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Weekly Column

Rules of the Road: Internet Growth Is Slowing, So We Instinctively Seek New Ways of Growing and New Rules to Make It Happen

Status: [CLOSED]
By Robert X. Cringely

Internet use in American homes is still growing, but the pace of that growth is slowing according to a study released this week by Parks Associates, a market research firm from Dallas, Texas. Based on a sample of 1,000 U.S, households, the survey concluded that 42 percent of U.S. homes have broadband, 22 percent use dial-up, but that 29 percent have no computers at all, thus placing a firm upper limit on potential Internet penetration. Not to put too much faith in a single study, this Parks report generally supports a similar Pew report from last year. This has to be a kick in the head to pundits who have seen Internet access quickly becoming as ubiquitous as electric power, telephone, televisions, or indoor plumbing. It also does a lot to explain much of the current Internet hype that emphasizes non-PC applications. By applying a couple Cringely rules of thumb, we can take these study results far beyond the Parks analysis and figure out where things are really headed and why.

There are two ways to build market share for a major new technology: 1) by attracting early adopters followed by normal consumers, and 2) through a generational change where non-users literally die-out to be replaced by a whole new generation of consumers who are comfortable with the technology. An innovation can generally reach about two-thirds of the market through the first method, but to reach near 100 percent market share you need the latter. And that's the way it always is, even though we choose to forget that fact when it is more convenient to do so.

That's why electricity and telephones, both of which have been with us for over a century, have almost 100 percent market share. People aren't born today who can imagine being without a telephone or electricity, so of course they have both. The only communication product class to buck this inter-generational trend is broadcast television, which grew to 97 percent market penetration in less than 30 years, but that probably confirms my feeling that television was really perceived by the consumer as an extension of radio, which would given it a much longer effective adoption cycle.

Today Internet use and cable television use in the U.S. are roughly comparable at just under 70 percent market penetration. That means the commercial Internet, which effectively dates from the late 1980s, has grown at about three times the rate of cable TV, which began in the late 1940s and took until 1976 to reach 15 percent penetration. In fact, cable TV market penetration stood at 50 percent in 1987, about the time the commercial Internet came into being.

So the Internet has grown a lot faster than these earlier communication technologies, but then the Internet is technically dependent, for the most part, on some other host network. At the very least you need to first be a telephone customer to then become an Internet customer. That makes cable TV, even for its slower growth rate, actually the more impressive act, since its numbers are truly ab initio.

Yet it seems obvious to me that while a generation shift will make Internet access almost universal in another 20 years, the same probably won't be said for cable TV, which may well peak and decline before then simply because there will be other ways to get television. That's the distruptive nature of the Internet, which threatens telephone companies, cable companies, and TV broadcasters, alike.

The result is that each of these industries is trying to poach the others. As such, cable TV is the very heart of the U.S. broadband industry even though broadband is what will probably end up eating cable's lunch. Telephone companies like the Internet, too, just as they are also trying to find ways to enter the television business while their voice business is being savaged by VoIP.

While waiting for the inter-generational boom or bust that is inevitable, each industry is building-out to maximize the revenue from its existing subscriber base. Cable TV companies do this by hawking pay-per-view, digital cable, and video-on-demand. Telephone companies are starting to do the same. But Internet companies have a slightly different task, and that's finding ways to connect more devices and more device types to their networks. That's because, as a stupid network that offers nothing more than bandwidth and a gleaming smile to its users, the value of the Internet is increased solely by the number of connections to it. So if you have already maxed-out your PC connections, it is logical to start connecting non-PC devices.

And that's the motivation -- the real motivation -- for all these TV shows and movies suddenly being made available over the Internet. It is to get more types of devices connected to the net to, in turn, increase the business value of that network to its nominal owners, which unfortunately would not be you or me.

This is just the simple motion of tectonic plates -- slow but inevitable, and also irresistible. Against this glacial scene of course there is still a subtext of local politics and short term business advantage, but the trends are clear, and here they are:

1. All networks will eventually be subsumed into the Internet, because only as a single network can their value be maximized. This is kind of a cock-eyed interpretation of Metcalfe's Law, which says the value of a network is the square of its number of nodes. I think using a square function was Bob Metcalfe going a bit far, and the real value here is to acknowledge that network unification is a primal technical urge and -- whatever the actual value achieved =- will drive all the existing networks into a single technology with wired and wireless varieties.

2. If all networks are eventually to merge, then all the whining from this special interest or that is just whining. When SBC (now AT&T) or BellSouth complain about having to carry Yahoo or Google bits for free, they are just trying to fool us into paying even more than we already are for the same network services they would give us for free if they had to. Sharing the increased value of the larger network is worth more to these companies than the incremental revenue of bleeding Yahoo. Either they don't get this, which is very possible, or they are lying, which is equally possible.

3. This is a stretch, but it makes sense to me: If the prime directive here is simply to grow the Net as big and as fast as possible, then the best way to do that is through the balancing of data loads as much as possible across the Net. This is contrary to the client-server model that has dominated the Internet for most of its existence. Put differently, the major impediment to eventual Internet hegemony is the problem of scaling client-server applications. How big a data center do you need before you realize that no data center is big enough for some applications? Only a server-server or peer-to-peer architecture makes sense in the long run.

Here we have what might be three new laws to guide future growth of the Internet. And they tell us a lot about where things are headed. It is logical to assume that all devices will eventually be networked but we will start with devices that are either already intelligent (computers) or are very important to us (televisions). Any political or business obstacles in the path of this transition are most likely temporary. And the only way for the network to maximize its value is through server-to-server or peer-to-peer networking.

So if your ISP doesn't want you to share or re-sell your Internet connection, it is just because they don't yet realize that such sharing is really to their advantage. In time they will come to see it or they will die. If your ISP doesn't like all that Bit Torrent traffic, it is just because they haven't yet figured out that it is the long term key to their success as a business.

For the transition of television to the Net, then, heavily data center-based ventures are unlikely to be successful in the long-term. Google and its distributed shipping containers might be right for this moment or next, but they can do the math and that math tells them that pumping tens of millions of simultaneous HDTV unicasts from a Google server is no way to make money. It is much better to use Google servers to seed video content, which is then shared by many peers. This is pretty much the only way the system can scale high enough to functionally replace and then improve on today's TV.

The poster child for television 2.0, it seems to me, is a company like Grid Networks, which might be a new name to you. Like Bit Torrent, Grid has built a peer-to-peer distribution system. Like Mike Homer's Kontiki, Grid has married Digital Rights Management and a business model of sorts to its Torrent-like distribution system. But unlike most of the others, Grid (no, I am not an investor but thanks for asking) most approximates what my Mom thinks of as TV.

Kontiki has been around for a long time, and are definitely first mover in the market. They adopted a subscription model (RSS+P2P=Video), but for that the videos have to be downloaded in entirety, and there really is no "browse, click, watch" functionality in their system (at least yet). It is certainly better than waiting 2 days for NetFlix at the mail box, but it's just not quite user friendly enough in my opinion.

Grid's system, on the other hand, accomplishes two things from the end-user perspective: it is point, click and watch; and it is very very high quality. Using p2p, they can afford to send 1.5Mbps - 2Mbps video over their network because it costs the same as sending 150Kbps-200Kbps video. I was shocked by the video quality, watching a DVD-quality movie at Starbucks on my notebook computer with virtually no waiting.

But a successful commercial system can't count on anarchy, so Grid has a full Content Management System built into the network (called Media Vaults) that allows for media uploaded to a media vault to be monetized and then syndicated with XML to as many vending websites you as the content owner wants. Mix that with a ubiquitous platform player and, well, you get the point.

Apple is selling one-hour TV shows on iTunes for $1.99 with 67 percent of that revenue going to the content owner ($1.33), and a cost of 25 cents for the network delivery leaves them $0.41 for marketing and operations per video -- very thin margins. Reducing the cost of the video delivery to as low as five cents while raising the bit rate would seem to be a no-brainer.

Right now, Grid only has about 100,000 clients installed, but that's enough for 80 percent lower prices for instant-on video. A new multi-platform client is on its way; the company will become 95 percent "grid efficient" with as few as 1,000 downloaded clients. This isn't rocket science, and there may be other, even better, solutions to the same problem, but it works, it is available now, and it could change television forever.

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