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Home - Industry
Mapping - The Layer Model
Industry Mapping
The Layer Model
Introduction
Layer I: The Equipment And Software Layer
Layer II: The Network Layer
The TCP/IP Interface
Layer
III: The End-To-End Connectivity Layer
Layer IV: Navigation and Middleware
Layer
Layer V: The
Applications Layer
Layer VI: The
Customers
Companies'
Specialisation By Layer
Introduction
The layer model is shown in three map diagrams. The first map describes the basic layer model. The
second describes typical products and services
that are produced in each of the layers while the
third provides examples of the companies that are to be found in each
layer. For a detailed analysis of how the layers of the telecoms industry have
evolved from the mid-1980s to 2000 see the
Martin Fransman's paper "Evolution
of the telecoms industry into the Internet Age"
in the
Articles zone.
Layer I: The Equipment And Software
Layer
In Layer I telecoms equipment and software is produced . This includes
not only the 'network elements' that are the building blocks for networks of
various kinds, but also customer equipment such as mobile phones, PCs and
information appliances of different sorts, as well as software for billing, IT
and management applications. Three types of companies specialise in Layer I:
first, traditional telecoms equipment companies (most with a long history and
some with recently acquired younger data networking equipment companies);
second, relatively new data networking companies; and third, computer hardware
and software companies.
It is important to stress that to date vertical specialisation is at its
strongest in Layer I. This process amongst the specialist technology suppliers
has had extremely important consequences for the way in which the new telecoms
industry as a whole works. Particularly important has been the impact that this
process has had in lowering technological barriers to entry into the industry,
with significant effects on the degree of competition.
Further questions arise
regarding whether specialist technology suppliers are likely to become network
operators. For further details - see Key
Questions
Proceed to Map Diagrams
Layer II: The Network Layer
Layer II contains the networks that carry the bits (binary digits) that
are the lifeblood of the infocommunications (or the infocommunitainment)
industry. Examples are local, long-distance and international networks based on
technologies and standards such as optical fibre, radio access (including
cellular and fixed radio), cable, DSL, satellite and Ethernet. The services
provided in this layer include telephone, fax, ISDN, frame relay, ATM and
leased circuits. Services sold on the carrier's carrier market are also
included here. All these services are closely associated technically with the
networks over which they run and it is for this reason that it is usually the
network operators that run the networks that also provide these services. By
contrast, the services offered in the higher layers, Layers III to V, can from
a technical point of view be more easily detached from the networks. They may
therefore be offered by players who do not necessarily own and control their
own networks. These players include the specialist facilities-less service
providers.
The network operators that populate the network layer can be divided
into three groups: 1) incumbents, such as the global 'Big Five' - AT&T, BT,
France Telecom, Deutsche Telekom and NTT; 2)original new entrants, that is the
companies that were first allowed to compete with the incumbents when
liberalisation was introduced into the US, UK and Japan in the mid-1980s,
namely MCI and Sprint in the US, Mercury/Cable & Wireless in the UK, and
DDI, Japan Telecom and Teleway Japan in Japan; and 3)new new entrants,
including WorldCom, Qwest, Level 3, Global Crossing, Global Telesystems, COLT,
Energis, Vivendi, Mannesmann etc. The reason for distinguishing between the
original new entrants and the new new entrants is that their strategies and
behaviours are significantly different and, in fact, the former companies have
tended over time to be acquired by the latter.
A set of important questions arises regarding the relationship and
co-ordination between the specialist technology suppliers in the equipment and
software layer (Layer I) and the network operators in the network layer (Layer
II). Clearly, all the network operators are highly dependent on the specialist
technology suppliers for their technology. Indeed sometimes they also depend on
them for managers and skilled personnel and, on occasion, for finance to
purchase technology.
However, a notable distinction between the network operators and the
specialist technology suppliers is that it is the latter that undertake the
bulk of R&D in the industry. An indication of the division of labour in
this area is provided by the R&D-intensity of the two groups of players.
For example, while the 'Big Five' incumbents allocate about 2.5 percent of
their sales to R&D the top five specialist technology suppliers have an
R&D-intensity of around 11 percent. To further complicate the picture, the
new new operators do virtually none of their own R&D, preferring to
outsource to specialist technology suppliers. Furthermore, all the network
operators have formed close, co-operative, obligational relationships, that go
significantly beyond contractual arrangements, with only a few specialist
technology suppliers.
The implications of these characteristics of the new telecoms industry
and further related issues are analysed in Key Questions and in Martin Fransman's paper "Evolution
of the telecoms industry into the Internet Age" in the Articles Zone.
Proceed to Map Diagrams
The TCP/IP Interface
An event of great significance for the industry emerged with the
evolution of the Transmission Control Protocol/ Internet Protocol (TCP/IP)
which came to play an important role in facilitating networking between
computers and networks. An excellent non-technical account of the evolution of
TCP/IP and the internet more generally is to be found in Janet Abbate's book,
Inventing the Internet - see Site
Bibliography
Kavassalis, Lee and Bailey (again in
Site Bibliography) have explained the
importance of the TCP/IP interface using the analogy of containerisation in the
transport industry. Previously, high costs were involved in moving goods
between different transport networks such as road, rail, ship and air. The
advent of containerisation, however, facilitated a smooth interface between
these networks, increasing the degree of interoperability and significantly
lowering the cost.
Likewise, within the network layer (Layer II) TCP/IP has facilitated the
transfer of bits across the different networks, many of which use significantly
different technologies. Furthermore, TCP/IP has also enabled a technical
separation of the network layer from the service layers above it (Layers III to
V). This has meant that service providers need not own nor control their own
networks, but can depend on network services bought on the market from network
operators. In this way, TCP/IP has allowed the possibility of vertical
specialisation between the different layers, enhancing the potential for
specialist facilities-less service providers to emerge and prosper. Whether in
practice this occurs will depend on a number of other determinants surrounding
the costs and benefits for:
- network operators integrating into the service layers
- service providers integrating 'backwards' into the network layer
- specialist facilities-less service providers deciding whether to
stay put in the services layer.
It may be concluded, therefore, that the TCP/IP interface and its
widespread adoption in most networks (including, most recently, mobile
networks) constitutes a radical structural change in the industry. It has
facilitated new forms of industrial organisation while creating the possibility
of new layers in the industry with new products and services, and new company
players. (See Key Questions for further
details.)
Proceed to Map Diagrams
Layer III: The End-To-End Connectivity Layer
The companies active in this layer provide services such as e-mail,
internet access, voice over the internet (Voice IP), web hosting, intranet and
extranet-related services, virtual private network services and mobile
services. Many players in Layer III are network operators, active in Layer II,
who have vertically integrated 'forwards' into the end-to-end connectivity
layer. However, specialist facilities-less service providers also compete in
Layer III and some specialise only in this layer. These include, for example,
internet access providers (IAPs) and internet service providers (ISPs) that
offer connectivity-related services but, apart from a few switches, may have
very little of their own networks, preferring to buy network services from
network operators in Layer II. Also included are resellers who sell
connectivity in retail markets having bought it from others wholesale. These
resellers are essentially involved in arbitrage and do not own nor control
their own networks.
Proceed to Map Diagrams
Layer IV:
Navigation and Middleware Layer
The services provided in Layer IV figuratively 'sit on top of' the
connectivity that has been provided in Layer III. These include
navigation-related services that allow users to find their way around the
connected networks of the internet and locate further services.
Navigation-related services include browsers, search engines and portals, made
possible by the advent in 1990 of the World Wide Web (again see Janet Abbate's
book in Site Bibliography). They also
include more conventional services like directory assistance and yellow pages.
'Middleware' is also located in Layer IV. This is primarily
software-related services that 'sit' between the connectivity layer (Layer III)
and the applications layer (Layer V). Examples of middleware products include
security systems, such as firewalls used to protect web sites, and electronic
payment systems.
A notable feature of Layer IV is the prominent role played by a large
number of recently established, venture capital financed, high-tech firms,
usually starting from a very small size and independent of more established
firms. These companies are also facilities-less. Examples include Netscape,
Yahoo, Lycos, Excite and a host of software companies that provide specialist
middleware products. Many of these companies, internet-related in the minds of
investors, have achieved extremely high market capitalisations as a result of
rapidly appreciating share prices. It seems then that it is the new entrants
who have performed best in the navigation part of Layer IV, rather than the
larger established computer hardware and software companies, and the telecoms
equipment companies. This carries important lessons regarding the flexibility
and speed of response of the latter players and their ability to envision new
opportunities.
Proceed to Map Diagrams
Layer V: The
Applications Layer
With networks, connectivity, navigation and middleware being provided,
it is possible for applications to be developed and distributed. These
applications include the creation and packaging of content. Examples of
services provided in this layer include:
- video-on-demand
- electronic-commerce services such as on-line shopping, banking and
auctions
- social services such as on-line health and educational services
- web design
- mobile phone services such as stock market prices, news and weather
- premium services such as racing results
- data bases
- broadcast
Examples of companies and services that have a notable presence in Layer
V include AOL/Time Warner, Microsoft's MSN, NTT DoCoMo's i-mode internet mobile
service, Bloomberg, Reuters and broadcasters such as News Corp.
Proceed to Map Diagrams
Layer VI: The Customers
At the top of the five layers are the customers. We think it important
to envision the customers as constituting a discrete layer, although this is
not the usual practice in layer models. It should be noted that customers
include not only those purchasing the final telecoms goods and services, but
also 'intermediate customers' who purchase intermediate products and services.
These include, for example, the specialist facilities-less service providers
who are customers buying network services from the network operators.
There are several reasons for customers being seen as constituting a
distinct layer. The most important reason is that in most layer models of the
telecoms and computer industries customers are implicitly conceived of as the
silent, passive recipients of the output provided by the various layers. This
implicit conception, however, contrasts markedly with reality.
In practice, customers as active users often provide not only market and
non-market mediated feedback to suppliers but also at times directly shape
changes. In this way they can play an important role in bringing about
evolutionary change in the telecoms, as in other, industries. In
Defining Visions there are noteworthy
examples showing how the future needs and wants of customers have been grossly
misunderstood. Janet Abbate has carefully analysed the crucial role that
customer/users of ARPANET and the Internet have played in shaping the
evolutionary path of the internet and its many applications.
Another reason for seeing customers as a separate layer is that, just
as with the other layers, their consumption and usage of products and services
'sit on top of', and are dependent upon, the activities of the layers that lie
beneath them. Moreover, given the role of customers as industry shapers and an
important source of learning and innovation, there is a similar interdependence
between the customer layer and the lower layers. Finally, it is hoped that by
explicitly incorporating customers as a layer their crucial role can be
highlighted, thereby facilitating steps to integrate them more constructively
into the evolutionary development of the industry.
Companies' Specialisation By
Layer
In the third map diagram the companies
involved in the telecoms industry are divided into five categories based upon
their activities in each of the five layers. The five categories of player are:
- Incumbent telecoms companies
- New facilities-based operators
- Specialist facilities-less service providers
- IT companies including hardware and software
- Specialist telecoms technology suppliers
Important questions relating to the strategies and future performance
of
companies in these five categories are analysed in
Key Questions and in
Martin Fransman's paper "Evolution
of the telecoms industry into the Internet Age" in the Articles Zone.
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