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Cyberspace and U.S. Competitiveness

Authors: Betsy Masiello, Global Public Policy Manager, Google Peter Schwartz, Cofounder and Chairman, Global Business Network; Partner, Monitor Group James Harkin, Author and Director, Flockwatching Sascha Meinrath, Open Technology Initiative Director, New America Foundation
Interviewer(s): Jonathan Masters, Deputy Editor
October 17, 2011

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Editor's Note: This is part of CFR's Renewing America initiative, which examines how domestic policies will influence U.S. economic and military strength and its ability to act in the world.

In the last decade, the Internet has dramatically expanded channels for global commerce and social expression. While the success of companies like Apple, Google, Facebook, and Amazon speak to U.S. excellence in digital technology, the country as a whole still lags behind other nations in critical areas such as bandwidth and broadband access. Additionally, privacy and cybersecurity issues are significant problems for both U.S. businesses and consumers that government has not sufficiently addressed.

In this roundup, four experts suggest ways for the United States to improve its cyber competitiveness in the global marketplace. Betsy Masiello, global public policy manager at Google, says governments should reduce restrictions on local businesses seeking cross-border commerce. Peter Schwartz, chairman of the Global Business Network, says the United States needs to expand Internet access to all citizens at a lower cost and balance open access with improvements in cybersecurity. James Harkin, author of Niche: Why the Market No Longer Favors the Mainstream, says U.S. companies need to position themselves to take advantage of changing consumer behavior. Sascha Meinrath, an expert on community wireless networks and telecommunications policy, calls on the United States to further invest in broadband infrastructure and says a new class of tech-savvy leadership is needed to drive innovation.

Betsy Masiello, Global Public Policy Manager, Google

Although the Internet is increasingly seen by policymakers as an indispensable guarantor of growth, jobs, and opportunity, we may be taking for granted the policy environment of the past decade that has enabled the Internet economy to flourish. As countries struggle to revive ailing economies, the web is responsible for generating rare signs of good news amid a never-ending torrent of grim economic data. Research shows that in the thirteen leading global economies, the Internet already accounts for an average of 3.4 percent of GDP.

Given the immaturity of the digital economy, that's already an impressive figure. There are currently two billion people online, and as another three billion people go online in the next decade, its impact only promises to grow. Continued progress requires that as a society we do not succumb to incumbent capture and try to regulate the creative destruction of technologies to protect the status quo.

As countries struggle to revive ailing economies, the web is responsible for generating rare signs of good news amid a never-ending torrent of grim economic data.

Right now, policymakers are clearly struggling to keep up. And in no small part that's due to the absence of credible economic metrics that reflect the new economy. We are currently using industrial economy metrics to understand the information economy, but these metrics do not begin to capture even just the consumer surplus created by the Internet. McKinsey & Company found that consumers enjoy €100 billion in value created by advertising-supported services online. This is three times the revenue of the advertising companies themselves--clearly we cannot rely simply on measurements of revenue to understand the creation of economic value or, furthermore, the way we understand employment, firms, and economic activity overall. Wikipedia, the product of one hundred million hours of work, is valued at zero dollars in today's GDP measure, yet no one would question its very real value to people worldwide.

To enable the Internet economy to thrive, we need to embrace the free flow of information across borders and within societies. Today, governments around the world take steps to restrict access to the flow of information--these steps only hurt the local economies within those countries. A small business with open access to the global Internet is able to export its goods and services at a cost so low as to be unimaginable twenty years ago, and by doing so grow into a micro-multinational corporation. When this ability is restricted to benefit the interests of political actors or established economic interests, local businesses are the ones that suffer most. Although this point still eludes many governments around the world, we need to adopt flexible and technology-neutral regulations in areas such as privacy and copyright protection to protect the economic interests of people locally.

Peter Schwartz, Cofounder and Chairman, Global Business Network; Partner, Monitor Group

The Internet enables two of the most fundamental forces transforming the world today. The first is the burgeoning of the knowledge economy made possible by access to productivity-enhancing services like cloud computing and knowledge resources like Wikipedia. The second is the explosion of political/social transparency and connectivity through services like search engines and a variety of social media.

Without the Internet, we would still be living in a world of isolated information islands, with limited access and connectivity, and where control of physical resources would be the paramount basis of wealth. New knowledge drives wealth creation and prosperity, as seen most recently in U.S. regions like the San Francisco Bay Area, and in nations like Korea, Taiwan, and Singapore. New knowledge reinvents old industries like automobiles and creates new ones like web services.

The country lags behind many nations both in the percentage of citizens with Internet access and in the amount of bandwidth available.

Social life and politics are also being transformed by the Internet. New personal relationships develop without reference to time or space. Political transparency--both inadvertently and by design--makes it increasingly hard for governments to hide behind a veil of secrecy. In its most benign forms, the Internet provides access to government data and services to citizens. In less benign forms--like WikiLeaks--it opens the door to citizen demands for accountability. And most clearly, social media and the cell phone camera have enabled bottom-up political organizations to challenge even some of the most entrenched regimes. It is increasingly hard to hide misbehaviour and profound human rights violations.

So what should be U.S. policy toward the digital infrastructure? Domestically, the policy targets should be expanding and deepening access to all U.S. citizens at a lower cost. The country lags behind many nations both in the percentage of citizens with Internet access and in the amount of bandwidth available. Important applications, like digitally rich textbooks, are expensive to deliver and will depend upon wider access and higher bandwidth. Cloud-based business services like Salesforce.com need constantly improving network technologies, especially in mobile communication. Equally important will be balancing open access with improved cybersecurity. The international focus should be on maintaining open standards to keep political systems accountable. The Internet has become a universal solvent, which enables a knowledge-intensive economy and growing citizen power. Washington needs to do everything it can to assure that this digital infrastructure continues to advance, deepen, and grow in its reach.

James Harkin, Author and Director, Flockwatching

The Internet has become an ambassador for American soft power abroad through brands like Apple and Google, but policymakers need to appreciate that it is just a medium and not a panacea for competitiveness in the long term. The challenge for the United States is to think anew about products and their distinctiveness.

The new generation of social media, along with processes of social fragmentation, is changing how consumers and audiences are viewed. As society continues to fragment and power passes from the mainstream media to online eco-systems like Facebook and Google, consumers are congregating spontaneously around the things they like. Many of these "flocks" transcend national borders and licensing agreements, and their rise and fall can be destabilizing for both companies and institutions. Policymakers and chief executives need to understand this new kind of consumer power and let it flower if they want to better serve their audiences.

As this data revolution develops, U.S. policymakers need to help consumers navigate the privacy issues that can stymie development.

Washington should encourage U.S. companies to assuage global privacy concerns. Europeans, for example, are often much more concerned about privacy and control of their data than Americans--especially when that data ends up on servers in the United States. Policymakers can also help streamline the process for licensing agreements, making it easier for online retailers to sell products in a global marketplace.

This evolution of the web presents a huge opportunity for U.S. companies to do something genuinely fresh and distinctive by cultivating intimate relationships with their audience. Inspiring a loyal following can not only help companies spread their gospel, but also help them develop better products. The global reach of the Internet allows companies to lead a conversation, rather than just observe it--it enables them to find a core of enthusiasts and then grow an audience organically. This is very different from old-fashioned customer-engagement strategies, or from picking off an audience via demographics. It's about identifying an audience according to their relationship to the product, service, or initiative--as Barack Obama's campaign team did in 2007--and cultivating a flock of enthusiasts from the ground up.

As this data revolution develops, U.S. policymakers need to help consumers navigate the privacy issues that can stymie development. In mature industries, they also need to do more to encourage innovation at the margins in order to develop premium brands that can inspire a global following, providing tax breaks whenever appropriate.

Sascha Meinrath, Open Technology Initiative Director, New America Foundation

For millennia, trade routes defined the very foundations of civilization and empire. Today, the Internet backbone and the spread of broadband connectivity are as fundamentally important to the future of civil society and the twenty-first century economy.

Access to online resources and the efficiencies, lowered transaction costs, increased collaboration, and information and media sharing that this access facilitates are driving increased productivity and financial activity. But while civilization is entering the information age renaissance, a diverse array of constituencies and communities have been denied the benefits.

Today, powerful interests are working to curtail user-driven innovation and lock down the Internet in ways guaranteed to undercut our long-term global competitiveness. The ignorance of politicians and regulators is acting as a "digital divide force multiplier"-- causing irreparable harm to local economies in underserved communities.

We need telecom and tech-savvy leadership--we've entered an era where lawyers are making decisions about technologies they clearly do not understand. Without bold leadership, the U.S. is consigning itself to a telecommunications backwater.

Whereas the evidence of how to improve our lot is overwhelming, key decision-makers have actively resisted implementing necessary consumer protections. The history of communications is rife with cautionary tales of what happens when leaders fail to act--worse service, higher prices, less buildout, and the stagnation of innovation. The key difference today is that the detriments to those on the wrong side of the digital divide will be doubly difficult to overcome--not only placing entire countries in the slow lane, but--because of the opportunity costs, externalities, and network effects--driving inequalities throughout almost every aspect of society.

Our estimates are that a $430 billion investment in broadband infrastructure is needed to return the United States to a leadership position in the world--if we forego this expenditure, it will cost the U.S. economy trillions. Voluntary "asks" have failed. Regulators need to mandate the systematic, longitudinal collection of key data--broadband speeds, deployment areas and geographical availability, and peering and network management--to prevent harm to consumers, anticompetitive business practices, and a cascading Internet failure like the 2003 electrical blackout that swept the Northeast. We need to stop pretending that we have a competitive market for wireline and wireless broadband services, and institute solutions that work: structural separation, common carriage, and open access.

But most importantly, we need telecom and tech-savvy leadership--we've entered an era where lawyers are making decisions about technologies they clearly do not understand. Without bold leadership, the U.S. is consigning itself to a telecommunications backwater. In a single decade, the United States has gone from a global leader to an international ranking between fourteenth and thirty-first place on a wide swath of broadband metrics and last place in its rate of innovation. Other countries have already acted while U.S. policymakers dither--the time to act has long since been upon us.

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