Jonathan Aronson ARNIC Presentation April
11, 2008

My co-conspirators Peter F. Cowhey
John Richards Donald Abelson

The Big Picture <ul><li>Information and
Communication Technology Are Merging—This Creates A Brand New Market Dynamic </li></ul><ul><li>Good Public Policy Should Facilitate the Growth of Modularity—The Key Characteristic of the New Technology Architecture </li></ul><ul><li>Modularity Creates Huge Global Opportunities and Challenges </li></ul>

The Traditional Model for ICT:
Leverage a Dominant Position <ul><li>The Leverage Model: Use a Large Advantage in Critical Part of the Value Chain to: </li></ul><ul><ul><li>Take leadership position in adjacent markets </li></ul></ul><ul><ul><li>Raise profit margins to build corporate “war chest” and research/investment funding to entrench leadership </li></ul></ul><ul><li>Traditional examples: AT&T before 1984, IBM in 1960s and 1970s, and Microsoft in 1990s </li></ul><ul><li>Will Google be Next? </li></ul>

IBM Dominance <ul><li>Results in dominance
in: </li></ul><ul><li>Integrated hardware systems </li></ul><ul><li>Mainframe software </li></ul><ul><li>Integrated Services </li></ul>Interfaces not transparent Leverage: Superior performance in integrated processors yields highest MIPS integrated with systems software Bundled packages of products for enterprises

Microsoft Dominance <ul><li>Results in dominance
in: </li></ul><ul><ul><li>Applications (Office) </li></ul></ul><ul><ul><li>Enterprise Server software </li></ul></ul><ul><ul><li>Collaborative software tools for enterprises </li></ul></ul>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 &quot;leverage point&quot; Interface is transparent, but rivals cannot rent local network on competitive price and performance terms <ul><li>Results in dominance in: </li></ul><ul><ul><li>Long Distance Services </li></ul></ul><ul><ul><li>Enterprise services </li></ul></ul>Local Network

Can Google Do It Again?
<ul><li>Leverage: Dominance in search as an information utility: </li></ul><ul><ul><li>Massive storage and computing infrastructure </li></ul></ul><ul><ul><li>Large private communications network </li></ul></ul><ul><ul><li>Syndicated ad network for entire Web </li></ul></ul><ul><li>Results in dominance in: </li></ul><ul><ul><li>Enterprise Applications markets </li></ul></ul><ul><ul><li>Productivity software </li></ul></ul><ul><ul><li>Social Networking </li></ul></ul><ul><ul><li>Media and Content </li></ul></ul>

Why Google Won’t Dominate –
The Modular Revolution <ul><li>Technology plus policy have produced a new architecture for Information and Communication Technology (ICT) – Modular Architecture </li></ul><ul><li>Modular: Standardized interfaces allow “mix and match” of ICT building blocks </li></ul>

How the Modular Revolution Evolved
– Policy & 1 st Two Stages <ul><ul><li>“ Carterfone” in 1950s establishes freedom to choose equipment as long there is “no harm to the network” and “transparent interfaces” </li></ul></ul><ul><ul><li>IBM antitrust suits in 1950s establish that IBM and rivals have to design “plug and play” hardware and software </li></ul></ul><ul><ul><li>Diversified supply base of specialist firms </li></ul></ul>Computing and terminals – the “cheap revolution” in computing and terminal equipment costs and performance <ul><ul><li>AT&T break up: Ability to build your own network or rent network capabilities from dominant firm </li></ul></ul><ul><ul><li>Wireless markets: FCC affirms principle of “technology neutrality” as long as calls can be exchanged between different technology networks </li></ul></ul><ul><ul><li>Limited version of net neutrality: Telecom carriers cannot discriminate on user access to content or value added services </li></ul></ul>Communications networks – growing bandwidth at plunging prices 1 2

The Cheap Revolution Scientific American,
January 2001 Number of Years 0 1 2 3 4 5 Performance per Dollar Spent 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)

How the Modular Revolution Evolved
– Policy & 2 nd Two Stages <ul><ul><li>Microsoft antitrust: transparent interfaces </li></ul></ul><ul><ul><li>Web browser becomes the common translation device among operating systems </li></ul></ul><ul><ul><li>Web 2.0: Growth of modular code that be “recycled” by other programmers </li></ul></ul>Software and Web Services <ul><ul><li>FCC forbids cable and broadcast networks from withholding content from rival transmission networks </li></ul></ul><ul><ul><li>Audio and visual merge with data via Web </li></ul></ul><ul><ul><li>Geographic markets merge via Web </li></ul></ul><ul><ul><li>Costs of creating high quality content drops dramatically (special effects are radically cheaper) </li></ul></ul>Content (Digital Media) – YouTube 3 4

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 <ul><li>Apple’s “iPod”: makes its money on selling the terminal – the networked information is a commodity </li></ul><ul><li>Salesforce.com: provides customers with on-demand computing that supports a powerful customer relations management platform – unlike Google, it simply rents the computing infrastructure </li></ul><ul><li>Orkut (Brazil) vs. Facebook: Google has limited success in social networking </li></ul><ul><li>Asian gaming market: Only one of top fifty networked games in East Asia are from U.S. </li></ul>vs.

Challenges and Opportunities <ul><li>Modularity is
the potential of the digital technology frontier, but it requires </li></ul><ul><ul><li>Smart competition policy to be effective </li></ul></ul><ul><ul><li>Support for technology innovation </li></ul></ul><ul><li>BUT in many developing countries communications/media infrastructure is low bandwidth and high priced by global standards. </li></ul><ul><li>Most of these countries invest too little in innovation capabilities – people and research facilities </li></ul>

Opportunities <ul><li>The rise of modularity
and decline of leveraging opens many global opportunities </li></ul><ul><li>The costs for being a global media and content provider are declining rapidly </li></ul><ul><li>The ability to innovate specialized global applications for consumers and enterprises is disseminating rapidly </li></ul>

Four Examples to Consider <ul><li>Web
2.0 applications will be driven by ad revenues </li></ul><ul><li>Networked medical innovations </li></ul><ul><li>Environmental policy depends on good data—breakthroughs on networks of air monitoring sensors </li></ul><ul><li>The implications of high end research networks for economic growth and modernization </li></ul>

The Rise of New Network
Uses Source: Krishna Nathanson, IBM, 2006

Global ICT Spending by Technology
($US Billions) <ul><li>Source: WITSA's 2004, Digital Planet: The Global Information Economy. </li></ul>2007 2006 2005 2004 2003 2002 2001 2000 1999 1,800 1,500 1,200 900 600 300 0 Hardware Software Services Communications

Policy is Political Policy is
Political and Cannot be Micromanaged <ul><li>Aronson’s 3 Laws </li></ul><ul><li>Every sector believes they are unique and deserve special treatment </li></ul><ul><li>- they are not </li></ul><ul><li>2. Ever firm believes competition is great in market’s they want to enter </li></ul><ul><li>- but not in those where they already dominate. </li></ul><ul><li>Regulators are needed and won’t go away </li></ul><ul><li>- “pretty good” policy is possible </li></ul><ul><li>- “terrible” policy is common </li></ul><ul><li>- So, getting it right is critical </li></ul>

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 of agents, including mixed authority structures when delegating authority globally.

Norms to Enable the Modular
Supply Chain B. Enabling the Modular Supply Chain Norm 2: Invest heavily in the creation of virtual common capabilities for the Internet, and its successors, in a competitively neutral manner. Norm 3: Reinforce the growing competitiveness of the supply chain by partly refocusing competition policy .

Norms for the Network Infrastructure
The 10 Norms 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 Services (1)
Norms for Consumer Services D. Norms for Consumer Services Norm 6: Government policies generally should not restrict experiments new applications by limiting mixing and matching of services Or through pricing rules that limit experimentation Norm 7: Create rules for the globalization of multimedia AV content that balance the goals of encouraging the trade in services and fostering legitimate domestic media policies. Norm 8: Use networked ICT techniques and changes to tip practices toward new markets for trading and transacting digital rights.

Norms for Consumer Services (2)
Norm 9: Enhance property rights for personal data and create mechanisms to allow commercial exchanges involving those rights on standard terms . Norm 10: Users may take their information with them when they depart from specific applications and experiences and own their “click-streams.”.