The Lowy Institute C R I T E R I O N E C O N O M I C S Jeffrey A. Eisenach, Ph.D. Chairman, Criterion Economics Convergence or Divergence? Global Regulation and the Digital Economy Sydney, Australia April 2, 2008

Three Points Internet use and online commerce continue to grow explosively – and there is no end in sight. As the Internet grows, its problems are growing with it. Global solutions are needed – but not “regulatory” ones. C R I T E R I O N E C O N O M I C S

Over 1 Billion Internet Users Worldwide; growing by 10 million each month. In 1996, 1.5 million gigabytes traveled through major U.S. Internet connection lines per month. By 2006, the figure was 700 million gigabytes.* Daily traffic is expected to grow from 90.4 billion s in 2007 to 102 billion s in 2009.** Half of all contains image spam, which is five times the size of traditional text spam.*** Backbone traffic is doubling every months. *the University of Minnesota Digital Technology Center **IDC ***MSNBC Internet Use Is Exploding

The Internet Is Part of Our Lives C R I T E R I O N E C O N O M I C S Eight in ten Australian households have Internet connections, and six in ten have broadband. Among families, nine in ten have Internet, and three out of four have broadband. Shopping, and web page viewing are commonplace, but… Audio and video downloads, “social networking” sites, video games and “Synthetic Reality” sites now dominate Internet traffic.

84% of Australians Shop Online C R I T E R I O N E C O N O M I C S Norton Online Living Report, Feb. 2008

57% of AU Adults Download Music C R I T E R I O N E C O N O M I C S Norton Online Living Report, Feb. 2008

75% of AU Children Share Videos C R I T E R I O N E C O N O M I C S Norton Online Living Report, Feb. 2008

Nielsen, Aussie Internet Usage Overtakes TV Viewing For The First Time March 18, 2008 The Internet Has Even Overtaken TV! C R I T E R I O N E C O N O M I C S

The Challenges of Growth National challenges, e.g., infrastructure Global challenges, e.g., policing crime and enforcing standards

C R I T E R I O N E C O N O M I C S Source: Bret Swanson, “The Coming ExaFlood” *TB = Bytes = 1 million MB = 1,000 GB; 1,000 TB = 1 Exa-Byte U.S. Internet Traffic (TB*/Month) A National Challenge: Infrastructure

C R I T E R I O N E C O N O M I C S Source: Bret Swanson, “The Coming ExaFlood” Investment Must Grow to Keep Pace U.S. Internet Traffic (TB*/Month)

C R I T E R I O N E C O N O M I C S “Building this new infrastructure will be very expensive, likely requiring some $137 billion in global new investment over the next two years alone.” George Gilder and Bret Swanson The Coming Exaflood (2008)

Other Challenges Are Global C R I T E R I O N E C O N O M I C S Identity Theft, “Spam” and “Phishing” Copyright Violations and “Piracy” Online Pornography (Especially Child Pornography)

Sources of Global Phishing Attacks Source: Websense

Sources of Spam

Sources of Pornography

“File Sharing” One of the world’s most popular web sites. Specifically dedicated to copyright infringement. After multi-year legal battle in Sweden, it has now moved to Egypt.

No Easy Solutions, but… C R I T E R I O N E C O N O M I C S National efforts are costly and limited in what they can achieve. The basic problem is that national efforts are inherently defensive in nature… …like putting locks on doors and windows, but never going after the criminals themselves. A balanced approach requires global enforcement.

The Danger – Over-Regulation C R I T E R I O N E C O N O M I C S Out of frustration, governments move unilaterally to try to solve the problem through regulatory solutions. In an effort to keep out the criminals, we put so many locks and chains on our doors and windows that we can’t get in and out ourselves.

Example: Online Pornography C R I T E R I O N E C O N O M I C S Age verification and take-down regimes do not work unless they can be enforced abroad. Filtering has a role to play, but it is costly and has large negative side-effects, especially over-blocking. Allowing foreign countries to act as safe havens for pornography is a form of state- sponsored cultural terrorism.

A Framework for Global Electronic Commerce: Key Principles 1. The private sector should lead. 2. Governments should avoid undue restrictions on electronic commerce. 3. Where governmental involvement is needed, its aim should be to support and enforce a predictable, minimalist, consistent and simple legal environment for commerce. 4. Governments should recognize the unique qualities of the Internet. 5. Electronic Commerce over the Internet should be facilitated on a global basis. “Regulation” is Not the Answer Ira Magaziner A Framework for Global Electronic Commerce (1997)

“[G]overnments should establish a predictable and simple legal environment based on a decentralized, contractual model of law rather than one based on top-down regulation. … [The] goal should be to ensure competition, protect intellectual property and privacy, prevent fraud, foster transparency, support commercial transactions, and facilitate dispute resolution.” Principles for a Global Framework Ira Magaziner A Framework for Global Electronic Commerce (1997)

Models C R I T E R I O N E C O N O M I C S WIPO (World Intellectual Property Organization) INHOPE (International Association of Internet Hotlines) ICANN (Internet Corporation for Assigned Names and Numbers)

Conclusions C R I T E R I O N E C O N O M I C S As global e-commerce grows, the policy challenges grow with it – as does the importance of solving them. Nation-state solutions are inherently limited and have the potential to over-regulate. A much stronger international regime to protect property rights and enforce legitimate standards is needed. There is a leadership vacuum waiting to be filled.

The Lowy Institute R I T E R I O N E C O N O M I C S. COM Jeffrey A. Eisenach, Ph.D. Chairman, Criterion Economics Convergence or Divergence? Global Regulation and the Digital Economy Sydney, Australia April 2, 2008