Jonathan Aronson

ARNIC Presentation

April 11, 2008

My co-conspirators

Peter F. CowheyJohn RichardsDonald Abelson

The Big Picture

• Information and Communication Technology Are Merging—This Creates A Brand New Market Dynamic

• Good Public Policy Should Facilitate the Growth of Modularity—The Key Characteristic of the New Technology Architecture

• Modularity Creates Huge Global Opportunities and Challenges

The Traditional Model for ICT: Leverage a Dominant Position

• The Leverage Model: Use a Large Advantage in Critical Part of the Value Chain to:– Take leadership position in adjacent markets– Raise profit margins to build corporate “war chest” and

research/investment funding to entrench leadership

• Traditional examples: AT&T before 1984, IBM in 1960s and 1970s, and Microsoft in 1990s

• Will Google be Next?

IBM Dominance

Results in dominance in:•Integrated hardware systems •Mainframe software•Integrated Services

Interfaces not transparent

Interfaces not transparent

Leverage: Superior performance in integrated processors yields highest MIPS integrated with systems software

Bundled packages of products for

enterprises

Microsoft Dominance

Results in dominance in:• Applications (Office)

• Enterprise Server software

• Collaborative software tools for enterprises

Interfaces not transparent

Interfaces not transparent

Leverage: DOS/Windows becomes the standard desktop environment

Then offer a package of related

applications and specialized software to large enterprises

AT&T Dominance Before 1984

Leverage: Control of Local Transmission Network

"leverage point"

Interface is transparent, but

rivals cannot rent local network on competitive price and performance

terms

Results in dominance in:• Long Distance

Services• Enterprise

services

Local Network

Can Google Do It Again?

Leverage: Dominance in search as an information utility:• Massive storage and

computing infrastructure• Large private

communications network• Syndicated ad network for

entire Web

Results in dominance in:• Enterprise Applications

markets• Productivity software• Social Networking • Media and Content

Why Google Won’t Dominate – The Modular Revolution

• Technology plus policy have produced a new architecture for Information and Communication Technology (ICT) – Modular Architecture

• Modular: Standardized interfaces allow “mix and match” of ICT building blocks

How the Modular Revolution Evolved – Policy & 1st Two Stages

• “Carterfone” in 1950s establishes freedom to choose equipment as long there is “no harm to the network” and “transparent interfaces”

• IBM antitrust suits in 1950s establish that IBM and rivals have to design “plug and play” hardware and software

• Diversified supply base of specialist firms

Computing and terminals – the

“cheap revolution” in computing and

terminal equipment costs and

performance

• AT&T break up: Ability to build your own network or rent network capabilities from dominant firm

• Wireless markets: FCC affirms principle of “technology neutrality” as long as calls can be exchanged between different technology networks

• Limited version of net neutrality: Telecom carriers cannot discriminate on user access to content or value added services

Communications networks – growing

bandwidth at plunging prices

11

22

The Cheap Revolution

Scientific American, January 2001

Number of Years0 1 2 3 4 5

Per

form

ance

per

Do

llar

Sp

ent

Data Storage(bits per

square inch)(Doubling time 12 Months)

Optical Fiber(bits per second)

(Doubling time 9 Months)

Silicon Computer Chips(Number of Transistors)

(Doubling time 18 Months)

• Microsoft antitrust: transparent interfaces• Web browser becomes the common translation device

among operating systems• Web 2.0: Growth of modular code that be “recycled” by other

programmers

Software and Web Services

• FCC forbids cable and broadcast networks from withholding content from rival transmission networks

• Audio and visual merge with data via Web• Geographic markets merge via Web• Costs of creating high quality content drops dramatically

(special effects are radically cheaper)

Content (Digital Media) –

YouTube

How the Modular Revolution Evolved – Policy & 2nd Two Stages

33

44

Why Winners Don’t Take All in the New Era

Source: Gartner (August 2006)

Figure 1. Percentage of OS-Specific (Generally Windows) vs. OS-Agnostic Applications

Figure 3. Application Development Mix — New Applications

Figure 2. Number of OS-Specific (Generally Windows) vs. OS-Agnostic Applications in Our Model Organization (Installed Base)

Some Examples of Modularity and Market Evolution

• Apple’s “iPod”: makes its money on selling the terminal – the networked information is a commodity

• Salesforce.com: provides customers with on-demand computing that supports a powerful customer relations management platform – unlike Google, it simply rents the computing infrastructure

• Orkut (Brazil) vs. Facebook: Google has limited success in social networking

• Asian gaming market: Only one of top fifty networked games in East Asia are from U.S.

vs.

Challenges and Opportunities

• Modularity is the potential of the digital technology frontier, but it requires– Smart competition policy to be effective– Support for technology innovation

• BUT in many developing countries communications/media infrastructure is low bandwidth and high priced by global standards.

• Most of these countries invest too little in innovation capabilities – people and research facilities

Opportunities

• The rise of modularity and decline of leveraging opens many global opportunities

• The costs for being a global media and content provider are declining rapidly

• The ability to innovate specialized global applications for consumers and enterprises is disseminating rapidly

Four Examples to Consider

• Web 2.0 applications will be driven by ad revenues• Networked medical innovations• Environmental policy depends on good data—

breakthroughs on networks of air monitoring sensors• The implications of high end research networks for

economic growth and modernization

The Rise of New Network Uses

Source: Krishna Nathanson, IBM, 2006

Global ICT Spending by Technology ($US Billions)

Source: WITSA's 2004, Digital Planet: The Global Information Economy.

200720062005200420032002200120001999

1,800

1,500

1,200

900

600

300

0

Hardware Software Services Communications

Policy is Political and Cannot be MicromanagedPolicy is Political

Aronson’s 3 Laws

1. Every sector believes they are unique and deserve special treatment- they are not

2. Ever firm believes competition is great in market’s they want to enter- but not in those where they already dominate.

3. Regulators are needed and won’t go away- “pretty good” policy is possible- “terrible” policy is common- So, getting it right is critical

Four Guiding Principles

Principle 1: Enable transactions among modular ICT building blocks

Principle 2: Facilitate interconnection of modular capabilities

Principle 3: Facilitate supply chain efficiency, reduce transaction costs

Principle 4: Reform domestically to help reorganize global governance

10 Norms to Implement Principles

A. Institutional Design

Norm 1: Emphasize flexible, sometimes experimental, choices ofagents, including mixed authority structures when delegatingauthority globally.

Norms to Enable the Modular Supply Chain

B. Enabling the Modular Supply Chain

Norm 2: Invest heavily in the creation of virtual commoncapabilities for the Internet, and its successors, in a competitivelyneutral manner.

Norm 3: Reinforce the growing competitiveness of the supply chain by partly refocusing competition policy.

The 10 NormsNorms for the Network Infrastructure

C. Norms for the Network Infrastructure

Norm 4: Use a light regulatory touch regarding pricing, investment, and assets crucial to providing ICT networks and services.

Norm 5: Narrow and reset network competition policy. - all networks must accept all traffic from other networks. - adopt a narrow scope for rules to assure network neutrality - separate decisions about peering from decisions about about interconnection when dealing with VAN functions

Norms for Consumer ServicesNorms for Consumer Services (1)

D. Norms for Consumer Services

Norm 6: Government policies generally should not restrict experiments new applications by limiting mixing and matching of servicesOr through pricing rules that limit experimentation

Norm 7: Create rules for the globalization of multimedia AV contentthat balance the goals of encouraging the trade in servicesand fostering legitimate domestic media policies.

Norm 8: Use networked ICT techniques and changes to tip practicestoward new markets for trading and transacting digital rights.

Norms for Consumer Services (2)

Norm 9: Enhance property rights for personal data and createmechanisms to allow commercial exchanges involving thoserights on standard terms.

Norm 10: Users may take their information with them when they depart from specific applications and experiences andown their “click-streams.”.