The Economics of the Internet and the Digital Economy: Guy Judge, February 2009 Lecture 2 The growth and development of the Internet: history, infrastructure, institutions and protocols. The Economics of the Internet and the Digital Economy ENET (U10988)
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1 The Economics of the Internet and the Digital Economy: Guy Judge, February 2009
Lecture 2The growth and development of the Internet: history, infrastructure, institutions and protocols.
The Economics of the Internet and the Digital EconomyENET (U10988)
The Economics of the Internet and the Digital EconomyENET (U10988)
2 The Economics of the Internet and the Digital Economy: Guy Judge, February 2009
to inform you about the important stages in the development of the Internet, the applications that run on it and the associated protocols
to familiarise you with some key points about the technical infrastructure of the Internet
to highlight the role of some key people and organisations
to look at the growth of the Internet and consider factors (especially economic ones) that can account for this growth
Today’s objectivesToday’s objectives
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1. Rohlfs, J H (2003) Bandwagon effects in high-technology industries. MIT Press, Cambridge, MA, especially chapters 5, 13 and 14.
2. Rohlfs, J H (2001) Bandwagon effects and the Internet. Strategic Policy Research Inc. http://www.spri.com/pdf/reports/its2001/jhrbandwagonpaper.pdf
3. Varian, H R, Farrell, J and Shapiro, C (2004) The Economics of Information Technology: An Introduction. Cambridge
4. Odlyzko, A (no date) The current state and likely evolution of the Internet. http://www.research.att.com/~amo
5. Greenstein, S (2003) Jumping on bandwagons. http://www.kellogg.northwestern.edu/faculty/greenstein/images/columns.html
ReadingReading
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Practical 21 explanation of some key terms and consideration
of their relevance to our understanding of the growth and development of the Internet
2 identification of the role of some key people3 identification of the role of some key
organisations4 Internet metrics issues
Follow up work for the weekFollow up work for the week
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the Internet and the World Wide Web are not the same thing
the importance of protocols - the standards or set of rules that enable computers to communicate with each other
the adaptable nature of the Internet and its institutions
The importance of network externalities and complementary bandwagon effects for the take off of the Internet
Some points from last weekSome points from last week
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The Internet is an interconnected set of computer networks across the globe that work together under a common set of rules or protocols (the TCP/IP suite).
“The name Internet refers to the global seamless interconnection of networks made possible by the protocols devised in the 1970s, the Internet protocols, still in use today.” (Vint Cerf, 1995)
The InternetThe Internet
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Internet backbone networks, ISP etc.Internet backbone networks, ISP etc.
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From ARPANET to InternetFrom ARPANET to Internet
1969 ARPANET - a single network with 4 nodes (funded from US Defense budget)
1973 work began on linking networks “Internetting”; first international links to UCL and Norway
1985 NSF takes over the backbone for interlinking networks (still government funded but by now more academic than military)
1995 NSF funding stops - commercial companies take over the Internet - by then it consists of over 50,000 networks connecting over 5 million computers
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The original ARPA networkThe original ARPA network
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Internet traffic (2005) as depicted by TeleGeography Inc.Internet traffic (2005) as depicted by TeleGeography Inc.
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A more detailed depiction of Internet traffic from TeleGeography Inc. (2006)A more detailed depiction of Internet traffic from TeleGeography Inc. (2006)
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A protocol is an agreement (set of rules) between the communicating parties (peers) on how communication is to proceed.
ProtocolsProtocols
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Q Why is it important?A It enables computers on different
networks, designed by different vendors, to work together in delivering various applications; e.g. e-mail, file transfer, remote login (telnet), use of the web etc.
TCP/IP was the key to turning the Arpanet into the Internet
The TCP/IP suiteThe TCP/IP suite
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1964 Paul Baran (RAND Corporation) publishes paper on packet-switching networks
1974 Vint Cerf and Bob Kahn publish paper describing TCP
1978 Vint Cerf and others separate the TCP and IP functions
TCP/IP key datesTCP/IP key dates
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Early core applications File Transfer FTP (SSH is usually now preferred) Terminal access (remote login) Telnet Electronic mail (E-mail) SMTP, POP3 Newsgroups Usenet The World Wide Web HTTP
More recent Internet applications include: chat systems, instant messaging, videoconferencing, video and audio streaming, Voice over Internet, peer-to-peer file-sharing, IPTV etc. They all have their associated protocols.
Internet applications and their protocolsInternet applications and their protocols
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Every computer on the Internet has a unique IP address - under the currently dominant
IPv4 system it consists of four numbers separated by dotse.g. 198.137.240.100identifies the main host computer at the White House
Because of the massive growth of the Internet the new IPv6 system has been introduced
The IP addressThe IP address
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The State University of New York at Stony Brook provides a service whereby you can find out the IP number of the Internet computer you are connected to.
http://www.sinc.sunysb.edu/cgi-bin/MyIP
Why not try it?
Find your IP numberFind your IP number
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DNS is the hierarchical domain-based naming scheme and distributed database system for mapping host names and e-mail destinations to IP addresses.
Domain names are easy (for humans) to remember names for the computers on the Internet i.e. those that have been assigned IP numbers
DNS - Domain Name System (1)DNS - Domain Name System (1)
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ICANN (Internet Corporation for Assigned Names and Numbers) coordinates the assignment of IP numbers and Internet domain names.
http://www.icann.org/
DNS - Domain Name System (2)DNS - Domain Name System (2)
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The top level domain covers two identifiers, separated by a dot
generic type or group (gTLD)- e.g. .com, .ed (or .co and .ac)
country codes (ccTLD) - e.g. .uk, .nl, .jp, .cn
DNS - Domain Name System (3)DNS - Domain Name System (3)
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Sub-domains can then be created lower down the hierarchy by those responsible for that levele.g. userweb.port.ac.uk
ICANN has recently (June 2008) announced a relaxation of the system of domain names
DNS - Domain Name System (4)DNS - Domain Name System (4)
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Access to remote information (e.g. data sources, e-commerce, video on demand)
Person to person communication (e.g. e-mail, videoconferencing)synchronous and asynchronous links
The Internet puts you in touch with resources and peopleThe Internet puts you in touch with resources and people
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via copper wires cable fibre optics microwaves (radio frequency) communication satellites
Network connectionsNetwork connections
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architecture is a set of layers and protocols
the purpose of a layer is to carry out services for the higher layer in a way that is transparent to the higher layer
layers communicate with their peers according to known protocols
between layers there is an interface
Network architectureNetwork architecture
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layers need to identify senders and receivers have rules for communication (protocols) know about different available routes have conventions about speed identify and correct errors
Design issues for layersDesign issues for layers
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Local Area Networks (LAN) Wide Area Networks (WAN) internets
Tanenbaum also distinguishes Home Networks, Wireless Networks and Metropolitan Area Networks (e.g. based on cable TV)
Size classification of networksSize classification of networks
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client-server modelclient-server model
different software models:
• fat client software• thin client software• Software as a Service
(SaaS) • cloud computing
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E-mail client software - examples Outlook Pegasus Eudoraalso web based e-mail systems such as Gmail, Hotmail, Yahoo!
E-mail clientsE-mail clients
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Simple Mail Transport Protocol (SMTP) (outgoing mail) encodes every e-mail message as a sequence of ASCII characters
Used to send e-mail messages from one server to another. Messages can be retrieved with an e-mail client using POP or IMAP protocols
Multipurpose Internet Mail Extension (MIME)specifies how non-text may be transmitted by SMTP
E-mail protocolsE-mail protocols
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1971 - Ray Tomlinson of Bolt Beranek and Newman Inc. (BBN) invents the first e-mail program to send messages across a distributed network
1972 - Tomlinson adapts the program to run on ARPANET where it is immediately taken up with enthusiasm
1975 - John Vittal develops MSG, the first widely available e-mail program
1978 – the first incidence of “spam”!
Key dates in the evolution of the Internet: Electronic MailKey dates in the evolution of the Internet: Electronic Mail
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The World Wide Web is a collection of inter-linked documents and associated files that are made available to people with computers connected to the Internet via a special protocol called
HTTP (HyperText Transfer protocol)
World Wide Web (WWW)World Wide Web (WWW)
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1965 Theodore (Ted) Nelson sets up project XANADU to establish a world-wide distributed library of information - he was the first to use the term hypertext (earlier inspiration from Vannevar Bush [1945])
gopher system developed at University of Minnesota
mid 1980s - hypertext packages such as HyperCard (1987) and Guide were developed
Key dates in the evolution of the Internet - precursors of the World Wide WebKey dates in the evolution of the Internet - precursors of the World Wide Web
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1989 - creation of the World Wide Web and HTTP at CERN(Geneva) by Tim Berners-Lee and others
1993 - first publicly available web browser (MOSAIC) developed at NCSA
1990s - new browsers (Netscape, IE) - with helper applications and plug-ins for dealing with graphics, video etc.
1994 - W3C, the World Wide Web Consortium set up
2004 - Firefox launched by the Mozilla Foundation
2008 - Google launches its browser Chrome
Key dates in the evolution of the Internet - the World Wide WebKey dates in the evolution of the Internet - the World Wide Web
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Sir Tim Berners-LeeSir Tim Berners-Lee
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telnet allows you to login to other remote computers on Internet to which you have access rights
e.g. I used to log in to the MIMAS computer at Manchester from Portsmouth using telnet to access data and to run econometrics programs
remote access or terminal emulation telnet
remote access or terminal emulation telnet
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transferring files from computer to computer on the Internet
FTP File Transfer Protocol - first established 1971
FTP and FTP client software (e.g.. WS_FTP32)anonymous FTP
today more secure protocols such as SSH are preferred
file transferfile transfer
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There is no single body in overall charge, but the following all have important roles
ICANN (Internet Corporation for Assigned names and Numbers) – manages domain names and IP addresses
UN (United Nations) – World Summit on the Information Society (WSIS) and the Internet Governance Forum (IGF)
ISOC (The Internet Society) – also the Internet Engineering Task Force (IETF)
W3C (World Wide Web Consortium)
We should perhaps also mention the regulators Ofcom (UK) and FCC (US)
Internet organisations and agenciesInternet organisations and agencies
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Many people have argued that the Internet should not be governed by a private (US) company (ICANN) but by a multilateral organization with international legitimacy and democratic processes – under United Nations control like the ITU (International Telecommunications Union) – some have suggested that the ITU should take over some of the functions of ICANN.
Kofi Annan set up a group called the Working Group on Internet Governance (WGIG) which presented a report to the second World Summit on the Information Society, be held in Tunisia in November 2005. Now available in book form “Reforming Internet Governance” http://www.wgig.org/book-Launch.html
Internet organisations and the United NationsInternet organisations and the United Nations
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The Internet Software Consortium conducts a semi-annual survey of the number of Internet hosts (see next slide).
But Zook (2000) cautions us about using this measure uncritically
Internet metricsInternet metrics
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Source: International Telcommunications Union website, accessed 15th August 2007. http://www.itu.int/ITU-D/ict/statistics/at_glance/KeyTelecom99.html
The global number of Internet Users, 1991-2004
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Source: Bandwagon effects in High-Technology Industries, Jeffrey H Rohlfs, MIT Press 2001
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Other measures: capacity, web pages There are problems with all these metrics
(see my links page for more details). But despite these concerns there is no
doubt that there has been phenomenal growth in the Internet and its use - particularly since around 1994 - WHY?
Internet metricsInternet metrics
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Some important concepts (see Rohlfs)Some important concepts (see Rohlfs)
Network externalities Complementary bandwagon effects Interlinking Interoperability Common standards and protocols Critical mass
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Network externalities - the value of the Internet to any one user is an increasing function of the total number of users [Rohlfs]
Complementary bandwagon effects - part of the value of the Internet derives from the availability of complementary products, services and applications (e-mail, web browsers, news and information services etc..) As the network expands there are increased incentives for the suppliers of complementary products [Clements (2004) calls this an indirect network externality]
eCommerce – opening up of the Internet to eCommerce in 1994 - despite the hype and the bursting of the dot.com bubble the Internet continues to grow and expand into new areas
Ease of use – the World Wide Web, HTML and browsers
Reasons for the rapid growth of the Internet and its useReasons for the rapid growth of the Internet and its use
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Varian (2004) interprets the Internet boom of the late 1990s as an example of “combinatorial innovation” – “components in the new technology can be combined and recombined to create new products” (Weitzman (1998) had used the term “recombinant growth”). Similar ideas go back as far as Schumpeter (1934).
Standardisation (allowing interchangeable parts) is an important part of such processes - as had occurred before, for example with the production of automobiles. Complementary products had been important then too (e.g. roads, gasoline, oil) – indirect network effects.
But unlike physical products Internet innovation was based on recombining software code, which due to the open source approach that was usually adopted, were not constrained by shortages of inputs.
“combinatorial innovation” and “recombinant growth”“combinatorial innovation” and “recombinant growth”
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Metcalfe’s Law - the value of the Internet to any one user increases as the square of the total number of users.
DeLong’s Law - the most important and cheapest links are established first and it becomes increasingly costly to connect the last few users – also on the demand side those who believe they can benefit most and so have the greatest WTP connect first.
Metcalfe’s “law” or DeLong’s “law”Metcalfe’s “law” or DeLong’s “law”
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Lower transactions costs - automated systems can vastly reduce transactions costs
Global reach - more customers are within “reach” (especially for information products that can be delivered as well as ordered and paid for over the Internet
E-commerce and e-banking driversE-commerce and e-banking drivers
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Source: PIU Report on e-commerce
Reduction in transactions costsCost to bank - typical US funds transfer transaction ($)Reduction in transactions costsCost to bank - typical US funds transfer transaction ($)
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Convergence, transition and diffusionConvergence, transition and diffusion
Convergence: Internet, telecoms, TV, etc. Transition: dial-up to broadband; voice (circuit
switched) to data (packet switched) traffic; fixed (wires) to mobile (wireless); analogue to digital, broadcast to on demand; passive downloading to interactive and user-generated content
Diffusion of Internet access across the globe and within countries – but still a digital divide? Negroponte’s $100 laptop and UN’s mobile phone initiatives
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Internet diffusion and the digital divide (1)Internet diffusion and the digital divide (1)
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Internet access is more unequally spread than income
Top 20% of people (by income share) have86% of GDP93% of Internet access
Bottom 20% of people (by income share) have1% of GDP0.2% of Internet access
United Nations Human Development Report, 1999
Internet diffusion and the digital divide (2)Internet diffusion and the digital divide (2)
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To what extent can the phenomenal growth of the Internet in the last decade be explained by economic factors? Use relevant economic concepts and models to support your arguments.
Hints: You would need to include the following concepts:
(i) network externalities (ii) complementary bandwagon effects (iii) critical mass (iv) interlinking (v) common standards and protocols
You would also mention eCommerce, and possibly file-sharing, Web 2.0 and other applications giving rise to complementary bandwagon effects