Economic Analysis of Telecom 1

Supply and Demand Analysis in Convergent Networks
by
Craig Thompson
Bachelor of Engineering !onors"
#niversity of New South $ales% &''(
S#B)*TTED T+ T!E S,+AN SC!++, +- )ANA.E)ENT *N /A0T*A, -#,-*,,)ENT
+- T!E 0E1#*0E)ENTS -+0 T!E DE.0EE +-
)ASTE0 +- B#S*NESS AD)*N*ST0AT*+N
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)ASSAC!#SETTS *NST*T#TE +- TEC!N+,+.2
3#NE 455&
6 455& Craig Thompson7 All rights reserved
The author hereby grants to )*T permission to
reproduce and to distribute publicly paper and electronic
copies of this thesis document in whole or in part7
Signature of Author8 9999999999999999999999999999999999999999999999999999999999999
Department of )anagement
April '% 455&
Certified by8 9999999999999999999999999999999999999999999999999999999999999999999
Charles !7 -ine
Chrysler ,-) /rofessor of )anagement
Thesis Supervisor
Accepted by8 9999999999999999999999999999999999999999999999999999999999999999999
)argaret Andrews
E:ecutive Director of the Sloan )BA /rogram
Supply and Demand Analysis in Convergent Networks
by
Craig Thompson
Submitted to the Sloan School +f )anagement on April '% 455& in
/artial -ulfillment of the 0e;uirements for the Degree of )aster +f
Business Administration
Abstract
This thesis e:amines the issue of bandwidth supply and demand in converging communications
networks7 Bandwidth is defined as the amount of data that can be transmitted in a fi:ed amount of
time% and is usually e:pressed in bits<per<second7 The huge growth in data communications as a
result of the growth in the *nternet% other public and private data networks% the continued growth
in voice traffic and the potential introduction of bandwidth<intensive services such as =ideo<on<
Demand% has raised some interesting ;uestions about the dynamics of supply and demand in the
ne:t generation of communications networks7
$hile many estimates e:ist for bandwidth supply and demand% there is still confusion about the
relationship between terms such as >offered load?% >network capacity?% >backbone traffic? and
>bandwidth supply?7 This thesis aims to discuss these topics in conte:t with each other and
introduce a model and framework for reconciling bandwidth supply and demand7
Current estimates for 4554 backbone traffic range from 4(%@55 to A@%555 terabitsBday% depending
on the services covered7 Estimates for traffic generated at the edge of the network are often much
higher CD5%555 E D55%555 terabitsBday depending on the services covered and the definition of
edge demand" as it is thought that much of the edge demand is localiFed and doesn?t make it onto
the backbone7 These figures e;uate to an average >peak hour? rate of appro:imately &5
terabitsBsec7 Because of the variability of such estimates% this thesis maintains that it is more
important to test scenarios and sensitivity of bandwidth to service adoption in percentage terms%
and to think more about the problem in terms of the dynamics of supply and demand of individual
services over a common network infrastructure7
Supply and Demand Analysis in Convergent Networks /age 4
6 455& Craig Thompson7 All rights reserved7
Chapter & of the document provides a broad introduction to network communications% its growth
and development in recent years and the importance of developing economic frameworks for
analyFing the industry7 The term >bandwidth? is defined and the concepts of >supply? and
>demand?% as they pertain to bandwidth% are introduced7
Chapter 4 provides a discussion of >Bandwidth Demand?7 Since the term is often used ;uite
loosely throughout the industry a standard definition has been adopted for the purposes of
research and discussion in this thesis7 The term >Bandwidth Demand? is used to describe the
>Edge ,oad?% or >+ffered ,oad? presented to the edge of the network7 This is most commonly
thought of as the load presented by end<user devices telephones% computers% T=s" to the access
level devices routers% switches% multiple:ers" of telecommunications and data networks7 /ossible
drivers of bandwidth demand are discussed% and economic tools for describing demand are
introduced7
Chapter C follows directly from Chapter 4 and introduces an Edge Demand model that is used to
forecast Edge Demand and illustrate key concepts such as services adoption% service draw% and
peak vs average offered load7 The model is described and the sample results are presented to
illustrate the usefulness and drawbacks of such a forecasting techni;ue7
Chapter ( e:pands on the concept of >Bandwidth Supply?7 Network Capacity% used as measure of
Bandwidth Supply% is discussed relative to Edge Demand7 A brief introduction to networking
technologies is given before discussing the drivers of Bandwidth Supply scaling7
-inally% Chapter D attempts to reconcile the two concepts of Bandwidth Supply and Demand by
using basic economic theories and tools to analyFe the dynamic interaction between Supply and
Demand7 .iven the comple:ity of supply and demand interaction in an industry with such a high
state of flu:% the two concepts of supply and demand were analyFed separately in previous
chapters7 This chapter attempts to link the two concepts through relatively simple supply and
demand curves incorporating price data and the ;uantity of bandwidth demanded and supplied in
local access connections7
Thesis Supervisor8 Charles !7 -ine
Title8 Chrysler ,-) /rofessor of )anagement
Supply and Demand Analysis in Convergent Networks /age C
Acknowledgements
* would like to thank all those people that contributed to the thought process in this thesis7 *n
particular * would like to acknowledge the contributions of 0yan Berryman% 0aGeev 0am and
Naresh 0ao who spent a considerable amount of time discussing the issues raised in this thesis7
+ther people to thank include the 0esearch Assistants and -aculty of the )icrophotonics Center
at )*T and my thesis advisor /rofessor Charles -ine7
-inally * would also like to thank those people that were directly affected by the time spent
bringing this thesis together% particularly my wife ,ianne and family7 Thank you for your
tremendous support% patience and time<credit7
Craig Thompson
Supply and Demand Analysis in Convergent Networks /age (
Table of Contents
Abstract77777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777 4
Acknowledgements77777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777(
Table of Contents77777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777D
-igures and Tables7777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777A
Chapter &8 *ntroduction77777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777 @
*ndustry Background77777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777@
The Converging Network7777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777'
$hat is bandwidthH77777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777&5
Shannon?s ,aw and the Time<Bandwidth /roduct77777777777777777777777777777777777777777777777777777777777&&
Bandwidth in Circuit<Switched and /acket<Switched Networks77777777777777777777777777777777777777&&
$hy are Bandwidth Supply and Demand *mportantH7777777777777777777777777777777777777777777777777777777777&4
Current Estimates for Bandwidth Supply and Demand77777777777777777777777777777777777777777777777777777777&4
Coffman% +dlyFko ATIT ,abs% &''@777777777777777777777777777777777777777777777777777777777777777777777777777777&(
Core +ptical Networks% /ioneer Consulting% 45557777777777777777777777777777777777777777777777777777777777&D
BackboneJ % )cKinseyB3/ )organ% Sep7 455577777777777777777777777777777777777777777777777777777777777777777&D
0!K E D$D) market -orecast% )arch 45557777777777777777777777777777777777777777777777777777777777777777&L
Chapter 48 Bandwidth Demand777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777&A
Edge Demand and Network Capacity7777777777777777777777777777777777777777777777777777777777777777777777777777777777&A
Drivers of Bandwidth Demand777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777&@
Declining CostB/erformance of Computing777777777777777777777777777777777777777777777777777777777777777777777&'
.rowth of Digital *nformation77777777777777777777777777777777777777777777777777777777777777777777777777777777777777777&'
Bandwidth /ricing77777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777&'
Broadband Access Adoption777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777774&
New Services Adoption77777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777774C
Changing Culture77777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777774(
=oice Traffic .rowth7777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777774L
Data Traffic .rowth77777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777774A
*nternet Services777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777774@
$ireless *nternet777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777774@
Corporate Data and E<Commerce7777777777777777777777777777777777777777777777777777777777777777777777777777777777774'
Chapter C8 Services Adoption and .rowth )odel77777777777777777777777777777777777777777777777777777777777777777777C&
0esults7777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777 CC
+ffered ,oad77777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777 CC
Average vs /eak ,oad777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777C(
)odel Description7777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777CD
Services7777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777 CL
Adoption 0ates7777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777C@
Chapter (8 Bandwidth Supply777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777(&
0elationship between Edge<Demand and Network Capacity77777777777777777777777777777777777777777777777(4
Traffic /enetration7777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777((
Drivers of Bandwidth Supply77777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777(L
0evenue .eneration777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777(A
Cost Savings77777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777(@
Technology Deployment77777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777D5
Supply and Demand Analysis in Convergent Networks /age D
*ndustry 0egulation7777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777D4
Capital Availability7777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777D4
Chapter D8 Dynamics of Supply and Demand777777777777777777777777777777777777777777777777777777777777777777777777777DD
Defining the )arket7777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777DL
Calculating /rice Elasticities777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777DA
/rice Elasticity of Demand8 ,ocal Bandwidth77777777777777777777777777777777777777777777777777777777777777777D@
/rice Elasticity of Supply8 ,ocal Bandwidth7777777777777777777777777777777777777777777777777777777777777777777L5
AnalyFing Supply and Demand77777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777LD
Costs% 0evenues and /rofits777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777LD
Conclusion77777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777 LA
.lossary of Terms77777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777LA
Appendi:7777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777 LA
E:ample Adoption 0ates for Services8 0esidential #sers77777777777777777777777777777777777777777777LA
Effective No7 Business #sers777777777777777777777777777777777777777777777777777777777777777777777777777777777777777LA
Aggregated Demand8 0esidential #sers7777777777777777777777777777777777777777777777777777777777777777777777LA
Supply and Demand Analysis in Convergent Networks /age L
Figures and Tables
-igure &8 Comple:ity in analyFing network convergence and evolution77777777777777777777777777777777777777&5
-igure 48 Estimates for Bandwidth Supply and Demand77777777777777777777777777777777777777777777777777777777777777&(
-igure C8 )cKinseyB3/ )organ -orecast of Backbone Traffic77777777777777777777777777777777777777777777777777777&L
-igure (8 0!K Estimates for ATITMs traffic demand7777777777777777777777777777777777777777777777777777777777777777777&L
-igure D8 Edge Demand and Traffic /enetration777777777777777777777777777777777777777777777777777777777777777777777777777&@
-igure L8 *nternet Domain Survey !ost Count777777777777777777777777777777777777777777777777777777777777777777777777777774A
-igure A8 #S .rowth in eCommerce777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777774'
-igure @ /otential effects of migration of spectrum usage from analog to digital services77777777777C4
-igure '8 Bandwidth Demand -orecast77777777777777777777777777777777777777777777777777777777777777777777777777777777777777777CC
-igure &58 Average /eak demand in a Day77777777777777777777777777777777777777777777777777777777777777777777777777777777777CD
-igure &&8 -orecast input parameters for service adoption rates777777777777777777777777777777777777777777777777777C'
-igure &48 )esh Network E:ample7777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777((
-igure &C8 BoundaryBCloud model < conceptual diagram7777777777777777777777777777777777777777777777777777777777777(D
-igure &(8 /rovisioning Costs Between &'@@ and 455&7777777777777777777777777777777777777777777777777777777777777777('
-igure &L8 Scaling of Network Technologies77777777777777777777777777777777777777777777777777777777777777777777777777777777D5
-igure &A8 Carrier CA/EN spending &''L<4555E777777777777777777777777777777777777777777777777777777777777777777777777DC
-igure &@8 Dynamics of Demand .rowth7777777777777777777777777777777777777777777777777777777777777777777777777777777777777DD
-igure &'8 ,og<,og .raph of ,ocal Termination ,ines7777777777777777777777777777777777777777777777777777777777777777D'
-igure 458 .raph of prices relative to total bandwidth demanded7777777777777777777777777777777777777777777777777L5
-igure 4&8 /rices for *nter<office leased line connections% &''5<4555777777777777777777777777777777777777777777LC
-igure 4C8 /rices for Earthlink Broadband Services777777777777777777777777777777777777777777777777777777777777777777777L(
-igure 4(8 Steady<state Supply Curve for Service /roviders77777777777777777777777777777777777777777777777777777777LL
-igure 4D8 /rice<setting and /rofit for a Service /rovider with )arket /ower77777777777777777777777777777LA
-igure 4A8 Demand Shift with Supply777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777LA
-igure 4@8 Cyclical nature of supply and demand in current telecommunications markets77777777777LA
Table &8 Estimates for Bandwidth Supply and Demand7777777777777777777777777777777777777777777777777777777777777777&C
Table 48 *nternet Connection Speeds )arket Share77777777777777777777777777777777777777777777777777777777777777777777774&
Table C8 #S !igh<speed Subscribers by Technology7777777777777777777777777777777777777777777777777777777777777777777744
Table (8 DS,?s Effect on +nline Activities777777777777777777777777777777777777777777777777777777777777777777777777777777777774C
Table D8 Traffic on U.S. long distance networks in terabytes, year-end 1999777777777777777777777777777777774L
Table L8 Average *nternet #se in )arch 455&77777777777777777777777777777777777777777777777777777777777777777777777777777774@
Table A8 #S *nternetB$ireless #sers7777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777774'
Table @8 /eak Demand Distribution7777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777C(
Table '8 Cost of +ptical Technology in Trans<Atlantic Cables77777777777777777777777777777777777777777777777777777(@
Table &58 #S -iber )iles Deployment77777777777777777777777777777777777777777777777777777777777777777777777777777777777777777D&
Table &48 #S Carrier Sales .rowth77777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777DC
Table &C8 Estimates of Supply and Demand Elasticity777777777777777777777777777777777777777777777777777777777777777777DA
Table &D8 /rices of ,ocal Termination ,ines% &''5<45557777777777777777777777777777777777777777777777777777777777777D@
Table &L8 ,eased<line prices relative to total bandwidth demanded7777777777777777777777777777777777777777777777D'
Table &A8 /rices for *nter<office leased line connections% &''5<455577777777777777777777777777777777777777777777L4
Table &'8 /rices for Earthlink Broadband Services77777777777777777777777777777777777777777777777777777777777777777777777L(
Supply and Demand Analysis in Convergent Networks /age A
Chapter 1: Introduction
Industry Background
The idea of a convergent communications network% and the implications of such a network
infrastructure% has been discussed for many years7 To a certain e:tent the concept of a converged
network infrastructure is already being played out in the backbone networks that carry a myriad
of different data% voice and media traffic7 The rapid development of packet switching
technologies% the integration of packet and circuit<switched networks and the rise of fiber optics
as a means of transporting and switching data% are some of the factors that have lead to the
concept of >convergent networks?% and will ensure that the convergence will likely spread to the
edge of the network7
*n general there are a number of current trends that will continue to have a significant impact of
the evolution of the convergent network8
&7 Convergence of different services onto single platformsO
47 *ntroduction of new% bandwidth intensive services e7g7 Napster% =ideo<on<Demand"O
C7 Deploying broadband access to both residential and business marketsO
(7 E:panding network capacity with optical networking systemsO
D7 )igrating the public network from a circuit<based hierarchy to a packet<based network7
The communications networking industry% encompassing the telecommunications% data
networking and media companies% is in a high state of flu: at the present time7 )any of the
technologies and policies underpinning% or preventing% the evolution towards a common%
competitive infrastructure are still in various stages of infancy and will continue developing for
some time7 This flows onto the economics of supply and demand of bandwidth7 During this high
state of flu:% the economics are as e;ually challenging to define7 +ver time% however% it is
e:pected that a more steady state will be reached when technologies% business practices% policies
and economic models can be refined7
Supply and Demand Analysis in Convergent Networks /age @
The Converging etwork
A >Converged Network? is defined as a common network infrastructure on which most or all
communications services% such as voice% the *nternet% digital T=% can be delivered to end<users7
$ith the rise to prominence of the *nternet% as a mainstream medium of information
communication% there has been much talk about the >convergence? of voice and data networks
towards a less<layered% data<centric model based largely on the ideals of the *nternet7 *n the
e:treme of such a view% backbones at all levels of the network would be homogenous pipes of
data packets aggregated at the edges of the network from service<specific access devices such as
telephones% computers% T=s etc7 *n this respect voice traffic and T= signals are Gust other data
streams discriminated in the network by their synchronicity% ;uality of service and price7
$hile the e:tent to which networks will converge is highly contentious% the e:ploration of =oice<
over<*/ and streaming video over the *nternet has laid the groundwork for a converging
infrastructure7 *t is the popularity of such a vision% in various incarnations% that has prompted
much of the surge of capital into research% development and commercialiFation of technologies
that support this convergence7 *n turn this has prompted policy makers and economists to study
the problem of a fundamentally different model of network communications7
This thesis assumes that such a convergence of network services onto a common infrastructure is
inevitable and much of the analysis is based on this assumption7 *n some ways this simplifies the
problem by treating bandwidth supply and demand in its aggregate form7 *n most ways% however%
this assumption presents problems when trying to collect data and define frameworks for thinking
about a common network that doesn?t really e:ist today7 *n reality a huge number of defining
factors will come into play to shape the future of any network convergence including government
regulation% economics and competitive forces% and technology advances7
Supply and Demand Analysis in Convergent Networks /age '
-igure &8 Comple:ity in analyFing network convergence and evolution
!hat is bandwidth"
Before e:amining bandwidth supply and demand% it is useful to define what >bandwidth? is7
According to $ebopedia% bandwidth is8 PThe amount of data that can be transmitted in a fi:ed
amount of time7 -or digital devices% the bandwidth is usually e:pressed in bits per second bps" or
bytes per second7 -or analog devices% the bandwidth is e:pressed in cycles per second% or !ertF
!F"7Q
&
The term is often used ;uite loosely and in strict scientific terms means something slightly
different7 -or the purposes of this thesis% the term >bandwidth? will be used in the conte:t defined
above since it is useful to think of both demand pull and supply capacity in terms of bits<per<
second7
&
www7webopedia7com
Supply and Demand Analysis in Convergent Networks /age &5
#hannon$s %aw and the Time&Bandwidth 'roduct
$ithout going into specifics about the technical differences between the definitions of bandwidth%
it is also useful to know that bandwidth is not unlimited7 Claude Shannon developed >Shannon?s
,aw? to describe the theoretical ma:imum rate at which error<free digits can be transmitted over a
bandwidth<limited channel in the presence of noise7 This is usually e:pressed in the form C R W
log4& S S BN "% where C is the channel capacity in bits per second% W is the bandwidth in hertF%
and S BN is the signal<to<noise ratio7
The Time<Bandwidth /roduct% another esoteric term of physics% is also necessary to understand
the limits of >bandwidth?7 The e;uation% which essentially states that the spectral width of a signal
is inversely proportional to the bit<duration% ensures that there is a theoretical ma:imum bit<rate
that can be transmitted in a >bandwidth<limited? domain7 This produces theoretical limits of fiber
capacity of between &4 and &L Terabits per second depending on multiple:ing schemes7
Bandwidth in Circuit&#witched and 'acket&#witched etworks
The usage of bandwidth in circuit<switched and packet<switched networks is fundamentally
different and worth defining in the conte:t of a convergent network in which a mi:ture of these
technologies is likely to be implemented7
/acket Networks% such as the *nternet% offer a single% >best effort? service ;uality7 *nformation is
broken up into packets and are transported first<come% first<served with no guarantee of success7
Some packets may e:perience severe delays% while others may be dropped and never arrive7
Different kinds of data% however% place different demands on network services7 E<mail and file
transfers re;uire &55T accuracy% but can easily tolerate delay7 0eal<time communications on
packet networks such as voice transmission or audioBvideo can tolerate lost packets and
distortions but can only tolerate minor delays and latency7 .ood >1uality of Service? 1oS"
relates to the appropriate delay% latency% and variability of data transmission for each service7
)ost importantly% packet networks are very efficient7 Because the bandwidth is shared between
many >hosts? or users and packets can carry a vast array of data% the utiliFation of the available
bandwidth is very high7
Circuit<switched networks such as current voice telephony networks handle the ;uality of service
problem by assigning each call a physical circuit with fi:ed resources sufficient to guarantee a
Supply and Demand Analysis in Convergent Networks /age &&
minimal ;uality of service7 +ne limitation of this scheme is that the amount of resources devoted
to each call% or circuit% is devoted to that service for the duration of the connection regardless of
whether someone is speaking or not7 As discussed above% packet networks take the approach of
sharing all resources% all of the time% which accommodates the wildly varying bandwidth
re;uirements of different applications% often at the e:pense of 1oS7
Today% much of the development in networking technology revolves around hybrid approaches
that use both circuit<switching and packet<switching to achieve e:cellent network efficiency AND
guaranteed 1oS7 A hybrid approach to offering different resources% along with guarantees% to
different users would be to allow fle:ible% dynamic resource reservation7 A user can declare how
much bandwidth% what ma:imal delay and what type of delay variation they re;uire for a given
session7
!hy are Bandwidth #upply and (emand Important"
*n recent times% many estimates of bandwidth supply and demand have been attempted7 The surge
in the value of communications real and perceived"% the financial returns of networking
companies and corresponding investment in the industry prompted many organiFations to focus
on the siFe of the opportunity at hand7 This re;uired a solid understanding of the current and
potential >demand? for the products of this industry e:pansion% the current and potential >supply?
of these products% i7e7 bits<per<second to the end<user7
Current )stimates for Bandwidth #upply and (emand
Table & and -igure 4 below summariFes the results of some of the network traffic studies
conducted recently7
There are several methodologies to estimate future demand for bandwidth7 $hile none of these
methodologies is likely to provide all the answers% each one contributes to developing a more
complete picture of the future7 *n this section% we provide the analysis of those methodologies
Supply and Demand Analysis in Convergent Networks /age &4
used in recent reports published by several research institutes e:pressing future bandwidth
demand7
Table &8 Estimates for Bandwidth Supply and Demand
Supply and Demand Analysis in Convergent Networks /age &C
Source and date Comments
Year Units
Year
Units
Andrew dly!ko of AT"T
#esearc$ %&'''( 1999
)*'''-
+,*'' T-ytes.mont$ 1999
1+///-
190)) Tbits.day Total US 1oice and 2ata Traffic
3ioneer Consulting %&'''( 1999 '.// Tbits.sec 1999 &0*1& Tbits.day
US -ackbone 3eak 4our 5nternet-
based traffic only
&'''6 '.99 Tbits.sec &'''6 0**/) Tbits.day
&''16 &.+0 Tbits.sec &''16 &,'19& Tbits.day
&''&6 ).11 Tbits.sec &''&6 *&+9', Tbits.day
&''/6 11.9& Tbits.sec &''/6 1'&9000 Tbits.day
&'',6 1+.9& Tbits.sec &'',6 1*,0&00 Tbits.day
7c8insey.93 7organ
%&'''( 1999 9' 3-ytes.mont$ 1999 &,''' Tbits.day
US -ackbone 1oice and 2ata
Traffic. Source: ;CC, AT"T,
UU<et, 52C
&'''6 1&* 3-ytes.mont$ &'''6 ///// Tbits.day
&''16 10, 3-ytes.mont$ &''16 ,9')+ Tbits.day
&''&6 &9* 3-ytes.mont$ &''&6 +0))+ Tbits.day
&''/6 *'9 3-ytes.mont$ &''/6 1/*+// Tbits.day
&'',6 9*' 3-ytes.mont$ &'',6 &*//// Tbits.day
#48 5nc %1999( 1990 0'/ T-ytes.day 1990 ),&, Tbits.day
US -ackbone 1oice and 2ata
Traffic -ased on AT"T figures
19996 1''' T-ytes.day 19996 0''' Tbits.day
&'''6 1/'' T-ytes.day &'''6 1','' Tbits.day
&''16 10'' T-ytes.day &''16 1,,'' Tbits.day
&''&6 /1'' T-ytes.day &''&6 &,0'' Tbits.day
&''/6 )9'' T-ytes.day &''/6 **&'' Tbits.day
7C5 %199)( 199) &*' T-ytes.mont$ 199) )+ Tbits.day
7C5 backbone only, &'-/'= market
s$are at time
Stated 6stimate 6>ui?alent 6stimate
-igure 48 Estimates for Bandwidth Supply and Demand
Coffman* +dly,ko AT-T %abs* 1../
Coffman and +dlyFko predicted that while growth rates of the *nternet are lower than often
;uoted% the natural growth rate appears to be around &55T per year7 They also state that if the
present trend continues% data traffic in the #S will overtake voice traffic around the year 4554%
and will be dominated by the *nternet7
*n &''' in TeraBytesBmonth"8
#S voice (@%555
*nternet &5<&L%555
+ther /ublic Data Networks 4%555
/rivate ,ine D%555 < @%D55
Supply and Demand Analysis in Convergent Networks /age &(
Bandwidth (emand )stimates
'
1'''''
&'''''
/'''''
,'''''
*'''''
)'''''
0ear
T
e
r
a
b
i
t
s
1
d
a
y
AT"T
AT"T &
3ioneer
7c8insey.937
#48
7C5
Core +ptical etworks* 'ioneer Consulting* 2333
/ioneer used the adoption of *nternet<related technologies% such as email% web and =oice<over<*/7
The firm estimated that the plateau for the number of *nternet users would be about two thirds of
the #7S7 population7
The /ioneer Bandwidth Demand )odel is based on content demand and it employs three
variables8
&" The number of *nternet applicationsO
4" The associated bandwidth of those *nternet applicationsO and
C" The percentage of all online time spent on those applications7
The model is based on a set of si: applications8 email% static web pages% dynamic web pages% */
Telephony% -T/BTelnet and multi<media applications7 Each of these applications has an
associated optimal bandwidth rate7
The calculation for bandwidth demand is as follows8
Average bandwidth re;uired by *nternet users per month R
Sum of T of all time online using app U&" : accessible bandwidth of appU&" SV VS T of all
time online using app Un" : accessible bandwidth of appUn"
Backbone4 * 5c6insey17' 5organ* #ep8 2333
According to )cKinsey and 3/ )organ% using data from ATIT% traffic on long haul networks is
e:pected to grow be L5T per year over the ne:t D years7 @5T of all traffic on the backbone will
be */<based traffic and is growing at '5<&45T annually over the ne:t few years7 *nternet traffic is
doubling every three to si: months7 =oice traffic will fall to &5T or less while data traffic will
climb to the remaining '5T or more7
Supply and Demand Analysis in Convergent Networks /age &D
)ost studies of data and voice networks have mostly concentrated on long<haul traffic and ignore
the significant edge<load placed by local services7 -or e:ample local telephone calls are
estimated to comprise between A5<@5T of all voice traffic7
-igure C8 )cKinseyB3/ )organ -orecast of Backbone Traffic

3eta-ytes @er mont$
9:6 ; (!(5 market Forecast* 5arch 2333
-igure (8 0!K Estimates for ATITMs traffic demand
Supply and Demand Analysis in Convergent Networks /age &L
Chapter 2: Bandwidth (emand
The following Chapter e:amines the issues of bandwidth demand in convergent networks and
addresses the issues of demand for voice as well as data services in residential and corporate
markets7 The term >bandwidth demand? will be defined in the conte:t of this paper and discussed
in terms of the drivers of bandwidth demand% and two possible frameworks for forecasting and
analyFing bandwidth demand E &" time<series forecasting using services adoption% and 4"
aggregate demand forecasting using /rice Elasticity of Demand% will be introduced7
)dge (emand and etwork Capacity
,ike >bandwidth? itself% the term >bandwidth demand? is used ;uite loosely and is often misused7
)any of the studies that provide forecasts of >bandwidth demand?% are growth forecasts of
backbone traffic and often fail to recogniFe the essential difference between backbone traffic and
the >+ffered ,oad? or >Edge Demand? of the network7
>Edge Demand? is a measure of the traffic inGected or demanded" at the edge of the network and
is usually described in terms of data rates e7g7 .igabits per second"7 This load is presented to the
network by all devices phones% computers etc" connected to the network7 +nce the traffic enters
the network it will penetrate a certain number of layers of the network depending on traffic type%
destination etc" before returning to the edge to be delivered to another device phone% computer
etc"7 This is shown conceptually in -igure D where all traffic begins at layer >5?7 Not all traffic
reaches the backbone of a network7 -or e:ample some estimates of voice traffic suggest that more
than @5T of voice calls stay local7
+ften reports will also try to e;uate backbone traffic% or even edge demand with >Network
Capacity?7 This can also be misleading and will be discussed further in the Chapter on
>Bandwidth Supply?7
Supply and Demand Analysis in Convergent Networks /age &A
-igure D8 Edge Demand and Traffic /enetration
(rivers of Bandwidth (emand
The ;uantity of bandwidth being demanded is increasing7 This is proven beyond doubt by various
measures of voice and data network traffic7 The drivers of this increasing ;uantity of bandwidth
demanded are less well understood and often debatable7 This thesis presents the following drivers
contributing to bandwidth demand7 +ther drivers may e:ist but can usually be included in one of
the following categories8
Declining CostB/erformance of Computing
.rowth of Digital *nformation
Broadband Access Adoption
New Services Adoption
Bandwidth /ricing
Changing Culture
Supply and Demand Analysis in Convergent Networks /age &@
(eclining Cost1'erformance of Computing
An oft<;uoted driver of bandwidth demand is the dramatically declining costBperformance of
computers7 Current generations of *ntel /entium ( processors coupled with abundant% low<cost
memory% large hard disk drives holding more than C5.bytes of data and large screen displays% has
elevated the potential for information to be generated and processed at the edge of any network7
)any believe that the mismatch between computing power at the edge and the capacity of those
computers to connect to other computers is a fundamental driver of increasing network
bandwidth7 The proliferation of computer<based devices from the /DA to the car also creates
demand for connectivity between those devices% as the value of the data generated becomes much
greater in a network of devices7
<rowth of (igital Information
*n general the amount of digital information is increasing dramatically7 The digitiFation of almost
all media digital cable% D=D% )/Cs etc"% the increasing number of digital devices /Cs% )obile
/hones% hand<held computers% digital cameras" and increasing average files siFes% as evidenced by
the growth in popularity of digital photos% )/C audio and video files% all contribute to increased
bandwidth demand7 All digital information re;uires processing by computing devices and in
many cases re;uires networks of computing devices to realiFe their true value7
Bandwidth 'ricing
Consistent with standard supply and demand theory% a downward trending price for bandwidth
will cause the ;uantity of bandwidth demanded to increase7 This is for the static case of an
unchanging demand curve over time7 $hile this is generally true% it is possible that bandwidth
demand increases even under increasing prices *- the demand curve is changing position with
time as shown in Chapter D8 Dynamics of Supply and Demand7 $hat cannot be denied is that
Bandwidth /ricing is an influential component of Bandwidth Demand scaling7
At any one point in time it is difficult to draw conclusions from pricing data since prices may or
may not be sustainable% and the dynamics of competition can blur trends7 According to 3eff
Kagan% recent rises in DS, and Cable prices may suggest that local providers of these
Supply and Demand Analysis in Convergent Networks /age &'
connections have been employing >/rice /enetration? tactics to combat increasing competition
4
7
The slowdown in business of some competitors may have allowed incumbent carriers to raise
prices to a sustainable level7
*n a further e:ample% Cahners *n<Stat .roup% found revenues proGections for backbone
connections will produce a compound annual growth rate CA.0" of &L7@ percent between &'''
and 455(7 During the same time frame% the number of backbone connections will achieve a
compound growth rate near 4C percent7 *n<Stat says the difference between the growth rates in
revenue and connections can be attributed to a continued decline in the cost of bandwidth7
C
This
appears to assume that% in at least some cases% the declining cost of bandwidth from carrier to
carrier is not being passed onto end<users7 This is very important to consider% especially in
oligopolies and effective<monopolies in local access services7
)uch work has also been done in the pricing of *nternet bandwidth7 Currently >connection<based<
pricing still dominate the market7 *n this nearly" all users are charged a fi:ed<bandwidth fee%
usually with unlimited usage7 To date most connection fees were paid by organiFations
universities% government agencies% etc7" and the users paid nothing themselves7 Essentially the
marginal packet placed on the *nternet is priced at Fero and no pricing mechanisms e:ist for
pricing at the margin of available bandwidth7 This has been a maGor contributor to early adoption
of *nternet technologies but maybe a barrier to continued commercialiFation and rapid innovation
of the *nternet7 /ricing schemes such as >Congestion /ricing? and >Committed *nformation 0ate
/ricing? based on usage and 1oS% among other things% are well documented by researchers such
as Clark and =arian7
(
*n summary% true competition between substitutable services and penetration pricing will likely
have an effect on broadband prices7 $here competition e:ists at the end<user level% price or cost
decreases are likely to be passed directly to the end<user7 $here competition e:ists a layer behind
local monopolies% or even oligopolies with incentive to avoid price competition% decreasing prices
i7e7 costs to the buyer" will probably not be passed onto the end<user7
4
Daily Tribune% (
th
)ay 455&7 3eff Kagan is an Atlanta<based telecom industry analyst% commentator7
http8BBwww7Geffkagan7com
C
Cahners *n<Stat .roup% PConnecting #7S7 *S/s The State of the Backbone )arketQ% December 4555
(
David Clark% )*T7 !al =arian% #C Berkeley7
Broadband Access Adoption
*t appears that one of the greatest drivers of bandwidth demand is the increasing adoption of
broadband *nternet connections7 This can be seen as supply<side economics inducing a shift in the
demand curve outwards7 This is an important effect% discussed in more detail later in the paper7
$hile infrastructure issues and access costs still have a strong effect on broadband penetration in
the #nited States% there has been strong relative growth in the past si: months7 0ecently%
NielsenBNet0atings found that the fastest growing segment of *nternet connection is >!igh
Speed?% which is defined as *SDN% ,AN% DS, and Cable )odems7
D
Even though the most
popular connection speed is still DLKbps% lower speed modem connections 4@7@BCC7LKbps" have
decreased by over 45T in the last year% as shown in Table 47
Table 48 *nternet Connection Speeds )arket Share
Internet Connection Speeds Dec. 99 vs. Dec. 00
#7S7 !ome #sers
Dec. 1999 Dec. 2000
Percent
Change
Speed
Users
555"
Composition
Percent
Users
555"
Composition
Percent
)odem &(7(K L%5@D @7CT (%@(4 D75T <457(T
)odem 4@7@BCC7LK C&%L54 (C7&T 44%'L5 4C7LT <4A7CT
)odem DLK C5%'&4 (474T DA%@'@ D'7(T @A7CT
!igh SpeedW (%A4D L7(T &&%A5D &475T &(A7AT
W *ncludes *SDN% ,AN% cable modems and DS,
Source8 NielsenBBNet0atings
Table C8 #S !igh<speed Subscribers by Technology% also shows past and forecasted data for
broadband technologies7 *nterestingly% the #S is not the fastest adopter of broadband technologies
at the present time even though% overall% it contains the largest number of broadband users7
According to The Strategis .roup
L
% the largest adopter of broadband connections is Korea with a
D
NielsenBNet0atings% -ebruary 455&
L
The Strategis .roup% X0esidential !igh<Speed *nternet8 Cable )odems% DS,% and -i:ed $ireless%X
3anuary 455&7
Supply and Demand Analysis in Convergent Networks /age 4&
DA7CT adoption rate of broadband connections% defined as cable modems% ADS,% satellite
connections and T&Bleased lines% compared with the #nited States with &&7&T adoption7
Table C8 #S !igh<speed Subscribers by Technology
Source8 The Strategis .roup% e:cept 4555 and 455& DS, figures which are more recent figures from DS,
/rime News
Some would argue that broadband connections are not drivers of increasing demand% and that it is
either the adoption of new services +0 the supply curve shifting out at the e:pense of prices% that
is driving the increased use of bandwidth7 *t does appear true that the availability of new content
and applications has driven the adoption of broadband in homes for downloading streaming
video% downloading )/Cs% emailing photographs and large file attachments% playing online
games% and even telecommuting7
-uture applications hold even greater promise for broadband users% such as video<on<demand%
video conferencing and home networking7 Better services from Service /roviders% such as self<
provisioning and dynamic 1oS pricing% may also add value to broadband connections and place
the *nternet on par with television and radio in terms of adoption7 !owever the debate about what
drives the ;uantity of bits demanded appears to be a moot point since there is evidence that users
of broadband *nternet connections fundamentally change their usage habits as a result of faster
connections% inducing users to demand higher load applications and services7
According to a study by Statistical 0esearch *nc% those with high<speed *nternet access% about AD
percent reported broadband has changed their habits
A
7 Some respondents said broadband had led
them to devote more time to the $eb% while others indicated that its speed allowed them to get
their *nternet tasks done more ;uickly and move on to other activities7 The study also shows that
broadband households are twice as likely to try downloading and streaming content from the
*nternet% and three to four times more likely to do so on a regular basis7 -or e:ample% (' percent
of those in broadband homes have tried streaming audio% as compared to 45 percent for the #S
A
Statistical 0esearch *nc7% PAll Things DigitalQ% -ebruary 455&%
http8BBwww7statisticalresearch7comBpressBpr54&D5&7htm7
&''' 4555 455&E 4554E 455CE 455(E 455DE
DS, 57D@ 47C D7D L7@@ '7C@ &&7@A &(744
Cable &74D (7&& A7&4 '7DA &&7@@ &(7&' &L7&C
$ireless 575& 575L 57&' 57'D &7'L C75( (7A&
+ther 5 575& 57& 57&D 57C 57D 57@
!igh<speed Subscribers by Technology millions"
population7 Si:teen percent of broadband households report listening to streaming audio in the
past week% as compared to four percent on average7
NielsenBNet0atings and SBC Communications have also found that residential users with high<
speed connections tend to increase their level of usage7 *n a /ress 0elease% NielsenBNet0atings
found broadband users visit more sites% view more pages% and spend more time online% in both the
number of sessions and aggregate minutes% than their dial<up counterparts7 SBCMs XBroadband
$atchX survey found 0esidential DS, users are spending an average of 4D hours per week online%
L& percent more than people in dial<up households7
Table (8 DS,?s Effect on +nline Activities
DSL's Effect on n!ine "ctivities
"ctivit#
Performed $#
DSL Users
Performed $#
Dia!%Up Users
Downloading )/Cs L&T CDT
Downloading video L(T CLT
E<mailing photos ALT L4T
Source8 SBC Communications
ew #ervices Adoption
As mentioned previously% a point that is often debated is which is the driver of bandwidth
demand% the adoption of broadband connection technologies% or the promise of new services such
as video<on<demand =oD"H This thesis maintains that it is a combination of both% since new%
compelling% bandwidth<intensive applications encourage people to demand more bandwidth% and
a product of a broadband connection is greater usage of the connection and further increase in
demand for bandwidth7
There is little doubt that once value<added% compelling network services are introduced that
demand for these services and the underlying bandwidth to support these services increases7 This
is particularly true of services in which positive network e:ternalities operate7 So<called
>)etcalf?s ,aw?% named after Bob )etcalf the *nventor of Ethernet and founder of CCom% states
Supply and Demand Analysis in Convergent Networks /age 4C
that the value of a network increases with the s;uare of the number of >users? connected to the
network7 )ost network services e:hibit this sort of characteristic < none more so than basic
telephone service7
The introduction of new services% at all levels of the value chain% contributes to the demand for
bandwidth as more users adopt these services7 Some services will scale edge demand almost
linearly with the number of users% e7g7 basic telephone service% while a number of new services
scale edge demand almost e:ponentially with the number of users% e7g7 peer<to<peer media
sharing such as Napster7 As demonstrated in the Services Adoption )odel later in the paper%
digital media streaming and =oD are services that are likely to increase the demand for bandwidth
dramatically7
$hile the previous two years have seen a dramatic increase in the investment of technologies to
build new services such as =oD% no one has been able to deliver a compelling product that has
attracted a wide audience7 )ost say that the infrastructure bandwidth" is not there to deliver
these new services% which brings us back to ;uestioning the driver of bandwidth demand7 This is
e:plored further in the Chapter on >Bandwidth Supply?7
*n summary% new services and the connections to support them create a positive feedback7
Broadband services will be adopted without broadband connections% /0+=*DED that the
services are compelling% cost<effective and offer a minimal% acceptable performance for the end<
user7 This may drive more people to adopt high<speed connections% further providing a catalyst
for new services adoption7 This is intimately linked with the available supply of bandwidth to the
end user and will be discussed in further detail in the chapter on Bandwidth Supply7
Changing Culture
#nderpinning many of the drivers of bandwidth demand discussed above are fundamental
changes in the culture and usage of network and communications7 $hile these paradigm shifts
are harder to define% it is worth discussing briefly7
0esearch has shown that many *nternet users% particularly younger users and early adopters
consider *nternet access to be less e:pendable than other fundamental services such as T= and
radio7
@
The ArbitronBEdison )edia 0esearch *nternet Study found that one<third of Americans
@
ArbitronBEdison )edia 0esearch *nternet Study and Statistical 0esearch% *nc7
Supply and Demand Analysis in Convergent Networks /age 4(
with *nternet access at home would give up television if forced to choose between television and
the *nternet7 Among those users who have ever listened to or viewed streaming media online there
is an even larger shift towards the *nternet E (&T7 According to ,arry 0osen% /resident of Edison
)edia 0esearch% Xour survey shows evidence that >streamies? Ythose that use streaming mediaZ
are more sophisticated users of *nternet technology and rely on it more for entertainment% work%
and news7X The study also found a relationship between a respondentMs age and their choice of
medium7 Americans between the ages of &4 and 4( are more likely to give up television (A
percent" than the *nternet% while more than two<thirds of Americans 4D and older would rather
retain T=7
According to study by Statistical 0esearch *nc% when a user interacts with both a T= and
a /C during primetime% the /C is four times more likely to hold consumersM attention than
the T=7
'
Eighty percent of those who use T=s and /Cs simultaneously during primetime
consider the computer to be their primary activity% while &@ percent cite the T= as
commanding more of their awareness7
$hile these studies do not present definitive conclusions% there are sufficient trends to suggest at
least #S culture is changing to become more >networked? and a higher consumer of information
and interactive communications and entertainment7 ,ong<term this is likely to have a significant
impact on the demand for network bandwidth7
'
Statistical 0esearch *nc% XThe T=B/C Connection 455&X
Supply and Demand Analysis in Convergent Networks /age 4D
The following section provides data on the growth of certain services in use today7
=oice Traffic <rowth
The *nternational Telecommunications #nion *T#" maintains a database providing estimates of
telephone traffic for 45A countries for &''A<'@% which total 47D : &5
&4
minutes per year7 Adding in
an estimate for the missing countries brings us to A7D : &5
&4
minutes per year% or roughly L55%555
terabytes per month7 The #S accounts for about 4D5%555 terabytes per month% of which roughly a
third is modem calls7 ATIT has somewhat better estimates for long<distance traffic in the #S%
including voice% *nternet% public data networks and private lines7
&5
Table D8 Traffic on U.S. long distance networks in terabytes, year-end 1999
etwork Traffic >terabytes1month?
US ?oice ,0,'''
5nternet 1',''' - 1),'''
t$er 3ublic 2ata <etworks &,'''
3ri?ate Aine *,''' - 0,*''
Source8 +dlyFko% ATIT 0esearch
=oice as well as modem and fa:" traffic on the /STN is currently growing at appro:imately @T
per year to about [[(5%555 TBBmonthHH\\7 Estimates that include local and intrastate toll traffic
rise to appro:imately 4AD%555 TBBmonth
&&
7
According to /eter Davidson% of Davidson Consulting% about C55 billion seconds of fa:
transmissions take place annually7 At (D seconds per page% this means (55 billion pages per year
are fa:ed7 At &D Kb per page% this comes to around L%555 terabytes of fa: information per year7
&5
Coffman and +dlyFko% ATIT 0esearch% &''@<4555"7
&&
Coffman% +dlyFko E The siFe and growth rate of the *nternet% ATIT ,abs E 0esearch% &''@
Supply and Demand Analysis in Convergent Networks /age 4L
(ata Traffic <rowth
According to most network surveys% the public *nternet is currently slightly smaller in both
capacity and traffic than the switched voice network but is rapidly approaching voice traffic
volume7 Currently% it is believe that *nternet traffic is growing at a rate of &55T per year7 -igure
L% shows the growth in *nternet Domains as supplied by a survey conducted by the *nternet
Software Consortium7 The survey counts the number of */ addresses that have been assigned a
name7
-igure L8 *nternet Domain Survey !ost Count
Source8 *nternet Software Consortium http8BBwww7isc7orgB"
+f particular interest8
#S *nternet users are going online more often and staying online for longer7 #S users
went online on an average of &D days in )arch 455&% up from &(7D days in )arch 4555%
and &(74 days in )arch &'''7 They spent an average of 4574 hours looking at *nternet
sites in )arch 455&% up from &D7' hours last year and &47@ hours the year before7
0esidential *nternet use in the #S is growing at about C5T a year7 $hen residential users
switch to broadband% the total volume of data accessed increases by a factor of D<&57
-y &''& data traffic will sur@ass @$one traffic.
1&
&4
3upiter )edia )etri:% Apr &@ 455&
Supply and Demand Analysis in Convergent Networks /age 4A
Internet #ervices
Table & shows the average activity for a $eb user in )arch 455&% as reported by
NielsenBNet0atings *nc7
Table L8 Average *nternet #se in )arch 455&
"verage Internet Use in &arch 2001
Combined home and work access
Number of sessions per month
&arch 'e$r(ar# ) Change
CC C5 &575T
Number of uni;ue sites visited 4& &' &57DT
/age views per month &%&&@ &%5D& L7(T
/age views per surfing session C( CL <D7LT
Time spent per month &A8&'8(' &L84'8C5 D7&T
Time spent during surfing session 58C&8(4 58C48(( <C7&T
Duration of page view 58558DD 58558DD 575T
Active *nternet universe
actually surfed"
&&47A million &5'7D million 47'T
Current *nternet universe &AC74 million &A57& million &7@T
!ireless Internet
According to eT-orecasts% by the end of 455D% the number of worldwide *nternet users will nearly
triple to &7&A billion% and an increasing number of these users will be using wireless devices to go
online7
&C
&C
http8BBwww7etforecasts7comB
Supply and Demand Analysis in Convergent Networks /age 4@
Table A8 #S *nternetB$ireless #sers
Internet Users*+ire!ess Users
millions"
,ear
2000 2002 200-
United States
*nternet #sers &CD &L' 4&(
$ireless *nternet #sers 4 &@ @C
+or!d.ide
*nternet #sers (&( LAC &%&A(
$ireless *nternet #sers (5 44D AC5
+estern E(rope
*nternet #sers 'D &(@ 4(L
$ireless *nternet #sers A D' &L@
Source8 eT-orecasts
Corporate (ata and )&Commerce
-igure A8 #S .rowth in eCommerce
Source: ;orrester #esearc$
Supply and Demand Analysis in Convergent Networks /age 4'
According to Constat% internal corporate intranet" traffic is growing at about C5T per year% but
corporate traffic to the public *nternet is growing at &55T per year7
(igital Cable and #treaming 5edia
According to study XStreaming at a CrossroadsX by Arbitron and Edison )edia 0esearch% CLT of
all $eb surfers accessed some form of streaming media in November 4555% as compared to 4@
percent during the same time last year7 According to Nielsen<Net0atings% streaming media
consumption reached an all<time high in November 4555% with CD million $eb users at home
accessing streaming content% a LD percent increase from 4& million during the same month last
year7
XStreaming media is one of the chief incentives prompting users to switch to high<speed $eb
access% which is fast becoming the must<have service in the home%X said T7S7 Kelly% director of
*nternet media strategies at Net0atings7 XThat said% improvements in ;uality% ease<of<use% and
accessibility must continue if streaming consumption is to become as commonplace as broadcast
or cable television7X
Table @8 Streaming )edia .rowth and 0each
Streaming &edia /ro.th and 0each
#S !ome *nternet #sers"
Uni1(e "(dience
Percent
/ro.th 2ov. 1999 2ov. 2000
3ota! Streaming "(dience 4&75m C(7Am LDT
3ota! "ctive Internet Users A(75m 'D7(m
Percent 0each of Streaming "(dience 4@T CLT
Supply and Demand Analysis in Convergent Networks /age C5
Chapter @: #ervices Adoption and <rowth
5odel
This chapter describes the methodology and results of a draft edge demand model based upon
services adoption7 This model is used to illustrate the concept of edge demand forecasting using
services adoption and how the results of the model maybe used to test demand assumptions and
how they impact on network capacity re;uirements7 The model is considered a work<in<progress
and will be refined over time as more and better inputs become available7
Demand forecasting using service adoption rates is a popular method of forecasting that has been
used in many studies of *nternet and telecommunications network growth7 The method is
relatively easy to implement and scale7 As new information becomes available% the accuracy and
comprehensiveness of the model can be improved without reworking the entire model7
-urthermore it utiliFes tangible services and statistical information such as population growth and
historical adoption rates for comparable services7
!owever the model is not without its drawbacks7 -irst and foremost the model does not consider
the interaction of supply and demand forces% specifically price and market<setting prices for
various services7 The model assumes that other factors such as network supply build out% a certain
level of competition and technical innovation will continue to fuel the introduction and adoption
of services7 $hile this may seem flawed% the output from a service adoption model should be
viewed as an input into a supply<demand model that does include price7 This will be covered
further in Chapter D8 Dynamics of Supply and Demand7
To date% most service adoption<based bandwidth demand models have fallen short of the mark7
There are possibly a number of reasons for this8
Bandwidth demand is a comple: problem with many interrelated variables7 +ften there
is a need to oversimplify the problem in order to keep the workload manageableO
!ard data% to support anything but the simplest of models% is very difficult% time<
consuming and costly to collectO
Supply and Demand Analysis in Convergent Networks /age C&
Content and services that draw on bandwidth are innumerable and few attempts have
been made to identify and categoriFe a comprehensive list of content and servicesO
Bandwidth studies are often delivered in the conte:t of market verticals% or industry
analysis and are therefore ;uite narrow in focusO and
Bandwidth studies fail to separate >bandwidth demand? from >bandwidth supply?7
)any similar models will also use *nternet bandwidth demand as a pro:y for ne:t<generation
networks7 This fails to recogniFe the importance of services such as =ideo<on<demand and digital
T= on a convergent network especially when considering substitution of services and the
migration from analog to digital services7 This is important from a regulator?s point of view as
well as a carrier?s perspective7 -igure @ shows the possible effect on bandwidth demand of
migrating analog T= services to a digital network7 The net result is digital bandwidth demand on
a convergent network increases but total bandwidth demand decreases and analog spectrum is
freed7
-igure @ /otential effects of migration of spectrum usage from analog to digital services
Time
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*t should be noted% however% that all models of this type do not help predict the impact of new
technology in the future7 -or e:ample% currently% analog T= demands an incredibly large amount
of bandwidth in it current analog form e;uivalent of \ 455)bps"7 *n order to switch to
technologies such as !DT=% the development of compression technologies is vital and could
possibly drastically reduce these bandwidth re;uirements when they are transmitted over the
digital format7 Neither will this static model take into account the iterative nature of supply and
Supply and Demand Analysis in Convergent Networks /age C4
demand typical in a high tech industry7 -or e:ample% when computer chips became more
powerful% applications that consume greater computing power were created to absorb the spare
capacity of these chips7 Analogously% the same can be said for supply and demand for bandwidth7
9esults
The following tables and graphs summariFe the results of various scenarios run through the
model7 *n each case the results show the >+ffered ,oad? or >Edge<Demand? as defined in Chapter
47 This is important to understand when comparing the results of this model to forecasts presented
by industry consultants and analysts% which mostly try to model backbone traffic7 The e:ception
is /ioneer Consulting% which developed an edge<demand model for *nternet usage7
+ffered %oad
-igure ' presents the results of four scenarios run through the Services Adoption )odel7
-igure '8 Bandwidth Demand -orecast
Bandwidth (emand Forecast
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4ig$ Ado@tion #ate of 2igital T1
Supply and Demand Analysis in Convergent Networks /age CC
Average vs 'eak %oad
.iven the offered load forecast at the edge of the network% -igure &58 Average /eak demand in a
Day% graphs the average >peak load? each hour during a day defined by the following demand
distribution8
Table '8 /eak Demand Distribution
Time = of Total
''''-'1'' 1.+&=
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The >Average /eak Demand? is defined as the average instantaneous demand in a given hour%
e:pressed in TerabitsBsec7
Supply and Demand Analysis in Convergent Networks /age C(
-igure &58 Average /eak demand in a Day
Forecast Average 'eak (emand )ach :our in a (ay
>Tbits1sec?
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5odel (escription
This model covers the continental #nited States only7 This was done for simplicity but also
because the best data is found for the #S market7 Both residential household and business traffic
is modeled% although the model for residential services is significantly more refined7 Business
data is very hard to come by and many business services are difficult to define in terms of
bandwidth demand% e7g7 corporate database synchroniFation7
Consumer household traffic can be easily modeled with service adoption rates as the primary
driver7 Service adoption generally follows a cumulative<normal distribution function and this
would not be entirely consistent with how businesses adopt new technologies or increase their
usage of e:isting services7 *n order to improve business traffic forecasting% additional data for
business traffic is re;uired and alternative modeling techni;ues should be e:plored to account for
the uni;ue adoption patterns e:perienced by business customers7
Supply and Demand Analysis in Convergent Networks /age CD
By principally classifying various types of services that would be demanded by a business and
residential users and applying a cumulative normal distribution rate of technology adoption for
the penetration and usage of each respective technology% a dynamic% interactive model can be
used to test bandwidth demand under various scenarios7
*t is important to note that the services in this model are a mi:ture of content signals < data%
video% T= etc" that are currently delivered over both analog and digital networks7 !owever these
services may be delivered over the digital >network? of the future7 As pointed in the previous
section% it is crucial to consider all these services% as their gradual migration into the digital media
will have a severe impact on bandwidth demand7 -or e:ample% analog T= could be delivered in
the !DT= format and the analog phones could become digital7 *n contrast to many other
research reports using the content demand driven methods% this model does not be restrict itself to
only the digital traffic running through the telecommunications networks and *nternet backbones
of today% but also considers the possible substitution of these technologies7
#ervices
A number of services for both residential users and business users are modeled7 New services can
be added to the model% and some rules for service substitution have been included7 The follow list
presents some of the services7
Samp!e 0esidentia! Services4
Audio 1 =ideo TeAt 1 Images
Tele@$one C$at
1o53 ;aB
Cireless Tele@$ony 6mail
1ideo 3$one 5mages
7o?ies on 2emand <ewswires
Streaming 1ideo Cli@s Ceb@ages
1oice 7essaging on <et S@am
2ownloaded 7o?ie 7aga!ines . 3rint
2ownloaded 1ideo Cli@s
<a@ster . 2ownloaded 7usic (ata
2igital T1 #emote -acku@
-roadcast Tele?ision #eal-Time 2ata
Cebcam . Cebcast
#adio -roadcast +nline Applications
53 Audio -roadcast Dames
14S Ta@es Drou@ware. 357
Supply and Demand Analysis in Convergent Networks /age CL
Samp!e $(siness services4
+nline Applications
AS3 A@@lications
Drou@ware. 357
;inance and Accounting
t$er AS3s
Transactions
nline 3rocurement
6-Commerce
;inance and Accounting
nline Trading
-ookings, #eser?ations
Adoption 9ates
-or each of these service types within these categories% a technology diffusion curve that follows
a cumulative normal distribution in the shape of an S curve has been used to model adoption7 This
method has been widely used and acclaimed as a reliable forecasting tool for technology
adoption
&(
7 -or each of these services% historical data has been used wherever possible to estimate
mean time in number of years since introduction" for D5
th
percentile of the population to adopt
this technology and for the &L
th
percentile one standard deviation from the mean" to adopt the
technology7 These figures serve as the mean and standard deviation of the normal distribution as
shown in -igure &&7 -or technologies in which historical data does not e:it% the inputs in the
normal distribution have been estimated and sensitivities run to determine the impact of
introduction date and adoption rate7
&(
0ogers% Everett7% <Diffusion of *nnovations"O -oster7% 07% *nnovation% The Attacker?s Advantage O )oore%
.eoffrey A7% Crossing the Chasm
Supply and Demand Analysis in Convergent Networks /age CA
-igure &&8 -orecast input parameters for service adoption rates
4 3 2 1 0 1 2 3 4

L@T of total
population between
E& and &
&LT of total
population below
E&
#nder this framework% it has also been assumed that the plateau rates of these service types will
eventually be &55T and do not face the threat of being phased out or put in another way% not
Pcrossing the chasm
&D
Q7 Though this may over simplify the problem% the effect can be mitigated
by manipulation of the standard deviations7
Average usage rate changes per user are dependent on a number of factors7 *n categories such as
spontaneous communication% video on demand% and online interactive gaming% the category usage
rates will probably depend on consumption behavior of individuals and households7 +n a
category level% the total usage is more likely to be constant7 !owever% within a category% such as
spontaneous communication% the substitution among the individual services such as cellular
phones% voice over */% and traditional telephony depends on factors such as network effects%
relative performance over price and cross price elasticity7 As a result% it is believed that the
average usage rates per user for newer technologies will increase as general pricing falls7 To
illustrate this% people will tend to change their cell<phone usage depending on price and whether
technology is good enough to replace regular phones7 !owever% the ma:imum number of minutes
an average individual can spend on the phone has a ma:imum% due to sheer human capacity and
there are only 4( hours in a day7
&D
)oore% .eoffrey A7 Crossing the Chasm
Supply and Demand Analysis in Convergent Networks /age C@
Chapter B: Bandwidth #upply
Chapters &and 4 e:amined bandwidth and the drivers that fuel the demand for bandwidth7 This
chapter will deal with the other side of the economic e;uation < the supply of bandwidth7 Supply%
in the conte:t of communications networks and this thesis% is taken as the network capacity
available to meet the edge<demand for bandwidth7
There have been many statements made about the >oversupply? of bandwidth7 *n general this
statement seems to refer to the increasing build out of fiber by C,ECs and carrier?s carriers such
as $illiams Communications and CL5Networks7 -or e:ample CL5networks has built 4&%555 miles
of fiber in North America and L%455 miles in Europe% of which &4%555 miles and C%@55 miles are
lit respectively7 $hile it is ;uite possible that a lot of fiber remains unlit in the backbone% this
should not be e;uated with >supply?7 Network Capacity is determined by entire systems of fiber%
networking e;uipment and management systems% and is generally segmented into various
markets for bandwidth7 +lder fiber and systems may ensure an undersupply of usable network
capacity in the future as ne:t<generation services become mainstream7
!owever% market<by<market% the >supply? of capacity can vary considerably7 According to Keith
Kennebeck of The Strategis .roup% XDeployment of residential broadband is supply<side limited
at this time7 *n order to cope with this% operators are relying more on automated subscriber
installation and management tools to help overcome the bottleneck and meet this demand7X
Traditionally the data networking and telecommunications markets have been somewhat
separated% and >network capacity? had to be discussed relative to the network each service ran on7
The >capacity? of the /STN was relative to circuit<switched voice service in which bandwidth is
reserved regardless of whether it is being used or not7 *n this respect the capacity is how many
voice calls% end<to<end connections% can be supported at once7 The data networks of corporate
,ANs and campus networks had a capacity e:pressed relative to packet<switched networks%
which is often a measure of the peak load the network can handle and not the number of sessions%
or end<users the network can support7 Since packet networks operate on a >best<effort? basis%
additional >sessions? or users can be added but at the e:pense of congestion and lost packets7 Both
Supply and Demand Analysis in Convergent Networks /age C'
can be e:pressed in >:<bits per second?% but the measure means slightly different things from a
network capacity point of view7
$ith the possibility of convergent networks this picture becomes more complicated% as it is likely
that convergent networks will be hybrid solutions employing both circuit<switching and packet<
switching technologies% each employed where their relative strengths Gustify7 +ver time% however%
an optimum architecture is likely to homogeniFe% Gust as the /STN and ,ANB$AN technologies
have homogeniFed somewhat7 *n this case different services will be running over the same
underlying infrastructure% differentiated only by their source% destination% ;uality of service%
synchronicity etc7 The conse;uence of this observation is that >supply? cannot be limited to the
ma:imum raw bandwidth a network can handle but must take into account the intelligence of the
network and its ability to differentiate services% managed traffic efficiently and provision
bandwidth to maintain high utiliFation of available network resources7
9elationship between )dge&(emand and etwork Capacity
As stated in Chapter 4% there is a difference between the bit load presented at the edge of the
network% and the network capacity re;uired to accept% transport and manage that load7 .raph
theory and optimiFation techni;ues have contributed significantly towards solving the problem of
configuring network capacity to handle increased offered load7 Network flow and flow deviation
techni;ues provide the mathematical foundation for such optimiFation and topological design7
*f an edge load is imposed on the outside nodes of a packet network% such as that shown in -igure
&4% each link should support the amount of traffic that can be placed on it from both nodes7 *f the
edge demand is doubled% as represented by a doubling of outside nodes% then graph theory
indicates that the number of lines to interconnect the set of nodes N" is determined by NWN<
&"B4% which can be simplified to N
4
for large values of N7 *t should be noted that this simple
derivation holds for packet networks where every node is connected to each node around it%
theoretically7 Circuit<switched networks such as the /STN are different problems% but will not be
discussed here7
Supply and Demand Analysis in Convergent Networks /age (5
-igure &48 )esh Network E:ample

The capacity re;uired in each link is best e:plained by taking the simplest of networks% a single
link between two nodes% if the edge demand at each node is >:?% then the capacity of the link
should be >4:? for a non<blocking architecture7 !owever% according to )ichael +?Dell of
##NET% the link between two maGor nodes is often e:pressed as a function of the amount of
>trunking? capacity e:pressed as bitsBsec"Wmiles7
&L
This is likely because links between two maGor
nodes maybe made up of more than one fiber and may have tributaries that feed into the trunk7
+?Dell has stated that for the edge load to double each year in the ##NET network% the network
capacity must double appro:imately every ( months7 This e;uates to a an @<fold increase in
network capacity for every doubling of edge loadJ
Traffic 'enetration
Another interesting phenomena of network traffic% is the idea of >Traffic /enetration?% described
by the author as the depth in which a packet or connection reaches inside the network7
-igure &C describes a model for thinking about traffic penetration7 Called the Boundary<Cloud
model% the network is described by a number of segments pertaining to the function of the
segment and roughly associated with geography7 The segments are described by >clouds? that are
defined as homogenous sets of networks performing similar functions% and >boundaries?% the
&L
http8BBwww7ehto7orgBcanarieBinternetgrowth7htm
Supply and Demand Analysis in Convergent Networks /age (&
demarcation borders between each cloud7 Today these clouds can be associated with the maGor
segments of the network often defined by carriers and e;uipment providers E access networks%
metro networks and backbone or long<haul networks"7 The boundaries are the crossover points
between clouds and can be thought of as a number of nodes on the boundary or the number of
links between the clouds7 +ver time these clouds and boundaries may% and do% change as
technologies change% and the functions performed in each segment change e7g7 aggregation%
grooming% transport% switching" but the basic premise of the model stays the same7
According to the model% &55T of traffic begins at the edge of network7 This is consistent with the
concept of >edge<demand?7 *n this case the >edge? maybe a single device% such as a phone% or a
network in itself such as a corporate ,AN or home network7 +f that traffic% a percentage of it
must leave the edge and travel into the access network before return to the edge to some other
edge device such as another telephone or ,AN7 A certain percentage of edge traffic may also need
to enter the metro network to get where it is going% and so on for backbone and international
traffic7 At the boundaries there are a finite number of nodes and ports that can handle the hand<
over% designated by nW)7 The interesting potential of the model lies in its ability to tie technical
and economic constraints to the model in order to define the clouds and boundaries of the day7
$hether these constraints are the balance between the ma:imum no7 of ports that can be fit into a
central office versus the number of subscribers in a given area who are willing to pay for such as
service may be compelling7
Supply and Demand Analysis in Convergent Networks /age (4
-igure &C8 BoundaryBCloud model < conceptual diagram
&55T of traffic
wT of traffic
:T of traffic
yT of traffic
FT of traffic
w R &55<:<y<F"T
: R &55<w<y<F"T
y R &55<w<:<F"T
Supply and Demand Analysis in Convergent Networks /age (C
(rivers of Bandwidth #upply
This section discusses the possible drivers of Bandwidth Supply7 As for bandwidth demand% a set
of drivers summariFing many of the factors driving Service /rovider?s capacity decisions are
presented here7 They are8
0evenue .eneration
Cost Savings
Technology Deployment
*ndustry 0egulation
Capital Availability
Determining the e;uation for bandwidth supply is a much more comple: proposition than for
bandwidth demand7 A comple: interaction of technology% competitive% financial and regulatory
decisions ensure that no one solution or model fits the industry with complete success7
/articularly in convergent networks% a Service /rovider must make decisions on the utiliFation of
current% and the e:pansion of future infrastructure based upon8
+ptimal service mi: on a common infrastructure to ma:imiFe revenueO
#sable capacity available for the service mi: proposedO
The need to support e:isting% cash<generating services as technology platforms migrateO
The cost of implementing various service mi:es on a common infrastructureO
Adherence of regulations from multiple regulatory bodies as the service mi: diversifies7
Even so the drivers of supply will be discussed here and a simplified framework for firm supply
decisions is presented in Chapter D7
Supply and Demand Analysis in Convergent Networks /age ((
9evenue <eneration
/erhaps the most obvious drivers of bandwidth supply are financially related7 -irst and foremost
Service /roviders must consider revenues and costs when making network capacity decisions7
This can be considered in two parts8 &" New<entrants attempting to capture a share of increasing
demand for bandwidth% and 4" *ncumbents protecting e:isting revenues and creating new revenue
streams to replace and decreasing streams7
Some of the revenue<related issues include8
)aintaining current >high margin? revenue streams7 >!igh margin? will vary from carrier
to carrier based on the costs of the carrier% but none<the<less a carrier must consider the
effects of any spending or technology decisions on revenue streams7 -urthermore a
carrier must consider service cannibaliFation when introducing new servicesO
.enerate new revenue streams7 As margins on e:isting services are eroded through
competition or regulation% there is a need to find new revenue streams7 This may involve
introducing new services to the same customer base% or widening the supply base to add
value to the network for new customers see )etcalf?s ,aw"O
-aster revenue turn<around7 *f a service provider is able to create services faster with
e:isting infrastructure% then not only does it decrease revenue turnaround time but also
increases available working capital and may reduce the need to seek new capital every C
years7
As an input to revenue% pricing is particularly important in a high fi:ed<cost% low marginal<cost
business such as network communications7 Service /roviders want to avoid price competition at
all costs% as it eats directly into the margin to fund prior debt or further infrastructure investment7
*f prices on current products cannot be maintained% and products are not greatly differentiated
e7g7 long<distance leased lines"% then service providers must find new higher margin services that
offer differentiation7 Candidates for new services such as these include &" dynamic bandwidth
provisioning% 4" leased >lambdas?% C" >managed services? for full out<sourcing of communications
needs% and dynamic pricing based on 1oS7 The flipside also holds E if revenue cannot be
generated% then spending on network capacity will decrease% as evidence in recent months7
Supply and Demand Analysis in Convergent Networks /age (D
Cost #avings
*ntimately related to revenue generation as a driver of bandwidth supply is the goal of cost<
saving% or more precisely spreading costs across a greater opportunity for revenue generation7
Technologies such as $avelength Division )ultiple:ing $D)" have fundamentally changed
the economics of optical transport7 State<of<the<art long haul transmission systems currently
being deployed have the potential to enable hundreds of gigabits per second to be transmitted
point<to<point on a single fiber pair% and reduce the cost of capacity e:pansion7 Table &5 shows
the investment cost per )bps of capacity on transatlantic optical transport systems going into
operation between &'@@ and 45557 The investment cost per )bps of capacity fell by about a
factor of &5 from &'@'<&''D and from &''D<45557 Note that there does not appear to have been a
significant difference in the reduction in investment cost per )bps from the first half of the
&''5s% before the adoption of $D) technology7
Table &58 Cost of +ptical Technology in Trans<Atlantic Cables

Source8 Douglas .albi% -CC Senior Economist
The premise is that the cost associated with e:tra transmission capacity in the network is more
than offset by the long<term revenue opportunity7 The fact that transmission e;uipment cost per
bitBsec is decreasing rapidly substantiates this e:pectation7
New optical systems employing optical signaling% dynamic provisioning% as well as multi<service
aggregation and traffic grooming all have the potential to lower the per<bit overhead for service
providers7 Sycamore Networks% an optical networking systems vendor% is marketing its solutions
on the premise that those same services will be delivered in real time as shown in -igure &(7
Supply and Demand Analysis in Convergent Networks /age (L
-igure &(8 /rovisioning Costs Between &'@@ and 455&
Source8 Sycamore Networks% www7sycamorenet7com
Costs% however% vary widely from segment to segment and carrier<to<carrier depending on their
incumbency% the siFe of their network and the supplier relationships they have7 -or e:ample%
)etro investments are driven by cost per bit per connection rather than cost per bit per mile
metrics7 #nlike core networks% metro networks typically have e;uipment in a wide range of non<
owned space and their operations costs reflect this7
&A

Carrier leased<line will also continue to add to the costs of providing service to end<users7
Carriers% and some corporations% will typically lease capacity on backbones with leases typically
running three years in duration% regardless of the present bandwidth needs7 As the network
becomes more and more dynamic% the carriers will increase capacity<on<demand lease
arrangements to provide instant on capacity to users7 This as<needed or Gust<in<time strategy
allows the carrier to pay for only what they need7
Technology (eployment
The innovation and deployment of technology solutions can also be seen as a driver of bandwidth
supply% even though many would argue that it is more of a result of increasing bandwidth supply7
Developments in optical technology un;uestionably have made massive increases in bandwidth
possible7 The migration to data<centric networks has lead to routers with a rich set of packet<
forwarding functions that provide &L5 .bps throughput using a bo: that is half the siFe of the
&A
3ohn Strand8 ATIT Gls]research7att7com 2ong Nue8 ##NETB$orldCom y:ue]uu7net
Supply and Demand Analysis in Convergent Networks /age (A
typical telecom e;uipment rack7 -igure &D shows a diagram of networking technologies and their
impact on the bandwidth available along a single fiber7
-igure &D8 Scaling of Network Technologies
Source8 +vum
A number of factors support the argument that the implementation of technology is also a driver%
beyond the goal of increasing revenue or cutting costs7 These factors include8
Carriers attempting to stay ahead of the competition and capturing the mind share of
customers will implement ne:t<generation systems7 An e:ample of this is the move from
+C<(@ to +C<&'4 transmission systems even though the later was a much more
e:pensive proposition7 The same could occur with the move to +C<AL@7 The first vendor
to deploy a viable +C<AL@ system could induce the deployment of these systemsO
Systems becoming increasingly scalable and allowing a service provider to >pay<as<they<
go?7 The aim of this is to generate carrier spending by limiting the upfront commitment7
-urthermore% Service /roviders are increasingly wary of solutions that lock them into
particular technologies that may not scale well7 The history of S+NET and AT) are
e:amples of thisO
Bridging the >technology gap? between bleeding edge technologies and >carrier<class?
systems7 *n order to implement and manage increasingly comple: systems and networks%
Supply and Demand Analysis in Convergent Networks /age (@
Service /roviders are demanding that systems vendors provide improved system
management% service introduction and better interoperability between different systems7
+nce these technology problems are solved% the barriers to adoption of new systems
decrease7 A further e:ample of this is the necessary deployment of new fiber before new
high<speed transmission systems become feasible7 According to .ambi% Pnew fiber
deployment indicates an e:pansion of potential capacity via both an increase in the gross
volume of installed fiber and an improvement in its technological vintage7Q Data
indicates that growth in fiber miles deployed in the #7S7 has been falling for over a
decade7 Table && shows that fiber miles grew about 4DT per year in the beginning of the
&''5s% while they grew about &@T per year at the end of the &''5s7 According to .ambi
the e:planation for this trend is clear8 local incumbents% who currently account for about
two<thirds of total fiber miles% have reduced their rate of deployment of new fiber miles7
The trend in fiber miles deployed suggests that growth in potential capacity has not
accelerated in the second half of the &''5s7
Table &&8 #S -iber )iles Deployment

Source8 Kraushaar% 3onathan )7% -iber Deployment #pdate% End of 2ear &''@%
*ndustry Analysis Division% CCB -CC
Supply and Demand Analysis in Convergent Networks /age ('
Industry 9egulation
Another significant contributor to service provider capacity decisions is government regulation7
The Telecommunications Act of &''L seemed to pave the way for a new era in competition in the
telecommunications industry7 This% together with the rise of the *nternet% was thought to ensure
the >unbundling? of local networks and the breakdown of local monopolies held by the >Baby
Bells? *,ECs" for so long7 *n the end the act has been a mi:ture of success with the *,ECs
seemingly stronger than ever7 Nonetheless this Act% and others to follow% will be important factors
in the continuing development of the communications industry% especially as telecommunications%
data networking and media companies converge to common ground already broken by mergers
such as A+, and Time $arner7
Capital Availability
The service provider rests at the critical Gunction between the media value chain and the
technology value chain where long<term capital e:penditures must achieve a return in the form of
recurring short<term service revenues7 Currently% the build out of communications networks
re;uires significant up front capital e:penditure on fiber laid or leased"% networking e;uipment%
real estate and labor% without guarantees that service fees will be sufficient to provide a return on
capital7 *n recent bull<market years the build out of networks has been funded by a combination
of Gunk<grade debt% e;uipment vendor financing and bubble<*/+s7 -igure &L% shows average
carrier CA/EN from &''L to 4555 estimated"7 As can be seen% there has been a CA.0 of &@T
during this time7 Today% the reality is much more grim with funding for new and e:isting proGects
drying up as returns on capital are dramatically lower than e:pected7 Table &4 shows sales growth
for maGor carriers from &''' to 4555 estimated" to be in the order of &4T% much less than
corresponding CA/EN7 *n order to maintain funding sources for capacity growth% service
providers must be able to keep revenue growth in line with capital e:penditures7
Supply and Demand Analysis in Convergent Networks /age D5
-igure &L8 Carrier CA/EN spending &''L<4555E
Source8 0!K *nc% 455&
Table &48 #S Carrier Sales .rowth
Source8 0!K *nc% 455&7 W AdGusted figures account for double counting7
Supply and Demand Analysis in Convergent Networks /age D&
C# Carrier CapeA 1..D& 33) >E@F1B?
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Chapter F: (ynamics of #upply and (emand
So far the paper has dealt with the ideas of Bandwidth Supply and Demand somewhat
independently of each other7 The reality is that these two concepts are highly interlinked and
cannot be treated separately7 An important ;uestion in relation to the adoption of new services
arises out of this observation8
*s the adoption of new services bandwidth demand" driven by the demand for these new services
in themselves% or driven by the availability of network capacity bandwidth supply" to support
these servicesH
*n the Services Adoption )odel% an edge demand is forecast using a linear time<series model to
test various scenarios of services adoption7 The adoption of these services is modeled using
normally<distributed adoption curves and does not take into account the cost of delivering the
services and thus the level of adoption as a function of the prices of the services7 *n effect% the
bandwidth demand was forecast assuming that the supply andBor the demand curves move out
over time% as illustrated below in -igure &A7
-igure &A8 Dynamics of Demand .rowth
$hile the Services Adoption )odel is useful for scenario analysis of edge demand% there is little
or no facility to model the interaction between demand and supply through price7 According to
,anning and +?Donnell PVin a period of sustained price declines Yas anticipated with
bandwidthZ% applications<based forecasts will be unreliable7 Dramatically lower prices can cause
fundamental changes in the mi: of applications and% hence% demand7Q
&@
*n order to properly
&@
A Ta:onomy of Communications Demand% Steve .7 ,anning% Shawn 07 +?Donnell and $7 0ussell
Neuman% September &'''7
Supply and Demand Analysis in Convergent Networks /age D4
^/
1
S
S?
D
D?
;& ;4 ;C
understand the interaction between the supply and demand sides of the bandwidth problem% it is
necessary to develop an economic model that includes price relative to an aggregate ;uantity of
bandwidth7
!owever% it is very difficult and comple: to model bandwidth supply and demand using a linking
mechanism such as price7 The author is aware of one model developed by the Communications
0esearch #nit C0#" of the Australian .overnment that makes an attempt to link supply and
demand in a multi<dimensional model7 -or the time being this is outside the scope of the work
conducted in this paper but will be discussed at the end7 0ather% a simplified model using two<
dimensional supply and demand curves will be presented to give some insight into the dynamics
of bandwidth supply and demand7
+ne of the fundamental concepts used to define 4D supply<demand curves is /rice Elasticity7 The
/rice Elasticity relative to supply or demand% measures the T change in ;uantity supplied or
demanded for each T change in price7 *n its simplest form% this allows the economist to
determine the slope of the curves presented in -igure &A7 This is useful for e:amining the effect
of moving supply and demand curves over time and the various effects of monopolistic and
oligopolistic markets that e:ist in network communications7 $hat this model is not useful for is
modeling and forecasting aggregated ;uantities of supply and demand% since this re;uires
comprehensive and accurate supply and demand data for every service and capacity substitute in
a convergent network7
(efining the 5arket
The dynamics of bandwidth supply and demand% best described by the price elasticities of supply
and demand or the slope of the supply and demand curves% can vary dramatically with service
mi:7 *n this chapter bandwidth supply and demand will be discussed relative to the market for
local access leased<line connections7 These are used since it is easiest to conceptualiFe the
concepts of supply the connection speed" and demand the services demanded" at this level of
the network7 -urthermore% while local e:change carriers offer a large variety of services and
connections% it is the local connections and leased<line services that have been the most important
on a revenue basis% and the price trends for these rate elements are a good indication of overall
price trends for local e:change carriers7
&'

&'
.rowth in the PNew EconomyQ8 #7S7 Bandwidth #se and /ricing Across the &''5s% Douglas A7 .albi
Supply and Demand Analysis in Convergent Networks /age DC
.oing forward% it will be useful and necessary to calculate demand elasticity for aggregated
demand7 Some argue that this is not feasible where services are sufficiently differentiated from
each other according to such parameters as 1oS% synchronicity and content7 ,anning and
+?Donnell argue that the convergence of the telecommunications industry will allow consumers
to see disparities in costs% forcing service providers to eliminate or Gustify price differentials of
different >bits? running over the same infrastructure7
Calculating 'rice )lasticities
Data used for calculating /rice Elasticities of bandwidth% such as price trends and network
capacities% is very difficult to come by since very little data is publicly available7
Table &C8 Estimates of Supply and Demand Elasticity displays e:amples of /rice Elasticities
calculated by third parties for various markets7 Attempts at calculating /rice Elasticity of Supply
and Demand for local bandwidth% have been attempted below using data from various sources7
Table &C8 Estimates of Supply and Demand Elasticity
-urthermore% establishing price and cost trends for leased lines can be very difficult since prices
vary widely and are often negotiated individually with customers7
45
As stated by .albi
PDescribing price trends for local e:change carriers? leased line offerings involves important
standardiFation% weighting% and aggregation issues7 -or e:ample% with different volume% term%
Senior Economist% Competitive /ricing Division% -CC% December 45557
http8BBwww7tpeditor7comBcontentsB455&Bgalbi9tablesandcharts7htm
45
Supply and Demand Analysis in Convergent Networks /age D(
'roduct 'rice )lasticity )stimate #ource +riginal #ource
Deneric Trans@ort -andwidt$ -1.'* to -1.1 Aanning.E2onnell ;CC
Aong-distance 1oice 1.1 Aanning.E2onnell ;CC
AT7 Circuit -andwidt$ -1.& to -1.)) Aanning.E2onnell
#outer -andwidt$ -1.'/ to -1.') Aanning.E2onnell
Switc$-router -andwidt$ -1./) to -1.+& Aanning.E2onnell
Circuit-switc$ed ?oice -andwidt$ -'.1 to -'.& C#U - Australian Do?ernment
5nternet -andwidt$ -1 to -/ C#U - Australian Do?ernment
<on-internet data -'./ to -1 C#U - Australian Do?ernment
-roadcast 5nformation %T1 etc( -'.* C#U - Australian Do?ernment
Fone% and distance plans% #S $est has in the year 4555 (CD different rates for fi:ed and per mile
monthly charges for inter<office DSC circuitsQ7
10
'rice )lasticity of (emand: %ocal Bandwidth
Table &( shows price trends for local connection terminations of leased lines% i7e7 the connections
between the carrier central office and a customer premise in a metro area7 This pricing is
e:pressed in ^BmonthB)bps and does not include a per<mile charge7 Therefore it is considered an
indication of customers? willingness to pay for connection speed7 This data has been graphed on a
log<log scale in -igure &@ to give a representation of a demand curve7 -rom this curve% the /rice
Elasticity of Demand for leased<line terminations is appro:imately E47CD elastic"7
Table &(8 /rices of ,ocal Termination ,ines% &''5<4555
Source8 Douglas A7 .albi% Senior Economist -CC% using data from Bell Atlantic and #S $est7
-igure &@8 ,og<,og .raph of ,ocal Termination ,ines
As a comparison% price data was graphed as a function of estimated *,EC leased<line bandwidth
in use% as shown in Table &D8 ,eased<line prices relative to total bandwidth demanded and -igure
&
Supply and Demand Analysis in Convergent Networks /age DD
Connection
S@eed %8b@s( 1..3 1..1 1..2 1..@ 1..B 1..F 1..D 1..G 1../ 1... 2333
12/ F/''.'' F&9*.'' F/'*.'' F&9,.'' F&99.'' F/19.'' F/19.'' F/&'.'' F/11.'' F/&/.'' F/&'.''
1F33 F1&/.'' F110.'' F11&.'' F11&.'' F1'&.'' F9).'' F90.'' F1'&.'' F9).'' F9+.'' F99.''
BBG33 F10.'' F&+.'' F&*.'' F&&.'' F&/.'' F&,.'' F&*.'' F&+.'' F&0.'' F/'.'' F/&.''
'rice vs Connection #peed
F1'.''
F1''.''
F1,'''.''
1'' 1''' 1'''' 1'''''
M >6bps?
'

>
E
1
m
o
n
t
h
1
5
b
p
s
?
199'
1991
199&
199/
199,
199*
199)
199+
1990
1999
&'''
&'7 This was derived from two different sets of data% one presenting Total Bandwidth Demanded
for each year between &''5 and 4555% and the other showing average prices for *,EC leased<lines
between &''5 and 45557 The correlation is for determining the slope of the curve only and should
not be viewed as the definitive demand curve for this market7
Table &D8 ,eased<line prices relative to total bandwidth demanded
Source8 Combination of data from Douglas A7 .albi% Senior Economist -CC% using data from Bell Atlantic
and #S $est7 http8BBwww7tpeditor7comBcontentsB455&Bgalbi9tablesandcharts7htm7
Supply and Demand Analysis in Convergent Networks /age DL
3rice for Aeased
Aines %F.mont$( BGF D/@ /@F 1313 1@/3 2@D2 2D.@ @BD1 F1F3 GB3G
FD 6bps F1,'.+) F1/*.** F11+.1/ F+0.// F*,./+ F)*.*+ F*'./9 F,+./+ F*1.+9 F*&.+,
1F33 6bps F&0).*' F&)1.'' F&)*.*' F&',.'' F10,.*' F1+1.'' F1+,.'' F1++.'' F1+1.'' F1)9.*'
Total -andwidt$ 2emanded in 5A6C Aeased Aines %Db@s(
-igure &'8 .raph of prices relative to total bandwidth demanded
As can be seen% the demand function is ;uite elastic as the adoption of leased<line services
reaches @ Tbps7 This is consistent with the graph in -igure &@7
'rice )lasticity of #upply: %ocal Bandwidth
Two sets of data have been used to calculate /rice Elasticities of Supply of local leased lines7 The
first set of data is from >inter<office? connections between carrier central offices or /+/s% and
includes links up to (D)bps7 The second set of data is from an *S/ providing connection services
to small and medium businesses and residential customers and covers connection speeds up to
&7D)bps7 *t should be noted that both of these data sets contain demand<side data% i7e7 prices paid
for leased<line service7 Supply<side data i7e7 network operator costs for specific services" appears
almost impossible to come by7 The use of this data is discussed further below7
The data given in Table &( is from two established local carriers E Bell Atlantic% now part of
=eriFon% and #S $est% now part of 1west7 Together these two companies account for about one<
third of 0B+C lines7
&'
$hile network providers other than local incumbents have been active in
supplying domestic bandwidth% new local network providers earned about &4T of total local
leased line revenues in the #7S7 in &''@7 Even if this has increased dramatically% which is
&
Supply and Demand Analysis in Convergent Networks /age DA
'rice vs Total Bandwidth (emanded >I%)C
%eased %ines?
F'.''
F*'.''
F1''.''
F1*'.''
F&''.''
F&*'.''
F/''.''
' &''' ,''' )''' 0'''
Bandwidth ><bps?
'
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?
*) 8b@s
1*'' 8b@s
3ower
%1*'' 8b@s(
3ower %*)
8b@s(
probably hasn?t given the fallout in telecom companies recently and the continued strength of
*,ECs% the data above provides a reasonable representation of local leased<line services7
-urthermore the rates covered in Table :4 accounts for about @DT of revenue associated with
leased lines from the two carriers7 !ence the trends apparent in those tables give a fairly complete
picture of the aggregate price trends for *,EC leased line services7
4&
Table &L8 /rices for *nter<office leased line connections% &''5<4555% shows prices in ^Bmonth for
three different speed inter<office leased<line connections offered by ,ocal E:change Carriers7
Because inter<office prices are determined by connection speed bps" and a per<mile charge% these
prices have been used as a very rough pro:y for connection costs% and thus the supply function7
This logic is ;uestionable but is presented as a rough guide for determining supply elasticity only
and should not be considered the relative supply curve7
The data has been graphed on a log<log scale in -igure 457 -rom the data% it appears that prices
decreased noticeably from &''5<&''( but only slightly on average" from &''(<45557 This is
shown on the log<log graph as the curve migrating downwards over time7 The price elasticities%
taken from the slopes of the log<log curves% come to appro:imately &75 inelastic" for &4@kps<
&7D)bps connections% and 47D elastic" for higher speed connections7
Table &L8 /rices for *nter<office leased line connections% &''5<4555
Source8 Douglas A7 .albi% Senior Economist -CC% using data from Bell Atlantic and #S $est7
4&
Supply and Demand Analysis in Convergent Networks /age D@
Connection
S@eed %8b@s( 1..3 1..1 1..2 1..@ 1..B 1..F 1..D 1..G 1../ 1... 2333
12/ F&'./) F19.9+ F1+.9/ F1*.,9 F1+.1) F1+.9/ F10.,, F1+.)+ F19.'0 F10.0& F10./1
1F33 F&0).*' F&)1.'' F&)*.*' F&',.'' F10,.*' F1+1.'' F1+,.'' F1++.'' F1+1.'' F1)9.*' F1)0.''
BBG33 F+&&.0' F0*'.), F0'+.+/ F+&,.*9 F0'&./+ F+)).)1 F+/0.09 F+/*.+) F+,+.0/ F+01.0' F+)+.*'
-igure 458 /rices for *nter<office leased line connections% &''5<4555
The difference in elasticity between high<speed vs low<speed services shown in the graph maybe
e:plained by one of two things E either &" the prices are not relative to costs across the range of
connection speeds e7g7 margins for higher<speed services are higher than for lower<speed
services"7 According to Brett ,eida
44
% in monthly tariffs for leased lines% the distance component is
typically more heavily weighted for higher capacity links% or 4" the prices are relative to costs% but
the supply constraint for lower<speed services e7g7 C+ aggregator capacity" is greater than for
higher<speed services which can Gustify a truck<roll to install the e:tra capacity7
Table &A shows current prices in ^Byear for leased<line data connections supplied by Earthlink% an
*S/ providing high<speed connections to business and residential customers7 Again% given the
nature of the pricing structure% these prices have been used as a rough pro:y for network costs
associated with setting up the connections% i7e7 fi:ed installation charge covering labor and
overhead and increasing charge based on connection speed7 Again% this was considered acceptable
since the data is only being used to estimate price elasticities7 The data has been plotted on a
linear scale in -igure 4&7 As can be seen from the graph% the price elasticities vary along the
supply curve% from appro:imately 57D inelastic" for lower<speed connections to &7( somewhat
elastic" for higher<speed connections7
44
B7 ,eida E A cost model of *nternet service providers8 *mplications for *nternet telephony and yield
management% )7S7 thesis% )*T% &''@7
Supply and Demand Analysis in Convergent Networks /age D'
'rice vs Connection #peed
F1'.''
F1''.''
F1,'''.''
1'' 1''' 1'''' 1'''''
Connection #peed >6bps?
'
r
i
c
e

>
E
1
m
o
n
t
h
?
199'
1991
199&
199/
199,
199*
199)
199+
1990
1999
&'''
Deneral Trend
199'-&'''
Table &A8 /rices for Earthlink Broadband Services
Source8 Earthlink $ebsite% 5DB54B5&% http8BBwww7earthlink7netB
-igure 4&8 /rices for Earthlink Broadband Services
*n general% it appears as if the Elasticity of Supply is inelastic for low<speed services and elastic
for high<speed services7 .iven the ;uestionable logic of the supply elasticity% the data will be
deemed inconclusive and the nature of the supply curve will be discussed further below7
Supply and Demand Analysis in Convergent Networks /age L5
/+0TS/EED SET<#/ -EE &4 )+NT!S T+TA, C+ST
DL ^D55755 ^4(5755 ^A(5755
&4@ ^&%555755 ^(&5755 ^&%(&5755
4DL ^&%555755 ^D45755 ^&%D45755
C@( ^&%555755 ^L(5755 ^&%L(5755
D&4 ^&%555755 ^@L5755 ^&%@L5755
&D55 ^&%555755 ^&%455755 ^4%455755
12 month cost vs Connection #peed >)arthlink?
F'.''
F*''.''
F1,'''.''
F1,*''.''
F&,'''.''
F&,*''.''
' *'' 1''' 1*'' &'''
Connection #peed >6bps?
'
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1
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a
r
;iBed
Cost
1ariable
Cost
Total
Cost
Analy,ing #upply and (emand
The following section discusses a framework for thinking about the interaction of supply and
demand in Service /rovider networks7 Again% supply and demand is relative to a service or set of
services% but the relative dynamics of the supply and demand should be somewhat consistent
across services7
Costs* 9evenues and 'rofits
*n building a model of supply and demand% it is important to gain an understanding of the costs
involved in delivering the bandwidth products to market7 There are three main costs to consider8
fi:ed costs% variable costs and marginal costs7 $hile cost data from service providers is difficult
to find% there are a few observations to note8
-i:ed costs are considered very high due to the large capital investment in e;uipment%
real estate% labor and current" fi:ed<cost leased lines re;uired to establish serviceO
=ariable costs include transaction costs e7g7 accounting and billing costs"% which are
considered reasonably high% administrative costs and some labor7 !owever% relative to the
fi:ed costs% the variable costs are considered lowO
+nce capacity is in place marginal costs are also considered low and possibly declining
with capacity as administrative costs are spread over the capacityO
+nce a certain capacity is in place% i7e7 steady<state supply% a short<term supply constraint
is present7
The elasticity of supply is inconclusive from the data in the previous section7 !owever given the
statements above% it is assumed that the >steady<state? supply curve can be represented by low or
declining marginal cost up to a fi:ed network capacity supply constraint as shown in -igure 447
Supply and Demand Analysis in Convergent Networks /age L&
-igure 448 Steady<state Supply Curve for Service /roviders
*n regards to pricing8 According to .ambi bandwidth prices% perhaps with the e:ception of T&
prices% have not reduced significantly in recent years despite predictions of price erosion7
4C
This is
in contrast to price indices from 0ate:change% a bandwidth e:change with strong #S operations%
which showed a C'T decline in its price inde: for DS<C circuit on maGor #S east<west routes
from 3une &''@ to Sept &'''7
4(
*n general it is accepted that raw bandwidth prices will decline
dramatically as they are commoditiFed7 *n general the following observations appear to hold8
/rices are largely set by monopolistic or oligopolistic firms% and therefore only weakly
signal broad industry conditions and e:pectationsO
)onopoly pricing still dominates at the local access level as a result of barriers to local
>unbundling? of the networkO
-irms% particularly at the local access level% are able to heavily price discriminate by
customer segmentationO
-irms with high fi:ed% sunk costs and low marginal costs have a strong incentive to avoid
direct price competitionO
4C
4(
0ateE:change% http8BBwww7rate:change7comB
Supply and Demand Analysis in Convergent Networks /age L4
1 N bps"
/

^
B
b
p
s
"
)arginal cost asymptotic to Fero
Short<term
capacity
constraint
Currently there is little opportunity for competitive differentiation% especially across A,,
services offered% although this is e:pected to change with current innovations in >service
aware? technologiesO
Service /roviders face a reasonably elastic demand curve as evidence by data in the
previous section and work conducted by others7
.iven the observations about pricing and the demand curve facing Service /roviders% a Service
/rovider will seek to profit ma:imiFe in much the same manner as a monopolist7 This is shown
-igure 4C7 The recurring operating profit for the services" is shaded7
-igure 4C8 /rice<setting and /rofit for a Service /rovider with )arket /ower
Note that the firm has an incentive to e:pand its capacity as demand grows% and that there will
generally be an over<supply of bandwidth without affecting price7 This is consistent with
observations noted throughout the thesis7
Carriers will also e:hibit a great amount of price discrimination in order to capture as much of the
consumer surplus as possible7 This is evidenced by volume discounts and pricing differentiation
between business and consumer segments7 As competition enters the market% the supply curve for
the local market moves out and the marginal revenue curve is shared between the competitors7
Supply and Demand Analysis in Convergent Networks /age LC
1 N bps"
/

^
B
b
p
s
"
)arginal 0evenue Curve
Elastic Demand Curve
)arginal Cost Curve
The supply<demand scenario above is for steady<state capacity facing a steady<state demand
curve7 Chapters 4 and C discussed a growing demand for bandwidth% while Chapter ( talked
alluded to heavy investment in ne:t<generation networks by Service /roviders7 .iven the need to
convert a high fi:ed<cost capital investment into a recurring revenue stream% how do service
provider combat declining prices with a growing demand for bandwidthH A mechanism is
proposed in -igure 4(7
-igure 4(8 Demand Shift with Supply
!ere% a Service /rovider may try to induce demand by increasing supply7 This is shown as a
movement of the capacity constraint portion of the marginal cost curve outward Step &"7 As new%
compelling services are created to take advantage of the new capacity% the demand curve shifts
outward 4"7 *t should be noted that the supply curve is likely to move out much further% for a
given service or set of services% when an individual Service /rovider e:pands capacity% as
opposed to new entrants e:panding capacity7 This is a direct result of product differentiation and
fragmentation of the market for bandwidth services7
Since marginal cost is very close to Fero% the carrier can use this strategy to substantially increase
its operating profits7 The carrier will make these investments based on the net present value of
Supply and Demand Analysis in Convergent Networks /age L(
1 N bps"
/

^
B
b
p
s"
Demand Curve
)arginal Cost Curve
Step &
Step 4
the e:pected operating profit and the e:pected life of the e;uipment before replacement7
4D
*t is
critical that the life of the capital e;uipment be estimated properly% as it is the primary
determinant of value in this scenario7 *f innovation makes the current e;uipment obsolete and
new competition emerges% the carrier may need to replace the e;uipment sooner than e:pected%
resulting in a loss of value for the proGect7 $ithout competition% the carrier will try to stick with
older technology unless new e;uipment actually adds new capacity that would induce additional
demand7 This has been demonstrated by the *,EC carriers? investments in *SDN and T&s and
their reluctance to adopt newer technologies until new competition forced them to invest in DS,
technology7 /erhaps another way to look at it is a monopolist or firm with market power is
encouraged to invest in new technologies to maintain capacity and market share% and therefore
market power7 *f an *,EC has market power% than this game can be played ;uite effectively7
-igure 4D8 Cyclical nature of supply and demand in current telecommunications markets
4D
0yan Berryman% )*T Sloan% )ay 455&7
Supply and Demand Analysis in Convergent Networks /age LD
Steady<state
supply S
Elastic
Demand7 e7g7
*,ECs
New Entrants provide new
capacity7 e7g7 C,ECs
Supply curve begins to shift7
*nduces some demand *ncumbent
response7
*ncrease
supply to
maintain
revenues7 e7g7
*,ECs roll
out DS,
New Supply induces
demand via new services
Demand curve shifts out%
dominant players" captures
market share
Conclusion
This thesis has reviewed the concepts of supply and demand as they pertain to bandwidth in
convergent networks7 A draft model for estimating and analyFing edge demand has been
presented% and a framework for thinking about the interaction of supply and demand facing
Service /roviders has been developed7
Bandwidth demand appears to be driven by a number of factors including8
The declining costBperformance of computing and the proliferation of computing devices
is generating data that is increasingly more valuable in a network of such devicesO
The tremendous growth of digital information re;uiring processing by computers and
networks of computersO
The pricing of bandwidth7 Elastic demand ensures that bandwidth demand scales
dramatically with decreasing pricesO
Broadband access adoption increases the bandwidth demanded by changing user?s on<
line habits7 #sers of broadband technologies such as DS, and Cable tend to have a higher
usage of bandwidth<intensive applicationsO
New services adoption7 /rovided that the value of the application is realiFable with
current access speeds% than new bandwidth<intensive applications can encourage users to
adopt high<speed services% thus increasing their usage of bandwidthO
-inally% an underlying cultural change is demonstrated by a gradual shift to on<line media
away from traditional media such as television% radio and print7 This is most apparent is
younger users7
Drivers of bandwidth supply i7e7 network capacity" will cause new entrants to enter the market%
and incumbents to increase their network capacity7 -or e:ample% increased opportunity for
revenue generation can induce new competition and lead to pressure on prices and the
incumbent?s share of marginal revenue7
The drivers of bandwidth supply include8
Supply and Demand Analysis in Convergent Networks /age LL
0evenue .eneration8 $hether it is a new entrant trying to capture a share of increasing
demand% or an incumbent attempting to protect current revenues or generate new revenue
streams% the investment in network capacity is directly related to revenue strategiesO
Cost Savings8 *n order to achieve economies of scale and scope Service /roviders are
investing in new technologies% such as D$D)% that scale network capacity and
potentially reduce the cost of providing bandwidthO
Technology Deployment8 The need for some carriers to maintain a technology >edge?%
and the desire to bridge technology >gaps? will possibly lead to greater investment in new
supply provided by such technologies as +C<AL@O
*ndustry 0egulation8 has already proved that it can have a dramatic effect on the
competitive landscape of the communications industryO
Capital Availability8 market forces ultimately decide how much capital is available to
invest in network capacity7
.iven these drivers of supply and demand% an interesting dynamic arises at the interface of supply
and demand7 *n the case of the maGority of Service /roviders in a monopoly or oligopoly
situation% a static demand curve ensures that as new competition enters the market% the marginal
revenue curve is shared between more players7 An incumbent is then encouraged to protect
market share by investing in network capacity7 *n many cases it seems that a shifting out of the
supply curve can induce a shift in the demand curve% in relation to the cyclical nature of the
drivers listed above% thus helping to maintain revenues and market power for the incumbent7 This
decision% however% must still be dependent on the N/= of the investment% which is a function of
the CA/EN and subse;uent recurring revenues generated by the CA/EN7
There are further observations that should be pointed out in this thesis7 The first is that the
communications market is highly fragmented with more product differentiation than is obvious at
first7 Therefore generaliFed observations about a >bandwidth glut? are should be localiFed to
particular sections of the market% and are often short<lived7
Second is the evidence that demand for bandwidth appears reasonably elastic7 The cyclical nature
of the market supply and demand ensures that capacity over and under<supply is also cyclical and
is determined heavily by the market power held by the incumbents7
Supply and Demand Analysis in Convergent Networks /age LA
The third observation is that Service /roviders play an important role in the development or
destruction of new services that generate bandwidth demand7 #nless new services are compelling
enough to generate revenues with current technology than investment in the infrastructure to
support the growth of these services will not occur7 Alternatively% if incentives e:ist e7g7 new
competition"% incumbent Service /roviders can induce the adoption of new services and shift the
demand curve by investing in additional network capacity7
-inally% estimates for the growth in network >edge demand? are VV
Supply and Demand Analysis in Convergent Networks /age L@
<lossary of Terms
*,EC *ncumbent ,ocal E:change Carrier7 Also includes
0B+Cs or >Baby Bells?7 e7g7 =eriFon
C,EC Competitive ,ocal E:change Carrier7 Essentially
the new entrants since the &''L Telecom Act7 e7g7
N+ Communications7
*NC *nter<E:change Carrier7 )ostly long<distance
carriers% e7g7 ATIT
D$D) Dense $avelength Division )ultiple:ing
*S/ *nternet Service /rovider7 e7g7 A+,
S+NET Synchronous +ptical Network% a standard for
optical networking7
Supply and Demand Analysis in Convergent Networks /age L'
AppendiA
Selected screen shots of Services Adoption Edge Demand )odel7
E:ample Adoption 0ates for Services8 0esidential #sers
Supply and Demand Analysis in Convergent Networks /age A5
Linear 5and.idth Demand &ode!
Household Adoption Assumptions
9eNuired #peed
>5b1s?
(ata =olume
per Cnit >5bits?
0ear of
Introduction
0ear of 1DH
Adoption
0ear of F3H
Adoption
Audio 1 =ideo
Tele@$one '.'), /.0, 19'' /'.'' ,'.''
1o53 '.''0 '.,0 &''' /.'' +.''
Cireless Tele@$ony '.''0 '.,0 190, 1&.'' 19.''
1ideo 3$one / 10' &''0 1&.'' 19.''
7o?ies on 2emand / &1,)'' &''& 11.'' 1*.''
Streaming 1ideo Cli@s 1.* /)' 1999 ).'' 1*.''
1oice 7essaging on <et na '.,0 1999 /.'' 0.''
2ownloaded 7o?ie na &1,)'' &''& ).'' 1*.''
2ownloaded 1ideo Cli@s na /)' 1990 ).'' 1*.''
<a@ster . 2ownloaded 7usic na /&,+)0 1999 ,.'' 0.''
2igital T1 / 10' &''1 *.0' 0.''
-roadcast Tele?ision &'' 1&,''' 19,* &'.'' ,'.''
Cebcam . Cebcast '.1 ) 1999 ,.'' ).''
#adio -roadcast '.'/& 1.9& 19&' ).'' 9.''
53 Audio -roadcast '.'', '.&, 1990 0.'' 1&.''
14S Ta@es * ' 190' ,.'' 1'.''
Audio Ta@es na ' 19+' ,.'' +.''
TeAt 1 Images
C$at '.* 199+ ).'' 1&.''
;aB '.& 190' 1'.'' /*.''
6mail 1.) 199' ,.'' 1&.''
5mages 0 199+ &.'' *.''
<ewswires , 199+ &.'' *.''
Ceb@ages /.& 199+ &.'' *.''
S@am 1.) 199+ &.'' *.''
7aga!ines . 3rint ' 19'' &.'' 1).''
(ata
#emote -acku@ , 1999 ).'' 1'.''
#eal-Time 2ata &, 1999 1'.'' &'.''
+nline Applications
Dames 1&0k-)m +.)0 199* 1.'' 1*.''
7S ffice.<6T &/, &''& &.'' ).''
Drou@ware. 357 &, 1999 *.'' 1'.''
7assi?e 7ulti-3layer Dames 1) 1990 ).'' 1''.''
t$er AS3s 1) &''& *.'' +.''
Transactions
S6T5G4ome . Centrata '.0 &''' 1/.'' &*.''
S$o@@ing 0 199+ ,.'' 1'.''
-anking 0 199+ ,.'' 1'.''
nline Trading 0 199+ ,.'' 1'.''
Auctions '.0 1990 +.'' 1*.''
Effective No7 Business #sers
Aggregated Demand8 0esidential #sers
Supply and Demand Analysis in Convergent Networks /age A&
Total Small -usinesses * 1'&''.' 1'/1'.& 1',&1.* 1'*/,.1 1'),+.0 1'+)&.0
Total 7edium -usinesses &' ,&.' ,&.* ,&.9 ,/., ,/.0 ,,./
Total 6nter@rise 0'' ).* ).) ).) ).+ ).0 ).9
Total 6ducation 1'' &+.' &+./ &+.) &+.9 &0.& &0.*
Total Do?ernment and Agency *' &''.' &'&.& &',./ &').) &'0.0 &11.'
Total )ffective Business Csers D.*GB3 G3*B.@ G1*2FF G2*32B G2*/32 G@*F//
2333 2331 2332 233@ 233B 233F
TeAt 1 Images
C$at ),/)1 0,*++ 11,/'* 1,,*+/ 10,/0& &&,+'*
;aB *,)/& ),0&, 0,199 9,++1 11,**' 1/,*,*
6mail */,9/* *9,/'9 )/,+&) )+,&1& )9,00) +1,91,
5mages *0,)+* )0,009 +1,1*0 +&,'&& +&,0'& +/,*00
<ewswires *0,)+* )0,009 +1,1*0 +&,'&& +&,0'& +/,*00
Ceb@ages *0,)+* )0,009 +1,1*0 +&,'&& +&,0'& +/,*00
S@am *0,)+* )0,009 +1,1*0 +&,'&& +&,0'& +/,*00
nline #esearc$ )9,+,' +',,9/ +1,&** +&,'&, +&,0'& +/,*00
(ata
#emote -acku@ and Sync$ ,,)*9 +,,,0 11,/'* 1),/&/ &&,,)& &9,*/'
#eal-Time 2ata Transfer &,*') /,1,& /,9'* ,,01& *,0+9 +,1&/
+nline Applications
' ' ' ' ' '
AS3 A@@lications - - ,,& 1,)/9 ,,0), 11,)+*
Drou@ware. 357 /,0&& *,)9/ 0,199 11,,&+ 1*,,&/ &',10&
;inance and Accounting 11,')* &1,+*' /*,)&+ ,9,0'& )1,&*& )0,)+&
t$er AS3s - - 0,199 11,,&+ 1*,,&/ &',10&
Transactions
nline 3rocurement 1,*0+ ,,+'9 11,/'* &&,&&& /),,'1 *',00/
6-Commerce /,,0+' *9,/'9 )9,)// +1,9&+ +&,0'' +/,*00
;inance and Accounting 11,')* 1*,9+) &1,90* &0,9'/ /),,'1 ,,,'*0
nline Trading 11,')* 1*,9+) &1,90* &0,9'/ /),,'1 ,,,'*0
-ookings, #eser?ations 1,*0+ 11,10, /*,)&+ )',*9+ +1,1,) +/,,09
umber of )ffective Business Csers
&''' &''1 &''& &''/ &'', &''* &'')
Audio 1 =ideo
Tele@$one +,+)&.+' +,0*0.// +,9*,./* 0,',9.)) 0,1,,.1) 0,&,1.'0 0,//0.01
1o53 - - - - /.+/ &,.9) 01.'&
Cireless Tele@$ony ),,.9+ +'1./0 +*9.&0 010.&/ 0++.0) 9/0.1+ 990.),
1ideo 3$one - - - - - - -
7o?ies on 2emand - - 1,*'/.)+ *,&1&.)& 1,,*1&.*/ /&,0+/.9& )1,),+.,*
Streaming 1ideo Cli@s 1,,19.9& /,1*+.10 ),//*.** 11,*)'.+0 19,/*+.,, /',')&.+/ ,/,+0'./0
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2ownloaded 7o?ie - - 1,*.// )),.++ &,/90.,, ),91*.+& 1),&10.+,
2ownloaded 1ideo Cli@s 9/+.10 1,00'.)/ /,,/&.11 *,+,+.*, 0,9&/.0) 1&,99*.19 1+,9,,.*,
<a@ster . 2ownloaded 7usic /,*0*.9& 9,1&'.00 &',&*,.*1 /9,*)0.)) )0,),1.90 1'),9)&.,/ 1*1,)'*.))
2igital T1 - )1,''*.&& &*+,'/).19 *),,*'/.'1 0/*,9)/.&0 1,')*,'+'.1/ 1,/'1,'',.0)
-roadcast Tele?ision - - - - - - -
Cebcam . Cebcast 1,'.,' /,1.'+ *,*.'9 +/&.11 9&&.00 1,11).0) 1,/'/.)9
#adio -roadcast - - - - - - -
53 Audio -roadcast /&*.9) ,)*.9/ *+0.)) )9*.*& 0&,.0& 9)).9* 1,1&'.+*
14S Ta@es - - - - - - -
Audio Ta@es - - - - - - -
TeAt 1 Images
C$at )9.'& 9*.'9 1&*.,0 1)1.+1 &'/.9' &*1.01 /',.+,
;aB '.'& '.'& '.'& '.'/ '.'/ '.', '.'*
6mail ,*).0* )/+.9' 0*'.') 1,'0*.'+ 1,//&./, 1,*01.** 1,0&/.&0
5mages &,9.', ,1).01 *0/.// +1+.&+ 0'/.0, 0*'.+, 0+,./9
<ewswires - - - - - - -
Ceb@ages /&/.,) +*).+1 1,,/9.09 &,/'&.)9 /,&1*./* ,,'+,.++ ,,0/).0+
S@am /,.*+ )).&& 1'+./+ 1*1.9) 19,.*' &//./& &)9.+0
7aga!ines . 3rint - - - - - - -
(ata
#emote -acku@ - - - - - - -
#eal-Time 2ata - - - - - - -
+nline Applications
Dames - '.'' '.'' '.'' '.'1 '.+9 /,.&1
7S ffice - - - - - - -
Drou@ware. 357 - - - - - - -
7assi?e 7ulti-3layer Dames - - - - - - -
AS3s - - - - - - -
Transactions
S6T5G4ome . Centrata /1.+0 ,,.1) )'.)/ 0&.&* 11'.&9 1,).&, 191.+/
S$o@@ing 1'.+9 1+.)1 &).++ /0.), */.1* )9.0+ 0+.99
-anking */.9/ 00.'+ 1//.0* 19/.&1 &)*.++ /,9./* ,/9.9/
nline Trading &1*.+' /*&.&9 */*./0 ++&.0/ 1,')/.'0 1,/9+./0 1,+*9.+1
Auctions '.&' './& '.,/ '.*) '.+/ '.9& 1.1*
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Bandwidth (emand

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