The WAVE Report on Digital Media
3D --- Media Creation --- Shared Space
---Published by 4th Wave, Inc.---
Issue #886------------------10/4/98

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Note to WAVE Readers

We are pleased to provide a complete talk
recently given by Nicholas Negroponte at
the Electronic Commerce World Conference
in Denver. His views place into context
key issues on the impact of the Internet
in Electronic Commerce. Given its length
we must place it in two issues of the WAVE
Report.

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The WAVE Report is Searchable on

http://www.3dlinks.com

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• 886.1 Story of the Issue
  • Part 2 - Nicholas Negroponte talk at the
    Electronic Commerce World 1998 Conference

    --------------------------------------

    886.1 Story of the Issue
    by Amanda Rogos

    Nicholas Negroponte, director of the Media Laboratory of the
    Massachusetts Institute of Technology, and founder of Wired
    Magazine was the keynote speaker at Electronic Commerce
    World 1998.

    Negroponte's speech was done extemporaneously, and the Wave
    Report recorded it and transcribed it. When the WAVE Report
    spoke with Nicholas Negroponte he cautioned us that there
    may be some errors or changes in grammar and sentence
    construction. Once transcribed we found any changes required
    as small and immaterial compared to the value of the views
    presented.

    Nicholas Negroponte:

    I said there were three, the second one is of course
    security and privacy. Security and privacy, the people of
    this world know as well as I do, is more regulatory than a
    technical issue. Its an extraordinary regulatory issue, of
    which people around the world don't agree. People around the
    world are treating it as a national problem which it isn't.
    You have some people who are declaring that they will adopt
    the theory of their country, and another country that this
    used to be the case. Until very recently in France, it was
    illegal to besiege, store or transmit an encrypted message
    of any sort. We have made some progress, but not enough, in
    the sense that we consider it illegal to export encryption
    after a certain strength.

    All of these things have to change. And they have to change
    in order to totally deregulate every technology that is
    necessary to make the transactions worthwhile. That is a
    hard position to adopt. If you are a politician you are not
    going to stand up the way I just did and say that because
    somebody will say, wait a minute, we're going to have the
    DEA go out of business, we're going to see more bombings by
    terrorists. Frankly it's a grueling issue for a politician,
    sitting there the dilemmas are extraordinary.

    But in the end there's no choice, you can't do otherwise. So
    lets move on and get that topic behind us.

    The third, which I think is more interesting because it
    isn't regulatory, it has to do with technology, we haven't
    solved it, and imagination is really needed, is the payment
    system. The payment systems are today largely debit and
    credit of one sort of another, on the computer system. So
    when you buy something, in electronic commerce you are using
    a credit or a debit system.

    Now, what credit and debit have in common, we don't use many
    debit cards in this country but they are becoming more
    common, what they have in common is that there is an
    accounting system. Mainly, when you make a purchase using
    your credit card or debit card, there is, in the back room,
    a machine or programmed system etc. that either dips into
    your account, withdraws the money, or accumulates the
    charges and then in the end bills you for it. Now, that
    mechanism, that accounting mechanism, has a real fault. The
    cost is said to be $.25 per transaction. Now, if the cost is
    indeed $.25 per transaction, that means that the transaction
    itself has to be considerably larger than the $.25 in order
    to justify what the transaction cost was.

    Well, some people will tell you that cost is $5, others will
    tell you its $20. Now the difference between the 5 and the
    20 comes from whether or not you include in your
    calculations the money credit card companies make from the
    interest paid at the end of the month on unpaid balances.
    That turns out to be a lot of money for the credit card
    companies and if you include that in their economic model
    then $5 works. If you don't include that in their economic
    model then it's more like $20. The point is that this debit
    credit engine requires real cost, you can get the $.25 down
    to $.22 or $.21, $.18 whatever, its still going to have a
    real cost.

    Now, the change, and this is the part that I think still
    requires imagination, is that if you can have some kind of
    stored value that you can basically put into bits, it would
    change what we think of as currency today. So that, on your
    machine or in your smart card, you have bits that have
    value. These are serialized, their printed, and they have
    real value backed by some entity. Now, the first of these to
    be conceived and implemented, was a smart card version
    called MONDEX. Now MONDEX is kind of cute, and I am using it
    as an example and I am not advocating it - it's one of many.

    It was the first, and the bits in a MONDEX card would go to
    an ATM machine and tank up on these bits, and then the
    theory, this was ten years ago, was that a city would be
    retrofitted. And you would find parking meters and food
    dispensers where you could stick your MONDEX card in and
    suck some bits out to get some parking time or a Coca-Cola
    or whatever.

    What's interesting about this is that if I have a keyboard
    with a slot for a MONDEX card, and you have a computer with
    a keyboard with the same slot, and I can buy something from
    you, even if I'm in Denver and you're in a distant city. In
    order to pay you, I suck some bits out of my MONDEX card and
    transmit them to you. The transaction cost, in that
    particular example is truly zero. There is no transaction
    cost. Now, that really changes the landscape. If we can find
    ways, I don't want to dwell on that particular one, but
    other ways of moving bits so that the payment is
    instantaneously and has no cost, it will effect a lot of
    things including small payments. How many times have you
    gotten to a site on the web where somebody asks you to pay
    for something and you go away not because you didn't want to
    pay for it, but because its so tedious. You say oh no, and
    plus I might have to reveal my name. For one reason or
    another I walk away from it.

    But, if on my screen there were some coins or the ability to
    type in a cash amount and transmit that anonymously,
    instantaneously, not because I am buying pornography or
    drugs, but because I don't want to hear from them again. I
    want to buy it but I don't want junk mail from them. I don't
    want to ever hear from these people but I would like to see
    what they just offered me.

    I have no way of doing that today. But if I could have an
    anonymous cash system then it really would become
    interesting. Again it's one of these topics that's very
    difficult to talk about if you are a politician. Someone
    says wait a minute, you're talking about people buying, kids
    buying pornography, or people buying all sorts of illegal
    things. Well, yes you can do that with digital cash, but you
    can also do things that you and I want to do. And that is to
    be able to make small purchases, to keep our privacy and to
    move on to the next site. There are other ways to whip the
    pornography and the drug problem. Lets not deprive us all of
    digital cash.

    So those are the three, penetration, encryption, and a
    payment system. Now, once those are rolling in one way or
    another, there are, in my mind, five major consequences of a
    real movement to electronic commerce. Lets pretend that I am
    correct and that the movement is bigger than any of us ever
    imagined. The first, and I hate the word, but the first is
    truly disintermediation. What does it mean to pull people
    out of the middle of some kind of chain between the
    manufacturer and the consumer?

    Now, in the United States when you buy a tomato there are
    seven people, on average, between you and the farmer. Now,
    when you pay, and again, on average its about $.50, for a
    tomato, the farmer is getting $.05. The seven people in
    between, and the $.45 in between, make sense. They're
    logical, you understand them, you can paint a picture in
    your mind where the farmer maybe just grows the tomatoes,
    and there are other neighbors growing other things. They get
    conglomerated in kind of a warehouse, they get shipped to
    the distribution point. They are perishable, they go through
    some kind of trucking nationally, or whatever. They then get
    redistributed, then they get put on, I don't know, a
    supermarket chain's trucks, and they finally make it to the
    shelves, and so on. Then you finally buy it.

    And so when you buy this tomato and somebody says hey there
    are seven people between there and the farmer only got $.05,
    you say well, fine. But it got here safely, probably some
    were rotten on the way and didn't get here so there was a
    yield problem in tomatoes, there also some other issues. It
    makes sense.

    In the world of bits, where that farmer is now farming bits,
    and for some reason, lets pretend, the bit costs you $.50,
    you would be alarmed if you were told that the farmer of
    those bits, or the maker of those bits only got $.05. You'd
    say hey, what were the other $.45 and seven people doing
    there? The answer is nothing. They were not doing much of
    anything. Yes, they maybe did a little bit, they might do
    some promotion etc. so you could find some elasticity. But
    in general, it collapses. And when that collapsing takes
    places then the proximity of the consumer to the
    manufacturer lowers the prices and is an enormous benefit to
    both parties. And sometimes you've got to artificially
    destroy it in order to basically have electronic commerce
    not work as soon as it could.

    I will give you a very specific example and there are a lot.
    One is quite famous and called Virtual Vineyards, which is
    trying to sell wine over the Internet. Well it turns out
    that in their original model, its not their current one,
    Virtual Vineyards had boutique vineyards throughout Napa
    Valley that would sell you wine, and they would make the
    sales a main intermediary. They intermediated themselves so
    to speak. But they got rid of all the wholesalers and liquor
    stores, so that the boutique vineyard could now sell to the
    consumer at a price much closer to retail, and the consumer
    could buy at a price much closer to wholesale. And both
    parties were thrilled. Well, what happened. Interstate,
    transport laws, wholesalers got in the way, they sort of
    took a vote, because of the 19th amendment etc. etc. and of
    course, tried to stop this.

    And its happening over and over again. I just picked one
    example, and that is where the movement of atoms not bits,
    benefits from electronic commerce, and then people will
    start invoking all sorts of other reasons to stall it. An
    example of the bit industry, is travel. An enormous amount
    of travel today is being done directly with airlines.
    Airlines are happier and the travelers are happier. Travel
    agents aren't so happy and up to now, the reason you needed
    a travel agent, was in part, not solely, but was in part as
    an interface between the absolutely Byzantine airline
    reservation system.

    You couldn't use it directly, prices changed five times a
    day, the scheduling was unbelievable. To actually directly
    use an airline reservation system three or four years ago
    was considered outrageously impossible, but that was an
    artificial situation. It was purposely made hard or
    outrageous and artificial. As soon as that changes, as its
    starting to do, we are going to find people like travel
    agents disintermediated, or being out of the picture.

    Now, for the sake of the travel agent or two who may be in
    the audience, what happens is that you don't lay down and
    play dead, what you do is reintermediate yourself. You
    reintermediate yourself by, in the case of travel agents,
    learning something about travel. Maybe learning something
    about a particular customer, recommending things, and there
    is added value in how extraordinarily interesting and in
    fact probably more valuable to the market they become. So
    there's disintermediation.

    The next one is what it does to retail. Retail is quite
    extraordinary. I don't know if other people in this world do
    it, but I will often go into a store, I love to shop, and I
    find the shopping experience entertaining, I spend time in
    cities that I visit, I spend time at home, I am sort of a
    shop until you drop kind of person. But now more and more I
    will not buy something, I will write down, on a piece of
    paper the product name, the number, whatever is relevant,
    and then I'll go home and buy it over the net.

    I'll buy it over the net and what happens is that, I
    obviously don't have to carry it, it will be sent by Federal
    Express or UPS or whatever. I may certainly get a better
    price, if I don't I will go buy it back in the store, so
    I've got a better price. And while this doesn't make much
    difference in this country, it makes a difference in other
    countries, I won't pay sales tax. I won't pay sales tax or
    value added tax in most situations, not all of them.

    So you have a totally different, again, retail experience,
    so retail becomes what I am starting to call indoor
    advertising. You go, you look and then you go away and buy
    elsewhere. That's a huge change. It's in fact an important
    change for the automobile, car dealerships. Car dealerships
    really have no reason on earth for existing. And in fact may
    not in a very short period of time. Why are they there, well
    the fact is, that one of the reasons they're there is that
    the automobile manufacturers are really slow at the draw. I
    mean you should be able to log in to Ford Motors, spec your
    car on your computer system, get a price, a day of delivery
    and bingo you get it.

    You may have to go pick it up in downtown Denver, if you
    live in this part of the world, maybe it will be driven to
    your house, who knows. But the fact that that's not how you
    buy a car today is unbelievable. Instead you have to go and
    do what is commonly done now to buy a car, it's not
    reasonable. Now, I'm not saying you buy a car on the basis
    of the information you get through and only through the web
    or through computer systems of some sort. No, you have to go
    kick the tires, drive the car, try it. But that could be
    provided to you by Ford. Or, that could be provided to you
    by a third party like consumer reports that has models of
    all the cars. You just go to this lot, don't have to go to
    thirty lots, you just go to one place that has a whole
    spectrum of cars that you can try.

    So retail will change quite profoundly. Anybody that says
    they go to a bookstore today to buy a book is really not.
    You don't go to a bookstore to buy a known book, it's a
    stupid thing to do, its takes energy and time and you go out
    there and don't know if they have it in inventory. So buy
    the thing over the web for goodness sake. You go to a
    bookstore for different reasons, you go to a bookstore to
    browse, you go to a bookstore to meet someone, you go to a
    bookstore to have coffee, to basically engage in a high
    intellectual form of serendipity.

    But you certainly don't go to a bookstore to buy a book. And
    the bookstore people know that so what they are becoming is
    much more, they are much more in the business of Walt
    Disney, than they are in the business of selling items off
    the shelf. They are in the experience business, much more
    than they are in the book business. And that's a big trend.
    So retail in general has to pay attention.

    The next thing, that will change is who you pay for what.
    There are many many examples, but I will use just sort of an
    economic model. The telephone companies will be the biggest
    change. The telephone companies have a long history of
    charging you per minute, per mile, or per bit. All three of
    those are history. In the not too distant future, no more
    charging per minute, per mile, per bit, it won't make sense.
    It will have to become a subscription phenomena.

    And that doesn't mean that the phone companies are going to
    go bankrupt. They will do just fine because as soon as they
    go to subscription, the billing costs go down, and in fact
    the billing cost of a phone call represents more than 50% of
    the cost of the phone call. So if you told every phone
    company in the world, stop billing, they would save 50% of
    their costs.

    The second thing that's going to happen is that its not just
    the phone companies that are going to change. A lot of other
    companies will find different ways to charge. I believe it
    was in Denver, somebody correct me, I may just be
    associating this with the fact that it's sort of the cable
    center of the world. But there was a boxing fight, I am
    pretty sure it was this part of the world. It was on pay TV,
    and there was a knockout after the first or second round.
    And the people that were subscribers, I was told, were
    outraged. Now, apparently, I don't go to boxing fights, but
    what I have seen in the movies as a kid, I remember seeing
    knockouts in the first and second rounds, and thinking who
    really cares. It was perhaps a more interesting fight, and
    there was the whole process of going there and being part of
    it and leaving whether it was two rounds or six rounds.

    But when you pay, whatever the price was, and you turn on
    your TV at 8 pm, and suddenly the show is over, at 8:03 pm,
    or whatever it takes, you're not so amused that you just
    paid $30-40 just to look at that. And they yelled bloody
    murder. Well, I don't believe that anybody got their money
    back, but I'm told the second time that this was done, that
    the people were offered that they could buy it at so much a
    round. You could pay $2 a round. And I said to myself, I
    don't really want to know if they've told that to the
    boxers. But, it's a different economic model.

    But why not do something really different. Why not charge
    the viewers per once of blood. Something really outrageous,
    I'm inventing that because I suspect that what makes a real
    fight. The point is that we are going to see new economic
    models emerge through electronic commerce and its going to
    be, again, a very very big change.

    People will come up with examples that are going to impress
    all of us. You'll say, wow, why didn't I think of that.
    There will be lots of those.

    The next one that I want to mention, and there are only two
    left, is taxes. Taxes, by that I mean sales taxes and value
    added taxes. A little over a year ago, the United States
    proposed to the rest of the world that the Internet become a
    duty free zone. Now, I like that idea very much, and my
    reason for liking it was very different than the governments
    for proposing it. The government's reason for proposing it
    was to stimulate the economy, to stimulate electronic
    commerce, to stimulate the virtual economy.

    My reason for liking it was that it would remove all the
    ridiculous effort to do something that was fundamentally
    impossible, like charging sales tax over the Internet, then
    we could move on and yes of course see it grow. Well, this
    particular proposal works really nicely in this country as
    far as the federal government is concerned, because the
    federal government of the United States earns most of its
    income through personal and corporate income taxes. Now,
    that is ok but if you're a country, of which most of the
    rest of the world happens to be, not all of them, but most
    countries actually, where you're making a lot of money from
    value added taxes, or nation wide sales tax, you're not so
    amused.

    Or if you're a state government that makes a lot of money
    from state wide sales taxes, or city sales taxes you are not
    particularly going to advocate or be for the idea of
    suddenly making the Internet a duty free zone.

    Well, it's a very very hard problem because if you're taxing
    bits, it's very difficult. You don't know where they're
    coming from, and you don't where they're going to. The state
    of Texas had a proposal for a while, that was totally
    screwed, that was to tax every bit that crossed the state of
    Texas. Good grief, how could possibly do that? First of all,
    I supposed that if you can't even think about satellites,
    ones that went that way, but I can't imagine if somebody in
    Arizona is buying something from Marks and Spencer and the
    bits go across Texas, somebody is going to try and count it.

    Europe had for eight years, no I am sorry, five years, a
    proposal to have a bit tax. To charge people so much per
    bit, and this was going to be done nationally. That's
    ridiculous. A book, a normal novel has roughly a million
    bits in it. Sorry, a million bytes, 8 million bits, 8, 10
    million bits. That's a rough number. You look at 10 million
    bits in 3 seconds when you're looking at digital television,
    versus spending two, three hours with a book. So you just
    can't charge per bit, that just doesn't make any sense.

    So the whole concept of taxes, has to change in terms of
    buying and selling. We are going to see a big change in that
    area and eventually you're only going to be able to tax real
    property and real estate so there will be a lot of big
    changes with taxes especially.

    And the last item is transport. And by that I mean physical
    transport. As we start doing more and more electronic
    commerce, again we are talking in context of the consumer,
    we are going to be faced with a delivery issue. The next
    time you go to a super market, as you walk out or walk in to
    the cash registers or whatever, look at your basket and ask
    yourself what would happen if each item in your basket
    arrived at your home separately. That Federal Express was
    going to deliver each one of those items, either on one
    truck or five trucks, or many different ways. You are going
    to have a traffic jam in your driveway.

    You're going to have an absolutely horrendous mess. You
    don't want that. Ok, you have to be much more imaginative
    about the delivery. And, we're going to find more solutions.
    In Germany there was a solution, which I thought was quite
    clever, because they have really arcane laws about what can
    be open on what day of the week, and yet garages for obvious
    reasons, are exempt from those laws. So some gas stations
    decided that they would become depots where food stores and
    other people could deposit your order and you could go to
    your local gas station on a Sunday afternoon to pick it up.

    You're going to see, once again, this is just one, there are
    hundreds of these solutions of physical delivery. Just to
    sort of give you two seconds of futurism, at the Media Lab
    today we have successfully been able to transmit working
    circuits electronically. They transmit the description and
    print at the other end using what looks like a normal inkjet
    process. A working motor then can physically move through
    electronic components. And what that means, we believe, is
    that we could manufacture a PC at a remote location by
    transmitting instructions for a total cost of less than $10,
    in 5 years.

    If that is true, you could probably manufacture other things
    from remote places with that type of technology. And as I
    recently said to Bill Gates, you know if the justice
    department is giving you trouble for embedding explorer in
    your operating system, wait to see what happens when you
    embed the PC in your operating system, transmitted in along
    with your code.

    I want to just end with one last thing. When we think of
    electronic commerce, we tend to not only emphasize bits
    going in one direction, but sometimes think that this whole
    world of people making money through adding value on models
    of one sort or another only applies to this electronic
    world. It actually applies to the physical and relatively
    mundane world that we live in today.

    I think there are a lot of people that would never come to a
    meeting like this who have a lot to learn about electronic
    commerce. I may have remarked before that the telephone
    companies are going to get into fixed costs subscription
    based models, but they're also going to have a lot of added
    value services. So that if you want privacy or back up or
    some other service, you will pay for that added value. And
    added value models of one sort another are really very
    common in our world, the electronic world.

    The physical world they are not so common, I was recently
    with Fred Smith, of Federal Express and I said Fred, I don't
    know about you and how many other customers do this but I
    have a problem that I want you to know about. That is, very
    often I will find myself travelling for six or seven days,
    where I am in one city each day. That really raises hell
    with my wardrobe because I am not in any city long enough to
    get my laundry done. I leave the hotel in the morning and I
    get to another one at night. And I really don't want to
    leave home with eight shirts and haul around all this stuff.
    So what I do, is I Fed Ex four shirts to the third location
    that I am going to be staying at. Then, in the little metal
    suitcase that I Fed Ex, I have a Fed Ex form that is the
    return Fed Ex that returns the old ones, obviously I take
    out the clean ones and put in the dirty ones and drop it
    back into the Fed Ex.

    And it goes home. And I said, Fred, if you cleaned them in
    Memphis I would pay you extra. And I think that there is a
    lot that that world has to learn from this.

    --------------------------------------

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