3
The Changing Landscape of the U.S. Information Technology R&D Ecosystem: 1995-2007

This chapter reviews the evolution of the information technology (IT) research and development (R&D) ecosystem in the time period 1995 through 2007. As with any ecosystem in nature, the IT R&D ecosystem responds to external forces to which it has been subjected, in turn influencing those forces by the way that the system evolves. The time from the mid-1990s to the present has been a period of almost unprecedented change, in the global, technical, and industrial contexts.

The chapter is organized in four sections. The first reviews the shocks to the U.S. IT R&D ecosystem in terms of the rise and aftermath of the speculative financial bubble. The second section discusses the emergence of new technology platforms, based on open-source software, collaborative community development, and Web-centric technologies, and the challenges that these present to traditional IT industrial organization. The third section addresses the rapid globalization of the underlying IT industrial sectors, with a particular focus on the cases of the semiconductor, computer, and software industries. It also describes the rise of new regions where IT R&D is performed, both nationally and internationally, focusing particularly on the new IT powerhouses of India, China, and Taiwan. The fourth section describes the role that infrastructure plays in enabling innovation and the importance of enhancing U.S. broadband local-access infrastructure. The chapter concludes with a brief summary.

SHOCKS TO THE U.S. ECOSYSTEM

The period 1995 to 2007 has been a turbulent one for the U.S. economy and the world economy. The early part of the period was characterized



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3 The Changing Landscape of the U.S. Information Technology R&D Ecosystem: 1995-2007 This chapter reviews the evolution of the information technology (IT) research and development (R&D) ecosystem in the time period 1995 through 2007. As with any ecosystem in nature, the IT R&D ecosystem responds to external forces to which it has been subjected, in turn influ- encing those forces by the way that the system evolves. The time from the mid-1990s to the present has been a period of almost unprecedented change, in the global, technical, and industrial contexts. The chapter is organized in four sections. The first reviews the shocks to the U.S. IT R&D ecosystem in terms of the rise and aftermath of the speculative financial bubble. The second section discusses the emergence of new technology platforms, based on open-source software, collab- orative community development, and Web-centric technologies, and the challenges that these present to traditional IT industrial organization. The third section addresses the rapid globalization of the underlying IT industrial sectors, with a particular focus on the cases of the semiconduc- tor, computer, and software industries. It also describes the rise of new regions where IT R&D is performed, both nationally and internationally, focusing particularly on the new IT powerhouses of India, China, and Taiwan. The fourth section describes the role that infrastructure plays in enabling innovation and the importance of enhancing U.S. broadband local-access infrastructure. The chapter concludes with a brief summary. SHOCKS TO THE U.S. ECOSySTEM The period 1995 to 2007 has been a turbulent one for the U.S. economy and the world economy. The early part of the period was characterized 

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 ThE ChANGING LANDSCAPE: -00 by an IT-fueled speculative boom, followed by an economic bust from which the IT sector is just now starting to emerge. This section reviews the shocks to which the IT R&D ecosystem was subjected during this time. The Rise of “Irrational Exuberance” The term “irrational exuberance” is credited to former Federal Reserve Board Chairman Alan Greenspan. In a speech given at the American Enterprise Institute in 1996, Greenspan made a general observation about the difficulty of recognizing “unduly escalated asset values.” Few seemed concerned about the possibility of irrational exuberance or unduly high asset values as the excitement about the Internet created the dot-com boom. The initial public offering (IPO) of Netscape Communications Cor- poration in August 1995 symbolizes the beginning of this period. With the benefit of hindsight, those early years can be seen to have fueled a mas- sive expansion and upgrade of the global telecommunications system and powered the adoption of the Internet, but when the bubble of excitement burst in 2000,1 a powerful jolt was inflicted on the IT R&D ecosystem.2 The introduction and adoption of the World Wide Web were predi- cated on the ubiquity of the personal computer. With intuitive browsers and simple mark-up language, the Web enabled millions of individuals and businesses to create Web sites that could reach hundreds of millions of people and to engage in commerce. Companies formed rapidly, raising venture capital at high valuations to pursue new Web-enabled opportuni- ties. Entrepreneurs and investors were lured into adopting business plans with weak fundamentals and (at least in retrospect) objectives that did not create lasting and tangible customer value. And yet, despite the agony of the bursting bubble, the Internet changed the lives of hundreds of millions of people around the world. Figure 3.1 shows the rapid growth in venture funding for IT start-ups, particularly in the software and telecommunications sectors, following the creation of the Web in the mid-1990s. (For comparison, biotechnology funding, which did not experience such extreme funding changes, is also shown.) According to data from the MoneyTree survey, the number of IT start-up companies receiving venture investments reached a peak of more 1For a broad study of the 1995 stock market boom in the context of others and with respect to structural factors contributing to speculative bubbles, see Robert Schiller, Irrational Exuber- ance, Princeton University Press, Princeton, N.J., 2000. 2The overall peak in terms of both the total number of venture deals and total amounts raised came in the first quarter of 2000: in that quarter there were 2,129 deals amount- ing to $28,414 million, according to PricewaterhouseCoopers/Thomson Financial/National Venture Capital Association MoneyTree Report historical data, available at https://www. pwcmoneytree.com/MTPublic/ns/nav.jsp?page=historical; accessed August 20, 2007.

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 ASSESSING ThE IMPACTS OF ChANGES IN ThE IT R&D ECOSySTEM Software 30 Telecommunications Computers and 25 Peripherals Networks and 20 Equipment U.S. $ (billion) Semiconductors 15 Biotechnology 10 5 0 1995 1997 1999 2001 2003 2005 2007 Year FIGURE 3.1 Total amount of investments by year, 1995 through 2007, in venture Figure 3-1.eps funding for IT start-ups in five sectors, compared with that for biotechnology start- ups. The investment bubble in IT start-ups ballooned after 1995 and was deflating by 2001. SOURCE: Data (national aggregate data by industry from 1995 to 2007) from PricewaterhouseCoopers/Thomson Financial/National Venture Capital Association MoneyTree Report. Available at https://www.pwcmoneytree.com/MTPublic/ns/nav. jsp?page=notice&iden=B. than 5,600 in the year 2000, compared with fewer than 1,300 in 1995; the average investment per deal was over $18 million for year 2000 invest- ments, compared with $4.5 million in 1995.3 The period 1995 through 2000 was characterized by a number of high- profile success stories along with many large-scale capital deployment mistakes. In retrospect, too many of the IT start-ups that received ven- ture capital funding were ill-conceived, too few of the funded start-ups had solid business fundamentals, and ultimately most squandered their invested capital and went bankrupt. 3Data from PricewaterhouseCoopers/Thomson Financial/National Venture Capital Asso- ciation MoneyTree Report, available at https://www.pwcmoneytree.com/MTPublic/ns/nav. jsp?page=historical; accessed November 20, 2008.

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 ThE ChANGING LANDSCAPE: -00 The financial woes, and even bankruptcies, of several large telecom- munications providers suggest that too many of them attempted to build next-generation data network backbones. This investment occurred even as the somewhat lackluster state of U.S. broadband suggests that too little investment went into the transformation of U.S. narrowband local-access infrastructure into a broadband local-access infrastructure—thus creat- ing a potential impediment to the deployment of cutting-edge applica- tions and services that depend on high data rates. (See the section below entitled “Infrastructure to Enable Multifaceted Innovation.”) At the same time, there are differing perspectives on the net success of investment strategies during this period. Researchers have begun to explore some of the entrepreneurial and investment dynamics of the era. For example, drawing on data contributed to the Business Plan Archive, 4 Goldfarb, Kirsch, and Pfarrer estimate that many less-visible and privately held ventures—accounting for nearly half of dot-com era ventures—sur- vived until 2004.5 Thus, they characterize the dot-com era as a “legitimate response to a technology shock.” However, these authors also recognize that “many good opportunities were oversold to investors and the public as large opportunities” and that the bursting bubble brought reduced, but more realistic, private and public market valuations.6 Subsequent research by Goldfarb, Kirsch, and Miller explored the implications of the pre-2000 “pervasive and persistent belief” in a “Get Big Fast (GBF)” business strategy that was based on the market preemp- tion of competitors and on expected economies of scale associated with network effects. They concluded that belief in the GBF strategy by entre- preneurs, investors, and the public led to overly focused investment in too 4The Business Plan Archive (www.businessplanarchive.org) was established in 2002 to preserve business plans and other digital ephemera from the dot-com era technology companies. 5Using a sample of new technology ventures drawn from the funding solicitations re- ceived by one venture capital fund, Goldfarb, Kirsch, and Pfarrer extrapolated estimates of venture creation during the 1996-2002 period that include transactions not published in the Thomson Financial data. They estimate that 50,000 new ventures were formed to exploit the commercialization of the Internet and that 24,000 of these received some $256 billion from formal and informal investors over the 1996-2002 period. By contrast, according to the authors, Thomson Financial reported only 8,500 transactions but the vast majority ($217 billion) of the investment during this period. See Brent D. Goldfarb, David A. Kirsch, and Michael D. Pfarrer, “Searching for Ghosts: Business Survival, Unmeasured Entrepreneur- ial Activity and Private Equity Investment in the Dot-Com Era,” Robert H. Smith School of Business Working Paper No. RHS-06-027, October 2005, available at http://ssrn.com/ abstract=825687; accessed December 1, 2007. 6Brent D. Goldfarb, David A. Kirsch, and Michael D. Pfarrer, “Searching for Ghosts: Busi- ness Survival, Unmeasured Entrepreneurial Activity and Private Equity Investment in the Dot-Com Era,” Robert H. Smith School of Business Working Paper No. RHS-06-027, October 2005, available at http://ssrn.com/abstract=825687; accessed December 1, 2007.

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 ASSESSING ThE IMPACTS OF ChANGES IN ThE IT R&D ECOSySTEM few start-ups and resulted both in too little entry and in both private and public market overcorrections once its limitations were realized. 7 In retrospect, the GBF strategy had mixed results. It did not work well for a number of firms such as Webvan, Pets.com, or Scient, whose failures and resulting financial losses contributed to a negative public perception of the era.8 However, the strategy worked well in the long term (i.e., until the present) for a small number of firms such as Amazon, Yahoo!, eBay, and Monster. Indeed, the existence of an environment that led to the suc- cessful creation of these leading firms is arguably a unique strength of the U.S. IT R&D ecosystem. From another perspective, however, the rapid birth and death of IT start-ups and the venture investments during the peak amounted to a valuable form of experimentation—with business models, customer pref- erences, consumer adoption of the relatively new Internet for entertain- ment and commerce—that was both faster and perhaps more effective than applied research in a university environment on the same ques- tions might have been. For society as a whole, the hundreds of millions of “written-off” venture dollars went toward market experimentation and toward operationalizing the scientific and engineering advances made possible in part by traditional IT R&D. Nonetheless, going for- ward, one lesson from this period is that capital misallocation might be avoided through greater focus on how consumers use and value IT (see the section entitled “Infrastructure to Enable Multifaceted Innovation,” below). “y2K” and the Development of the Indian Software Industry The year 2000 problem, known as Y2K, or the Millennium Bug, refers to the perceived difficulty of handling 21st century dates in older but still used computing systems. Industry and government voiced concern that mission-critical software that used only two digits to store years would confuse 2000 with 1900 when the calendar wrapped from 1999 to 2000. In the end, after considerable effort to revamp software or introduce opera- tional workarounds, the disruptions caused were minor. Global efforts to address the Y2K problem provided a major growth impetus for the Indian software industry. Few programmers in the United 7BrentD. Goldfarb, David A. Kirsch, and David A. Miller, “Was There Too Little Entry During the Dot Com Era?” Journal of Financial Economics 86(1):100-144, 2007, available at www.sciencedirect.com; accessed December 4, 2007. 8David Kirsch and Brent Goldfarb, “Small Ideas, Big Ideas, Bad Ideas, Good Ideas: Get Big Fast and Dot Com Venture Creation,” Robert H. Smith School of Business Working Paper No. RHS-06-049, November 2006, available at http://ssrn.com/abstract=946446; accessed December 1, 2007.

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 ThE ChANGING LANDSCAPE: -00 States were prepared, or even wanted, to deal with fixing the legacy software problems. Firms turned to Indian companies to develop tools to analyze their software for vulnerabilities and to modify their applica- tions. The build-out of global telecommunications services and adop- tion of the Internet that had recently taken place in India and the rest of Asia helped make it possible to coordinate activities between the United States and overseas. India’s Y2K success enticed global IT firms to locate development laboratories and product groups there, where products for global markets are being developed. By 2007, Indian firms had emerged as world-class IT services enterprises. NASDAQ Bust (2000) The NASDAQ—National Association of Securities Dealers Auto- mated Quotations—bust came in the aftermath of a soaring stock market of the 1990s. It peaked in March 2000, and the bust began when the valu- ations of firms with questionable business models could no longer be sustained. The immediate effect was to end the unsustainable expansion plans of many firms, leading to retrenchments and even bankruptcies. A recession ensued, even affecting IT workers. Venture capital investments declined, with start-up companies encouraged to outsource development to reduce costs. The public markets no longer supported technology IPOs, reducing the returns to early-stage investors and increasing inves- tors’ aversions. The general sense of pessimism about the IT sector and a perceived lack of employment appear to have led to the ensuing decline in enroll- ments in computer science programs. This happened at the same time that the software industry in India and Eastern Europe enjoyed high rates of growth, helping to accelerate the migration of projects to these regions. In 2007, the markets and the field continued their recovery.9 Venture capital investment was up, reaching the highest levels since 2001. There had been a number of spectacular recent IPOs, including those of Google (2004), Riverbed Technology (2006), and VMware (2007). The number of technology IPOs on U.S. exchanges was once again increasing,10 albeit at a sobered pace.11 As the pace of investment in IT firms increases, access to talent becomes a limiting factor. The demand for students with IT skills 9See Kristina Shevory, “In Silicon Valley, Steady But Cautious Growth Returns,” New york Times, June 27, 2007. 10See “Door Is Open to High-Tech Offerings That Meet Thresholds,” New york Times, June 29, 2007. 11As this report went to press in 2008, there were indications of at least a temporary falloff in IPOs, reflecting prevailing economic conditions.

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8 ASSESSING ThE IMPACTS OF ChANGES IN ThE IT R&D ECOSySTEM is increasing, but with their numbers reduced, salaries rise and firms look globally for technical talent.12 Aftereffects of September 11, 2001 The terrorist attacks of September 11, 2001, profoundly affected the United States, with a redirection of national attention focused on address- ing the terrorist threat. Subsequent conflicts in Afghanistan and Iraq led national resources to be redirected to the war effort. There is evidence that some IT research funding has been redirected to national and home- land defense objectives.13 This type of research is not easily performed in universities owing to campus restrictions on classified research and the presence of large numbers of students, faculty, and other researchers who are foreign nationals. Funding data suggest that the Department of Defense (DOD) has reduced its investment in university research programs.14 Furthermore, the post-September 11 environment had other effects. Anecdotal evidence suggests that in the immediate aftermath of Septem- ber 11, foreign students found it more difficult to enroll in U.S. graduate programs owing to visa difficulties and new background checks at U.S. embassies and consulates abroad.15 In any case, survey data were col- lected in early 2004 by the Council of Graduate Schools (CGS) from the 113 graduate schools that enroll nearly half of all international graduate students in the United States. These data indicated an overall decline of 12The average salary offer for a college graduate with a computer science major was $53,051 in 2007, up 4.5 percent from the previous year. Only graduates with majors in chemi- cal, electrical, and mechanical engineering had higher average starting salaries. See National Association of Colleges and Employers data reported by Computing Research Association, available at http://www.cra.org/wp/index.php?p=123; accessed February 20, 2008. 13See John Markoff, “Pentagon Redirects Its Research Dollars,” New york Times, April 2, 2005, quoting officials of the Defense Advanced Research Projects Agency (DARPA) as saying that, while the amount of DARPA computer science research funding rose slightly from 2001 to 2004, the portion going to university researchers fell by about 40 percent; avail- able at http://www.nytimes.com/2005/04/02/technology/02darpa.html; accessed April 16, 2008. 14For example, the fiscal year 2008 budget request for total DOD basic research (known as 6.1 funding) declined 7.8 percent from the fiscal year 2007 budget, but total DOD uni- versity research initiatives declined more, by 14 percent. See http://www.aaas.org/spp/ rd/08ptbii4.pdf; accessed October 17, 2007. 15See “Science and Security in the Post-9/11 Environment: Foreign Students and Scholars (Updated),” available at http://www.aaas.org/spp/post911/visas/; accessed October 27, 2008. Legislation such as the USA PATRIOT Act of 2001 (Public Law 107-56) and the En- hanced Border Security and Visa Entry Reform Act of 2002 (Public Law 107-173) affected visa procedures.

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 ThE ChANGING LANDSCAPE: -00 32 percent in international student applications for the fall of 2004 com- pared with applications for the fall of 2003. Eighty percent of the schools responding reported decreases in applications for graduate engineering programs; the majority of respondents reported declines in applications from students in the two largest “sending” countries, China (76 percent of respondents reported a decline) and India (58 percent of respondents reported a decline). In the fall of 2004, the CGS reported a 6 percent decline in overall first-time international student enrollment from 2003 to 2004; engineering enrollments dropped 8 percent. This represented the third consecutive year in which the number of first-time international graduate students studying in the United States decreased between 6 percent and 10 percent from the preceding year.16 This effect appears to have mitigated by 2007, by which time enroll- ments were once again increasing. CGS survey data from 172 U.S. uni- versities (including 9 of the 10 with the largest international graduate student enrollment) on international graduate student admissions offers and enrollments for 2006 and 2007 showed that admissions offers were up 14 percent for 2006 compared with those in 2005 and that they were up 7 percent for 2007 compared with those for 2006. First-time enrollment was up 12 percent for 2006 compared with that in 2005 and was up 4 percent for 2007 compared with that in 2006. Admissions and enrollments from China and India showed the greatest increases, with engineering being the field of study showing the largest increases.17 Findings for international students overall (undergraduate and grad- uate) were reported by the Institute for International Education (IIE), which publishes the annual Open Doors: Report on International Education Exchange with support from the U.S. Department of State. According to the IIE, the total number of international students enrolled in colleges and universities in the United States increased by 3 percent over that of the previous year to a total of 582,984 in the 2006/2007 academic year; this is the first significant increase since 2001/2002. Engineering students 16See Council of Graduate Schools, “Council of Graduate Schools Finds Widespread Declines in International Graduate Student Applications to U.S. Graduate Schools for Fall 2004” and “Council of Graduate Schools Finds Decline in New International Graduate Student Enrollment for the Third Consecutive Year,” Washington, D.C., March 2, 2004, and November 4, 2004, respectively. Research reports and summaries from the CGS are available at http://www.cgsnet.org/Default.aspx?tabid=172; accessed December 11, 2007. 17See Council of Graduate Schools, “Findings from the 2007 CGS International Graduate Admissions Survey Phase III: Final Offers of Admission and Enrollment,” Washington, D.C., November 2007, available at http://www.cgsnet.org/portals/0/pdf/R_intlenrl07_III.pdf; accessed December 11, 2007.

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0 ASSESSING ThE IMPACTS OF ChANGES IN ThE IT R&D ECOSySTEM represented about 14 percent of the 2006/2007 international enrollment, up 1.5 percent from the previous year.18 However, despite the overall increase in international student enroll- ment and in engineering enrollment by international students, the IIE data showed a continuing decrease in international student enrollments in computer and information sciences. These dropped by about 40 percent from 2003/2004 through 2006/2007. In 2003/2004, about 10 percent of international students (57,739 students) were enrolled in computer and information sciences; by 2006/2007 this had fallen to 5.7 percent (33,437 students).19 Because computer science departments rely heavily on for- eign graduate students, this decrease can have a large impact on computer science degree production.20 With respect to graduate education, the Computing Research Asso- ciation’s (CRA’s) analysis of National Science Foundation (NSF) data on first-time, full-time graduate student enrollments in computer science showed a large drop in foreign student enrollments, from 6,500 students in 2001 to about 4,300 students in 2003. There was a small decline to about 4,000 students in 2004, then a small rise in 2005 to just over 4,500 stu- dents. Throughout this period, the number of foreign graduate students exceeded the number of U.S. graduate students in computer science: U.S. student enrollments rose from about 2,500 in 2001 to about 4,000 in 2003 and then declined to about 3,500 in 2005.21 Attracting talented, foreign-born students and retaining them after they graduate are important goals for enabling continued technology entrepreneurship, business formation, and job creation. As noted in Chapter 1, for at least 25 percent of U.S. engineering and technology companies started between 1995 and 2005, at least one key founder 18See Institute for International Education, 2007 data tables and summaries, available at http://opendoors.iienetwork.org/?p=113743; accessed December 11, 2007. See Institute for International Education, Open Doors 00: Report on International Education Exchange, New York, N.Y., 2008. 19See the IIE Open Doors report statistics by field of study tabulated in Jay Vegso, “Contin- ued Drop in Foreign Total Enrollment in CIS,” CRA Bulletin, November 12, 2007, available at http://www.cra.org/wp/index.php?p=130; accessed January 2, 2008. 20In 2004, over half of doctoral degrees and over 40 percent of master’s degrees in the field of computer science were earned by foreign students. Fields that enjoyed growth in foreign student enrollments from 2005/2006 to 2006/2007 included intensive English language (30.0 percent increase), mathematics and statistics (12.3 percent increase), health professions (4.3 percent increase), physical and life sciences (3.4 percent increase), and business and man- agement (2.7 percent increase). See Jay Vegso, “Continued Drop in Foreign Total Enrollment in CIS,” CRA Bulletin, November 12, 2007, available at http://www.cra.org/wp/index. php?p=130; accessed January 2, 2008. 21Computing Research Association, “First-Time, Full-Time Graduate Enrollment in CS by Citizenship,” available at http://www.cra.org/wp/index.php?p=120; accessed February 20, 2008.

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 ThE ChANGING LANDSCAPE: -00 was born outside the United States. In 2005, these immigrant-founded companies (about 80 percent of which were in the fields of software and innovation and in manufacturing-related services) produced $52 billion in sales and employed 450,000 people.22 Yet an equally important goal will be to attract a larger share of U.S. citizens to advanced study in the field, as opportunities increase for foreign students to pursue informa- tion technology research and development in their own and other parts of the world. Financial Scandals and Bankruptcies (December 2001) Enron Corporation was a leading U.S. energy company that went spectacularly bankrupt in late 2001 after claiming revenues of $111 bil- lion in 2000. Its bankruptcy and the subsequent criminal charges brought against company executives, as well as other highly publicized failures such as that of WorldCom, led the U.S. Congress to respond with the Sarbanes-Oxley Act of 2002, informally referred to as SOX.23 SOX estab- lished new standards for boards, management, and accounting firms of U.S. public companies with respect to the visibility of and responsibility for the financial dealings within such companies. In the wake of the pas- sage of SOX, U.S. public companies have faced significant new require- ments for implementing and assessing internal controls over financial reporting. Section 404 in particular (pertaining to the certification of the integrity of the financial control structure of a firm) has proven dispropor- tionately costly for young IT companies relative to their limited resources, imposing new costs on venture firms that seek to pursue an IPO. 24 Various efforts have been advanced to propose modifications to SOX. These include reforms under consideration by the Securities and Exchange Commission (SEC) and other efforts to relax some of the most disproportionate aspects for IT start-ups pursuing an IPO. Whether the SEC reforms or others will go as fast or as far as members of the IT indus- try hope is uncertain.25 A secondary concern, more subtle to detect but 22Vivek Wadhwa, AnnaLee Saxenian, Ben Rissing, and Gary Gereffi, “America’s New Im- migrant Entrepreneurs,” Duke Science, Innovation, and Technology Paper No. 23, January 4, 2007, available at http://ssrn.com/abstract=990152; accessed December 26, 2007. 23The official name of the Sarbanes-Oxley Act of 2002 (Public Law 107-204, 116 Stat. 745) is the Public Company Accounting Reform and Investor Protection Act of 2002. 24Section 404 of SOX requires company management and an external auditor to report on the adequacy of the company’s internal controls on financial reporting; compliance requires extensive compliance documentation and testing of financial systems and controls. For a summary of a survey on the costs of SOX compliance, see http://fei.mediaroom.com/index. php?s=43&item=204; accessed May 1, 2008. 25See Sean Wolfe, “Sarbanes-Oxley Lite,” Red herring, January 10, 2007.

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 ASSESSING ThE IMPACTS OF ChANGES IN ThE IT R&D ECOSySTEM with potentially deeper consequences over time, is that over time, boards of directors and the corporate culture that they inspire in these young, small IT companies may shift their primary emphasis on innovation and entrepreneurship to one of regulatory compliance.26 Surviving After the Bubble Burst (2001-2004) Following the bursting of the investment bubble, the eruption of financial scandals, and the spectacular bankruptcies, firms’ focus turned both to cost cutting and to regulatory compliance. For fledgling IT start- ups, the most urgent issues involved survival and prospects for going public. For larger firms, cash conservation became far more important. IT budgets gave priority to compliance projects such as fraud detection, internal controls, risk assessment, regulations, and conforming with legis- lation on corporate governance.27 Boards became concerned with personal liability and saw a significant increase in their board duties. For many segments of the IT industry, this was the first period of prolonged spend- ing cuts. (By contrast, firms offering compliance systems faced increas- ing demand.) Spending by telecommunications carriers on equipment in the United States dropped sharply between 2000 and 2003 (from some $52 billion to $20 billion) and has only slowly increased through 2006 (to just over $24 billion).28 Similarly, growth in data-center equipment such as high-end servers stalled and moved into negative territory. Not all IT segments shrank, and IT spending as a whole grew, albeit at a far reduced pace and according to a substantially altered spending portfolio allocation (for example, companies began to spend more on compliance and control systems to help them meet regulatory requirements, sometimes at the expense of R&D and other longer-term investments). 26See Tom Perkins, “The ‘Compliance’ Board,” Wall Street Journal, March 2, 2007. A former board member of the Hewlett-Packard Company, Tom Perkins advocated the “guidance board” over the “compliance board” in this op-ed piece. 27In addition to SOX, this legislation includes the Bank Secrecy Act/Anti-Money Launder- ing Laws. The Currency and Foreign Transactions Reporting Act, 31 U.S.C. Sections 5311-5330 and 12 U.S.C. Sections 1818(s), 1829(b), and 1951-1959, also known as the Bank Secrecy Act (BSA), and its implementing regulation, 31 CFR 103, constitute a tool that the U.S. govern- ment uses to fight drug trafficking, money laundering, and other crimes. Other laws also provide tools to prevent money laundering. See Bank Secrecy Act/Anti-Money Laundering: Comptroller’s handbook, September 2000, available at http://www.occ.treas.gov/handbook/ bsa.pdf; accessed October 19, 2007. 28“Telecommunications Industry Association 2007 Industry Playbook,” p. 4, available at http://www.tiaonline.org/gov_affairs/policyplaybook2007.swf?/policy/policyplay book2007.swf; accessed March 7, 2008.

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 ThE ChANGING LANDSCAPE: -00 ranks 122 countries on the basis of their “networked readiness.” This is a metric that the Forum uses to measure the countries’ preparation to participate in and benefit from developments in information technology. In the 2006-2007 report, the networked readiness ranking for the United States was seventh place; the United States had been in first place in the 2005-2006 rankings. The drop in the U.S. ranking was attributed to “rela- tive deterioration of the political and regulatory environment.”144 In its 2007-2008 report, however, the World Economic Forum raised the United States’ networked readiness ranking to fourth overall, after Denmark, Sweden, and Switzerland. The new report placed particular focus on the role of networked readiness in spurring innovation. The reported U.S. strengths included availability of capital and the quality of U.S. R&D insti- tutions; the reported weaknesses included cost and speed of broadband connectivity.145 Comparing Aspects of Broadband in the United States and Abroad Compared with the more highly regulated environment of past decades, the current telecommunications market environment in the United States has yielded many consumer benefits. However, these ben- efits have not accrued evenly. By the early years of the 21st century, although broadband was regarded as a national and local imperative, there was substantial geographical variation in the nature of broadband competition, broadband was not available everywhere, and investments 144The World Economic Forum’s national Networked Readiness Indicator (NRI) has three components: the environment for IT offered by the country; the readiness of the country’s individuals, businesses, and governments; and the usage of IT among these stakeholders. The 10 top-ranked countries were Denmark, Sweden, Singapore, Finland, Switzerland, the Netherlands, the United States, Iceland, the United Kingdom, and Norway. These countries all had NRI scores between 5.71 and 5.42. By comparison, France ranked 23rd, with a score of 4.99, and Mexico ranked 49th, with a score of 3.91. (However, the United States was cited for maintaining its “primacy in innovation, driven by one of the world’s best tertiary education systems and its high degree of cooperation with the industry as well as by the extremely efficient market environment.”) See World Economic Forum, “Denmark Climbs to the Top in the Rankings of the World Economic Forum’s Global Information Technology Report 2006-2007,” Press Release, available at http://www.weforum.org/en/media/Latest%20 Press%20Releases/gitr_2007_press_release; accessed July 18, 2007. 145World Economic Forum, The Global Information Technology Report 00-008, available at http://www.weforum.org/en/initiatives/gcp/Global%20Information%20Technology%20 Report/index.htm; accessed April 9, 2008. Some observers reportedly were skeptical of the improvement in the U.S. ranking owing to their concerns about U.S. broadband capabilities, penetration, adoption, and costs. See John Markoff, “Study Gives High Marks to U.S. In- ternet,” New york Times, April 9, 2008, available at http://www.nytimes.com/2008/04/09/ technology/09internet.html?ex=1208404800&en=5625fba016b5acbf&ei=5070&emc=eta1; accessed April 9, 2008.

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 ASSESSING ThE IMPACTS OF ChANGES IN ThE IT R&D ECOSySTEM in additional facilities and performance improvements were uncertain.146 In that environment, although the United States was a world leader in computer usage, it was already lagging in broadband connectivity (espe- cially in the areas of speed and price—see Table 3.2) compared with other countries (albeit those with geographic, population-density, and indus- trial policy characteristics different from those of the United States). A number of international rankings show that the United States lags in international comparisons. For example, IDC’s “Information Society Index” (ISI) measures the ability of 53 nations to participate in the infor- mation revolution. To construct the ISI, IDC includes 15 variables grouped into four types of infrastructure indexes: social, Internet, computer, and telecommunications (telecom) infrastructures. In 2003, the United States ranked first in IDC’s computer index, but only 20th in the telecom index, which included the number of broadband households.147 Another inter- national ranking, by the International Telecommunications Union, based on broadband subscribers per 100 people, put the United States in 20th place in 2006, after a steady decline from 3rd place in 1999.148 Table 3.2 presents a snapshot of the United States’ uneven interna- tional standing in broadband in 2007: according to OECD data, it leads in total number of subscribers, is in the middle of the 10 countries listed in terms of per capita penetration, and is far behind in advertised down- load speed (at relatively high prices). However, like some of their foreign counterparts, U.S. carriers have continued to deploy combination service offerings and pricing arrangements (for example, bundling television, telephone, and data services in one cable or fiber-optic phone offering), and therefore prices and capabilities are likely to continue to improve in at least some areas of the United States. The goal of more-ubiquitous, lower-cost, and higher-speed broad- band deployment149 has been the focus of significant analysis and advo- 146National Research Council, Broadband: Bringing home the Bits, National Academy Press, Washington, D.C., 2002; discussion of findings on pp. 13, 18, and 21. 147In 2003, the top 10 countries in IDC’s composite ISI rankings were Denmark, Sweden, United States, Switzerland, Canada, Netherlands, Finland, Korea, Norway, and the United Kingdom. The IDC’s computer index includes PCs per household, IT spending as a fraction of GDP, IT services’ contribution to GDP, and software spending; the telecom index includes the number of broadband households, wireless subscribers, and handset shipments. See IDC, “IDC’s Information Society Index,” available at http://www.idc.com/groups/isi/ main.html; accessed July 18, 2007. 148J. Windhausen, Jr., A Blueprint for Big Broadband, EDUCAUSE White Paper, January 2008, p. 12, citing International Telecommunications Union data, available at http://www. educause.edu/ir/library/pdf/EPO0801.pdf; accessed March 13, 2008. 149For technical, regulatory, and policy analyses of broadband, see National Research Council, Broadband: Bringing home the Bits, National Academy Press, Washington, D.C., 2002.

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 ThE ChANGING LANDSCAPE: -00 TABLE 3.2 A Snapshot Comparison of Broadband in 10 Countries in 2007 Average Advertised Total Number of Broadband Average Number of Broadband Download Monthly Broadband Subscribers Speed Cost of Subscribers per 100 (megabits Broadband Country (million) Inhabitants per second) (U.S. $) United States 66.2 22.1 8.9 53 Japan 27.2 21.3 93.7 34 Germany 17.5 21.2 9.2 NA Korea 14.4 29.9 43.3 42 United Kingdom 14.4 23.7 10.6 33 France 14.3 22.5 44.2 37 Italy 9.3 15.8 13.1 NA Canada 8.1 25.0 7.8 51 Spain 7.5 17.0 6.901 NA Netherlands 5.5 33.5 5.312 39 NOTE: NA, not available. SOURCE: Based on data of the Organisation for Economic Co-operation and Development presented in J. Windhausen, Jr., A Blueprint for Big Broadband, EDUCAUSE White Paper, January 2008, pp. 20-21; 23-24, available at http://www.educause.edu/ir/library/pdf/ EPO0801.pdf. cacy. In January 2002, for example, TechNet, a group of Silicon Valley chief executive officers, proposed that the President and policy makers “make broadband a national priority and set a goal of making an affordable 100-megabits per second broadband connection available to 100 million American homes and small businesses by 2010.”150 A June 2007 report from the Information Technology and Innovation Foundation (ITIF) uses an externalities argument to make its case that government action is needed to advance broadband deployment, because market forces will not be sufficient: First, it [broadband] is a not just a consumer technology like the iPod or Blu-Ray player, it is “prosumer” technology that is enabling consumers to also be producers who contribute to economic growth and innova- tion. Second, it exhibits positive network externalities where the benefits from broadband adoption accrue not just to individual consumers, but to other broadband users and society as a whole. Because of this the 150See TechNet, A National Imperatie: Uniersal Aailability of Broadband by 00, January 15, 2002, available at http://www.technet.org/resources.dyn/2002-01-15.64.pdf; accessed June 27, 2007.

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8 ASSESSING ThE IMPACTS OF ChANGES IN ThE IT R&D ECOSySTEM social returns from investing in more broadband exceed the private returns of companies and consumers. As a result, market forces alone will not generate the societally optimal level of broadband, at least for the foreseeable future. In markets like this, public policies—in this case a proactive national broadband strategy—are needed to maximize overall societal welfare.151 Additionally, based on 2006 OECD data, the ITIF found that the United States had fallen to rank 12th behind countries including Korea, Japan, and Iceland. A 2007 report of the National Telecommunications and Information Administration (NTIA), Broadband in America, describes federal efforts toward the vision of “universal, affordable access” to broadband technol- ogy: these include Federal Communications Commission (FCC) efforts to modify regulations in order to provide incentives for network invest- ments by local telephone companies and to stimulate facilities-based investments by other providers, support for cable franchise reforms, and more timely and cost-effective access to rights-of-way on federal land. 152 Using data from various sources, the NTIA reported large increases in various types of high-speed network access (via telephone lines and cable, as well as high-speed wireless) and decreases in prices, over the period from 2001 to 2007. Significantly, however, the NTIA report notes that “the lack of a sin- gle authoritative data set makes it difficult to establish with certainty whether broadband penetration has become ubiquitous, and this Report acknowledges the benefits of better data gathering tools.”153 In part, the piecemeal nature of the U.S. data compared with the data available for some other countries naturally reflects the multiplicity of federal, state, and local policies and regulatory regimes for different types of technolo- gies and providers, as well as the large and growing number of providers (see Table 3.3). Nevertheless, data limitations make it difficult to piece together a complete, current snapshot of broadband in the United States or to evaluate the various claims regarding progress—or lags—in broad- band availability. Moreover, the often wide differences between available “broadband” speeds in the United States and foreign counties complicate direct comparisons. 151Robert D. Atkinson, The Case for a National Broadband Policy, The Information Technology and Innovation Foundation, Washington, D.C., June 2007. 152National Telecommunications and Information Administration, Networked Nation: Broadband in America, U.S. Department of Commerce, Washington, D.C., January 2008, pp. i, ii, available at http://www.ntia.doc.gov/reports/2008/NetworkedNationBroadbandin America2007.pdf; accessed March 13, 2008. 153Ibid., p. 12.

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 ThE ChANGING LANDSCAPE: -00 TABLE 3.3 Number of Providers of High-Speed Lines Nationwide in the United States, 1999-2006, by Technology (over 200 kilobits per second in at least one direction) Number of Providers Cable All ADSLa Otherb Totalc Month, Year Modem December 1999 28 43 65 105 December 2000 68 39 87 136 December 2001 117 59 122 203 December 2002 178 87 169 299 December 2003 274 110 246 432 December 2004 352 147 312 552 December 2005 820 242 835 1,347 December 2006 862 278 882 1,397 NOTES: According to the National Telecommunications and Information Administration, data through December 2004 include only providers with at least 250 lines per state, which were the only ones required to file; some historical data have been revised. According to the 2002 report of the National Research Council entitled Broadband: Bring- ing home the Bits (National Academy Press, Washington, D.C., 2002, p. 63), 200 kilobits per second is not adequate to support a single, TV-quality video stream to each house. aADSL, or asynchronous digital subscriber line, is carried over copper telephone lines. Because it provides essential infrastructure, broadband constitutes a foundation for leader- ship elsewhere. Attention here could produce benefits in a number of other areas, including health care (for example, access to broadband facilitates the transfer and analysis of elec- tronic patient records and test results, particularly imaging). Note that the Federal Com- munications Commission has started a pilot funding program for a nationwide, broadband network dedicated to health care. See “Rural Health Care Pilot Program,” available at http://www.fcc.gov/cgb/rural/rhcp.html; accessed October 18, 2007. b“All Other” includes synchronous digital subscriber line (SDSL), traditional wireline, fiber, satellite, fixed and mobile wireless, and power line. cTotal is not simply the sum of the first three columns because some providers offer services using multiple technologies. SOURCE: Data from National Telecommunications and Information Administration, Net- worked Nation: Broadband in America, U.S. Department of Commerce, Washington, D.C., 2008, Table 1, based on data from Federal Communications Commission, high-Speed Serices for Internet Access: Status as of December , 00, Washington, D.C., October 2007, Table 7. Unlike the United States, Korea and Japan are small in area, with political institutions that favor a government role in industrial policy. While overall comparisons among countries are difficult, relative rank- ings in broadband penetration, speeds, and costs are nonetheless relevant because of the linkages between enabling infrastructure, demand leader- ship, and innovation leadership. For example, although the household penetration (fraction of households that subscribe to a broadband service) of broadband in Korea in 2007 was 90 percent, in the United States it was

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00 ASSESSING ThE IMPACTS OF ChANGES IN ThE IT R&D ECOSySTEM only 51 percent. The United States also lags in penetration per 100 inhabi- tants (see Table 3.2). In 2007 the average bandwidth was over 40 Mbps in Korea; it was under 10 Mbps in the United States; the average cost per 1 megabit of capacity was under $1 per month in Korea; it was almost $6 in the United States (see Table 3.2). Korea’s high-speed infrastructure is widely credited with enabling its inhabitants to attain demand leadership in content-rich online games. Japan is pursuing a very aggressive strategy of broadband deploy- ment. It reportedly had the world’s fastest broadband service in 2007 (see Table 3.2), a speed (on average, 93.7 Mbps) that enables Japanese con- sumers to watch full-screen, broadcast-quality television over the Inter- net. Japan’s broadband lead over the United States is attributed in part to better physical infrastructure (newer and better telephone wires and shorter distances between the central office and homes); DSL in Japan is often 5 to 10 times as fast as the services widely offered by U.S. cable pro- viders. However, Japanese industrial policy also plays a role: the Japanese government used subsidies, tax incentives, and regulation to promote high-speed broadband deployment: • Government subsidies and tax incentives reportedly spurred Nip- pon Telegraph and Telephone Corp.’s (NTT’s) nationwide build-out of fiber-optic lines (offering connection speeds of up to 100 megabits per sec- ond) to about 8.8 million Japanese homes. NTT, Japan’s largest telephone company, was once government-controlled. • Government regulation required large telephone companies (NTT, for example) to open up their copper wire networks to small Internet pro- viders at prices that allowed these new broadband companies to charge as little as $22 a month for a DSL connection faster than almost all U.S. broadband services. These levels of broadband service are enabling the development of a number of valuable new applications, such as low-cost, high-definition teleconferencing for telemedicine and advanced telecommuting. 154 A fundamental step to being the world leader in information tech- nology use is for the United States to deploy world-class broadband connectivity aggressively over the next decade. The United States cur- rently lags behind other nations such as Japan and Korea in upgrading and deploying national broadband connectivity. Setting, and reaching, a highly ambitious target—such as making 1,000 megabits per second 154See Blaine Harden, “Japan’s Warp-Speed Ride to Internet Future,” Washington Post, August 29, 2007, p. A01, available at http://www.washingtonpost.com/wp-dyn/content/ article/2007/08/28/AR2007082801990_pf.html; accessed August 29, 2007.

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0 ThE ChANGING LANDSCAPE: -00 broadband connectivity available to 100 million American homes and small businesses by 2020—would enable the United States to leap well ahead of other countries in this area and to hold that lead. 155 Governments can use economic incentives and targeted regulations to promote higher-speed connectivity across a common physical infra- structure. By using multiple wavelengths or colors, a single fiber today is able to carry 1 to 10 terabits of data.156 U.S. terrestrial fiber networks have large amounts of “dark” (unused) fiber, and many fibers already lit could accommodate additional colors.157 However, a large obstacle remains: the deployment of fiber or the installation of other upgrades to the “last mile” to connect all the endpoints (homes, businesses, government agen- cies, and other organizations) to the national networks. In the United States, the connectivity landscape is in part a product of historical policy goals (such as universal access for telephony) and the structure of U.S. economic regulation. There is merit in considering models for broadband deployment—for example, models of companies competing in the value- added services market using a common physical infrastructure,158 or models whereby facilities-based competition is fostered.159 Value-added services that can benefit from gigabit connectivity include movies on demand, multimedia Web browsing, many-to-many video communica- tions, news groups, and so forth. However, the question remains as to who makes the infrastructure investments and who extracts the value of these services. In the United States, the complex system of federal, state, and local governance and regulations can present numerous transactional bottle- necks, such as right-of-way restrictions and content franchising (for exam- ple, for video), to pursuing such approaches. These may tend to favor the 155This target is more ambitious than TechNet’s proposal for accelerating broadband deployment and demand, which called for 100 megabit-per-second connectivity by 2010. See “Accelerating Broadband Deployment and Demand,” available at http://www.technet. org/issues/broadband/; accessed September 7, 2007. A goal of gigabit connectivity would be useful in helping the United States leapfrog Japan and other nations now moving ahead in broadband deployment. 156See “Introducing DWDM [Dense Wavelength Division Multiplexing],” http://www. cisco.com/univercd/cc/td/doc/product/mels/cm1500/dwdm/dwdm_fns.htm; accessed September 7, 2007. 157TeleGeography Research, “Global Bandwidth Research Service: Executive Summary,” Washington, D.C., 2008, available at http://www.telegeography.com/products/gb/index. php; accessed October 31, 2008. 158An inexact analogy would be the federal government paying for an interstate highway system and the private sector creating products (such as cars, gas stations, and motels) that benefit from the use of this infrastructure. 159See National Research Council, Broadband: Bringing home the Bits, National Academy Press, Washington, D.C., 2002.

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0 ASSESSING ThE IMPACTS OF ChANGES IN ThE IT R&D ECOSySTEM incumbents and slow overall progress toward attaining higher-speed, lower-cost broadband deployment that can support data-rich IT applica- tions and services and enable leading-edge, customer-driven innovation by U.S. consumers. Broadband Speeds and Capabilities With respect to broadband, how fast is fast enough? That is, what bandwidth target is desired in order to enable multifaceted innovation? The “answer” is actually a moving target. Consequently, in the 2002 National Research Council report Broadband: Bringing home the Bits, the Committee on Broadband Last Mile Technology did not set bandwidth- specific definitions for what constituted “broadbands,” and it deliber- ately did not set specific bandwidth targets for policy makers. Instead, that committee established a functional definition: “Broadband services should provide sufficient performance—and wide enough penetration of services reaching that performance level—to encourage the development of new applications.”160 Furthermore, that committee recommended a more coherent, consistent broadband policy framework that is service- oriented, rather than being technology-centric.161 An important consideration in thinking about broadband leadership and the question of what bandwidth to “target” is the fact that broadband data rates considered adequate a few years ago are no longer sufficient to support new applications and services.162 Higher-speed services attract more customers because they are more useful for high-data-rate applica- tions (such as video). A higher-speed infrastructure stimulates multifac- eted innovation. In January 2008, the California Broadband Task Force (CBTF) pub- lished its final report, The State of Connectiity: Building Innoation Through Broadband.163 The CBTF recommendations included building out “high speed” broadband infrastructure for all Californians, as well as promoting innovative uses of broadband technology. The CBTF adopted a working definition of broadband that includes a basic minimum speed (expected to increase over time) of 512 kbps.164 Table 3.4, adapted with minor stylistic 160Ibid., p. 80. 161Ibid., pp. 32-33. 162Ibid.; see, especially, Ch. 2 for a discussion of then-current broadband technologies, speeds, and capabilities (as well as economic, regulatory, and policy factors). 163California Broadband Task Force, The State of Connectiity: Building Innoation Through Broadband, January 2008, available at http://www.calink.ca.gov/taskforcereport/; accessed March 17, 2008. 164Ibid., pp. 8, 12..

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0 ThE ChANGING LANDSCAPE: -00 TABLE 3.4 Bandwidth Ranges Corresponding to Advanced Applications and Services Bandwidth Range Applications and Services Enabled 500 kbps–1 Mbps Voice over IP [Internet Protocol] SMS [short message service] Basic e-mail Web Browsing (simple sites) Streaming Music (caching) Low-Quality Video (highly compressed) 1 Mbps–5 Mbps Web Browsing (complex sites) E-mail (larger-size attachments) Remote Surveillance IPTV-SD (1-3 channels) [standard definition Internet Protocol television] File Sharing (small/medium) Telecommuting (ordinary) Digital Broadcast Video (1 channel) Streaming Music 5 Mbps–10 Mbps Telecommuting (converged services) File Sharing (large) IPTV-SD (multiple channels) Switched Digital Video Video on Demand SD Broadcast SD Video Video Streaming (2-3 channels) HD [High-Definition] Video Downloading Low-Definition Telepresence Gaming Medical File Sharing (basic) Remote Diagnosis (basic) Remote Education Building Control and Management 10 Mbps–100 Mbps Telemedicine Educational Services Broadcast Video SD and Some HD IPTV-HD [high-definition Internet Protocol television] Gaming (complex) Telecommuting (high-quality video) High-Quality Telepresence HD Surveillance Smart/Intelligent Building Control continued

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0 ASSESSING ThE IMPACTS OF ChANGES IN ThE IT R&D ECOSySTEM TABLE 3.4 continued Bandwidth Range Applications and Services Enabled 100 Mbps–1 Gbps HD Telemedicine Multiple Educational Services Broadcast Video Full HD Full IPTV Channel Support Video on Demand HD Gaming (immersion) Remote Server Services for Telecommuting 1 Gbps–10 Gbps Research Applications Telepresence Using Uncompressed High-Definition Video Streams Live Event Digital Cinema Streaming Telemedicine Remote Control of Scientific/Medical Instruments Interactive Remote Visualization and Virtual Reality Movement of Terabyte Data Sets Remote Supercomputing SOURCE: Adapted from table entitled “What Is Broadband,” p. 12, California Broadband Task Force, The State of Connectiity: Building Innoation Through Broadband, January 2008, available at http://www.calink.ca.gov/taskforcereport/; accessed March 17, 2008. changes from the CBTF report, illustrates the types of applications and services made feasible by increasing bandwidth. SUMMARy In this chapter, the intention of the committee has been to illuminate the complex story of the evolution of the U.S. IT R&D ecosystem during the 1995-2007 period. First, it summarized the tumultuous business and technological changes experienced in the IT industry since 1995. The IT R&D ecosystem was affected by business transformations as the Inter- net was commercialized. In the process, the world experienced the larg- est venture capital investment bubble in history and an accompanying dramatic stock market bubble. The bubble may not have been entirely negative, because major new firms were created and the ways that people work and play were transformed. However, the collapse of the bubble did lead to a massive reduction in venture capital investing that some believe significantly retarded the commercialization of information technologies. Also, the collapse of the bubble may have discouraged students from entering the computer science and computer engineering fields, possibly leading to longer-term labor shortages.

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0 ThE ChANGING LANDSCAPE: -00 The committee then turned its attention to the evolution of major platforms (such as Web 2.0, open-source development, new mobile access devices, and services executing within Internet data centers) and to the evolution of the major component sectors of semiconductors, computers, and software. In technological terms, there were two extremely powerful major developments during the period of study: The first of these was the mass popularization of the Internet for purposes of business, uses as tools, and recreational use. The second was the rise of mobile telephony. Information technologies in this time period became ubiquitous. In purely technical terms, IT has permeated nearly every part of daily existence and knitted the world closer together. With this change came a globalization in which, for the first time in history, engineers even in developing nations became more capable of being integrated in the global economy. By dis- cussing India and China—two growing, potential IT industry giants—in particular, the committee places the situation of the U.S. IT R&D eco- system into a global context. Today, it is no longer possible to understand the health and competitiveness of an isolated U.S. IT R&D ecosystem; it is now necessary to place it in a global context. Finally, the committee considered the multifaceted nature of IT inno- vation. IT innovation is no longer mainly supplier-driven. Increasingly, customers are creating value through application innovations. As these new applications and IT-enabled services grow in importance, IT workers will increasingly need more than just technology skills. They will need in-depth business- and market-related knowledge to leverage technology use and differentiate their products and services. For the United States to lead in this new environment, an appropriate network infrastructure is required: ubiquitous, higher-speed, and more-affordable broadband. With that as background for understanding the current state of the U.S. IT R&D ecosystem, the next chapter argues that the changes since 1995 have resulted in a globalized and fast-changing R&D ecosystem. If the United States does not navigate successfully in this global environ- ment, it will no longer enjoy a position at the center of technological change, one that it has enjoyed for the past decade or more.