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Panel IV ---------------------------------------- Participants' Roundtable Moderator: Dale W. Jorgenson, Harvard University H. Brian Thompson, iTown Communications David S. Isenberg, Isen.com Lisa A. Hook, AOL Broadband (retired) Jeffrey M. Jaffe, Lucent Technologies Andrew Schuon, International Music Feed William J. Raduchel, Ruckus Network Dr. Jorgenson asked each of the roundtable's participants to state briefly what he or she would be taking away from the day's meeting. As someone who had repeatedly had the experience during his career in the telecommunications industry of looking back and seeing the preceding few years as the most exciting yet, Mr. Thompson said he had the feeling as the symposium concluded that the coming five years were going to be extremely exciting. Significant discontinuities would be taking place "in everything that everybody thought was the status quo," he predicted, quoting MCI's founder, Bill McGowan, on the danger of "wanting the status quo long after the quo had lost its status." That those in industry desire both to lead commercially and to cause their technologies to evolve into something useful to society dictates that they look at 147

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148 THE TELECOMMUNICATIONS CHALLENGE what they are trying to accomplish from more than one perspective. Putting in a word of praise for open access, he said that "we've got to create the opportunity for people not to be shut off even from the small things that we find not just enjoyable but beneficial to us intellectually as well as socially." Mr. Thompson found frustrating that a huge part of the world still had never used a telephone, let alone taken downloads on an iPod. He stressed the impor- tance of opening up access to the network and "creating opportunity for the people, broadly based, to make their own selections about what they want to do." Endorsing Ms. Hook's plea for simplicity, he said that services needed to be not only accessible but also packaged in a way that would allow users throughout the nation and the world to take advantage of them. The symposium had also, he said, left him with the pleasure of knowing that his was not a lone voice on such issues. Mr. Isenberg asserted that "if the status quo has lost its status, people in general at this conference don't seem to realize it." Technology that already existed made it unnecessary to be limited by bandwidth, but those in attendance were "just assuming that we're on the right track." If, as others had claimed, the demand for bandwidth was insatiable and people would use bandwidth once they were given it, then the problem, as he expressed it, was that "nobody's giving me bandwidth." What he wanted, he said, was "not just bandwidth [but] stupid, open bandwidth: fast pipe, always on, get out of my way." Ms. Hook recounted that in the summer of 1949 there was an article in Electrical Engineering magazine predicting that within the next three years all homes would be networked, with a server in the telephone closet. In the late 1970s and early 1980s Warner Communications founder Steve Ross had an inter- active network called "Cube" in Columbus, Ohio, intended to deliver voice, video, and several additional applications, as well as to upload and download the user's medical information, in a networked household. It was, she said, "a complete fiasco." Time Warner had a similar full-service network about ten years later that provided voice, video, data, uploading, and downloading on a trial basis to several thousand homes in Orlando, Florida. A survey conducted upon the conclusion of the experiment found that the only application users would have been willing to pay for was a high-pitched tone that killed roaches. "So for $100,000 a home," she said, "we had created the networked version of Terminix." Juxtaposing the picture emerging from this 50-year span of industry history with the current argument that if people are given unlimited bandwidth, they will be able to use it, Ms. Hook offered several observations: that, in line with what Mr. Thompson had said, a point of inflection had been reached with respect to the ability to put unlimited bandwidth into people's hands; that, particularly over the previous year, people had begun to experiment in the manner of Mr. Schuon with uploading and downloading, and to change their behaviors in ways never seen before; but

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PARTICIPANTS' ROUNDTABLE 149 that the industry was struggling at the service layer to find business models and revenue streams on these applications that would justify the investment needed to make unlimited bandwidth available. "So I think we're getting there," she said, "but I'd still say we can't build out this entire network based on Terminix's business model, because they're doing just fine with the old juice." Dr. Jaffe's strategy for summarizing the symposium, which he said had presented so many issues and perspectives that his head was spinning, was to take all of the day's ideas and put them into five different "buckets": Bucket No. 1, technology issues. Technology issues concerning invest- ment, infrastructure, security, and reliability remained to be resolved before service could be offered that was universal, high speed, and full bandwidth with a large number of applications. Bucket No. 2, regulatory policy. All had concluded that it is not accept- able for the United States to be thirteenth in the world in broadband and that, "somehow or other, our regulatory policies are failing us"; therefore, regulatory policy needed to be addressed. Bucket No. 3, economic policy. There had been a great deal of very interesting discussion about who the winners and losers would be in the next generation of networks. "What's important to me," said Dr. Jaffe, "is that the consumer wins, that the country wins, and that we get this technology out there." Bucket No. 4, technology absorption. "Technology absorption by the masses is a non-trivial part of the technology and industrial ecosystem," said Dr. Jaffe, praising Ms. Hook's points regarding the important role played by the service infrastructure. Bucket No. 5, R&D policy. While much of the symposium had been devoted to "how we deploy that which we already know how to do," Dr. Jaffe was anxious about "that which we don't know how to do" and about making sure that the United States got there first. The country had been very innovative over the past two decades, and the day's discussion had indicated that it would con- tinue to be innovative over the coming two decades, but, he said, "we don't want to stop there." For this reason, R&D policy was, for him, a "hot-button issue." Mr. Schuon evoked the memory of the "perfect storm" for entertainment content providers that had arisen from the confluence of a number of elements: the availability of ample space on hard drives and of a certain amount of broad- band with the advent of MP3s and then of Napster. This ushered in an era of widespread piracy and file-sharing, and it made music the killer app driving much of the growth of the Internet's entertainment content sites in the late 1990s. At that time, every major media company thought it had to have music sites, as music sites were going to drive its business.

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150 THE TELECOMMUNICATIONS CHALLENGE The music business, Mr. Schuon reiterated, is the guinea pig for other content businesses, and, with larger amounts of broadband becoming available, the movie business was now right behind the music business. Remarking that not all financial models had yet been figured out, he expressed the hope that the content sector of the entertainment industry could "catch up to the technology a little bit and get a little bit ahead of the game." Because providers had neglected to think about how to monetize content on the Internet, they were now having a hard time convincing consumers, who had become used to the idea that everything coming to them via the Internet was free, that they should pay. "If we don't educate people early about the value of the content," he said, "then when all [the antici- pated new offerings become] available, everybody is going to be trading it again, and we're going to have no business at all in media." Mr. Schuon called this a frightening prospect but said that, although it might seem to be just around the corner, it would be longer in coming than many--and, in particular, enthusiastic potential users--might think. Still, he warned, if the industry tarried in creating an economic model for "the distribution of content on a grand scale," then it would find itself "in very big trouble." To conclude the panelists' accounts of what they would take away from the symposium, Dr. Jorgenson turned to Dr. Raduchel, who had set the context for the day's discussions by providing what Dr. Jorgenson called a "very eloquent picture of the convergence of everything on the great network." Dr. Raduchel began by noting that Mr. LaJoie had been the only one among the network providers to raise the question of content protection, as well as by seconding Mr. Schuon's observation that content protection would be essential for the future of the entertainment business. Auguring a significant challenge was the fact that content protection had not been built into the network, nor had the industry yet come up with an alternative. His response to the question of "who was going to win, the broadcast industry feeding large hard drives on TiVo-like devices or the IP network-based people," was that "one side has all the licenses and the other has none." Seeing in this the existence of a "major edge," he said the question needed to be addressed. But the foremost challenge, according to Dr. Raduchel, was coming up with a viable business model. He had recently returned from a visit to South Korea during which the president of Korea Telecom had told him: "'Bit consumption is going up all the time. Prices are flat to down.'" As a result, the company, although "way ahead" of its U.S. counterparts, was not making any money--or, as its president had put it, "'We're dying.'" And Messrs. Wegleitner, LaJoie, and Thompson had all just said the same thing: In the absence of a stable business model, there was no knowing when it would be possible to make a return on these activities. Mr. Thompson in particular was making "a huge bet" in positing pay- back over 1012 years, which Dr. Raduchel called "a long time in today's world." Convergence was coming, and every time it seemed that the flow of money into it might stop, it began again from yet another source. How would telecom

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PARTICIPANTS' ROUNDTABLE 151 companies deal with making cell phones work perfectly everywhere? with VoIP causing rates to plummet? with Skype, a company made up of eight computer programmers in Estonia, offering telephone calls worldwide for next to nothing? The next decade, Dr. Raduchel warned, would be marked by "lots of dislocation." Alluding to the remarks by Mr. Tenhula of the FCC, he placed the industry "some- where between consumer confusion and political anxiety" and opined that the latter was just beginning to build. Among his own worries, he said, was where the R&D would come from. Korea had no expectation of making money on consumer broadband but had built out its network because 38 percent of its exports were IP based and it wanted to make sure that Samsung and LG were the companies that supplied the world. It was clear that the network, as the Koreans did not care whether it ended up having value in itself, was an instrument of industrial policy, and that their interest was in driving investment, driving standards, and giving their home companies an advantage. It was because Dr. Raduchel felt that U.S. competitiveness hinged on broadband, even if he was unable to sketch the connection directly, that this was among his worries. Although unsure what the business model for 100-Mbps-into-the-home might be, he was certain that it would depend on supplying content. Recalling that it was not market forces but, in the face of opposition from the cable industry, an act of Congress that got HBO onto satellite, Dr. Raduchel said he thought "it might take a similar act of Congress here around content." The European Union had been bolder, having overridden existing exclusivities in ordering that soccer rights be made available to broadband, both wireless and wired. "If you don't have the content, you're not going to have the business models to do this," he observed, reminding those in attendance that the reason consumers pay is to be entertained. Summing up, he said he could not predict who would mediate the coming dislocation. Whether the FCC had the legitimacy to do this was unclear, as the FCC's moves to protect content had constituted "at best a mixed bag." There was, in fact, no one institution that was constituted such that it could settle questions of intellectual property rights. His initial question--how regulation would be achieved once convergence had turned all the various telecommunications indus- tries into features--had thus remained unanswered. DISCUSSION Mr. Gardinier said that his major takeaway from the symposium was the Sturgeon Rule--"90 percent of everything is crap"--and inferred that it was exemplified by the practice of bundling. "People are being sold CDs when they want a song, they're being sold a DVD with 10 different applications that, because they just want to watch a movie, they never are going to use," he noted, asserting that this is "one of the big problems" in that it drives up prices. That said, he

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152 THE TELECOMMUNICATIONS CHALLENGE asked whether any of the panelists had taken consumer wants and needs into account in forming business models. Mr. Thompson, emphasizing that he was speaking as a service provider and not a content provider, said that his own business model was based on the fact that "the consumer today is paying $137 a month to get something that's not worth $137." An assumption of his targeting a ten-year payback was that he could take out costs that service providers had been passing down to consumers. Consumers "go catatonic" upon reading their phone bill because none of the numerous charges it contains, the largest of which is the federal access charge, makes any sense to them. And it is these charges to which they are objecting. Bundling was a second source of objection. "People want it simple," he said, "but they want it simple the way that they can consume it and the way they want to consume it." While having open access is difficult, it leads to the consumer's having more say. "It will get people who want to bundle in different ways for different audiences together to create something that's of great value to the individual," he claimed. Addressing the question from the content side, Mr. Schuon said that since the American record industry had lost the ability to make money selling singles, which continued to be a decent business in Europe, it had been plagued by the bundling problem. Over the years, the U.S. industry had not done the best job of marketing the value of music to the consumer. Certain offerings could be consid- ered complete works that actually constituted an album, he said, naming as examples certain classical works, movie soundtracks, and the music of such artists as U2 and Bruce Springsteen. But in most cases popular records were built around two or three songs, with the rest put in as filler. The fact that it had not figured out how to make money on an a la carte basis had caught up with the record industry now that consumers wishing to purchase single songs had the option of taking their business somewhere else, and it was something that the industry had to deal with. DVDs, in contrast, were reasonably priced, and the extras were thrown in as a bonus, which consumers liked and which added value without raising cost. To illustrate how the pricing of DVDs had hurt the record business, Mr. Schuon recounted going to Best Buy and seeing the Spiderman DVD displayed right next to the Spiderman soundtrack and priced $2 below it. Such a thing is possible because there are so many marketing windows in the movie business: A film is sold at the box office, in stores, on pay-per-view, to airplane passengers, on HBO, and to broadcasters. In contrast, records have only the one play, they sell fewer units, and the cost is greater. For this reason, albums cost more than DVDs; consumers, however, have no idea why, whereas they know how much movies cost to make because "the film industry always tells you, `this movie cost $100 million and this star got this much, and there's real value in that.'" While admit- ting that the record industry had not taken the time to educate the consumer on this point, he speculated that it might not be possible to do so in any case.

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PARTICIPANTS' ROUNDTABLE 153 Comparing prices through the different distribution channels, Ms. Hook observed that it seemed fairly rational to pay $17 for the ownership of a film as opposed to $10 for a ticket to a movie theater. The problem for the music industry was that the alternative to paying $17.99 for a CD was not paying at all but stealing the content off the Internet. The issue, as she put it, was that the music industry had fallen behind in figuring out interim price points between zero and $18. In response, Mr. Schuon called charging a dollar per track "a nice start" but noted that the industry still can't make a profit at that price level. Dr. Isenberg threw out two questions: whether Apple could be considered part of the music industry, and whether it hadn't figured out how to sell singles successfully. Ms. Hook answered that singles were a loss leader for Apple the same way music was a loss leader for Wal-Mart. "This whole industry has become a promo- tional industry," she declared. But Mr. Schuon pointed out that the world's largest music company, the Universal Music Group, was not in the hardware business at all and therefore drew no benefit if its works promoted the sale of iPods or stereos--yet it still had, somehow, to turn a profit. As for the claim that iTunes was profitable, he speculated that if it had sold 150 million downloads at a dollar each, the business would emerge as "at best a breakeven" once Apple's market- ing costs were figured in. "Couldn't it be that the music industry is changing and that the formerly `greatest music company in the world' is losing its status in the current quo?" Dr. Isenberg asked. Mr. Schuon replied that consumers had never had a more voracious appetite for music, and that there were more hits than ever, but that monetizing that enjoyment of the music had become extremely challenging. In the opinion of Dr. Raduchel, iTunes in fact constituted "a disaster for the music industry" because, on a $330 sale of an iPod on iTunes, the music industry got $20 and Apple got $310. This business model was not sustainable for the industry in the long run because it would not provide sufficient revenue either to produce the music or to create the demand that drives sales. Moreover, as Steve Ballmer had said, the basic DRM for music on the iPod was "stolen." While the Microsoft CEO issued a retraction owing to the annoyance his statement had caused, according to Dr. Raduchel only 30 songs on an average iPod had actually been sold. To address the question of bundling, he turned to the price structure in effect at McDonald's and the consumer behavior it engenders. A customer ordering a double cheeseburger, a coke, and French fries may base his or her decision on the price of the cheeseburger, but there is in fact no gross margin on that item, while there is a 90 percent gross margin on the coke and the fries. The company, there- fore, depends on the sale of bundles for its profit. "The essence of every consumer business I've ever studied," Dr. Raduchel remarked, "is that you make your money by denying consumers what they most want, thus making them buy it the way you want them to." As this model was used in consumer businesses across the board, bundling would continue.

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154 THE TELECOMMUNICATIONS CHALLENGE Observing that the symposium had spent far less time on the issue of security than did most meetings of its kind, Dr. Nelson posed a question on that topic in the form of a scenario. Some who knew the Internet well remained worried about the prospect of a systemic problem: perhaps a way in which the Domain Name System (DNS) could be brought down or a virus that, spreading throughout the `Net, could disable a million hard drives in a day. How would the investment community respond to such an occurrence? How would regulators, both in the United States and elsewhere, respond? And how should they respond if the Internet has a serious security problem that could be exploited? Dr. Jaffe expressed the belief that a single instance would occasion a great number of meetings and perhaps even a congressional investigation but "very minimal" response beyond that. The dearth of practical measures taken after the events of 9/11 had shown the country's first-responder systems to be antiquated could be regarded as precedent. He put forward as an explanation that in order to believe that there is economic value in defending against a security threat, "you have to believe it's going to happen again or build into your model that it's going to happen again." Because the United States is "a very optimistic society," he said, "it seems to take us a very long time to take things seriously." Agencies of the government that are nominally responsible for the country's infrastructure should be more active in this area than they had been, because nothing would happen otherwise. Dr. Raduchel attributed recent resignations at the Department of Homeland Security to the lack of attention given this issue and said that Richard Clarke was very passionate about it but that, once he had left, there would be no one to carry the torch. As to whether a security disaster was likely to happen, Dr. Raduchel expressed uncertainty. He personally had been using the PC firewall product that had been voted the most secure, but attackers specifically targeting it had found a hole in it a few months before, with the result that his hard drive had been com- pletely destroyed. Still, he registered his disagreement with Dr. Jaffe, saying that a major D-DOS attack would incite "panic in some quarters over what it would do and where it would go." In the face of Dr. Jaffe's rejoinder that significant security breaches had already taken place, Dr. Raduchel objected there had been nothing "to the extent to which you couldn't make airline reservations for a week." But Dr. Jaffe held his ground, saying that incidents "pretty close to that scale" had occurred, includ- ing the shutting down of Amazon. Ms. Hook drew a parallel to the major power outage of two summers before that had crippled the U.S. Northeast, among other things taking down all financial services and causing them to be rerouted to North Carolina. Although it was a "huge issue" at the time, she recalled, "nothing happened in Congress [and] nothing has happened since then [except for] a couple of days' worth of news stories." The incident would, in her judgment, have had to be "much, much more dramatic" for anyone to take real action.

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PARTICIPANTS' ROUNDTABLE 155 Dr. Isenberg weighed in on the second half of Dr. Nelson's question, that addressing what should happen. First, arguing for alternatives to the DNS system, which he called "a single point of failure," he recommended a research effort that would investigate options. Second, he called for the institution both of "multiple, completely physically dissimilar ways of accessing the Internet" and of com- pletely dissimilar Internet backbones transiting different parts of the country. Dr. Nelson mentioned that the Defense Department was in the process of imple- menting such a program, but Dr. Isenberg dismissed it because use would be limited to DOD itself. While he was unsure about advocating the resurrection of microwave transmission, Dr. Isenberg said that diverse fiber routes should "cer- tainly" be made available. Third, it was important to have multiple and different operating systems: Having one operating system that accounted 85 percent or more of terminals was unacceptable from the point of view of network reliability. Robert Hershey asked whether increasing bandwidth and computer power, the consequence of which seemed likely to be an improvement in capability by orders of magnitude, would simply make currently available services cheaper or lead to innovation. Dr. Isenberg said this would lead to a world unimaginable even to those with active imaginations. "If we all had a gigabit to our home, which is probably affordable and within the scope of today's technology, life would be really differ- ent and, I have to believe, immeasurably better," he said. Dr. Jaffe, recalling jibes from earlier in the day about the symposium's being a physical rather than a virtual meeting, confided that he "didn't relish waking up at 4 in the morning to go to the airport, pass through security, and board a plane in order to get here. Agreeing that the changes cited by Mr. Hershey would make a big difference, he predicted that "once there's enough bandwidth, there'll be this visceral feeling of being there even when you're not there." Ms. Hook said that most bandwidth providers with whom AOL talks want to know, before they invest in the bandwidth, what applications it would be used to provide and how much people are willing to pay for them. She therefore called Mr. Hershey's question--which she rephrased as "What are they going to do with it?"--the question of the day. She asked Mr. Thompson to what degree he was willing to speculate: How extensively would he build out his network before his market could be sized and those willing to write monthly checks for his service had been identified? Mr. Thompson emphasized that his project was focused on present rather than future capabilities. Having looked at what was happening in Japan with its $28 gigabits and at what was going on in Korea, he had become convinced that the crucial issue was not that of the technology's availability--rather, it was the cost of doing something with it that was beginning to drive new applications. Had the United States moved toward more of an open network three or four years before, as in his judgment it should have, it would already have IP TV. That was the killer application that would "change the world as we know it," he said,

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156 THE TELECOMMUNICATIONS CHALLENGE adding that AT&T had thought the same in 1956, when it introduced the first television picture phone. Not only was Mr. Thompson himself convinced that IP TV would be coming along in the following two or three years, so were Southwest Bell, which was taking a big bet on it, and others as well. While admitting that how they would deliver was "another story," he maintained that lower costs were generating more opportunity to develop applications that could be useful. At present, the country was paying for capabilities that it was not taking advantage of. Dr. Isenberg, however, "respectfully" disagreed that TV over IP had not yet arrived. He said that he often "went" to FCC meetings that put co-diffusing TV over IP, although the picture was, unfortunately in his view, both small and low- resolution. He objected to the notion, thrown out by Ms. Hook, that he was the only one interested in watching this, saying that specialized niches existed. He allowed as how the clips from The Daily Show that were being passed around were more popular than the FCC meetings, although he remarked: "If I had the bandwidth, I'd like to see that glint in [FCC Chairman Michael] Powell's eye when he says what he says." Dr. Raduchel, looking at R&D trends, said that the one field in which the country was spending billions of dollars pretty much out of the public view was sensors. A large portion of the research was classified, as it was meant for appli- cation in such homeland security concerns as border protection and monitoring, but its results would inevitably flow into public use. Sensors could, in fact, emerge as the source of the next round of productivity improvements, and they had the potential to cause other significant changes as well. "If you put sensors every- where, you change the way that every logistics system works," he said, adding: "In the end, every business is a logistics system." Pointing out that all sensors are silicon, Dr. Raduchel remarked that the de- clining cost of semiconductors was still "driving the world." And a great deal of bandwidth would be consumed by the constant communication among sensors, which don't do any good if they can't communicate. It would be above all the dumb sensors, those lacking the built-in intelligence to make decisions regarding the meaning of the information they were gathering, that would communicate in large volume. Asserting that the impact of sensors on the economy would be large--although its scope had not yet become clear, something also true of nanotechnology--he predicted that, within three to five years, they would provide the focus for many meetings similar to the day's symposium.