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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.
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 POP Internet Components Backbone Router (digital switch) Wireless Gateway Individuals Cell Phones PDAs Other mobile devices User’s computer User’s computer Server (web/file) Gateway (LAN server) Enterprises
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.
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.
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).
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.
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.
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.
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.
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.
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.
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.
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.
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:
Communication service providers
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.
E-Commerce: Those companies that sell goods over the Internet.
Content Aggregators: Those that gather content from multiple sources and display that content on their sites.
Market Makers: Act as intermediaries and run electronic markets.
Brokers/Agents: Act as intermediaries by facilitating transactions for a particular party (e.g., a buyer or a seller)
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 (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 * According to a compilation of sources. $3,300 5. Amazon $3,500 4. IBM $8,700 3. AOL Time Warner $22,300 2. Cisco Systems $31,200 (online) 1. Dell Computer Revenue in millions Company
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.
The Largest Companies in Content Aggregators Profit Site * According to a compilation of sources. $290 5. CNET $670 4. Terra Lycos $720 3. Yahoo! $2,500 2. MSN $8,700 (online) 1. AOL Time Warner Revenue in millions Company
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 * According to a compilation of sources. $50 5. ImageX $60 4. Sotheby’s $130 3. VerticalNet $750 2. eBay $1,200 (online) 1. Priceline Revenue in millions Company
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 * According to a compilation of sources. $340 5. HarrisDirect $500 4. Ameritrade $800 3. Citigroup $2,100 2. E*Trade $4,400 (online) 1. Charles Schwab Revenue in millions Company
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.
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!
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.
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.
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 3.0 M 5. CompuServe 4.9 M 4. Earthlink 5.2 M 3. United Online 7.7 M 2. MSN 28.5 M (subscribers) 1. AOL Time Warner Users Company
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 $43,800 5. British Telecom $45,900 4. SBC Communications $52,600 3. AT&T $67,200 2. Verizon $103,100
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.
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 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.
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.
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.
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.
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.
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.
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).
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.
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).
Companies in the Internet infrastructure are found in 1 of 11 market categories, or profit sites, grouped into three segments:
Communications service providers
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.