Smart Money?

the Genesis of Electronic Commerce
By Andrew Leonard

Harry Saal's business card is a Silicon Valley work of art. It boasts no fewer than six telephone numbers Ñ home phone and fax, main office, direct line, and office fax, and, of course, car phone. Then there's the requisite Internet address, Hsaal@svi.org, and his executive assistant's phone number and Internet address. But what really rounds out the picture of this digital organization man are the two pager numbers, with their concordant PIN numbers, the Radiomail e- mail address, and the Sky-Gram 800 number. Harry Saal is connected.

Which is a good thing. Because Harry Saal is the CEO and president of a Silicon Valley-based organization called Smart Valley Inc. And Smart Valley, according to Saal, is all about smart networking: bringing people and organizations together in pursuit of the information technology future.

One of the best examples of what Smart Valley does is an entity known as CommerceNet, now barely more than a year old. Variously described as "the first large-scale market trial of electronic commerce on the Internet," "a fully distributed network of information service providers," "an industrial park in cyberspace," and as a "consortium of companies" CommerceNet is all about doing business on the Internet. It's also the beneficiary of a six million dollar federal grant.

Depending on who you talk to in the labyrinthine and interconnected world of Silicon Valley, where net-libertarians, social liberals, and hard-core conservatives all have their own vision for the future of cyberspace, CommerceNet is either a model for public- private cooperation and government sponsored "industrial policy," a state-of-the-art example of Silicon Valley marketing hype, or a flat-out waste of taxpayer money. The truth lies somewhere in between, and hinges on whether CommerceNet's proponents are correct in asserting their main claim to fame Ñ that without CommerceNet, the information technology industry would currently be floundering in its search for an answer to problem number one for business and the Internet: the need for security.

The Road to CommerceNet

"I like to describe part of our role as very much like a venture capitalist except we don't have a checkbook," says Saal, sitting at his desk in a nicely furnished office in Palo Alto, just across the street from the campus of Stanford University. "What we try to do is bring together, to broker, to network organizations and companies in the sense of human and organizational networking."

Saal is quick to assert that Smart Valley Inc. itself, which has a staff of twelve and an annual budget of around a million dollars, is a non-profit organization that receives no government money. And he says its unfair to criticize projects like CommerceNet for taking advantage of federal programs that are already in place.

Saal traces Smart Valley Inc.'s origin back to a "grass roots" initiative called Joint Venture: Silicon Valley (JVSV) which grew out of a report commissioned from the SRI think tank by the San Jose Chamber of Commerce in January 1992. Entitled "An Economy at Risk", the report argued that Silicon Valley would fail to emerge from recession unless it took activist measures to take advantage of local strengths.

Joint Venture: Silicon Valley identified target areas of concern. Smart Valley Inc. was created to spawn projects addressing those areas. Such projects include PAN (Public Access Network) which promotes public access to the Internet, BADGER, which plans to satellite-generated geographical information on-line, a "Bay Area Multimedia Technology Alliance," and CommerceNet.

Cathy Medich, CommerceNet's executive director says CommerceNet, which was formally launched in April 1994, currently has 107 dues-paying corporate "members" and "associates." It boasts an impressive web site, administered by Silicon Valley-based Enterprise Integration Technologies, that features "storefronts, on-line directories, and hyperlinks to numerous documents on issues related to Internet commerce. Among the numerous pilot projects sponsored by CommerceNet over the last year are an exhaustive demographic survey of the Internet and World Wide Web, on-line product catalogs, payment mechanisms, and Internet connectivity.

But the real focus of CommerceNet activities isn't what happens on-line. According to one outsider who wishes his company had the time to attend the countless "working group" meetings and seminars sponsored by CommerceNet, when it gets down to basics, CommerceNet is really nothing more than an organized framework for big-time shmoozing. "A forum," as one observer put it, "for discussing commerce issues on the Internet."

"Most importantly," says Marty Tenenbaum, CEO of EIT, a Menlo Park-based company that administers CommerceNet's server, "CommerceNet brought together a critical mass of buyers and sellers, and people who make the market, and legitimized electronic commerce on the Internet."

Security

Two years ago, when plans for what eventually became CommerceNet were first being discussed, the two words "commerce" and "Internet" weren't often found in the same sentence.

Tenenbaum notes that "when CommerceNet got started no one was thinking of the Net as having a role for business. What CommerceNet did was open the eyes of industry to the possibilities of the Internet. Most importantly it brought together a critical mass of buyers and sellers and people who make the market. It legitimized electronic commerce on the Internet, and I think that's behind a lot of the current explosion of activity."

Today, everyone and their mother wants to make a buck on the Internet. There's even a growth industry in companies marketing ways of doing business on the Net, companies with names like Digicash, CyberCash, First Virtual, and Open Market, not to mention EIT and its chief rival, Netscape, both of whom have been aggressively pushing different methods for ensuring transaction security on the World Wide Web.

The basic problem is that even though commercial interest in cyberspace is high and rising, the Net still isn't quite ready for free-market prime time. And that's because there is no single, widely accepted means of ensuring the level of electronic transaction security that the mainstream business community demands.

"The more commercial Internet action there is on the Internet," says Cathy Medich, "the better it is going to be for the industry as a whole. The real problem is if you get lots of different approaches to security that fragment the market."

"If anyone thinks that the Internet is ready for business, they're wrong," says Medich. "There isn't a security infrastructure in place that will support the privacy of transactions, the authentication of transactions, the signing of documents. There are no standard payment mechanisms on the Internet, and there's a lot that has to be put in place before it's a viable place for business. That's what we're trying to take an active role in, defining the approaches and standards for that."

And that's where the boldest claim for CommerceNet, and by extension, Smart Valley, is made. Saal are convinced that without CommerceNet, the current industry-wide consensus on the need for one common security standard would never have occurred, or would at least have required many more years to develop.

Earlier this year, according to cybercommerce observers, banks and on-line service providers interested in establishing a toehold in the electronic frontier were alarmed at the prospect of having to gamble on one of two very prominent standards. A "technology war" seemed inevitable. EIT had set up Terisa, a joint venture with RSA, a firm specializing in cryptography, to push "Secure HTTP" Ñ an encryption system designed to make the Web's hypertext transfer protocol secure. Meanwhile, Netscape was pushing it's "secure socket layer (SSL) technology, designed to make web servers secure.

Then, in May, Netscape announced that it was purchasing an equity stake in Terisa. All of a sudden, SSL and secure-HTTP, which had been thought to be competing standards, suddenly turned out to be complementary standards that would work together in a "merged toolkit" scheduled to be offered by Terisa later this year. The industry breathed a huge sigh of relief.

And, claims Harry Saal, none of it would have happened without CommerceNet.

"I think that we have managed in a cooperative way, without any legislation, without anything but maybe some government money, to get the major players in on-line services to come together and currently have only two alternative standards Ñ the S-HTTP and SSL alternatives," says Saal. "And now we see the prospect of those two standards coming together in Terisa."

"I don't think that would have happened without CommerceNet."

Representatives of both Netscape and EIT agreed that CommerceNet had played a role in bringing the two companies together, though to differing degrees.

"The actual deals probably get done on golf courses and in board rooms," said EIT's Tenenbaum, "but CommerceNet provided a context in which all the players were working together and knew each other, and set the framework for doing business together."

Jeff Treuhaft, a product manager at Netscape, was a bit more circumspect. He said that pressure applied by the big on-line service providers, AmericaOn-line, Prodigy, and CompuServe, who wanted to deal with just tone security standard, played an important role in encouraging Netscape to join Terisa.

Treuhaft also skirted over a potentially touchy issue. EIT administers the CommerceNet Web server. The offices of Cathy Medich, executive director of CommerceNet, are just down the hall from the offices of Tenenbaum, on the second floor of a nondescript four story building in Menlo Park. Such coziness has led to speculation that CommerceNet served a vehicle for getting the industry behind secure-HTTP.

All relevant parties denied such speculation. "CommerceNet is an independent corporation and is independent of EIT," said Medich.

Business - Silicon Valley style

"I spend a lot of time," says Harry Saal, "sitting around Smart Valley trying to answer the question of gee, what if we weren't here? Are we the rooster who believes we are making the sun come up in the morning, or are we doing something? I firmly believe from my experience in the computer industry, including the personal computer industry and the network communication industry, that those industries, when they started to explode, ended up in a plethora of solutions, there was LAN of the day, there was personal computer of the week, operating system if the month."

"Eventually it all coalesced," continued Saal. "Eventually winners got picked by market place. I think the underlying theme in all this is that standards themselves are not the axis that you compete over. You compete over other value adds and attributes. But you can't have competition if you don't have standards."

Saal's observations are important, because whether or not one believes that CommerceNet has played a positive role in the search for Web security still begs the basic question. Why should the federal government be supporting the shmoozing of Silicon Valley execs, on-line providers, and banks? Industry skeptics argue that consortium operations like Terisa almost never succeed, claiming that the market will make its own determination in ways unforeseeable by government policy makers.

Harry Saal disagrees. For him the business of information technology requires collaboration, a fact that Saal says Silicon Valley learned long ago.

"I am firmly convinced that telecommunications are an area that does need national, and in fact, international standardization," says Saal. "Clearly if you want to communicate with anyone, you need to have one telephone system. Allowing each county and city in the United States to make its own decision about how many digits they want in their phone and what kind of compression algorithms they want to use is not going to lead to the Internet. The Internet was founded on standards, done in a very distributed fashion and without central control Ñ having the same standards does not mean that the government is in charge and that's where I think most people misread the need to collaborate and work together."

Saal denies that the CommerceNet project is an example of "picking winners" Ñ a phrase Republicans like to use when they're busy denouncing the efficacy of government sponsored "industrial policy." The point they emphasize is that CommerceNet and Terisa are not examples of government mandated standards. In this case, government money facilitated the creation of a forum in which the industry players could get together and form their own standard.

"I think it [CommerceNet] is a model for what the government ought to do," said Saal. "I would go that far, and not be defensive about them, quite the contrary, but to say, these are the models for what the government ought to be doing. These are the kinds of programs that should be the last ones taken off the table, if we're in the mood for trying to reduce programs. What's happened, I believe, is these programs have been caught up in a frankly political battle between the Republicans and Democrats. These are the star programs of the Democratic administration. They show creativity and insight and inspiration and the last thing Republicans want is for them to succeed, for purely political reasons. It has nothing to do with cutting the economy, reducing the budget or other ideological philosophies about having a smaller government versus a bigger government. This is raw power politics."

In a larger sense, the question of whether tax-payer money is being wasted is already moot. Changes in the national political scene have already chopped funding from the TRP program and many other programs that could conceivably be labeled under the rubric "industrial policy."

For Harry Saal, that's a shame.

"I think it would be a real mistake to simply paint these programs just like any other government program and believe that this is sort of the high tech equivalent of paying farmers not grow crops, that this is some sort of price support for the information industry. That would be wrong and in fact getting it totally backward."

"In my mind I have absolute no question that this would not have been the outcome had not groups like Smart Valley spent a heck of a lot of time together, and I don't mean just CommerceNet, I mean other projects as well. And I guess here is where I really party ways from the total free market libertarian point of view, the people who, like Dr. Pangloss, believe everything is all for the good, it would have all happened by itself in the best of all possible worlds, so why are we intervening, it's OK, we could only break it. I don't believe that. That's why I feel comfortable with industrial policy. We made a difference."

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