UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF PENNSYLVANIA

Report of Dr. Donna Hoffman

Introduction

I have been retained by plaintiffs as an expert in this case and have submitted a declaration in support of the motion for a temporary restraining order. That declaration included some of the facts and opinions I think are relevant to this case. That declaration also accurately describes my qualifications and background and summarizes many of the articles I have published in the last ten years. I incorporate that declaration into this report by reference. Additionally, I atttach my curriculum vitae to this report which provides a complete record of my publications in the last decade.

As of the time this report is being written, I do not anticipate using any exhibits. I am being paid a fee of $5000 plus expenses for my work on this case. I have not testified as an expert or been deposed as an expert in any case other than ACLU v. Reno I, cited in my declaration.

In my view, the Act, if enforced, will have seriously negative consequences for the future development of the Web. First, I believe the Act will have a chilling effect on commercial innovation in cyberspace. If enforced, it is my opinion that the Act will stifle the introduction of original and exciting new business models suitable for online commerce. Second, I believe the Act will have a damaging effect on the nature of cyberspace. If enforced, it is my opinion that the Act will render the Web ineffective at engaging its users in meaningful and productive ways. In essence, the Act could cripple those elements of the Web that are most responsible for its explosive growth, and dramatically lessen its potential as the engine fueling the future economic growth of our society.

Business Models on the Web

In my declaration, I discussed ways in which email, chat, bulletin boards, and other parts of the Internet are being increasingly provided directly through the Web. Thus, for purposes of this report, the Internet and the Web can be considered the same thing.

Commercial activity on the Web adopts numerous forms. Some Web sites incorporate business models of selling speech, goods, or services that follow closely from models in the traditional world. However, as electronic commerce continues its rapid ascent as a key component of business strategy, the most important business models are those that represent hybrids of well understood models and completely new forms and ways of doing business.

Indeed, one of the key virtues of the Web is that it allows for the development of new business models. One of the most important developments emerging on commercial Web sites is the use of free material in order to attract visitors to the site, engage them on the site for reasonable periods of time, and retain them as customers to the site in the future. Issues of initial trial, repeat usage, usage frequency and duration, and customer retention are vitally important as commercial Web sites search for sustainable business models over the long run. Such issues are relevant whether the commercial Web site represents a new small business enterprise operating out of a single mother's home or a Fortune 500 multinational corporation.

It is worth noting that the Web offers important opportunities to entrepreneurs with severely limited resources. Because the entry barriers and start-up costs are relatively low, an individual with a profit-potential idea now has the means to start a home-based business with global reach. Such a business may be deployed easily and at a remarkably low cost, compared to the costs of starting a traditional, bricks-and-mortar transaction-oriented business in the physical world.

Even those commercial Web sites whose business models are currently built exclusively on sales transactions to generate a revenue stream must develop strategies that will both direct sufficient traffic to the Web site and sustain such traffic over time. It is emerging that the most effective ways to stimulate traffic and engage Web site visitors, (the better to ensure their return another day), is to develop a compelling online environment. This is true regardless of the business model currently being employed by a commercial Web site. At present and for the foreseeable future, the most effective mechanism appears to be offering content for free.

Thus, some sites may offer all or most information for free and attempt to generate revenues through various forms of advertising. Many of these sites offer extensive opportunities for visitor interaction. For example, OBGYN.net (http://www.obgyn.net/) is an advertiser-supported Web site targeting Obstetrics and Gynecology professionals, the medical industry, and female patients and clients. The OBGYN.net offers its online visitors a comprehensive set of resources including up-to-the-minute reference information, an event calendar, clinical reference collections, powerful search tools, discussion forums, electronic journals, and opportunities for visitors to publish their own articles. This extensive collection of services and interaction opportunities are offered free of charge to visitors. In the same model, Bolt (http://www.bolt.com/) is a highly interactive, advertiser-supported Web site offering innovative and cutting edge content and services targeted to high school and college students. Bolt offers advice-oriented articles on sex ("Coming Out of the Closet" is a recent piece), provocative editorial content ("Will Locker Searchers Keep Schools Safe and Free of Drugs?") movie reviews, chat, email, and bulletin boards.

In a similar vein, Salon Magazine (http://www.salon1999.com/) functions as an advertiser-supported magazine, subscription-free online magazine and offers its readers the opportunities to comment on past and current articles.

Still other Web sites may not generate any revenues directly, whether from advertising sponsorship or onsite sales transactions, but instead serve to generate customer awareness and interest in purchasing offerings available in the physical world. For example, "Making Cherry" (http://www.cypressfilms.com/cherryweb/) chronicles the making of the independent romantic comedy movie, Cherry, scheduled to be released in theaters in the spring of 1999. Visitors to the site can ready detailed reports covering the first three months of production, view a post-production report, view stills, browse through the cast, read publicity about the movie, and generally get a behind-the-scenes look at what it's like to make an "indie" movie.

Other sites may provide material for free, but depend on sales transactions for revenues. For example, Amazon.com (http://www.amazon.com/) supports the sale of millions of books, videos, music, and gifts with freely accessible detailed text descriptions and images, visitor-provided reviews, product rankings, and recommendations. Similarly, Condomania (http://www.condomania.com/) offers extensive educational, news-oriented, and product-oriented information relating to safe sex and condoms as a public service to its visitors. Such free information has the additional value, of course, of drawing visitors to the site who may wish to purchase Condomania's offerings. I believe the Act could cripple the ability of many of these transaction-oriented sites to engage in those mechanisms that can effectively attract online visitors to the site, keep visitors engaged while on the site, and encourage them to return.

In all these cases and many more, the Act, if enforced, would have the effect of repressing and even eliminating these important new forms of electronic commerce.

Commercial sites that contain any information that may subject them to the Act will be compelled to cease the development and application of innovative business models suitable for the Web medium. Instead, they will be forced to adopt more traditional business models that, while perhaps posing lower risks, may also inhibit innovation and, ultimately, the expected returns from sustainable business models best suited to the new medium. Thus, enforcement of the Act will not simply harm those firms that must transform to comply, but will have the negative consequence of transforming the Web itself.

Many sites, particularly those operated by individuals running small businesses, may well be forced out of business. Other sites may be able to survive, but only by following, for example, a static catalog model and operating in much the same fashion as a traditional mail order business. In this respect, the very creativity and innovation that the Web affords, and that continues to drive its rapid expansion, will be destroyed.

Further, the Act, if enforced, will not only affect those individuals who now seek to make their living using the Web. It will also affect Web browsers and customers. In seeking out information, Web users are interested in getting accurate and useful information and may be indifferent to whether a site is for- or non-profit. What matters in such cases is the quality of the information. Thus it is the case that current for-profit Web sites offer free information that is used by a wide variety of Web users, including students, researchers, and consumers. For example, a person seeking information about diagnosis and treatment of a particular medical procedure may go to for-profit sites that offer relevant information. Thus it is that the information provided on commercial sites such as OBGYN.net and those of drug companies, as well as university and non-profit sites will be considered by the person as she makes a medical decision in conjunction with her doctor. This information, along with the collaborative process it implies for individuals in our society, will be lost if business models that include the provision of free information are destroyed.

The Act will also affect Web users in other ways. One of the most exciting features of the Web, from the perspective of both commercial entities and their customers, is that small businesses (or even large ones) are no longer bound by geography. Instead, the Web offers business the opportunity to make its information available to anyone in the world who has a computer, a connection to the Web, and a Web browser. This dramatically increases commercial opportunities for both buyers and sellers.

I understand that the plaintiff ArtNet (http://www.artnet.com/) is discussing this from the perspective of a fine art provider. It also applies to other areas. For example, there are hundreds, if not thousands of used bookstores around the country. The nature of the used book business is such that the inventory of the stores is not duplicative. There are now a number of commercial Web sites that include part or all of the entire inventory of used bookstores, either individually such as the plaintiff Powell's Bookstore, or from bookstores all over the country. This means that both the sellers and the buyers have greater access to each other. For example, a buyer can go to one of these sites and search by a topic, including topics that might refer to books that might be at risk under this Act. That buyer can often obtain information about the book. Increasingly, people who sell books on the Web list excerpts of the books, reviews, and other information that, in addition to the subject matter, might place the sites at jeopardy under the law. If this law takes effect, such innovative business models will either have to seriously self-censor or go out of business. Similarly, auction sites represent one of the newest and most important commercial forms to have emerged recently on the Web (see, for example, eBay at http://www.ebay.com/ or ONSALE at http://www.onsale.com/). These "market maker" sites bring buyers and sellers together for the purpose of creating an efficient market for various goods and services. As this model evolves, and as more auction sites innovate with features like chat, discussion groups, text based product reviews and product images, it is likely that such sites, and the innovative business models they represent, will be increasingly at risk under the Act.

Network Navigation and Flow on the Web

If the Act is allowed to stifle the wide range of speakers such as those represented by the plaintiffs, and if those speakers are required to place information they now offer for free behind some sort of credit card system, it will negatively impact a critical quality of the navigation experience on the Web. This experience, which my colleagues and I refer to as "flow," defines the essence of a compelling experience online. As such, flow is critical to commercial Web sites.

Thus, the concept of flow is at the heart of many crucial aspects of a person's interactions in the Web. Flow formalizes and extends a sense of playfulness, incorporating the extent to which people: 1) feel a sense of control over their interactions in the Web, 2) focus their attention on the interaction, and 3) find it enjoying.

For the flow state to be experienced in a computer-mediated environment like the Web, 1) skills and challenges must be perceived to be in balance and above a critical threshold, and 2) focused attention must be present. Only when users perceive that the Web contains high enough opportunities for action (or challenges), which are matched to their own abilities to take action (or skills), can flow potentially occur.

If navigation on the Web does not provide for this congruence between skills and challenges, then people will either become bored (skills exceed challenges) or anxious (challenges exceed skills) and then either exit the Web, or select a more or less challenging activity within the Web.

The two broad categories of behavior that people engage in during time spent in the Web, goal-directed and experiential, have different characteristics.

For example, users employing the Web to buy an automobile are engaging in goal-directed flow behavior, based on an intentional state of mind that reflects the user's deliberate choice to select specific content regarding automobiles.

On the other hand, "browsers" exploring the Web in their quest for the latest information about new cars, in general, will experience an intrinsically motivated experiential flow state. This ritualized situation focuses more on the medium itself, rather than on the particular content, is associated with motives such as habit or relaxation, is less intentional, and is, in essence, a time-passing activity.

It is important to recognize that people will engage in both goal-directed and experiential behaviors on commercial Web sites and that flow may occur with both types of behaviors.

Experiential behavior primarily involves an ongoing series of navigational decisions of "what to do next." This is a highly unstructured activity. Flow during experiential behaviors is like navigating through an amusement park where the visitor must choose among a large number of ride choices in an unstructured, nonlinear fashion.

Experiential behavior will tend to dominate a user's early flow experiences in the Web, but over time goal-directed behavior will also lead to flow experiences. Early interactions in the Web that lead to flow are characterized by a non-directed, "time-passing," ritualistic quality. This ritualistic use evolves into instrumental use as users accumulate experience navigating within the medium.

People need greater degrees of technical skill to successfully perform goal-directed behaviors, compared to experiential behaviors. However, as people experiment and become familiar with the Web, through experiential behaviors, they will develop skills to meet the challenges presented by the computer-mediated environment.

In other words, learning occurs and users begin to seek higher challenges online. Thus, a goal-directed approach is likely to dominate many peoples' later interactions in the environment, although both orientations may be present at different points in time, depending on individual characteristics.

This has important implications for consumer adoption of the Web as a large-scale communications medium. Goal-directed behaviors like home shopping and home banking, motivated by convenience, will not necessarily lead to flow for new Web users. On the other hand, experiential behaviors such as browsing online magazines, participating in interactive chat rooms, and exploring a Web site for a topic with which people exhibit continuing interest, would be more likely to lead to flow and thus stimulate adoption in new users.

Thus, stifling experiential behaviors in this new medium, as the Act would do, could have a profoundly negative impact on consumer adoption of the medium, with attendant negative consequences for its subsequent development.

The Act will also have a negative impact on goal-directed behaviors.

The Act would require commercial providers to seek "proof of age" for individuals visiting Web sites because many providers would be uncertain of what would be considered "harmful to minors" by a particular user.

In effect, this registration process would be tantamount to a lock on those previously open and accessible hyperlinked documents on the Web.

Constructing a system of virtual doors on those World Wide Web sites, each of which would require identification for entry, would seriously hinder the process of network navigation I have described above.

If people cannot navigate through the World Wide Web by means of clicking on hyperlinked documents, and thereby move seamlessly through cyberspace, the Web will cease to exist as a many-to-many decentralized communication with characteristics unique in the history of media.

In that way, the most important innovation to human society since the development of the printing press will be effectively destroyed.

To see this, consider that requiring use of a credit card for admission to commercial Web sites will have at least three damaging consequences: 1) commercial provider efforts to explore fully the interactive nature of the medium will be impeded because even requesting comments from visitors could lead to liability; 2) individuals will no longer be able to navigate with flexibility and control in an active manner through cyberspace, because every mouse click could potentially lead to a burdensome request for identity; 3) individual privacy will be at risk because every person must now potentially register with every single commercial site she wishes to visit.

In this way, the Act also pushes the Web toward a centralized system of homogenized content suitable only for children, controlled by a few large providers and firms with the resources to manage large databases and audience-oriented, lowest common denominator content sites.

Thus, the Act could force the communications process underlying the Web to be transformed into something more akin to the one-to-many broadcast model underlying mass media television. Its impact as a democratic communication medium that allows any user to be a provider will be lost.

The Web represents a revolutionary medium for commercial activity. To consumers, it offers greater control, and is highly accessible, flexible, and sense stimulating. To businesses, it provides an innovative new medium and marketplace for the creative exploration of novel business models. Thus, the commercial Web environment offers unprecedented opportunities for firms to get closer to and provide greater value to their customers than ever before.

Conclusion

In summary, it is my belief that this Act is likely to have a negative impact on the commercial development of the Web. The consequences of this cannot be overstated. This transformation will create enormous ripples in the developing commercial market and could negatively impact the progress of commercialization.

The Act will have a negative impact on commercialization, because many providers will either cease to innovate, exit the market, or simply never enter. Commercialization is the engine driving critical mass of the Web and without critical mass, the Web will never achieve its potential as an interactive, democratic communications medium.

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Donna L. Hoffman