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Suggested Citation:"6 Network Services and Terminal Devices." National Research Council. 1996. Risk & Innovation: Small Companies in Six Industries: Background Papers Prepared for the NAE Risk and Innovation Study. Washington, DC: The National Academies Press. doi: 10.17226/9191.
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NETWORK SERVICES AND TERMINAL DEVICES

Janet Hunziker and Simon Glynn

The current “information age” is the result of remarkable technological innovations that have opened enormous opportunities for new companies. First, high-speed communications and computer technologies have enabled a new infrastructure of local- and wide-area networks. The most spectacular of these technologies includes new wireless modes of communication—cellular, satellitebased, and fiber-optic computer networks—enabling the intelligent linking of individuals and computers without geographic constraints. Second, computers are now ubiquitous as a consequence of advances in microprocessors and displays, and software. The increasing use of computers is, in turn, accelerating the new technologies of digital encoding (and compression), and of broadband interactive communications. In the future, real-time video communications and video-on-demand services will become economically feasible on a broad basis, forcing the convergence of computers, communications, and information.

These advances in information technologies are not happening in a vacuum. The tremendous potential of these new information technologies depends, to a degree not always appreciated, on the adaptability of important public policies as well as the specifics of the technology. The current paradigm for regulating telecommunications, for example, may not be tenable as the consequences of advances in information technology are played out. The impact of new technologies extends to legal questions as well, including intellectual property rights (IPRs), controlling content, and universal service.

Janet Hunziker is a staff officer in the Program Office of the National Academy of Engineering.

This paper was prepared for a National Academy of Engineering workshop on small companies in advanced network terminal devices and services held March 24–25, 1994, at the Beckman Center in Irvine, California.

Suggested Citation:"6 Network Services and Terminal Devices." National Research Council. 1996. Risk & Innovation: Small Companies in Six Industries: Background Papers Prepared for the NAE Risk and Innovation Study. Washington, DC: The National Academies Press. doi: 10.17226/9191.
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These two trends—rapid technological innovation, and the transformations in policy in response to these innovations—have combined to create a huge, technically dynamic, and fragmented “networking sector” of the economy in which there are few organizational or technical certainties. There are also few meaningful definitions. In this respect, this paper does not attempt to define the sector of the economy concerned with networking, or discuss all opportunities. Indeed, it is exactly this enormous demand for communications and computing networks, and the high degree of uncertainty around important questions of technology and regulatory policy, that creates opportunities for entrepreneurs.

DEFINING THE CONTEXT

The astonishing new complexity of these new communications and computer networks, and the speed of this transformation, is driven to a large extent by technology that enables digitization and compression of data, and makes possible massive increases in use of network bandwidth. Digitization means translating information—video, audio, text—into binary code (1s and 0s), which makes it easier to send and to manipulate information. Compression squeezes this information so that more can be sent using a given network capacity, or bandwidth. Advances in compression technology have also substantially reduced the cost of this technology. For example, in 1992, AT&T announced a set of integrated circuits costing $400 that performs many of the same compression functions previously performed by systems costing $25,000.

Simultaneously, the use of fiber optics is vastly increasing network bandwidth. Currently, more than 90 percent of long-distance phone calls are transmitted over optical fiber, and the large bandwidth of optical fiber as well as improvements in network control are expected to enable these networks to simultaneously send large amounts of data. New technologies used to amplify lightwaves in fiber optic networks are also breaking transmission distance records, particularly significant for undersea cables (Mayo, 1985).

These technological advances in digitization, compression, and bandwidth have done two things. First, they have increased dramatically the rate at which information can be sent over these new networks. Second, and more important, they have blurred the boundaries between computers, communications, information, and consumer electronics. Previously, these sectors were separated by different forms of information:

  • Computer makers used data in digital form, although these data were restricted to numbers and text.

  • Communications companies provided analog voice communications and limited data communications.

  • Cable television (CATV) providers provided analog video programming.

Suggested Citation:"6 Network Services and Terminal Devices." National Research Council. 1996. Risk & Innovation: Small Companies in Six Industries: Background Papers Prepared for the NAE Risk and Innovation Study. Washington, DC: The National Academies Press. doi: 10.17226/9191.
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  • Information providers typically published information as printed text.

  • Imaging companies, for example Xerox and Kodak, reproduced images but did not develop sophisticated technologies to archive or manipulate these images.

But with digital technology, any information, irrespective of its original form, can be sent as a sequence of 1 s and 0s. The user, not the provider, decides what form the information will take and when and where it will be displayed. This, in turn, is forcing the convergence of computers, communications, content, and consumer electronics (Economist, February 27, 1993; Gemini Consulting, 1994). The new generation of wireless paging and interactive data services, as well as the next generation of wireless phones referred to as “Personal Communications Services” (PCS), are examples of this phenomenon. Significant synergies exist between PCS and the existing infrastructures of local telephone companies and CATV. For example, CATV providers estimate that the cost of building PCS can be reduced by at least 50 percent by using existing CATV networks to connect base stations instead of dedicated fiber links. Several other proposals envision integrating satellite networks with PCS to achieve a national network.

As a consequence of this convergence, players in these sectors are attempting to transform themselves to compete either as distributors of the new digital information, as content providers, or by building the computer equipment that will be used to manipulate and display information. Competitors are creating alliances and joint ventures to spread costs and risks, especially for expensive or new technologies. Areas in which such alliances are appearing include the following:

  • Distribution. The largest attempt to dominate the competitive space for distribution so far is Bell Atlantic’s abandoned $33 billion bid to merge with CATV provider Tele-Communication Inc. (TCI), to create a new company valued at about $60 billion.

  • Content. The competition to acquire Paramount was essentially an attempt to control access to content, which is concentrated in relatively few companies.

  • Software. General Magic, an Apple spin-off backed by AT&T, Sony, Motorola, Philips, and Matsushita, has developed a communications language and systems software that are expected to be used in competing PDAs developed by each of General Magic’s investors.

What this convergence will ultimately look like, and how useful these alliances will be, will also be shaped by government policies. Increasingly intense competition in these different sectors, as well as the convergence of different modes of communications, has seen regulations relaxed for almost all communications and computing networks. The question is whether public policies will continue to encourage this new environment.

Suggested Citation:"6 Network Services and Terminal Devices." National Research Council. 1996. Risk & Innovation: Small Companies in Six Industries: Background Papers Prepared for the NAE Risk and Innovation Study. Washington, DC: The National Academies Press. doi: 10.17226/9191.
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CHARACTERIZING THE OPPORTUNITIES FOR NEW COMPANIES

It is this enormous demand for communications and computing networks, and the very high degree of uncertainty around important questions of technology and regulatory policy (see below), that creates opportunities for new companies. The small companies that were invited and/or participated in the National Academy of Engineering workshop organized around opportunities and challenges in networking, for example, included developers of:

  • pen-based operating systems

  • software that sorts through e-mail messages

  • video-compression chip sets and circuit boards

  • personal digital assistants (PDAs) and personal communicators

  • network security cards

  • high-speed network connectivity products

  • combination laptop PCs and optical disk writer-readers

  • data-capable cellular telephones

  • interactive TV devices

  • screen phones

  • wireless communications systems

  • modems

  • PCMCIA cards incorporating communications devices

  • multimedia hardware and software

As these examples illustrate, the scope of opportunities for new companies is large. Opportunities are fueled by companies (both users and producers) who develop or combine software and physical assets in order to create networks and deliver services over those networks. In this incredibly fluid market, smaller, innovative companies play a very important role by (1) developing “interim” technologies that help larger players respond to the high degree of uncertainty about demand for specific network architectures and applications, and (2) discovering new opportunities not seen by larger players, or seen as too narrow, that will drive demand for network capacity.

Interim Technologies

These emerging networks depend to perhaps a surprising extent on solutions developed by innovative new companies. For example, the demand for broadband services, including full-motion

Suggested Citation:"6 Network Services and Terminal Devices." National Research Council. 1996. Risk & Innovation: Small Companies in Six Industries: Background Papers Prepared for the NAE Risk and Innovation Study. Washington, DC: The National Academies Press. doi: 10.17226/9191.
×

video or multimedia, is in turn creating demand for new, faster networking technologies. Existing local networks such as Ethernet, token ring, and fiber distributed data interface (FDDI) will eventually transition to these faster technologies, such as asynchronous transfer mode (ATM). The implementation of these new broadband network technologies is creating opportunities for network equipment and software management vendors, many of which are new companies. New companies such as Level One Communications, for example, have specialized in designing and marketing innovative integrated circuits to address network needs.

Uncertainty about the direction and speed of technical development of these new networks also creates opportunities for new companies. For example, the assumption is that the wide-area networks that will distribute these new broadband services will be fiber-optic based. But laying fiber has a high fixed cost. For the initial attempts to provide these services, systems using an electronic format developed by Bell Communications Research called asymmetric digital subscriber line (ASDL) which uses the existing copper telecommunications infrastructure, may be a better bet. Westell Technologies, a relatively new company, has exploited this opportunity by designing electronic circuitry using the ASDL format which enables telephone companies to provide advanced services selectively at a lower initial cost (Hutheesing, 1994).

By developing these interim technologies, technology-smart new companies help larger players respond to the high degree of uncertainty about demand for specific network architectures and applications. High-speed data networking is yet another example. In 1993, 56 percent of PCs were connected to a local-area network (LAN) over copper wires. In Europe, this figure is about 44 percent; the rest of the world is estimated at 15 percent. Ultimately, fiber-based networks are expected to link these discrete networks into a seamless data communications network. Less certain, though, is the speed at which these fiber networks will be deployed. There is also uncertainty about whether demand will force other, faster, technological solutions. For example, data communications over wireless networks are increasing, and cellular digital packet data (CDPD) and narrowband/broadband personal communications services are now widely available. In response to this technological uncertainty, LANcity, a technology start-up, has developed technology to enable large computer networking companies to create virtual high-speed multimedia networks over existing CATV networks between computers up to 70 miles apart. Although this service does not provide the same capacity as fiber, fiber-optic lines are not nearly as ubiquitous as CATV, creating an opportunity for small companies that can develop competing technologies until fiber is completely deployed (Wilke, 1993).

Driving Demand

The technological and demand uncertainty that marks many of these new systems creates yet another set of opportunities for new companies. Larger players in communications are engaged in a competitive search for solutions that simultaneously create de facto technical standards and establish

Suggested Citation:"6 Network Services and Terminal Devices." National Research Council. 1996. Risk & Innovation: Small Companies in Six Industries: Background Papers Prepared for the NAE Risk and Innovation Study. Washington, DC: The National Academies Press. doi: 10.17226/9191.
×

the proprietary network technologies that will dominate the nation’s information infrastructure. In this competitive environment, larger companies depend on new companies (1) to realize new opportunities that will drive demand for communications capacity in these new networks and (2) to create the core technologies such as compression technologies and portable computing technology that these larger players seek control.

Terminal devices for satellite-based systems are an example of this. Satellite-based communications are perhaps the most spectacular demonstration of new information technologies creating opportunities—in this instance to provide instantaneous point-to-point communications and broadcast anywhere in the world. Especially intriguing are developments in low-earth orbiting (LEO) satellites that circle the globe only a few hundred kilometers above the surface. Motorola’s $3.4 billion Irridium system, for example, is expected to use a network of 66 “Big LEO” satellites (satellites using frequencies above 1GHz) for a new generation of wireless phones. Several highly capitalized new companies are also exploiting the small size and relatively inexpensive technology used by “Little LEO” satellites (satellites using frequencies below 1GHz) to deploy global communications services for brief digital messages (e.g., electronic mail and paging to portable devices). The most ambitious of these is a $9 billion global network of 840 satellites proposed by start-up Teledesic that will use advanced networking technology developed under the Strategic Defense Initiative’s “brilliant pebbles” program to send digital messages anywhere on the globe (Sugawara, 1994). These Big LEO and Little LEO satellites will ultimately cover the globe in a seamless voice and data communications network that Teledesic has termed a wireless Internet. Several geostationary satellite systems are also planned. The Spaceway system from GM Hughes, for example, is expected to provide all-digital voice, data, and video services to users beginning in 1997.

But the terminal devices needed to use the information from these services, including positioning and navigation devices, and the personal digital devices needed to receive facsimile and data—as opposed to the satellite networks—are expected to be developed by new companies (at least initially). The terminal devices for the Global Positioning System, or GPS, for example, have been developed largely by smaller companies. GPS is a navigation system of 24 satellites operated by the Department of Defense (DOD) that sends latitude, longitude, and altitude information accurate to within 10 meters to users equipped with a GPS terminal device. Revenues from GPS users exceeded $400 million in 1993 and are expected to exceed $5 billion in 1996. The overwhelming majority of these revenues comes from commercial users; nonmilitary use, including for aviation and marine navigation as well as hand-held terminal devices, now exceeds military use of the GPS by a factor of five. There were an estimated 350,000 non-DOD users of GPS in 1993.

New companies exploit these opportunities to incrementally develop networking technologies (as opposed to developing fundamental advances, such as optical transmission or satellite-based networking) to realize new opportunities that are not seen by larger players, or are seen as too narrow. Videoconferencing is a second example of this. Videoconferencing is driving demand for high-speed

Suggested Citation:"6 Network Services and Terminal Devices." National Research Council. 1996. Risk & Innovation: Small Companies in Six Industries: Background Papers Prepared for the NAE Risk and Innovation Study. Washington, DC: The National Academies Press. doi: 10.17226/9191.
×

advanced communications networks. Revenues from video communications equipment are expected to expand by 30 percent a year, reaching $1.2 billion by 1998. As real-time videoconferencing becomes integrated with desktop systems, videoconferencing could even exceed these projections. The major vendors in this market are largely new companies formed to exploit this opportunity, including Compression Labs, PictureTel, and VTEL that have developed attachments that can turn a desktop computer into a video communications center for less than $10,000 (Shaffer, 1993). However, many larger companies, like Intel, AT&T, Silicon Graphics, and Sun Microsystems, as well as start-ups, are also moving into desktop video systems.

Communications technologies developed by innovative new companies have also increased the viability of portable computing. For example, the number of people using cellular and satellite systems to transmit data is expected to increase from fewer than 1 million in 1993 to more than 20 million in the next decade. According to Dataquest, 18 percent of the PCs sold in 1993 were portable, and inside many of these are interchangeable credit-card-sized high-speed modems called PCMCIA cards. The electronic standard for the PCMCIA card, which originally was used to add memory to a computer, has been expanded by innovative new companies to include other features for portable computing such as network connectors, modems, and pagers (Shaffer, 1994).

Cyberspace as an Opportunity for Small Companies

But beyond these uses, what exactly these networks will ultimately deliver is not clear. Video on demand (VOD) is one obvious new application of these new networks that everyone seems to agree on, but VOD increases the expense of these new networks enormously (Economist, September 10, 1994). Everyone agrees that networks have tremendous potential to alter the ways information is received and used, but nobody knows what applications consumers are willing to pay for. Indeed, this high degree of uncertainty has caused almost all larger competitors adopt a “fast follower” strategy that avoids the high costs of pioneering a new market (and the potential cost of product failure) (Fortune, Autumn, 1993b).

This creates opportunities for innovative new companies. One set of these opportunities is expected to be in the explosive growth of the Internet (Business Week, November 14, 1994). In March 1993, about 10,000 networks in more than 50 countries were part of the Internet. By July 1993, there were 14,000 networks, representing perhaps 20 million users. These numbers have been doubling every year fueled by the World Wide Web, often viewed as the Internet’s “killer application” (Fortune, Autumn, 1993a). The Web now represents about 10 percent of all traffic on the Internet, according to Tim Berners-Lee, the researcher who invented the Web technology.

The market for the majority of these new applications like the World Wide Web is expected to be pioneered by innovative new companies, for several reasons. First, the costs of participating in cyberspace are extremely low. Literally all that is required to develop and test an application on the

Suggested Citation:"6 Network Services and Terminal Devices." National Research Council. 1996. Risk & Innovation: Small Companies in Six Industries: Background Papers Prepared for the NAE Risk and Innovation Study. Washington, DC: The National Academies Press. doi: 10.17226/9191.
×

Internet, for example, is a computer and access through an Internet provider. Pioneering new companies are being joined by giants such as MCI and are providing access to these new network services. In New York City, for example, a small Internet service called ECHO (for East Coast Hang Out) provides Internet access for between 6,000 and 10,000 people for a service charge of $19.95 per month per person (Fortune, Autumn, 1993a). Dataquest, a market research firm, estimates that the market for Internet access providers was $70 million in 1993 and will reach $150 million by 1995 (Economist, September 10, 1994).

Second, there appear to be no economies of scale (and perhaps even reverse economies) in developing these applications. Indeed, the imperative of creativity in software development and the flexibility to respond quickly to emerging opportunities favors either new competitors or relatively new videogame and software companies such as Knowledge Adventure, Voyager, and Maxis. These small video game and software companies have already demonstrated the capabilities needed to bring video, animation, sound, and narrative together in an effective way. The enormous success of these new companies, in turn, has attracted the attention of larger players, once the viability of the application or opportunity has been demonstrated. For example, AT&T and Paramount have acquired an interest in Knowledge Adventure (Economist, October 16, 1993).

The viability of innovative new companies on the Internet is also demonstrated in the $11 billion opportunity for on-line services and information (Simba Information, in the Economist, September 10, 1994). Previously, financial information (Dow Jones, Bloomberg), news services (Reuters), and databases (Mead Data’s NEXIS/LEXIS, Dialog) were offered only on private networks, outside the Internet. Now, new companies are offering specialized Internet news services to computer users. For example, Infoseek in California uses the Internet to let users search large, commercial databases by typing requests in simple English for about 10 cents a query, considerably less than Mead Data or Dialog. A second company, Farcast Inc, uses an “agent-based” news and information service over the Internet that automatically retrieves articles or stock price quotes on topics or companies identified by the user (Markoff 1994).

Another large opportunity for innovative new companies is in the development of the software and interfaces that make the Internet easy to use. The most popular of these interfaces is the graphical point-and-click interface Mosaic, developed at the National Center for Supercomputing Applications (NCSA) at the University of Illinois. In May 1994, NCSA selected a new company, Spyglass, to develop and distribute an enhanced commercial version of Mosaic (Hill, 1994). Similarly, the World Wide Web technology that links text, graphics, and sound in a single document from databases anywhere in the Internet was developed by Tim Berners-Lee at CERN, Europe’s high-energy physics lab, to help researchers cope with the enormous amounts of data from their experiments. This World Wide Web technology is freely available over the Internet (Economist, February 5, 1994b). General Magic, a spin-off from Apple Computer, is also developing software systems and interfaces that it hopes will be at the center of these new networks. One is Telescript, a computer language that uses

Suggested Citation:"6 Network Services and Terminal Devices." National Research Council. 1996. Risk & Innovation: Small Companies in Six Industries: Background Papers Prepared for the NAE Risk and Innovation Study. Washington, DC: The National Academies Press. doi: 10.17226/9191.
×

“agents” to perform tasks over networks—finding the cheapest flight to Boston, for example, or somebody’s e-mail address. AT&T, one of the investors in General Magic, recently said it would use Telescript for an intelligent messaging service, using agents to identify and deliver messages in the most appropriate way, for example using a digitized voice over the telephone or sending an e-mail (Economist, February 5, 1994a).

IMPORTANT QUESTIONS FOR NEW COMPANIES

Because of the great uncertainty about which products and services will eventually succeed, many new companies must often pursue a technology-push strategy based on nothing more than an intuitive sense that an opportunity exists. This combination of intuition and luck has helped many small companies succeed. Of course, many factors affect their survival. These include sources of technology for the start-up phase, internal and external resources for growth, intellectual property questions, and access to capital.

Sources of Technology

New companies commonly depend on the creative ideas of a few individuals. University research is an important source of technology that has led to the launch of many successful new companies. Universities can also be continuing sources of technology for established small companies, although it is difficult for those companies to learn about the research being done.

Internal and External Resources

Proprietary technologies or skills are critical assets for small companies. The fact that a small company has a talented team of people that cannot be duplicated may be an important consideration for potential partners. However, without a talented management team, a company will not prosper.

External alliances and sources of talent come from many places—universities, big companies, “angels”—and they serve different functions at different stages of a company’s growth. Alliances can help a small company gain credibility it would not otherwise have, handle functions such as manufacturing and marketing that need to be outsourced, and provide financial backing.

Alliances are particularly important in this industry, which is characterized by the number of partnerships being formed and the fact that the firms entering into them are strange bedfellows: big and small companies, firms from different industries, product manufacturers and service providers. A relationship with a well-established partner, if carefully structured, can provide many advantages to a small company, including but not limited to access to other partners, manufacturing expertise, and a distribution system for the product. What the larger company gains by acquiring rights, however

Suggested Citation:"6 Network Services and Terminal Devices." National Research Council. 1996. Risk & Innovation: Small Companies in Six Industries: Background Papers Prepared for the NAE Risk and Innovation Study. Washington, DC: The National Academies Press. doi: 10.17226/9191.
×

defined, to a technology that is already operational is shorter time to market. Partnering with a big company also includes the following risks for small firms:

  • Difficulty remaining independent, since the partner may expect 100 percent of the small company’s time. The small company needs to be clear about its mission and about what it is contributing to the larger partner.

  • Difficulty structuring the return so it benefits the small company.

  • Dealing with large, bureaucratic organizations with different cultures.

  • Expecting the big company to make the market for the small company.

Standards, Patents, and Licensing Strategies

The networking sector attempts to deal with technological uncertainty by developing standards, and competitors seek to have the standards built around their own technology. Technologies become an industry standard in different ways, usually either through competition among various technologies for acceptance in the marketplace, or selection by a standards-setting body. The lack of an entity-established standard, which may be more reflective of the status quo than the future of an industry, can benefit a small company by leveling the playing field it shares with larger, more well-established competitors.

Some new companies are attempting to exploit this fact by pursuing an open licensing strategy as a way to gain widespread user acceptance of their technologies and thereby become the de facto standard. For example, General Magic’s novel communications software received financing from Apple, AT&T, Matsushita, Motorola, Philips, and Sony, all of whom expect to use these technologies in PDAs and new terminal devices, as well as for communications networks (Economist, February 5, 1994a).

This strategy demonstrates that there are times for a small company when public disclosure of proprietary information may be useful, particularly if it relates to such competitive advantages as speed, cost, and performance. General Magic will be vulnerable to competition unless it licenses its technology, irrespective of how good its communications software is. The PDA market, for example, is bound to see competing standards. So will the market for set-top boxes. Microsoft, IBM, Sun Microsystems, Silicon Graphics, and others are all currently developing competing technologies in this area (Economist, February 5, 1994a).

Patents are another reason small companies may elect to license proprietary information. Patents provide a way to protect intellectual property, but their usefulness depends on the company’s ability to prosecute them. This may be particularly true for small companies. (Because of the extremely high costs of litigation, larger players enjoy a comparative advantage over a small company

Suggested Citation:"6 Network Services and Terminal Devices." National Research Council. 1996. Risk & Innovation: Small Companies in Six Industries: Background Papers Prepared for the NAE Risk and Innovation Study. Washington, DC: The National Academies Press. doi: 10.17226/9191.
×

on whose patents it has infringed.) Similarly, when entering into alliances with larger companies, it is important to define what kinds of information will and will not be shared with the partner.

Financing

There are several unique characteristics of this industry that make financing particularly challenging for small companies. One is that small and large companies are in many instances competing for the same opportunity. Another is that tremendous growth is predicted for this industry, requiring significant financing. Small companies have different financing options, including “angels”, various federal and state programs, venture capital, and partnering with larger players to get access to financing. Each brings with it particular constraints and benefits. Even with partnerships with other companies, there are big differences depending on how ownership of the company is structured. For example, in some companies the largest shareholder has a relatively small percentage of the stock; others are fully private; still others are companies where the largest shareholder is a family with a longer-term perspective. If a small company desires to maintain its flexibility or independence, financing through an angel or a company with a long-term perspective is the preferred option. Venture capital groups largely concentrated in areas like Silicon Valley, New York, and Boston tend to provide funds regionally. Since most small companies do not have access to venture capital, particularly outside certain geographic areas, they may need to pursue more creative strategies for obtaining financing.

THE IMPACT OF POLICY ON OPPORTUNITIES

As well as these questions, the opportunities for new companies created by advances in information technologies and the convergence and competition in computers and communications, depend to a very large extent on public policy. Increasingly intense competition has seen regulations relaxed in almost all sectors of telecommunications. Perhaps the most dramatic of these changes is in long-distance service, where deregulation and competing microwave transmission and satellite technologies have resulted in an open, competitive market for larger users as well as lower rates for subscribers.

Public policy has also started to recognize competition and convergence in other areas. Competition has recently emerged in the heavily regulated “local loop,” for example. Cellular systems, especially, are seen as a credible threat to the local-loop monopoly by the Bell Operating Companies (combined revenues, $82 billion). Newer competitors are also on the horizon, using either cellular or PCS technologies. The reduced costs of fiber-optic networks and Federal Communications Commission (FCC) orders requiring local telephone companies to let competitive access providers

Suggested Citation:"6 Network Services and Terminal Devices." National Research Council. 1996. Risk & Innovation: Small Companies in Six Industries: Background Papers Prepared for the NAE Risk and Innovation Study. Washington, DC: The National Academies Press. doi: 10.17226/9191.
×

(CAPs) interconnect to local exchange facilities have also enabled CAPs to compete with the local telephone company for large users. CATV providers also expect to compete for the $80 billion market for phone service, accelerating competition in the local loop.

Competition is also emerging for CATV (combined revenues, $21 billion). Direct Broadcasting Satellites represent a real challenge to the local monopoly enjoyed by CATV providers. The Bell Operating Companies are also challenging the CATV monopolies. Pressure on their monopolies in the local loop has left them anxious to attack CATV providers by sending video over the telephone network. Currently, the phone companies are allowed to provide (on a selected basis) “video dial-tone” service and to sell access to video program suppliers such as HBO (with FCC permission). In June 1994 the FCC approved the first permanent video dial-tone service, to Bell Atlantic in New Jersey for service to approximately 38,000 people. The system is expected to expand from 64 to nearly 400 channels in early 1995. Twenty-four other applications for permanent video dial tone are pending with the FCC. The question is whether regulation will encourage this new competitive environment.

Regulation must also address other questions. First, digitization and convergence present special challenges for intellectual property rights (IPRs). The ability of computers to manipulate digital images of tangible expressions, for example the digital image of a painting by Monet, can be expected to create problems in licensing and copyright. The inability to control distribution is also expected to cause headaches (Barton, 1993).

Second, with respect to content, experience with the Internet would seem to suggest that new programming may not conform to everyone’s standards of decency, in terms of sexual content or violence. To what extent should the government attempt to control information available to consumers? Should the network be open to alternative programming (Firestone, 1993)?

Third, should network providers be forced to provide universal service? If yes, what items should be considered essential and subject to regulation to ensure that most people have access to them? And at what cost should these services be provided (Firestone, 1993)?

Public Networks and Systems

As well as regulating these new networks, the federal government has on several occasions directly funded new communications networks, like the Global Positioning System, for specific applications. The National Science Foundation’s NSFNET is a second example of a network that, like GPS, was funded by the government for a specific purpose: in this instance, research. NSFNET links the NSF’s supercomputer sites and other centers for computing research to address a series of “grand challenges” in science and engineering—for example, modeling global climate change and weather. As demand for advanced computing power has accelerated, other local networks, linked by the NSFNET and connected to other sites and networks around the world, have quickly developed, creating demand

Suggested Citation:"6 Network Services and Terminal Devices." National Research Council. 1996. Risk & Innovation: Small Companies in Six Industries: Background Papers Prepared for the NAE Risk and Innovation Study. Washington, DC: The National Academies Press. doi: 10.17226/9191.
×

for interconnections using these technologies, as well as the protocols and standards that are now referred to as the Internet. Currently, more than 50 percent of the registered networks connected to the Internet are commercial.

These and other initiatives have also helped to bring new users, including schools, libraries, and government, onto the Internet. Recent proposals, for example to provide funds to schools and other nonprofit organizations to purchase the equipment needed to connect to the Internet, are expected to accelerate this trend.

BOX 1 High Performance Computing and Communications Program (HPCC) initiatives

High Performance Computing Systems (HPCS)

  • Focuses on (1) the development of very high performance, scaleable computing systems and operating software capable of at least one trillion operations per second, or teraops (as of 1990, the fastest systems had exceeded 0.1 teraops), and

  • (2) enabling networks of heterogeneous systems.

National Research and Education Network (NREN)

  • Enhances the research and education community’s access to high-performance computing and research centers, and to electronic information resources and libraries.

  • Accelerates the development of ground-based, satellite, and wireless communications systems and protocols.

Advanced Software Technology and Algorithms (ASTA)

  • Demonstrates approaches to solving computationally-intensive problems in a series of “Grand Challenges.” Examples of these problems are forecasting weather and climate, and designing better drugs.

Information Infrastructure Technology and Applications (IITA)

  • Demonstrates prototype solutions for a series of “National Challenge” problems. These include systems development environments to support virtual reality, image understanding, language and speech recognition, and data and object databases for electronic libraries.

Basic Research and Human Resources (BRHR)

  • Supports research and education in computer science, computer engineering, and computational theory.

  • This initiative also includes pilot projects for K-12 to support expansion of the NII.

Source: Adapted from Office of Science and Technology Policy, 1994, p. 11.

Suggested Citation:"6 Network Services and Terminal Devices." National Research Council. 1996. Risk & Innovation: Small Companies in Six Industries: Background Papers Prepared for the NAE Risk and Innovation Study. Washington, DC: The National Academies Press. doi: 10.17226/9191.
×

Direct Support for R&D

Government initiatives have also been extremely important in developing the technologies for emerging networks. For example, the original concept of distributed computer and communication links used by ARPANET, called packet-switching, was developed in the early 1960s by Paul Baran at RAND, with funding from DOD. In 1969, the Advanced Research Projects Agency (ARPA) decided to build a secure communications network for military and university computers using packet-switching technology. By the early 1980s, the success of the ARPANET technology encouraged the NSF to fund its own NSFNET using the same technologies (Baer, 1993).

Current initiatives to encourage the development of new technologies in computers and telecommunications are concentrated in the High Performance Computing and Communications Program (HPCC). HPCC is budgeted at $1.0 billion to $1.2 billion annually for 1992–1996 (Office of Science and Technology Policy, 1994). The HPCC initiatives are described in Box 1.

Of these initiatives, the National Research and Educational Network (NREN) is the component most clearly directed toward advancing the telecommunications infrastructure. NREN does this in two phases. First, NREN will increase the communication speed of the National Science Foundation’s NSFNET from 1.5 million bits per second to 45 million bits per second, providing immediate benefits to Internet users. For example, at about 20 percent capacity use, the Internet running over NSFNET at 45 million bits per second can send a file nearly 20 times faster than at 1.5 million bits per second. The second phase of NREN involves research and development on “gigabit test-beds” to develop networking technology that will enable computer networks of 1 billion bits per second (one gigabit). Most of this R&D is expected to be done in close collaboration with larger telecommunications and computer companies to encourage the transfer of these technologies to commercial high-speed data communications networks (Office of Technology Assessment, 1993; Office of Science and Technology Policy, 1994).

Development of New Applications

Public spending has also funded innovative demonstration programs for applications of networking technology in several areas. To encourage the development of these applications, the administration requested $96 million in 1994 for a new Information Infrastructure Technology and Applications Program to assist industry in development of hardware and software needed to fully apply advanced computing and networking technology in manufacturing, in health care, in life-long learning, and in libraries (Office of Science and Technology Policy, 1994). Separately, Congress increased the funding of the HPCC program by $1 billion in 1993 to fund demonstration projects in four areas: medical imaging, education, manufacturing, and electronic libraries. In November 1993, the first digital representation of a complete human being was made accessible over the Internet for educational

Suggested Citation:"6 Network Services and Terminal Devices." National Research Council. 1996. Risk & Innovation: Small Companies in Six Industries: Background Papers Prepared for the NAE Risk and Innovation Study. Washington, DC: The National Academies Press. doi: 10.17226/9191.
×

purposes as part of the Visible Human Project of the National Library of Medicine (Office of Science and Technology Policy, 1994).

THE FUTURE

The networks sector of the economy is characterized by enormous opportunity and, as such, presents a fertile environment for new companies and entrepreneurs. For the next few years, new companies and entrepreneurs will continue to exploit many new opportunities because of low barriers to entry and a comparative advantage in creativity. In the long term, however, the opportunities for new small companies will be affected by the following trends:

  • Evolutionary (rather than revolutionary) changes in network terminal devices and services will dominate, leaving less room for new competitors.

  • A reduction of uncertainty, and hence lower risk for big players’ participation, as markets evolve.

  • Diffusion of proprietary knowledge, especially by spin-offs, will increase competition and increase the risk of new business start-up.

  • Accumulation of experience by larger players and large capital availability will determine market success.

However, each wave of technological advances opens new business frontiers and opportunities, and this process will continue in networks—if public policy continues to encourage an open, competitive environment.

Suggested Citation:"6 Network Services and Terminal Devices." National Research Council. 1996. Risk & Innovation: Small Companies in Six Industries: Background Papers Prepared for the NAE Risk and Innovation Study. Washington, DC: The National Academies Press. doi: 10.17226/9191.
×

REFERENCES

Baer, W.S. 1993. Government Investment in Telecommunications Infrastructure. Paper presented to the Computer Science and Telecommunications Board workshop on the changing nature of telecommunications/information infrastructure, October 12–13, 1993.

Barton, J. 1993. Adapting the Intellectual Property System to New Technologies. Pp. 256–283 in Global Dimensions of Intellectual Property Rights in Science and Technology, M.B.Wallerstein, M.E.Mogee, and R.A.Schoen, eds. Washington, D.C.: National Academy Press.

Business Week. November 14, 1994. The Internet: how it will change the way you do business. Pp.80–8.


Economist. February 27, 1993. Survey: The computer industry: Lost horizons. Pp.17–8.

Economist. October 16, 1993. The tangled webs they weave. Pp.21–24.

Economist. February 5, 1994a. Abracadabra. Pp.67–8.

Economist. February 5, 1994b. Webbed fingers. Pp.86–7.

Economist. September 10, 1994. Is there gold in the Internet? Pp.73–4.


Firestone, C.M. 1993. The Search for the Holy Paradigm: Regulating the Information Infrastructure in the 21st Century. Paper presented to the Computer Science and Telecommunications Board workshop on the changing nature of telecommunications/information infrastructure, October 12–13, 1993.

Fortune. Autumn, 1993a. Information technology special report: Boom time on the new frontier. Pp.153–161.

Fortune. Autumn, 1993b. Information technology special report: Customers will be the innovators. Pp.105–106.


Gemini Consulting. 1994. Convergence: Driving the Information Industry Revolution. Morristown, N.J.: Gemini Consulting.


Hill, G.C. 1994. Clark is starting firm to provide Internet system. Wall Street Journal. May 9. B2.

Hutheesing, N. 1994. Copper highway? Forbes. June 6. P.104.


Markoff, J. 1994. Silicon valley concerns offer specialized news. New York Times. July 21. D4.

Mayo, J.S. 1985. The evolution of Information technologies. Pp.7–33 in Information Technologies and Social Transformation, B.Guile, ed. Washington, D.C.: National Academy Press.


Office of Science and Technology Policy. 1994. High Performance Computing and Communications: Towards a National Infrastructure. Washington, D.C.: Office of Science and Technology Policy.

Office of Technology Assessment 1993. Background Paper: Advanced Network Technology. Washington, D.C.: Office of Technology Assessment.


Shaffer, R. 1994. Don’t leave home without this. Forbes. January 3. P.92

___. 1994. Meeting tube to tube. Forbes. December 6. P.242.

Sugawara, S. 1994. Satellite network seeks to link remote areas. Washington Post. Mar 21. A7.


Wilke, J.R. 1993. Digital unveils cable technology for network access. Wall Street Journal. May 17. B6.

Suggested Citation:"6 Network Services and Terminal Devices." National Research Council. 1996. Risk & Innovation: Small Companies in Six Industries: Background Papers Prepared for the NAE Risk and Innovation Study. Washington, DC: The National Academies Press. doi: 10.17226/9191.
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