Remarks of Everett M. Ehrlich Under Secretary for Economic Affairs U.S. Department of Commerce Before the Computer and Communications Industry Association Chicago, Illinois September 14, 1994
I appreciate having the opportunity to be here this afternoon and to speak to my colleagues at the CCIA about my views on the economics of the information superhighway. It's a topic to which I bring several perspectives.
First, my organization, the Commerce Department, is the lead agency of the federal government charged with bringing that superhighway into existence. Commerce Secretary Ron Brown chairs the Administration-wide Information Infrastructure Task Force that will implement this mission.
Second, as the Under Secretary for Economic Affairs and, therefore, the executive of interest in the Department for economic policy, I have the specific mission of analyzing the structural changes underway in the U.S. economy and their implications for our economy's future. And the information superhighway -- I'll call it the network -- is the most active source of change in our economic lives today.
Third, and by no means last, as a former executive of Unisys Corporation, I've seen first hand changes in the hardware and software industries, and, most importantly, I've seen users both succeed and fail using information technology to transform their organizations.
I'm going to talk about three basic issues today:
• the changing "balance of power" within our industries;
• the "theory of our business" -- what is it that we're selling when we further extend the network into the marketplace?; and
• government's role -- what government can and should -- and will -- do to advance this agenda.
THE BALANCE OF POWER
Computing traditionally has been measured by the dimension of smaller, faster, and cheaper. Each successive generation of hardware is compared to its predecessors along these lines. The compute power that sent a man to the moon is now dwarfed by what's on your desk. The compute power of the first Univac is in your wristwatch.
But a second dimension of computing now dominates its application -- not just smaller, faster, and cheaper, but more open, accessible, and flexible.
And so it is with the network. Just as the compute power of hardware inevitably overwhelmed the user's ability to do things with it, so it will be with the growing functionality of the network.
Today, all you need to know about anybody in the world is one fact and you can find them and speak to them in less than a minute. That fact is their phone number. One day, we will be able to contact data in the same fashion. Any fact, any image, any sound, any document, any data product or exchange will be available in the same fashion.
When that day comes, what data will people want to call up?
We do not yet know the answer. Our success to date is frankly poor. On-line services -- correct me if I'm wrong -- have catered to date to enthusiasts for the technology more than offering any newfound functionality.
Greater compute power, greater connectivity, will not solve the problem, because the problem is not technological. The problem is anthropological. Our software engineers were the right people to write applications that apply compute power to doing specific tasks. They are the wrong people to develop computer-driven ways of living and experiencing.
Who will solve this problem? Disney. Spielberg. Diller. Geraldine Laybourne. The world's premier signal creators. And a next generation whose names we don't know, but our kids surely will. They will show humankind the ability of the compute power and the connectivity to touch something within us. And that is lesson number one: the network will spread not by its ability to carry more signal, but by the signal it carries.
Compute power plays a role. Voice recognition will one day -- I'd guess in a decade -- be where point and click computing is today, and will result in a similar order-of-magnitude leap in accessibility. Computers are in this sense like cars and not like televisions -- that is, greater technological sophistication has made them simpler rather than harder to use. The question then becomes: what do I do with it? Computing and connectivity penetrate the market because of the applications that rationalize the compute power and the technological capability.
In short, hardware is trash, and signal is cash. Technology is not the product. Signal is the product.
Let me tell you a story about a friend of mine, a cinematographer named Steve Poster. Steve was hired by Sony to make a demonstration film of their HDTV system. Steve was a good choice -- he's both an artist and a thoughtful student of technology.
Sony so liked Steve's work that they brought him to Tokyo to talk to their engineers about the system. Picture Steve -- he's a light meter type, you know? -- in front of hundreds upon hundreds of Sony engineers in a massive auditorium. He tells them this: the first time Arnold Schwarzenegger turns into a stream of molten silver, people will pay seven bucks to see it. The second time he does it, people will want to know how he's going to catch the bad guy. The technology is not the movie, not the product, not the story. The creativity is.
They stood up and applauded. They got it.
One day, capital intensive, fixed-cost systems will compete in a business defined by market penetration. In the last several years, I have seen articles that say that cable will beat telco because its infrastructure is more modern, that telco will beat cable because it's the known medium, that satellites will beat both because they don't need expensive infrastructure on the ground, or that low-power microwave and other esoteric possibilities that I really don't understand will emerge as the technology of choice. There are all sorts of possibilities.
What do these articles mean, taken together as a group?
• First, they tell us that the technologies are going to compete. Households will have the ultimate A/B switch.
• Second, they tell us that technology will not differentiate carriage providers. Everything will be breathtaking -- breathtaking won't differentiate. Ease of use might, but technology makes ease of use a moving target.
• Third, pressures to price to gain share will be unrelenting -- quite the opposite of today.
Perhaps I'm too driven by the shifts in the composition of the computing value chain that I experienced, but this suggests a profound shift in value-creation -- the "balance of power", because in markets, value creation ispower -- to signal providers.
Carriage will be a commodity product, a platform on which value-creating products will be delivered. Integrated carriage and signal providers will be forced to one end of the "stack" or the other. Signal producers -- Disney, Viacom -- will consolidate their signal "brand names" as a way of cutting through the inevitable signal clutter. Signal carriers -- be they cables, telcos, Sky TVs, or whatever -- will be forced to innovate continually to cut costs and support their drive for share. And by competing, they will extend the market for signal and their own need for it.
WHAT ARE WE SELLING?
There's a wonderful article by Peter Drucker in Harvard Business Review this month on his notion of the "theory of the business". Any business is founded on a set of premises about where its sustainable advantages lie and how it creates value for the customer. What's the theory of our business? What are we selling?
My answer is drawn from my experiences at Unisys. Smart information technology users were re-engineering before they knew the term. They used the technology to rewrite the script, to change business process. Some thought of it as "cleansheeting" the enterprise. Those who didn't bought an expensive paperweight or door stop. It was a real-life demonstration of what Shoshanna Zuboff saw as the difference between "automating" and "informating".
And that's what I believe we're selling: change.
For business, we know this story. The informated business environment has given us concepts about business that are part of a new conventional wisdom about being in business. Process re-engineering. Time-based competition. Networked production. Smaller minimum scale. Customization as a competitive norm. Close to the customer. Faster product cycles. Better asset use. New dimensions of competition, new types of strategic advantages. Our productive base is literally being transformed -- technology is driving an epochal reorganization of the way we do business.
Households are going to have a parallel process -- but we've not yet cracked the code. When we have the tools that allow compute power and connectivity to change their lives, they will respond. The industry will be commanded by those who can conceive of how to change our customers' way of life, their use of time, their range of experience, they way they are amused, the way they navigate the world, the way they manage daily affairs. It will have to be simple, accessible, basic, and experiential.
Because that's what we're selling -- a new way of life. The product isn't the information -- it's what the information allows you do, how it allows you to feel, what it allows you to experience. Better cars led to more vehicle miles travelled not because people got in those cars and went places, but because they gradually changed their living patterns in a way that integrated those cars into their daily routine. It won't be different for us. We need to sell change -- to show our customers how to change their routines and let that integration take place. And we're not there yet.
WHAT ABOUT GOVERNMENT?
I've come to tell you about your business. I hope I'm right. And I hope, whether I'm right or wrong, that you're right.
This Administration knows that your industries are agents for profound change. The digital revolution is an epochal event. We welcome its changes -- and if we didn't, we'd have to learn to tolerate them anyway, because they're inevitable.
And like many of you, we intend to be in the business of social change. And so, we're obliged to have a vision of what that change should look like.
We've articulated such a vision. First, we see the network as a vehicle for improving our economic growth, productivity, and potential for a rising standard of living. We see it as a vehicle for greater international competitiveness, as a way of developing and levering the great assets of the American business environment -- its flexibility and adaptation, its emphasis on entrepreneurial action, its ability to reconfigure itself quickly.
But we also see the network as a tool for improving the quality of life, and as a way to promote social coherence and unity. It can be that -- it can be a new shared social thoroughfare. But it can also be a line of demarkation -- a "walled city" that separates forever those on the inside from those on the outside.
I would encourage you to think of the government's posture in terms of a seven point agenda.
First, we need to pass telecommunications reform legislation. The industry shares two precepts that must move it in this direction. First, we must recognize that competition is the best way to enlarge our market and the potential gains of each producer, whether telco, cable, or anybody else. Second, we need to accept that FCC and judicial review are not the way to build our new industry. The momentum for deregulation is there. If we follow through, a good result will follow.
Second, we need to promote openness and interoperability. The problem is that these words mean different things to different people. To me, "open" and "proprietary" are not contradictory. UNIX was open despite AT&T's interest in it. In fact, it was even more open because it was proprietary: in the absence of some accepted steward for UNIX, it would have degenerated into eight different versions that would have left users with no clear standard.
That doesn't mean that open must equal proprietary. It means that "open" is not an institution or a property relationship, but a quality that we assign to the relationship between the users of a standard and its stewards. We're looking for new ways to create an environment that drives us towards that end.
Third, we intend to search for international opportunities in our industry -- we've got a winner. Overseas information technology equipment sales totalled $62 billion in 1993. And that doesn't count billions in software and services.
Part of the strategy for exporting our gear and services is to push for the GII based on private investment, competition, open access, universal service, and flexible regulation. As he has taken U.S. businesses to China, Latin America, the Soviet Union, and elsewhere, Secretary Brown has championed this cause in the name of American firms and workers.
Fourth, we are rationalizing spectrum use. We've transferred spectrum from the feds to private sector. We know that spectrum is the resource that will support an entirely new "portability" industry. Larry Irving, our Assistant Secretary for Telecommunications, tells me that world has already seen the sale of a billion walkmans! And PDAs are on their way. In the face of this flux, spectrum allocation is not just a revenue-raising device. It's an exercise in building new institutions that allow spectrum to be best used in a changing and deregulated world.
Fifth, we need to pursue demonstration projects for public purposes -- schools, hospitals, libraries, universities, police and fire protectors, and the like. We need to teach the value of what we sell, and expand the constituency for what it represents. Vendors won't put boxes in schools -- teachers will. Doctors will in hospitals. We need to enter into coalitions with these groups of users to introduce not only the new products and technology, but the new ways of doing things that they entail.
Sixth, we need strong intellectual property protection for signal producers. The integrity of software and other data products must be defended, because that is where value will reside, and because that is where America has unique and sustainable advantages. To do otherwise is to undermine our greatest strength in this new economic era.
And last, we need to come together to determine the right approach to the issue of universal access. What will it mean in practice? The reality is that we don't know. But you can help us figure it out. After all, it will happen with or without you. Your insights and imagination can help move us to a resolution that truly serves everybody well.
A good speech offends one person in the audience, puts one person to sleep, confuses one person, and, of course, gives at least one person a good idea. The good idea is the point. The rest is to make sure that you've fully tested your audience's range. I will stop here, therefore, and hope you'll allow me to clarify what I said, apologize for whatever it was, or wake you up.
Many thanks for your attention.
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