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Panel III ---------------------------------------- The Waterfall Effects INTRODUCTION Cherry A. Murray Lucent Technologies While Dr. Murray explained that the title "Waterfall Effects" indicated that the panel would be devoted to some newer applications in telecommunications, she also reminded the audience that "voice is the killer app, and voice will con- tinue to be the killer app." Still, she noted, in the areas of the world where "broad- band is just rampant"--in South Korea and Finland, for example--messaging was becoming increasingly popular, especially among the younger generation. As the first speaker, she introduced Mike Nelson of IBM. MOVING COMPUTING TO THE GRID Michael R. Nelson International Business Machines In his talk, Dr. Nelson said, he would cover "what's beyond broadband, why we need to keep continuing up the technology curve to produce faster and faster networks, and what we will do once we get there." To start, he encapsulated his 117
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118 THE TELECOMMUNICATIONS CHALLENGE main points in what he called "bumper stickers," easily remembered summaries seven or eight words in length whose value he had learned while working on Capitol Hill and at the White House. His first point so expressed, "It's not just about email and the Web," was intended to signal that the Internet had entered a third phase. This transition was being made possible by grid computing, auto- nomic computing, pervasive computing, and open standards, all of which he planned to address further. The initial 20 years of the Internet, Dr. Nelson recalled, were marked by one- to-one applications. Its very first user, who was located in Los Angeles, attempted to log on to a computer at Stanford; because the system crashed before this user could type "log in," the first message on the `Net read "lo." Such one-to-one messages, whereby a person talked to a computer or to another person, were typical of the Internet's first two decades, constituting most of its traffic until about 1990. Then, the advent of the World Wide Web precipitated a fundamental change: Through the addition of one-to-many communications, the Internet became a "broadcast medium." This important step resulted in a remarkably sharp increase in the amount of Internet traffic; for a short period, it doubled every four or five months, all because of the Web. Internet Undergoing a Pivotal Transition The present was a similar moment, said Dr. Nelson, arguing that the Internet was undergoing another pivotal transition to become a "many-to-many medium." Napster, the first example of this phenomenon, had shown "what could happen if you took a million people and hooked them up to a network that tied together 300,000 PCs all operating as a single system." When users went onto the Napster network looking for an obscure Beatles recording, they didn't care which com- puter actually had the bits that they wanted: "They knew only that somewhere out there on the network would be the answer." In this way, Napster had demonstrated the power of a new paradigm--which in its own case, unfortunately, had been illegal. But that same principle had begun serving as a base for other innovative technologies. Dr. Nelson praised his employer, IBM, as a leader in one of these, known as "The Grid." This technology allowed not only systems that had music files to be hooked together, but also systems that shared other types of data, software, and--perhaps most important-- computing power. Likening the result to the supplying of electricity by a utility, he said that a user logging onto The Grid could obtain access to far more comput- ing power than was available on that user's own systems. Peer-to-Peer Computing: Promise and Limitations To illustrate the variations of distributed computing, Dr. Nelson displayed a graph with the number of nodes on a grid plotted on the y-axis and the power of
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THE WATERFALL EFFECTS 119 1,000,000 The Holy Grid Peer-to-peer Everything integrated (PC-based) with everything Napster KaZaa Nodes SETI@home of Nlumber Grid Computing (Server-based) 10 National Grids TeraGrid 1 100 Power per node FIGURE 34 Many flavors of distributed computing. each node on the x-axis (see Figure 34). He first addressed peer-to-peer comput- ing, in which PCs are tied together to provide hundreds of millions of dollars' worth of computing power that runs software aimed at a specific problem. Naming Napster, KaZaa, and SETI@home, he commented that while each handled its task well, it was unable to go beyond that single function to perform others. He focused on the example of SETI@home, describing it as a screensaver that harvests all cycles on a user's laptop or desktop that are not in use--a consid- erable bounty, considering that a typical laptop is used only about 2 percent of the time and that most of its power is wasted even when it is in use. "With SETI@home," Dr. Nelson explained, "you get a little piece of radio-antenna data from Puerto Rico, and your computer tries to find some kind of consistent signal in that data to see if we are getting a signal from intelligent life on Mars or in another galaxy." As 500,000 people had downloaded the screensaver, it had generated an amount of computing power that would have cost over $100 million to purchase. In grid computing, situated opposite peer-to-peer computing on the graph, fewer nodes are tied together. But because of the size of the machines--large servers and storage systems, even supercomputers--at least as much power is generated. In addition, since the systems involved in grid computing are more tightly coupled and more general-purpose, they can do more. Dr. Nelson reserved his greatest excitement for what he called "the next step: the `Holy Grid,' where everything is connected to everything, running common software, able to tackle a wide range of problems."
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120 THE TELECOMMUNICATIONS CHALLENGE The `Utility Model' of Computing Positing the notion of computing as a utility, Dr. Nelson discussed his vision of The Grid in light of the history of electrical distribution in the United States. In the early decades of the last century, most American companies had a vice presi- dent for electricity, who was in charge of making sure that each factory had work- ing generators to supply the power needed. Once electrical utilities showed that they could provide power more cheaply and more reliably, however, few factories continued running their own generators. With the advent of The Grid, companies large and small would be able to proceed on a pay-as-you-go basis. "They will be able to buy the computing power they need and get the software they need over this grid of network systems," he stated. "It's got everything a normal laptop or server would have: data, applications, storage, processing power." What will eventuate, Dr. Nelson predicted, is a unified system that will be managed as such and be able to provide services to all who tap into it. Service will be better and efficiency higher as a result. "You make much better use of your systems," he said, "because rather than a laptop or desktop being in use only 5 percent of the time or 3 percent of the time, it can be part of a larger system and contributing excess cycles to the grid." Even a typical corporate server is in use only about 3050 percent of the time and is thus a potential source of power to be harvested. In addition, because The Grid is to be managed as a single unit that will unify "different sites, each managed by different people running different software," security will increase and complexity diminish. In this "new world," systems and software will be virtualized: The user will be able to log on to the grid, draw data from several different sites, pool it, process it using computing power from several other sites, and then output it somewhere else. This presents a powerful opportunity for collaboration. By allowing all its different sites to tap into the global grid, a company would be giving all employees access to its most powerful tools, something not possible with the current Internet. The First Steps Toward `The Grid' The first step in the development of The Grid has been the creation of intranets by companies that take existing hardware, tie it together with high-speed systems, and use the resulting network as a grid. "They don't have to buy any new servers or storage systems," Dr. Nelson said, because by running "software that ties their systems together they can double or triple the amount of computing power they get out of their existing equipment." IBM tests some of its chips, using what is called the "download grid," whereby employees all around the com- pany back up their laptops and desktops. Although the application may be re- garded as mundane, it can be carried out much faster and more economically thanks to the grid.
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THE WATERFALL EFFECTS 121 The second step in The Grid's development is the partner grid, which involves companies tying their systems to those of other companies. The third step is the actual move to the utility computing model, under which third-party grids run by independent companies--possibly IBM, AT&T, or the telecommu- nications providers--furnish the computing platform upon which thousands of businesses run. IBM had just started some demonstration projects in this area; for one of them, the "Smallpox Grid," about 10,000 IBM employees had downloaded software enabling their computers to do modeling designed to determine whether a particular drug molecule might be used to block replication of the smallpox virus. The project had generated millions of dollars' worth of free computing power for Oxford University, which as a consequence had identified 10 or 12 drugs worthy of further investigation. This software was running on Dr. Nelson's com- puter as he spoke, trying to match a molecule with the virus to see whether there was a way in which the two locked and, thereby, to identify an anti-smallpox drug that merited testing. Autonomic Computing and Pervasive Computing Also part of this vision for future computing is "autonomic computing": systems that are not only self-protecting, self-optimizing, self-configuring, and self-healing, but that also come close to being self-managing. IBM customers, Dr. Nelson said, were experiencing enormous increases in the number of transactions they processed and the amount of data they stored. Unable to hire enough qualified people to run all the systems required, they needed systems that could take care of themselves. "The Grid will facilitate that by making it easier to manage many systems at once," he said. Another important component of the vision was pervasive computing, some- thing that Dr. Nelson felt had not received sufficient emphasis. It was his working assumption that, five years down the road, he would own literally hundreds of devices and products that interacted in one way or another with the Internet. Many of them would have a radio frequency identification (RFID) tag, others simple sensors; "anything in my house that's worth more than $50 or $100, or that has some moving part, will probably have some way of interacting with the `Net," he said. In reference to a logarithmic diagram showing the numbers of computers, appliances, and sensors that have been connected to the Internet since 1990 and projecting them out to 2020 (see Figure 35), Dr. Nelson observed that sensors could be expected to become more numerous than either of the other two within 510 years. While many of the world's 1 billion PCs were connected to the Internet, they already lagged cell phones and other devices. "Soon," he said, "we'll have trillions of sensors, and that will be what we really rely on the `Net for." These sensors will be located all around the world and the data they generate will somehow have to be managed, something he saw as another application for The Grid.
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122 THE TELECOMMUNICATIONS CHALLENGE 100 Billion Sensors 10 Billion Appliances Number 1 Billion Computers 100 Million 1990 2000 2010 2020 Year FIGURE 35 Sensors will predominate: Internet-connected devices. Computing Power Available on Demand Behind IBM's excitement about The Grid, as well as about autonomic and pervasive computing, is the role they play as building blocks of what the com- pany calls "E-Business on Demand" or "On-Demand Business." The integration of a company's entire IT infrastructure using common standards and common software will make it much easier for the company to obtain the computing power, data, and software it needs when it needs them. Currently, tackling a new prob- lem can take weeks if not months, Dr. Nelson said, because it means ordering numerous servers, having them brought in, having somebody configure them, and getting them up and running. In what he referred to as "this new vision of the future," acquiring the computing power sought will take a "few hours, or even a few minutes--just as, today, if you need some extra electricity, you can just plug something in." The vision, IBM's response to its customers' demands for less complexity, more reliability, and improved security, will require better networks, he acknowledged. Pulling out another of his "bumper-sticker" phrases, Dr. Nelson estimated the Internet Revolution to be less than 8 percent complete, a figure that nonethe- less registered an improvement over the 5 percent of "a couple of years" before. Some 810 percent of the world's population was using the `Net on a regular basis, with the total number of Internet-connected devices at three or four per person in the United States. As many new and exciting applications could be expected to be enabled by The Grid, this figure would rise to "dozens if not
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THE WATERFALL EFFECTS 123 hundreds," he predicted, adding: "No matter how you measure it, we're just at the start of this." Increased Activity Assured, New Policies Needed Offering a formula to aid comprehension, Dr. Nelson advised those in atten- dance to "take everything that's already happened--all the new applications, all the new content, all the new money that's been made, all the bankruptcies--and multiply by 12." Realizing the vision of The Grid and the next-generation Internet will require some new technologies and significant investment, he cau- tioned, as it will entail providing whole neighborhoods with gigabit-per-second networks that are as affordable and reliable as they are ubiquitous. "Getting there is going to require more intelligent, more consistent policies than we have today," he declared, noting that he was far from the first speaker of the day to call for policies that were more consistent. Furthermore, those working toward this vision would "have to look beyond the FCC" if they hoped to address all the issues currently driving decisions, which he summed up with a list he had devel- oped 15 years before and titled "The Ten P's of Cyberpolicy" including pricing, privacy, piracy, pornography, protection (security), policing, procurement, pay- ment, and protectionism. In fact, they would also have to look beyond policy makers in general. Spend- ing much of his time on standards issues, Dr. Nelson said, had impressed upon him that the next-generation Internet was already being shaped by critical stan- dards that were in development, as well as by choices that the marketplace was making between competing standards. Posting a list of "key technology choices" (see Figure 36), he said that how those issues and perhaps four or five others were decided would not only shape the next generation of the Internet but also deter- mine whether The Grid became a niche application or something upon which almost every company relied on a daily basis. U.S. Decisions' Worldwide Impact His final point was that decisions being made on these issues in the United States would have an impact on developments in other countries. It would affect them directly, because the market for new products created in the United States would enable sales elsewhere. It would affect them indirectly as well, because "if we decide to do something stupid here, there are at least 40 countries that will probably emulate our stupidity," said Dr. Nelson, adding: "We have to make sure they learn from our stupidity rather than emulating it." Furthermore, if The Grid's rollout justifies his expectations, taking the form of a "grid of grids" that ties all countries' information-technology infrastructures together in a global digital economy, future debates about offshoring, allshoring, and allsourcing will make the current one "look pretty tame." In the resulting
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124 THE TELECOMMUNICATIONS CHALLENGE · Authentication and directories · Privacy-enhancing technologies (P3P) · Digital Rights Management · Filtering technologies to block spam, porn · Voice over IP · Wireless Internet standards · Web services and Grid computing · Instant messaging · IPv6 deployment · Linking the phone network and the Internet · Rich media standards (SIP, multicast, etc.) · End-to-end vs. walled gardens FIGURE 36 It's not just about laws and regulation: Key technology choices. environment, any employee anywhere will have the ability to tap into The Grid, and any company will be able to compete with any other using the most powerful tools available. If the Internet led to "the death of distance," then The Grid will mean "the death of geography," because companies everywhere will have access not only to computing power but also to collaborators, databases, new tools, and new software. Opportunity will abound, but so will weighty issues. Introducing Louis Mamakos of Vonage, whose talk was titled "Is VoIP the Future?" Dr. Murray observed that, already, VoIP was the present. IS VOIP THE FUTURE? Louis Mamakos Vonage Mr. Mamakos endorsed Dr. Murray's assessment, noting that there had already been quite a bit of uptake of voice over Internet Protocol technology, and said he would be speaking about how the market for this service had developed.
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THE WATERFALL EFFECTS 125 He began an overview of the factors that helped bring VoIP capability to market by observing that the Internet had decoupled the transport of bits from applications. Internet service providers (ISPs) had supplied the pipe to plug the computer into; new, interesting, and varied applications had come from numerous sources. "If we can arrange to have an environment where new and innovative ideas can be tried out," he observed, "interesting results pop out." Recalling "Sturgeon's Law," coined by the science-fiction writer Theodore Sturgeon-- "Ninety percent of everything is crap"--he emphasized that, for the remaining 10 percent, that was not necessarily true. Such innovations as the World Wide Web and email had been the product of extensive experimentation rather than of "people going off into a room, thinking really, really hard, and coming up with the answer." This had also been the case with voice over IP, which he described as "something familiar cast in a new light." Markets, Services Increase with Broadband Penetration An important enabler had been the growth of broadband. But while broad- band is a prerequisite for any such multimedia service, his own company's offer- ing, and voice over IP service in general, are fairly insensitive to the type of technology over which they are run as long as capacity is adequate. The increasing penetration of broadband deployment, globally and in the U.S. (see Figure 37), opened new markets to new kinds of products and services. The reception with which not only Vonage but also other VoIP players had met in the marketplace (see Figure 38), Mr. Mamakos said, indicated that the service's acceptance had moved beyond an early-adopter population to the more mainstream consumer. Because VoIP exists within a broadband environment, basic assumptions can be altered, including those regarding the way in which the customer interacts with the service. Service provided over the public switched telephone network (PSTN) has in recent years offered such options as call forwarding and call wait- ing. But, Mr. Mamakos said, changing the provisioning of these features has tended to be a fairly lengthy process: Where it is automated, the interface consists of audio heard in the ear plus a ten-digit keypad on the phone. Voice over IP takes advantage of broadband to present service parameters to customers using a very rich, high-fidelity interface in the form of their Web browser. New and interest- ing services can thus be delivered that may have been available previously but were simply too unwieldy to control without the customer's having access to a richer interface. "In the voice over IP world," Mr. Mamakos noted, "all these features are just software, and if you look at how voice over IP operators tend to deliver their services, these features are bundled in as a standard part of the service offering." That the customer is not paying extra for touch-tone dialing, caller ID, three-way calling, and other services is, he added, a "side-effect" of the amount of power that VoIP brings to the marketplace.
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126 67 2008 59 2007 50 2006 Year 41 2005 33 2004 transformation 25 this 2003 80 70 60 50 40 30 20 10 millions) (in driving Growth Broadband U.S. is adoption 251 2008 224 2007 broadband 196 2006 Global Year 164 2005 growth. 131 2004 98 2003 Broadband 37 50 300 250 200 150 100 millions) (in Growth Broadband Global FIGURE
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THE WATERFALL EFFECTS 127 900,000 800,000 700,000 795,000 Lines 600,000 of 500,000 400,000 542,000 Number 300,000 381,000 200,000 252,000 100,000 0 2004 2004 2004 2004 First quarter Second quarter Third quarter Fourth quarter (est.) Quarter FIGURE 38 Growth of U.S. consumer VoIP lines. VoIP: Shared Infrastructure, Greater Customer Control Mr. Mamakos cited two sources of opportunity that arise with VoIP. One is through sharing infrastructure, which comes of chopping up audio into packets and transmitting it over an existing packet-based network. But equally powerful, he contended, are opportunities that come of making the call control of services available on platforms that are easier to program than a telephone switch. This flexibility, in the form of exposing call processing, made it possible for compa- nies like Vonage to try out very interesting ideas, some of which might resonate with customers. The company would start with features that customers are very familiar with, Mr. Mamakos said, but he suggested that it might then blend familiar elements into novel contexts. As an example, he offered integrating buddy lists from instant-messenger clients with phone service so that customers could control who could call their phone after 9 in the evening. An instance of integrating telephony service with computer capability that Vonage had already developed is "Click to Call," which allows the user to highlight a name in his or her email address book, then click a button that rings both the user's Vonage phone and the person that he or she wanted to call--"thus," he said, "saving that tedious dialing, with its wear and tear on the finger." Conceding that "none of this is really rocket science to
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136 THE TELECOMMUNICATIONS CHALLENGE be televised however the consumer wants to televise it to his or her friends, [and] on whatever platform they want" to use. In conclusion, he said that he planned to take part in ensuring that the field's "exciting evolution" continued. SERVING CONSUMERS ON BROADBAND Lisa A. Hook AOL Broadband (retired) Ms. Hook, having entered retirement only days before the symposium, put the attendees on notice at the outset that her style of presentation would reflect her new, relaxed frame of mind. She began by describing a longtime reluctance on America Online's part to acknowledge that broadband offerings would play a significant role in the consumer market for Internet services. "Historically the company has had a commanding market share in the dial-up space," she said, but it "also had a commanding ability to ignore the advent of broadband." It was only after some 15 million U.S. households had become broadband customers that AOL "decided maybe it wasn't just an early-adopter, propeller-head type of a product and [the company] should start paying a little bit of attention to it." Its response was to import its business model for dial-up service into the broadband business. The dial-up model was brilliant and permitted AOL, accord- ing to Ms. Hook's description, to act as a "buying club" for internet connectivity: "We got a bunch of subscribers in the door, we went out and bought network connectivity--thanks to the 1996 Telecom Act, we could buy it more and more cheaply--and so our EBITDA [earnings before interest, taxes, depreciation, and amortization] margins were effectively driven by our ability to be the world's largest acquirer of network connectivity." In the dial-up space, this had been successful to the point of genius. Replicating the Dial-Up Model in Broadband Bent on replicating the model in the broadband space, AOL attempted to negotiate wholesale connectivity purchases with both cable operators and DSL providers. The former showed extreme reticence, resisting the company's entreaties that they open up their networks in a regulated fashion for reasons that were obvious. But AOL did conclude deals with the latter for the portion of the network that it needed, obtaining "great" line charges. It backed all traffic to its headquarters in Dulles, Virginia, put it through an "enormous amount" of processing, and sent it back out of its server architecture on the other side. AOL ended up providing "the slowest broadband service in the world," she said, adding: "The DSL guys were probably laughing all the way to their operations meetings." Moreover, with respect to its own operations, AOL had unwittingly gone into a business that had nothing to do with its dial-up business. "On the dial-up
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THE WATERFALL EFFECTS 137 side, we were able to acquire network connectivity and to handle the customer care into networks that had a high level of visibility down to the home," Ms. Hook explained. "In the broadband area, there's absolutely no visibility into the net- works, so we were getting customer care calls and, frankly, not having answers the customers needed--never a good recipe for customer satisfaction." To com- plicate matters further, the company was warehousing more than 20 SKUs of DSL modems--something that those with experience in operations might recog- nize as "a very bad thing." To top it all off, AOL was managing its modem inventory next to that of another business it had: selling linens, seed pearls, and other such items. "They were all in these bins, and sometimes we'd send a DSL customer sheets and towels instead of a modem," she recalled. "Very difficult to get connectivity, even at 200 thread count." Separating the Network and Service Layers In sum, AOL was trying to force itself into a connectivity business in which it did not belong, but it continued on for some time--"losing EBITDA on an operating basis on every single subscriber [it] brought onto the network"--before taking stock of the situation. The company then decided to leave aside the net- work layer of the business, which it judged to be beyond its area of expertise, and to focus instead on the service layer: on developing innovative products, integrat- ing them, and selling them to consumers under the AOL brand. "While we all now assume that the split between the network layer and the service layer has been out there for a number of years," Ms. Hook remarked, when this decision was made two years before, "it was quite revolutionary. Wall Street thought--as did some people inside our company--that we had lost our minds." But the consumer, faced with a proliferation of Internet services, operating systems, and devices, still wants service that is both easy to use and integrated. This is true even of the early adopter, Ms. Hook asserted. For this reason, the AOL brand positioning of "simple and easy to use" was one that could be spun to the service layer without much difficulty. As a result, around 5 million users had signed up for AOL's broadband service layer at $15 and $25 per month in the previous two years, and 3 million more had opted for its premium services, which included voice, wireless, safety and security applications at $3 to $5 per month. Point Service Explosion to Renew Demand for Aggregators The market was thus clearly present at the service layer, concluded Ms. Hook, predicting future offerings of point services in advanced communications, as fore- shadowed by Vonage, and entertainment, where the potentially "explosive" video over IP would be joining music. All such products would need to be integrated with each other, including those in the field of safety and security, which she rated as the preeminent market: "What we see people saying to us is, `I've got a
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138 THE TELECOMMUNICATIONS CHALLENGE firewall, I've got anti-virus, I've got the spyware protection, but I'm dying here. Can you put it altogether so that I have one click into my system?'" The paid services of providers like AOL have and will become more relevant. In short, the proliferation of point services and of theme packages could be expected to lead back to the need for aggregators like AOL. Companies participating in this service layer will have to get innovations to market very quickly, said Ms. Hook, pointing to dramatically shortening innova- tion cycles and to problems experienced by MSN in kicking off its Longhorn line of Internet products, as well as to similar problems at AOL. What this accelerated pace will require from large firms like AOL is "moving from our old mentality of building proprietary networks and systems to an open-platform type of architec- ture, and recognizing that our value add is in the brand, the distribution platform, and the customer care and billing on the back end," she said, adding: "People like us just cannot innovate so, like other companies our size, we are moving out and embracing third-party innovators." Launching Applications as If They Were TV Programs Over the previous year AOL had already taken advantage of shifts in the market to begin opening up its subsystems, inviting third-party developers to work with it, and then launching their innovative applications into the market in the way a television network would launch a program. "We put things up, we try them, we see whether consumers like them, we take them down if they don't, we put more marketing dollars behind them and integrate them into our service if they do," Ms. Hook explained. As Internet services moved off the PC and onto stereo systems, television sets, game boys, PlayStation 2s, and cellular services, the necessity of this would only grow. To parry potential questions as to whether there remained a role for an aggregator such as AOL or Yahoo!, Ms. Hook said that while early adopters might be expected to share the symposium audience's level of sophistication regarding the Internet, members of the average user base would not. She recounted a customer-service call of a few weeks before, saying that she had made a prac- tice of listening in on such calls to remind herself that people could experience problems with even the simplest of services. This call concerned a system that AOL offered to both broadband and dial-up customers permitting parents to set the level of access their children would have to the Internet. "We had one long- time customer call, and he was trying to figure out how to turn out the parental controls," she recounted. "He unfortunately was down in his laundry room, and he thought that the parental-control switch was near the boiler." Simplicity is needed, she declared, "so we don't have everybody who's trying to use these services wandering around the laundry room or worse."
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THE WATERFALL EFFECTS 139 THE VIEW FROM THE COPYRIGHT INDUSTRY Steven J. Metalitz Smith & Metalitz Mr. Metalitz began by listing products and services that are dependent upon copyright protection: books, music and sound recordings, movies, audio-visual, TV, video games, computer games, and business software, among others. To illustrate the economic impact of the industries that produce them, he posted a chart showing the results of a study commissioned periodically by the Inter- national Intellectual Property Alliance, which he represents (see Figure 40). The most recent study, based on data for the year 2002, put the annual contribution of the copyright industries to U.S. GDP at $1.25 trillion dollars. Half of that came from the "core copyright industries," those he had just mentioned; the rest came from other, "copyright-dependent industries" including the segments of the retail, transportation, and distribution businesses devoted to copyrighted materials. Similar studies, of which more and more were being conducted, put results for other countries in basically the same range. Pirate Product Inevitable with Broadband Expressing his enthusiasm for the opportunities broadband affords to "every- thing that is protected by copyright"--opportunities to provide new types of products and services to new customers over new delivery media--Mr. Metalitz Core Copyright Industries Other Copyright Industries 1,400 1,200 1,000 611.9 627.8 Dollars 800 594.3 of 600 Billions 400 595 626.2 470.3 200 0 1997 2001 2002 Year FIGURE 40 Copyright industries (ISIC) value-added contribution to GDP. SOURCE: .
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140 THE TELECOMMUNICATIONS CHALLENGE said he looked forward to the growth of broadband's presence in the United States. At the same time, he cautioned, "we know there's going to be a certain amount of pirate product coming through the pipe, and anybody who tells you that there's any realistic strategy to eliminate piracy on the network is fooling themselves or attempting to fool you." The hope, he said, was to achieve a relatively low level of piracy and a very high level of legitimate products; the concern, of course, was that the exact opposite might result. The broadband challenge was "to make sure that it's the first scenario, and not the second," that prevailed. Referring to Dr. Nelson's observation that Napster, though demonstrating the power of a new paradigm, had nonetheless been illegal, Mr. Metalitz went further. "Not only is it illegal," he declared, "but it's also bad for this huge segment of the economy that we've been talking about. It's therefore bad for our overall economy, it's bad for jobs in the United States, and it's certainly bad for the public as a whole in terms of the continuing incentive to invest in the creation of new audio, video, software, and other products." Korean, U.S. Broadband Markets Diametrically Opposed Mr. Metalitz evoked trends from the music industry in South Korea--whose present, he suggested, may provide a glimpse of the United States' future--to underline his concern. Close to 80 percent of South Korean households have broadband access, a rate twice that of the United States, and the network is used differently in the Korean market than it is here. Four-fifths of Korean broadband customers reported consuming audio and video products, over half play games online, and some two-fifths engage in file sharing, while only 14 percent reported using their broadband connection for email. U.S. figures were close to opposite, with a far higher percentage of Americans using broadband for email, a far lower percentage for some of the other applications. In the music industry, whose role as guinea pig he ascribed to its needing less bandwidth than video, the Korean market for compact disks was off 4060 percent from a few years before, to the point that it was smaller than the market for ringtones. "It's great that mobile services are growing," he reflected, "but that isn't really going to replace the much-larger hard goods market." The country had, at the same time, seen a huge increase in pirate services. When the Korean version of Napster 1, Soribada, was shut down, it had 8 million subscribers, or about one-sixth of the country's popu- lation. An unlicensed audio streaming service had 14 million. "We don't want to end up in this situation," he said. But how might the United States avoid it? Mr. Metalitz organized the elements of the challenge under five rubrics: legitimate market, technology, legal tools, enforcement, and public education.
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THE WATERFALL EFFECTS 141 Legitimate market Developing the legitimate market for copyrighted materials over broad- band--for entertainment services, software, video games, research, reference works--was indispensable for success. Meeting this challenge would mean offer- ing enhanced products, as had been done in hard goods with the transition from the CD to the DVD and on to the various types of enhanced formats whose presence in the market was increasing; offering more delivery channels; and making services easier to use. This new broadband market was analogous in cer- tain ways to a large, new geographical market: He drew a parallel between it and the Chinese market, which the copyright industries had been trying to reach with physical goods and where they had encountered a significant piracy problem. While remarking that many steps had been taken to combat piracy in China, Mr. Metalitz suggested it was generally recognized "that you can't really change the paradigm and move to a society that's mostly consuming legitimate goods unless you have access to that market and can get your legitimate goods in." The widespread availability of infringing product represents a similar "market access barrier" for legitimate copyright industries in the broadband market. The key to surmounting that barrier is to make sure that the technology was married to the creative product in a way that delivered something customers would want and would find both easy to use and attractive. Technology Greater control over content would need to be provided to the end user, as Mr. Schuon and others had discussed, but delivery of the content would have to be sufficiently secure "to keep honest people honest." Also needed would be measures ensuring that the income-generating potential of material going into the pipe did not vanish forever. In addition, according to Mr. Metalitz, a more platform-neutral approach was called for; the problem of interoperability, salient in the music sphere, where legitimate services were proliferating, had not yet been solved. Finally, it was desirable that protections be developed that, when applied, were more or less invisible to end users--who could thus focus on enjoy- ing the experience that they had paid for, or on getting access to the material that they had subscribed to, rather than on the protections. Legal Issues In the Digital Millennium Copyright Act, the United States had the basic framework needed to protect the technological measures used to control access to copyrighted materials in the network environment, and more and more countries were adopting similar measures. Some enforcement improvements were pending before Congress even then: The Intellectual Property Protection Act contained an
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142 THE TELECOMMUNICATIONS CHALLENGE amalgam of ways to improve enforcement activities, including those of the Department of Justice. But a problem had been presented by a recent decision of the Ninth Circuit Court of Appeals dealing with peer-to-peer services and, particularly, with Grokster. Under that precedent, according to Mr. Metalitz, a business could be built whose only viability was based on copyright infringe- ment, "and yet that doesn't attract liability under the copyright law or, really, any other law at this point." This needed to be fixed, he said, because investment and innovation should be going into legal businesses rather than into encouraging illegal activity, and there were many ways in which it could be fixed. A petition was then pending before the U.S. Supreme Court asking that the case be reviewed, and legislation had been proposed in the Congress that would address the matter, although it was unlikely to be passed during the current session. However it was addressed, he said, the status quo was untenable because, under it, investment was permitted that encouraged illegal activity. Enforcement Sometimes forgotten "in all the brouhaha about the lawsuits that the RIAA [had] brought and that the MPAA [was] about to bring against end-user file sharers," Mr. Metalitz said, was that "most of the piracy problem we face is still due to organized criminal groups." Many of these groups are transnational, and that, he felt, is where many enforcement resources need to be focused. Still, what he called "dedicated amateurs" also played a role in making the system insecure, which explained the RIAA's and MPAA's actions. Public Education Enforcement action, however, was not being undertaken exclusively for its own sake; in fact, Mr. Metalitz asserted that it was best viewed as a means of public education. Survey research had shown that most people in the United States had not known a year or two before that uploading through a file-sharing service was illegal and an infringement of copyright if one did not have permission from the copyright owner. Those present at the symposium would have known that this activity was illegal, he stated, because they followed such issues closely, but the average consumer really had not been aware. That had since changed, in that most people now knew that it was illegal. The question of whether they were able to make their own conduct or that of their family members conform to the law, however, got into a cultural issue regarding attitudes toward intellectual property and creativity in the larger society. Nonetheless, public understanding, at least of this basic feature of copyright law, had moved to a much higher level.
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THE WATERFALL EFFECTS 143 To Meet the Challenge, Cooperation a Must Possibly the most important concept for the copyright industry as it attempted to meet the broadband challenge, according to Mr. Metalitz, was cooperation. The copyright industry was unlikely to achieve or even to advance its objectives in any of the above areas, he said, in the absence of cooperation with providers of networking services on the one hand, and, on the other, better communication with policymakers and people such as those attending the symposium who were "seeking to understand what all these developments are leading to." DISCUSSION Philippe Webre of the Congressional Budget Office noted that Cisco's claim to have sold "a couple of million" IP telephones contrasted with Mr. Mamakos's estimate that, at 300,000, Vonage held half the VoIP market. He conjectured that many IP phones were being used in enterprises and asked Mr. Mamakos to explain how the enterprise market was different from the market he had discussed in his talk. Mr. Mamakos suggested that the VoIP enterprise market might be consid- ered "sort of a next-generation PBX." He himself had a Cisco VoIP phone on his desk at Vonage, and many other companies had abandoned the traditional Nortel/ Avaya key system phone that is plugged into a central PBX using dedicated wires. Replacing it were voice over IP appliances bought from Cisco or other vendors; these are equipped with a "soft PBX" that handles VoIP and then is connected to the PSTN "behind the scenes by whatever means: either voice over IP again, or ISDN PRI, or the normal sort of interconnect." The statistics in his own presenta- tion had referred to end-user subscribers on the PSTN as opposed to users within an enterprise or corporate setting. He said he did not know whether the enterprise market was growing faster than the end-user market. VoIP Consumer, Enterprise Market Rising in Tandem Dr. Nelson, expressing IBM's excitement about enterprise voice over IP, posited that growth in the two markets was similar, with curves going up very quickly. He stressed, however, that the enterprise sector comprised IP services beyond voice. It was the ability to put fax, email, and voice together in one system that IBM was selling to its enterprise customers, who were tired of managing separate phone and data networks. This was particularly useful to companies with large numbers of mobile employees; for example, it allowed IBM employees, 30 percent of whom did not have an office, to get their voice mail and faxes as email attachments. As a result, he remarked, "we don't have to go to three differ- ent services to get the information we need to do our job." So while Vonage was selling more versatile voice service, IBM was selling a totally different way of doing messaging.
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144 THE TELECOMMUNICATIONS CHALLENGE Vonage, stated Mr. Mamakos, offered the same sort of technology and some overlapping products and services, but was targeting different market segments. New Services: Identifying the Showstoppers Evoking the term "showstoppers," used by the semiconductor industry for potential obstacles to the continuation of progress at the pace described by Moore's Law, Dr. Charles Wessner of the STEP Board asked Dr. Nelson and Mr. Mamakos whether they were aware of potential showstoppers of either a regulatory or technical nature in the markets they had discussed. He asked in addition whether solutions to any such barriers had been identified. Dr. Nelson named privacy, intellectual property, and security as the three showstopper issues for The Grid, with a solution to the last being a prerequisite for dealing with the first two. As to privacy, a "major change in mindset" was needed before corporations would accept a third party's running the IT infrastructure on which their essential services depended; among other things, they had to be convinced that their data would be kept confidential even though the third party was running all the systems that that data passed through. "You not only need to make sure the data is safe from hackers," he said, "you also have to convince the corporate customer that you're not somehow tracking what kind of applications they're using and who they're talking to." This was similarly true, he observed, in the case of Vonage's customers, to whom it must be abundantly clear that the company was storing a great deal of personal data, voice mails included. The challenge for both grid and VoIP providers was to win the customer's trust. On the issue of intellectual property, Dr. Nelson said, there was "a long way to go." No consistent standards for DRM existed, and it was clear that many different solutions would be needed, as The Grid would be a very powerful tool for the pirates referred to by Mr. Metalitz. Imposing Old Regulation on a New Medium Dr. Nelson then turned to security, which he considered not a regulatory issue but a challenge for suppliers of services, as hundred-billion-dollar indus- tries were being built on an infrastructure that "isn't quite ready for that." In the regulatory domain, his biggest fear was of efforts to impose old regulation on the new medium--a tendency that was, in fact, active all around the world. Serving as vice president for policy for the Internet Society and working with developing countries, he had seen how easy it was to say, "Internet telephony looks like telephony so we'd better to regulate it that way, and streaming audio looks like radio so we'd better impose regulation that way." Such thinking, he asserted, "could stop everything very quickly." Mr. Mamakos placed the major challenge for Vonage in the domain of regu- lation and public policy. There was "no new physics we have to invent to be able
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THE WATERFALL EFFECTS 145 to grow the business," he said. "It's a matter of doing a good job of execution, and technology evolution hopefully allows us to do a better job more economically." In contrast, great uncertainty remained on the policy and regulatory side. Vonage was engaged in a project to implement CALEA capability, as the company wanted to be "part of the solution, not part of the public policy problem." While his own belief was that the company needed to pursue the project even though great expense was involved, he acknowledged that this was "not entirely clear." If the grid is inherently global, Dr. Murray then asked, "what do we do in the United States?" Locating Transactions in an Inherently Global Market Mr. Mamakos remarked that Vonage's users could, and did, take their tele- phone adapter and plug it in all over the world, using their telephone service as if they were at home. "It's a feature," he said, "not a bug." Dr. Nelson observed that while many old laws assume that a company is located in one place and that a transaction occurs in one place, The Grid might have data coming from Brazil and computing power from Canada and Germany while the user was somewhere in Belgium. Thus the potential existed "to do a transaction in five places at once," which would also confound regulations taxing the value of the transaction based on where it took place. That the "laws are not virtualized but The Grid is" could lead to what he termed "a lot of just total collision." Mr. Metalitz said that all three issues raised by Dr. Nelson were problematic on the international level. That legal standards were harmonized to a greater degree than they had been a decade or two before in the intellectual property areas, and particularly in the copyright area, was a positive development. But there was far less harmonization in the privacy area, where there was not any one international agreement that established a standard of privacy protection. Ms. Hook, while concurring on the previous points regarding IP and privacy, differed on taxes and subsidization. "It is really quite easy," she contended, "for service-layer providers to provide the services from an international point of presence and avoid having to get at all entangled in any kind of local or state taxation or universal service fund." This was particularly important on the telecom side, where upward of 23 percent of the revenue line was subject to a variety of state and local taxes, making domestic providers "automatically non-competitive vis-à-vis providers coming in from international sources." Technology's Challenge to the Constancy of Time Mr. Hellman, in reflecting on how the evolution of computer and communi- cation technologies might affect real estate development, had realized that people live simultaneously in two different domains, time and space. Asking someone
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146 THE TELECOMMUNICATIONS CHALLENGE the distance between home and work, for instance, more often elicits an answer expressed in time than in space. Examining the reason people respond this way leads to a profound insight: There have always been 24 hours in a day, and in the future there will presumably continue to be 24 hours in a day, and because all basic activities have to fit into 24 hours, people's behavior is relatively stable in the time domain. But as work becomes more virtual, with technology allowing it to move away from a paper-based manual-labor paradigm toward an electronic- based network paradigm, the whole world becomes one virtual place in which Australia, say, is less than one-tenth of one second from the United States. The challenge for the evolution of the human species, in light of this, may be whether it can deal with the world as one integrated system. Dr. Nelson remarked that one of the drivers behind The Grid was the desire, since there are only 24 hours in a day, not to waste half an hour of that time backing up a hard drive, reconfiguring a disk, or downloading new software patches. Mr. Schuon recounted having experienced a "kind of content Moore's Law" over the previous two years thanks to TiVos and other products incorporating hard drives. He now flips through TV shows as through pages of a magazine, forwarding through parts of shows that do not interest him. "I can watch `Date- line NBC' and `60 Minutes' in under and hour," he said, "and I'll bookmark the business section of the New York Times, reading that every morning but never getting to the rest of the paper." By managing content in this manner, he has been able to do and see much more in the same 24-hour period. The IP Dilemma: Private Licenses vs. Public Good Mr. Hellman observed that information is an unusual form of property in that even if it is stolen, the victim of the theft retains it. He saw in the current increase in the flow of intellectual property a parallel to the change brought about by the invention of the printing press, which had drastically reduced the cost of repro- ducing and distributing information, thereby elevating the quality of life on earth as a whole. The intellectual property issue becomes very interesting, in his view, if the only way to protect what we think of as intellectual property rights is to slow down an evolution whose benefit to the world is such that economics may be irrelevant. Mr. Metalitz noted that intellectual property law had faced many challenges in the past and had adapted to significant changes. A century ago, for example, there was no such thing as recorded music, and copyright law has been able to adapt to all the changes that intervened. Still, he acknowledged, there was no question that, as Mr. Hellman had outlined, it was again facing a profound challenge. Mr. Schuon, recalling Dr. Raduchel's description of how people gathered to listen to the virgin play of an LP, observed that the current consumer was largely happy with an MP3 file on an iPod, whose quality was well below that of a compact disk. Consumers, he concluded, would trade quality for the ability to manage content and use it in a more exciting way.