ANALYSIS: Not <EM>If</EM>, But <EM>When</EM> and <EM>How</EM>

By Bob Diefenbacher

Sneak attacks are a specialty of the governing class in Washington. Especially when the issue is unpopular or favors one interest group over another. Stealth-like provisions are inserted into a law which, when they are finally discovered, have already launched missiles towards unsuspecting targets with devastating effect.

E-commerce is an attractive target growing geometrically bigger each year. Already missiles have been fired. Get ready to duck. The cash flow on the Net is just too big and growing too fast, for Washington to ignore it much longer. Here's an example.

Jim McTague's column, D.C. Current, in the February 22, 1999, issue of BARRON'S reports that the National Association of Insurance Commissioners (NAIC) wants to see "some adjustment" of regulation on the Internet to recognize its "borderless nature." While NAIC cautions against changes that would interfere with e-commerce, NAIC knows its insurance company members fear that banks will be formidable competitors to insurance company sales staffs when banks are free to offer insurance products on the Net.

McTague reports that Barbara Timmer, a lawyer and banking expert, has uncovered a plot buried in the insurance-sales section of the Leach Bill. This Bill is the legislation permitting banks to engage in a broad range of financial activities, including selling insurance. Timmer says the provision would authorize state insurance regulators to police any Web site that contained information about an insurance product, even if it merely offered consumers a link to another site.

While no one admits to the authorship of the offending provision, Timmer thinks state insurance regulators were behind it. This is because, she says, some states are already making demands of insurance and mortgage companies whose Web sites are accessible to their citizens.

Esther Dyson, chairman of EDventure Holdings and an authority on the high tech industry, writes in her book, RELEASE 2.1, of life in the new digital society. Her chapter on governance of the Internet is a reasoned analysis of how the participants on the Web can self-police themselves. While pointing out that the Web crosses international borders with ease, she emphasizes that geographic boundaries, and the governments they enclose, are losing relevance.

"The best enforcement vehicle for this free flow of power that keeps anyone from getting too entrenched," she writes, "is informed customers and citizens.

Bureaucracies have as a primary goal - even before that of serving their constituencies - to take all necessary steps to ensure their own survival. Companies that have enjoyed the protection of these governmental bureaucracies, or have their own internal ones, also make self-preservation their primary goal. One tactic they use is to create legislation preserving the status quo or expanding the role of the bureaucracy into a new area of influence.

Not that complete freedom from regulation is desirable in every case, but writing laws to protect an obsolete form of business or an ineffective means of transacting it is wrong.

The Web has many bright spots of self-regulation. There are also scoundrels on the Web running scams that steal from people. However, the groundbreaking approaches by auction site e-Bay promoting honesty and fair dealing show how the Web can manage itself. The site has gone through several iterations and continues to respond when necessary. Its recent decision to prohibit the sale of firearms on its site is an example of a wise choice made as a responsible Net citizen. Legislation might have forced this to happen eventually, but it would have taken a long time and cost all of us a lot of money.

Legislators enact laws with the greatest care possible. Yet much proposed legislation is highly technical and voluminous. If the Web is to remain largely self-policing, it will take vigilance by its e-commerce participants to ensure legislators know the details of the bills they are voting on. Special interest lobbies with extensive legislative connections and experience will be looking for ways to protect their stakeholders. Governments at all levels see the opportunity to gain a new source of tax revenue from transactions on the Web. Even within the IT industry, there will be those looking for an unfair advantage.

Technical managers need to be sure that general managers understand the implications of regulating Web sites. They must know what it might mean if something as simple as a hyperlink could invite government oversight and reporting activities. Regulation and control is inevitable. Self-imposed it is desirable. Government directed it is unpalatable.

After 18 years in marketing and sales at IBM, Bob Diefenbacher founded Denbrook Systems Associates, an IT consulting firm based in Malvern, Pa.