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SPEECH/00/55 Erkki LIIKANEN Member of the European Commission responsible for Enterprise and the Information Society “A strong e-economy for all in Europe” E-Agenda for Business Seminar Dibb, Lupton, Alsop 23 February 2000 Electronic commerce is a revolution that is going to impact all of Europe’s economy profoundly. I want to present my understanding of the main trends, and outline a vision about how Europe can most benefit from this revolution. I will finish by presenting some ideas about how to realise this vision and the contribution of the European Commission to make the vision become a reality. 1. Facts and figures Electronic commerce is booming. Predictions of market researchers, which often tend to be optimistic, have even been surpassed. E-commerce was growing by 130% from ‘98 to ‘99. In ’99 there were an estimated 2.3 million Internet-related jobs in the USA. 400,000 of these were created by electronic commerce. The Internet and e-commerce are also leading to a surge in new company creation. Electronic commerce can be between businesses, with consumers, and with public administrations. Business-to-business electronic commerce is by far most important, representing about 80% of all e-commerce. The potential of B-to-B electronic commerce is huge, since the total value of trading between businesses is about 5 times the total GDP. That is so because products are traded multiple times in intermediate form between business, whereas GDP measures only the total final output of the economy. As a reference, the estimated real GDP of the EU in 2003 is € 8 trillion. More recent and less modest forecasts from the Boston Consulting Group even predict B-to-B to become as large as $ 7 trillion in 2003 in the USA. Europe is lagging behind the USA in the use of the Internet and e-commerce. But there was a surge of interest from ’98 to ’99. Electronic commerce starts to be on the management agenda of large enterprises. Over 80% of top-managers in Europe are now expecting to use e-commerce intensively by 2004, that is, not only for marketing and sales but also for purchasing and procurement, according to Andersen Consulting. Nearly two-thirds of top-managers now consider e-commerce as important for their competitive advantage. Despite the emerging positive attitude towards e-commerce, even large companies are still too much pre-occupied by worries about internal acceptance, non-receptive management culture and difficult integration with existing systems. These concerns keep them from moving more quickly. They urgently need to start thinking about adopting electronic commerce now rather than by 2004 ! Small companies, and especially the enterprises with less than 10 employees are even more hesitant about electronic commerce. They are concerned about costs and do not see the appropriate business model. Small companies in Europe worry more than their counterparts in the USA about the validity of the concept of doing business electronically. According to ECATT in 1999 only one-third of all very small companies in Europe were on the Internet while virtually all of the large enterprises are online. Equally worrying is that business-to-administrations electronic commerce, such as electronic procurement by governments hardly show up in the statistics. Where in many of our economies the government is the single largest buyer, it should be the leading e-commerce user. But it is not. 2 All figures show that e-commerce in Europe continues to lag behind the USA, despite the recent increase in interest and current rapid growth. The European economy is as large as the American is and it has even many more consumers. It is worrying that Europe is not taking up e-commerce even faster since the Internet and electronic commerce will radically impact nearly all sectors of the economy and dramatically alter the patterns of competition. Consumer access to the Internet may change in our favour, though. Today in Europe there are some 50 million Internet users. But when internet goes mobile, this may jump to some 170 to 220 million by 2003, mainly because by that time 65% of all Europeans will have a mobile phone, of which 85% will be Internet-enabled. This is a very significant change. Electronic commerce is said to be born global. It is a phenomenon without borders. It gives immediate access to markets internationally. But competitors also get immediate access to the market that used to be your backyard. In fact, small companies make little use of the global nature of the Internet until now, with 90% of electronic commerce done by them still not crossing national borders. But of course e-commerce can also be a tool to do better business locally. Examples are now emerging which demonstrate that electronic business can excellently be combined with local physical presence. Local and vernacular content is the fastest growing segment of Websites, which is encouraging for a multicultural continent. The Internet and electronic commerce are not a guarantee that old geographical differences disappear. Europe remains a collection of diverse markets, as the Boston Consulting Group recently observed in a report about online retailing. Certain highly advanced smaller countries and regions in Europe can be characterised as early adopters. Some are even ahead of the USA. Some large countries can be called ‘awakening giants’. They have a lot of potential in terms of market size and current growth rate. Also, recent reports from both Forrester and ECATT indicate for PC-based Internet access a North-South gap in Europe. This gap does not seem to be shrinking. However, the tremendous interest for mobile phones in Southern Europe, which will soon be Internet-enabled, is an encouraging indicator. There is potential to bridge the gap. In mobile phones we have a North-South lead. 2. Trends The explosion of the Internet and of electronic commerce is by many seen as a sign that society as a whole is now going through an unparalleled transformation process towards the information or knowledge society. As Toffler and Castells describe it, the western world went through the transition from the agrarian to the handicraft society in the Middle Ages. It then made the transition from the handicraft to the industrial society in the 19th century, a society dominated by multinationals focused on production capacity, skills specialisation and mass markets. Today at the beginning of the 21st century we are in the midst of the transition from the industrial to the information or knowledge society. 3 Electronic commerce, or better, e-business, or e-services are manifestations of the revolution. These new ways of doing business, of working and of living are inherently global and mobile with many activities happening in parallel in space and time. They put the individual at the centre, and are more win-win rather than a zerosum game as information as a resource is abundant and unbounded. The Internet makes it possible to put multiple skills together and make information and knowledge the primary resource for value creation. Value will increasingly be carried by intangibles such as digital information, services, entertainment, brand, trust, etc. This leads to entirely new thinking about what a product actually is composed of. The products of the future are extended products, consisting of tangible and intangible components. A mobile phone is a good example. The handset, the tangible component itself, has some value. But the software and content is already more decisive in affecting the value to the customer. This intangible component can be modified and upgraded, at a fee. For example, popular services in Japan and Finland are ringing sounds and icons that can be downloaded and exchanged. Although still small this is already a viable business. The value of the product is realised through the services, starting with basic telecom and Internet access. On top of that there are relationship-based services that is personalised and possibly localised services in which there is plenty of room for innovation. Electronic commerce, even though still relatively small compared to total GDP, is already starting to shake up whole industry sectors as radically new business models are being explored. Banks are re-thinking their retail operations and some such as ABN-AMRO or Bundesbank have already announced large changes due to the rise of Internet banking. Major new economic sectors are arising such as a new integrated multi-media communication, information, and entertainment industry that freely and flexibly exploits any delivery mechanism thriving on the convergence between TV broadcast, Internet, fixed and mobile phones. What matters for that convergence industry is access to large numbers of individual customers, everywhere and anytime. The mergers of today are the signals of the change, as companies are buying themselves a place in the converged landscape where they have access to huge numbers of consumers. Stock markets recognise that it is access to customers that matters and express it in the valuation of the new brands such as Vodafone, Freeserve, Amazon, AOL-Time Warner, World Online, Ericson, Nokia and others. The battle for the customer base is already starting to blur boundaries between industry sectors. The media world has been going through a shock recently when an Internet-only company, AOL, bought the world’s largest media concern, TimeWarner. ISPs and telecom companies become banks, petrol companies become retailers, retailers become entertainment publishers, publishers become consumer health companies, and so on. But this will not be a world of mega-concerns only, as these large companies need many smaller partners to provide design, content, services, specialised software and so on. 4 Going hand-in-hand with the growth of this new industry is the growth of the personalisation industry. Understanding the customer, data mining, profiling, personalised marketing, one-to-one customer interaction, call centres, are all approaches to individualise and personalise products and services. And they are not always about automation. In fact, as Internet call centres and the integration of brick and click show, there is a great opportunity to create jobs by providing personto-person and face-to-face services of which we have only seen the very beginning. In business-to-business procurement enormous changes are happening too. Ford and General Motors are moving their procurement onto the Internet, which will bring all their suppliers and sub-assembly suppliers online. New B-to-B intermediaries are arising of a kind that we have not seen before. These are the market makers, the third party marketplace providers, who set up exchanges for businesses to trade with each other much faster, cheaper, and with much more choice than before. The smartest of the new intermediaries exploit Metcalfe’s law which says that the value of a network grows with the square of the number of participants. They exploit these network effects for example through buyer and seller coalitions. The winnertake-all nature of the new economy will almost certainly lead to a situation where some of these new market makers become very big. The B-to-B intermediaries provide the infrastructure for the new economy, consisting of large scale trading systems to which services like financing, transport and logistics and even assembly are subcontracted. The companies providing the underpinning software and trust services are amongst the fastest rising companies on the stock markets. The new market makers revolutionise the industrial perspective, shifting it from factory- or production-centred to market-centred. All of these changes radically alter the pattern of competition. Some managers say: what I fear most is not my competitor of today, it is the Internet company that does not yet exist. The examples illustrate some of the paradigm shifts of the new economy. There are more such shifts to come or already underway, in business, work, education, public services etc. Growth opportunities are vast provided that the right business models are found, that technology becomes more user-friendly and that legal frameworks are adapted and clarified with a view to creating confidence in the new economy. Already now the information society sector is creating new jobs at a rate of nearly 10% per year, which is far above the average of industry and service sectors. 3. Vision We are at a breakpoint in economic history. Dealing with the changes requires that we put together all resources and insights from business, politics, research and technology. For those who might be tempted to think so: there is no brake that can be applied to slow down the change which technology will continue to drive. The Internet and electronic commerce force us to re-think many of our policies and indeed, our own organisation. 5 In Europe we want to fully benefit from the emerging of the e-economy, without excluding anyone. We believe that the information society in Europe can have a positive impact on employment, growth, productivity, and social cohesion. We have successfully managed to create a single market in Europe and a single currency that have significantly increased wealth and wellbeing in the European Union. Our vision is now to create a strong European e-economy in the global economy. Europe can become a leader in ‘electronic commerce and services for all’. That is, electronic commerce that is accessible and beneficial to all citizens and businesses and public administrations in Europe. A strong e-economy for all in Europe can exploit our strengths in inclusiveness, cultural richness and diversity, mobile and secure technologies such as mobile phones, smart cards and enterprise management software. Europe needs a strong societal and technical infrastructure for the e-economy in terms of skills, legal framework, and interoperable technologies and dependable networks. European broad and high level of education for all can become a key part of the infrastructure of the e-economy. Its value will increase exponentially for everyone once network effects kick in through Internet-enabled sharing and collaboration. This infrastructure is the basis for knowledge-based and networked ‘smart SMEs’ to add a wealth of personalised products and services. 4. Actions How to realise the vision of a strong e-economy for all in Europe? Since 1994 the European Union is committed to the information society. Since 1997 it has taken a leading position together with our main trading partners in promoting electronic commerce, starting with the European Initiative in Electronic Commerce. This was followed by an ambitious succession of measures. The completion of an enabling legislative framework is on its way at EU level, including the adoption of a Directive for the use of electronic signatures and the forthcoming Electronic Commerce Directive. EU supports a large number of electronic commerce R&D and standardisation projects. We are actively working with business to create awareness and support self-regulation in forums such as the GBDe and others. From this year onwards we foresee to step up further our commitment to accelerating electronic commerce or the e-economy in Europe. This includes the recent eEurope initiative to bring the benefits of the information society within reach of all in Europe. We need to push the frontiers of electronic commerce further by exploring the future of technology and business models in the Information Society Technologies programme. We are aware that accelerating the e-economy requires a coherent approach to advancing the legal framework and self-regulation, providing cheaper access to faster networks and better technology, and promoting economic and societal development including skills for the information society. The challenge is to balance the mix between these elements. 6 We are convinced that even where legislation is in some cases needed as the ultimate safety net, we often need self-regulation and technology to create trust and confidence in electronic commerce. These elements need to develop hand-in-hand, in partnership between the private and public sector, that is, in a process of coregulation. The legal and regulatory framework for the e-economy should be appropriate for the wide variety of information services that are emerging, protect key interests such as privacy and consumer rights, involve all actors and be kept simple, flexible and technology-neutral as far as possible. The particular issues to deal with on short term are the following. The information society in general and electronic commerce specifically benefits greatly from healthy competition in telecommunications services – cheaper access in short. Following onto the 1999 Communications Review the European Commission will propose legislative changes to progressively relax regulation as markets become more competitive. It intends to accelerate the process as much as possible amongst others in local loop unbundling, giving consumers more choice and arriving at lower prices for high-speed Internet access. The recent adoption of the Electronic Signatures Directive and the political agreement in December 1999 on the central Electronic Commerce Directive will contribute to establishing a clear environment for all actors in the Information Society in the EU, from providers to consumers. Both directives, once the political process and the implementation in the Member States are completed, will remove hesitations to engage in electronic transactions. They will clarify issues such as the legal framework applicable to providers established in Member States, the legal validity of an electronic signature or an electronic transaction or the liability of providers of Internet-based services. Enhanced consumer protection regarding financial services will become available with the adoption of the current draft Directive on the distance marketing of consumer financial services. This will complete the already existing consumer protection measures in electronic commerce and other distance selling methods such as the Directive on distance contracts adopted in 1997. The protection of content will clearly benefit from the Copyright Directive which is also awaiting final adoption. It aims to ensure an Internal Market in copyright and related rights with particular emphasis on new products and services. It links to the Electronic Commerce Directive on the issue of liability, where the provisions of the Electronic Commerce Directive will complement the Copyright Directive in cases of copyright breaches. A multi-annual Action Plan adopted in January 1999 is providing the incentives for safer use of the Internet, that is to fight against illegal and harmful content. Measures include self-regulation, awareness actions and increased availability of tools such as filtering and rating software. The Internet has proven to be too easy a target for attacks of all kind, ranging from benign to severe, such as the denial of service attacks recently experienced by major Internet companies. The Commission will soon issue a Communication which will propose actions to fight computer-related crime combining legislative measures, awareness raising and international co-operation. 7 The Data Protection Directives, both the general one and the telecommunications sector specific one, are progressively getting in place in most Member States. Negotiations are still on-going with the United States to establish the basis for a Safe Harbor approach which would ensure between the EU and the US the adequacy required by the data protection Directive in the case of personal data transfer to third countries. Very recently we have heard positive signals from these talks. The two directives are contributing to awareness on the need for a solid basis to such protection in the international environment. The challenge for the coming years will be to establish effective self-regulation which is, with technology, the indispensable partner to the legal framework in order to provide the flexibility needed for this fast-moving economy. Some initiatives are already arising for example in trust labelling, money-back guarantees, and soon out-of-court and other alternative fast-track dispute settlement systems for consumers. The participation of Europeans in the world-wide governance of the Internet has been acknowledged as crucial. Competition for registration of domain names is now open, following the establishment of ICANN. Despite numerous difficulties, the structure of ICANN allows for a more balanced world-wide participation. The Commission has very recently launched a consultation on the creation of a ‘.eu’ top level domain. Particularly challenging remain certain issues including taxation and especially indirect taxation such as VAT as well as the jurisdiction and applicable law questions. Regarding taxation, progress has been made in the OECD context but certain problems remain. Jurisdiction and applicable law issues are yet to be finally resolved. The Commission has recently held an open hearing to listen to the views of the stakeholders. The outcome emphasised the need of a balanced solution. It also made clear that further work on online alternative dispute resolution mechanisms provides a way forward. Electronic commerce will develop in many different ways in Europe. Three examples can illustrate the opportunities and challenges: the eEurope initiative, electronic commerce for everyday and mobile electronic commerce. The first is the take-up of electronic commerce on the short term. The challenge is to bridge the gap with the USA soon. It is not too late and the signs of growing interest throughout Europe are encouraging. Accelerating the take-up of electronic commerce amongst SMEs and governments is one of the priorities of the eEurope initiative. The key targets by the end of 2000 are to complete the internal market framework for electronic commerce, to promote e-procurement by governments, to support self-regulation including the setting up of online and alternative dispute resolution in Europe, to help SMEs go digital and to set up an ‘.eu’ top level domain name as mentioned before. 8 The second example of the future of electronic commerce in Europe is making electronic commerce or services suitable for and an integrated part of everyday business, work and daily life. We are challenged to conceive a next generation of electronic commerce or services that should provide a natural support to everyday activities, for all citizens and all businesses, large and small, global and local. We have an excellent opportunity to contribute to such ‘electronic commerce for everyday’, or human-centred electronic commerce in the EU Information Society Technologies R&D programme. Advanced electronic commerce should offer natural interaction using voice, text, video, gestures, and natural language. It should make use of a widely present communications infrastructure and freely mix fixed and mobile work and business environments. Business transformation and new skills development should be experimented with to integrate electronic commerce naturally into new business and work behaviour. To a large extent ‘electronic commerce for everyday’ will have to rely upon selfconfiguring, autonomous electronic commerce systems. It will also have to meet the challenge of dynamically combining a wide variety of services such as ordering, payments, logistics, and after-sales, which will require a next level of thinking about interoperability. Realising this will enable many forms of dynamic networked collaboration between companies and individuals, which will increase their creative and value-adding potential. Mobile electronic commerce is the third example of the future of electronic commerce in Europe. The estimates say that there will be one billion mobile phone users in 2003, up from 300 million today. No less than 65% of all Europeans will have a mobile phone by 2003. 85% of these third-generation phones will be WAPenabled, which means that they have built-in Internet access. It is likely that a flood of new services will be offered to the many newcomers on the Internet and that many of today’s PC-based information and online shopping services will move onto mobile phones and personal digital assistants. Europe is well placed to profit from this opening of the floodgates onto the Internet. Mobile e-commerce turnover in Europe is expected to surge to € 24 billion in 2003. This can become a big push for Europe. We support active experimentation with new business models and applications for mobile commerce in areas such as tourism, health, entertainment, and logistics. The combination of location and mobility, for example with the help of global positioning satellite systems, opens up exciting possibilities for partnerships between local information and service providers. There are also some open questions regarding liability and crime-prevention that need to be addressed with the help of technology and perhaps by reinforcing the legal safety net. It will also be very interesting to see how competition and collaboration in the industry develops in view of the future competitive structure of the economy. Summary Europe is in the middle of an economic revolution. This is the time for a call for action to both the private and the public sector in Europe. We must work for a strong European e-economy which realises electronic services for the benefit of all. 9