Textbooks and SuppliesData and Computer Communications, 9E.docx

Textbooks and Supplies
:
Data and Computer Communications
, 9/E, William Stallings,ISBN
-
10:
0131392050 ,ISBN
-
13:
9780131392052, Publisher: Prentice Hall Copyright: 2011
Reference Books:
R
1.
Microwave and RF Design of Wireless Systems
, David M. Pozar, Wiley (2 lectures of
communication hardware
will
be from this book)
R
2.
Modern Digital an
d Analog Communication Systems
, B.P.Lathi, Oxford University Press
R
3.
Digital and Analog Communication Systems
, Leon W. Couch, II, Prentice Hall
(3
lectures of
communication hardware
will
be from this book)

Apple Inc. in 2010
On April 4, 2010, Apple Inc. launched its eagerly anticipated
iPad amid great hype. The multimedia computer tablet was the
third major innovation that Apple had released over the last
decade. CEO Steve Jobs had argued that the iPad was another
revolutionary product that could emulate the smashing success
of the iPod and the iPhone. Expectations ran high. Even The
Economist displayed the release of the iPad on its magazine
cover with Jobs illustrated as a biblical figure, noting, “The
enthusiasm of the Apple faithful may be overdone, but Mr.
Jobs’s record suggests that
when he blesses a market, it takes off.”1
The company started off as “Apple Computer,” best known for
its Macintosh personal computers (PCs) in the 1980s and 1990s.
Despite a strong brand, rapid growth, and high profits in the
late 1980s, Apple almost went bankrupt in 1996. Then Jobs
went to work, transforming “Apple Computer” into “Apple
Inc.,” with innovative non-PC products starting in the early
2000s. In fact, by 2010, the company viewed itself as a “mobile
device company.”2 In fiscal year 2009, sales related to the
iPhone
and the iPod represented nearly 60% of Apple’s total sales of
$43 billion.3 Even in the midst of a severe economic recession,
revenues and net income both soared (see Exhibits 1a through
1c). Meanwhile, Apple’s stock was making history of its own.
The share price had risen more than 15-fold since 2003 (See
Exhibit 2).
By almost any measure, Apple’s turnaround was a spectacular
accomplishment. Yet Jobs knew that no company in the
technology industry could relax. Challenges abounded. In 2009,
for example, iPod sales were falling. At the same time,
Microsoft introduced Window 7, which led to a resurgence in
PC sales. Even though Macintosh (Mac) sales had grown faster
than the industry in recent years, Apple’s share of the
worldwide PC market had remained below 5% since 1997 (see
Exhibit 3). In addition, there was great uncertainty about the

iconic CEO’s health. Jobs had taken medical leave for a liver
transplant in 2009, following treatment for pancreatic cancer a
few years earlier. Many wondered, would Jobs remain at Apple
and could the company thrive without him? Finally, would the
iPhone continue its march to dominate smartphones in the face
of growing competition from Google, RIM, and Nokia? And
would Apple’s newest creation, the iPad, take the company to
the next level?
For the exclusive use of K. Marangoz, 2018.
This document is authorized for use only by Kubra Nur
Marangoz in Strategic Management 2018 Spring taught by
Xiaoyu Pu, SUNY - New Paltz from February 2018 to August
2018.
710-467 Apple Inc. in 2010
2
Apple’s History
Steve Jobs and Steve Wozniak, a pair of 20-something college
dropouts, founded Apple Computer on April Fool’s Day, 1976.4
Working out of the Jobs family’s garage in Los Altos,
California, they built a computer circuit board that they named
the Apple I. Within several months, they had made 200 units
and taken on a new partner—A. C. “Mike” Markkula, Jr., who
was instrumental in attracting venture capital as the experienced
businessman on the team.
Jobs’s mission was to bring an easy-to-use computer to market,
which led to the release of the Apple II in April 1978. It
sparked a computing revolution that drove the PC industry to $1
billion in annual sales in less than three years.5 Apple quickly
became the industry leader, selling more than 100,000 Apple IIs
by the end of 1980. In December 1980, Apple launched a
successful IPO.
Apple’s competitive position changed fundamentally in 1981
when IBM entered the PC market. The IBM PC, which used MS-
DOS (Microsoft Disk Operating System) and a microprocessor
(also called a CPU) from Intel, was a relatively “open” system
that other producers could clone. Apple, on the other hand,

practiced horizontal and vertical integration. It relied on its own
proprietary designs and refused to license its hardware to third
parties.
IBM PCs not only gained more market share, but they also
emerged as the new standard for the industry. Apple responded
by introducing the Mac in 1984. The Mac marked a
breakthrough in ease of use, industrial design, and technical
elegance. However, the Mac’s slow processor speed and lack of
compatible software limited sales. Apple’s net income fell 62%
between 1981 and 1984, sending the company into a crisis.
Jobs, who was often referred to as the “soul” of the company,
was forced out in 1985.6 The boardroom coup left John Sculley,
the executive whom Jobs had actively recruited from Pepsi-Cola
for his marketing skills, alone at the helm.
The Sculley Years, 1985–1993
Sculley pushed the Mac into new markets, most notably in
desktop publishing and education. Apple’s desktop market was
driven by its superior software, such as Aldus (later Adobe)
PageMaker, and peripherals, such as laser printers. In
education, Apple grabbed more than half the market. Apple’s
worldwide market share recovered and stabilized at around 8%
(see Exhibit 3). By 1990, Apple had $1 billion in cash and was
the most profitable PC company in the world.
Apple offered its customers a complete desktop solution,
including hardware, software, and peripherals that allowed them
to simply “plug and play.” Apple also stood out for typically
designing its products from scratch, using unique chips, disk
drives, and monitors. IBM-compatibles narrowed the gap in ease
of use in 1990 when Microsoft released Windows 3.0. Still, as
one analyst noted, “The majority of IBM and compatible users
‘put up’ with their machines, but Apple’s customers ‘love’ their
Macs.”7
The Mac’s popularity allowed Apple to sell its products at a
premium price. Top-of-the-line Macs went for as much as
$10,000, and gross profit hovered around an enviable 50%.
However, as IBM- compatible prices dropped, Macs appeared

overpriced by comparison. As the volume leader, IBM
compatibles were also attracting the vast majority of new
applications. Moreover, Apple’s cost structure was high: Apple
devoted 9% of sales to research and development (R&D),
compared with 5% at Compaq and only 1% at many other IBM-
clone manufacturers. After adding on the Chief Technology
Officer title in 1990, Sculley tried to move Apple into the
mainstream by becoming a low- cost producer of computers
with mass-market appeal. For instance, the Mac Classic, a $999
computer, was designed to compete head-to-head with low-
priced IBM clones.
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Apple Inc. in 2010 710-467
3
Sculley also chose to forge an alliance with Apple’s foremost
rival, IBM. They worked on two joint ventures: Taligent was set
up to create a new OS, and Kaleida aimed to write multimedia
applications. Apple undertook another cooperative project
involving Novell and Intel to rework the Mac OS to run on Intel
chips that boasted faster processing speed. These projects,
coupled with an ambition to bring out new “hit” products every
6 to 12 months, led to a full-scale assault on the PC industry.
Yet Apple’s gross margin dropped to 34%, 14 points below the
company’s 10-year average. In June 1993, Sculley was replaced
by Michael Spindler, the company’s president.
The Spindler and Amelio Years, 1993–1997
Spindler killed the plan to put the Mac OS on Intel chips and
announced that Apple would license a handful of companies to
make Mac clones. He tried to slash costs, which included
cutting 16% of Apple’s workforce, and pushed for international
growth. In 1992, 45% of Apple’s sales came from outside the
United States. Yet despite these efforts, Apple lost momentum:

a 1995 Computerworld survey found that none of the Windows
users would consider buying a Mac, while more than half
the Apple users expected to buy an Intel-based PC8 (see Exhibit
4). Spindler, like his predecessor, had high hopes for a
revolutionary OS that would turn around the company’s fate.
But at the end of 1995, Apple and IBM parted ways on Taligent
and Kaleida. After spending more than $500 million, neither
side wanted to switch to a new technology.9 Following a $69
million loss in Apple’s first fiscal quarter
of 1996, the company appointed another new CEO, Gilbert
Amelio, an Apple director.10
Amelio proclaimed that Apple would return to its premium-
price differentiation strategy. Yet Mac sales fell amid Apple’s
failure to produce a new OS that would keep it ahead of
Microsoft’s Windows 95. Amelio ended up turning to Jobs. In
December 1996, Amelio announced the acquisition of NeXT
Software (founded by Jobs after he left Apple) and plans to
develop a new OS based on work done by NeXT. Jobs also
returned to Apple as a part-time adviser. Despite more job cuts
and restructuring efforts, Apple lost $1.6 billion under Amelio,
and its worldwide market share tumbled to around 3% (see
Exhibit 3). In September 1997, Jobs became the company’s
interim CEO.
Jobs and the Apple Turnaround
Jobs moved quickly to reshape Apple. In August 1997, Apple
announced that Microsoft would invest $150 million in Apple
and make a five-year commitment to develop core products,
such as Microsoft Office, for the Mac. Jobs abruptly halted the
Macintosh licensing program. Almost 99% of
customers who had bought clones were existing Mac users,
cannibalizing Apple’s profits.11 Jobs also refused to license the
latest Mac OS. Apple’s 15 product lines were slashed to just
four categories— desktop and portable Macs, for consumers and
professionals. Other restructuring efforts involved hiring
Taiwanese contract assemblers to manufacture Mac products
and revamping Apple’s distribution system from smaller outlets

to national chains. In addition, in 1997, Apple launched a
website to set up direct sales for the first time. Internally, Jobs
focused on reinvigorating innovation. Apple pared down its
inventory significantly and increased its spending on R&D (see
Exhibit 5).
Jobs’s first real coup came with the iMac in August 1998. The
$1,299 all-in-one computer featured colorful translucent cases
with a distinct eggshell design. The iMac also supported “plug-
and-play” peripherals, such as printers, that were designed for
Windows-based computers for the first time. Thanks to the
iMac, Apple’s sales outpaced the industry’s average for the first
time in years. Following Jobs’s return, Apple posted a $309
million profit in its fiscal year 1998, reversing the previous
year’s $1 billion loss.
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710-467 Apple Inc. in 2010
4
Another priority for Jobs was to break away from Apple’s tired,
tarnished image. Jobs wanted Apple to be a cultural force. Not
coincidentally, perhaps, Jobs retained his position as CEO of
Pixar, an animation studio that he bought in 1986. (Jobs later
sold Pixar to the Walt Disney Company for $7.4 billion in
2006.) Through multimillion dollar marketing campaigns such
as the successful “Think Different” ads and catchy slogans
(“The ultimate all-in-one design,” “It just works”), Apple
promoted itself as a hip alternative to other computer brands.
Apple ads were placed in popular and fashion magazines as
well, venturing out from general computer publications. Later
on, Apple highlighted its computers as “the world’s greenest
lineup of notebooks” since they were energy efficient and used
recyclable materials.12 The goal was to differentiate the Mac
amid intense competition in the PC industry.

The Personal Computer Industry
While Apple pioneered the first usable “personal” computing
devices, it was IBM that brought PCs into the mainstream in the
1980s. But by the early 1990s, a new standard known as
“Wintel” (the Windows OS combined with an Intel processor)
dominated the industry. Thousands of manufacturers—ranging
from Dell Computer to no-name clone makers—built PCs
around standard building blocks from Microsoft and Intel.
Growth was driven by lower prices and expanding capabilities.
The overall industry continued to boom through the early 2000s,
propelled by Internet demand and emerging markets such as
China and the Middle East. By 2010, more than one billion PCs
were in use around the world.
Revenue growth, however, failed to keep pace with volume
growth. Despite PCs that were faster and had more memory and
storage, average selling prices (ASPs) declined by a compound
annual rate of 8% per year between 1999 and 2005.13 Prices for
key components (CPUs, memory, and hard
disk drives) dropped even faster, by an average annual rate of
30%.14 As a result, most PC manufacturers’ average profit
margins fell below 5%.15 The standardization of components
also led PC makers to cut spending on research and
development. By the early 2000s, Dell—then the industry
leader—devoted about 1% of revenue to R&D. Contract
manufacturing in Taiwan and China became popular and took
over more complex areas, such as design and testing.
New PC products emerged as well. More expensive laptop
computers gained traction starting in the late 1980s. Two
decades later, portable PCs represented 57% of worldwide PC
shipments and
were expected to reach 70% by 2012.16 Like desktops, lower
prices led to higher sales volume; the ASP for a laptop was
around $544 toward the end of 2009, nearly half of the ASP in
2007.17 Meanwhile, a new sub-product category of netbooks
took off during the global economic downturn in 2009. These
lightweight mini notebooks had limited storage capacity and

were optimized for the
Web. Price-sensitive buyers loved the price; a netbook usually
sold for around $400.18
Buyers and Distribution
PC buyers fell into five categories: home, small- and medium-
sized business (SMB), corporate, education, and government.
Home consumers represented the biggest segment, accounting
for nearly half of worldwide PC shipments.19 While all buyers
cared deeply about price, home consumers also valued design,
mobility, and wireless connectivity; business consumers
balanced price with service and support; and education buyers
depended on software availability.
In distribution, a significant shift occurred in the early 1990s
when more knowledgeable PC customers moved away from full-
service dealers that primarily sold established brands to
business
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Apple Inc. in 2010 710-467
5
managers. Instead, larger enterprises bought directly from the
manufacturer, while home and SMB customers started to buy
PCs through superstores (Wal-Mart, Costco), electronics
retailers, (Best Buy, Circuit City), and web-based retailers. At
the same time, the so-called “white box” channel—which
featured generic machines assembled by local entrepreneurs—
represented a large channel for PC sales, especially in key
emerging markets. White-box PCs reportedly represented about
30% of the
overall market in 2009 and were most frequently sold into the
small-office and home-office markets.20
PC Manufacturers
The four top PC vendors—Hewlett-Packard (HP), Dell, Acer,

and Lenovo—accounted for 55% of worldwide shipments in
2009 (see Exhibit 6). Industry leader HP had staged an
impressive comeback following a rough period with the
acquisition of Compaq Computer in 2002. HP was also the
world’s largest technology company, diversifying into services,
servers, and storage. Around two-thirds of HP’s PCs were sold
outside the U.S. HP also had a strong retail presence through
110,000 worldwide outlets. Dell, on the other hand, stumbled
(see Exhibit 7). Its distinct combination of direct sales and
build-to-order manufacturing was a hit in the corporate market.
Yet Dell was late to catch the consumer boom. Founder Michael
Dell returned as CEO in January 2007 and emphasized
consumer- friendly products, reentered retail distribution, and
pushed for international expansion. Still, Dell struggled with
cost controls and poor margins. In 2009, Dell was the only top-
four PC vendor to lose its worldwide market share.
Acer and Lenovo, active in emerging markets, both benefited
from acquisitions of high-profile U.S. PC brands. In 2007,
Taiwan-based Acer bought Gateway, a leading U.S. PC brand,
and became the third-largest PC vendor in the world. Acer also
acquired Packard-Bell, a PC maker with a strong presence in
Europe (where Acer also was a leading brand). The company’s
worldwide PC shipments grew 22% in 2009, the fastest among
its competitors, thanks to Acer’s strength in notebooks and
netbooks.21 China-based Lenovo vaulted into the front ranks of
PC vendors in 2005 when it acquired IBM’s money-losing PC
business for $1.75 billion. Lenovo’s greatest strength was its
dominant position in China, where it commanded a third of the
market.
Suppliers, Complements, and Substitutes
Suppliers to the PC industry fell into two categories: those that
made products—such as memory chips, disk drives, and
keyboards—that had many sources; and those that made
products—notably microprocessors and operating systems—that
had just a few sources. Products in the first category were
widely available at highly competitive prices. Products in the

second category were supplied chiefly by two firms: Intel and
Microsoft.
Microprocessors Microprocessors, or CPUs, were the hardware
“brains” of a PC. Intel commanded roughly 80% of the PC CPU
market. Competition emerged in the 1990s from companies like
Advanced Micro Devices and, later, VIA Technologies. Still,
Intel remained the market leader with leading-edge technology,
manufacturing scale, and a powerful brand. Since 1970, CPU
prices
(adjusted for changes in computing power) had dropped by an
average of 30% per year.22
Operating systems An OS was the software that managed a PC’s
resources and supported its applications. Microsoft had
dominated this market since the IBM PC in the 1980s. More
than 90% of all PCs in the world ran some version of Windows.
Microsoft’s big hit in the last decade was Windows XP.
Introduced in October 2001, XP sold 17 million copies in its
first eight weeks of sales. Developed at a cost of $1 billion, XP
initially garnered Microsoft between $45 and $60 in revenue per
copy.23 Vista, the next version introduced in 2007, did not fare
as well. Consumers complained about
2018.
710-467 Apple Inc. in 2010
6
its sluggish performance and were reluctant to upgrade to Vista.
Two years later, Windows 7 was released to strong reviews.
Analysts estimated that Microsoft spent $1.5 billion to develop
Windows 7 and another $1 billion in marketing. Microsoft
shipped over 60 million units of the new OS in its first quarter
of sales in the fall of 2009, generating almost $7 billion in
revenue. Windows 7 was the fastest- selling OS in history.24
Application software, content, and complementary products The

value of a computer corresponded directly to the complementary
software, content, and hardware that were available on that
platform. Key application software included word processing,
presentation graphics, desktop publishing, and Internet
browsing. Since the early 1990s, the number of applications
available on PCs exploded, while ASPs for PC software
collapsed. Microsoft was the largest vendor of software for
Wintel PCs and, aside from Apple itself, for Macs as well.25
Firms such as Google even offered productivity software
(Google Apps) for free. PCs also benefited from a wide
selection of content and a vast array of complementary
hardware, ranging from printers to multimedia devices.
Alternative technologies Since the early 2000s, consumer
electronics (CE) products, ranging from cell phones and PDAs
to TV set-top boxes to game consoles, started to encroach on
functionality that was once the sole purview of the PC. For
example, advanced game devices like Sony PlayStation3
allowed consumers to watch DVDs, surf the Web, and play
games directly online in addition to playing traditional video
games. At the same time, smartphones increasingly functioned
as handheld computers, allowing users to send and receive
email, visit websites, and manage their online lives. While
several industry insiders worried about the impact of digital
devices on the PC industry, Jobs had a different view—
positioning the Mac at the heart of his business strategy for
Apple.
The Macintosh and Apple’s “Digital Hub” Strategy
In 2001, marking Apple’s 25th anniversary, Jobs presented his
vision for the Mac in what he called the “digital hub.” He
believed that the Mac had a real advantage for consumers who
were becoming entrenched in a digital lifestyle, using digital
cameras, portable music players, and digital camcorders, not to
mention mobile phones. The Mac could be the preferred “hub”
to control, integrate, and add value to these devices. Jobs
viewed Apple’s control of both hardware and software, one of
the very few remaining in the PC industry, as a unique strength.

Apple subsequently revamped its product line to offer machines
that could deliver a cutting-edge, tightly integrated user
experience. Although the company remained committed to the
education market, new PC products focused on home
consumers’ lifestyles. Thanks to several technological
innovations and a new retail strategy, Apple became the fourth-
largest PC vendor in the U.S. market with an 8% share by the
end of 2009.26 The company’s greatest strength lay in the
premium-priced PC
category; 91% of PCs priced $1,000 and above in the U.S.
market were sold by Apple.27
Shift to Intel CPUs Apple introduced the first Mac computer to
run on an Intel chip in 2006. By the next year, the entire
Macintosh line ran on Intel chips that were better for laptops as
well as for higher-performance desktops and servers.28 Critical
to the Mac’s resurgence, Intel’s chips enabled
Apple to build laptops that were both faster and less power-
hungry.29 By fiscal year 2009, notebooks accounted for 69% of
all Mac sales compared to 38% seven years earlier. With “Intel
inside,” the Mac also became a machine that could natively run
a Windows OS along with Windows applications. This
capability potentially offset a long-standing disadvantage to
choosing a Mac—the relative lack of Macintosh software.
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Apple Inc. in 2010 710-467
7
Operating system Apple introduced a new OS in 2001, the first
fully overhauled platform released since 1984. The Mac OS X
was based on UNIX, a more stable, industrial-strength OS
favored by computer professionals. Analysts estimated that OS
X cost Apple roughly $1 billion to develop. Apple issued
upgrades every 12 to 18 months, in greater frequency than what

Microsoft had done with Windows. The sixth version, named
“Leopard,” was released in October 2007 and sold two
million copies in its opening weekend.30 By January 2010,
Leopard was running on more than half of all Mac computers.31
Early sales of the following Snow Leopard version indicated
high adoption rates as well. According to one market survey,
81% of Leopard users were “very satisfied” with the OS
compared to 53% of Windows XP users.32
Applications Proprietary, Apple-developed applications made
up a growing segment of the company’s efforts to support the
Macintosh line. Building programs such as those in the iLife
suite
(iPhoto, iTunes, iWeb) required Apple to assume significant
development costs.33 At the same time, the company continued
to depend on the cooperation of key independent software
vendors— especially Microsoft. In 2003, after Apple developed
its Web browser Safari, Microsoft said it would no longer
develop Internet Explorer for the Mac. However, Microsoft did
continue to develop its Office suite for the Mac. Full
interoperability with Office products was critical to the Mac’s
viability. Microsoft benefitted from this arrangement as well.
By one estimate, it sold close to $1 billion of Office software to
Mac users. Jobs still hedged his bets by developing iWork
productivity
applications, including Pages, Keynote, and Numbers.34
Distribution The first Apple retail store opened in McLean,
Virginia, in 2001. Apple wanted consumers to not only look at
the eye-catching Macintosh designs, but to directly use and
experience Apple’s software. The Apple retail experience gave
many consumers their first exposure to the Mac product line. By
2009, the company estimated that half of all Mac retail sales
were to “new to Mac”
customers.35 The retail division—with more than 280 stores in
10 countries—grew to account for 16% of Apple’s total
revenue.36 Observers viewed Apple’s retail strategy as a huge
success: one analyst

said that the company had become “the Nordstrom of
technology.”37 Other retail revenues were explored as well,
such as entering a partnership with Best Buy, the world’s
largest electronics retailer. Yet a key factor in bringing people
into the stores, most analysts believed, was the popularity of the
iPod.
Moving Beyond the Macintosh
Apple’s shift toward a digital hub strategy was initiated by the
debut of the iPod in 2001, followed by the iPhone in 2007, then
the iPad in 2010. These product lines set Apple on a path
toward becoming a full-fledged digital convergence company.
The change in the company’s name from “Apple Computer” to
“Apple Inc.” in 2007 marked the official repositioning of the
company.
The iPod Sensation
While the prospects for the Macintosh business had improved, it
was the iPod that set Apple on its explosive growth path. The
iPod was initially one of many portable digital music players
based on the MP3 standard. Thanks to its sleek design, simple
user interface, and large storage, it soon became “an icon of the
Digital Age,” in the words of one writer.38 While early MP3
players stored only an hour of music, the first iPod stored up to
1,000 songs and retailed for $399. Over the next five years,
Apple delivered one new innovative design after another. By
2010, Apple reportedly held more than
70% of the MP3 market in the U.S. 39
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710-467 Apple Inc. in 2010
8
The economics of the iPod were stellar by CE industry
standards. The iPod nano, for example, had gross margins of
around 40% in 2007.40 The biggest cost component for the nano

was flash memory, which could account for more than half of
the bill of materials. Recognizing the importance of flash
memory, Apple set out to ensure that it got the best prices. In
November 2005, for example, Apple agreed to pay $500 million
up front to Intel and Micron to secure “a substantial portion” of
their
memory output.41 Similar deals were made with Hynix,
Samsung, and Toshiba. Apple subsequently became one of the
largest purchasers of flash memory in the world.
Apple’s approach to developing and marketing the iPod was
more open than its strategy for the Mac. The iPod could sync
with Windows as well as a Mac. Apple also built an ecosystem
with the iPod accessory market that ranged from fashionable
cases to docking stations. For every $3 spent on an iPod,
according to one analyst, consumers spent another $1 on iPod
add-on products.42 Apple, through a program that licensed its
“Made for iPod” logo, earned an estimated 5% of the retail
price
of such items.43 Many analysts also believed that the iPod’s
“halo effect” had benefitted Apple’s Mac business.44
Within the iPod product line, the Touch was Apple’s premier
device. Released in 2007, the Touch was the first iPod that had
built-in WiFi, a 3.5-inch screen, and a multi-touch graphical
interface. Popular handheld game players such as the Nintendo
DS and Sony PSP suddenly found themselves competing with
the Touch. Some 35 million iPod Touch devices had been sold
by April 2010.45
While iPods were available in all price segments, iPod ASPs
generally ran $50 to $100 higher than the competition.46 Rivals
in the MP3 player market included SanDisk, Creative, and
Samsung; each had a market share below 10%. Microsoft also
introduced its Zune line of music players in 2006. At the
hardware level, most players were roughly comparable to iPod
models. Yet competitors found themselves at a major
disadvantage with the emergence of Apple’s iTunes store.
iTunes Two features that dramatically differentiated the iPod

were its iTunes desktop software, which synchronized iPods
with computers, and its iTunes Music Store, which opened in
April 2003. The two, in combination, completed Apple’s vision
of an entertainment hub.47 The iTunes store was the first legal
site that allowed music downloads on a pay-per-song basis.
Visitors could pay 99 cents per song for a title offered by all
five major record labels and by thousands of independent music
labels. The downloaded songs could be played on the user’s
computer, burned onto a CD, or transferred to an iPod. Within
three days of launching the service, PC owners had downloaded
one million copies of free iTunes software and had paid for one
million songs.48 Customers loved the vast music selection and
ease of use, transforming the iTunes store into the
number-one music store in the world.49 By February 2010, it
had sold 10 billion songs and featured the world’s largest music
catalog. Offerings expanded to audiobooks and TV shows,
including the latest episodes of popular shows such as American
Idol. In addition, over 8,000 movies titles could be rented or
downloaded to own, catering to iPod Touch owners.
The launch of the iTunes store had a galvanic impact on iPod
sales. Before the advent of iTunes, Apple sold an average of
113,000 iPods per quarter. After the iTunes launch, iPod sales
shot up to
733,000 units and exploded thereafter.50 The direct impact of
iTunes on Apple’s profitability was far less impressive. Of the
99 cents that Apple collected per song, as much as 70 cents
went to the music label that owned it, and about 20 cents went
toward the cost of credit card processing. That left Apple with
only about a dime of revenue per track, from which Apple had
to pay for its website along with other direct and indirect
costs.51 In essence, Jobs had created a razor-and-blade
business, only in
reverse: here, the variable element served as a loss leader for a
profit-driving durable good.52

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Apple Inc. in 2010 710-467
9
Central to the initial iTunes model was a set of standards that
guarded both the music labels’ intellectual property and the
proprietary technology inside the iPod. An Apple-exclusive
digital rights management (DRM) system called FairPlay
protected iTunes songs against piracy by limiting the number of
computers that could play a downloaded song to five. FairPlay
enabled Jobs to coax music executives into supporting the
initial iTunes venture. No competing MP3 player could play
FairPlay-protected songs.53 Observers called iTunes a “Trojan
horse” that allowed iPod-specific standards to invade users’
music libraries and, in effect, to lock out other music players.54
The iPod, meanwhile, could play content recorded in most
standard formats.
Despite the success of iTunes, Apple had a tense relationship
with content companies. They balked at its dominance of the
digital music market and objected, in particular, to its fixed
pricing structure. Music labels also saw their higher-priced CD
sales pushed aside in favor of 99-cent a-la- carte downloads.
Then, in a revised agreement announced in 2009, music labels
gave up the DRM in exchange for flexible pricing, allowing
them to charge more for new or popular songs. In addition, the
removal of DRM allowed people to move the songs they bought
on iTunes among different computers, phones, and other
devices.
Competition Online music stores such as Amazon.com, Napster,
and Walmart.com offered individual song downloads at
competitive or discounted prices to iTunes. To put more
pressure on Apple, music labels had allowed some of these
stores to sell DRM-free music for more than a year before
signing the new agreement with Apple. Some had subscription
plans that allowed unlimited listening, starting at $5 per month.

Social networking service MySpace—where millions of music
artists maintained profile pages to promote their music—formed
a partnership with three major music labels to unveil its own
music service in 2008. Most of these competitors offered songs
to play on various devices, including the iPod.
In addition to music-streaming services from social networks,
Apple and other MP3 players had to consider other challenges.
Internet radio sites, such as Pandora and Last.fm, offered free
streaming music. Spotify, Europe’s largest legal online music
jukebox that was partially owned by major music labels,
allowed users to create their own playlists, share them, and
stream free music like a virtual MP3 player. Although Spotify
was not yet available in the U.S., in markets where service was
available, some music labels were making more money from
Spotify than iTunes.55 Even mobile handset manufacturers such
as Nokia started to bundle unlimited music services with their
phones.
Jobs had two responses to these threats. In 2009, he bought
Lala.com, a music-streaming service. The deal raised
speculations that Apple could be exploring an alternative model
to store and play digital music, bypassing downloads on a media
player altogether. And of course, in June of 2007, he introduced
the iPhone.
The iPhone
Hailed as Time magazine’s “Invention of the Year” for 2007,
the iPhone represented Apple’s bid to
“reinvent the phone.”56 Two and a half years of development
efforts had been devoted to the phone, guarding it under intense
secrecy, even among the company’s own employees. The
estimated development cost was around $150 million.
Entry into mobile phones might have been a risky move for
Apple. The industry was dominated by Nokia, Motorola, and
Samsung, with roughly 60% market share. In addition, products
were characterized by short product life cycles (averaging six to
nine months) and sophisticated technology, including radio
technology, where Apple had little experience. In distribution,

Apple faced powerful cellular carriers such as NTT DoCoMo
and Vodafone, which controlled the networks
2018.
710-467 Apple Inc. in 2010
10
and often the phones used on those networks. In the U.S., the
top two carriers—Verizon Wireless and AT&T—collectively
controlled more than 60% of the market, and their networks
were “locked”: an AT&T phone would work only on AT&T’s
network. Especially in the U.S., a handset manufacturer was
usually dependent on the operator to provide a subsidy, which
could lower the consumer’s purchase price of a popular new
handset by as much as $150 or more. In return, most consumers
signed a two-year service contract with the carrier. Operators
also maintained “walled gardens,” which required consumers to
access content only from their own networks. Price competition
was especially intense in emerging markets like China and
India, where, like the PC market, manufacturers had to compete
with white-box phones.
In the early days when a mobile phone’s foremost purpose was
to make calls, consumers selected a handset based on its
appearance and service provider. Starting in the mid-1990s, the
industry’s preference shifted toward feature phones that offered
more attractive hardware designs and user- friendly interfaces, a
shift that was pioneered by Nokia, the world’s largest mobile
phone manufacturer. Multimedia functions, such as a camera,
were added as well. Then smartphones rose to prominence in the
next decade. These high-end phones brought multiple functions
together in the palm of one’s hand, serving as a mobile phone,
Internet browser, PDA device (for managing schedules and
address books, for example), and media player.
The iPhone, however, changed the rules in the industry. A

revolutionary 3.5-inch touch-screen interface placed commands
at the touch of users’ fingertips without a physical keyboard.
The iPhone’s entire system ran on a specially adapted version of
Apple’s OS X platform. Above all, users found it intuitive to
use. The first model was priced at $499 for an 8-GB model. At
that time, handsets
that cost more than $300 accounted for only 5% of worldwide
mobile phone sales.57 AT&T, the exclusive U.S. operator for
the iPhone, did not provide a subsidy. Instead, AT&T agreed to
an unprecedented revenue-sharing agreement with Apple, which
gave Apple control over distribution, pricing, and branding.
The first-generation iPhone sold about six million units over
five quarters. However, more than a million had been sold in the
“gray market,” in which consumers bought iPhones from
unauthorized resellers and used them on unsanctioned mobile
networks. Apple’s demand for a share of service revenue had
led to only a few markets in the world with legal iPhone
distribution. One estimate
suggested that Apple could lose $1 billion over three years from
the loss of service-share revenue.58
The second iPhone model was released in 2008. This version
ran on a faster 3G network. More importantly, Apple had
revamped the pricing model under a new agreement with AT&T.
The carrier provided a subsidy on the phone in exchange for
dropping the revenue-sharing agreement. Consumers could buy
an 8-GB iPhone with a two-year contract for $199. An
unsubsidized iPhone could cost $599 for the same version. With
the 3G model, iPhone revenues exploded to $13 billion by the
end of fiscal year 2009 (see Exhibit 1b). A third version, the
iPhone 3GS, went on sale in June 2009. With its release, the
subsidized price of the 8-GB iPhone dropped down to $99.
Analysts estimated that Apple generated an ASP of $562 from
its iPhones, while competitors’
ASPs on similar handsets ranged between $300 and $400.59
Falling component costs and design improvements helped to
reduce the iPhone’s cost structure. According to one analysis,

the bill of materials for the latest 16-GB model was just under
$180.60 The first iPhone, with half of that storage
capacity, cost around $220 to build.61 Lower prices and wider
international distribution (94 countries) fueled sales. AT&T
also benefitted from being the exclusive carrier for the iPhone
in the U.S. The carrier generated an average revenue per user
(ARPU) of $95 with the iPhone. The ARPU for the top three
U.S. carriers was, in contrast, around $50.62
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Apple Inc. in 2010 710-467
11
Within two years, the iPhone went from zero to 30% of Apple’s
total revenue. In terms of global smartphones sales, the iPhone
was the biggest growth story, capturing more than 14% of the
market (see Exhibit 8). Like the iTunes store, a key factor
behind the iPhone sensation was the extension of the iPhone’s
ecosystem with the launch of Apple’s App Store in 2008.
App Store Software applications for PDAs and smartphones had
been around for years. Palm Inc., the PDA market leader in the
1990s, was known for its wealth of third-party-developed
applications. Microsoft similarly had more than 20,000 apps
written for its mobile OS. These applications could be
downloaded through multiple outlets with an average price of
$10 or more. But Apple’s App Store was the first outlet that
made it easy to distribute, access, and download applications
directly onto the mobile phone. Customers could download apps
onto their iPhones over the network or download them to their
PC. Many apps were free; even paid apps usually started at 99
cents. The App Store was introduced as part of iTunes, which
consumers were already familiar with through the iPod. Third-
party developers also welcomed the App Store because Apple
made it easier to reach consumers. Apple reserved the right to

approve all applications before they went on sale, and it kept a
30% cut of the developer’s app sales.
The popularity of the App Store was stunning. In about 18
months, four billion applications had
been downloaded by iPhone and iPod Touch users worldwide.63
More than 185,000 applications were offered in some 20
categories, ranging from games to health to business
productivity programs. Walt Mossberg, the well-known
technology columnist for the Wall Street Journal, even claimed,
“The App Store is what makes your device worth the price.”64
Mobile apps had turned into a nice side business for Apple as
well. Around $4 billion was spent on mobile phone applications
in 2009, the
bulk of which was spent on iPhone apps.65 Excluding
developers’ shares, that still left Apple with about $1 billion
dollars in app sales.66 Apple’s blockbuster hit sent competitors
rushing to offer their own application stores and touch-screen
devices as well.
Competitors Apple’s competitors fell into two large categories,
based on their business models. Research In Motion (RIM),
Palm, and to a lesser extent, Nokia, took an approach similar to
Apple by controlling both hardware and software. RIM’s
BlackBerry smartphones delivered one of the best mobile e-mail
experiences and was a popular choice among corporate
consumers. BlackBerrys were offered through approximately
550 carriers in 175 countries.67 By far, RIM and Apple were
the most profitable smartphone companies in the world:
According to the Wall Street Journal, RIM and Apple accounted
for roughly 5% of the total unit value of the cellphone industry
but
60% of total operating profits in 2009.68 Palm, on the other
hand, was struggling to survive. Over the prior decade, a series
of breakups and mergers left Palm in disarray. Despite new
phones with good reviews, Palm continued to suffer. In March
2010, Palm reported its 11th consecutive quarterly loss.
The leader in smartphones was Nokia. Its Symbian OS held 47%

of worldwide smartphone sales (see Exhibit 8). The company’s
strength lay in Europe and emerging markets such as India and
China. However, Nokia’s smartphone market share had slipped
dramatically. Nokia had a weak presence in the U.S., a key
market for smartphones, and struggled to find U.S. carriers to
subsidize its handsets. In 2010, Nokia announced that it would
abandon Symbian for its high-end smartphones, opting for a
new OS developed jointly with Intel. Rejecting Apple’s closed
system, the new Nokia OS, named MeeGo, would become a
free, open platform. One of the main goals was to attract more
software developers to write programs and applications for its
app store, named Ovi.
Meanwhile, manufacturers such as HTC, Samsung Electronics,
LG Electronics, and Motorola were taking a different approach.
These firms mostly licensed their operating systems from
Microsoft or used Google’s free Android OS.69 Microsoft was
one of the few leading platforms that still charged a
2018.
710-467 Apple Inc. in 2010
12
license fee. It was banking on regaining its lost market share
with a next-generation Windows Phone 7 platform, which
Microsoft aimed to start shipping around the 2010 holiday
season. Android, on the other hand, was an open platform that
allowed mobile operators and handset makers to use it for free
with few restrictions. By 2010, there were about 50 Android-
based smartphone models in the market and Android had gained
a 4% market share.
Moreover, Android Marketplace, Google’s competitive app
store to iTunes, was gaining momentum (see Exhibit 9). A
survey of developers in the spring of 2010 suggested that 87%
were very interested in developing iPhone apps; 81% for

Android apps, with Blackberry and Microsoft a distant third and
fourth, at 43% and 34% respectively.70 Competition between
Apple and Google was expected to intensify with iAd, Apple’s
own ad system, introduced in April 2010. iAd would allow App
Store developers to include ads in their software while Apple
tried to tap its App Store customer base to reach out to the
evolving mobile ad market. One study indicated that an iPhone
user had an
average of 37 applications on the device compared to Android’s
average of 22 apps.71
Limitations of the iPhone Despite enormous momentum, the
iPhone had its critics. In several markets around the world,
Apple’s decision to restrict the iPhone to a single network
operator was unpopular. In the U.S., AT&T’s network had
spotty data access and dropped calls, especially in New York
City and San Francisco. Some even opted to stick with a more
reliable carrier such as Verizon Wireless and purchase the iPod
Touch instead. Other complaints included the lack of a physical
QWERTY keyboard, especially among high-volume e-mail
users. The battery life, although improved, was relatively weak,
and users could not replace the iPhone battery or add memory.
The iPhone did not support Flash technology, which meant that
the device could not play embedded video featured on many
websites or view shows through Hulu, a popular website that
provided streamed video and movies.
The iPad
The launch of the iPad in 2010 was yet another bold move by
Jobs to redefine an industry. Positioned between a smartphone
and a laptop computer, the iPad was priced from $499 to $829.
The computer tablet featured a 9.7-inch LED screen for reading
books, watching movies, and using some business productivity
applications. In fact, several reviews referred to the iPad as a
“giant iPod Touch” with almost identical hardware and
interface. The iPad could either connect to the Internet via
WiFi, or consumers could buy a premium iPad and then spend
another $30 per month for AT&T’s unlimited 3G service. The

device could run almost all iPhone apps, with some limitations.
To offset those limitations, software developers had already
released over 1,000 applications specifically developed for the
iPad at the time of its launch.
Apple took a somewhat different approach to the iPad compared
to the iPod and the iPhone. Going back to his roots, Jobs
decided to take more control over the components. Between
2008 and 2010, Jobs bought two microprocessor-design
companies for about $400 million.72 The iPad became the first
Apple product to run on its own branded chip, the A4. Like
Intel’s Atom or Qualcomm’s Snapdragon CPUs, the A4 was
specifically designed for next-generation mobile devices that
required low power and fast processing speed. Apple claimed
that the A4 enabled the iPad to deliver 10 hours of battery life.
More than 450,000 iPads were sold during its first week on the
market. Jobs commented, “It feels
great to have the iPad launched into the world—it’s going to be
a game changer.”73 Yet the jury was out on the device.
Computer tablets, before the iPad’s launch, accounted for less
than 1% of the PC
market.74 The iPad still lacked a physical QWERTY keyboard,
to the frustration of many business
2018.
Apple Inc. in 2010 710-467
13
consumers. It could not take advantage of Flash video or
animation on the Web. A top complaint was the lack of multi-
tasking to run different apps in the background. In April 2010,
Jobs announced that the new iPhone OS 4 would enable
multitasking, and analysts expected the new OS to be available
for iPads later in the year.
Perhaps the biggest debate about the iPad was its usage model.

One possibility was that the iPad would replace the Kindle,
Amazon.com’s hugely successful e-reader. But Jobs had bigger
ambitions. He argued that the iPad would be a netbook killer
and drive new consumer behavior. Others thought that the iPad
could not replace a laptop, questioning whether consumers
would really spend as much as $829 to carry around a third
device.
Another controversy for the iPad was its relationship with
publishers. For content on the iPod and iPhone, Jobs had
insisted on low prices (99 cents for songs, and free or low-
priced apps). But in trying to woo book and magazine
publishers to the iPad, Jobs took a more flexible strategy.
Industry leader Amazon held an estimated 90% of the small but
growing e-book market. Before the iPad, Amazon had insisted
that electronic books for its Kindle could not be priced higher
than $9.99. When Apple entered the market, it chose to let
publishers set their own prices, usually ranging from $12 to $15
for an e-book, and took a 30% cut from the sales. After the
announcement of the iPad, Amazon was forced to allow some
publishers to set their own prices on Kindle books.
The hype over the iPad produced an immediate competitive
response: at least a dozen companies announced plans to ship
tablets in 2010, including HP, which said it would make a
Wintel-based tablet, and Dell, which planned to ship an
Android-based tablet.
The Occasional Failures
While almost everything that Jobs had touched in the first
decade of the 21st century had turned to gold, his record was
not unblemished. Apple had two notable products that failed to
live up to expectations. One was the Mac Mini in 2005. As
Apple’s entry-level desktop, the $599 price tag did not come
with a keyboard or a mouse. The Mac Mini had limited memory
and few expansion options. Consumers could get a similar
Windows desktop with more functions and faster performance at
a lower price. The other disappointment was Apple TV.
Introduced in 2007, the set- top box was Apple’s attempt to

bring digital video content directly into consumers’ living
rooms. Users could stream movies and TV shows to a TV set
after downloading content from iTunes. However, Apple TV
sales were paltry compared to Apple’s other products. Nearly
three years after its release, the company’s management
continued to refer to Apple TV as a “hobby.”
Apple Inc. in the Next Decade?
Few, if any, could disagree that Apple’s evolution from a PC
manufacturer to a mobile device company had been a
spectacular success. Most of the credit went to Steve Jobs, the
man who had “changed the rules” for the company and the
industry, again and again. As Apple’s market capitalization
approached $220 billion in the spring of 2010, surpassing IBM,
HP, Cisco, Intel, and the rest of the tech world except
Microsoft, one couldn’t help but wonder—could anything derail
Apple’s momentum? The history of technology companies was
littered with speeding rockets headed to the sky, only to fall
back to earth with a crash. Jobs had to think: Was his second act
with Apple going to be the exception?
2018.
Chapter 2
Protocol Architecture, TCP/IP, and OSI
Wireless Communication Technology
(WCT)

Today
A simple example - 3 Layers Structure
TCP/IP – 5 Layers Structure *

Standard OSI - 7 Layers Structure
Problem 2.7 and Homework Assignments

The Need For Protocol Architecture

3
3
When computers, terminals, and/or other data processing
devices exchange data, the procedures involved can be quite
complex. Consider, for example, the transfer of a file between
two computers. There must be a data path between the two
computers, either directly or via a communication network. But
more is needed. Typical tasks to be performed:
1. The source system must either activate the direct data
communication path or inform the communication network of
the identity of the desired destination system.
2. The source system must ascertain that the destination
system is prepared to receive data.
3. The file transfer application on the source system
must ascertain that the file management program on the
destination system is prepared to accept and store the file for
this particular user.
4. If the file formats used on the two systems are
different, one or the other system must perform a format
translation function.
To transfer data several tasks must be performed:
1.) the source must activate communications path or inform
network of destination
2.) the source must make sure that destination is prepared to

receive data
3.) the file transfer application on source must confirm file
management program at destination is prepared to accept and
store file
4.) a format translation function may need to be performed if
the formats on systems are different
Functions of Protocol Architecture-Layers
breaks logic into subtask modules which are implemented
separately
modules are arranged in a vertical stack
each layer in the stack performs a subset of functions
relies on next lower layer for primitive functions
changes in one layer should not require changes in other layers

4
It is clear that there must be a high degree of cooperation
between the two computer systems. Instead of implementing the
logic for this as a single module, the task is broken up into
subtasks, each of which is implemented separately. In a protocol
architecture, the modules are arranged in a vertical stack. Each

layer in the stack performs a related subset of the functions
required to communicate with another system. It relies on the
next lower layer to perform more primitive functions and to
conceal the details of those functions. It provides services to the
next higher layer. Ideally, layers should be defined so that
changes in one layer do not require changes in other layers.
Of course, it takes two to communicate, so the same set of
layered functions must exist in two systems. Communication is
achieved by having the corresponding, or peer, layers in two
systems communicate. The peer layers communicate by means
of formatted blocks of data that obey a set of rules or
conventions known as a protocol.
4
A Simple Protocol

5
5
In very general terms, distributed data communications can be
said to involve three agents: applications, computers, and
networks. Examples of applications include file transfer and
electronic mail. These applications execute on computers that
typically support multiple simultaneous applications. Computers
are connected to networks, and the data to be exchanged are
transferred by the network from one computer to another. Thus,
the transfer of data from one application to another involves
first getting the data to the computer in which the application
resides and then getting it to the intended application within the
computer.
agents involved:
examples of applications include file transfer and electronic
mail

these execute on computers that support multiple simultaneous
applications
applications
computers
networks
Communication Layers
communication tasks are organized into three relatively
independent layers:
Network access layer
concerned with the exchange of data
Transport layer
provides reliable data transfer
Application layer
Contains logic to support applications

6
6
With these concepts in mind, it appears natural to organize the

communication task into three relatively independent layers:
network access layer, transport layer, and application layer.
Network Access Layer
covers the exchange of data between an end system and the
network that it is attached to
concerned with issues like :
destination address provision
invoking specific services like priority
access to & routing data across a network for two end systems
attached to the same network

7
7
The network access layer is concerned with the exchange of
data between a computer and the network to which it is
attached. The sending computer must provide the network with
the address of the destination computer, so that the network may
route the data to the appropriate destination. The sending
computer may wish to invoke certain services, such as priority,
that might be provided by the network. The specific software
used at this layer depends on the type of network to be used;
different standards have been developed for circuit switching,
packet switching, local area networks (LANs), and others. For
example, IEEE 802 is a standard that specifies the access to a
LAN; this standard is described in Part Three. It makes sense to
put those functions having to do with network access into a
separate layer. By doing this, the remainder of the
communications software, above the network access layer, need
not be concerned about the specifics of the network to be used.
The same higher-layer software should function properly
regardless of the particular network to which the computer is
attached.

8
8
Regardless of the nature of the applications that are exchanging
data, there is usually a requirement that data be exchanged
reliably. That is, we would like to be assured that all of the data
arrive at the destination application and that the data arrive in
the same order in which they were sent. As we shall see, the
mechanisms for providing reliability are essentially independent
of the nature of the applications. Thus, it makes sense to collect
those mechanisms in a common layer shared by all applications;
this is referred to as the transport layer.
Protocol Architecture and Networks

9
Stallings DCC9e Figure 2.1 indicates that modules at the same
level (peers) on different computers communicate with each
other by means of a protocol. An application entity (e.g., a file
transfer application) in one computer communicates with an
application in another computer via an application-level
protocol (e.g., the File Transfer Protocol). The interchange is
not direct (indicated by the dashed line) but is mediated by a
transport protocol that handles many of the details of
transferring data between two computers. The transport protocol
is also not direct, but relies on a network-level protocol to
achieve network access and to route data through the network to
the destination system. At each level, the cooperating peer
entities focus on what they need to communicate to each other.
9
Protocols in a Simplified Architecture

10
Let us trace a simple operation. Suppose that an application,

associated with port 1 at computer A, wishes to send a message
to another application, associated with port 2 at computer B.
The application at A hands the message over to its transport
layer with instructions to send it to port 2 on computer B. The
transport layer hands the message over to the network access
layer, which instructs the network to send the message to
computer B. Note that the network need not be told the identity
of the destination port. All that it needs to know is that the data
are intended for computer B.
To control this operation, control information, as well as
user data, must be transmitted, as suggested in Stallings DCC9e
Figure 2.2. Let us say that the sending application generates a
block of data and passes this to the transport layer. The
transport layer may break this block into two smaller pieces for
convenience, as discussed subsequently. To each of these pieces
the transport layer appends a transport header, containing
protocol control information. The addition of control
information to data is referred to as encapsulation.
10
Addressing
Two levels of addressing are needed:

11
For successful communication, every entity in the overall
system must have a unique address. In our three-layer model,
two levels of addressing are needed. Each computer on the
network has a unique network address; this allows the network
to deliver data to the proper computer. Each application on a
computer has an address that is unique within that computer;
this allows the transport layer to support multiple applications
at each computer. These latter addresses are known as service
access points (SAPs), or ports, connoting the fact that each
application is individually accessing the services of the
transport layer.

11
each computer on the network has a unique network address
each application has an address that is unique with that
computer (SAPs)
Protocol Data Unit (PDU)
the combination of data and control information is a protocol
data unit (PDU)
typically control information is contained in a PDU header
control information is used by the peer transport protocol at
computer B
headers may include:
source port, destination port, sequence number, and error-
detection code

12
The combination of data from the next higher layer and control
information is known as a protocol data unit (PDU). Typically,
the control information is contained in a PDU header; some data
link layer PDUs include a trailer as well. In this case, the PDU
is referred to as a transport PDU. Transport PDUs are typically
called segments. The header in each segment contains control
information to be used by the peer transport protocol at
computer B. Examples of items that may be stored in this header
include the following:
Source port: This indicates that application that sent the data.
Destination port: When the destination transport layer receives
the segment, it must know to which application the data are to

be delivered.
Sequence number: Because the transport protocol is sending a
sequence of segments, it numbers them sequentially so that if
they arrive out of order, the destination transport entity may
reorder them.
Error-detection code: The sending transport entity may include
a code that is a function of the contents of the segment. The
receiving transport protocol performs the same calculation and
compares the result with the incoming code. A discrepancy
results if there has been some error in transmission. In that
case, the receiver can discard the segment and take corrective
action. This code is also referred to as a checksum or frame
check sequence.
12
Network Access Protocol
after receiving segment from transport layer, the network access
protocol must request transmission over the network
the network access protocol creates a network access PDU
(packet) with control information
header includes:
source computer address
destination computer address
facilities requests

13
The next step is for the transport layer to hand each segment
over to the network layer, with instructions to transmit it to the
destination computer. To satisfy this request, the network
access protocol must present the data to the network with a
request for transmission. As before, this operation requires the
use of control information. In this case, the network access
protocol appends a network access header to the data it receives
from the transport layer, creating a network access PDU,
typically called a packet. Examples of the items that may be

stored in the header include the following:
Source computer address: Indicates the source of this packet.
Destination computer address: The network must know to which
computer on the network the data are to be delivered.
Facilities requests: The network access protocol might want the
network to make use of certain facilities, such as priority.
Note that the transport header is not "visible" at the
network access layer; the network access layer is not concerned
with the contents of the transport segment.
The network accepts the network packet from A and
delivers it to B. The network access module in B receives the
packet, strips off the packet header, and transfers the enclosed
transport segment to B's transport layer module. The transport
layer examines the segment header and, on the basis of the port
field in the header, delivers the enclosed record to the
appropriate application, in this case the file transfer module in
B.
13
TCP/IP

14
The TCP/IP Layers
In general terms, computer communications can be said to
involve three agents: applications, computers, and networks.
Examples of applications include file transfer and electronic
mail. The applications that we are concerned with here are
distributed applications that involve the exchange of data
between two computer systems. These applications, and others,
execute on computers that can often support multiple
simultaneous applications. Computers are connected to
networks, and the data to be exchanged are transferred by the
network from one computer to another. Thus, the transfer of
data from one application to another involves first getting the

data to the computer in which the application resides and then
getting the data to the intended application within the computer.
With these concepts in mind, we can organize the
communication task into five relatively independent layers
(Stallings DCC9e Figure 2.3):
Physical layer
Network access layer
Internet layer
Host-to-host, or transport layer
Application layer
14
Physical Layer
covers the physical interface between computer and network
concerned with issues like:
characteristics of transmission medium
nature of the signals
data rates

15
15
The physical layer covers the physical interface between a data
transmission device (e.g., workstation, computer) and a
transmission medium or network. This layer is concerned with
specifying the characteristics of the transmission medium, the
nature of the signals, the data rate, and related matters.
Network Access Layer
covers the exchange of data between an end system and the
network that it is attached to
concerned with issues like :
destination address provision

invoking specific services like priority
access to & routing data across a network for two end systems
attached to the same network

16
16
The network access layer is concerned with the exchange of
data between an end system (server, workstation, etc.) and the
network to which it is attached. The sending computer must
provide the network with the address of the destination
computer, so that the network may route the data to the
appropriate destination. The sending computer may wish to
invoke certain services, such as priority, that might be provided
by the network. The specific software used at this layer depends
on the type of network to be used; different standards have been
developed for circuit switching, packet switching (e.g., ATM),
LANs (e.g., Ethernet or WiFi), and others. Thus it makes sense
to separate those functions having to do with network access
into a separate layer. By doing this, the remainder of the
communications software, above the network access layer, need
not be concerned about the specifics of the network to be used.
The same higher-layer software should function properly
regardless of the particular network to which the computer is
attached.
Internet Layer

17
17
The network access layer is concerned with access to and
routing data across a network for two end systems attached to
the same network. In those cases where two devices are attached
to different networks, procedures are needed to allow data to
traverse multiple interconnected networks. This is the function
of the internet layer. The Internet Protocol (IP) is used at this
layer to provide the routing function across multiple networks.
This protocol is implemented not only in the end systems but
also in routers. A router is a processor that connects two

networks and whose primary function is to relay data from one
network to the other on its route from the source to the
destination end system.
Host-to-Host (Transport) Layer

18
18
Regardless of the nature of the applications that are exchanging
data, there is usually a requirement that data be exchanged
reliably. That is, we would like to be assured that all of the data
arrive at the destination application and that the data arrive in
the same order in which they were sent. As we shall see, the
mechanisms for providing reliability are essentially independent
of the nature of the applications. Thus, it makes sense to collect
those mechanisms in a common layer shared by all applications;
this is referred to as the host-to-host layer, or transport layer.
The Transmission Control Protocol (TCP) is the most commonly
used protocol to provide this functionality.
Operation of TCP/IP

19
19
Operation of TCP and IP
Stallings DCC9e Figure 2.4 indicates how these protocols are
configured for communications. To make clear that the total
communications facility may consist of multiple networks, the
constituent networks are usually referred to as subnetworks.
Some sort of network access protocol, such as the Ethernet or
WiFi logic, is used to connect a computer to a subnetwork. This
protocol enables the host to send data across the subnetwork to
another host or, if the target host is on another subnetwork, to a
router that will forward the data. IP is implemented in all of the
end systems and the routers. It acts as a relay to move a block
of data from one host, through one or more routers, to another

host. TCP is implemented only in the end systems; it keeps
track of the blocks of data to assure that all are delivered
reliably to the appropriate application.
TCP/IP Address Requirements
Two levels of addressing are needed:

20
For successful communication, every entity in the overall
system must have a unique address. Actually, two levels of
addressing are needed. Each host on a subnetwork must have a
unique global internet address; this allows the data to be
delivered to the proper host. Each process with a host must have
an address that is unique within the host; this allows the host-
to-host protocol (TCP) to deliver data to the proper process.
These latter addresses are known as ports.
20
each host on a subnetwork must have a unique global internet
address
each process with a host must have an address (known as a port)
that is unique within the host
Operation of TCP/IP

21
21
Let us trace a simple operation. Suppose that a process,
associated with port 3 at host A, wishes to send a message to

another process, associated with port 2 at host B. The process at
A hands the message down to TCP with instructions to send it
to host B, port 2. TCP hands the message down to IP with
instructions to send it to host B. Note that IP need not be told
the identity of the destination port. All it needs to know is that
the data are intended for host B. Next, IP hands the message
down to the network access layer (e.g., Ethernet logic) with
instructions to send it to router J (the first hop on the way to B).
To control this operation, control information as well as
user data must be transmitted, as suggested in Stallings DCC9e
Figure 2.5. Let us say that the sending process generates a block
of data and passes this to TCP. TCP may break this block into
smaller pieces to make it more manageable. To each of these
pieces, TCP appends control information known as the TCP
header, forming a TCP segment. The control information is to
be used by the peer TCP protocol entity at host B. Examples of
items in this header include:
Destination port: When the TCP entity at B receives the
segment, it must know to whom the data are to be delivered.
Sequence number: TCP numbers the segments that it sends to a
particular destination port sequentially, so that if they arrive out
of order, the TCP entity at B can reorder them.
Checksum: The sending TCP includes a code that is a function
of the contents of the remainder of the segment. The receiving
TCP performs the same calculation and compares the result with
the incoming code. A discrepancy results if there has been some
error in transmission.
Next, TCP hands each segment over to IP, with
instructions to transmit it to B. These segments must be
transmitted across one or more subnetworks and relayed through
one or more intermediate routers. This operation, too, requires
the use of control information. Thus IP appends a header of
control information to each segment to form an IP datagram. An
example of an item stored in the IP header is the destination

host address (in this example, B).
Finally, each IP datagram is presented to the network
access layer for transmission across the first subnetwork in its
journey to the destination. The network access layer appends its
own header, creating a packet, or frame. The packet is
transmitted across the subnetwork to router J. The packet header
contains the information that the subnetwork needs to transfer
the data across the subnetwork. Examples of items that may be
contained in this header include:
Destination subnetwork address: The subnetwork must know to
which attached device the packet is to be delivered.
Facilities requests: The network access protocol might request
the use of certain subnetwork facilities, such as priority.
At router J, the packet header is stripped off and the IP
header examined. On the basis of the destination address
information in the IP header, the IP module in the router directs
the datagram out across subnetwork 2 to B. To do this, the
datagram is again augmented with a network access header.
When the data are received at B, the reverse process
occurs. At each layer, the corresponding header is removed, and
the remainder is passed on to the next higher layer, until the
original user data are delivered to the destination process.
Transmission Control Protocol (TCP)
TCP is the transport layer protocol for most applications
TCP provides a reliable connection for transfer of data between
applications
A TCP segment is the basic protocol unit
TCP tracks segments between entities for duration of each
connection

22
22
TCP and UDP
For most applications running as part of the TCP/IP protocol
architecture, the transport layer protocol is TCP. TCP provides
a reliable connection for the transfer of data between
applications. A connection is simply a temporary logical
association between two entities in different systems. A logical
connection refers to a given pair of port values. For the duration
of the connection each entity keeps track of TCP segments
coming and going to the other entity, in order to regulate the
flow of segments and to recover from lost or damaged segments.

23
23
Stallings DCC9e Figure 2.6a shows the header format for TCP,
which is a minimum of 20 octets, or 160 bits. The Source Port
and Destination Port fields identify the applications at the
source and destination systems that are using this connection.
The Sequence Number, Acknowledgment Number, and Window
fields provide flow control and error control. The checksum is a
16-bit frame check sequence used to detect errors in the TCP
segment. Chapter 20 provides more details.
User Datagram Protocol
(UDP) what is PDU then?
alternative to TCP
does not guarantee delivery, preservation of sequence, or
protection against duplication(simpler)
adds port addressing capability to IP
used with Simple Network Management Protocol (SNMP)

24
24
In addition to TCP, there is one other transport-level

protocol that is in common use as part of the TCP/IP protocol
suite: the User Datagram Protocol (UDP). UDP does not
guarantee delivery, preservation of sequence, or protection
against duplication. UDP enables a procedure to send messages
to other procedures with a minimum of protocol mechanism.
Some transaction-oriented applications make use of UDP; one
example is SNMP (Simple Network Management Protocol), the
standard network management protocol for TCP/IP networks
UDP Header

25
25
Because it is connectionless, UDP has very little to do.
Essentially, it adds a port addressing capability to IP. This is
best seen by examining the UDP header, shown in Stallings
DCC9e Figure 2.6b. UDP also includes a checksum to verify
that no error occurs in the data; the use of the checksum is
optional.
IPv6
Provides enhancements over existing IP
Designed to accommodate higher speeds and the mix of graphic
and video data(multimedia)
Driving force was the need for more addresses due to growth of
the Internet
IPv6 includes 128-bit source and destination address fields

26
IP and IPv6
For decades, the keystone of the TCP/IP protocol architecture
has been IPv4, generally referred to simply as IP. Stallings
DCC9e Figure 2.7a shows the IP header format, which is a
minimum of 20 octets, or 160 bits. The header, together with
the segment from the transport layer, forms an IP-level PDU
referred to as an IP datagram or an IP packet. The header
includes 32-bit source and destination addresses. The Header
Checksum field is used to detect errors in the header to avoid

misdelivery. The Protocol field indicates which higher-layer
protocol is using IP. The ID, Flags, and Fragment Offset fields
are used in the fragmentation and reassembly process. Chapter
18 provides more detail.
In 1995, the Internet Engineering Task Force (IETF),
which develops protocol standards for the Internet, issued a
specification for a next-generation IP, known then as IPng. This
specification was turned into a standard in 1996 known as IPv6.
IPv6 provides a number of functional enhancements over the
existing IP, designed to accommodate the higher speeds of
today's networks and the mix of data streams, including graphic
and video, that are becoming more prevalent. But the driving
force behind the development of the new protocol was the need
for more addresses. IPv4 uses a 32-bit address to specify a
source or destination. With the explosive growth of the Internet
and of private networks attached to the Internet, this address
length became insufficient to accommodate all systems needing
addresses
26
IPv6 Header

27
27
As Stallings DCC9e Figure 2.7b shows, IPv6 includes 128-bit
source and destination address fields.
Ultimately, all installations using TCP/IP are expected to
migrate from the current IP to IPv6, but this process will take
many years, if not decades.
TCP/IP Protocols

Each layer in the TCP/IP protocol suite interacts with its
immediate adjacent layers. At the source, the application layer
makes use of the services of the end-to-end layer and provides
data down to that layer. A similar relationship exists at the
interface between the transport and internet layers and at the
interface of the internet and network access layers. At the
destination, each layer delivers data up to the next higher layer.
This use of each individual layer is not required by the
architecture. As Stallings DCC9e Figure 2.8 suggests, it is
possible to develop applications that directly invoke the
services of any one of the layers. Most applications require a
reliable end-to-end protocol and thus make use of TCP. Some
special-purpose applications do not need the services of TCP.
Some of these applications, such as the Simple Network
Management Protocol (SNMP), use an alternative end-to-end
protocol known as the User Datagram Protocol (UDP); others
may make use of IP directly. Applications that do not involve
internetworking and that do not need TCP have been developed
to invoke the network access layer directly.
Standardized Protocol Architectures

29
29
A protocol architecture, such as the TCP/IP architecture or OSI,
provides a framework for standardization. Within the model,
one or more protocol standards can be developed at each layer.
The model defines in general terms the functions to be
performed at that layer and facilitates the standards-making
process in two ways:
Because the functions of each layer are well defined, standards
can be developed independently and simultaneously for each
layer. This speeds up the standards-making process.
Because the boundaries between layers are well defined,
changes in standards in one layer need not affect already

existing software in another layer. This makes it easier to
introduce new standards.
Stallings DCC9e Figure 2.9 illustrates the use of a protocol
architecture as such a framework. The overall communications
function is decomposed into a number distinct layers. That is,
the overall function is broken up into a number of modules,
making the interfaces between modules as simple as possible. In
addition, the design principle of information hiding is used:
Lower layers are concerned with greater levels of detail; upper
layers are independent of these details. Each layer provides
services to the next higher layer and implements a protocol to
the peer layer in other systems.
OSI Standardization
framework for standardization was motivator
lower layers are concerned with greater levels of details
each layer provides services to the next higher layer
three key elements:

30
In addition, the design principle of information hiding is used:
Lower layers are concerned with greater levels of detail; upper
layers are independent of these details. Each layer provides
services to the next higher layer and implements a protocol to
the peer layer in other systems.
Three elements are key:
Protocol specification: Two entities at the same layer in
different systems cooperate and interact by means of a protocol.
Because two different open systems are involved, the protocol
must be specified precisely. This includes the format of the
protocol data units exchanged, the semantics of all fields, and
the allowable sequence of PDUs.

Service definition: In addition to the protocol or protocols that
operate at a given layer, standards are needed for the services
that each layer provides to the next higher layer. Typically, the
definition of services is equivalent to a functional description
that defines what services are provided, but not how the
services are to be provided.
Addressing: Each layer provides services to entities at the next
higher layer. These entities are referenced by means of a port,
or service access point (SAP). Thus, a network service access
point (NSAP) indicates a transport entity that is a user of the
network service.
The need to provide a precise protocol specification for open
systems is self-evident. The other two items listed warrant
further comment. With respect to service definitions, the
motivation for providing only a functional definition is as
follows. First, the interaction between two adjacent layers takes
place within the confines of a single open system and is not the
concern of any other open system. Thus, as long as peer layers
in different systems provide the same services to their next
higher layers, the details of how the services are provided may
differ from one system to another without loss of
interoperability. Second, it will usually be the case that adjacent
layers are implemented on the same processor. In that case, we
would like to leave the system programmer free to exploit the
hardware and operating system to provide an interface that is as
efficient as possible.
With respect to addressing, the use of an address
mechanism at each layer, implemented as a service access point,
allows each layer to multiplex multiple users from the next
higher layer. Multiplexing may not occur at each layer, but the
model allows for that possibility.
30

Protocol specification
Service definition
Addressing
Multimedia Terminology

31
With the increasing availability of broadband access to the
Internet has come an increased interest in Web-based and
Internet-based multimedia applications. The terms multimedia
and multimedia applications are used rather loosely in the
literature and in commercial publications, and no single
definition of the term multimedia has been agreed (e.g.,
[JAIN94], [GRIM91], [PURC98], [PACK99]). For our purposes,
the definitions in Stallings DCC9e Table 2.2 provide a starting
point.
31
Multimedia Terminology

Media Types
Typically, the term multimedia refers to four distinct types of
media: text, audio, graphics, and video.
From a communications perspective, the term text is self-
explanatory, referring to information that can be entered via a
keyboard and is directly readable and printable. Text
messaging, instant messaging, and text (non-html) e-mail are
common examples, as are chat rooms and message boards.
However, the term often is used in the broader sense of data that
can be stored in files and databases and that does not fit into the
other three categories. For example, an organization's database
my contain files of numerical data, in which the data are stored
in a more compact form than printable characters.
The term audio generally encompasses two different ranges
of sound. Voice, or speech, refers to sounds that are produced
by the human speech mechanism. Generally, a modest
bandwidth (under 4 kHz) is required to transmit voice.
Telephony and related applications (e.g., voice mail, audio
teleconferencing, telemarketing) are the most common
traditional applications of voice communications technology. A
broader frequency spectrum is needed to support music
applications, including the download of music files.
The image service supports the communication of
individual pictures, charts, or drawings. Image-based
applications include facsimile, computer-aided design (CAD),
publishing, and medical imaging. Images can be represented in
a vector graphics format, such as is used in drawing programs
and PDF files. In a raster graphics format, an image is
represented as a two-dimensional array of spots, called pixels.
The compressed JPG format is derived from a raster graphics
format.
The video service carries sequences of pictures in time. In
essence, video makes use of a sequence of raster-scan images.
Domains of Multimedia Systems and Example Applications

33
The Internet, until recently, has been dominated by information
retrieval applications, e-mail, and file transfer, plus Web
interfaces that emphasized text and images. Increasingly, the
Internet is being used for multimedia applications that involve
massive amounts of data for visualization and support of real-
time interactivity. Streaming audio and video are perhaps the
best known of such applications. An example of an interactive
application is a virtual training environment involving
distributed simulations and real-time user interaction [VIN98].
Some other examples are shown in Stallings DCC9e Table 2.3.
33
Summary
needs and key elements for protocol architecture
TCP/IP protocol architecture
OSI Model & protocol architecture standardization
traditional versus multimedia application needs

34
34
Stallings DCC9e Chapter 2 summary.
P.2.7 page 56
Q: A TCP segment consisting of 1500 bits of data and 160 bits
of header is sent to the IP layer, which appends another 160 bits
of header. This then transmitted through two networks, each of
which uses a 24-bit packet header. The destination network has
a maximum packet size of 800 bits. How many bits, including
headers, are delivered to the network layer protocol at the
destination?

HW #1
Review Questions (page 55)
2.4, 2.6, 2.8
How many layers does a router have? What are they?
Which layer is TCP at? Then how about IP?

Domain
Example Application
Information management
Hypermedia, multimedia-capable databases, content-based
retrieval
Entertainment
Computer games, digital video, audio (MP3)
Telecommunication
Videoconferencing, shared workspaces, virtual communities
Information publishing/delivery
Online training, electronic books, streaming media

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