Internet Business StrategyInternet Business Strategy

Part I: Internet Strategy

Week 3: Overview of Internet Technology &

Value Network

January 2003

© 2001-2003 William J. Brown

What We’ll Cover in this Presentation

• Definition and history– What are the Internet and the World

Wide Web?– A brief history of the Internet and the

World Wide Web

• The Internet Value Network– Users– Communications Services– Suppliers

What are the Internet & World Wide Web?

• So far, we have only briefly discussed the Internet and said nothing about the World Wide Web.– Now, we fully explore both

• The Internet is a vast collection of networks of computers that are interconnected both physically and through their ability to encode and decode certain specialized communications protocols called the Internet Protocol (IP) and the Transmission Control Protocol (TCP).

• A protocol in this sense is simply a specification of how computers exchange information.

• IP describes how information to be transmitted should be broken down into small packets, while TCP describes how a “stream” of packets should be reconstructed at the other end and what to do, for example, if a packet is missing.

The Internet Infrastructure

• Consists of five major components:– The backbone– Routers (digital switches)– Points of presence (POPs)– Computer servers– Users’ connected computers

• This system allows authorized users connected to the network anyplace in the world to have access to data stored on computers anywhere else in the world

Homes and small organizations

User’s computer

User’s computer

Wireless Gateway

Individuals

CellPhones

PDAs Other mobile devices

POP

User’s computerUser’s computer

Server (web/file)Gateway(LAN server)

Enterprises

Internet Components

Backbone

Router (digital switch)

Backbone

• The backbone is a collection of high-speed telecommunications lines (what used to be called “trunk lines” or simply “telephone lines” but now have a much higher capacity) that are connected by high-speed computers.– It is made of fast fiber-optic lines that allow

computers to transfer data at very high speeds.

Bandwidth

• The bandwidth of the telecommunications line refers to the capacity of speed or data transfer: – the amount of information – the digital 1s or 0s

that are called bits - the line is capable of carrying per unit time, usually expressed in the number of bits per second (bps) or millions of bits per second (Mbps) or, for very high-capacity lines, billions of bits per second (gigabits per second, or Gbps).

• Thus, the backbone of the Internet is made up of high-bandwidth lines that crisscross North America and extend throughout the world.

• For example, in 2002 MCI Worldcom’s backbone lines from New York to the San Francisco Bay Area had a capacity of 10 Gbps (10,000 Mbps or 10 billion bits per second) and they had several of those lines.

• In 1999, forty backbone carriers transported almost all of the long-distance traffic in the USA.

Digital Switches

• Connecting each backbone line to another is a high-speed digital switch such as an asynchronous transmission mode (ATM) switch.

• These switches are actually very fast dedicated computers that move “traffic” (information) along the backbone lines.

• The switches take the information and pass it along to the next backbone line.

Routers

• Switches that perform a “routing” function, deciding on which direction to pass traffic, are called routers.

• For example, suppose you request information from a computer in a different part of the country.

• This generates “traffic” in the form of a request to a remote computer and a response from that computer, if the information is available.

• Between the two ends of the transaction, the information “flows” along the backbone lines as it is forwarded from one digital switch to the next.

• Many of these intermediate switches are connected to more than two backbone lines. Based on the destination and the congestion along the lines, they decide which line information should be “routed” (forwarded).

Getting onto the network

• To gain access to this network requires other specialized computers.

• The three most common types of end users are:– Individuals– Small-to medium-sized organizations– Large organizations or “enterprises”

Point of Presence

• Individuals and small organizations are often grouped together because their access is usually identical.

• They gain access to the Internet by means of an Internet service provider’s (ISP) point of presence (POP).– A POP is simply a point of access to the

network and consists of a switch (computer) that knows how to route traffic to the end users connected directly to it.

• Individuals may also gain access to the Internet via personal communications and electronic devices, such as mobile telephones and personal digital assistants, via wireless gateways.

• This means of access is a little more complicated as the individual may be moving from one location to the next, but conceptually speaking it is similar to the case of the home user.

• The wireless gateway serves as an interface between the Internet and the wireless operator’s own network.

• Information within the operator’s network from the mobile device to and from the operator’s equipment, is treated as any voice call would be.

Mobile Devices in Action

Local Area Network

• Large enterprises connect to the Internet by means of a similar kind of switch called a gateway or local area network (LAN) server, which may or may not be behind a “firewall”.– A combination of specialized hardware and software that

provides protection from users and requests outside the LAN.

• LANs consist of various types of hardware devices and other resources that organizations can share.

• Large LANs such as those that serve enterprises are usually connected directly to a high-speed switch through the LAN server, which also knows how to route local traffic to end users on the LAN.

LAN connectivity

• End users can be physically connected to the LAN (the so-called fixed-line or wire-line Internet) or can be connected wirelessly through the combination of a network access point that is physically attached to the network and a wireless card (antenna) that sends and receives data from the access point.

• This setup is often called fixed wireless.• All computers that can interconnect with the

Internet are considered part of the Internet.

World Wide Web

• The World Wide Web (WWW or the Web, for short) is the collection of computers on the Internet that support a certain hypertext function.

• Hypertext is different from “normal” text in that it does not follow a linear path from top to bottom; instead, one can follow items of interest in a nonlinear fashion by selecting words or pictures of interest and immediately gaining more information on the items selected.

• Not all potential items (words or pictures) can be selected, so how does the user-reader know which items are available?

• The author of the page decides which items are worthy of more information and creates a special link from the current page to the page (or pages) that has additional information.

Content

• The pages are also content; thus, the author is often referred to as the content creator. In the language of the World Wide Web, a user clicks on (selects) the link to gain the desired information.

Example

• Imagine that you wish to post your resume online to improve your chances of getting a job.– When you contact recruiters, you tell them to go to your Web

page to see the latest version of your resume.• There are many tools available to translate your

document into HTML (HyperText Markup Language), which will be discussed shortly.

• Simply posting the text of the resume is entirely possible, but very limiting.

• Recruiters, though, will see only the text of the resume and will not be able to follow links to other sites.

• However, you decide that it is appropriate to provide more information in two areas.

• First, University of Miami has its own website, so on your resume you create a link between the words “University of Miami” and the website, http://www.miami.edu.

• Therefore, users viewing your resume see the link underlining University of Miami; when they click it, they are connected to the University of Miami website.

• As the author, you determine which links are “clickable.”

• The UM link was to an external source of the additional information.

• However, you may want to develop some further content.– For example, in the section under Additional Information, you may

want to have a picture of you at age 12 shaking hands with Bill Gates.

– Let’s say that you do not want that picture, which you have scanned into a file, to be on your resume.

– So, in the Additional Information section on your resume, you link the words “shook hands with Bill Gates” to the new file.

• Thus, you now have two links in your resume, one to content created and maintained by someone else (UM), the other to content created, or at least maintained, by you (the picture).

• That is part of the content process that content authors go through whenever they design for the Web.

• The World Wide Web works because the Internet infrastructure is in place to support it.

• Thus, the WWW performs a function (hypertext) that is a subset of all the functions available on the Internet (file transfers, remote login, electronic mail, etc.)

• Because the WWW is the most famous function of the Internet, many people use the terms interchangeably; as we have seen from the above discussion, this is slightly inaccurate.

A Brief History of Time

• Well, a brief history of the Internet and the World Wide Web

• During the Cold War the United States military and its think tanks such as the RAND Corporation were faced with a problem.

• The threat of nuclear attack loomed in the minds of military strategists: specifically, any centralized “control center” would be a prime target in a nuclear attack.

• This problem gave birth to the idea of a decentralized “network” with redundant connections.

ARPA

• The research was sponsored for many years by the Advanced Research Projects Agency (ARPA), a government agency affiliated with the Department of Defense.

• When a few computers (one at UCLA and another at the Stanford Research Institute – SRI) were connected in the late 1960s and early 1970s, the precursor of the Internet, the ARPAnet, was born

DARPA• By design, the system was intended to be redundant;

that is, it would have many paths of delivering data so that if any one part of the network was disabled, other paths could be found automatically.

• In this decentralized environment, the network grew from a handful of U.S. universities to practically all universities in the United States and many overseas, in addition to many research institutes and some companies, usually defense-oriented companies with some affiliation with DARPA (Defense Advanced Research Projects Agency, as ARPA became known).

• At one point, the National Science Foundation took over responsibility for providing the backbone (high-speed trunk line) services.

• As the number of commercial users grew from year to year and it became clear that users were willing to pay for such services, private telecommunications companies stepped into the void and began providing their own high-speed lines, the use of which they rented or sold to companies wanting access.

4 Applications Drove Growth

• Most of the traffic in the early days of the Internet, as the network eventually became known, was generated by just four applications.

• The most widely used service was electronic mail, or e-mail.

• Email service allowed a user at one end-user computer (also known as a host) to send a text message and have this message stored for delivery at the recipient’s host for retrieval by the recipient when convenient.

• In addition to email, discussion lists/newsgroups became popular.

• Users posting messages to a newsgroup or a discussion list had their message copied to all other subscribers of the list.– Yahoo Groups is an example that we know

well.

• Another popular application, especially among the scientific community, was file transfer protocol (ftp).

• With a file transfer, one could either send a file to or retrieve one from a remote host.

• The advantage of this was that a user could move large blocks of data very quickly, much more quickly than backing up a file on tape and carrying or mailing it to the remote site.

• Finally, a highly useful application was telnet or remote login capability.

• This allowed the user to log in to a remote host and perform functions on the remote computer as if the user were connected to the host on-site.

• For example, a user in California could log in to a computer in Korea and be indistinguishable from a user sitting at a terminal in Korea.

• These four applications were popular enough to drive the growth of the Internet for many years.

• The Internet infrastructure – the backbone, digital switches, computer servers, POPs, users’ computers, software, and protocols – was created to help users gain access to information on computers anywhere in the world.

• The problem in the early days was that to find information on the Internet, a user had to specify the address of the computer on which the information resided.

• This made finding information on different computers tedious and limited to those with computer science skills.

Tim Berners-Lee

• Tim Berners-Lee, a researcher at CERN, the particle physics laboratory near Geneva, Switzerland, would change all of that.

• The scientists who worked at CERN came from all over the world and had immense problems exchanging incompatible documents and email messages from their own proprietary systems.

• Berners-Lee revived an earlier idea of his from 1980 that was a precursor to a hypertext storage and retrieval system.

• He proposed that CERN’s scientists could combine their knowledge by linking their documents contextually.

HTML

• He developed a language called HyperText Markup Language (HTML) that he could use not only to create links to different computers but also to display graphics associated with some files.

• To the user, such links, or hypertext, are highlighted; all the user needs to do to gain access to the information associated with the links is to click on it.

• These hypertext links and the associated information stored on the Internet nodes became known as the World Wide Web.

• CERN made the source code for the first WWW browser and server freely available, which spurned growth in their development as programmers from all over the world began contributing to the infrastructure of the WWW.

Wireless Protocols

• In recent years, a slew of wireless protocols have been developed to help bridge the gap between the information available on the Internet (email, instant messaging, Web pages, and so on) and portable devices ranging from laptops to cell phones.

• We’ll only mention just a few of the most important ones here with the proviso that the wireless sector is in a great deal of flux.

Wi-Fi & Bluetooth

• IEEE 802.11b (and its eventual successor, the quicker 802.11a or 802.11g), also known as “Wi-Fi” (short for wireless fidelity), is a standard that defines how information is passed between a wireless access point (also known as a base station) and a wireless client (such as a laptop with a wireless card) or between two wireless clients.

• Bluetooth is another, albeit slower but more energy-efficient.

• For communications with cell phones, several broad classes of technology have been developed, starting with so-called 2G (second generation) digital PCS (personal communication service), which is used for voice but enables limited data exchange.

• After 2G, a transitional technology known as 2.5G was developed.

• This is an extension of 2G that allows for packet-switched data services.

• Late in 2001, 3G (third generation) technology was introduced and is meant for higher bandwidth on data transfer to and from cellular phones and other mobile clients.

• The bandwidth is much lower than Wi-Fi, but the advantage is that the power requirements are also much lower and thus more suited to personal mobile devices.

• To gain access specifically to Internet content, these 3G-compatible devices utilize such protocols as Wireless Access Protocol (WAP), which is an open protocol designed to request, receive, and transform Internet content.

• Proprietary services such as NTT DoCoMo’s i-Mode can also take advantage of 3G.

• In addition, in principle, 3G devices can run IP applications directly on the devices.

The Internet Value Network

• Associated with each of the components of the Internet is an industry or group of firms that market similar or related products.

• In this part of the presentation, we describe the various sectors of the Internet economy and give the names of the largest companies in each sector.

• We’ll call this the Internet Value Network because in its broadest sense, all the components described here and their interrelations create value for the end users, the customers, and organizations that actually use the network.

• Generally speaking, we propose that the Internet value network can be divided into three major groups:– Users– Communication service providers– Suppliers

• This division into three groups is an abstraction; many firms are both users and suppliers, or users and communications service providers, or communications service providers and suppliers.

• Example: Cisco Systems is a supplier of communications equipment and a large user (a Web merchant) in its own right; that is, Cisco not only makes routers that Internet Service providers (ISPs) buy but also sell directly to those ISPs over the Internet.

• In addition, some segments might just as easily be classified as both suppliers and users.

• Example: Media and content companies, such as AOL Time Warner, supply editorial content to firms as well as run “portals,” which are entry and focal sites for consumers and businesses.

• For this reason, we can categorize under both users and suppliers.

• Thus, the categorizations of any one firm or even subsegment are slightly arbitrary.

Profit Sites

• The three large groups – users, communications services, and suppliers – can be further subdivided into segments or what we are calling profit sites.

• Let’s now look at each group in turn and provide examples of the largest companies in each segment.

Users

Users

• Users are companies that use the Internet intensively in the core of their business.

• We exclude from consideration here large companies that use the Internet intensively but only at the periphery of their business (we will talk about them later).

Subdividing Users into 5 categories

1. E-Commerce: Those companies that sell goods over the Internet.

2. Content Aggregators: Those that gather content from multiple sources and display that content on their sites.

3. Market Makers: Act as intermediaries and run electronic markets.

4. Brokers/Agents: Act as intermediaries by facilitating transactions for a particular party (e.g., a buyer or a seller)

5. Service Providers: Furnish all other Internet-based services.

• Technically, individuals and non-Internet organizations (e.g., automobile manufacturers) are also “users,” but they will not be discussed at this point because our main focus right now is to describe the interrelations that comprise the Internet infrastructure.

E-Commerce Companies

• E-Commerce (electronic commerce) companies exchange “real products for real money through online channels.”

• While some people refer to e-commerce as any business having anything to do with the Internet, we will be more precise in our classification and limit ourselves only to those companies that sell over online channels.

• Some companies manufacture or assemble the goods themselves; others simply resell goods made by other companies.

• The largest companies in this space sell over the Internet products they manufacture themselves.– See next slide

The Largest Companies in the E-Commerce Profit Site

Company Revenue in millions

1. Dell Computer $31,200 (online)

2. Cisco Systems $22,300

3. AOL Time Warner $8,700

4. IBM $3,500

5. Amazon $3,300

* According to a compilation of sources.

E-Commerce leads to Channel Conflict

• Some e-commerce companies sell only over the Internet; others sell both over the Internet and in standard bricks-and-mortar distribution channels.

• When the downstream buyers’ (not those of the end-user customers) needs conflict with the Internet channel, it is called channel conflict.– Recall the Charles Schwab example from Part I.

• Many companies are involved in multiple segments, especially the e-commerce segment, where companies can compete in any other segment and take orders over the Internet.

• Example: Intel is one of the largest hardware components manufacturers, but it also sells several billion dollars worth of those components online.

• Example: America Online (AOL) is the largest online service provider (OSP), and it books all of its revenues online.

• Thus, the e-commerce segment is a catch-all for any segment selling online and can be treated in tandem with the other segments.

• M-Commerce (mobile commerce) over wireless channels may have lots of potential but little realization.

Content Aggregators

• The next category of users encompasses media companies and content providers.

• Media companies and content providers can be listed under both users and suppliers because most of them are intensive users of the Internet as well as suppliers (of information) to other users.– Next slide

Company Revenue in millions

1. AOL Time Warner $8,700 (online)

2. MSN $2,500

3. Yahoo! $720

4. Terra Lycos $670

5. CNET $290

The Largest Companies in Content Aggregators Profit Site

* According to a compilation of sources.

• These are the companies whose business revolves around intensive use of the Internet, such as America Online, Netscape (which was acquired by AOL in 1999), and Yahoo!

• These companies, while they are content providers, are mainly information aggregators and portals.

Market-Makers & Broker-Agents• In contrast to expectations, many famous names

in Internet business are intermediaries.• “In contrast to expectations” because much of

what you read in the business press is how the Internet reduces intermediation (we’ll see this isn’t quite true).– Indeed, the Internet may actually increase

intermediation.

• The Internet allowed and continues to allow a new class of intermediaries that bring buyers and sellers together and make money by charging one or the other party a small transaction fee.

• A market-maker acts as a neutral intermediary that provides a place to trade and also sets the rules of the market.

• Thus, the profit site includes companies that run or set up electronic markets, such as electricity markets, and electronic auctioneers, such as eBay or Sotheby’s.

• Priceline makes a market in airline tickets, among other areas.

• They all have the same logic of bringing buyers and sellers together.

• As you’ll see on the next slide, note the relatively small size of intermediaries in general and market-makers in particular.

The Largest Companies in the Market-Makers Profit Site

Company Revenue in millions

1. Priceline $1,200 (online)

2. eBay $750

3. VerticalNet $130

4. Sotheby’s $60

5. ImageX $50

* According to a compilation of sources.

• We also see a large number of brokerages (buyers and sellers of securities), banks (borrowers and lenders), and travel agents (buyers and sellers of travel services) migrating or extending their businesses to the Internet.

• These are all examples of brokers or agents, who facilitate transactions for one party to a transaction.

Top Brokers/Agent Profit Sites

Company Revenue in millions

1. Charles Schwab $4,400 (online)

2. E*Trade $2,100

3. Citigroup $800

4. Ameritrade $500

5. HarrisDirect $340

* According to a compilation of sources.

Internet Services

• Internet services include support services such as:– Consulting– Outsourcing– Website design– Electronic data interchange– Firewalls– Data storage backups

• Any service beyond communications services belongs in this category.

• Thousands of companies perform these services, but the companies in this segment tend to be very small.

Five of the largest Services Firms

Company Revenue in Millions

1. IBM $34,900 (services)

2. EDS $19,200

3. Computer Sciences $10,500

4. Automatic Data Processing (ADP)

$9,500

5. EMC $7,400

• These companies make money by selling their services or their expertise on a fee-for-service basis.

• Electronic Data Systems (EDS), for example, has made a name for itself in the outsourcing of information technology services.

Outsourcing

• When a company in a noncomputer industry grows tired of managing its own data processing (databases, payroll, hardware upgrades, software upgrades), the original firm may decide to hire another firm to completely run its own data processing, freeing up management to run its original business.

• This is referred to as outsourcing.• Some of these services offered by EDS and other

companies have now begun migrating to the Internet; for example, EDS can completely manage the software upgrade process for an entire company over the Internet.

Communication Services

3 Segments

• Communications service providers may also be divided into several segments:– Backbone service providers– ISPs/OSPs– Last Mile providers

• Backbone service providers are those companies that maintain their own backbone lines (we’ve talked about them already)

• An Internet service provider (ISP) delivers access to customers and small-to medium-sized organizations, while online service providers (OSPs) do the same but also provide content to subscribers.

• Last Mile providers develop, maintain, and provide the physical connection (the telephone, cable, or wireless connections) to consumers and small- to medium-sized organizations.

• The companies in this group all provide telecommunications services to each other, to the users’ segment, and to consumers.

• They develop communications networks that enable the connectivity of their customers.

• Their key expertise is in designing and developing new products (*69, ISDN, DSL, cable modems), developing sophisticated billing systems, and maintaining equipment and lines.

• They also face a similar problem: recovering fixed costs.

• Anyone who has used a telephone in recent years has probably noticed that long-distance rates have fallen dramatically from 28 cents per minute to 15 cents (remember 10-cent Sundays?) to 10 cents per minute, 24 hours a day, seven days a week.

• In 2002, the rate has pushed down further to 2.9 cents a minute and lower!

• How do we explain this relentless price movement?

• The problem for the companies, not for the consumer, is that the fixed cost of buying and installing a switch and developing a billing system is very high, but the marginal cost of connecting an additional telephone call is essentially nil.

• This was not much of an issue when one telephone company, AT&T, dominated the telephone industry.

• It simply charged enough to recover its fixed costs and make a profit.

• But after the long-distance market was opened to competition, any company that had made the high fixed investment was – and continues to be – in a battle for revenues– Hence the price competition and the “race to the bottom.”

• This is an extreme example of a more general problem in so-called knowledge-based industries which we will discuss later in the course (about 2 weeks from now).

• In any case, the telecommunications service providers in the Internet sphere have not had to face this problem yet, perhaps because of the tremendous growth of the market, perhaps because many of them still hold monopolies in local telephone services.

• Most of the companies in the communications services segment rely on a subscription-based model for making money.

Backbone Operators

• The first segment of the Internet infrastructure is the companies that run the backbone.

• The companies in this segment control large-bandwidth lines and are able to handle a large volume of digital traffic.

• The next slide shows the market share of the five leading companies in the industry.

Backbone Operators

Company % of Market Share

1. MCI Worldcom/UUNet 27.9% (market share)

2. AT&T 10.0%

3. Intermedia 7.7%

4. Sprint 6.5%

5. Genuity 6.3%

• MCI Worldcom dominates with one-third of the market, followed by AT&T with just 10%.– MCI Worldcom attempted to acquire Sprint in 2000.

• These companies make money by selling Internet connectivity services to Internet service providers and large companies on a subscription basis.

• For information purposes, the median charge in 2001 for tapping into the network through the backbone operators was about $1,800 per T1 line (1.544 Mbps) per month.

ISPs/OSPs

• How do individuals or small organizations without LANs access the Web? A group of firms called Internet service providers (ISPs) provide the hardware and software that enable individuals to gain access to the Web.

• ISPs have their own servers, switches, and software to connect individuals to the Internet.

• ISPs include firms such as AT&T, MCI Worldcom, Sprint, UUNet, Netcom, PSI and others.

Online Service Providers (OSPs)

• In addition to ISPs that offer their customers access to the free content of the Internet, proprietary online service providers (OSPs) not only offer their subscribers access to the Internet but also, for a fee, offer access to a private, closed network whose content is only for fee-paying members.

• OSPs include America Online (AOL), CompuServe, Prodigy, and Microsoft Network (MSN).

• These companies make money by providing Internet access through their points of presence (POP) to small organizations and to individuals, usually for a flat monthly fee.

The Largest ISPs/OSPs

Company Users

1. AOL Time Warner 28.5 M (subscribers)

2. MSN 7.7 M

3. United Online 5.2 M

4. Earthlink 4.9 M

5. CompuServe 3.0 M

Last Mile

• The connection to consumers is sometimes known as the Last Mile because it represents the physical connection between the POP – which is usually considered to be local, such as the local telephone switch – and the end user.

• These connections can take many forms, such as telephone wire (“twisted pair”), fiber optics, cable and wireless.

• More generally, the Last Mile is the category of the industry supporting these types of communication services.

• As we’ll see on the next slide, this segment is dominated by telecommunications companies, mainly local phone companies.

Last Mile Profit Site

Company Revenues in Millions

1. NTT $103,100

2. Verizon $67,200

3. AT&T $52,600

4. SBC Communications $45,900

5. British Telecom $43,800

• We would have to move all the way down that list to #12 before we found a cable company.

• Also, note the sheer size of the companies in the Last Mile category, which is much bigger on average than any of the other segments.

• Most of these companies grew to their vast size as a result of the monopoly they had as local telephone companies.

• Now they make money by investing in local lines and selling access to these lines on a subscription basis.

• Many researchers believe that controlling the Last Mile is a battle in its infancy.

• The former AT&T local telephone monopolies (the Regional Bell Operating Companies) have done a credible job of maintaining their control over the Last Mile, perhaps through their development of new products or their influence on the regulatory process.

ISDN & DSL

• Two developments over the last decade that count as new products are Integrated Services Digital Network (ISDN) and the Digital Subscriber Lines (DSL).

• Both technologies allow for higher-bandwidth transfers, using the normal twisted-pair telephone wiring, and enable the end user to talk on the telephone while sending and receiving digital data at rates higher than those available from a modem.

AT&T’s 2-Pronged Strategy

• AT&T itself, though, has chosen a two-pronged approach to wrest control of the Last Mile from the regional Bell operating companies.

• The first is a “wireless” strategy (giving away cellular telephones, promoting flat-rate long-distance service from cellular phones, eliminating roaming charges, providing complimentary services such as traffic reports) that attempts to supplant the wireless telephone from its primacy in the hearts of consumers.

• In fact, in much of the rest of the world, wireless access to the Internet via cell phones is predicted to surpass wire-line access.

• AT&T’s second approach relates to the use of cable television lines as an alternative Last Mile conduit.

• Cable lines can provide high-speed Internet access.• Therefore, in 1999 AT&T acquired MediaOne – of the

largest cable television companies – with the intention of providing an alternative to the regional Bells.

• In addition, other media firms that own cable companies, such as AOL Time Warner, have been developing products based on high-speed Internet access over the cable.

• Even electric utilities have contemplated entering this market, using the electricity lines they have already installed and maintained.

Why care about the Last Mile?

• There are several reasons for this intense interest.

• The first is control over strategic resources.• Just about every page served, every commerce

transaction, and every download will pass through that Last Mile, so it is natural that certain firms do not want to leave to chance or historical accident who controls that Last Mile.

• In the past the regional Bell operating companies controlled that last mile, which turned out to be immensely profitable.

• Thus, the Last Mile has attracted entry precisely because of its profitability.

• This entry represents the first time the regional Bells have faced any serious competition; it was only a matter of time before other companies with a different technology jumped in to shave off a piece of that gigantic market.

• As mentioned, all consumers go through a Last Mile provider before attaining access to the Internet, and it seems that consumers are quite willing to pay for high quality/bandwidth in the Last Mile.

Suppliers

• Finally, suppliers can be divided into three segments:– Content creators– Software suppliers– Hardware suppliers

• These segments belong with “suppliers” because they typically supply upstream products or services to users and communications service providers, and in some cases to each other.

• Content creators are in the business of developing news- and entertainment-oriented content in many forms, including text, music, and video.

• Computer software suppliers develop the software, usually in packaged form, and sell the software that runs on consumer and enterprise computers, including personal computers and engineering workstations.

• Computer hardware companies manufacture the desktop computers, workstations, mobile devices, servers, telecommunications, and switching hardware that end users and communications service providers need.– Hardware suppliers also manufacture components such as the

internal devices that control or interact with computer hardware systems.

Content Creators

• Media/content suppliers are the developers and owners of intellectual capital.

• They produce such works as music, games, graphics, video/motion pictures, and text (articles, news, and others sorts of information).

• The two largest companies, Disney and AOL Time Warner, are fully integrated in the content business, producing and developing all of the above, such as motion pictures, videos, music, games, and news in their business units.

• In contrast to the bricks-and-mortar economy, this category of the Internet economy has been the most in flux with no dominant model of making money.

• The subscription model applies to few content creators, mainly those dispensing financial information.

• For example, Dow Jones supports its Wall Street Journal Interactive Edition with subscriptions from The Wall Street Journal subscribers and even nonsubscribers, who are charged more for the content.

• Fee-for-service is another model pursued by some of these companies, although users are apparently unwilling to pay for most intellectual content (with the exception of pornography).

Eyeballs

• Part of the problem is that it is extremely inexpensive to reproduce digital media, thus making it very difficult to enforce intellectual property ownership of media content.

• We will discuss this further next week, but for now most media/content suppliers have been satisfied to give away their content for free, raise the number of “eyeballs” (the number of unique viewers), and pin their hopes on an advertising model.

• Some sell complementary goods and make money from that rather than the content.

• For example, Sony sells gaming hardware that is Internet-enabled so that consumers can play games with other Internet users.– While there is nothing (or little) to prevent the copying of the

gaming software, the hardware itself is more difficult to imitate.

Software Suppliers

• Software suppliers provide software products, such as word processing or spreadsheet applications, operating systems, printer drivers, databases, electronic commerce software, and so on.

• These companies operate on the principle of selling software products to end users or to companies interested in starting or maintaining an Internet presence.

• They are like manufacturers, investing in software development and marketing and selling products, presumably for a profit.

• While fixed-cost recovery and easy replication are also theoretically issues – and may be so in the future – the insatiable appetite of the public for increased features (coupled with Microsoft’s dominant position) keeps the industry growing.

• Microsoft is the largest of these companies; it is the software company of choice for desktop personal computers and, in the late 1990s, some servers.

• Oracle has made the transition from database company to Internet-database company and has maintained its position as the second-largest software company.

• To provide a taste of some kinds of Internet-based software suppliers, consider e-commerce software.

• Electronic commerce software companies produce software that enables e-commerce, which can be one of several different types.

• Prior to the advent of the Internet, the most important and popular kind of e-commerce was electronic data interchange (EDI).

EDI

• EDI allowed companies to exchange ordering and inventory information up and down the supply chain– Example: When a distributor ran low on

inventory for a certain product, and EDI system passed that information to the manufacturer.

– In the past, EDI was implemented on private data networks; in the late 1990s this technology has migrated to the Internet.

• There are a variety of other e-commerce applications having to do with retailing products on a website, such as “shopping cart” technology, order/payment processing, and “micro-payments”.

Shopping Carts• Shopping cart technology keeps track of purchases that

consumers make.• While this might sound like a trivial task, most people do not

realize the complexity of tracking such information from page to page on a website.

• It operates on the principle that the Web server for the retailer does not know who you are when you make repeated shopping selections without some form of identification.

• The companies that make the browsers allow an identification number of sorts to be stored on your computer, which can be passed to the retailer every time you interact with it.

• In this way you can keep adding items to your shopping cart and the retailer knows that it is you placing the order.

Order/Processing Software

• This software is designed to track orders, track inventories, and, most importantly, process credit card transactions.

• As you can imagine, the security considerations of processing payments are immense.

• Most of the effort in this area has been to design systems that prevent credit card numbers from falling into the wrong hands through the use of encryption (we’ll get into this aspect of e-commerce security later in the course as time allows us).

Micropayments/Microcash

• Micropayment or microcash software is designed to handle very, very small transactions.

• Example: Imagine that you wanted to listen to a piece of music only once over the Internet.– The recording studio would like to charge you a

royalty fee of 1/20 cent (if you listened to it 20 times, you would owe 1 cent).

• How can companies keep track of such small payments?– Micropayment systems are designed to do just that.

Application Service Providers

• In 1999 a new type of software business sprang up: the application service provider (ASP).

• The ASP service, also referred to as an “app-on-tap”, provides a centralized repository for software applications which individuals can “borrow” or “rent” to run their own desktop personal computers.

• This end-use system is called a thin client because the applications no longer reside on the end-user system.

• The applications are delivered over the Internet to the thin client on demand.

• Applications envisioned for this type of service span the full range from database software packages to word processing applications to corporate business process analysis programs.

• Large enterprises also appreciate the ASP system because it enables the centralized information technology (IT) function to regain control over employees’ desktop software.

• In recent years, as corporate computer systems have become more decentralized, it has become more difficult for companies to control the versions of software that employees store on their own personal computers.

Hardware Suppliers

• The hardware category comprises three interrelated areas:– Communications equipment manufacturers– Computer equipment manufacturers– Hardware component manufacturers

Communications Equipment

• These manufacturers are the producers of the various kinds of routers and other digital switches.

• Cisco Systems and Lucent Technologies (formerly part of AT&T) dominate this industry, although 3Com is also well known for its communications equipment.

• Motorola also gains much of its revenue from communications equipment, cellular telephones, and semiconductors.

• These companies make money by selling their manufactured products, which are hardware/software systems that enable the Internet to move data traffic.

• The customers of these companies include backbone operators, ISPs, and large organizations that have their own internal networks.

• Computer hardware contains both client and server hardware– That is, end-user computers (personal

computers and workstations) and server devices (Web servers, file servers, e-mail servers, LAN servers).

• The largest computer hardware company is undoubtedly IBM, which brought in almost $86 billion dollars in 2001, much of which came from hardware sales.

• Other large computer manufacturers include Hewlett-Packard and Compaq, which merged in 2002.

• These companies also produce servers, as does Sun Microsystems, which is one of the largest server manufacturers.

• These companies sell their hardware to end users and to other businesses.

• They are the main customers of the hardware components companies, which sell computer chips and peripherals such as disk drives to the computer hardware companies and the communications equipment companies.

• The hardware components segment also operates under the producer model where the largest companies are Motorola and Intel (processors and other semiconductor chips) and Seagate (disk drives).

Review:• We’ve provided a brief introduction to the history and

terminology of the Internet along with the key segments of the Internet industry.

• The Internet and the World Wide Web, often used interchangeably, are not the same.

• The Internet is a vast system of computers that are connected by high-speed communications lines and can understand IP/TCP protocols.

• The WWW is linked content that is accessible through the Internet, written in HTML and viewed through a browser.

• In addition to the WWW protocol (http), the main four applications on the Internet are email (electronic mail), discussion lists/newsgroups, FTP (file transfer protocol), and remote login (telnet).

• Companies in the Internet infrastructure are found in 1 of 11 market categories, or profit sites, grouped into three segments:– Users– Communications service providers– Suppliers

• Users are divided into e-commerce companies, content aggregators, market-makers, brokers/agents, and service providers.

• Communications service providers are divided into backbone operators, ISPs/OSPs, and Last Mile providers. Finally, suppliers can be divided into content creators, software suppliers, and hardware suppliers.

Terms you should know

• Application service providers (ASP)

• ARPAnet• Backbone• Backbone service

providers• Bandwidth• Bits• Content• Digital switch• Discussion lists

• E-Commerce• Email• Eyeballs• File transfer protocol

(FTP)• Firewall• Fixed line Internet• Fixed wireless• Hypertext• Hypertext Markup

Language (HTML)

• Internet Service Provider (ISP)

• Internet value network• Last Mile providers• Local Area Network

(LAN)• M-commerce• Newsgroups• Online service providers

(OSPs)• Outsourcing• Point of Presence (POP)

• Portals• Profit sites• Routers• Telnet• Thin client• Traffic• Wire-line Internet• Wireless protocols• World Wide Web

Homework:Possible Exam Questions

1. Step-by-step: Draw a map of what happens when you buy a new widget online.

• Start with pressing the “Add to Shopping Cart” button on the vendor’s website.

• End with the vendor packing your order.• Who makes money in this transaction?• Where is value added?

2. Discuss the benefits and pitfalls of being in the content creation business. Name a content creation company and describe the weaknesses in its business plan.

3. Is an Internet service provider different from a backbone operator? How?

4. Looking at a company such as Amazon.com, would you classify it as an e-commerce provider? Why? How about a company such as eBay?

5. Think of another industry besides telecommunications where fixed-cost recovery is an important challenge.

6. Pick one of the profit sites and discuss the differences between being a wire-line and wireless participant in that profit site.

• Email your homework to william_brownii@msn.com • Subject line to read: Assignment 2

(no attachments – please send your answers in the body of the email)

Homework is due Tuesday night, February 4.

Next Week

• We’ll examine in-depth the competitive landscape, impacted by the changing properties of the Internet.