Open Networks: Theoretical and Policy Lessons from the Internet Fran ç ois Bar

Modeling network change 1. Digital networks Network configuration independent from physical layout Control separable from ownership 2. Hypotheses New network uses / innovation patterns New network evolution dynamics 3. Evidence Corporate networks Electronic marketplaces 4. Implications Understanding network transformation Policy lessons

1. Digital networks

Network configuration independent from physical layout

Control separable from ownership

2. Hypotheses

New network uses / innovation patterns

New network evolution dynamics

3. Evidence

Corporate networks

Electronic marketplaces

4. Implications

Understanding network transformation

Policy lessons

1. New network possibilities Digital: bits, ubiquitous logic, and plentiful bandwidth Programmable networks: network configuration written in software A given network supports multiple communication patterns Network control becomes flexibly separable from network ownership

Digital: bits, ubiquitous logic, and plentiful bandwidth

Programmable networks: network configuration written in software

A given network supports multiple communication patterns

Network control becomes flexibly separable from network ownership

Four broad media categories live delayed interpersonal mass

Media archetypes live delayed interpersonal mass telephone mail television newspaper

Distinct technical infrastructures live delayed interpersonal mass telephone mail television newspaper Switched network copper wires Packet switched trucks, planes, trains Broadcast network radio waves broadcast network print and deliver

Distinct actors live delayed interpersonal mass telephone mail television newspaper AT&T, RBOCs Publishers USPS FedEx, UPS CBS, ABC, NBC, Fox cable channels, cable networks

Distinct policy regimes live delayed interpersonal mass telephone mail television newspaper Common carriage Price regulation Universal service Free speech no prior restraint Common carriage Gov nt ownership License

live delayed interpersonal mass telephone mail television newspaper voice mail conference call answering machine

live delayed interpersonal mass telephone mail television newspaper telegram overnight delivery mass mailing

live delayed interpersonal mass telephone mail television newspaper targeted newsletters several editions per day

live delayed interpersonal mass telephone mail television newspaper many channels taped programs reruns

Internet as convergence live delayed interpersonal mass telephone mail television newspaper ip telephone email listserv web-cast

old distinctions become irrelevant live delayed interpersonal mass telephone mail television newspaper ip telephone email listserv web-cast web CU-seeme software updates

Characteristics of the new space? live delayed interpersonal mass "Open" means: Internet as software overlay on existing networks multiple communication patterns , invented by (lead) users Interconnection becomes key

"Open" means:

Internet as software overlay on existing networks

multiple communication patterns , invented by (lead) users

Interconnection becomes key

Three-layer network model Applications Hardware Control

Control is flexibly separable Applications Hardware Control

Applications Hardware Control Applications Hardware Control Applications

Applications Hardware Control Applications Hardware Control Applications SBC AOL

Applications Hardware Control Applications Hardware Control Applications Earthlink

Applications Hardware Control Applications Hardware Control Applications Corp. LAN

Open networks' new possibilities Multiple diverse physical networks can be interconnected Multiple communication patterns can be overlaid on a given network Network owners no longer are the only actors who can do that Users can control and configure the network they use New drivers of network evolution

Multiple diverse physical networks can be interconnected

Multiple communication patterns can be overlaid on a given network

Network owners no longer are the only actors who can do that

Users can control and configure the network they use

New drivers of network evolution

2. Open networks: theoretical implications Mechanisms driving network evolution New ways to support and structure economic activities Organizations Markets

Mechanisms driving network evolution

New ways to support and structure economic activities

Organizations

Markets

Hypotheses Users –esp. Lead users– increasingly drive network innovation. Iterative exploration process Organizations and networks co-evolve Network architecture matters Various modes of intermediation yield different modes of innovation creation and diffusion

Users –esp. Lead users– increasingly drive network innovation.

Iterative exploration process

Organizations and networks co-evolve

Network architecture matters

Various modes of intermediation yield different modes of innovation creation and diffusion

3. Evidence Case studies / User Roundtables Including: Bank of America, HP, General Motors, Levi Strauss, Bechtel, Cisco, Quantum, Peoplesoft, Solectron, Silicon Graphics,… Internal corporate networks Inter-organizational networks Electronic markets

Case studies / User Roundtables Including: Bank of America, HP, General Motors, Levi Strauss, Bechtel, Cisco, Quantum, Peoplesoft, Solectron, Silicon Graphics,…

Internal corporate networks

Inter-organizational networks

Electronic markets

Corporate Networks Evolution

Corporate Networks Evolution

Network evolution cycle: automation use network to do old things in new ways organization unchanged, new infrastructure deployed network as tool 1. automate

use network to do old things in new ways

organization unchanged, new infrastructure deployed

network as tool

Network evolution cycle: experimentation without fundamentally changing the network infrastructure in place after the automation phase, experiment with new applications marginal changes in organization and in network network as lab (bricolage) 1. automate 2. experiment

without fundamentally changing the network infrastructure in place after the automation phase, experiment with new applications

marginal changes in organization and in network

network as lab (bricolage)

Network evolution cycle: re-configuration limits of the old network have been reached organization and network change simultaneously network articulates change 1. automate 2. experiment 3. re-organize

limits of the old network have been reached

organization and network change simultaneously

network articulates change

Network Evolution: start a new cycle a new network has been deployed, upon which new tasks can now be automated new network generation 1. automate 2. experiment 3. re-organize

a new network has been deployed, upon which new tasks can now be automated

new network generation

A succession of cycles 1. automate 2. experiment 3. re-organize 5. experiment 6. re-organize 4. automate

A succession of cycles… made of smaller cycles 1. automate 2. experiment 3. re-organize 5. experiment 6. re-organize 4. automate

Key features of the network evolution cycle Iterative Cumulative End-user driven Structured learning Embedded knowledge Path-dependent 1. automate 2. experiment 3. re-organize

Co-evolution 1. automate 2. experiment 3. re-organize network organization

Co-evolution requires Network flexibility 1. automate 2. experiment 3. re-organize configuration flexibility application flexibility

Co-evolution requires Network flexibility 1. automate 2. experiment 3. re-organize configuration flexibility application flexibility deploy a range of applications over a stable network configuration simultaneously - change network configuration to provide new applications and -invent new applications that t ake advantage of new configuration possibilities

Network flexibility 1. automate 2. experiment 3. re-organize configuration flexibility application flexibility control layer physical layer application layer

Learning: using vs. doing 1. automate 2. experiment 3. re-organize learning by using learning by doing

Learning: who learns? 1. automate 2. experiment 3. re-organize learning by using learning by doing network user network provider

Corporate network generations automate experiment re-organize automate experiment re-organize automate experiment re-organize public network private network hybrid network web portfolio 1975-85 1995-? 1985-95 ? automate experiment re-organize

Electronic Commerce

Electronic Commerce

E-commerce promises: Structural change and efficiency Entry barriers shattered Small is powerful Disintermediation Frictionless economy

Entry barriers shattered

Small is powerful

Disintermediation

Frictionless economy

The story so far... Entering is easy, staying is difficult Large players dominate, consolidation New intermediaries emerge, old intermediaries adapt Stickiness provides traction, friction-free is slippery

Entering is easy, staying is difficult

Large players dominate, consolidation

New intermediaries emerge, old intermediaries adapt

Stickiness provides traction, friction-free is slippery

Mapping E-commerce infrastructure marketplace transaction & payment deliverable

Conventional marketplace C-good Mapping E-commerce conventional infrastructure marketplace transaction & payment deliverable Conventional Commerce

Electronic infrastructure Conventional marketplace C-good C-good Mapping E-commerce conventional electronic infrastructure marketplace transaction & payment deliverable Conventional Commerce Net-aided Commerce

Electronic infrastructure Conventional marketplace Electronic marketplace C-good C-good C-good Mapping E-commerce E-payment conventional electronic infrastructure marketplace transaction & payment deliverable Conventional Commerce Net-aided Commerce Indirect E-commerce

Electronic infrastructure Conventional marketplace Electronic marketplace E-good C-good C-good C-good E-delivery Mapping E-commerce E-payment conventional electronic infrastructure marketplace transaction & payment deliverable Conventional Commerce Net-aided Commerce Indirect E-commerce Direct E-Commerce

Electronic infrastructure Conventional marketplace Electronic marketplace E-good C-good C-good C-good E-delivery E-payment conventional electronic marketplace Mapping E-commerce Creating new Marketplaces

Not so new: Network-aided commerce Enhance the flow of market-related information Inform price changes and relay them ("more dynamic pricing") Fast, cost-effective demand and supply matching Speed up transactions Reach new customers Lower sales and marketing costs Lower procurement costs

Enhance the flow of market-related information

Inform price changes and relay them ("more dynamic pricing")

Fast, cost-effective demand and supply matching

Speed up transactions

Reach new customers

Lower sales and marketing costs

Lower procurement costs

Really new: The network is the marketplace The network has become the place where fundamental market processes take place: discovery matching negotiation transaction (sometimes) delivery

The network has become the place where fundamental market processes take place:

discovery

matching

negotiation

transaction

(sometimes) delivery

Network configuration determines Marketplace architecture Who can play? Buyers, sellers, third parties Equal or differential access By what rules? Exchange (bid/ask), auctions, catalog, brokerage,... level or biased network control yields market control

Who can play?

Buyers, sellers, third parties

Equal or differential access

By what rules?

Exchange (bid/ask), auctions, catalog, brokerage,...

level or biased

network control yields market control

Multiple marketplaces Consolidate existing market relationships and market power (e.g. auto, Dell) New trading and distribution spaces (e.g. Napster, content syndication) Aggregate buyer power (e.g. procurement) Walled gardens (e.g. AOL-TW, broadband cable, I-mode, WAP)

Consolidate existing market relationships and market power (e.g. auto, Dell)

New trading and distribution spaces (e.g. Napster, content syndication)

Aggregate buyer power (e.g. procurement)

Walled gardens (e.g. AOL-TW, broadband cable, I-mode, WAP)

- Discovery + - execution / fulfillment + Existing channels automation E-marketplace Content & Community portals Neutral exchanges Buyers’ agents Sellers’ agents

Airline reservation systems automate experiment re-organize automate experiment re-organize automate experiment re-organize SABRE, closed system SABRE as open marketplace Internet direct sales, multiple marketplaces Orbitz, SABRE (travelocity) automate experiment re-organize

4. What this means User-driven innovation is now a core driver of network change E co nomic organization and net work infrastructure co- evolve (true at various levels of analysis: small groups, firm, firm clusters, markets, national economy) Network architecture matters economic control, innovation creation and diffusion, cross-learning, intermediation.

User-driven innovation is now a core driver of network change

E co nomic organization and net work infrastructure co- evolve (true at various levels of analysis: small groups, firm, firm clusters, markets, national economy)

Network architecture matters economic control, innovation creation and diffusion, cross-learning, intermediation.

Policy implications A generic problem: Microsoft Windows as "control layer" Broadband internet access Interactive TV Wireless Allocation of network control becomes a key policy issue Open networks foster broad-based innovation

A generic problem:

Microsoft Windows as "control layer"

Broadband internet access

Interactive TV

Wireless

Allocation of network control becomes a key policy issue

Open networks foster broad-based innovation