The Unpredictable Certainty Information Infrastructure Through 2000 (1996) / Chapter Skim
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3 WHERE IS THE BUSINESS CASE?
3 WHERE IS THE BUSINESS CASE?
Pages 63-114
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From page 63... ...
FACTORS SHAPING INVESTMENT IN INFORMATION INFRASTRUCTURE Perceptions of business opportunities pace deployment of information infrastructure how much money can be made, with what investment and risk, over what period of time? In and around 1993, when the administration released its National Information Infrastructure: Agenda for Action (IITF, 1993)
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From page 64... ...
motivates some investment decisions based on anticipation that the framework will change. Shifts in industrial organization draw on both technology and policy trends and are fed by the declining costs of bandwidth, increasing consumer investment for infrastructure (cable, end nodes, information services)
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From page 65... ...
. 65 more sports, more movies, more replays of sitcoms, and perhaps more news programs." On the other hand, comments generated by the project suggest that such variations on a theme are more likely to come from the obvious players, the existing businesses, and that newer ideas hatched by entrepreneurs may be less visible, at least at first.5 Confident of the potential for innovation, lames Chiddix of Time Warner Cable observed that "there are thousands of people who will begin to put creative energy into trying to find ways to harness these technologies to find some new wonders and surprises.
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From page 66... ...
A number of themes emerged from the different inputs to the project; this chapter reports, as well as comments on, some of the tone or flavor imparted by different types of facilities and service providers (and by industry analysts) to the debate on information infrastructure investments.
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From page 67... ...
Noting that net capital stock has been declining with changes in accounting measures, if not in economic terms in the telephony business, Robert Crandall underscored the need to "keep the flow of new funds coming into this sector of the economy if we hope to build these extremely risky-particularly if they are to be wireline systems with a substantial amount of fixed costs." With a nod to the major presence of telephone companies, he estimated that "if the NII is to be built by established telephone companies with technology now under development, it would probably require a near doubling of these companies' assets."~° The scale of the investment, combined with both competition and constraints on the nature and remuneration provided by business activities to generate revenue, poses the threat of asset stranding to telephone companies. Stewart Personick of Bell Communications Research expressed the problem in the context of sustaining demand, in a competitive environment, for two-way communications capacity: If I had to spend $30 a month personally to operate a server, and I found out that for $20 a month I could put my material on someone else's server, with a 155-megabit-per-second incoming line, redundancy, and everything else, why would I month after month nay the $30?
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From page 68... ...
See Box 3.3. In his white paper Robert Blau of BellSouth points out that telephone companies can and do choose to invest in apparently less risky "opportunities outside local networks," and he suggests that "decisions by Bell company managers to accelerate the introduction of advanced network gear did not have a positive effect on shareholder returns." His analysis points out that investment is deterred by the prospect of delays between deployment (and associated investment)
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From page 69... ...
(1995) , however, have recommended against considering earnings as the key valuation metric for online service providers because they are "investing heavily ahead of expected revenues"; revenue (subscriber)
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From page 70... ...
of interactive video and data services of their expectations for the original target markets. Moreover, while attempting to reconceptualize the services they can offer and reduce financial risks, they may transmit only test signals to meet Federal Communications Commission requirements-an illustration of the fact that investment and deployment do not necessarily add up to commercial service availability (see Arlen, 1995a; and Mills, 1995b)
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From page 71... ...
These global systems will be able to provide "cellular-like" service throughout the United States. The white paper by Robert Blau cites a WEFA Group forecast that suggests that excess capacity will result from commercial wireless investments.~8 However, since some unused capacity is normal for lumpy infrastructure investments, the key unknown is the size and duration of the gap between capacity and demand.
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From page 72... ...
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From page 73... ...
Openness and bandwidth symmetry were focal points of discussion in the January workshop; the inability of people to quantify markets for these qualities seems to lead to market trials and deployment plans with limited openness and limited upstream bandwidth. Overall, comments by representatives of various industries suggested that more closed and proprietary service packages seemed to offer more promise for profits, a view anecdotally supported by reports that Wall Street attaches higher value to ventures with some element of proprietary, differentiating technology.
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From page 74... ...
Since Internet transport is an undifferentiated commodity, consumers are going to buy on the basis of price." However, several Internet service providers do use proprietary technology (e.g., some in routing Advanced Networks and Services Inc.; some in security UUNET, ANS; and some in network management MCI, ANS) , which raises questions about the relative costs and success of technologybased attempts to differentiate service offerings.
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From page 75... ...
in his content-creating and content-distributing business at Viacom where he could face higher costs because of the constrained choices of services that arise as a consequence of "only one solution for a network." He emphasized the need for open access to the set-top device, explaining that "it is not a box per se; it is the process by which you extract information from transportation and you get it displayed or [converted] into usable form." Horowitz's concerns are examined in the context of alternative industry and government perspectives in a white paper by attorney Jonathan Band.
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From page 76... ...
People are insisting that their networks will, for instance, support multiple operating systems." Wendell Bailey of the National Cable Television Association pointed out that the facilities by themselves do not guarantee openness, which also derives from business strategies: Cable modems are about supplying wideband access to data service, [also including] multimedia clips or video in motion.
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From page 77... ...
It may be some of yours, and you may have to work with someone else to put a package together that someone wants." These comments appeared to focus on bundling with content providers, but they could apply equally to services associated with other kinds of applications, as anticipated in Chapter 2. Stewart Personick, noting that internetworking does not have to imply full integration of services, suggested that part of the problem was one of getting started: There are two different meanings of interoperability.
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From page 78... ...
by information infrastructure for generating and distributing content, relating their value to users to their degree of openness (Box 3.6~. Similarly, Charles Ferguson of Vermeer Technologies maintained in a white paper that software and network interoperability both depend on unbundling "viewers, servers, tools, operating systems, specific information services, and/or Internet access provision with each other." Adams' observations also seemed to anticipate the explosion of interest, in late 1995, in Sun Microsystem's lava programming language for developing distributed applications.
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From page 79... ...
As Edward Horowitz argued, "You have no bytes and bits without intellectual property; you have no business without something to convey." Some market analysts have gone so far as to suggest that the value of information about a service can exceed that of the actual service.23 Horowitz's comments on the importance of packaging and marketing to content providers showed that information infrastructure can be important for distributing both information-based products and information about those products. Ongoing developments suggest that the information infrastructure plays a key role in such trends as marketing goods as streams of services.
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From page 80... ...
Similar experiences and ambitions have been chron-icled in business press reports on a wide variety of efforts to use the Internet and Web for advertising and promotion, with some degree of contention among directly generated and advertising agency efforts.25 Peter Huber of the Manhattan Institute cautioned against assuming that the content tail would wag the infrastructure dog, inasmuch as communications transport businesses are the largest information infrastructure businesses in terms of revenues. Even factoring out known levels of data traffic over telephony networks, their size attests to a huge market composed of humans talking to each other.
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From page 81... ...
Mel market growth. THE INTERNED AND ITS USE FOR BUSINESS Effect on Provision of Coods and Services How Dig the Internet or other information services affect the basic economics of content-providing businesses/ which have historically been quite risky/ with a much higher rate (and expectation)
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From page 82... ...
In the short term, cost recovery is an issue here as well as in other information infrastructure businesses; on-line service providers, for example, have reportedly frustrated some content providers with revenue sharing terms that favor themselves, but these arrangements, like pricing of Internet service provider offerings generally, are volatile (Zelnick, 1994~. A broad view of the information infrastructure and of trends in information supply and demand provides evidence that one-to-many communications is beginning to lose some of its effectiveness and efficiency.26 Trends in product diversification and customization suggest that if the slogan of the Industrial Revolution was the manufacturer's or retailer's statement, "This is what I have, don't you want it?
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From page 83... ...
First there are the Internet service and access providers. Although there is no clean categorization, some of these are commodity providers and some add higher value (e.g., information service providers that provide both communications and information services)
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From page 84... ...
. In their white paper, lion" Gong and Padmanabhan Srinagesh comment on the economics behind different categories of Internet service providers, themselves displaying different degrees of layering depending on whether they own their own facilities: The variety of organizational forms in use raises the following question: Can ISPs tInternet service providers]
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From page 85... ...
Wolff noted that Internet growth will not remain very high unless facilities providers "increase their investment at commensurate pace, because the Internet is a value-added service on top of the underlying bitway structure. So it's all got to go together or it's not going to go at all." Similarly, Home's Milo Medin noted that despite its growth, the Web's "potential is not going to be realized unless we can really scale up the level of bandwidth in the network." In his white paper, Robert Blau describes the Web as a driver of network market growth that could challenge local network capacity: As new resources come on-line, demand for access to the WWW will increase along with its value to users as well as information service providers.
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From page 86... ...
Robert Crandall also emphasized at the forum that services will evolve with the information appliance (and other equipment) base, including access equipment and other elements of applications.33 34 Part of the growth of fax, for example, reflected the transition in equipment from telex as well as the acquisition of fax equipment by more and more people as a function of declining cost.35 Recognizing this problem and taking advantage of the relatively low cost of reproduction for software, on-line service providers (e.g., America Online and Prodigy)
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From page 87... ...
Katz et al. underscore the importance of developing appropriate software, as noted above: they relate cross-cutting applications to the emergence of "a common service environment" for building domain-specific applications, complemented by application development and support tools and "a marketplace of reusable subsystems." See Box 3.8.
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From page 88... ...
This development seems to go beyond the bundling of TCP/IP software with computer and network operating systems (Higgins, 1995a) 4° and the distribution by information service providers of access software with PCs and directly to consumers recently.
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From page 89... ...
and the telephony activities associated with the Advanced Intelligent Network initiative (see white paper by Stewart Personick) to architectures that allow more intelligence in terminal devices and thereby provide more flexibility in provisioning new services than do architectures that contain all service functions in centralized switches.
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From page 90... ...
Mahal Mohan explained in a white paper that ADSL makes use of existing copper plant by installing matching equipment at both ends of the loop. An incremental deployment, "ADSL devices can be disconnected from one user and moved to another user as, for example, when the first ADSL user decides to upgrade to a higher bandwidth medium such as fiber or fiber coax access." Similarly, other forms of digital subscriber loop technology allow the copper loop to be reused for other forms of new service.
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From page 91... ...
The television industry has perhaps the strongest tradition of incrementalism, in part because of expectations reinforced by a history of regulatory requirements for back-compatibility with the installed television set base regarding consumers' limited ability and willingness to upgrade television sets. Thus, Scientific-Atlanta's Allen Ecker pointed out, "Analog is going to pay the bills for a long period of time for the investment to get the infrastructure, certainly in the entertainment part ...." Some kinds of information infrastructure require relatively modest incremental investments for consumers, some require more, and, as discussed in Chapter 2, the increase in intelligence and functionality in end-user devices suggests that more and more of the total investment is migrating to the periphery of the network and into users' environments.
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From page 92... ...
. He related capacity supplied by cable providers to home equipment and demand.
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From page 93... ...
PCS can be considered a kind of incremental improvement over cellular, with digital cellular as a closer improvement over analog cellular. There was some speculation among project contributors about the value of PCS and other wireless systems as a vehicle for relatively near term experimentation with different product and service concepts.45 Mused Harvard University's Lewis Branscomb, "Let the wireless services try to capture these new markets, and then see how fast the cable firms and the local exchange carriers get into the competition for the business." The comments of both cable and telephony providers referred to business calculations and "traffic engineering" intended to manage and minimize investments in anticipation of delayed revenue growth.
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From page 94... ...
. They relate those facilities to business arrangements, noting that In the Internet "commercial service providers hand off traffic to each other with no settlements, no exchange of Morley, on a sender-keep-all or bill-and-keep basis."48 At the forum, Schwartz asked, Are competing local exchange carriers terminating traffic on each other's networks going to pay each other or are they going to do a senderkeep-all arrangement?
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From page 95... ...
The terms and conditions for interconnection are becoming a pressing issue as more and more networks connect with the Internet and with each other. Tim Clifford noted that arrangements between local exchange and interexchange carriers involve business mechanisms to track traffic flows and translate that information into financial settlements that are designed for switched voice and private line services; because the experience in telephony tends to exclude interconnection between competitive service providers, the past models may not apply.
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From page 96... ...
Complicating the debate, the new constituents entering the national information infrastructure discussion bring with them different models and motives. These models drive experimentation with pricing schemes, which in turn drive the flow of cost recovery from end users and from information and on-line service providers that make use of facilities and even other services owned by others.5: End-user pricing arrangements can and probably will differ from the way carriers are or will be compensated for providing underlying network capacity to information service vendors.
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From page 97... ...
However, in their white paper, Gong and Srinagesh note that "there appears to be an empirical trend toward term/volume commitments that encourage consumers of private line services to establish an exclusive, long-term relationship with a single carrier." A consequence appears to be evidence that non-facilities-owning Internet service providers with such multiyear leases are themselves begging to offer long-term pricing options to their customers. Both NII 2000 project components (workshop, forum)
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From page 98... ...
; information appliances (e.g., telephones, televisions and set-top boxes, personal computers, personal digital assistants) ; and skills (implying time and training)
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From page 99... ...
Usage-based Fees for Communications and Information Services The model of usage-based fees for services is most like the metered telephony model, which involves monthly payments on a volume-of-usage (e.g., message service units) basis.
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From page 100... ...
Another example is provided by Pacific Gas and Electric Corporation, which is experimenting with an "energy channel" on cable television that allows users to more easily control their home appliances, lighting, and heating and other climate control functions. Although more efficient monitoring and control of energy consumption will ultimately save on utility costs, meter readers, and other costs, Pacific Gas and Electric currently plans to charge consumers about $10 per month for this optional service.
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From page 101... ...
Robert Crandall, speaking on behalf of an advertising group, commented on the historic role of advertising revenues in the growth of various media, despite regulation, and relative to subscriber-funded telephony. He argued that advertising should continue to be exploited as a source of financing for new information infrastructure, speculating on possibilities for a mix of advertising and direct subscriber paymentsbetween services and for the same service: "tI]
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From page 102... ...
These dialogues have the potential to become enduring relationships among manufacturers, service providers or retailers, and the ultimate consumer. Unable to identify or separate loyal users from trial purchasers or identify heavy users of other brands who would be well worth converting, manufacturers have lacked the capability to create different advertising programs for each.
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From page 103... ...
It assumes that consumers will possess more intelligent information appliances in addition to the nearly ubiquitous basic televisions and telephones.59 It also recognizes that fundamental to the growth of the Internet and private networking has been the growing capital investment by individuals and organizations in computer equipment and associated local networks, modems, and related goods and services. As discussed in Chapter 2, the growth in number, diversity, sophistication, and cost of household information appliances is a major indicator; as discussed in Realizing the Information Future (CSTB, 1994b)
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From page 104... ...
Queried Stewart Personick, "Is there a model that people will get used to the idea that these things are really disposable and throw them out every 3 to 5 years? Is the model that service providers will subsidize them like wireless cellular telephones, and it will be possible to get a new one for $29?
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From page 105... ...
This transition has now occurred, and there are a number of Internet service providers that offer wide-area Internet service, as well as regional and local providers. Consequently, payment for services by users is increasing, through subscription services offering Internet access, while federal support (historically targeted to members of the research, education, and library communities but often overestimated by both beneficiaries and observers)
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From page 106... ...
But the basic Internet services and functions can be provided in all these cases.
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From page 107... ...
(Current penetration for cable television is about 60 percent of homes passed and for the telephone is nearly 100 percent.) Deployment of a new HFC network with full telephone-switching and video-delivery capabilities is estimated to cost about $1,000 per home passed (see the white paper by Stewart Personick)
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From page 108... ...
They identify the cost of file servers and set-top boxes for two-way communications as variables that may drive the network cost higher than these estimates. As discussed in the white paper by Bailey and Chiddix, however, these are incremental costs; while the cost of building the basic transport infrastructure must be incurred completely before any services can be carried, incremental investments supporting interactivity and video on demand can be incurred gradually, while market demand for services builds.
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From page 109... ...
Although the introduction of Microsoft Network inspired various strategic responses by other on-line service providers, it did not command an initial market share as high as some had expected, and Microsoft's strategy is subject to change. Those expectations are a measure of the uncertainty and volatility that characterize the on-line service arena.
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From page 110... ...
According to one reviewer who provided many insights into advertising, "Branding was originally a way of identifying the manufacturer of a product so that consumers who liked it could repurchase it with the assurance of ongoing similarity. This became necessary because in a mass production economy, the manufacturer and the ultimate consumer of his product were separated by several layers of distribution.
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From page 111... ...
38. "Commonalities," they continue, "include standard or conventional interfaces, protocols, reference architectures, and common building blocks from which applications can be constructed to deliver information services to end users."
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From page 112... ...
43. AT&T's Mahal Mohan describes in a white paper how the expansion of bandwidth in telephony is being accompanied by a steady expansion of service offerings In circuit-switched voice (and data)
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From page 113... ...
"When you're fooling around on-line and you're worried about minutes ticking by, you simply don't use it as much.... You see pennies going by your eyeballs." The implications of various pricing schemes for the future of multimedia communications are drawing service providers, users, and regulators into an ongoing debate; see Mills (1995a)
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From page 114... ...
58. Perhaps because of difficulties guaranteeing cost recovery, they conclude that cable-delivered interactive services will be a choice available to only about 2.5 million households by 1998, but will accelerate and reach 40 million households by 2005.
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