Tan Sri Andrew Sheng: The year of Internet innovation

Updated: Saturday December 21, 2013 MYT 12:40:21 PM

The year of Internet innovation

BY ANDREW SHENG

Online business is here to stay

As the year comes to a close, we need to reflect on what are the most important things that have affected our lives in the recent past. In my view, the Internet continues to change our world. The most significant Internet event in 2013 was not the listing of Facebook, which priced the company at US$104bil, but the revelation by Edward Snowden of the surveillance of the Internet in July 2013, which showed that Big Brother, friend or foe, is really watching. Since my smartphone is smart enough to track me to the toilet, there really is no privacy left in this world.On the plus side, Singles Day – Nov 11, 2013 – garnered 35 billion yuan (US$5.8bil) in online sales in one day in China. Since China already accounts for one-third of the smartphones in the world, and they can make and sell smartphones at one-third the price of iPhones or Samsung, it is not surprising that e-commerce in China is set to overtake even the United States in volume, probably next year.

Online business is here to stay.

What the combination of the Internet and smartphone means is that a person in the remotest part of Indonesia can sell his or her craft to buyers worldwide, and collect over the smartphone, which is impossible to imagine even twenty years ago.

I am personally amazed at the apps that are downloaded to maximize personal efficiency, and then being able to share interesting news through WeChat. Free Internet services are rising so fast that even mobile company revenue from SMS text messages are slowing down.

On the other side, after Snowden, what is the proper role of the government in the Internet and how should the government behave to encourage Internet innovation and growth?

Nobel Laureate economist Joseph Stiglitz was one of the first to write about “The Role of Government in a Digital Age” (2000), with Peter and Jonathan Orzag. Their report recommended 12 principles for the government’s role. The first three principles are proper roles of government, such as (1) providing public data and information; (2) improving efficient government services and (3) support of basic research.

The next six principles are areas where the government should exercise caution. These include (4) adding specialised value to public data and information; (5) provide private goods only under limited circumstances; (6) providing services online where private services are more efficient; (7) ensuring that mechanisms exist to protect privacy, security, and consumer protection online; (8) promoting network externalities only with great deliberations and care and (9) be allowed to maintain proprietary information or exercise rights under patents or copyright only under special circumstances (including national security).

The “red light” areas where governments should not undertake are: (10) government should exercise substantial caution in entering markets in which private sector firms are active; (11) government (including government corporations) should generally not aim to maximise net revenues or take action that would reduce competition and (12) government should only be allowed to provide goods or services for which appropriate privacy and conflict-of-interest protections have been erected.

The Stiglitz-Orzag report was written for the US market, but the general principles are useful guides for other governments. The trouble with these principles is that Snowden showed that the US government may not have followed some of these guidelines. We do know that governments are more intrusive and becoming more so over the Internet, but it also inhibits competition and innovation.

Because the Internet is evolving very fast, the appropriate role of the government must also evolve. Businesses are becoming even more service and information-oriented, and more and more will be digital and in the Cloud. This means that governments will be struggling with three major issues – protecting private privacy; ensuring a level playing field in competition; and how to tax online activities.

Governments must also sort out jurisdictional duties and powers, because the Cloud is global, and taxation and regulation is not only national, but departmental. It is as if each small part of the bureaucracy is trying to regulate the Cloud. We can all touch and feel its power, but there is no overall central authority that can control the Cloud.

A nation like an island in the Pacific can pass a law on the Cloud, but can it enforce it?

The problem with private privacy is that hacking is a real threat, and the biggest hacker is not some nerd or weirdo, but the biggest governments everywhere.

The second problem of a level playing field is really serious. If Google has maps and can monitor everything I do through my smartphone, does that information belong toGoogle or me? If it belongs to the large platforms, does that not confer huge informational advantage to them? How can governments ensure that there is a level playing field between these humongous online platforms and the small businesses that have no such information or may have to pay the platform for it?

The third area is taxation. Online commerce has not been taxed because it was an innovation. But bricks-and-mortar shops have rents, create jobs and pay value-added taxes. If everything moves online, the government loses the ability to tax, and bricks-and-mortar retail shops complain that they are losing out to larger and larger platforms. Bookshops around the world started closing when everyone can order through Amazon.com.

There are no easy answers to these tough questions. The interdependent and interconnected nature of the Internet means that regulatory or government action in one part may affect the system as a whole. In other words, government action or non-action creates a shadow system – the business moves offline, offshore or into cyberspace.

What we do need is better transparency, better education, wider access and also some key principles of fair competition that should be enforced for online business to innovate.

Year-end reminder: when you make a phone call in the toilet, someone (not Snowden) can hear you flush. Merry Xmas and Happy New Year to all.