Tapscott says that the shift from analog broadcast (one-way) technologies to digital (two-way interactive) "will happen in the long term as telephone companies come to transmit programming through optical fiber; in the short term, it will occur through asymmetric digital subscriber loops (ADSL), the technology that allows high-quality video over copper wires with some interactivity." I agree that fiber to the home currently appears to be the best long-term solution and that for most communities ADSL appears to be the best interim solution.

In North America there are three main contenders for providing end-user on-ramps to the I-way. The most common currently is the plain old telephone service (POTS) which currently uses more than forty-year-old (analog) transmission technology. ISDN is available in some areas but this is not really much of an improvement over POTS. In some areas cable modems are available which can provide Mbps links to the internet and some of the cable companies (cablecos) are currently laying fiber-optic cable loops in business and residential areas. Sometime in the near future two-way Mbps digital satellite links for residential subscribers will come on line.

Technologically the telephone companies (telcos) are probably in the best position to provide the on-ramps to residential areas. According to AT&T, the technology is now available to convert your POTS into a digital link with more than 100 times the capacity of the POTS using your existing copper telephone line. The asymmetric digital subscriber link (ADSL) modems can provide a regular telephone circuit and a high speed digital link over the same line so that you don't need even need a new telephone line. You purchase a new modem and the telco upgrades their end of the copper wire connection -- viola! -- a high speed connection to the internet and video on demand etc... This sounds great -- but are the telcos ready to implement this type of technology?

The core business of telcos is to provide telephone services and to charge for their service on the basis of telephone call minutes. This business model dates back to the times when copper wires carried a single call at a time. Long distance "trunk lines" contained hundreds of copper wires and connected communities with millions of subscribers. Given this bottle neck in the network, it made good business sense to have a charging structure that discouraged indiscriminant use of the telephone system -- so that most of the long distance calls could get through. Higher charges at peak times had the practical goal of encouraging residential use at off-peak times. "Free" local dialing did not involve the long distance trunk lines.

The invention of fiber optic cables has fundamentally changed the technological landscape for telcos. When long distance communication became digital, the number of (long distance) telephone circuits that could be carried over a given fiber-optic cable began to double every 18 months -- at constant cost. This exponential growth now allows more than half a million simultaneous telephone conversations over a single fiber pair. (A cable may contain hundreds of fiber pairs.) There is no longer a long-distance bottleneck, so why do the some telcos still charge for service according to the old business model?

A quote in THE DIGITAL ECONOMY from Dick Notebaert CEO of Ameritech with regard to restructuring of his telco may provide some insight into the answer to this question -- "Decades of an entitlement mindset die hard ... It is too easy to fall back into the familiar, comfortable ways of doing business, even though the new environment demands that you do otherwise. Turning a corporate culture around is no easy task. The progress that we have made began with the acknowledgement that our success in a monopoly background did not arm us with many of the skills sets that are absolutely vital to success in the competitive environment."

The actual cost to the telco of a long distance call is in large part due to the cost of access to the local networks at each end and the overhead associated with billing on a per minute basis. The pure long distance transport component is typically a small part of the cost, particularly for calls between large population centers. For example, according to the International Telecommunication Union (ITU) a trans-Atlantic telephone circuit cost less than US$0.03 per hour to operate in 1993.

The telcos can (of course) charge for their services in any way that they want (unless regulated otherwise by government). The problem is that the telcos current charging regime is at odds with the way the internet works. For residential access to the internet (via modem) service is charged on the basis of local access alone. Surfing a web site in Massachusetts, California, Ontario or Ireland incurs no long distance charge -- this is true almost universally. (New Zealand is a notable exception)

The provision of ADSL service highlights the conflict between the internet and telephony. If the digital part of the link is connected to the internet and charged for at a flat (monthly) rate and the telephone outlet is charged for in the old manner one can easily see the conflict. The old telephone link has a maximum bandwidth of 56kbps but the digital link has about 100-times that bandwidth and incurs no long distances charges -- so any customer given the choice would undoubtedly move as much of the long distance communication to the internet as possible.

One could easily talk directly to anyone else on the internet using web phones or even web video conferencing. The technology to bridge from the telephone network to the internet is available now. What this means is that it is technically possible to use the internet for the long distance part of a telephone call between two regular telephones -- thus bypassing one of the telco's current profit centers -- long distance telephony.

Clearly something will have to give in the long run -- the question is what business model will become dominant -- charging for access to the global network based on the bandwidth of your local connection (flat monthly rate) -- or charging for traffic on a time/distance basis (rate based on gigabytes transferred over a particular link) -- or something in between.

[4] Restructuring the Data Transport Industry
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According to Dick Notebaert, CEO of Ameritech "My guess on the transport side is that a decade or so from now, we will be down to a handful of mega companies -- organizations formed by alliances that integrate the core competencies of various industry leaders." -- This process has already started and is enabled by the Telecommunications Act of 1996.

In perhaps one of the most significant changes in the telecomms industry since the breakup of AT&T -- long-distance telephone company WorldCom Inc. has acquired local access provider MFS Communications Co. for $14.4 billion in stock, creating a business-communications giant that stretches from phone lines to the Internet -- according to a CNNfn report. According to MFS Communications CEO, James Crowe "[T]he real exciting opportunity is the ability, for the first time since the breakup of AT&T, to bundle local service, long distance service, and internet access through one company over one network -- managed end to end by a single organization -- one stop shopping." WorldCom CEO, Bernard Ebbers agrees that the combined company has a significant advantage over the baby Bells who have to show equal access to their markets for competitors before they can make a similar move. The combined company includes UUNet which is the largest provider of underlying internet services to corporations (e.g. the Microsoft Network)

MFS WorldCom will initially concentrate on providing service to its business customers. Crowe indicates a new service they could develop soon is one of "moving faxes over the Internet rather than over the old, and frankly outmoded, voice network. We have a whole set of potentials that we have just barely scratched the surface on." MFS WorldCom appreciates that its future lies in digital rather than voice communications.

Tapscott claims that "Well before the end of the century, the television will be dead -- replaced by an information appliance." and TV set-top boxes will not prevent this. High definition TV (HDTV) "is unlikely to get off the ground." According to Tapscott "The cable companies will likely be the big losers because they have long enjoyed being monopolies and have been slow to respond. Many have been concerned with migrating into the telephone industry -- a nonstarter at best. Unlike the telephone network, which carries its own power source, cable networks crash when there is a storm. Given this, the importance of the Internet, the silliness of HDTV, and the diversion of the set-top box, cable companies should be focusing more on how to operate with the internet and how to deliver interactive services to the PC."

Predicting the demise of regular broadcast TV seems a little premature. It seems more likely that TV will go into a long gradual decline with its content evolving to match the changing market conditions. A good analogy here is what happened to AM radio when FM took over. Clearly, FM radio is technically superior, but AM news-, sports- and talk-radio stations still have millions of listeners every day. It seems that broadcast TV will adapt its content to the changing environment in similar ways and will be alive and kicking (unfortunately with the likes of Howard Stern and Geraldo wearing the boots) well into the next millenium.

Regarding TV set-top boxes, Tapscott quotes his colleague David Ticoll of the Alliance for Converging Technologies "Why would I take this low resolution, dumb, obsolete appliance and stick a set-top box on it? I already have computers at home that can do way more than the TV with a set-top box." -- I agree with the sentiment -- but millions of Nintendo users would argue that set-top boxes can provide better price/performance for selected applications. According to Tapscott "In 1995 the electronic games industry had revenues of $17 billion -- greater than the entire American motion picture industry." -- so we're not talking about a minor market segment here.

Tapscott's comments about cablecos are at odds with the local situation in the Boston area where NYNEX (a baby Bell) and Continental Cablevision (a cableco) are fighting it out. So far Continental has been the first to deliver high performance internet services to residential areas using cable modems, and is laying fiber-optic cable in residential areas. In contrast, NYNEX offers (the now obsolete) ISDN to some areas.

The cover story of the September 1996 issue of BYTE magazine discusses cable modems and ADSL in some detail. According to BYTE's Halfhill cable modems will have a raw data connection speed (for downloading from the internet) of around 30Mbps and ADSL will come in at 9Mbps. "A monthly subscription fee of $30 to $40 will probably include the lease of a modem and unlimited Internet access. That's only $10 to $20 more than what most users are paying today for flat-rate access to the Internet at narrowband speeds. In most areas, middleband ISDN is a much more expensive option." (emphasis added).

Halfhill also briefly discusses the impact of these broadband modems on network infrastructures and how you won't see as much of a benefit as you might expect because of bottlenecks further up the pipe -- I can attest to that -- my PC at home has a 10Mbps connection to MIT's network and the throughput I get to sites outside of MIT is nearly always _much_ slower than 10Mbps. The internet has noticeably slowed down over the last few weeks as millions of college students return from their summer vacations and once again get access to ethernet-connected PCs and workstations.

Halfhill claims that "In market driven economies, however, such imbalances don't last long. The voracious consumption of bandwidth will drive more investment in bandwidth. It's already happening: @Home, a cable modem venture backed by TCI, is building its own top-tier Internet backbone and is equipping cable head-ends with special servers that cache frequently accessed content."

The current network environment at Boston College (BC) is also illustrative of how the competition between telcos and cablecos benefits users. BC has a state-of-the-art telephone system that is connected to the rest of the world through an OC3 fiber-optic link -- the equivalent of more than 2000 telephone circuits -- provided by Continental Cablevision. Incoming long distance calls generate close to a million dollars in annual revenue for BC (long-distance carriers pay for the privilege of connecting incoming long distance calls through BC's telephone network). It is difficult to see how this arrangement with a cableco is a "nonstarter". BC is also replacing voice mail equipment provided by Northern Telecom with a solution provided by IBM using an SP2 multi-processing system connected to the internet. This system provides access to voice mail and other telephone functions over the internet. At least in the BC example -- it is not the cableco who has been the big loser so far.

[5] Content Providers Take Control?
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Data transport technology alone will not determine what happens in the digital economy. A good example is how Tapscott's book was published by McGraw-Hill. The technology for producing low-cost paperback books has been around for a long time -- but according to the local book store the book is only published in hardcover. This is the "standard practice" of the publishing industry for initial publication of books that are expected to be best-sellers. Presumably they consider that more profit is to made by initial distribution in a more expensive medium. Paperback publication occurs later after the initial demand dies down and cost becomes more important.

Technically, Tapscott's book could be published on the internet in its full form today -- the reason why they have chosen not to do this because there is no practical way to make money out of doing so, at present. Presumably, when digital cash becomes a widely accepted reality, one would be able to purchase an electronic copy of the book over the internet for substantially less than the cost of a paperback -- but will this type of publication only occur after demand for the hardcover/paperback versions has subsided -- or would Tapscott set up his own web site and publish the book by himself? (thereby disintermediating the publisher McGraw-Hill). Similar issues will arise for all of the content providers in the digital economy. e.g.

• Bands who provide music/video/interactive entertainment programming etc...
• Authors of non-fiction/novels/news/cartoons/magazines/poetry/ and anything else you can think of that is currently printed or spoken.
• Performers/producers of just about any imaginable kind, including those of TV programming, movies, plays, and other performances.
• Sports and entertainment promoters/organizers.
• Software providers of all kinds -- did you download your latest copy of Netscape over the Net?

According to Vice President Al Gore "This is not a matter of guaranteeing the right to play video games. It is a matter of guaranteeing access to essential services ... We cannot tolerate -- nor in the long run can this nation afford -- a society in which some children become fully educated and others do not; in which some adults have access to training and lifetime education, and others do not. Nor can we permit geographic location to determine whether the information highway passes by your door."

According to Tapscott "[T]here is strong consensus emerging that this is one area that can't be left to the market." and "We need to move to an open, competitive market for information technology -- absolutely. Investments will come from the private sector -- absolutely. However, an open marketplace does not a social strategy make. It is hard to imagine how a broader social transformation will occur without conscious effort and leadership at every level of society. Market determinism is not the answer to the challenges being discussed here."

"[G]overnments do have a role to play. The approach developed by the government of Ontario is noteworthy. It was the first North American jurisdiction to develop a comprehensive approach to the information highway. The approach is balanced, and it was developed by a consensus process involving business, labor, government, community groups and others. Moreover, it is actually being implemented by various partnerships throughout the province. The strategy rested on the view that the information highway must be developed and funded by the private sector but that government could play a useful role in several areas:

• Create the regulatory conditions for an open competitive marketplace for the evolution of the information infrastructure.

• Use the new technologies to reinvent itself to cut costs and improve the delivery of government programs. In doing so governments would not only deliver better and cheaper services but as a significant purchaser place considerable demand on the market.

• Take steps to ensure that technology serves people by implementing policies and programs to ensure universal access, equity, privacy, and security.

• Act as a catalyst for new kinds of partnerships that would encourage demands for networks, the growth of applications, and the use of the new technologies.

"The digital economy requires a new kind of businessperson: one who has the curiosity and confidence to let go of old mental models and old paradigms; who tempers the needs for business growth and profit with the requirements of employees, customers, and society for privacy, fairness, and a share of the wealth they create; one who has the vision to think socially, the courage to act, and the strength to lead in the face of coolness or even ridicule."

Let's hope they take notice. However, in a capitalist society the business leader is always primarily responsible to the stock holder and to the bottom line. The common good is a secondary consideration. In a democracy, it is the role of government to safeguard the common good.

[7] The New Zealand Perspective
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In New Zealand, the government has taken Tapscott's view 1: "It'll all come out in the wash" or "leave it to the market" or to use a New Zealand colloquialism "she'll be right mate". As we have seen this is considered by Tapscott and governments in North America to be a bad option. The consequences can be seen in the structure of the internet within New Zealand (the ".nz" domain), its connections to the rest of the world and the proportion of New Zealand web presence providers located in other countries.

The internet in New Zealand is run on a purely commercial basis and it should come as no surprise that the telcos are currently providing services with charging practices that match their (outdated) business model for telephony. Local internet service providers (ISPs) are charged for data transfer to and from their sites on a per gigabyte basis: one rate for traffic within the ".nz" domain; and another substantially higher rate for international data transfer. The rates are set at values comparable to charges for traditional telephony. In May '96 the bulk rate charge for international data traffic was NZ$2 per megabyte (about US$1.40). This is good for the telcos as the internet can be made to fall within their traditional business model. This however, is not good for the rest of the community in New Zealand. Web sites within New Zealand are charged for hits from overseas. This puts web presence providers located with New Zealand at a significant disadvantage compared with those elsewhere in the world. Not surprisingly, the majority of New Zealand web providers are now located outside of the ".nz" domain to avoid the high data transfer charging rates.

The general populace is also penalized as the high international data transfer charges must be passed on to them by local ISP's -- resulting in high local time-based access charges (or data transfer based charges). The usage rates have worked as initially designed, and have suppressed demand to "manageable levels". As recently as May 1996, New Zealand, a country with over a million local access lines, had a total bandwidth of 2.5 Mbps to the rest of the world -- a single residential ADSL modem has 3 times this bandwidth!

Tapscott says that "The Age of Networked Intelligence is creating a borderless world where nation states become less important. Money, communications, business transactions, and information are becoming bits that lack awareness and respect for national boundaries." This includes high bandwidth applications -- so any country which fails to provide affordable high-speed digital links to the rest of the world will be dissadvantaged economically.

As Tapscott warns:

"[A]ny nation that dallies will also face competitive decline -- facing the specter of massive structural unemployment. Capital and jobs will be attracted to economies with state-of-the-art infrastructures and innovative, affordable services. Countries that lag in developing the new information highways will tend to become backwaters of economic activity." (emphasis added)

In America, the high level of competition will probably prevent such moves from being as successful -- but if the CEO of Ameritech (who have a substantial interest in Telecom NZ) is correct and "a handful of mega companies" come to dominate data transport in America then similar moves may be possible here too.

[8] Summary
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I agree with the reviews -- The Digital Economy is essential reading for any business person who wishes to succeed in the information age. The digital revolution has already started and the convergence of communications, computing and content technologies will undoubtedly transform societies in profound and perhaps unexpected ways. The global web of interdependences in the information age will facilitate new ways of doing business and spawn whole new industries. -- These are areas where market forces can probably be left to determine the future landscape of the digital economy.

Commercial access to the I-way (at least in large population centers in North America) will probably continue to be driven by market forces -- there is currently sufficient competition in this market (viz MFS WorldCom) -- and the commercial consumer has sufficient leverage to ensure affordable access (e.g. Boston College's choice of Continental Cablevision).

One area where market forces need to be moderated -- is in the general construction of the information highway -- Tapscott agrees -- as do governments in Canada and the Clinton administration. One issue that Tapscott doesn't discuss in enough detail is how the telcos and other telecommunications companies will operate in the digital economy. As discussed above there is a fundamental conflict between the internet and the existing telephone system. How this conflict is resolved will determine the landscape of the information age. If Vice President Al Gore gets what he wants and the information highway passes by every door in America -- the days of long distance telephone charges in America are numbered. This of course assumes that the "information highway" Gore speaks of is a freeway like the current internet.

One problem is that those in the best position to provide on-ramps to the highway (telcos) stand to lose the most if they do so -- the highway bypasses their current business. So, not only do they have to completely restructure their telecommunications networks but their whole business model will need to be reinvented. One way around this is if ADSL modems do not connect to the internet but to a private network run by the telco to provide video on demand etc. In recent news articles in New Zealand about plans for ADSL, the modems are stated as being used to connect to the telco's television division and to the telco's own "added value" ISP. However, it is unclear whether the telco is planning to allow the ADSL modems to be used as general purpose on-ramps to the I-way. There is a significant incentive for a telco, in a monopoly position, to put up road blocks across the data path that might otherwise be used to bypass traditional long-distance and local telephony charges.

The analogy between the information highway and the interstate system in America is one that is particularly useful in most circumstances, however, there is a major technological difference. Highways constructed in the 1950's still operate today basically unchanged from their original design -- vehicles carrying similar loads at similar speeds. The I-way will be governed by Moore's law and the speed limit is expected to double every 18 months into the forseeable future. Putting a bureaucracy in charge of something changing that fast would seem like folly. The challenge then is to establish a regulatory regime where market forces can be used to ensure that the infrastructure is constantly upgraded to keep pace with technology.

As mentioned above, the current levels of competition in America will eventually allow most businesses to get state of the art on-ramps to the I-way. If Al Gore gets his way, both Hawaii and Alaska will get the infrastructure to connect seamlessly to the rest of America -- but will access in Hawaii cost the same as in California? Will Hawaiians be able to access high bandwidth applications from Hollywood or New York at the same price as people in say -- Boston? Who will pay for the high-speed transmission equipment required to cross the pacific? -- telcos already have fiber-optic cables connecting Hawaii to the mainland.

What of the rest of the world? -- Should people in Australia or Europe be able to get access to high bandwidth applications in the USA? -- If you live in the Czech Republic, who pays for data transfer to you across France and Germany? What of the developing nations -- will they be left behind once again?