Ever since the Internet burst into the public realm, it has held aloft the promise of a commercial revolution. The promise is of a radical new world of business—a friction-free arena where millions of buyers and sellers complete their transactions cheaply, instantaneously, and anonymously. Cut free from layers of middlemen, companies will be able to sell their products directly to their customers; consumers will be able to customize products, interact with the companies that supply them, and conduct business from the comfort of their own homes. By bringing companies and customers together, the Internet thus promises to widen markets, increase efficiencies, and lower costs. Those are radical promises, and on their strength thousands of companies have already joined a massive scramble to cyberspace.
For many of those companies, however, the Internet has yet to deliver on its promises. Although doing business in cyberspace may be novel and exhilarating, it can also be frustrating, confusing, and even unprofitable. Whereas for some companies on-line commerce is a natural outgrowth of their business, for others—particularly in information-intensive industries such as software, publishing, and financial services—moving into cyberspace is a difficult endeavor. The problems these companies face have little to do with a lack of technology or imagination. They stem instead from a lack of rules.
Why, in the midst of such a critical transformation, should managers pause to consider anything so mundane as rules? The answer is that rules are critical to commerce. Without the order that rules create, business cannot be conducted.
At the moment, there are few rules in cyberspace. The legal status of electronic copyright is still vague, as are the legal and practical issues surrounding on-line exchange and “electronic cash.” There is also limited authority to enforce rules on the Internet and little capacity to punish those who violate the norms of on-line conduct. Although these problems have been well documented, they persist nevertheless. And until they are solved, cyberspace will remain a frontier town—a land of opportunities, to be sure, but also one of tremendous risks.
Until rules are established and enforced, cyberspace will remain a frontier town.
In surveying this frontier, it is important to realize that the current lack of rules does not necessarily mean that governments will send in the cavalry or that companies will walk away in despair, leaving the Internet to the hackers and the chat lines. Instead, it simply means that companies need to think carefully before making any headlong leaps into cyberspace. Rather than just posting pages on the World Wide Web, for instance, companies may want to move more selectively, clustering themselves into on-line communities where rules prevail and commerce can proceed. Auto parts suppliers, for example, might band together in an exclusive network serving only the auto industry, whereas investment management firms might want to sell their services only where distribution is limited and payment ensured.
These sorts of on-line communities will create a very different form of electronic commerce from the one envisioned today by many Internet adherents. The communities will not be open to all; they will increasingly charge customers for their services; and they will not permit information to flow across seamless borders. They will change the current spirit of the Internet and bring order and management to the Net’s unruly tangle. By writing the rules for commercial transactions, on-line communities will also shift the balance of power between business and government toward business. That evolution will occur not because of the power of particular companies, or because business is opposed by nature to an open Internet or a free flow of information. Rather, commerce will move toward on-line communities simply because companies need a basic infrastructure of rules to survive.
This vision of Internet commerce is a less radical one than that embraced by many Internet proponents, and a far cry from the friction-free world of open and unregulated commerce espoused by such figures as Bill Gates. But it takes into account the realities facing most companies today. In our view, the commercial promise of the Internet is still vast, but it does not lie in the unmanaged reaches of cyberspace. Nor does it come solely from the Internet’s technical ability to facilitate transactions and reduce costs. Instead, the promise lies in the ability of companies to form well-defined communities that will protect their property and promote their own interests. It lies in the potential of other companies to construct these communities, to intermediate their commerce, and to guard their members. The commercial promise of the Internet, in short, requires rules for its fulfillment. And the companies that stand to reap the greatest profits in cyberspace are the pioneers who will write, support, and enforce the new rules of the emerging frontier.
The Rules of Exchange
When the Internet was first developed in the 1960s, it was governed by clear codes of conduct and working norms of behavior. Developed by a community of like-minded scientists, the rules were rarely written down or even explicit, but they did not have to be, because travelers on the Net could easily observe them. Just as early automobile drivers informally devised rules of the road, so too did early Internet users develop their own norms of behavior. They created symbols to express emotions such as happiness [:-)] and unhappiness [:-(]. They created some explicit rules, such as Don’t change the subject and Read the FAQ [frequently-asked-questions] file, and they even created a language of sorts with terms such as flame and spam. Despite its outward image as an untamed realm of hackers, the early Net was in fact a rule-bound, orderly community. The rules, however, evolved to serve the interests of a particular community—researchers in academia and in the U.S. Department of Defense, who had no desire to profit from their on-line activities.
For roughly 20 years, that community flourished. But in the early 1990s, the community’s rules and values were suddenly attacked by hordes of “new-bies,” new users who had scrambled on-line. Whereas the Internet in the early 1980s consisted of only about 25 linked networks, it had grown by 1995 to include more than 44,000 networks extending to 160 countries and including 26,000 registered commercial entities. Somewhere between 40 million and 50 million computers were connected to Internet hosts in 1995, and that number was growing by an estimated 10% to 20% per month.
The entrance of the newbies did more than just increase the sheer numbers on the Internet; it led to a fundamental change in the Net’s culture. Arriving on-line largely through new commercial services and Internet access providers, these new users were riding a wave of privatization that began with the emergence of commercial service providers in 1989 and continued when the Internet was officially opened to commercial ventures in 1990. The newbies had little interest in the research questions that had previously bound users together. They were also largely unfamiliar with many of the Internet’s specific protocols. Cyberspace for the newbies was simply an adventure—an opportunity to meet people, gain information, and perhaps re-create some sense of small-town intimacy and immediacy. But many newcomers also came to cyberspace for profit, to explore the Net’s potential, and to stake a claim in a technology that promised to revolutionize the nature of transactions. As a result, the Internet’s new business district—the “.com domain”—quickly swelled to become the largest sector of the Net.
Dramatic levels of growth and a radical shift in the Internet’s population of users make necessary a new set of on-line rules. Yet because the Net lacks any central authority or organizing structure, rules are emerging piecemeal, pulled and prodded by the often conflicting interests of business, governmental agencies, and traditional Net users. In general, the governmental agencies and traditional users have been more explicit than businesses in describing how they want rules to evolve. The U.S. government, for example, has focused largely on safeguarding defense-related access and regulating access to pornography. Traditional users have lobbied vociferously for open communications, universal access, and a ban on government intervention of any sort. The business community, by contrast, has been relatively quiet. Rather than thinking abstractly about rules, most companies have concentrated on the more immediate tasks of getting on-line and claiming a stake in cyberspace.
The Net’s rules are emerging piecemeal, pulled and prodded by business, governmental agencies, and traditional users.
That focus is shortsighted because it overlooks the greatest potential for companies on the Internet: the opportunity not only to master the game of electronic commerce but also to create the rules of the game. In particular, companies can influence the creation of rules in three distinct areas: property rights, means of exchange, and enforcement.
All economic systems are based fundamentally on a shared understanding of property rights. Developed over decades or even centuries, property rights clarify the basis of ownership and exchange. They provide a consistent way of defining who owns what and how possessions can be transferred from one owner to another. Property rights reduce the costs of exchange by clarifying ownership and providing a means for punishing thieves; thus they define not only possession but also theft.
In modern market economies, property rights also provide the incentives that drive growth. If property is communal or property rights are ill defined, no one in the community has much incentive to produce anything more than he or she can consume. What creates the incentive and impels progress is a system that defines private property and enables its owners to make use of it for their own benefit. Without the ability to garner the returns from one’s property, there is no incentive to invest in specialization or technology or even to put in a hard day’s work. To generate such investments, communities create and preserve rules of private property.1 And as economies evolve, so too must the rules.
The connection between property rights and commerce applies with full force to the Internet. The advent of electronic commerce does not eliminate business’s basic need for an infrastructure to clarify ownership and allow owners to reap economic rewards. But at the moment, online property rights are imprecisely defined; the Net remains a virtual free-for-all where information is seen as a public good and ownership is up for grabs.
Understandably, then, companies that deal in the business of information are approaching the Net with caution. The Recording Industry Association of America, for instance, held back because it was worried that its products might be changed or misrepresented on-line. Likewise, the Smithsonian Institution has limited the electronic reproduction of its artistic works; as a spokesperson told the New York Times, the institution reasons that “at least for now…cyberspace is a chaotic wild west frontier full of highway bandits and subject to only the roughest kind of vigilante justice.”
There is one fairly obvious way to solve the problem of property rights on the Internet: the creation of law by central governments. In cyberspace, that law would probably come from an extension of existing copyright law. Because copyright provides for the commercialization of intangible products—intellectual property—the extension of copyright law into cyberspace would seem to make sense. By guaranteeing the rights of intellectual property owners, copyright law should allow information-based companies to move more confidently onto the Internet. Accordingly, lawmakers in Washington, D.C., have recently begun to tinker with copyright law. In September 1995, a group convened by the White House’s Information Infrastructure Task Force recommended changing the 1976 copyright law to explicitly include transmission as a form of distribution. The group also endorsed a “fair use” provision that would limit any noncommercial use of intellectual property that nevertheless damages the legal owner of the property.
If enacted as law, these provisions will do a lot to protect the property of companies that transact in cyberspace. But they won’t do nearly enough. First, copyright is already one of the most intricate and esoteric areas of law. Courts vary widely in their interpretation of existing statutes and even in their understanding of a given law’s intent. The extension of those laws into a new realm of commerce is almost sure to create ambiguity and uncertainty, leaving courts and litigants to fumble toward new definitions of private property and property rights. Second, because the laws are national, they will have little influence on the Internet’s international transactions. Thus, even if the laws stop a company based in Cincinnati from covertly downloading a competitor’s software, textbook, or database, they may not stop that company from routing the material through a computer in Thailand or the Netherlands. Finally, even if the laws were applied at the global level (and there is some talk of doing so under the new World Trade Organization), they still would not provide the means for businesses to determine if their information has been altered or copied in cyberspace. The laws also offer no solution to the thorny problems involved in tracing online violations. Even if a company suspects that its product has been stolen, how can it find the thief, especially if the transactions have been routed through multiple sites and untraceable user IDs?
Again, there are measures that governments can take to fill those gaps. They can establish a central registration point for user IDs, as France initially did with its innovative Minitel service. They can use central crime-fighting units, as the United States did in directing a raid by the FBI on on-line pornography and in tracking down Kevin Mitnick, the credit card hacker. But such forays are likely to be limited both by the diffuse structure of the Internet and by the antigovernment sentiment that still prevails within it.
Meanwhile, the door is open for private companies to move directly into the rule-making business. Although companies cannot write the rules of intellectual property rights, they can establish rule-bound areas of the Internet—“virtual communities” in which rules are enforced. In those areas, companies can perform the functions that governments are not yet capable of fulfilling. For a fee or by contract, they can protect the rights of on-line property. Just as merchants in medieval times developed the customs and practices that eventually became commercial law in Europe, so can contemporary companies and entrepreneurs create the rules of electronic commerce.
Consider, for example, the services provided by America Online. AOL sells access to the Internet. It gives users an easy way to enter cyberspace and a new forum in which to advertise products or disseminate ideas. When new subscribers join AOL, though, they get much more than a pathway to the Net. They get a well-regulated, well-maintained road. AOL offers a user-friendly environment and direct access to commercial services. In return, it regulates all users and demands that they comply with explicit rules. Likewise, when a content provider signs on with AOL, it does not simply transmit its information into the vast reaches of the Internet. Rather, it provides its content—news stories, photographs, flight schedules—directly to AOL, which then redistributes the content to its own subscribers, a discrete and identifiable customer base. By intermediating the transaction, AOL converts the Internet from an open, lawless realm into a secure community where access is controlled and rules are enforced. As a result, AOL can assure its content providers that their sales will be controlled, identified, and reimbursed. In effect, AOL creates and enforces the property rights of its customers. Even without a well-defined legal infrastructure, AOL is writing the rules of commerce.
Means of Exchange
Rules for commercial transactions constitute a second area ripe for private intervention. In most economic systems, currency of one form or another is used as payment in transactions. Typically, currency is issued by a central government that retains a monopoly over its creation and backs it with fractional reserves of precious metals or other countries’ currencies. Even when the currency is not directly backed by a tangible asset, a government’s management of its supply can create value based on confidence (that the government will always accept it as a store of value) and scarcity (because there is never quite enough to go around).
In contrast to the rules of property rights, which must change to meet the demands of electronic commerce, the rules governing currency could probably function quite well for electronic exchange. Even in cyberspace, customers can order goods priced in dollars, charge them to a credit card, and let banks intermediate the financial transaction. There is nothing intrinsic about the Internet that demands new means of exchange. There are no technical obstacles to routing and recording even nontraditional transactions through established routes; nor are there demands for new levels of financial oversight or regulation.
Instead, the impetus for change stems from the instantaneous and intangible nature of electronic transactions. If electronic purchases become commonplace, they are likely to include such “micro-transactions” as buying one article from the Atlantic Monthly or browsing through the New York Times for three minutes. The cost of processing those services by credit card would overwhelm the price of the service itself; such costs could doom small on-line entrepreneurs from the start. If payment could take place instantly, however, then the costs of transacting would plummet and commercial activity could flourish. As an added benefit, electronic exchange could, like cash transactions, allow buyers and sellers to maintain their anonymity. With a wallet full of “E-cash,” buyers could purchase items quickly and anonymously in cyberspace. Without having to rely on credit cards, bank tellers, and checkbooks, they could save both time and money. This is the radical vision of Internet commerce—fast, cheap, and anonymous.
Technologically, the creation of electronic money depends on the issuance of an anonymous electronic note. An institution would sell electronic money to its customers, coding the E-cash onto a wallet-sized card or transmitting it directly to another on-line merchant. It would debit the disbursed E-money, plus a small transaction fee, from customers’ regular bank accounts. For this process to work, the electronic transfers must remain anonymous and secure, and transaction fees must be kept low. In the past, similar requirements were met by the agencies of a central government. Governments printed currency, allowed it to circulate anonymously, punished those who stole or copied it, and covered their expenses through taxation. On the Internet, however, there is no central authority to establish the means of exchange. And national governments have little interest in taking on the problem, because E-cash raises a host of troubling law-enforcement questions. For example, would E-cash expand the possibilities for tax evasion and money laundering? And how would governments track the assets of individuals or the trading balances of states? If E-cash proliferates, many aspects of economic activity will likely escape the scrutiny of government agencies; thus they have little incentive to play any role in its creation.
For private companies, by contrast, the incentives are vast. First, there is the cost-cutting potential of electronic payment. Banks in particular have a considerable interest in cutting the costs of intermediate transactions and moving directly to electronic payment systems. Several institutions, such as Citibank and Wells Fargo, already employ proprietary software systems that allow customers to do their banking on-line. As banks and other financial-service institutions increasingly compete on the basis of transactions rather than relationships, these payment systems will become critical to their success.
But the real breakthrough will come when electronic payment systems are pushed into the broader reaches of cyberspace. Eventually, the value of E-cash, like the value of any currency, will be determined by the market’s demand for it. For demand to increase, the currency will have to be widely accepted. In the past, governments ensured this acceptance simply by proclaiming their currency legal tender. In the future, the game will be inherently more competitive. Companies that establish the most accessible and secure means of exchange will capture the market of all those seeking to conduct electronic transactions. And success in this game will breed more success, because a currency’s acceptance by some users will increase its attractiveness to others.
Not surprisingly, then, the race to develop the means of secure electronic exchange has become one of the most spirited competitions in cyberspace, with start-ups such as DigiCash and Cyber-Cash taking on established players such as Visa and MasterCard. To some extent, it is a race of technology: Winning will entail the refinement of encryption algorithms—which scramble electronic signals and allow access through mathematically encoded digital signatures—as well as the development of secure “electronic wallets.” The race, however, is also about rules, because technology alone cannot support a full-fledged system of electronic exchange. If payment systems are to proliferate along the Internet, some trusted entity will have to oversee and regulate their use. The issue goes beyond the widely publicized threat of credit card theft. The question is, Can large companies attain the confidence necessary to conduct business over the Internet? Even with major leaps in encryption technology, few institutions are likely to feel sufficiently comfortable with the Internet’s open architecture to entrust it with millions of dollars’ worth of transactions. Performing commercial transactions in a private electronic network is a far cry from allowing them to occur in the blatant public spaces of the Internet.
If companies are to push their financial transactions into the broader reaches of the Net, they will need some means of recourse. At a minimum, they will need to know that some identifiable, credible entity is backing the security of their transactions and preventing widespread fraud and abuse. Historically, governments have served in that role, but private companies will have to do so on the Internet. Financial institutions, with their combination of trusted brand-name and risk-management experience, are particularly well suited for this role. Yet the attributes of those institutions could also eventually adhere to any other trusted entity—the local telephone company, a utility, a local newspaper. In any case, the entity managing an exchange system would also need to bundle its means of exchange with rules of security and enforcement.
Security and Enforcement
Security and enforcement pose the most obvious problems for Internet commerce. They also create the most tantalizing opportunities for new business development. Before any E-cash changes hands, and indeed before any real financial transaction occurs on-line, the parties to an exchange must have confidence that their transaction is secure. That is, they must know that the buyers or sellers are really who they claim to be, that the information being exchanged cannot be stolen or altered en route, and that the payment being offered is real.
These levels of security do not yet exist broadly on the Internet. Instead, as information travels through the network, it passes through many computers and sorters and is thus exposed to a host of possible points and paths of interception. Although the Electronic Communications Privacy Act of 1986 specifically forbids eavesdropping on electronic transmissions, laws of that kind are extraordinarily difficult to enforce because no policing agency controls the points of access. This basic lack of control is a major impediment to the growth of electronic commerce.
The need to guarantee information integrity presents a second security problem. Once information is put on-line, its creators can do little to ensure that it will not be altered electronically. Thus hospitals worry about patients’ records being changed, and authors and publishers are concerned that their views might be misrepresented. Moreover, just as the nature of the Internet makes it difficult to detect the theft of information, its current structure also makes it virtually impossible to trace tampering. Anyone can operate on-line under a false name. A New Yorker cartoon makes the point: A dog, sitting at a computer keyboard, turns to his canine companion and remarks, “On the Internet, nobody knows you’re a dog.” As the Internet grows, security problems are likely to mount. In 1990, the federally funded Computer Emergency Response Team reported 130 break-ins on the Internet. According to an article in Technology Review, that number grew to 1,300 in 1993 and 2,300 in 1994.
Usually break-ins, like tampering, fraud, and theft, are considered to be within the purview of governmental agencies. But on the Internet, governments have not yet defined precisely what constitutes theft, nor have they established the institutions to trace or apprehend thieves. So the field is wide open to private development. The most obvious opportunity lies with the technologies of electronic security. Theoretically, cutting-edge technologies such as encryption and fire walls can solve security problems by fully protecting on-line transmissions. (Fire walls protect a company’s internal network from outside users by establishing physical filters between networks.) Neither technology has been perfected or widely deployed, but many industry insiders believe that within a year or two, both will be powerful enough to guarantee the security of transactions. And the companies that reach perfection first will generate a new current of enthusiasm for commercial activity on the Net. At the moment, the leader in digital-security software is RSA Data Security, which has already licensed its encryption algorithms to major Net players such as IBM and Netscape. Other companies, such as Verisign and Microsoft, have also joined the race.
Meanwhile, there is another race going on, a race less obvious in some respects but ultimately more important. The development of secure technologies is absolutely critical to the expansion of Internet commerce, but it is not sufficient. To facilitate the expansion of electronic commerce, even the most sophisticated technologies will have to be embedded in broader, more secure networks. And those networks, along with their security systems, will have to be managed by some trusted intermediary. Enter again private companies, making rules and managing virtual communities.
If the Internet is a lawless frontier, then service providers are the new marshals in town.
On-line communities are necessary because individual security precautions have only a limited value on the Net. Value lies, instead, in a wider, protected community of users, who can communicate among themselves confidentially and thus confidently. The value of the community is created by the entities that run and manage it. They are the ones who determine its size, choose its members, implement security provisions, and punish violators. If the Internet is a lawless frontier, then these service providers are the new marshals in town. Unlike the old marshals, though, they are also constructing the towns and then marketing them by bragging about the local security and clientele. Wyatt Earp would have drooled.
Communities and Commerce
For on-line communities to form, content providers need to feel confident about whom they are dealing with, how their material is being used, and how they are receiving payment. What they need, in short, is an entity to transform the anonymity and anarchy of the Internet into a market with identifiable customers and recordable transactions. That entity would manage a corner of the Internet where explicit rules and norms would prevail.
Early forms of management entities already exist in such Internet service providers as UUnet, PSINet, and Bolt Beranek & Newman. But the services they make available are still minimal, limited largely to granting their users a means of access to the Internet and some tools for navigating it. What these providers could offer (and presumably soon will) are the value-added services associated with rules and rule making. They could, for instance, provide secure transaction services, limit access to certain groups, or cluster their users into communities linked by similar interests or needs.
Such communities already exist on-line in the form of chat groups and bulletin boards. But their rapid proliferation has undermined some of the Net’s early sense of community and begun to raise concerns among some users about the risks of association with unknown, untraceable parties. Some users, especially old-time hackers and technophiles, will probably want to remain in the vast, anonymous realm of the open Web. But others—parents who want their children reading the Encyclopaedia Britannica but not Hustler, researchers who tire of their professional discussions being interrupted by outsiders, technophobic shoppers who love L.L. Bean but hate keyboards—will probably prefer to exchange the adventure of cyberspace for a more regulated and predictable community. Service providers can fill this need by creating customized, managed communities in cyberspace and setting their own standards for online exchange.
To set and maintain those standards, service providers will need to employ many of the technologies described earlier. They will need, for example, an accurate means of tracking who is online and what those people are doing. That way, any content provider can learn who is making use of its product and, more important, can be paid for its “microsales” to those users. Armed with the appropriate tracking and billing technologies, the service provider would perform the crucial functions of intermediation: It would track customers, bill them, and pay content providers. It would also guarantee that violators of the rules would be punished, most likely by expulsion from the community.
Microsoft Network is one example of this trend toward on-line communities. Originally conceived as another proprietary on-line service, MSN has recently been repositioned as an Internet community with well-ordered rules and value-added services. Other on-line services, such as AOL, Prodigy, and CompuServe, are similarly reinventing themselves as full-service Internet communities. And they are not alone. Time Warner’s popular Pathfinder site—which offers rich content from across the media giant’s empire—requires users to register, tracks their subsequent usage, and plans soon to offer accompanying transaction services. Several other telecommunication and media companies have also announced plans to launch their own communities on the Internet.
While the shift toward communities of commerce is most evident in consumer-oriented services, the logic of communities extends even further than that. A computer manufacturer could easily create an Internet community with its key distributors, just as a large clothing company might reap the benefits of establishing a secure transaction infrastructure with its suppliers. Universities could choose to distribute their course catalogs only within their own corners of the Internet, and banks could dedicate separate, secure lines for their own internal transactions. The recent interest in using the Internet as an intracompany business tool—an “Intranet”—is yet another variation on those themes.
In all these examples, the companies managing the on-line transactions of their users would have created privately ruled communities, just as developers in some urban areas have built private “towns,” complete with strict rules, security forces, and gates to keep outsiders away. To build these communities, service providers would employ encryption, fire walls, and other evolving technologies to control access in the same way as developers control it in physical communities.
This vision—of walls and guards and tracked activities—is precisely opposed to the open market and universal access approved of by most Internet proponents. It is also seemingly at odds with the democracy that mass electronic communication is thought to foster. But although private towns may well undermine the broad goals of an open, egalitarian society, managed virtual communities do not restrict the prospects for free, open communication. They merely divide the realms of activity, just as most people already divide their own activities into private and public spheres. Moreover, by establishing limited, ordered communities, service providers have the potential to increase dramatically the number of people who venture on-line. For despite the terrific growth in Internet use, many people still find cyberspace too noisy, too anarchic, and too cumbersome for their purposes. By restricting the on-line options, fine-tuning the offerings to match a select group of users, and offering some means of recourse in case of fraud or abuse, service providers can develop the kinds of managed communities that will draw new users on-line and increase the productivity of those already there.
Most important, though, service providers can create an environment conducive to commerce. As long as the Internet remains an open, unregulated space, companies from information-intensive industries such as publishing, software, and financial services are unlikely to shift large segments of their business on-line. They may advertise or encourage chat groups to discuss their products, but they probably will not sell them directly through cyberspace. To make the final leap, they—and presumably all content providers—need systems of property rights and exchange, as well as a means of enforcement. Central governments are not now in a position to make or enforce the needed rules, and the Internet as a whole has no controlling body. Individual companies or entrepreneurs are likely to develop the technological means for implementing rules—encryption, fire walls, tracking systems, and so on—but only if they have some prospect of reaping the benefits from their investment or innovation. Service providers can facilitate the development of a market by purchasing or licensing the technologies from their creators and then using them to create a commercial space that would bring together buyers, sellers, browsers, and advertisers in a regulated, orderly community.
Commerce will migrate to areas where rules prevail and responsibility can be assigned.
In the long run, the Internet will not transform business into a friction-free realm in which millions of anonymous buyers and sellers meet for one-shot, instantaneous transactions. Nor will the Net remain unregulated and uncensored. Portions of the Net may stay that way, but they will not be busy with commerce. Rather, commerce will migrate to areas where rules prevail and responsibility can be assigned. Some of those areas probably will appear unorganized, and transactions within them will take place faster and more cheaply than in the physical world. But increased speed and reduced costs will not lead to the disappearance of rules, communities, or intermediaries. On the contrary, the real move to electronic commerce will demand several layers of intermediaries to form new communities and support new rules. Electronic commerce requires those changes, which will also provide companies with the greatest opportunity for profit. In cyberspace, the real power will lie with those who make the rules.
1. The argument of this section draws extensively on the work and writings of Douglass C. North. See, in particular, North, Structure and Change in Economic History (New York: W.W. Norton & Company, 1981); and North and Robert P. Thomas, The Rise of the Western World: A New Economic History (Cambridge: Cambridge University Press, 1973).