Full Screen
and
Jeffrey Bussgang
Open Market, Inc.
As all but the most ardent technophobes will readily acknowledge, business is currently in the midst of an Information Revolution. Spurred on by the development of digital technologies and the spectacular growth of the Internet, managers are scrambling to push their organizations into cyberspace and join the ranks of the revolutionaries.For firms in information-intensive industries -- such as financial services, publishing, and software -- the Internet's lure is immense. It promises nothing less than a radical transformation of their businesses, enabling firms to ignore geographic distances, circumvent traditional middlemen, and reduce distribution costs nearly to zero.
But before these information-intensive industries can reap the benefits of moving their operations "online", they need to face and solve a fundamental problem. The problem has little to do with technology or innovation. The problem is a lack of rules. At the moment, the Internet remains a chaotic, lawless frontier, missing the most basic rules that are required for business to flourish. And rules, mundane as they may seem, are crucial to any commercial transformation. Especially when the modes of commerce are rapidly changing, firms need some rules, whether formal or not, to clarify the basic terms of their transactions: who owns the goods or services being exchanged (property rights), how the exchange will be compensated (means of exchange), and how the deal's terms will be structured and ensured (security).
Yet in cyberspace, few of these rules exist. The legal status of electronic copyright is still vague, as are the legal and practical issues surrounding online transactions. There is limited enforcement authority in the Networld, and no agency with sufficient power to punish those who violate the norms of online conduct. This state of affairs is perfectly workable for businesses who are using the Internet primarily to advertise their products or service their customers. But for those engaged in the business of selling information, the existing lack of rules is simply not tenable. Before these firms can profitably sell their information online, they need to have confidence that their product will not be stolen, or altered, or endlessly copied in cyberspace. They need, in short, the basic rules of commerce.
In this article, we argue that the very lawlessness of computer-mediated communication creates a tremendous, if nontraditional, opportunity for firms. The opportunity lies with the ability of firms to create and enforce the rules that the Internet lacks and that national governments are unlikely to provide. Specifically, it lies with the ability to do three things: 1) to guarantee the rights of property, particularly intellectual property, in electronic transmissions; 2) to develop anonymous and secure systems for electronic payment: and 3) to enforce both property rights and secure exchanges.
The firms that create these rules will provide the Internet with a critical component: a secure environment where buyers and sellers can come together and transact business safely. By creating ordered cybercommunities on top of the ordered chaos of the Internet, these "rule makers" or "service providers" can create a stable and predictable realm for electronic commerce. In the process, they will shift the balance of power between business and government closer to the business side. They will change as well the current spirit of the Internet, adding to its open and free-wheeling architecture areas that are explicitly neither open nor unordered. And they also stand to reap tremendous profits.
The Rules of Exchange Once upon a time, the Internet did have rules. In its earliest days, the Internet was very much a cybercommunity of like-minded individuals who developed clear codes of conduct and working norms of behavior. The rules were rarely written or even explicit, but they did not have to be, since they were widely observed by all those traveling on the Internet. Just as early automobile drivers developed the rules of the road, so too did the early Internet users develop their own norms of behavior. They created symbols to express emotions such as joy [:-)] and sorrow [:-(]. They created rules, such as Don't-change-the-subject and Read-the-FAQ-file, and they even created a language of sorts, with expressions such as "FAQ," "flame," and "spam." Despite its outward image as the untamed realm of hackers, therefore, the early Internet was in fact a rule-bound, orderly cybercommunity. The strength of its rules was powerfully demonstrated in 1994, when a now-infamous pair of Arizona lawyers posted an advertisement for their services on hundreds of electronic bulletin boards, bombarding many uninterested users with multiple copies. Seeing unsolicited advertisements in their e-mail as a violation of the Internet's then-existing norm against private commerce and "junk mail," thousands of users "flamed" the lawyers' office with a torrent of hate-mail and cyber-threats. With this spontaneous response they demonstrated not only the power of online norms, but also the ability of the Internet cybercommunity to monitor and enforce these norms, punishing violations with online's closest approximation of force.
Since the Arizona lawyers' misadventure, however, the norms themselves have come under attack, besieged by an onslaught of newcomers. These newcomers have both the mass and the power to alter how the newer Networld is used and what it can do. But because they came from beyond the scientific and engineering cybercommunities, and particularly because they want to use the Internet as a means of conducting business as well as correspondence, their participation breaks the existing rules and demands a set of new ones. In particular, mass participation in the Networld requires at least three sets of rules: rules of property rights; rules of currency; and rules of enforcement.
Property Rights All economic systems are based fundamentally on a shared understanding of property rights. Developed over decades or even centuries, these rights clarify the basis of ownership and exchange. They provide a consistent way of defining who owns what, and how these possessions can be transferred from one owner to another. Without well-accepted rules of property, most commercial exchange either would not occur, or would be exceedingly costly. Property rights reduce the costs of exchange by clarifying ownership and providing some means for punishing those who violate it. They define not only possession but also theft.
In modern market economies, property rights also provide the incentives that drive innovation and growth. If property is communal or property rights ill-defined, no one in the cybercommunity has much incentive to produce anything more than he or she can consume. What creates the incentive, and thus what drives technological and economic progress, is a system that clearly defines private property and enables the owner of this property to alienate it for his or her own benefit. [2] Without the ability to appropriate the returns from one's property, few people in any cybercommunity are likely to invest in specialization, or technological advance, or even a hard day's work. To generate these types of investments, cybercommunities and economies create and preserve rules of private property[3]. And as economies evolve, they must ensure that their property rights evolve as well[4].
This connection between property rights and commerce applies equally to computer-mediated communication. For even if electronic commerce fundamentally transforms the nature of business, it does not eliminate business's basic need for an infrastructure that clarifies ownership and allows owners to reap the economic rewards of their possessions. In the Networld, however, there is only a limited system of online property rights. Instead it remains a virtual free-for-all where information is regarded as a public good and common practice is "what is yours is mine." [5] This norm of sharing was eminently reasonable in the early days of the Internet, when its purpose lay in facilitating communication among researchers. It is much less reasonable as a norm for commercial activity today. In fact, it simply will not work, since few entrepreneurs have a long-term interest in sharing the profits from their product. They may want to advertise their product on the World Wide Web; they may even want to sell it directly online, but they also want to make money from it - - to appropriate the returns of ownership and recoup the costs of investment and innovation. So long as all computer-mediated information online is treated as common property, this cannot be achieved.
To understand the extent of the problem, consider three high-profile industries: software, publishing, and financial services. In each of these industries the product being sold is essentially information. The producers earn their profits from the sale of intangible goods -- from information captured and embedded in a variety of forms. In the Networld, these information-based goods can be disseminated and reproduced at extremely low costs. This presumably gives the author of the text or the originator of the ideas new ways of distributing their work. It also potentially denies them the proceeds from this work. Once information is transmitted into the vast and anonymous realm of cyberspace, it can be endlessly copied and altered -- for free, and without detection. That is why computer-mediated communication is such an exciting development for people who want to access information. That is also why it demands caution by firms that are in the business of selling information. No firm that creates property wants to leave this property untended and unprotected in an accessible public space. Yet this is precisely the situation that faces information-based firms as they consider the move toward electronic commerce.
Understandably, then, firms that deal in the business of information are approaching the opportunities offered by the World Wide Web with caution. The Recording Industry Association and the Walt Disney Company, for instance, have both held back, worried that their products (recordings and characters) can be not only misappropriated but also actually changed or misrepresented online. [6] Likewise, the Smithsonian Institution has limited the electronic reproduction of its artistic works, reasoning that "at least for now...cyberspace is a chaotic wild west frontier full of highway bandits and subject to only the roughest kind of vigilante justice."[7] And thus the Networld remains in many ways a "lawless frontier," where intellectual property risks being put up for grabs and ownership lies largely in possession.
There is, of course, a fairly obvious way to solve the problem of property rights. If the problem of property rights is the absence of law, then solution may rest -- historically has often rested -- with the creation of law by a central government. In cyberspace, that law would come, most probably, from an extension of existing copyright law. Since copyright deals already with intangible products such as ideas or expressions, and since it provides for the commercialization of intellectual property, the extension of copyright law into cyberspace would seem to make a great deal of sense. By guaranteeing the owners of intellectual property that their information and ideas remained "theirs" online, copyright law should allow information-based firms to move more confidently on to the Internet. Accordingly, law makers in Washington have recently begun to tinker with the statutes of copyright law. In September 1995, a working group convened under the auspices of the White House Infrastructure Task Force recommended changes in the language of the 1976 copyright law to include transmission explicitly as a form of distribution. The working group also endorsed a "fair use" provision that would limit any non-commercial use of intellectual property that nonetheless damages the legal owner of the property.
If enacted as law, the working group's provisions will do a lot to protect the property of firms that transact in cyberspace but not nearly enough. First, copyright law is already among the most intricate and esoteric areas of law. Courts vary widely in their interpretation of existing statutes, and even in their understanding of the laws' intent. The extension of these laws into a whole new realm of commerce is almost certain to create great clouds of ambiguity and uncertainty, leaving courts and litigants to fumble towards new definitions of private property and property rights. Second, because the laws are national, they will barely influence the international transactions that proliferate. Thus, even if the laws stop a Cincinnati-based firm from covertly downloading a competitor's software or textbook or database in the United States, they may not stop the same firm, or any other, from routing the download through a computer in Bangkok or the Netherlands. Third, even if the laws were applied at the global level (and there is some talk of doing so under the auspices of the new World Trade Organization), the laws still do not provide the means for a commercial provider to determine if its information has been altered or copied in cyberspace. The laws also provide no technical solution to the thorny problems involved in tracing online violations. Even if a firm suspects that its product has been stolen, how can it find the perpetrator, especially if all transactions can be routed through multiple sites and untraceable user-ID's?
Again, there are measures that governments can take to fill these gaps. They can establish a central registration point for user-ID's, as France did initially with its innovative Minitel service. They can establish central crime-fighting units, as the United States did with its FBI-directed raid on online pornography, or its coordinated 1995 search for Kevin Mitnick, the credit-card hacker. But these governmental forays are likely to be limited both by the diffuse structure of computer-mediated networks and by the anti-government sentiment that still prevails among Internet pioneers.
Meanwhile, as government moves slowly and haltingly into the already intricate realm of copyright law, the door is open for private firms to move directly into the rule-making business. Although firms clearly cannot write the rules of intellectual property, they can establish rule-bound areas of the Internet, "virtual cybercommunities" where the rules are already upheld and enforced. In these areas, firms perform the functions that governments, for a variety of reasons, are not yet capable of providing. For a fee, or on a contractual basis, they can protect the rights of online property. Just as medieval merchants developed the customs and practices that eventually became commercial law in Europe, so can firms and entrepreneurs create the rules of their own commercial game.
Consider, for example, the services provided by America Online (AOL) , one of the Internet's commercial pioneers. In addition to its own network services, AOL also sells its customers access to the Internet. It gives new users an easy way to enter cyberspace and a new realm in which to advertise their products or disseminate their ideas. When new subscribers join AOL, though, they get much more than a pathway to the Net. They get a well-regulated, well-maintained road. AOL provides a user-friendly environment and direct access to commercial services. In return, it regulates all users and demands that they comply with specific written rules. Likewise, when a content provider signs on with AOL, it does not simply transmit its information into the vast reaches of the Internet. Rather, it sells its content (news stories, photographs, flight schedules) directly to AOL, which then re-sells the content to its own subscribers -- a discrete and identifiable customer base. By intermediating the transaction, AOL converts computer-mediated communication from an open and lawless realm into a secure cybercommunity, where access is controlled and rules enforced. As a result, AOL can guarantee its content providers that their sales will be controlled, identified, and reimbursed. In effect, AOL creates and enforces the property rights of its customers. Even without a well-defined legal infrastructure, AOL is writing the rules of commerce.
Means of Exchange A second area of rules ripe for private intervention are the rules that surround and facilitate commercial transactions: the rules and means of exchange.
In most economic systems, the means of exchange is money. It is currency of one form or another that is widely accepted as payment for transactions. Typically, this currency is issued by a central government which retains a monopoly over its creation and backs the currency with fractional reserves of gold, precious metals, or other countries' currencies. Even when the currency is not directly backed by a tangible asset, the government's management of its supply creates a value based on confidence (that the government will always accept it as a store of value) and scarcity (that there is never quite enough to go around).
In contrast to the rules of property, which must change to meet the demands of electronic commerce, these existing rules of money could probably function quite well as a means of conducting electronic exchange. Even in cyberspace, customers can order goods priced in dollars, charge them to a credit card, and let banks intermediate the financial transaction. There is nothing intrinsic about computer-mediated communication that demands a new means of exchange. There are no technical obstacles to routing and recording even nontraditional transactions through established routes, no new demands for financial oversight or regulation.
Instead, the source of change lies with the vast financial opportunities that electronic commerce appears to present. Specifically, it lies again with the instantaneous and intangible nature of electronic transactions. If electronic purchases become commonplace, they are likely to include such minute transactions, dubbed "micropurchases," as buying an article from the Atlantic Monthly or browsing through three minutes of the New York Times. The cost of processing these services through the traditional credit card route would overwhelm the price of the service itself. For small online entrepreneurs, these costs could even doom the business from the start. If payment could occur electronically and instantly, however, then the costs of transacting would plummet, allowing commercial activity to flourish online. As an added benefit, electronic exchange could also potentially develop its own form of cash, allowing both buyer and seller to maintain their anonymity. With a wallet full of "e-cash," buyers could browse quickly and anonymously in the Networld. [8]Without having to rely on credit cards, bank tellers, and checkbooks, they could save themselves both time and money. This is the radical vision of computer-mediated commerce: fast, cheap, and completely anonymous. It also offers tremendous opportunities for the firms who write the new rules of money.
Technologically, the creation of electronic money rests with the issuance of an anonymous electronic note. An institution sells electronic money to its customers, coding the e-cash onto a wallet-sized card or transmitting it directly to another online merchant. It debits the amount of the e-money, plus a small transaction fee, from the customer's old-fashioned account. Critical to the process are three aspects: 1) that the electronic transfers remain anonymous; 2) that they remain secure; and 3) that the transaction fees remain minimal. In the past, similar requirements were met by agencies of a central government. Governments printed the currency, allowed it to circulate anonymously, punished those who stole or copied it, and covered their expenses through taxes. In the Networld, however, there is no central authority to establish the means of exchange. There is also little interest on the part of national governments, since e-cash raises a host of troubling questions for governments and their law enforcement agencies. How, for instance, will e-cash expand the possibilities of tax evasion and money laundering? And how will governments be able to track the assets of individuals or the trading balances of states? If e-cash proliferates, it is likely to allow many aspects of economic activity to escape the scrutiny of government agencies. And thus government agencies have little incentive to play any role in its creation.
For private firms, by contrast, the incentives are vast. First, there is the simple cost-cutting potential of electronic payment. Many firms, and particularly banks, have a considerable interest in cutting the costs of intermediate transactions and moving directly to electronic payment systems. Several institutions, such as Citibank and Wells Fargo, already employ proprietary software systems that allow customers to do their banking online. As banks and other financial systems increasingly compete on the basis of transactions, rather than relations, these payment systems will become critical to their success. And the firms that create the supporting technologies and software are liable to succeed handsomely as well.
The real prize, though, will come from pushing electronic payment out of proprietary networks and into the broader reaches of cyberspace. Eventually, the value of e-cash, like the value of any currency, will be determined by the market's demand for it. To increase demand, the currency must be widely accepted. In the past, governments ensured this acceptance simply by proclaiming their currency "legal tender." In the future, the game will be inherently more competitive. Firms that establish the most accessible and secure means of exchange will capture the market of all those seeking to conduct electronic transactions beyond their internal border. And success in this game will breed further success, since the acceptability of a currency increases its attractiveness to other users.
To a large extent, the race to develop e-cash is a race of technology. Winning will entail the refinement of encryption algorithms and the development of secure "electronic wallets." The race, however, is also about rules, since technology alone cannot support a full-fledged system of electronic exchange. If payment systems are ever to proliferate along the Internet, they will require some trusted entity to oversee and regulate their use. The problem is not just the widely-publicized threat of credit card theft. Rather, it is the confidence with which any major financial institution can ever hope to approach computer-mediated commerce. Even with major leaps in encryption technology, few institutions are liable to feel sufficiently comfortable with even the most secure payment system to entrust it with millions or billions of dollars worth of transactions. Performing these transactions in their own internal network is a far cry from allowing them to occur across the blatantly public spaces of the Internet. If these firms are ever to move onto the broader reaches of the Networld, they will need some means of recourse. They will need, at a minimum, to know that some identifiable and credible entity is backing the value of their money and preventing widespread fraud and abuse. Historically, these tasks have fallen to governments. But in the Networld, it seems, private firms will scramble to provide the equivalent functions. And to perform these functions fully, firms will have to bundle their means of exchange with a third and linked set of rules: rules of security and enforcement.
Security and Enforcement Before any e-cash changes hands, and indeed before any real financial transactions occur online, the parties to the exchange must have confidence that their transaction is secure. That is, they must know 1) that the buyer or seller is really who they claim to be (authentication); 2) that the information being exchanged is not stolen en route or altered (message integrity); and 3) that the payment being offered is real.
These levels of security do not yet exist broadly in the Networld. Instead, as information travels through the complex network of networks, it passes through many different computers and sorters, creating many possible points and paths of interception. Although laws like the Electronic Communications Privacy Act of 1986 specifically forbid eavesdropping on electronic transmissions, such laws are extraordinarily difficult to enforce: no policing agency controls the multiple points of access. This basic lack of control is a major impediment to the growth of electronic commerce.
A second security problem, that of information integrity, is also particularly sensitive. Once information is put online, the creators of this information can do little to ensure that it will not be electronically altered. Thus, hospitals worry about patient records being changed and authors and publishers are concerned that their views might be misrepresented. Moreover, just as the nature of computer-mediated communication makes it difficult to detect the theft of information, its current structure also makes it virtually impossible to trace alterations or tampering, especially since anyone can operate online under a false name -- recall the famous New Yorker cartoon, where a dog sitting at the keyboard turns to his canine companion and remarks, "On the Internet, nobody knows you,re a dog." As the Internet grows, so too are the problems of security likely to mount: in 1990, the federally-funded Computer Emergency Response Team (CERT) reported 130 break-ins on the Internet. That number grew to 1,300 in 1993 and 2,300 in 1994.[9]
Usually break-ins, like tampering, fraud, and theft, are considered the purview of government agencies. In the Networld, though, governments have not yet defined precisely what constitutes theft, nor have they established the institutions to trace or apprehend the thieves. So the field is wide open to private development. The first and most obvious opportunity lies with the technologies of electronic security. Theoretically, cutting-edge technologies such as encryption and firewalls can solve security problems by fully protecting online transmissions. Encryption scrambles electronic signals and verifies access to communications with mathematically coded "digital signatures." Firewalls establish physical filters between networks. Neither technology has yet been perfected or widely deployed. But most industry insiders believe that within a year or two, they both will be powerful enough to guarantee transaction security. And the firms that reach perfection first are liable to generate a windfall of enthusiasm and profits. Currently, the leader in digital-security software is RSA Data Security. An early leader in the field of encryption, RSA has already licensed its encryption algorithms to major corporations such as IBM, Netscape, and Open Market. Many other companies, though, such as Verisign and Microsoft have also joined the race.
Meanwhile, there is another race going on, a race less obvious in some respects but ultimately more important. The development of technologies is absolutely critical to the expansion of computer-mediated commerce. But it is not sufficient. In order to truly facilitate the expansion of electronic commerce, even the most sophisticated technologies will have to be embedded in broader, secure networks. And these networks, along with their security systems, will have to be managed by some trusted intermediary. Enter again private firms, making rules and managing virtual cybercommunities.
These networks, or cybercommunities, are necessary online because security, by definition, cannot operate in a vacuum. If individuals are hooked into a global network, individual security precautions have only a limited value. Value lies, instead, in a wider, protected cybercommunity of users. Within the boundaries of this cybercommunity, users can communicate confidentially, and thus confidently. The more users there are, up to a certain point, the greater the value of the overall cybercommunity. The value is created by the entities which run the cybercommunity. They are the ones who determine its size, choose its members, implement the necessary security provisions, and ensure security by punishing violators. They are the ones, in short, who form the cybercommunity and write its rules. If the Networld is an anarchic and lawless frontier, then these cybercommunity builders are the new marshals in town. Unlike the old marshals, though, they are also constructing the towns, and then selling them by bragging of the local security and clientele. Wyatt Earp would have drooled.
Commerce and Cybercommunities Before commerce can flourish online some trusted intermediary must create the basic rules of the game: rules of property, security of exchange, and means of enforcement. If central governments are not well-positioned to make and enforce these rules, then business entities are likely to fill the vacuum. In the process, they will shift the delicate balance between business and government. They will also stand to reap tremendous profits.
The source of the profits lies squarely with the rules, or standards, of electronic commerce. Accordingly, the generation of profit will occur largely in the cybercommunities that establish and support these rules. To understand the probable shape and evolution of online cybercommunities, consider the challenges facing a would-be content provider. What would such a provider need to feel confident about before making its articles available online? It would want to know precisely what is being read (or downloaded) online, and by whom, just as it can now broadly track its readership by subscription lists. It would want to collect payment from these readers, as it currently collects from subscribers. And it would want some assurance that outsiders could not widely reproduce or reassemble the content to suit their own purposes. In the Networld, no one can offer these guarantees, because in the Networld, there is no central authority: no one to track readership; no one to collect payment; and no one to punish violations. What the content providers need, therefore, is an entity to assume these central functions, an entity that would transform the current anonymity and anarchy into a viable market with identifiable customers and recordable transactions. This entity would manage, not the entire Networld but a corner of the vast cyberspaces where certain explicit and accepted rules and norms would prevail.
Already, the early forms of these management entities exist in online information service providers as America Online, CompuServe, and Prodigy. But the services they provide are still relatively minimal, limited largely to granting their users a means of access to the Internet, some tools for navigating through it, and an assortment of chat areas and data bases. What these providers could offer (and presumably will soon offer) are the much higher value-added services associated with rules and rule-making. They could, for instance, provide access only to certain groups, or cluster their users into cybercommunities linked by similar interests or needs. Some users, especially the old-time hackers and electronic technophiles, will probably want to remain in the vast and anonymous realm of the open World Wide Web. But others--parents who want their children reading Encyclopedia Britannica but not Hustler; researchers who tire of their professional discussions being interrupted by outsiders; technophobic shoppers who love L.L. Bean but hate keyboards--would probably prefer to exchange the anarchic adventures of cyberspace for a more regulated and predictable computer-mediated environment. Information service providers can fill this need, creating customized cybercommunities and setting their own regulations for online exchange.
To set and maintain these rules, information service providers will also need to employ, though not necessarily create, many of the technologies described earlier. They will need, for instance, a wholly accurate means for tracking who is online and what they are doing. That way, any content provider can learn who is making use of its product, and more importantly, can be paid for its "microsales" to these users. Armed with the appropriate tracking and billing technologies, service providers can perform the crucial functions of intermediation: tracking the readers, billing them, and paying the content provider. Already, several service providers have begun to perform precisely these functions. And before too long, they will undoubtedly take the next step towards enforcement, guaranteeing that violations of the rules will be punished, most likely by expulsion from the cybercommunity.
In effect, therefore, service providers will create privately-ruled cybercommunities, just as developers in some urban areas have built private "towns," complete with strict norms, security forces, and gates to keep outsiders away. Employing the evolving technologies of encryption, firewalls and intelligent agents, they will build walls and control access just as in the developer's physical cybercommunities.
This vision -- of walls and guards and tracked purposes -- is precisely opposed to the open market and universal access that Internet pioneers most commonly cite. It is also seemingly at odds with the democracy that mass electronic communication is thought to foster. But while private physical cybercommunities may well undermine the broad goals of open and egalitarian society, cybercommunities do not restrict the prospects for free and open communication. They merely divide the realms of activity, just as most people already divide their own activities into private and public, professional and personal spheres. Moreover, by establishing limited and ordered cybercommunities, service providers have the potential to increase dramatically the number of people who venture online. For despite the recent rapid growth in usage of all types of online communication, there are significant numbers of people who still find cyberspace too noisy, too anarchic, and too cumbersome for their purposes. By restricting the online options, fine-tuning the offerings to match a select group of users, and offering some means of recourse in case of fraud or abuse, service providers can develop the kinds of cybercommunities that will draw new users online and increase the productivity of those already there.
Most importantly, though, information service providers can create an environment conducive to commerce. As long as the Networld remains an open and unregulated space, firms from information-intensive industries such as publishing, software, and financial services are unlikely to transact large segments of their business online. They may advertise their product or encourage chat groups to discuss their product, but they probably will not sell their product directly into cyberspace. To make this final leap, they -- and presumably all content providers -- need a system of property rights and a means of enforcement. Central governments are not currently in a position to make or enforce these rules uniformly in the Networld, and there is no centralized online controlling body. Individual firms or entrepreneurs are likely to develop the technological means for implementing these rules -- encryption, firewalls, tracking systems, and the like -- but they are unlikely to proceed with technological development unless they have some prospect of reaping the benefits from their own investment or innovation. Again, information service providers can facilitate the development of a market, purchasing or licensing the technologies from their creators and then using the technologies to create a commercial space that brings together buyers, sellers, browsers and advertisers in a regulated and orderly cybercommunity.
This is the most likely path of evolution for electronic commerce. Nothing will transform computer-mediated business into a "friction-free" realm where millions of anonymous buyers and sellers meet for single-shot, instantaneous transactions. Neither will the Networld remain unregulated, untraceable, and uncensored. Portions of the Networld may stay this way, but they will not coincide with significant levels of commerce. Rather, commerce will migrate to cyberspaces where rules prevail and responsibility can ultimately be assigned. Some of these areas will probably still appear unorganized, and transactions on most of them are likely to occur faster and more cheaply than they do in the physical realm. But increasing speed and reducing costs does not mean that rules and cybercommunities and intermediaries will disappear. On the contrary, the real move to computer-mediated commerce will demand several layers of intermediaries to form new cybercommunities and support new rules and standards. This is what electronic commerce requires, and also what will provide purveyors of information with the greatest opportunity for financial gain. In the Networld, just as in the real world, the real power lies with those who make the rules.
Footnotes 1. A related version of this article, entitled "Ruling the Net", appears in the May 1996 edition of Harvard Business Review.
2. Marxists, of course, would insist that the communal state represents the natural and desirable condition of economic organization. With a handful of exceptions, though, it is exceedingly difficult in the 1990's to find evidence of the long-term viability of an economic system based on communal rights.
3. The argument of this section draws extensively on the work and writings of Douglass C. North. See in particular, North, Structure and change in economic history (New York: W.W. Norton & Company, 1981); and North and Robert P. Thomas, The rise of the western world: A new economic history (Cambridge: Cambridge University Press, 1973).
4. In this context, it is interesting to note that at every major junction in the evolution of capitalism, the transformation of commerce has coincided with and been facilitated by a change in the structure of property rights and the incentives they create. Hunters and gatherers became farmers once they developed the means to protect "their" lands; feudal lords turned to commerce once they were allowed to own and bequeath property; and oceanic exploration flourished once the kings of Europe offered bounties for discovery and cleared the seas of pirates. Where property rights fail to develop, economic growth stagnates, as is the case in much of the less-developed world. Insufficient property rights can also explain the demise of Soviet-style commerce, where property rights were clear (all in the hands of "the people"), but did not establish the incentives necessary to fuel economic growth. What allowed the system to grow, by contrast, was a rigid structure of state-controlled disincentives (coercion). Once the coercive apparatus declined, so too did any substantial economic activity.
5. Anne Wells Branscomb, Who owns information, p.6.
6. See Otis Port, "Halting highway robbery on the Internet," Businessweek, October 17, 1994, p. 212; and Max Frankel, "Cyberights," New York Times, Magazine Section, February 12, 1995, p. 26.
7. Ralph Blumenthal, "Thieves in the idea marketplace," New York Times, Section 1, February 11, 1995, p. 13.
8. In a recent speech, Microsoft CEO Bill Gates described the future of "wallet PCs" from which customers would easily be able to "push a few buttons and transfer some electronic currency. The wallet PC is capable of replacing everything you carry with you, and more, so that getting messages, seeing the latest news...keeping track of your schedule, [and even] keeping hundreds of pictures of your children stored there [will be possible]." Bill Gates, "Vision 2005," speech at Fall Comdex, November 1994.