Interesting People mailing list archives
IP: The natural evolution of the Internet industry
From: Dave Farber <farber () central cis upenn edu>
Date: Sun, 08 Sep 1996 16:26:03 -0400
Date: Fri, 6 Sep 1996 17:04:46 -0900
To: Dave Farber <<farber () central cis upenn edu>
From: sky () earthlink net (Sky Dayton)
Dave,
This is an updated ASCII version of the paper you helped me edit back=20
in
April. Might be appropriate for IP. It provides a good perspective on
many
recent industry events.
Sky
--
"Making Some Sense of the Madness"
The Natural Evolution
of the Internet Industry
by Sky Dayton,
Founder & Chairman, EarthLink Network, Inc.
Originally published 4/1/96, revised 8/21/96
State of the Internet industry
Only two years ago, the Internet was virtually unknown in the
mass-consumer market. Today, it is a phenomenon reshaping global
communications for millions of people. Almost every industry is
touched
by the Internet's fanatical momentum. It is growing faster than=20
any
other new technology industry in history, and it has the potential
to
change the way people interact on Earth.
In many ways, the Internet's communications properties have acted as
a
catalyst to its own growth, making it a self-fueling entity
Despite its growth and its assimilation of whole industries, the
Internet is still a nascent market. Many in the industry fear a
backlash if the Internet fails to deliver on its hyped potential
fast
enough. Even now, media pundits have begun to circle overhead
looking
for the opportunity to strike and be the first to predict such a
backlash.
Most agree the Internet will be the foundation of what some call
the
"Information Superhighway", a communications system that will tie
together all existing voice and data applications on an open,
inexpensive and fast network. However, the current Internet
industry
lacks a clear definition of how it will mature toward this vision.
As in all markets, maturity will bring segmentation of products=20
and
services within the Internet industry. An understanding and
prediction
of this segmentation is needed.
Need for definition in the industry
We need a segmentation map of the Internet industry. Without some
sort
of guideline of how the market will mature, companies will have
difficulty putting their potential products and services in=20
context
with other companies and in focus within the rest of the industry.
Many large companies today are pursuing unrefined "Internet
strategies". Thousands of start-ups are also clamoring to produce
products and services for the Internet. Until recently, investors
hoping to cash in on the craze were buying any stock with the word
"Internet" attached to it, and analysts continue to have=20
difficulty
differentiating thousands of new product and service offerings.
Additionally, industry experts are still trying to explain the
failures
of dozens of previous ventures in the interactive video and
proprietary
online services businesses, especially those backed by top-tier
players
such as AT&T, IBM and others.
Companies that don't predict segmentation will have their=20
offerings
segmented by market forces nonetheless. Hundreds of companies,=20
from
start-ups to blue chips, went through this experience in the PC
revolution.
This paper gives participants in this new industry a guide to the
coming segmentation, thus allowing them to better define and
position
their offerings in the context of one another.
The premise of this paper is that Internet market segmentation will
be
based on the structure of Internet networks themselves.
The OSI model
The Internet marketplace is already segmented in a way analogous to
the
basic architecture of networking. Network architecture is best
defined
in the Open Systems Interconnection (OSI) model developed by the
International Standards Organization (ISO) over the past 15 years.
The OSI model was created to provide an open-standard reference=20
for
network development. It lets network developers work on different
parts
of the same networking problems in a way that will allow their
final
work to be compatible with other developers' work.
The OSI model describes the building blocks of all networks. It
lays
out how a network is built, from the foundation up. Computer
networking
began as a wire connecting two computers. In order to communicate,
the
voltage on the wire was modulated. As networking evolved over the
years, engineers began building up from this foundation, one layer
at a
time, with each successive layer allowing greater network
functionality.
Much of today's networking technology, including the foundation
protocols of the Internet, TCP and IP, was developed without=20
direct
reference to the OSI model. So were hundreds of other protocols.
However, OSI is an attempt to put networking protocols in context.
Understanding the OSI model
Here is the OSI model:
Layer Name Description & Example
7 Application The communications applications themselves.
Email, file transfer, client/server=20
applications.
Applications such as Netscape & Eudora talk to
this layer.
6 Presentation Syntax for data conversion, makes session layer
available to application layer. ASCII, binary
conversion, encryption and decryption, sockets
5 Session Starts, stops and governs transmission order.
Sockets, synchronization
4 Transport Ensures delivery of the completed message.
TCP, SNA, UDP
3 Network Routes data to different networks. Forms=20
packets.
IP, x.25, IPX, AppleTalk, Routing
2 Datalink Transmits from node to node. Divides bits into
frames. Ethernet, Token ring, Frame Relay,
Bridging
1 Physical The connection medium. The hard, physical
connection.
RTS, CTS, RS-232, copper, fiber, wireless.
The access sector of the Internet market is currently populated by
Internet access, cable and telephone providers. Each company in=20
the
access sector can be plotted on the OSI model above.
The company I founded, EarthLink Network, is an Internet access
provider focused on the consumer market in North America. For most
of
our network, we purchase layers 1 through 4 from our partner,=20
UUNET
Technologies. They deliver TCP/IP packets (layers 3 and 4) to our
customers over dial-up modem lines in hundreds of cities. They, in
turn, purchase layers 1 and 2 from local telephone companies.=20
These
companies deliver dial-tone or other layer 1 and 2 services to
UUNET.
If UUNET can send a ping (a TCP/IP packet from one point to another)
to
our customer, their job is done - the customer has an Internet
connection. We take over at that point and deliver the services=20
the
customer uses to communicate on the Internet: email, Usenet, ftp,
Web,
etc. These services operate on layers 5 to 7.
Early analysts might have seen our relationship with UUNET as
competitive. EarthLink predicted industry segmentation, however,
and
recognized the relationship was complimentary. UUNET decided to
focus
its business on layers 3 and 4 principally. It buys layers 1 and 2
from
carriers and packages the whole thing up into a 4-layer product.
Other Internet access providers, such as Netcom and PSINet, have
attempted to build 5 layers at once, all during massive growth.
While
this strategy made sense early on, these companies will have to
defend
many more layers against competition. Their competitors will
specialize
more and more on one or two layers, resulting in better
efficiencies
than Netcom or PSINet could ever have on a multi-layered strategy.
Since the first edition of this paper was published, PSINet has
refocused their business on their traditional core competence:
layers 3
and 4. After several quarters of diluted attention and stunted
growth,
they sold off their consumer dial-up access business and
concentrated
on business-to-business and wholesale Internet access, where they
have
always been strongest. With this new, focused strategy, they will
be
able to compete much more effectively in their market segment.
Other companies have failed to embrace market segmentation by
assuming
their expertise in lower layers would translate into an advantage
in
higher layers, particularly where their implementation required them
to
provide all 7 layers themselves. Today, this is tantamount to=20
IBM's
early attempts to own all aspects of the personal computer
business.
Recent examples of such disasters were AT&T's foray into computer
hardware and online services, USWest's interactive video services
and
MCI's consumer Internet service. These companies' traditional
technology expertise did not translate into expertise on higher
layers.
Though telephone and cable companies are pursuing Internet access
strategies today, their core business is on layers 1 and 2. With
recent
deregulation, it is detrimental for them to leave layers 1 and 2
unguarded from major new competition to pursue a completely new
business on higher layers.
Layers 1 and 2 are the foundation of the Internet. Because
telephone
and cable companies were regulated monopolies for so long, they
have
let this foundation languish. They have not kept up with sweeping
innovations in the upper layers. As a result, most consumers now
suffer
with an Internet experience at a mere 28.8k/bits per second; their
computers can process bits thousands of times faster than the
network
can send them.
The telephone and cable operators have a significant task before
them
to upgrade and maintain the foundation of the Internet in a newly
competitive market. In the long term, they will be more successful
focusing on new challenges and opportunities in their traditional
lower-layer businesses than pursuing purported opportunities on=20
the
upper layers.
OSI model applied to all Internet industry sectors
The OSI model defines how the technology of the Internet underlies
the
segmentation of its products and services. The industry can also=20
be
subdivided into sectors which classify the different types of
products
and services available on these network layers.
The Internet currently has six market sectors(1):
1. Hardware
2. Software
3. Access
4. Content
5. Services
6. Expertise
In order to see how companies in each of these sectors operate in
the
context of one another, all can be classified on the OSI model.=20
The
following chart is a random sampling of companies in each sector.
Layer Hardware Software Access Content Services =20
Expertise
Appli- Apple Netscape EarthLink AOL Yahoo =20
CKS
cation Intel Microsoft Netcom Compusrve Excite =20
Digital-
Dell Quartrdeck Sprynet Prodigy Infoseek =20
Planet
Gateway GNN CNN WSJ Lycos =20
USWeb
Presen- Sun Netscape EarthLink AOL CyberCash =20
CKS
tation SGI HP Microsoft Netcom Compusrve RSA =20
Digital-
IBM Interwrld Sprynet Prodigy BBN =20
Planet
DEC GNN BBN I/Pro =20
USWeb
Intel Best Netcount
Session Sun Netscape EarthLink AOL BBN =20
CKS
SGI HP Microsoft Netcom Compusrve Compusrve =20
Digital-
IBM Interworl Sprynet Prodigy I/Pro =20
Planet
DEC Xing GNN BBN Netcount =20
USWeb
Intel RealAudio Best
Transport Cisco FTP Netcom AOLNet- BBN =20
Anderson
Bay Netmanage UUNET (ANS) Compusrve =20
EDS
3Com Network PSINet Compusrve Network- =20
Perot
Wellfleet TeleSystem Concentric Sprintnet Solutions =20
BBN
MCI BBN BBN
Sprintlink
Network Cisco FTP Netcom AOLNet- BBN =20
Anderson
Bay Netmanage UUNET (ANS) Compusrve =20
EDS
3Com Network PSINet Compusrve Network- =20
Perot
Wellfleet TeleSystem Concentric Sprintnet Solutions =20
BBN
MCI BBN BBN
Sprintlink
Datalink USR Nortel MCI TCI MCI TCI MCI TCI =20
Anderson
Ascend AT&T Sprint Sprint Sprint =20
EDS
Cascade Worldcom Worldcom Worldcom =20
@Home
Stratacom AT&T AT&T AT&T =20
AT&T
AT&T
Physical USR Nortel MCI TCI MCI TCI MCI TCI =20
Anderson
Ascend AT&T Sprint Sprint Sprint =20
EDS
Cascade Worldcom Worldcom Worldcom =20
@Home
Stratacom AT&T AT&T AT&T =20
AT&T
AT&T
Many companies overlap onto different layers in more than one
sector.
Most companies, however, generally maintain their core business on
one
or two layers in one sector only.
The OSI model specifies that each layer only deals with the layers
immediately above and below it. Similarly, companies will be most
successful doing business with other companies on the layers
immediately above and below them. As an illustration of this, we
have
seen many recent failed partnerships between cable or telephone
companies and computer software and hardware companies. These
companies
are many layers apart, as the OSI model shows. The best
partnerships
are between companies occupying neighboring layers.
Also, complications in developing and deploying networks and
network-based products are directly proportional to the number of
layers involved. Conversely, the fewer the layers involved, the
simpler
and more reliable the networking technology.
With more layers involved, the technology becomes more complex, but
it
also allows much greater flexibility. For example, Morse code
operated
at the first layer only, and telephone technology deals only with
the
first and second layers. Both afford little room for innovation
compared to the seven-layer full Internet connection.
Because Internet technology is so versatile, it will be difficult
to
fit the industry into a "commodity" description. While one or more
layers may become commodity businesses, there is so much flexibility
in
the implementation of multiple layers, it will be a long time
before
the entire industry commoditizes, if ever.
Summary
The Internet has the potential to become the greatest
communications
medium in history. It will take thousands of developers at hundreds
of
companies to provide the innovations necessary for the Internet to
achieve this potential. Whether or not these companies become a
financial success depends largely on their anticipation of the
market's
segmentation.
Many companies will not foresee this segmentation and will fail to
position themselves to occupy a layer, or segment, of the industry.
Or
they may pursue a segment but fail to understand its relationship
with
the layers immediately above and below.
Companies that understand and embrace the natural segmentation of
the
marketplace will be able to make wise decisions about partners and
competitors. By anticipating changes in the market, these=20
companies
will be principal contributors to the Internet of the future.
---
(1) These six sectors were originally outlined by Michael Parekh,
analyst at Goldman Sachs, in a prescient paper called "Byways to
Highways" in October, 1994.
This paper is also available on the Web:
http://www.earthlink.net/special/marketevol.html
=A9Copyright 1996 Sky Dayton
--
Sky Dayton, Founder & Chairman | Voice: 818-296-3072
EarthLink Network, Inc. | Fax: 818-296-4161
sky () earthlink net | 3100 New York Drive
http://websites.earthlink.net/~sky | Pasadena, CA 91107
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- IP: The natural evolution of the Internet industry Dave Farber (Sep 08)