Trends and Laws

Profs. Chuah and KishoreEMC 165

Spring 2005

Last Time/Today

Last time, we reviewed some basics of computer and networks and we examined some “laws” describing growth in this industry.

Today, we will review some business and technology trends related to computer and network engineering.

Clarification from Last Time

Recall we talked about transistors.

Transistors can be used as electrical switches:

Transistort

5V

0V

Volts

t

5V

0V

Volts

For example,

Or,

Transistort

5V

0V

Volts

t

5V

0V

Volts

Here, 5V representsbit 1 and 0Vrepresentsbit 0.

Clarification (Cont’d)

Using transistors we can then construct larger units called gates. For example, an AND gate or an OR gate:

They each have two inputs and one output. Input are bits (represented as voltage signal, e.g., with value 5V or 0V)

AND11

AND01

1

0

AND10

AND00

0

0

OR11

OR01

1

1

OR10

OR00

1

0

Clarification (Cont’d)

There are also other types of gates, e.g., NOR, NAND, XOR, etc.

All computer operations are performed using these gates.

For example, adding two numbers: numbers are converted to binary format, binary addition is performed by feeding the binary numbers to a series of gates.

Transistors are the elemental units that make modern computers (and thus digital communication networks) work.

Technology Penetration Rates

What is it?

Penetration rate of a technology (say cell phones or computers, etc) measures the number of these units per number of inhabitants (sometimes per number of households).

Measurements are made at regularly and give indication of the growth rate of a technology.

Penetration Rate of Several Key 20th Century Technologies

Source: U.S. Census Bureau

Another Representation

What these curves show

Television experienced rapid surge in sales in the 50’s. (Due in part to increase in TV production post WWII)

VCR Sales saw similar surge in 80’s.

In contrast, some other communication technologies took far longer to spread.

For example, sales of radio initially held back due to technological complexity of crystal sets and onset of Great Depression. Today there are more radio sets than people in the U.S.

What these curve show (Cont’d)

Telephones have been around since 1877 but only took off after WWII.

Vehicles (not shown in curve) experienced steady growth but really took off after 1945.

Cable TV saw slow diffusion from 60’s to 80’s, when cables were being laid out. Only after sufficient cable equipment deployment did subscription growth occur.

What these curves show (Cont’d)

Flood of internet users since early 90’s show sharp growth.

It remains to see where the penetration rate will level off. Whether it will level off at roughly 2/3, like Cable TV, or over 90%, like TV.

How does Internet Usage in U.S. compare to the rest of the world?

Internet Usage

As of September 30, 2004 the number of Internet users equal 812,931,592. Average penetration rate is12.7 %.

Asia continues to lead in the number of surfers with 257,898,314 people, equivalent to 31.7% of the world total. Europe comes next with 230,886,424 surfers, 28.4% of the total. Northern America is third with 222,165,659 Internet users, a 27.3% of the total.

Internet Usage (Cont’d)

Remaining 12.6% is represented by 55,930,974 users in Latin America, plus 17,325,900 users in the Middle East, 15,787,221 users in Oceania, and 12,937,100 surfers in Africa.

Internet growth to date since the year 2000 has been 125.2%, or about 25% per year. At this rate, Internet will hit one billion users in 2005.

TOP 22 COUNTRIES WITH THE HIGHEST INTERNET PENETRATION RATE

# Country or RegionPenetration

(% Population)Internet Users

Latest DataPopulation( 2004 Est. )

Source and Dateof Latest Data

1 Sweden 74.6 % 6,722,576 9,010,700 Nielsen//NR Aug./04

2 Hong Kong 72.5 % 4,878,713 6,727,900 Nielsen//NR Aug./04

3 United States 68.8 % 201,661,159 293,271,500 Nielsen//NR Aug./04

4 Iceland 66.6 % 195,000 292,800 ITU - Dec./03

5 Netherlands 66.5 % 10,806,328 16,254,900 Nielsen//NR Aug./04

6 Australia 65.9 % 13,359,821 20,275,700 Nielsen//NR Aug./04

7 Canada 64.2 % 20,450,000 31,846,900 C.I.Almanac - Dec/03

8 Switzerland 63.5 % 4,432,190 7,433,000 Nielsen//NR Aug./04

9 Denmark 62.5 % 3,375,850 5,397,600 Nielsen//NR June/02

10 Korea, (South) 62.4 % 30,670,000 49,131,700 KRNIC - July/04

11 Singapore 61.0 % 2,135,000 3,499,500 ITU - Sept/04

12 United Kingdom 58.5 % 34,874,469 59,595,900 Nielsen//NR Aug./04

13 Liechtenstein 57.6 % 20,000 34,700 CIA - Dec/02

14 Germany 57.1 % 47,182,668 82,633,200 Nielsen//NR July/04

15 Bermuda 54.2 % 34,500 63,600 ITU - Dec/03

16 Japan 52.2 % 66,548,060 127,853,600 Nielsen//NR July/04

17 Croatia 52.1 % 2,318,240 4,453,700 ITU - Sept/04

18 New Zealand 52.0 % 2,110,000 4,059,900 ITU - Dec/03

17 Taiwan 51.1 % 11,602,523 22,689,300 Nielsen//NR June/01

20 Faroe Islands 50.9 % 25,000 49,100 CIA - Dec/02

21 Finland 50.7 % 2,650,000 5,231,900 ITU - Dec/02

22 Norway 50.0 % 2,288,000 4,577,500 C.I.Almanac - Dec/03

TOP 22 in Penetration 62.1 % 468,840,669 754,384,600 IWS - Sept.30/04

Rest of the World 6.1 % 344,090,923 5,582,313,287 IWS - Sept.30/04

TotalWorld - Users 12.7 % 812,931,592 6,390,147,487 IWS - Sept.30/04

How to measure Internet Usage?

What is an internet user? There are some disagreements on how to answer this seemingly simple question.

The International Telecommunication Union (ITU) says an internet user as someone aged 2 years old and above, who went online in the past 30 days.

US Department of Commerce defines internet users as those 3 years or older who 'currently use' the internet.

Other market researchers have there own definitions.

Measuring Internet Usage (Cont’d)

Data showed in earlier slide defines an Internet User as anyone currently in capacity to use the Internet, i.e., an Internet User has:

(1) Access to an Internet connection point, and

(2) The basic knowledge required to use the technology.

Measuring Internet Usage (Cont’d)

Note: In many Third World countries one same Internet connection may be shared by many individual users.

Result: Internet users might outnumber amount of Internet access subscribers and also outnumber telephone lines available in the country.

TOP TEN COUNTRIES WITH HIGHESTNUMBER OF INTERNET USERS

# Country or RegionInternet Users

Latest DataPopulation

( 2004 Est. )Internet

PenetrationSource of

Latest Data% of World

Usage / Users

1 United States 201,661,159 293,271,500 68.8 % Nielsen//NR July/04 24.8 %

2 China 87,000,000 1,288,307,100 6.8 % CNNIC June/04 10.7 %

3 Japan 66,763,838 127,853,600 52.2 % Nielsen//NR July/04 8.2 %

4 Germany 47,182,668 82,633,200 57.1 % Nielsen//NR July/04 5.8 %

5 United Kingdom 34,874,469 59,595,900 58.5 % Nielsen//NR July/04 4.3 %

6 South Korea 30,670,000 49,131,700 62.4 % KRNIC June/04 3.8 %

7 Italy 28,610,000 57,987,100 49.3 % C+I+A Dec/03 3.5 %

8 France 24,352,522 60,011,200 40.6 % Nielsen//NR July/04 3.0 %

9 Canada 20,450,000 31,846,900 64.2 % C+I+A Dec/03 2.5 %

10 Brazil 19,311,854 179,383,500 10.8 % Nielsen//NR July/04 2.4 %

TOP TEN COUNTRIES 560,876,470 2,230,021,700 25.2 % IWS - Sept.30/04 69.0 %

Rest of the World 252,055,122 4,160,125,787 6.1 % IWS - Sept.30/04 31.0 %

Totals 812,931,592 6,390,147,487 12.7 % IWS - Sept.30/04 100.0 %

Source for Previous Two Tables

http://www.internetworldstats.com/top25.htm

http://www.internetworldstats.com/top10.htm

Data was updated 9/04.

What Influences Internet Penetration Rate?

Several researchers are looking into this.

Among the factors that they test are: Income (GDP/capita) Education (computer literacy) Market size Local/accessible content Cultural factors

Factors Influencing Internet Penetration (Cont’d)

These are all structural factors. In addition, there can be access condition issues: Regulatory framework Access business model Telecom infrastructure and tariffs

Also, there may be influences due to corporate strategies: What are the telcom companies doing What are the ISP’s doing What are business firms doing

Factors that Influence Internet Penetration Rate (Cont’d)

For example, the income of a nation as measured by the GDP/capita is a strong determinant of Internet access. A lower GDP/capita is usually correlated with lower Internet usage. Some also look at purchasing power index of a nation.

Market size is another important factor as information goods often are produced with substantial economies of scale. US has an advantage in this respect.

Influence of GDP on US/EU Countries

Factors that Influence Internet Penetration Rate (Cont’d)

One study show that content matters a lot.

As the Internet first developed in the U.S., website contents tend to be mostly in English and geared to an American public.

This is not a problem for European English-speaking countries, such as the U.K. or Ireland, or for countries where English is widely understood, such as the Nordic countries. It is a major problem for all other countries. Developing local contents is therefore an essential step to improving penetration.

Factors Influencing Internet Penetration Rate (Cont’d)

Some studies have also found a kind-of rule of thumb as far as regulatory framework is concerned.

The more unregulated environment is the higher the penetration rate tends to be (Nordic countries, U.S.).

Not surprisingly, there is a negative correlation between cost of access (tariffs) and amount of access.

How many of Internet Users have Broadband Access?

First, what is broadband? In old days, internet access strictly mean dial-up. Dial-up: phone line becomes restrict for internet

use; only internet data can be transported on this line.

Further, dial-up data rates range from 14.4 kbps (kilo bits per second) to 56.6 kpbs.

Note: kilo = 1000, mega = 1000000, etc.

More on Broadband

Broadband technologies (like DSL, Cable Modem, etc.) offer much higher data rates, upto hundreds of kbps to several Mbps (mega bits per second).

They not only give high-speed data access to the internet but may also bundle together voice (e.g,, DSL), video (e.g., cable modem), etc.

Other forms of broadband (aka wideband) data access: T1, T2, ISDN, wireless methods, etc.

Some US Broadband Trends

US has highest number of total broadband users in the world, roughly 40% in 2002.

Within the US the highest broadband penetration is in metropolitan locations (San Diego, Boston, NYC, Providence (RI), Kansas City, Detroit, etc.).

State-wise, highest residential broadband penetration rate is in Hawaii. Lowest in Southeast states and Rocky Mountain states.

US Broadband Trends/Facts

US contains majority of ecommerce websites, world’s internet hosts, email boxes, on-line buyers, and internet users (2003).

US online sales at some 144 billion dollars for 2004, a 14 percent annual growth rate and about 7% of total retail sales in US.

Some projections that US online sales will hit $316 billion by 2010: travel ($119 billion), home products ($43 billion), apparel ($28 billion), etc.

Broadband Cost Comparison

PC Penetration Rates

The number of PCs in-use surpassed 500M units in 2000 and will reach 1.17B units by year-end 2008.

Cumulative PC sales topped 1B units in 2002 and will top 2B in 2008.

PCs in-use reached nearly 206M in the U.S. in 2002 and will surpass 269M in 2008.

PC Sales

Mill

ions

of

Uni

ts

PCs in Use

Mill

ions

of

Uni

ts

Digital Divide

With all this penetration of digital technology, we should keep in mind disparity in access due to income.

This disparity is known as the digital divide.

Following charts show demonstrate statistics for digital divide in Canada.

Digital Divide in Canada

Data for 2000Source: http://www.statcan.ca/english/research/56F0009XIE/56F0009XIE.pdf

Digital Divide in Canada (Cont’d)

Digital divide closes as curves move closer to black curve over time.

Cellular Penetration Rates

China has the largest number of cellular users, with a penetration of roughly 24%.

U.S. is second with a penetration rate of roughly 60%.

The total number of US cellular subscriber can be tracked: www.wow-com.com.

As of today (2/1/05), there are 174,908,819 cellular subscribers in the US.

European Cellular Rates

In Europe, cellular penetration ranges from 70% to 100%.

In fact, in Sweden, the cellular penetration rate is higher 100%. This is because people often have multiple phones (personal and work use).

Highest penetration rates in Europe are in the Nordic countries (Sweden, Finland, Norway, etc).

More on Cellular Penetration

South Korea and Singapore have penetration rates in the 70%-80% range.

Japan has penetration rates in the 80%-90% range.

If you are interested in learning coverage of different cellular providers in various countries, check out: www.cellular-news.com/coverage

Past, Present, Future of Telecommunications Industry

Roller Coaster Ride

The U.S. telecommunications industry is riding a roller coaster.

For most of the 1990s, the industry's future looked promising: growth of Internet use, promise of a broadband network, and a less restrictive regulatory environment that was

expected following passage of the 1996 Telecommunications Act.

Up

This led industry experts to forecast rapidly growing demand for network services and high-margin business opportunities.

The industry backed expectations with massive investments to expand the capacity of both wireless and wire line

networks and to facilitate the expected boom in high-speed data

transmission.

And Down

But in years following enactment of 1996 Telecommunications Act and ensuing investment boom, demand did not boom.

Demand for both standard telephone and broadband services was strong but not as explosive as the industry had anticipated.

As capacity expanded more rapidly than demand and competition began to take hold, prices fell. Not surprisingly, a few major and many minor players fell into bankruptcy.

Future of Industry

A recent Brookings Institute report [see references] discusses several issues related to future of industry.

The growing gap between expectations and reality in industry performance has given rise to new calls to rethink national communications policy.

State of Industry

In the good old days of regulated monopoly in telecommunications services, investment probably would not have exploded as it did.

Even if it had (and demand had not boomed), regulators probably would have allowed firms to recover their costs through price increases.

Because regulation no longer provides a floor for service prices in the industry when capacity is increased, providers compete much more intensely on price.

State of Industry (Cont’d)

This competition benefits service users.

However, investors sometimes see their profits disappear as prices fall, which is what happened extensively in long distance and to new entrants in local access, and to a lesser degree to wireless carriers.

The regulatory environment also changed for incumbent local telephone companies—the Regional Bell Operating Companies (RBOCs) and other incumbent access companies that formerly had been monopolies.

RBOC’s & Divestiture

Before 1984, the United States public network utilized practices, procedures, and equipment largely determined by AT&T and the Bell System. The network performed well and, for customers, life was simple. Problem: Monopoly.

With divestiture in 1984, when AT&T and its operating telephone companies “broke up,” the Department of Justice broke the seamless national network into 164 separate pieces called Local Access and Transport Areas (LATAs) to handle local phone traffic.

Divestiture

Through this move the DOJ created two distinct types of service providers local exchange carriers (LECs) or RBOC’s and interexchange carriers (IXCs).

LEC’s or RBOC’s (Baby Bells) handled local telephone traffic and IXC’s (AT&T, MCI) handled long distance.

There were 7 RBOC’s created.

Original RBOC’s

Only four remain today: Verizon, SBC, Bell South, Qwest

More on Divestiture

The divestiture of AT&T (A.K.A. "Ma Bell") was costly both to AT&T, the Baby Bells (the RBOC’s) and the consumer. 

Litigation costs alone for AT&T up to the January 8, 1982 announcement of divestiture was 360 million dollars along with an additional 15 million dollars of costs to the federal government. 

But the costs didn't stop there.  To get an idea of just how costly this was to both the former Bell System companies and the consumer, see "The Rape of  Ma Bell."

Clear not entirely un-biased discussion.

Divestiture (Cont’d)

There were many at the time (especially at Ma and Baby Bells) who against the breakup and believed the government was not informed in its judgement:

"There are two giant entities at work in our country, and they both have an amazing influence on our daily lives . . . one has given us radar, sonar, stereo, teletype, the transistor, hearing aids, artificial larynxes, talking movies, and the telephone. The other has given us the Civil War, the Spanish American War, the First World War, the Second World War, the Korean War, the Vietnam War, double-digit inflation, double digit unemployment, the Great Depression, the gasoline crisis, and the Watergate fiasco. Guess which one is now trying to tell the other one how to run its business?"

1996 Telecommunications Act and UNE’s

It used to be that RBOC’s owned all network components to carry on local telephone calls.

1996 Telecommunications Act allowed for leasing of this equipment (known as UNE’s).

The purpose of allowing the leasing of UNEs was to allow entrants to either lease all of facilities of the incumbent local telephone company or just the unbundled, or individual, elements of that network.

Those elements could include, for example, the switches that allow calls to be routed from the central telephone company office to a customer's home.

RBOC’s

RBOC’s are still subject to price regulation, but until the 1990s had been insulated against competition.

The 1996 law formally ended monopoly on local telephone service by requiring that states let competitors into the market, develop mandatory interconnection rules to facilitate

this entry, and allow entrants to lease for resale at reasonable rates

the incumbent's "unbundled network elements" (UNEs).

Telecom Act and UNE (Cont’d)

These requirements introduced new forms of price regulation.

One new regulated price was the fee that one local telephone company would pay to complete calls to customers of its competitor.

The other new regulated prices were the charges to lease each UNE.

The 1996 law did not specify exactly how these prices ought to be calculated

Telecom Act and UNE (Cont’d)

1996 Act did detail how not to do it, e.g., prices must not be based on historical costs, etc.,

Extensive litigation has ensued over the UNE leasing requirement and method of setting UNE prices.

The incumbent carriers faced still another competitive threat—this one from wireless.

Competition for Local Market

As a result of competition from both wire entrants and wireless, beginning in 2000, incumbent local wire access companies actually began to lose customers.

Between 1999 and 2002, incumbent wire access carriers lost over 18 million access lines

Competitive wire carriers added over 16 million.

Wireless carriers added almost 60 million.

How Does Cable Fit in?

Another major beneficiary of the old regulated monopoly structure was cable television.

But cable also has seen growing competition.

Due to advances in technology, satellite television services vastly increased their capacity and lowered their costs. As a result, cable's share of television households has begun to decline for the first time since the technology was developed in the 1950s.

Cable (Cont’d)

Till now, cable has been winning the race for high-speed Internet access customers.

This could change in the future if the RBOCs (now free from requirements to share their high-speed facilities with competitors) become more aggressive and if various forms of wireless high-speed service become effective competitors.

Policy Issues

The poor financial performance of the telecommunications industry since 2000 has led to a variety of policy proposals advanced by industry experts and policymakers.

One suggestion is subsidies.

Question is whether the telecommunications sector, or any important part of it, is on the verge of collapse and, if so, in need of some kind of subsidy.

Subsidies

Because the telecommunications industry developed significant excess capacity, many firms are likely to be unprofitable, some so much that they enter bankruptcy.

But under Chapter 11, which is where we find the large, bankrupt telecommunications firms, companies continue to operate.

Chapter 11 firms typically generate more revenues than their operating costs, but not enough to pay off all of their debt, so bondholders take losses and shareholders get wiped out. But consumers continue to be served.

Subsidies (Cont’d)

If a large fraction of the firms in industry somehow were to disappear, stockholders and employees would suffer—and so would their customers.

A dissolved firm's assets are sold one by one to highest bidder, and funds are used to pay off creditors—typically at rate of a few cents/dollar.

In telecommunications, dissolution is rare, but owing to the specialized nature of telecommunications companies, even when dissolution occurs, the assets are sold to other telecommunications firms and services continue.

Subsidies (Cont’d)

It is hard to imagine the doomsday scenario that millions of customers will wake up one day to find that they no longer have telephone service, let alone no way to acquire any service that they want quickly at a reasonable price.

For this reason, many do not find a compelling case for government intervention to forestall what the market may require by handing out subsidies to existing players in the hope that one or more may survive.

Mergers

Another policy option is to encourage mergers among telecommunications companies.

One possible set of mergers is between current long-distance providers.

Only a short time ago, WorldCom and Sprint wanted to merge, but the Department of Justice stepped in to stop them.

Mergers (Cont’d)

Long distance market has “big three”: AT&T, MCI, and Sprint.

If two of the Big Three seek to merge, should the authorities allow it?

Some say: Such a merger would lead to a much more concentrated long-distance industry. Because many wireline and wireless "local access providers" simply resell the long-distance services of the Big Three, a merger among two of them would substantially reduce wholesale competition.

Mergers (Cont’d)

Competition in the long distance market would improve however if local access companies build their own long-distance facilities, rather than lease the facilities of the Big Three.

In this case, merger between the Big Three would be less problematic.

Second type of merger: between RBOC’s.

Mergers (Cont’d)

Some see mergers of RBOC’s as putting the old AT&T Humpty Dumpty back together again.

From legal prospective, it has been difficult for antitrust authorities to oppose such marriages.

In both local and retail long-distance services, the RBOCs have chosen not to compete with each other, and thus a merger would be treated, in part, as a conglomerate combination, which the courts have been very hesitant to stop.

Mergers (Cont’d)

A third category of telecommunications merger would entail an RBOC buying a major long-distance provider.

In fact, just such a merger—between SBC and AT&T—reportedly was first in the works in the late 1990s, when then-FCC Chairman (at the time) Reed Hundt pronounced it "unthinkable."

This merger is in the news again now.

Mergers (Cont’d)

A final type of merger is between wireless carriers.

For the last few years, there had been six major wireless carriers in the US…now there are five.

Cingular , Verizon, Sprint, T-Mobile, NextTel.

Other Policy Issues

UNE pricing and interconnection

Interconnection charges (origination and termination charges)

Universal service fees

Some References for Today’s Slides

http://www.inq7.net/inf/2004/jul/09/inf_5-1.htm http://www.cellular.co.za/news_2004/june/062404-china-USE.htm http://www.techweb.com/wire/26802151 http://www.internetworldstats.com http://www.dmeurope.com/default.asp?ArticleID=4179 http://sanjose.bizjournals.com/sanjose/stories/2004/03/08/daily30.html http://www.statcan.ca/english/research/56F0009XIE/56F0009XIE.pdf http://ksghome.harvard.edu/~pnorris/acrobat/digitalch2.pdf http://www.etforecasts.com/products/ES_pcww1203.htm http://www.101science.com/transistor.htm http://www.lucent.com/minds/transistor/ http://www.brookings.edu/comm/policybriefs/pb129.htm http://jsis.artsci.washington.edu/programs/europe/Netconference/

BernePaper.htm