Session One | Session Two | Session Three | Evening Session | Session Four | Session Five |
Session Six | Session Seven
The 2017 APRU Digital Economy Business Offsite was the third in a series of programs launched in 2015 under the leadership of Keio University and the Asia Pacific Institute for the Digital Economy (APIDE). The Offsite took place at Stanford University in Palo Alto, California with the cooperation of Stanford’s US-Asia Technology Management Center.
The meeting brought together top academic experts on the Digital Economy from the 45-members of the Association of Pacific Rim Universities (APRU). The Offsite matched the academics with senior business executives from companies that are at the center of growth and innovation in the region’s Digital Economy.
Over the course of the two-day program, the academics and business representatives exchanged views in a highly interactive environment on the key challenges of the emerging Digital Economy in the Asia Pacific regions. Key participants alternated as facilitators for the discussion in their respective areas of expertise. The dialogue took place under the Chatham House rule.
This report brings together without specific attribution the key ideas and solutions expressed at the Offsite as well as perspectives on the future of Internet and Digital Governance; privacy and cybersecurity; intellectual property and big data; new business and technology models in e-commerce, automobiles, supply chain management and entertainment, the relationship between competition policy and innovation, and the future of digital trade and, finally, the national and regional institutions and processes responsible for promoting it.
With increasing trends governments in the region as well as in the US and Europe focusing inward, this conference is a timely moment for the academic and business communities to explore avenues for increased cooperation for a digital economic and trade agenda for the region. The 2017 Offsite was an important collaborative effort between Digital Economy policy research groups at Keio University and Stanford University and reflects our shared commitment to building an open, transparent and innovative Digital Economy in the Asia Pacific.
1| Internet governance was once the purview of a group of engineers and civil society activists centered around the WSIS process and ICANN. Today, the issues are no longer just about network management, but rather how these new technologies are impacting on the economy and society generally. The attempt to use TPP to create a framework for “digital” trade is just the start of a broader process to build new baseline regulatory principles for the emerging Digital Economy.
2| Government have come to realize the stake that their societies and economies have in the Internet. Mandates for “data localization” are part of this. The trend in trade agreements has been to limit government intervention in the flow of goods and services. Now there are proposals to extend these principles to cover “data” flows, but governments and civil society outside the US are suspicious of giving a “carte blanche” to Silicon Valley.
3| Countries are increasingly worried about their capacity to protect the networks, which are more and more the foundations of their economies. There is a danger of their responding to a cyberattack using “kinectic” means. The risks of this are mounting because the current structure of the Internet is not secure: the protocols are vulnerable and so too are the operating systems. We are surviving largely through “good luck” – and it is questionable whether we can completely migrate key systems, such as finance, air transport and power generation to the “cloud” given the multiple vulnerabilities of the current Internet.
4| Certification boards, akin to Underwriters Laboratory, to set baseline cyber standards for devices that connect to the Internet, should be considered. There will also be the need for many, special purpose Internets, which can provide differing levels of secure infrastructure to discrete sectors of the Digital Economy. The “Bright” Internet may most quickly find a home here – with security being guaranteed within a “walled garden” where “Bright” Internet certified messages are exchanged on a “Bright” Internet cloud.
5| Artificial Intelligence will undoubtedly be a larger and larger part of the Digital Economy. It is already reshaping how we make decisions and just as automation changed the factory work floor AI will have a transformative impact on traditional areas like the legal profession, education, agriculture, and finance. Hooked up 3-D printing, AI holds the potential to dramatically upend existing patterns of trade and shared appropriately could contribute to bridging the “digital divide” by empowering local production and cultures.
6| The automobile sector is under great stress. Tesla has not only challenged the industry technically but in using technology to reach out to consumers directly is undermining the traditional dealer network. Although AI and autonomous driving get the most attention in the press, the advent of 3D printing and IOT that provides a continuous stream of data on automobile performance are equally transformative. The patchwork of national and subnational regulation in the auto area is also a huge legacy challenge as the pace of innovation continues to accelerate in this sector.
7| Health care is ripe for digitalization with the biggest areas being mobile health (that can move with the individual and deliver healthcare onsite); telemedicine (that is platform for remote diagnosis and treatment); e-health (that involves storage and analysis of health records and data); and digital health (that encompasses new areas like AI-driven clinical diagnosis and genetic profiling). These trends will be reinforced by the app economy and pose real challenges for physician revenue models and insurance schemes when services are fragmented and often outside the traditional healthcare community.
8| The global production of knowledge associated with the Digital Economy has the potential to dramatically expand the scope of the copyright industry. We will need new solutions built around “traceability” so the value chain is clear between the data subject, the data collector and the user of the data. This will require new contracts and new terms conditioning usage. The question of whether rights to data are exclusive or purpose and time limited will need discussion and regulators will have to look at FRAND terms for sharing data as they define markets and assess competitive trends.
9| Effective competition policies in the Digital Space should strike a balance between the requirement to guard against market domination by a few companies and the concurrent need to encourage greater innovation, growth, and consumer welfare. However, these two goals are not always consistent and the current set of rules originally developed for the “analog” economy are not necessarily congruent with the speed of change in the Digital Economy. Getting competition policy right is important, but as the EU is discovering it does not guarantee innovation and growth.
10| It is not possible to consider the future of the Digital Economy in the Asia Pacific without looking at China. Its period of internal growth and development is ending – and Chinese companies are looking to ride the Cloud into external markets, first in Asia and then globally. Internally, the China already is developing an increasing sophisticated digital economy, but as they move outwards they will need to make adjustments in their approaches to intellectual property and privacy as well as their cooperation with others on cybersecurity. Many countries and companies remain wary of the security of Chinese devices and services – winning “trust” and projecting the image and reality of “accountability” will be a big challenge for Chinese firms.
11| Indonesia is a big market with a distinctive and proud culture – and not surprisingly it has largely gone its own way in developing the Internet. Indonesians credit recent legislation that mandates localization of data services as making a key contribution to the acceleration in the growth of its Digital Economy. With its huge population and economic potential, Indonesia can probably continue down this path for some time. But most countries in the region should understand that building a competitive internal digital market place ultimately depends on being integrated into global markets. With the debut of the Cloud, Big Data, IOT and AI, local Indonesian companies will need to access the infrastructure and expertise of global partners to fully participate in regional and world markets.
12| The current deadlock over TPP may be an opportunity to shift the focus from polemics to a more analytic discussion as to what are the necessary legal and policy requirements for growing the Digital Economy in the region. The negotiations leading up to TPP have actually done much of the preliminary spadework, highlighting areas of agreement and issues where more work is required. One key decision point is whether to continue efforts toward a comprehensive arrangement or to focus on a series of sectorial and bilateral initiatives. We cannot let five years of work may go for naught.
13| What would a digital trade arrangement for the Asia-Pacific look like? Some key elements could include a non-discrimination clause for the cross-border delivery of digital services; agreement around principles and dispute settlement mechanisms for supporting a “trusted” digital environment in the region; a consensus on regulatory principles and guidelines for safeguarding cyberspace and infrastructure; and the establishment of certification bodies in key sectors, such as financial services and healthcare, to strengthen transparency and accountability for digital services.
14| The prognosis for progress on a truly digital agenda for the region is uncertain. The technology will continue to drive change, but how this will be managed institutionally by national governments and regional organizations is less clear. In the meantime, the responsibility for thought leadership and the development of practical solutions rests importantly with the universities and the private corporate sector in the region. Our hope is that the APRU Digital Economy Business Offsite can continue as forum and platform where these two communities can meet to share views and consider strategies to promote the continued growth of the Digital Economy in the Asia Pacific.
Technology & Trade
The Internet and Digital Economy in Asia
The discussion opened with the observation that digital technologies are becoming increasing modular and are thus easily deployable outside the traditional ICT sector. Technology is now “wearable” and incorporated into functional clothing that can monitor one’s health and exercise performance. This same trend can also be seen in the biosciences, where massive data sets produce extraordinary new insights in conjunction with huge demands on the network.
The relentless pace of digitization is transforming the nature of competition in the market, where the putative leaders are being constantly upended by new technologies and application. Oracle and SAP were once synonymous with proprietary database management, and now they are being challenged by open-source solutions.
Once the purview of a group of engineers and civil society activists, issues of Internet governance today are no longer just about the network, but rather how these new technologies are impacting on the economy and society overall. The efforts of the negotiations leading to the Trans-Pacific Partnership (TPP) Agreement to create a framework for digital trade was just the start of a broader process to advance an ongoing platform to solve emerging challenges of the Digital Economy.
The reality is that we are being overwhelmed by data, and the technology to analyze and use it is becoming ever more powerful. Algorithms can now access unstructured data and segment large databases in areas like power generation and medicine to produce knowledge that extends quite beyond the intentions of the coders.
Technology and business model developments associated with Silicon Valley are now poised to transform competition in every sector and disrupt everything. Systems will become more intelligent, more personalized, and increasingly anticipatory. As big data analytics enable increasingly narrower customization, the problem emerging is how to protect privacy in a hyper-personalized environment where artificial intelligence is becoming a commodity.
The pervasive spread of AI-enabled cloud-based data analysis has important implications for traditional concepts of Internet governance. Rather than the engineering and computer science communities, it is the corporate private sector that is driving this change. Neither the IETF nor ICANN can speak to issues associated with data governance, artificial intelligence or the new areas of biotechnology that are transforming healthcare.
Previously, a distinction could be drawn between IT users and providers. But due to the advancements of machine learning, we have all become users – i.e. beneficiaries of analytics-based technologies. We must find a way to preserve the human dimension as more and more decisions are made for us by machines. We are in a period of truly revolutionary change in which incredibly basic issues such as who is liable for a data breach have yet to be resolved.
One counterintuitive development is that despite the innovation and growth surrounding digitization, global trade has been flat for the last few years. This pattern is partly due to digital services not necessarily moving through traditional trade channels and thus are not included in the usual measurements of trade. One impetus for TPP was to begin to address this gap as the world transitions from an analog to a digital economy. This trend will likely further accelerate as innovations like 3-D printing grow. For instance, how will trade measurements account for a situation such as when the design features of a product in one country are transferred electronically to another country where the product will be physically manufactured via 3-D printing?
In this context, the impact of the emerging Digital Economy on employment cannot be overlooked. The problem of job loss is not a trade issue, but rather a consequence of our burgeoning reliance on technology. The solution lies not in creating barriers to the flow of data but in retraining and the improved education of workers to meet the new challenges and opportunities of the Digital Economy.
The Digital Economy is truly the start of a new world, yet its success should not be taken for granted. In the end, a unified and scalable Internet runs on people. New decision-making processes must transcend traditional jurisdictions, and the continually evolving multi-stakeholder model of governance which has served the community well should not be rejected. Civil society not only continues to be relevant, but the need for its involvement is growing.
ICANN did a creditable job in managing the IANA transition and we should look carefully to see other areas where this institution may prove useful. More than 3000 people participated last year in ICANN’s regional meetings. These forums also offer the opportunity to include diverse voices early in the policy cycle on issues from ranging from IP to privacy to consumer safety.
Moreover, while a focus on new rules for digital trade makes sense, it is only part of the answer. The US and the EU have very different perspectives on privacy. For the Europeans, it is not a “commodity” but a core part of human identity and dignity. The UN has recently been focusing on new rules for cyberspace with the goal of achieving an “open and secure Internet environment.” It is important to note that Russia and China are contributing positively to this process even as they are strongest advocates of “cyber sovereignty.”
Multi-stakeholder governance celebrates diversity, yet is also weakened by this quality. ICANN has worked well within its technical writ of assigning IP addresses and managing the domain name system, but can this same approach set rules for global commerce? For all the controversy over the IANA transition, the actual role of ICANN has been largely administrative, not deliberative or judicial.
We still work in an environment where national governments set the rules. Governments have come to realize that their societies and economies have a stake in the Internet as reflected by mandates for data localization. The rationale behind liberalizing trade has been to limit government intervention in the flow of goods and services, and though there is an attempt to extend this to data, governments outside the US are suspicious of giving carte blanche to Silicon Valley powerhouse firms that arguably have the greatest capacity to capture and store data. Rules on data localization amount to little more than economic protectionism dressed up as Internet governance.
Moreover, the capacity of institutions to draw boundaries to these new technologies is increasingly suspect. When everyone is a user, who is truly in control? With the Internet Economy giving way rapidly to the Digital Economy, the question of “governance” is a growing and complex concern as models for consensus building and rulemaking are less sufficient and possibly irrelevant.
Privacy and Cyber Security
The APEC Privacy and NIST Cyber Framework
The APEC Cross Border Privacy Principles (CBPR) were elevated by Japan’s accession to membership and the recent creation of a potential mechanism for cross-recognition with the EU’s Privacy Directive. Most countries in the region now have national privacy frameworks, albeit with wide variation in the definitions, mechanisms, and processes through which data is protected and shared. There have been similar efforts by governments and companies to strengthen cyber security, but measures for sharing threat information and technology among governments remain nascent.
Considerations of privacy and cybersecurity must always be balanced as one cannot exist without the other. Nevertheless, nations are increasingly worried about their capacity to protect the networks and stored data that are rapidly becoming the foundations of their economies. There is also a danger that a country might respond to a cyber attack by using more kinetic means, exacting retribution in the real world.
These risks are mounting. The current structure of the Internet was not designed with the security needs of critical systems such as power, finance, or air transportation in mind. The protocols originally developed for collaboration among academics are vulnerable and so too are the underlying software and hardware systems. We have survived largely through good luck, but it is questionable whether we can continue to migrate such key systems to the cloud given the multiple vulnerabilities of the current Internet.
One response to this dilemma comes from Asia in the form of the ongoing development of the “Bright Internet” principles and “Internet Peace Principles” which have gotten traction among a number of Korean and Chinese academics. The “Bright Internet” is so named because it aims to expose and tackle the growing “Dark Internet” of hackers, criminals, and terrorists. This exposure aims to create a new and more sustainable “balance” between the needs for security, user privacy and individual freedom of expression.
The “Bright Internet” proposal shares elements of the APEC CBPR, but is far more ambitious in its objective to mandate “accountability” across the entire Internet rather than just the area of e-commerce.The Initiative posits that IP addresses must be connected to real names (possibly through a two-layer architecture) and that deliverers of services over the Internet should bear the legal risk and responsibility for service breaches. The goal is to bring the “Dark Internet” into the light and enable law enforcement to preempt attacks rather than simply react to them.
Making the “Bright Internet” work will require investments in technology, a new consensus on the utility of identifiable anonymity, the acceptance of new costs and responsibilities by Internet service providers, and the creation of an international organization to oversee the security of the Internet. Parallel to this, the proposal asserts the need for an agreement on Internet peace principles for cyberspace, drawing from the UN Charter, the Outer Space Treaty and the Tallinn Manual. A Global Summit will convene in Seoul, Korea to discuss this proposal in December, 2017.
Reaction to the “Bright Internet” proposal was mixed. The point was made that the requirement for originator responsibility is a complete departure from current Internet practices. In addition, concerns were raised that deliverer liability could stifle innovation by discouraging companies from bringing new services and products to the market. It was also noted that, as currently framed, the proposal does not account for the operation of artificial intelligence. For example, AI is programmed to capture information about behavior, e.g. autonomous driving, and act on it without necessitating any human intervention. How do we assign responsibility in this environment when it cannot solely be assigned to the programmers of the device?
A related concern is the presumed dichotomy between privacy and security implicit in the proposal. In fact, the choice between privacy and security is not binary but rather a weighing of risks against opportunity. Citizens and consumers may actually make rational tradeoffs when they support things like the US National Security Agency’s authority to monitor emails and when they allow Apple to build and provide services based on their private preferences from music to shopping. The anonymity of the current Internet may be both overstated and already compromised.
In some respects, the problems addressed by the “Bright Internet” are a reflection of the turbulence of the transition from the Internet Economy to the Digital Economy, and they underscore the need for enhanced tools for global coordination on these issues. The question is, should these new tools be peace principles or trade principles? We have probably had more success at developing and implementing the latter.
Positions related to data privacy are still evolving. Some basic principles are already enshrined in APEC CBPR, but individual attitudes are constantly changing. “Cookies” used to be a hot concern, but now that angst has shifted to locational data, and this too will likely be overtaken by the increasing use of autonomous driving vehicles.
On the cybersecurity side, the individual privacy dimension is superseded by the problem involving the interests of law enforcement and national security organizations in protecting important private and public economic infrastructure. Assigning these issues to a completely open multi-stakeholder process is not workable. As shown by the impact of Russian hacking on the US election, we are not living in a “shared commons” world, and there is potential for real catastrophe.
Of course, while governments may have ultimate responsibility for protecting their citizens, they cannot do everything, especially in the cyber field where most of the expertise rests in the private sector. One suggestion is to borrow an example from the history of the US railway system and deputize certain vendors to provide they security necessary to root out criminality. Another practical step is to find ways to encourage companies to do a better job to make their own internal systems more resilient. During the course of the session, a story emerged that at a recent meeting in Japan, nearly all attending companies had yet to adopt a cybersecurity plan.
The coming wave of IoT devices will certainly amplify the existing security problem. Getting the private sector involved through creating certification boards, akin to Underwriters Laboratory, to set baseline cyber standards for devices that connect to the Internet, should be considered. Resilience and redundancy also need to be engineered into the manufacturing and deployment of IoT devices.
In this environment, there will also be the need for many, special purpose Internets offered by the private sector that provides differing levels of secure infrastructure to discrete sectors of the Digital Economy. The “Bright Internet” may quickly find a home here with security being guaranteed within a walled garden where “Bright Internet”- certified messages are exchanged with and in a “Bright Internet” cloud.
Building the Future of the Digital Economy (Company Visits)
Silicon Valley is at the epicenter of many of the developments critical to the future of the Digital Economy. It is where new technologies are linked with innovative business models. Equally important is that the location provides a place to find the financial capital and human resources necessary to bring these models to market. We visited one of the largest global IT firms to learn more about their strategies to promote innovation and protect their operations. We were also welcomed by an upstream venture capital firm that counts Twilio among its early successes, concluding with a tour of Stanford University’s car automation research laboratory.
The AT&T Foundry in Palo Alto opened the doors of their incubation program for new ventures and provided a remote briefing on the operations of their global network management center in Bedminster, New Jersey. The Center monitors and respond to “abnormalities” in the flow of voice and data communications worldwide from natural disasters to cyber attacks. We are grateful for AT&T Policy Director Jake Jennings for making the arrangements for the APRU group to visit.
500 Start Ups, a venture capital firm that also provides business accelerator services in multiple Asia-Pacific cities, has an impressive record of success in identifying, funding and coaching firms in the early stages of their development. Representatives at their original facility in Silicon Valley outlined for us their programs and offered insights as to where the next wave of innovation will develop. The briefing underscored the breakneck speed of product development by showing how many technical issues are simply “worked around” in the interest of taking innovation to a level of usage, where the scale related benefits of the Internet can be exploited. Managing Director Aaron Blumenthal, himself a successful serial entrepreneur, was an energetic and compelling briefer.
A visit to the Center for Automotive Research at Stanford (CARS) acquainted us with the experimental work being done by Stanford faculty-student teams on self-driving cars and highlighted the technical and social challenges that industry must grapple with in the race to bring this technology to the market. Dr. Stephen Zoepf, the CARS executive director, also briefed the participants on his research into the ride-sharing economy, pinpointing some of the social and business challenges related to the rapid emergence of this new technology in previously highly regulated markets.
Artificial Intelligence, Robotics, and the Digital Economy
Artificial Intelligence and Robotics are already transforming manufacturing and transportation. As these technologies are further deployed, they will permeate all aspects of the Digital Economy. The Evening Dinner Forum featured a discussion on the latest developments in the field and assessed the political, social and cultural challenges that require attention even as the technology is deployed at scale over the next five years.
Artificial Intelligence (AI) is conventionally defined as involving the performance by computers (or robots) of tasks that are thought to require human intelligence, namely sensing, comprehending and acting. All AI additionally include a “machine learning” function, in which the computing system’s performance improves as it repeats its task. AI and robots go together because most new approaches to programming robots make use of AI principles. Despite the exploding scientific and policy interest in AI, most applications of AI in business domains are still at stage one (sensing and analysis), although full automation of tasks through AI can be seen with self-driving vehicles and intelligent virtual assistants.
The impact of AI on the economy is predicted to be huge, so much so that some analysts are describing it as a new “factor of production” along with capital and labor. In this view, AI should be directly calculated into some new formulation of GDP. In consideration of their current levels of research sophistication, the US and Japan are predicted to be the greatest beneficiaries of this reformulation.
The AI of today is the result of a multi-decade effort to make machines smarter. Today’s machine learning focuses on the “training” of the computing system, the “machine”, to recognize certain key combinations of patterns given iterative analysis of prior data, for example, recognition of a photo of cat v. non-cat, such that there is less straight programming involving every detail to be analyzed. The big advance over the 1980s is the massive computing power that can be drawn on to process information. These developments are not limited to the US. More and more students in China are electing to work on AI.
There is a concern that like video conferencing, the full potential of AI technology will only be realized at a gradual pace because of the economic and social disruptions associated with its deployment. Areas, where AI and the machine learning component may be most immediately helpful, include the field of cybersecurity and enabling robot-assisted care for the elderly.
A potential flashpoint is the concentration of AI expertise among only a few countries and companies, potentially creating a new type of “digital divide.” More outreach to the broader multi-stakeholder community and increased availability of open source material on AI will both be needed so that a broader group can be involved in shaping the future of this new technology. The provisioning by large IT firms (e.g. Google, Microsoft, and Amazon) of open platforms and APIs for third-party development of AI applications has had a major impact in opening up applications development, but the perception remains that access to this development environment is controlled by an oligarchy.
Care also needs to be exercised as AI moves into areas like healthcare to ensure that ethical standards are upheld and brought to bear on technology solutions.
These cautions aside, the consensus was that AI will undoubtedly be a larger part of the Digital Economy even as it is already reshaping the way we make decisions. Just as automation changed the factory work floor AI will have a transformative impact on traditional fields like the legal profession, education, agriculture and finance. With the advent of 3-D printing, AI also holds the potential to dramatically upend existing patterns of trade and, shared appropriately, AI could thus contribute to bridging the “digital divide” by empowering local production and cultures.
New Business Models and Challenges
The Digital Economy is rapidly becoming “the” economy for the Asia Pacific region. E-commerce, automobiles, healthcare and supply chain management are at the forefront of this transformation at national levels, but obstacles remain to the creation of cohesive regional frameworks in each of these sectors. E-commerce must contend with divergent taxation and consumer protection schemes while self-driving cars remain unavailable due to financial and regulatory challenges. Healthcare must resolve patient privacy and professional licensing requirements; and supply chain management depends critically on the flow of data across national boundaries.
The Digital Economy disrupts the traditional business models of the analog economy as it begins to offer new solutions to the Internet Economy’s dilemma of how to monetize this new technology. Apple used to be a “device” company, but now services delivered through its apps are an increasing source of revenue. Google has become a giant by disrupting traditional advertising channels, and Facebook has achieved similar success by using social media exchange as a platform for new revenue-bearing businesses, and this process continues alongside the spread of social network delivery of content to mobile devices. Meanwhile, sharing economy business models and data-targeted subscription-based delivery of OTT (over the top) content and entertainment are opening up new revenue streams as they cause shifts in the traditional TV and movie industries. The common thread through all of this is the innovative use of data.
Governments are also part of the innovative use of data, even at the local level. In fact, cities often lead the charge in using citizen data to deal with practical problems such as traffic and the delivery of local services. In fact, some of the pressures for data localization are coming from this sector as cities erroneously believe that local data centers will provide stimulus for small and medium-sized businesses. Of course, not all areas of the economy are keeping pace. Legal documents in many cases still require signatures that cannot be executed digitally. This creates a rarely noticed but significant bottleneck that is only starting to be addressed.
The automobile sector is under great stress. Tesla has not only challenged the industry technically, but by using technology to reach out to consumers, it directly undermines the traditional dealer network. Although AI and autonomous driving get the most press, the advent of 3D printing and IoT that provide a continuous stream of data on automobile performance may both be equally transformative. The patchwork of national and subnational regulations in the automobile industry is also a huge legacy challenge as the pace of innovation continues to accelerate in this sector.
It is not possible to consider the future of the Digital Economy without looking to China. China’s period of internal growth and development are at an end, and Chinese companies are looking to drive their cloud technologies into external markets – both in Asia and beyond. Internally, China is already developing an increasingly sophisticated digital economy, but as they move outwards, they will need to make adjustments in their approaches to intellectual property and privacy as well as increase their cooperation with others on cybersecurity. Many countries and companies remain wary of the security of Chinese devices and services. Winning trust and projecting the image and reality of accountability will be big challenges for Chinese firms.
Health care is ripe for digitization with the biggest areas being mobile health that can move with the individual and deliver healthcare onsite, telemedicine that serves as a platform for remote diagnosis and treatment, e-health involving the storage and analysis of health records and data, and digital health that encompasses new areas like AI-driven clinical diagnosis and genetic profiling.
However, there are also numerous potential areas for disruption with specialists being on call everywhere and the prospect of IBM’s Watson serving as a “consulting physician” on cases both too difficult and too simple for doctors. This will be reinforced by the app economy and pose real challenges to traditional physician revenue models and insurance schemes when services are further fragmented and often outside the traditional healthcare community.
Related to this perspective is how the “supply chain” for health care is being transformed. As traditional distributors of health care IT are no longer simply delivering and maintaining equipment, the new environment demands that they deliver solutions to hospitals and other end users, often though cloud technology. The web of regulatory and cultural obstacles pose a challenge to the converging and repackaging health data, slowing the pace of innovation and hindering the sharing of data across providers.
The challenge is not limited to healthcare. Data security is a key problem for the connected car, and remains an issue for governments, particularly China which has policies in place largely to control data rather than share it. One key step to a global solution is to drive “regional” solutions for products and services based on mutual recognition and shared standards. There is also a need for greater transparency and due process to keep manufacturers and resellers from becoming “stuck” with inventory that they cannot sell because of labeling or certification requirements. “Safe Harbor” and the reliance on ISO/EIC mechanisms are important to demonstrate and encourage compliance.
This means extending the rule of law to make a concrete bottom up effort to increase accountability, particularly amongst like-minded countries and companies with the capabilities to build on each other’s efforts. This will prove particularly important with IoT since devices embedded within other devices. Greater emphasis must be placed on “security by design” and companies must become more accountable in addition to understanding the reputational issues involved. Governments frankly do not have the resources or the regulatory jurisdictions to manage regional and global supply chains. The industrial Internet will not take root without greater coordination between all stakeholders and improved cohesion within each of the vertical sectors.
IP Protection and Access
Protecting Internet content while preserving broad and easy access has been a key challenge from the start. This has become ever more complex and the prospects for arriving at a sustainable balance among the competing interests remain problematic. At issue are new and changing ways of using content amidst a legal framework that is not keeping pace with technology. The issue is particularly acute with regard to the “ownership” and utilization of large data bases – a problem that will only increase with the ongoing deployment of the Internet of Things (IoT).
Intellectual property (IP) is an 18th Century concept that finds its roots among other places in the US Constitution. At present, the future of IP is being fought out between Hollywood (Los Angeles) on the one hand and Silicon Valley (San Francisco) on the other. Patent and copyright holders are losing control, but the solutions advanced so far are piecemeal or counterproductive. We do not need more locks and limits on digital access and the threat of criminal punishment is not deterring piracy by users. Putting the liability on intermediaries to cleanse their sites of illegal content is legally and practically fraught. There are no easy answers.
Not that there are no innovative approaches out there. Netflix is busy creating and delivering its own content and other hosting site are busy purchasing content. But attacking the issue at the user or intermediary level remains a dead end. In this context, it is important to understand that users will purchase content when it is right priced and easy to access. Piracy is a second-best solution for most. AT&T has 35 million video subscribers and it is these consumers that are driving the telecom’s investments. Users want content on demand and mobility along with it. Increasingly, they also want choices curated for them rather than searching through the deluge of available content. Thus, the question emerges can content holders work more closely and proactively with intermediaries and digital distributors like AT&T to make content more freely and cheaply available? Or will they continue to release movies, for example, first in brick and mortar theaters before putting them online?
More than content, data may be the hottest issue in the IP space. Data has value – but it is not always clear how much it is worth and who should control access. It is noteworthy in this regard that Japan is considering launching a public data exchange market that could in theory operate like any other commodities market from copper to oil. Japan is awash in data – the country boasts 40 percent of the world’s sensor devices. It is now trying to figure out how to monetize these through creating innovative mechanisms for sharing data.
Japan is not always known for this kind of innovation with respect to copyrighted works in particular. Music and movies are still by and large consumed in Japan on CDs and DVDs, because of the broadcast industry and the entertainment sector continuing reluctance to embrace the Internet for fear of losing control of their product. But the IOT and the AI market by extension is viewed differently.
There are still many issues remaining. Japan does not treat data as “intellectual property”, but there is consideration of revising the protection provided trade secrets under competition law, which will incentivize companies to open up their data – provided that certain penalties are established for hacking or stealing data. For Japan, it is a really new era of intellectual property protection with a focus on defining the “ownership” of data and creating a framework for its regulation and protection.
In this sense, the global production of knowledge associated with the Digital Economy has the potential to dramatically expand the scope of the copyright industry. At the same time, new rules are needed to make sure that any protection given to data holders also create opportunities for market access to and investment in information sources. Equally important, any rules set at the national level need to be crafted with an eye toward interoperability since the data business is inherently global.
As part of this, we will need new solutions built around traceability so the value chain is clear between the data subject, the data collector and the user of the data. This will require new contracts and new terms conditioning usage. The question of whether rights to data are exclusive or purpose and time limited will needs examination and regulators will have to look at FRAND terms for sharing data as they define markets and assess competitive trends.
As part of this market-driven process, a new framework for safeguarding personal privacy could likely emerge based more on contract law than the political considerations that have largely driven the conversation to date. This also transcends the fundamental rationale for intellectual property protection, which provided exclusivity for a fixed term to compensate the creator for their work. The question now is can copyright protections be extended to a “collector” of data and for how long should they be granted exclusive use? We are really in new territory.
Balancing Innovation and Consumer Welfare in the Digital Economy
Effective competition policies in the Digital Space should strike a balance between the requirement to guard against market domination by a few companies and the concurrent need to encourage greater innovation, growth and consumer welfare. However, these two goals are not always consistent and the current set of rules originally developed for the “analog” economy are not necessarily congruent with the reality of the Digital Economy.
There are a number of issues. the first is how to define the market – especially in cases such as search or social media where the market did not exist even in a decade ago. A second concern is who and what are we trying to protect? Is it companies or the consumer? And how do we account in current legal theory for products or services that are offered for “free”? Third, how do we connect traditional thinking about competition within national borders to an environment like the Internet where scale and cross-border delivery of services is inherent to the technology? And fourth, how do we value data – can you have a monopoly of information?
Starting with last question, is it the “ownership” of data or the “utilization” of data that is at issue? The evidence is clear that it is the latter. Data by itself does not confer an advantage. It must be connected to a service or product that is welcomed by the market. And this starts a virtuous cycle, which in a surprisingly short time can displace putative incumbents as successful service offerings result in data collection that allow for even more attractive and competitive commercial offers. This is particularly true in the Asia Pacific region where the large incumbents in sectors like finance, consumer goods and entertainment have not successfully been able to use the sometime massive amounts of usage data that they have accumulated and have been outmaneuvered by smaller and much less well funded newcomers.
Addressing the question of market definition, digital markets are evolving and multi-sided. Innovation is not allowing companies to dominate a market for long. Consumers are constantly looking for the next device, the next service and the next experience. In this context, pricing has been found to be often a much smaller determinate of value in the eyes of consumers than the perceived “quality” or “coolness” factor of a product or service. Witness the Apple phone’s success in countries like Japan, China and Korea with strong national champions in the mobile market.
In this kind of environment, ex ante regulation needs to be avoided. Innovation is moving too fast and markets can change quickly in unexpected ways, based on products and services moving across borders at the speed of fiber optics. One size does not fit all. Solutions welcomed in one market can be problematic in others for cultural, religious or “political” reasons. Regulators can address these issues, but their actions need to be crafted to deal with the actual problem and always with a “light touch.” And they must take care to be sure that their proposals are “interoperable” with markets elsewhere in the region and globally.
Still, for many countries in the region, competition policy begins and ends with regulation of the incumbent telecom. Cyberspace is still not well understood and the new market paradigms connected to the Digital Economy are unevenly appreciated. This is an obstacle to broader cooperation regionally on the new competition issues presented in the digital market as well as in other areas like standards and privacy. Competition policy will continue to be important, but as the EU is discovering it does not guarantee innovation and growth.
Indonesia is a big market with a distinctive and proud culture – and not surprisingly it has largely gone its own way in developing the Internet. It is a nation of 260 million persons with only 100 million online. When the national infrastructure backbone is completed in 2018, a good part of this divide will be bridged. Indonesia has a vibrant internal “digital” economy. It has already spawned a number of “unicorn” startups and has a strong app culture that allows people to find online shopping, employment and lots of entertainment. Indonesians credit recent legislation that mandates localization of data services and argue that this has actually attracted new foreign investment that this has actually attracted new foreign investment and spurred the development of local content. Outside observers are less sure.
With its huge population and economic potential, Indonesia can probably continue down this path for some time. But most countries in the region should understand that building a competitive internal digital market place ultimately depends on being integrated into global markets. With the debut of the Cloud, Big Data, IOT and AI, local Indonesian companies will need to access the infrastructure and expertise of global partners to fully participate in regional and world markets. Rather than mandating local data centers, Indonesia might better invest in training new local engineering talent and in building a work force able to grow the Indonesian economy outside its borders.
Advancing a Regional Digital Economic and Trade Consensus
The current deadlock over TPP may be an opportunity to shift the focus from polemics to a more analytic discussion as to what are the necessary legal and policy requirements for growing the Digital Economy in the region. The negotiations leading up to TPP have actually done much of the preliminary spadework, highlighting areas of agreement and issues where more work is required. One key decision point is whether to continue efforts toward a comprehensive arrangement or to focus on a series of sectorial and bilateral initiatives. In either case, cooperation between the academic community and business is crucial – the Digital Economy is simply too important to leave up to governments.
The TPP process is not over. Some encouragement can be taken from a rump meeting in Vietnam where trade ministers from the 11 countries still signatories to the pact pledged to continue to go ahead with the agreement. As the one nation to have formally ratified the agreement and now the largest economy within the new trade bloc, Japan has picked up the leadership baton from the United States.
Nonetheless, we are in a very different universe. When US VP Mike Pence and Commerce Secretary Wilbur Ross visited Tokyo in April, they were emphatic that the US has no intention of pursuing further multilateral trade arrangements in Asia. The emphasis will be on bilateral negotiations and a FTA with Japan is a top priority. Tokyo for its part has quietly but firmly made clear that it is not willing to negotiate a TPP-plus arrangement with the US.
The tragedy is that five years of work may go for naught. The negotiators achieved consensus on a range of issues that are vital building blocks for the Digital Economy from intellectual property to financial services to consumer protection to cybersecurity and privacy. Many of these gains will now go to other countries with Japan using TPP as a template in its negotiations for a free trade arrangement with the EU.
The region is moving forward with or without the US – and this may be a significant point of inflection as the countries in the region take on the responsibility for driving a digital trade agenda. What APEC does in this context will be important.
APEC launched the ADHOC Steering Group for the Internet Economy two years ago. Its mandate is up for renewal and there is a debate about whether to extend this mandate where its role is to coordinate policy as it touches on the Internet across all committees in APEC or to bring it under one of the functional committees, such as e-commerce or telecommunications.
The Adhoc Steering Committee has been successful to date because it has treated the issues of the Internet now Digital Economy comprehensively rather than in a piecemeal fashion. It has developed an APEC Digital Economy Road Map around a set of key principles and is now looking at the TPP text to see what might be taken up in an action-oriented work plan.
But moving a regional organization from discussion to undertaking concrete measures is a huge challenge. Just the meeting schedule is daunting. APEC has 800 meetings annually and ASEAN 1300. Moreover, unlike the EU, administrative and policy support in each organization is counted in the hundreds not the tens of thousands.
Of course, with or without TPP and APEC, cross border data flows will continue to grow. Maintaining interoperability and working on cybersecurity will be vital, but much of this can be done through the ISO/EIC 27000 series of standards. Trade agreement are desirable because they provide a binding dispute settlement process and address tariffs – but we need to understand that TPP was not rejected because of its digital trade provisions.
TPP became a political issue in the US election and elsewhere in the region because of its perceived impact on employment. The business community needs to do a better job in engaging the public on these issues. Messaging also needs to target the SME community that see many of the benefits of digitalization going to large offshore enterprises. Consideration of a stand-alone digital trade framework should be done carefully since the successful incorporation of digital provisions in the TPP benefit greatly from tradeoffs brokered in other areas, e.g. access to agricultural markets.
What would a digital trade arrangement for the Asia Pacific look like? Some key elements could include a non-discrimination clause for the cross-border delivery of digital services; agreement around principles and dispute settlement mechanisms for supporting a “trusted” digital environment in the region; a consensus on regulatory principles and guidelines for safeguarding cyberspace and infrastructure; and the establishment of certification bodies in key sectors, such as financial services and healthcare, to strengthen transparency and accountability for digital services.
Progress in all these areas will be difficult given the cultural, economic and political diversity of the region. China’s role in all this will be important, given the strength of its economy and the dynamism of companies like Alibaba and Huawei that already have a strong regional presence. But China will take time to grow into this role. The Regional Comprehensive Economic Partnership (RCEP) and the “One Belt, One Road” Program are still work in progress.
In this context, the prognosis for progress on a truly digital agenda for the region is uncertain. The technology will continue to drive change, but how this will be managed institutionally by national governments and regional organizations is less clear. In the meantime, the responsibility for thought leadership and the development of practical solutions rests importantly with the universities and the private corporate sector in the region. Our hope is that the APRU Digital Economy Business Offsite can continue as forum and platform where these two communities can meet to share views and consider strategies to promote the continued growth of the Digital Economy in the Asia Pacific.