one of my partners, Roger McNamee, has a third law of investing which I have to warn the faint of heart about before I start in. Which is in a raging bull market, beware. Cream is not the only bovine byproduct that rises to the top. I think that's fair. But was there any substance to this? Was this rational? Because every time you go to and listen to an economics professor they say the markets are always rational. So what happened?

What really happened is I could have taken this chart back to the 60s or 70s. But what's happened is the technology economy really has transformed the overall economy. If you look at this chart, this is really just products, this is capital this does not include services. If you include services in here there's some estimates, services are always hard to measure, but there's some estimates that it's 14 percent of the total GDP (Gross Domestic Product). If it's 14 percent, it's the single largest segment of the economy and it's the fastest-growing sector of the economy and it's the fastest-growing sector of the economy at this scale in the history of the United States. And if you look at, this is real GDP growth, this is not nominal. If you look at nominal the CAGR (compound annual growth rate) here is actually closer to 18 to 20 percent.

That's a phenomenal growth rate. And that understates it. If you look at what's really happening in corporate spending, how are people investing capital? And if you look at the transition from a mainframe-based economy to PC where productivity improvements came into being, you look at the Internet and what's currently going on, 50 cents out of every dollar of capital spending is being spent on IT (Information Technology) solutions. Again, that understates it. If you actually look at, this is capital equipment and software license fees. If you go buy an Oracle ERP (Enterprise Resource Planning) system or an I2 system or a PeopleSoft system you typically spend 15 to 25 percent of the total installation is the license fee. The rest of it is services to deploy the solution and get it up and running. If you look at the dollars being spent and where corporate America is spending money, non-government corporate America, 50 cents on every dollar and look at the trend line. Why? How do you get an economy with high productivity gains, low inflation, low employment? You don't get it without productivity gains primarily enabled by technology.

So if you think about it, how do you get those numbers? Those numbers don't get to be that big because everybody's buying PCs. You can only own so many beautiful Dells and Gateways and Compaqs and how many cell phones can you have? Probably I should except myself from that question. But you can't buy that much electronic gear. So what happens is you go through this, I'll take automotive as an example. In 1998 Business Week wrote an article that talked about the growth of technology. They were only eight years late but it was Business Week. They claimed that, it was an interesting fact, in the automotive industry for the first time the bill of materials, the cost of goods of the average automobile purchased by the average consumer in the United States, semiconductor content exceeded the steel content in a car. Now that's a big deal coming in this part of the country because steel believes that the automotive industry is a large end market. The steel industry tries to court the auto industry. And obviously the steel content has gone down but the number of memory chips, microcontrollers and microprocessors in a car has gone up dramatically. If you think about your car today there's almost no physical linkage anymore in you system. The brakes are automatic, you airbag has an accelerometer. In 1998, I don't know what the current number is, but more than 80 microcontrollers and microprocessors were included in the average automobile. I don't even know where autos rank in terms of end markets for the semiconductor industry. It's not in the top 10. So this is a big deal. You look at hotels, or when you walk into a hotel and someone says, "Welcome, Mr. Davidson. We have you king non-smoking room ready for you." There's a software program that tells them how often I stay, what I order from room service and they're happy to see me.

What's going on in the market right now is kind of interesting. Because we're going to find out really the courage that people have in the economy. A lot of economists are debating are we in a recession, are we about to go into a recession, are we just barely, miraculously, with the grace of God going to avoid a recession. And that debate actually is frightening some people in delaying IT spending. There's been a big inventory buildup that's caused a lot of the crash but uncertainty about IT spending is causing a lot of the uncertainty in the market and crashing the stock prices. But you look at somebody like Jack Welsh he says, "God bless my competitors who slow down because if they slow down it will make it easier for me to crush them." And that's actually something, you look at some of the gains that people are really getting here, this is Oracle. Oracle actually understands technology; they're deploying their own product so one would suspect they know something about it. But look at those gains. Forty-two percent revenue growth rate and their operating margin's almost doubled. And you might say to me, "Well, that's obvious, Jim, because that's a software company. You get incredible leverage from a company that sells software licenses." But that's not the Oracle business model. The license revenue from Oracle is slower growing than their services component. They're doing this because they're putting standard processes across their entire company. They used to negotiate price customer by customer by customer. Guess what? Ellison put a stop to that. There's one pricing formula that's available online in an Intranet and they manage it the entire way. You look at inventory or vacation, HR (Human Resources) benefits, they're doing every single thing internally. Look at those numbers in the productivity gain. Taking something from 17 percent operating margin to 30 percent, in excess of 30 percent operating margin, for a company of that size growing that fast is impossible without an IT solution.

So what is the Internet economy? I think we're going to talk about that because I've talked to a couple of press people before I got here about the conference and they basically said they'd like to write stories about the death of the dot.coms. Again it's kind of like Business Week. The dot.coms died last year, but there is something about the Internet that's real. The fundamental change that the Internet enables is real-time information and that's really very simple. For the first time in history you can connect an almost infinite number of participants to a system and share information in real time. In the old days for people who have been around, you know the batch-processing mode, the IBM mainframe, you'd stack up your cards, your punch cards, and you'd run them through, you'd run a program, and wait patiently while your timesharing solution let you enter your program. It would calculate when you would get your report. If you were lucky you'd get to run one once a night or something like that. The Internet's real different. It's real time. And what that means is you know immediately what your customer wants. And it enables something if you can incorporate the whole supply chain to get whole new business processes and eliminate a ton of waste in a supply chain where time has been your enemy. So with apologies to Admiral Stockdale from the famous debate where are we, how'd we get here and is it different this time. I'm going to talk about valuations a little bit. I really don't think they're that irrational although from the third-party observer they're frighteningly and irrational.

First, what's the old economy? The old economy is just what you've grown up with. You get a great idea, you build a prototype, you have to go get money at some point to help expand your idea and actually grow. You have to build a pilot line because you have to build something. Again you got more money or time. If you build a pilot line and grow your business internally it takes longer. You build yourself regionally you get some more money, you add physical infrastructure and you expand. A lot of companies did this.

In the new economy, people actually have outsourced a lot of their "non-core competencies" to other people and you've created a virtual corporation where you were able to share information through an integrated IT system. It's what Oracle's done very well, it's the foundation of Microsoft.net's strategy and actually some people brute force it right now just by eliminating firewalls between companies. For example, Cisco today has one of their contract manufacturers, Flextronics, does a lot of the high-end manufacturing gear for Cisco. There is literally no firewall between their ERP systems for the gear they manufacture. It's not necessarily the ideal solution for people worried about privacy and confidence but those companies are such great partners that they've been able to make it work and has given Cisco an unbelievable competitive advantage as they've gone against Lucent and Cabletron and others.

When you create virtual corporations targeting huge markets, what's interesting is they grow faster. This isn't really any different than other transformational disruptive technologies in the economy from railroads to radio to TV, it just happens faster because the economy has structurally changed to be able to be deployed and reach more people in a shorter period of time. And it's not slowing down. This is one of the more amazing slides as you look at technology. Because most people think of Moore's Law, which is price performance doubles every 18 months. You get twice as many transistors on a piece of silicon for the same price or you get the same number for half price, however you want to do it. But storage, which everybody talks about, if you get streaming video you get voice, you're going to need a lot more storage. You look at companies like EMC who are selling network storage everywhere and growing like crazy. That's growing, that's doubling every 12 months. Then you come to optical. Communications industry is being transformed because you just look at the numbers. In a six-year period semiconductors, which most people think is a frighteningly aggressive evolutionary or revolutionary progression, their technology, it'll go up 16 fold. But optical will go up 256 fold. I shouldn't have had to look; I was a math person at one point in my life.

So what's that mean? Look what happens to these companies. Think about this, first product off the assembly line to a billion dollars in revenues. They used to say a billion here, a billion there pretty soon it adds up to real money. These are amazing things. A company, Serent, I don't know if you guys remember Serent. It got a lot of publicity about a year-and-a-half ago, maybe two years ago, because Cisco bought the company. They paid $7 billion for a company with $8 million of trailing revenue. And everybody said, "How can that be? How can a company with $8 million of trailing revenue be valued at $7 billion?" These multiples have gone crazy and it was the poster child for technology gone amuck. At the time, Cisco traded for 23 times revenue. Maybe the market had gone amuck. But you look at a company that traded at 23 times revenue, giving stock to a little company, and three quarters later they were at a billion dollar run rate. In three quarters that acquisition was wildly accretive to Cisco. Could you have done that in the old economy? You'd have to build manufacturing, you'd have to build geographic distribution, you'd have to expand your capital base. What happened is the virtualization of the technology industry allowed them to outsource manufacturing to Flextronics and they were able to scale from zero to a billion in three quarters.

Now, with respect to policy questions I'll throw in some bones for us. One of the things in the markets, the markets are really volatile and everybody seems to be getting hurt lately. And if you look back at the regulatory environment, the legal environment that governs the stock markets it's all about the efficient market theory. You have full and fair disclosure of all material information among competing rational buyers and sellers. The questions I'd ask people to consider would be have the markets changed since that theory was codified? And secondly has the definition of an investor changed? Are people looking at different things than they used to? And I think again the answer is they're crazy different.

In the old days, think about 1933. If you wanted to buy a share of stock in Ma Bell you'd call a broker, there are only a couple brokers licensed for the exchange, they charged you whatever they wanted to because it was all regulated, I guess they charged you whatever the regulated price was but it was grossly exorbitant, they'd go find a price and then they'd call you back or send you a confirm and they'd look at their ticker or they'd call somebody up on the phone, which was new technology to them, and you wouldn't know about the trade or the price necessarily right away. Today we invest in a company called Datech, which owns Island ECN and the average time it takes for them to receive your order, make the trade and send you a confirm back is 0.8 seconds. So the time it takes to execute a trade and you think about the information. If you want to know what information was going on at Microsoft in the trial, or actually pick another, RCA, you want to know what RCA was doing in 1936, you'd have to find, it would take you a lot of time and effort to find probably bad information. Today the Internet enables you or CNBC or CNNFN they let you look at this information in real time and it's more information than you could ever digest and you're making trades immediately. About a hundred years ago Keynes interestingly predicted that if you had a very liquid market where the cost of trading was very low, people would change their mind a lot. And that people would stop investing as long-term investors and they would start trading as speculators. What's interesting is Keynes, you know I guess he deserves his reputation, because I think that's exactly what's happened.

Second comment is what's an investor today? And there's really three dominant styles of investing for this century. The first, Graham and Dodd, which Buffet, Warren Buffet is the leading protagonist today, of value investing. Then you have the growth investors who are, Peter Lynch went around as Magellan Fund and he tried to find companies who every year their earnings would grow with solid management and the stocks would go up. Really in '90s you started getting the dominance of momentum players. Momentum players, if you look at William O'Neill, Investor's Business Daily, he's basically the chart people who have the view that if you accelerate at revenue growth, your margins are expanding, there was better news today than there was yesterday, analysts expectations were going up, whisper numbers were ahead of published estimate numbers, that the stock was worth more tomorrow than it was today. And so they started this momentum game and it turned out to be the single most successful investment strategy in the '90s. I used to do speeches with people two years ago or for eight years ending two years ago, where I'd ask people what do you look at when you buy and sell a stock? Does value and multiple even enter into your consideration? Is it part of the matrix? And they looked at me as if I'd just landed from Mars and said, "No. Why would it?" That wasn't a data point that people cared about. And so today what you have is an environment where . . ., Rick made a comment at lunch today that's very, when I take away from the economics courses I took when I was here, it's supposed to be about an efficient market but at the end of day it's really about buyers and sellers. If there's more buyers than sellers, stocks go up. If there's more sellers than buyers, stocks go down. That's a great strategy when you're in an up market because that means there's always more buyers and stocks go up. But what it says in a down market is there are no buyers. The market could be at 1800 tomorrow; it could be at 2600 tomorrow. It is now a random market. You look at volatility, the amazing thing is, you look at this chart, 11 percent of the days NASDAQ moves more than 5 percent. Think about that. Five- percent movement in a day happens once every two weeks.

So why are they more volatile? They should be, they're changing the world. I mean you look at the cost savings that Oracle's getting and that their customers are going to get from Oracle 11I or what Dot Net's going to do for their customers. You look at what Siebel did for front-end automation. It's crazy. Supply and demand, people think they want to be part of this tech environment so they buy the stocks. And when they're hot they'll buy a lot of them. Pockets of lunacy will always exist. The things that were mentioned earlier. You get the Serents of the world. If a company can go from eight million to a billion dollars, it ought to trade at a big multiple. You look at the optical environment. There's still a lot of innovation there today. JDS Uniface continues to ship product today at 60, 70 percent gross margin where their yield is only 8 or 10 percent. Someone can figure out how to make an optical component with a better yield, it's worth a lot of money.

Brings me to my corollary. When there's pockets of lunacy, you need to be careful about investing because you cognitively may know that a stock is grossly overvalued, but my specific corollary is that the market can stay irrational longer than you can stay solvent. So if you dare to short stocks when you know they're overvalued be prepared to go bankrupt and then in the poor house go around telling all your friends how smart you were. It's still crazy out there. This is after the correction. Look at the multiples. The thing is, people want to own winners. So the distribution here is that some stocks have crazy, crazy multiples and they're the market leaders or the perceived market leaders. The new, emerging technologies that are going to dominate the next wave of expansion. But look at the bottom three-quarters of the chart. These stocks are fundamentally cheap. Why? No one wants to own them. Some are good companies, some deserve to die. The question is can you tell the difference? You would think that the growth companies, the ones that have a path to profitability where they're accelerating their earnings every year, would be the ones that people own. Having taken statistics once in my life, look at the r-squared and the correlation between growth and multiple that exists in today's tech universe. It is, for all intents and purposes, uncorrelated. It's irrational. And these are the large stocks that are followed by Morgan Stanley Dean Witter, Goldman Sachs, CS of First Boston, and Merrill Lynch. So these are not unfollowed, random stocks. These are the most followed stocks in all of technology.

So although it seems irrational, I'll actually argue it's healthy for the economy and it's really the way it should be. You need to blow out not only the bad companies, but you need to blow out the bad investors. The people who can't tell the difference need to get out of this thing. And maybe that's elitist with professional investors dominating it, but investing in technology is different than buying a food company or buying a financial services company. Some of these companies will fail. They go public earlier in their lives, there's a lot more risk and even the big guys have to completely redo their business model. You could argue Microsoft.net's vision is a complete reengineering of the strategic priorities of one of the most successful companies in history. So it brings me back to my reason for optimism is my partner's first law of investing, is that investing is always a battle between fear and greed. And the good news is that fear always passes but greed is forever.

So my conclusions are straightforward. I actually think it's working. We had a speculative blow off, it's overcorrecting to the down side and it will scare people out who don't have the conviction or courage to stay in and play this game. I think one thing that's important and Rick talked about a little bit, is you need to continue encouraging innovation in the venture community in particular. The venture business is inherently a great business. Because you get a start with something with almost no value and you get to create, potentially, something that is of incredible value. And so if 70 percent of the ideas fail, and 20 percent of the ideas are mediocre, 10 percent of the ideas might be great. And if you do that, the returns financially from those kinds of risk-rewards profiles are incredible. The problem today is, the venture business for the last five years was really easy. And so a lot of people out there are carrying venture capital business cards that have no idea how to build a company.

One question from a policy we could talk about or not is that the markets are inherently volatile and what the popular press has referred to as the Schumputer Economy, where the economy isn't a smooth progression but there's actually fits and starts as entrepreneurs and capital flock to periods of technologies with discontinuity in the economy. I actually think that's healthy. It's worked great and I don't really see any reasons to damper things. But there's some policy proposals pending that might change that.

And finally, since I talked to some of the press before who said, "Aren't you going to come and tell us technology's dead and you're going to go to something else, go back to being a lawyer." And with apologies to Mark Twain, I think the rumors that technology industries are dead or dying is grossly exaggerated. So with that my colleagues here are ready to tell me I'm nuts, I'm crazy.


JEFFREY MACKIE-MASON: Okay. Thanks. One of my colleagues who edits a journal told me a few years ago that he'd like to send papers to me to review when he really wanted to get rid of the paper. And he said that in the editorial office my nickname was Mack the Knife. That usually makes it easy to discuss things because I'm pretty brutal and critical. But, actually today isn't the case. Before I met Jim and talked to him about what he was going to talk about I was trying to anticipate what the session was going to be about and think about what I might say. And I was really quite delighted to find out that we think very similarly about things, but that makes my commentary maybe not quite as aggressive or interesting. So what I'm mostly going to do is compliment his remarks and really just add a few comments. A lot of the things I'll say are essentially the same things he was saying. I'm going to add a few comments, draw more perhaps from the focus that an economist would have on the fundamentals and the long-term prospects, but it comes to the same conclusion.

So I also anticipated, and it's not hard to these days, that a lot of people would wonder, "Gee, isn't the dot.com economy dead?" and I wanted to sort of remind us to have a little bit of perspective on what dot.coms are and how horrible this crash of the dot.com sector is. As of the beginning of this week in industry trade magazine called Industry Standard, they've been keeping track, they've got a layoff tracker online, they keep track day by day of how many layoffs there have been in the industry. And they claim now that they've counted a little over 61,000. That was actually as of two days ago so it's up a bit now I'm sure, of layoffs in dot.coms. For a little bit of perspective, especially local perspective, Daimler Chrysler is in the process of laying off, announced in January they're laying off 26,000. That may mean we're in for really big trouble, there are layoffs all over the economy but unlike in two decades ago, there hasn't been a huge amount of panic that the economy is going south because 26,000 auto workers are being let go. I don't mean to diminish the pain and dislocation and suffering that those workers in either industry will experience, although James Fallows made the point recently that the white-collar, highly educated workers in dot.com's may not suffer quite as much as the older, less trained auto workers and such that are being laid off. But the point is, that the numbers aren't really all that overwhelming. You hear about all the layoffs and given the size of the economy it's actually not that many people when one company alone, and Chrysler's only planning a 15 percent reduction in output. Fifteen percent is not trivial but it's not disappearing. Hasn't had a 90 percent collapse the way that some of the companies that Jim pointed to have.

The other thing is that between December of last year and January of this year, seasonally adjusted employment increased in the U.S. And, in fact, that's been steadily true. And as Jim said, it's not even clear we're in a recession much less any sort of free fall or collapse. In the economy as a whole, things are still looking awfully good and it's important, I think, to keep a little perspective and not get, just as wise investors probably get a little bit overhyped about the value of the dot.com sector in the first place, I think the press is helping to fuel a little bit of overenthusiasm about the collapse of the dot.com sector and how horrible a thing that is. Jim's point, I think, is well taken that it's actually a very healthy thing. You throw out a lot of ideas, if a lot of them don't fail then you're not trying enough new things. We happen to be seeing a period of time now when people are discovering which of those ideas are failing.

So how bad is it? Again, just for some perspective, this is the unemployment rate in the U.S. from 1989 to the year 2001. This is the horrible new recession we're in, this little blip here. The unemployment rate has gone up. Total employment has also gone up. More people are actually in the workforce. So we have both employment and unemployment going up. The point is that compared to the beginning of the tech decade, the '90s, unemployment is extraordinarily low in the U. S. In fact it's almost frighteningly low and it's probably because of IT that it can be that low. That our economy functions much more smoothly, transitions are much easier and we have much better communications, not only in the technical sense but in the business process sense so that we can keep a much more highly employed economy. We're really at a remarkably powerful and strong state. Of course, it could go up very rapidly and that's what people are worried about. But at the moment things don't look so bad at all. Here's the employment. Employment is a percentage of non-institutional population in the U.S. Again, over the past decade employment as a percent of population has gone up dramatically and you can't see any collapse in the last year.

So what is important? If I'm saying that the collapse of a few dot.coms and the loss of a few tens of billions of dollars really doesn't matter, what does matter? Well, the fundamentals are the same fundamentals that were true 20 years ago. I want to emphasize that unlike looking for the next best marketing idea, thinking of the next best retail Internet product to sell, the next best way to deliver dog food to the people that bought through their web browser, one thing that is absolutely true and hasn't changed for a long time and is crucially important is Moore's Law, which again Jim pointed out. This is Intel's version of it so there's a lot of little references to Intel products but after all it was Gordon Moore who first proposed Moore's Law. It's really an astonishing thing. Since the first Intel microprocessor, the 4004 in 1970 which had a couple thousand transistors, they've now released the Pentium 4 with almost 100 million transistors. That's a long time, after all that's 30 years. But if you look at the difference in the Pentium 3 and the Pentium 4 in just the last two years, or the Pentium 2 in '97, we've gone from 10 million transistors to 100 million transistors in less than five years. That inexorable technological rate of change has continued without any serious deviation and it's going to continue for quite some time and that's drastically changing what the economy can do and what the nature of the infrastructure of our economy is and is going to be. And that's not going to change and that's not going to go away anytime in the foreseeable future at least.

Communications, too, as Jim pointed out it's not just semiconductors but other forms of technology as well. On the left chart I've got the mileage, basically the capacity of transoceanic fiber optic cable. That's just been explosive, the amount of communication capacity that's been laid under the ocean. And that's not cheap. The cable is cheap. It's just glass and less than pennies a yard now but you're laying it in trenches and under the ocean so it's still not cheap but the explosion has been there. Same in Internet backbone bandwith. When you get down to the technological fundamentals it looks like this and is going to continue to look like this. The price of dot.coms of all of those experiments, a lot of those are going to come down, there's going to be a correction and we're going to see some pain for a while in market valuations. But the technology fundamentals haven't changed and that means that the economy built on these technologies isn't fundamentally going to change either.

The graph showing prices for communications lines and routers and switches. I like to explain this in terms of cost. Prices have been coming down about 30 percent per year for the underlying communication technology for the last four years. Think about the cost of anything going down 30 percent a year. Think if you will about the cost of tuition to a law school going down 30 percent per year. Law school would be pretty darn cheap just a few years from now. This is in an industry on which we build all other industries, communications, and the underlying cost of the core technology is going down 30 percent a year forever. It has been doing it since the 1950s and '60s.

So what are some of the implications? Well, just to do the exponential math just to remind you that these numbers are really big. Electronics functions will increase by factors of 10, 100, 1000 over a few years. Five, 10, 20 years. That means that what you could do before you can do a thousand times better 20 years from now, or a thousand times more of it just from semiconductor growth. For example, my laptop over there has approximately two times the computing power of the IBM 3090, which was their top of the line mainframe in 1986. Now 1986 that was a long time ago, it's 15 years. But then again that was a big machine on which a lot of industry was built and I've got twice the computing power on that laptop over there. What this means is that all business needs to design their operations around information technology. It is a key infrastructure input to all activities basically, all significant economic activities. And it's one which is now the transforming driver. Technology is now improving so rapidly and so persistently that any business that doesn't redesign its processes around information technology is going to be left behind. The quote from Jack Welch of GE is a good example of that. At least that somebody believes that at GE. Of course I did point out to Jim this morning he was saying that Jack is one of those great people who is willing to take big risks through recession. I pointed out that Jack is retiring this year so he can say whatever he wants but. . . .

If you're in a business where your core value is information technology, if you're in some sense an information technology business, and the argument is essentially that everything is going to become to some extent an information technology business, but if that's really what your value is coming from, where your product and your value to your customers is coming from, then you have to be on the Moore's Law curve. Because if you're not, one of your competitors will be. You have to be bringing out new products, improving your products or reducing your costs at that same exponential rate as Moore's Law or if not you'll be left behind. So there has to be a transformation in the way we do business, the way the economy operates, the way firms interact with each other that is moving at this same pace in order to keep up with the technological transformation. That means that things are going to continue to change very rapidly in the economy.

So let me go back for a sec. It may sound like I'm just a foolish optimist who doesn't have very much invested in dot.coms, which is true, so it didn't hurt me too much that they all disappeared last year. But, nonetheless, what did happen having all these companies go away, how can I be so optimistic when in fact everybody says the sky is falling? Well, what I said is that the sky isn't falling in the sense if you look at the technological fundamentals they haven't changed. Moore's Law in computing and in communications has continued and that means we're going to continue to see that type of value.

Where do we see it then? In contrast to the horrible death-fall graphs if you look at the NASDAQ as a whole or the dot.coms, this is Microsoft. I know people feel sorry for Bill, he's had a bad year, he's lost a few tens of billions of dollars, but all things considered, if you look at the blue line from 1992 to today Microsoft hasn't actually done all that badly. You can see a few things going on last year that certainly weren't pleasant but the scale over there points out that the return on owning Microsoft for the past decade has been about 2000 percent compared to the S&P 500, which is down here in sort of the normal 200 percent over a decade, normal for the biggest bull market we've ever seen. So Microsoft, which is built on Moore's Law, has really followed that track and it's probably, maybe not Microsoft because they may be managed badly from now on or other problems, somebody with a lawsuit may affect it, but the point is if you build on Moore's Law and you stick to the technological fundamentals, that value is there and we're going to see that continuing to be there.

On the hardware side, Intel, the same thing. Intel over the past decade, 2000 percent return. Yeah, sure, there's been a collapse in the last year, it's not been a nice year for Intel shareholders but all they had to do is look back 13 or 14 months and they're still up 2000 percent over a decade.

What about communications? Well, Cisco's even better. And there's the one you really wish you'd invested in if you're investing in blue chip technologies. They're up a little over 10,000 percent over the decade, again compared to this is the rest of America down here, S&P 500, which has been a pretty darn good return if you've been investing in the S&P 500. It's been the best decade you could have done that. But it would be even better if you'd invested in Moore's Law.

So why did the bubble burst? What went wrong? Yeah, there was an irrational feeding frenzy. Jim said there's a lot of people out there who don't know what they're doing. That's been true on both the financing side and on the technology side. It seemed like anybody who named a company dot.com was going to make money and so a lot of people who didn't know how to do anything other than name their company dot.com went out there and there was the feeding frenzy. There was also a timing problem, and this is something that I think is worth keeping in mind. In the '80s, particularly in the late '80s, there was a lot of talk about the so-called productivity paradox. The boom in IT investment started in the '70s and the early '80s. And by the late '80s people were starting to say, "You know, we've been spending all this money on computers, why don't we see productivity going up in the U.S.? Why are we still stuck in these rather not very exciting productivity numbers that aren't growing very fast? Where is the boom from all this IT?" Well, it turns out it was there and by the early '90s we could measure it, and in fact about half of productivity growth in the last 20 years in the U.S. has been due to information technology investments. But it took us a while to see it, because although the technology improves very rapidly and we can build bigger and better machines and fatter and faster communications pipes at extraordinary rates, we still have to learn how to use them. The human element hasn't changed, the process element hasn't changed, we haven't sped up figuring out how to adapt, figuring out how to structure new businesses, figuring out how to structure new partnerships, figuring how to change our old product lines into new product lines. So there's going to be a lag. It's going to take time to see the benefits.

So in the '80s, we couldn't find anywhere in the data, the productivity benefits, but in the '90s it became very evident what they were and we saw it big time. I think we're going to see the same light from the technology boom of the '90s. The new economy has been driven by these infrastructure investments and as Jim pointed out you now have companies that go from zero dollars to a billion dollars in two to four years, sometimes even less than that. Very rapid growth in the physical infrastructure and the technology development, but the infrastructure companies themselves; they're relatively small part of the economy. They may be the biggest sector of the economy if you include services but we're still only talking about 10 to 15 percent at most of the U.S. economy. What really matters is that IT is being incorporated in the rest of the economy and becoming part of the rest of the economy. The benefits of the infrastructure development are going to require reengineering; new management processes, new social policies, new legislative policies and implementations of those policies. We need social transformation throughout the process to take advantage of that so the tremendous benefits of the '90s technological boom were not in the valuations of the dot.coms. We're going to see them in the next decade, in the developments of news ways of doing business and new sources of value.

I'm going to skip this slide because I'm talking to long and it's just sort of connecting some of the policy issues that are coming up in other talks. I'll let other people do that.

So do we have a new economy? The speculative bubble has burst, but the fundamentals have changed forever. I don't think economics has changed. I'm not one of the people who thinks there's a new economics, but there is, in some sense, a new economy in that the core infrastructure of the economy now is information technology. And that is a technology that increases at extraordinary rate in terms of its value and the economy is going to be driven by that for some time to come. That's true, that's here to stay, we're not going to see that change. So as long as the key infrastructures are improving at the rate of about doubling every year in terms of capabilities and value, we're going to see the economy changing at something similar. Thank you.


RONALD J. MANN: So Jim gets up here and Jim actually goes out and makes money doing this and so he really knows what's going on. And Jeff's an economist and so he actually has data so he has something significant to say. But I'm a lawyer and so the only way I can know anything about any of this is by trying to talk to people who do it because it's just not what we do. So it's really true when I say that I don't have anything to disagree with what they said so I'm just going to try and compliment what Jim said, too. Mostly what I want to build on is just a couple of separate points. What does it mean--Internet time--that we're just going to move so much more rapidly, and I'm going to talk about just two things briefly looking at the four-minute-to-three clock.

The first thing I think Internet time is it really exaggerates these Schumpeterian waves of creative destruction that you see throughout the economy. The second thing is, I want to talk about a legal issue, surprisingly enough. It really rebalances, I think, ideas about what kinds of intellectual property protection we'd have in this economy.

The first one is fairly simple. You just want to know is this so bad that we had this crash? And as both of them suggested, no. We had this infrastructure that's going up so much more rapidly. What that means is that we have a much greater number of new companies every year. There are many more companies that started up in the Internet sector and in the venture capital sector in the last five years than in the five years before that. You have many more companies that we're testing out every year.

The second thing we know is that these companies have incredibly short life cycles. When you see this graph I think one of the two most important charts from Jim's presentation is this one where you see Microsoft. That's a very slow, stodgy old-style company. It takes them like 14 years to make a billion dollars. Then you see Serent that just goes straight up. What that means is, you've got a lot of companies that succeed really quickly but if you're going to fail we can find that out pretty quickly. You can go from nothing to three rounds of venture capital to going public to being wildly successful to failing and you might not have even needed to have an annual meeting yet. What that means is we needed to have a massive number of failures and, frankly, it's not really clear we've had as massive a number of failures of companies yet as we need to have. What we've had so far is a lot of stock prices falling and I really think this quarter you're just now starting to see the companies failing and you're going to see a lot more over the next year of people who are just trying to hang on still.

What I want to talk about a little bit is what's going to be left after this particular wave of a crash. And I'm just going to talk about business-to-consumer companies because that's just the thing that I study most and offer a couple of thoughts about that. One thing, the world moves really, really quickly in Internet time and it's just not really clear that getting yourself up and going public and getting your product out on the market as fast as you possibly can with as much advertising to build market share as quickly as possible is the best thing to do. Some of the companies that look like they're succeeding are companies that really went more slowly. Many of these are companies that either Jim's company or Jim's close partners have invested in. I can't remember which ones they are. I know that Kleiner and Integral Capital Partners have invested in almost every one of the companies I'm going to talk about, for what it's worth.

What you also see is instead of focusing on selling something on the Internet that no one else has thought of selling on the Internet yet, which is an idea which seemed to work pretty well last year, now people have realized that to make money even on the Internet you have to have a very large gross profit margin. What Amazon.com really tells you is even if you conquer the entire world and can sell huge, massive quantities of something for which there is a positive profit margin, it's very hard to make money unless you have a substantial gross margin. The companies that are making money are the ones that identify products for which you can see some sort of margin. And really, I think the way you see these companies doing, that is, they try to figure out a business model that allows them to have lots more transactions off of which they can slice money rather than figure out something that requires them to pile up big mounds of inventory. And the companies that tried to grow lots of inventory or were forced to grow lots of inventory have had more problems making money.

Some of the companies I think are showing how this works--I'm just going to go very quickly here--are people who sell products which even in the regular brick-and-mortar area have very high margins. You have people who sell jewelry like Blue Nile, flowers is something for which some of these companies have been very successful and Reflect.com is a sort of personalized, cosmetic products thing that Proctor & Gamble's doing. Another thing to do is you just do transactions. If you do transactions you don't really need to have inventory because there's not really anything you're selling except information and of course it's not very expensive to store information. You see these companies like e-Trade and Travelocity and that's what they're doing.

Second thing I want to talk about is how is this pace of Internet time affecting the legal infrastructure. And the principle legal infrastructure for the new economy, for my purposes, is the intellectual-property protection that we provide for the things that people are creating. Basic rationale that the American system of intellectual property has, and this isn't necessarily the best rationale. It's certainly in a lot of respects not the rationale that other Western countries have for lots of the important products. Our system generally proceeds on the idea that we want to give people an incentive for innovation. And the way we're going to do that is if they come up with a product that falls within one of the pigeonholes that we protect, we're not going to let anybody else use that product or idea for a long period time so that they can reap profits from it. For that to make sense a couple things have to be true. One, it only makes sense if giving this incentive is necessary for people to make the product. It's not good for the economy to give a monopoly to somebody to create something that they would have created anyway because the monopoly is necessarily a cost to the economy. So you shouldn't be doing this unless you need to do it to give people the incentive to create it.

The other thing is, it assumes that the incentive is effective. It's possible that the incentive just doesn't have any affect on people. Now you look at Internet time. How long in Internet time does it take to go from zero to a billion dollars? Well you know maybe four or five weeks. How long do we protect intellectual property? Well patents we give people 20 years. Twenty years is a very long time on the Internet. You would have to wonder, I think, whether we really need to protect patents for infrastructure for Internet 20 years or whether some shorter period of time is long enough to reap a return on the investment. It's very difficult to figure out how to do these things because when you're trying to figure out the appropriate length of intellectual property protection, you want to look at broad categories that are easily understandable and figure out something about how innovation works in the area as a whole. But when you hear these people talking about what happens under Moore's Law in 20 years, that's a long, long, long time. And it's much longer now than it was in 1800. I mean in 1800, 20 years was a small part of the life cycle of a product. Now, it's generations and generations and generations of life cycle.

What about copyright? Copyright's important. We protect software with copyright. Well, the copyright protection is life plus 75 years. And if it's a company, some companies write software, well they get 95 years. Ninety-five years is just an absurdly long period of time to have copyright protection for things that have product cycles so short. So you would wonder so does this really matter? Because you might think, well if the product's only going to be used because its life cycle is so short, we're not going to be using this software product for more than 18 months, why does it matter if we protect it for 95 years because after all it's unlikely anybody's going to be buying Microsoft Word in the year 2060. I'm not sure what they'll be buying. It might be something by Microsoft but it probably won't recognizably resemble anything that we buy now in any way even if there's some chance that the object that you use it on resembles what we use it on now, which I guess that's unlikely, too. But I think that's just not right. What happens is the patent protection, the copyright protection being to the extent that the products develop more rapidly it's still true that the products are built on things that are protected. And you tie up the infrastructure for decades. So if someone can get a patent or copyright protection for something, it lasts a much longer time than I think is plausibly necessary to get the amount of incentive for the innovation. If someone can bring a product to market and gets profits from a first mover advantage for a significant portion of the product cycle before someone can come in and compete with them, if you then protect them for another 85 years after that it's easy to think that's really longer than is necessary.

I'm several minutes past when I'm supposed to stop so I'll just stop.


DEAN JEFFREY S. LEHMAN: Okay, let's collect questions from everyone and I'll pose them to the panel as they come in. The first one is simple and direct. I'll start with Jim's reaction on this. Please comment on the proposition that Microsoft and Intel and Cisco are not representative of the tech industry because of their monopoly positions.

JIM DAVIDSON: I guess they're clearly large players in the markets but it's actually kind of interesting that I guess Microsoft's on trial right now whether they're a monopoly or not. I think they're not representative of every tech company because there are thousands and thousands of tech companies and they are three of the most successful tech companies. It would be like saying Michael Jordan and Magic Johnson are representative of basketball players. They are among the best that have ever been and I would say that the benefit they've done for the economy has actually been extraordinary in that a lot of the effects that we talked about in terms of the economy growing as productivity improvements are a result of there existing some kind of industry standards that people can have some kind of standard platform for communicating in business and have a standard productivity pool. And I think Microsoft, one of the operating system, the Windows part of it, but actually the office tools have been incredibly important for productivity improvements. I think Intel with their microprocessor back in the days of August of 1981 in their hotel in New York City when they announced that they won the lottery. IBM picked them for the microprocessor for the 8086 microprocessor for the IBM PC. A lot of the developer community that rallied around it, all these funny stories about how IBM tried to pick digital research as the operating system, the modified CPM and the guy wouldn't return Ken Avito's call so Gates got the deal and then had to write basically his dos version. Cisco I think is the most interesting of all. If you look at Cisco's success, Cisco's success is really the result of being the first company in the technology industry that outsourced a huge percentage of their R&D. They've done so many acquisitions and their secret is their marketing department, their sales department and their customer relationship business has been so far superior that they've actually been better than any other technology company that I'm aware of in integrating acquisitions and driving revenue and profitability. And by outsourcing that R&D I would argue, in fact, they are the almost opposite of a monopolist. There's a lot of new technologies, particularly in the optical and the metro area switch markets, where the best technology continues to be done outside of Cisco. I think one of the big issues for Cisco going forward is going to be with their stock price as depressed as it is, are they going to be able to continue to do business as usual and acquire the needed technologies as the communications industries change so rapidly and continue on that path. But I think that to say they're representative is a gross exaggeration because I think that they are among the best companies, not only in the tech industry, but in all of corporateness(sic) in the world.

DEAN JEFFREY S. LEHMAN: Any other reactions?

JEFFREY MACKIE-MASON: I'll just say a word because I put up those charts and I certainly didn't mean to suggest that they were representative companies. Of companies. I wasn't giving investment advice. For instance the easy thing for an economist trained in efficient markets theory to do is to say pick the winners. Jim showed me he has a book in his briefcase with him today that the title of which is How to Make Money in the Stock Market. It's a nice title. Everyone would like to write that book and in fact a lot of people have. No, the point I was making in picking those companies was to show that over a decade there's been a tremendous amount of value created by following this technology curve. Obviously, the companies that followed it best and were the best companies made the most. But the correction we're seeing at the moment is mostly the collapse of mania for retail-based Internet delivery businesses. And it turns out, the Internet delivery business for retail is just not probably the biggest advantage we get from all this technology. There are lots of other things we get and the technology over time is driving tremendous increases in value and will continue to do so. Which of the companies to invest in for the next decade, I'm not going to tell you. Jim would be happy to tell you and you should see him afterwards if that's what you want to know.


DEAN JEFFREY S. LEHMAN: This, I guess, is about information here, which is what can regulators do to monitor chatrooms where an aggressive campaign of misinformation can cause serious harm to a company's stock in the short term?

RONALD J. MANN: Hard problem. I think that's a hard problem because it's difficult given the norms of our country and the technology of the Internet as I understand it to expect that you're going to have regulators who are going to keep people from posting messages on the Internet. It's very difficult, I think, technologically to keep anybody in the United States from writing anything that's mean about somebody and it's going to be particularly difficult to do that before they've done it. I think the most that you're likely to see is reactions to the sites that are dedicated to a particular company and there's a lot of litigation right now about acquiring domain names that might be critical of companies so you might have such domain names as WalMartSucks.com. There's a whole series of litigation before ICANN in which Wal-Mart tries to acquire that name and people try to acquire these negative names. But that's just a fruitless battle to spin, paying lawyers to do that because as soon as you get the one name there'll just be a different one or there'll be a chatroom someplace. I don't think that anything can be done about it. I think the most that can be done is as time goes on I think the people who invest in these companies become more sophisticated at distinguishing between false information and true information and there's just much more information out there than there used to be and just because there's more information doesn't mean that it's all true.

JIM DAVIDSON: I would say that I think it's good and bad. It probably goes back to the type of investor we're talking about. The good news is there's a lot of information that goes in on chatrooms and 99.9 percent of it is just wrong. It's people who need to get a life. The interesting thing is, and it happens every quarter, there'll be someone who goes on for QLogic I think it was most recently, they're going to miss their quarter and the stock tanked. If you had just slept in that day and then woken up, because the information flow is so quick the SEC or the NASD or the New York Stock Exchange sees the stock market reaction, calls the company immediately and then there is corrective information that goes out very quickly. And so if you had just slept in that day, you would have had no impact on your life. The stock would have cratered down 70 percent and then recovered at the end of the day. And so, the question is you're going to obviously, speculators who trade on rumor, innuendo, whispers etc. are playing that game and it is market manipulation and I think right now the SEC has few tools to really combat it and there are some teenagers in southern California who think of it as sport. But, people have to deal with that but for most investors whether you invest in a mutual fund or you invest directly in the market, it really doesn't affect you as much as the press would lead you to believe because there really isn't that much volume and the volume that's generated is really around people trading it as it moves around. So it's people getting in and out of the market. If you really look statistically my guess is there are very few people hurt and the dollars hurt are not as great as the press lead you to believe.


DEAN JEFFREY S. LEHMAN: Next question and the person who wrote it down is going to need to help me in case I'm having trouble reading one word on here. If I misread it shout out the correct word. Most IT software value is not, the questioner suggests, from speed but rather from finality, that's the word I think is here.

JIM DAVIDSON: Functionality.

DEAN JEFFREY S. LEHMAN: Functionality could be it. Maybe this is an abbreviation for functionality. Finality or functionality? Okay you can stay anonymous. Your competitor doesn't get, it must be functionality, for one-tenth of your cost by waiting for faster CPUs. Moore's Law makes it run faster, not better. That's an assertion. Reactions?

JEFFREY MACKIE-MASON: I certainly agree. That's one of the important points, is that Moore's Law makes the underlying technology run faster but it doesn't mean we know how to use it better. And that's why we saw such lags in the measurement of productivity improvements from technology investments in the 1980s and why in general I think we should expect to. If anything it's going to seem like that lag is increasing. Probably it's getting shorter because our processes for adopting new technologies are also improving but the new technologies are emerging so much faster the time it takes to incorporate those in our business and social processes is not getting that much faster and so it really will depend on how you use the technology and not just having it. You can't make money any more by just buying chips than you can make money just by starting a dotcom. You have to actually do something useful with those chips.

DEAN JEFFREY S. LEHMAN: I'm out of questions. Anybody else have any other questions for the panelists? If not I'll give the panelists a chance to add any final comments. Then let's thank them for a wonderful presentation.

That concludes today's sessions and we will begin again tomorrow morning bright and early at 9:00 a.m. Thanks a lot.

END OF DAY TWO

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