0 Viewpoint The World Bank Group July 1997 Note No. 118 The Drivers of the Information James Bond Revolution-Cost, Computing Power, and Convergence Powerful forces are In the past few years, there has been a technological phase-shift as computers have become recasting the business world in a fleeter, more ubiquitous, communications technologies have multiplied, and the Internet has become a widely competitive form. These forces, largely used means of doing business. The three most powerful trends driving these developments are grouped around information infra- the decline in the cost of transmitting information, the increase in the power of computing, and structure and new communications the shift from analog to digital information technologies that has joined the telecommunications technologies, have come to be known and computing industries and merged market segments of the information industry. This Note collectively as the information revolution. explains these three trends. This Note is the first in a series of five that looks at the information revolution and the Cost of communicating cable, the cost is mostly in installation), the future of telecom- generalization of fiber optics is profoundly munications-and what they mean for the The cost of communicating has declined dra- changing the industry's cost structure, moving regulatory role of matically in the past twenty years. The cost of it away from existing tariff-setting mechanisms. government. a voice transmission circuit, for example, has fallen by a factor of 10,000 as a result of the Cheap electronics. A key part of the telephone development of fiber optics, cheap electron- infrastructure is network exchanges, made up ics, and smart wireless (figure 1). of switching equipment. Automatic switches were originally electromechanical, but the Fiber optics. First produced commercially by switches installed today are electronic-essen- Corning Glass in 1970, fiber-optic cable has tially specialized computers. The advent of become the increasingly dominant means of cheap, powerful, microprocessor-based com- signal transmission in telephony since the mid- puting has altered the economics of switching, 1980s, replacing copper cables, microwave reducing costs and increasing reliability while transmission, and satellite. Optical fiber has ex- also delivering new value added services for tremely high capacity (bandwidth) because of the user (such as call waiting and caller ID). the light it transports. The high frequency of Cheap electronics are also at the heart of cel- light allows higher information density than lular telephony and personal communications conventional cable: a fiber thinner than a single services, which use electromagnetic spectrum hair can carry a laser signal combining many more efficiently than conventional wireless. thousands of telephone conversations, so that And computing power now makes it possible the cost per voice circuit becomes almost in- to run existing telecommunications infrastruc- finitesimal. Because fiber optics reduces the ture as an "intelligent network," improving cost of signal transmission so much, and be- capacity utilization, lowering the cost of main- cause this cost is increasingly fixed (with main- taining switches, and creating new services, tenance costs much lower than for conventional such as virtual private networks. industry and Energy Department * Finance, Private Sector, and Infrastructure Network The Drivers of the Information Revolution-Cost, Computing Power, and Convergence FIGURE 1 COST TRENDS IN OPTICAL FIBER TRANSMISSION Index of transmission cost per bits per second per kilometer (log scale) Smart wireless. Wireless technology is evolving 1,000 toward higher frequencies (inherently more 45Mbps information dense), with a range of clever com- 100 90-135Mbps pression algorithms to squeeze many conversa- 0400Mbps tions into a given frequency (such as Time 12--1.7Gbps Division Multiple Access, or TDMA, and Code 1 2.5Gbps Division Multiple Access, or CDMA). This de- 10Ghps velopment, coupled with cheap electronics, per- 0.1 4Gbps mits mobility for the user-in some situations, 0.01 wireless has become an alternative to conven- 1975 1980 1985 1990 1995 2000 tional wireline technology for basic services. Cel- Note: Mbps is megabits per second; Gbps is gigabits per second. lular telephony is growing rapidly, more than Source:AT&T data. doubling worldwide every two years, while fixed FIGURE 2 PRICE TRENDS IN INFORMATION PROCESSING wireless is increasingly being deployed for the "local loop," or local access network-that part Index of investment cost of the network providing access to the end user. per instruction per second So besides bringing overall costs down, fixed (log scale) 100 wireless has also introduced real opportunities SMa nrame for competing providers of local services, an area earlier deemed to be a natural monopoly. 10 C Digital VAX Finally, the cost of deploying wireless is much less sensitive to subscriber density (the number a of customers in a given area) than that of install- IBM PC Sun Microsystems 2 ing wireline, so wireless is of great interest to developing countries, particularly for rural areas. 0.1 These three developments have necessarily been 0.01 Pentium accompanied by a move away from analog to 1975 1980 1985 1990 1995 digital technology, in which signals are trans- Source: World Bank compilation based on industry data. mitted as binary code. Digital telephone net- works ensure better quality and allow the use FIGURE 3 TRENDS IN TRANSISTORS PER MICROPROCESSOR of packing protocols for data transmission, such as frame relay, Asynchronous Transfer Mode (log scale) Pentium 11 (ATM), and the Internet protocol TCP/IP. (7.5 million) 10,0,000 Pentium Pro 5i.mk.1 Power of computing 1,000,000 486. Pentium The second important driver of the information 4 13.1 million) revolution has been the relentless increase in the 386a power of computing. Computing power per dol- 100,000 286. lar invested has risen by a factor of 10,000 in Motorola 68000 . twenty years (figure 2). Power has increased and Intel 8086 x Sun SPARC costs have fallen because of the development of 1,000 integrated circuits and microchips, because of increasing transistor density on microchips, and Intel 8080 because of economies of scale in production. ntel 4004 1 0 01975 1980 1985 1990 1995i 2000 Integrated circuits, miniaturization, and micro- chips. The modern electronics era began with Source:World Bank compilation based on industry data. the invention of the integrated circuit in a Texas Instruments laboratory in Dallas in 1958. The integrated circuit, which groups transistors and cating is the rise of networks. When PCs began other electronic circuits on a tiny piece of semi- penetrating the business environment around conductor, is a breakthrough in product design 1981, they were used mainly as stand-alone work- because of its enormous potential for miniatur- stations. Independent mainframe computers, ization and for reducing unit costs. The micro- accessed by "dumb" terminals, continued to chip, essentially an entire computer on a chip, handle much of the heavy processing. Today's was developed by Intel (as the four-bit 4004 business computers are connected to one another processor) in 1971. Its 2,300 transistors provide in local area networks (LANs), and increasingly, all the essential functions of a computer. these private networks are interconnected through the Internet, the international "network of net- Increasing transistor density. The density of tran- works," which is doubling in size every year. sistors has been rising exponentially-a phe- Because of the growing interconnection, PCs' pri- nomenon sometimes characterized as Moore's mary function has shifted from document and law. In the 1960s, Gordon Moore, an electrical spreadsheet management to communication and engineer and a cofounder of Intel, observed that information processing. The growth of the the number of transistors on a microchip doubles Internet illustrates Metcalfe's law (Metcalfe was every one to two years. Because computing the cofounder of modern computer networking), power is roughly proportional to the number of which states that the value of a network equals transistors, or "gates," on the microprocessor, the square of the number of interconnected this would translate into a doubling of comput- nodes. As new users join the Internet, its value ing power per microchip every eighteen months for all users increases geometrically. Metcalfe's or so. And because the cost of a microchip rises law illustrates how networking PCs radically only slowly from one generation to the next increases their value as a knowledge tool. and represents only about 5 to 15 percent of the cost of the computer, Moore's law would Convergence translate into a near doubling of computing power for a given investment every eighteen As costs have fallen and digitalization has re- months. In fact, the growth in power over placed analog technologies in telecommunica- twenty-four years-from the Intel 4004 (2,300 tions, the telecommunications, information transistors) of 1971 to the Pentium It (7.5 mil- technology, and media industries are merging lion) of 1997-averaged nearly 40 percent a year, into a "bit industry" that manipulates voice, corresponding to a doubling every twenty-five image, video, and computer data in binary form. and a half months-close enough to Moore's This convergence has profound implications for estimate (figure 3). the industries involved. * Communications and information services are Economies of scale. Computing has also become being delinked from their underlying deliv- far cheaper and more powerful because of econo- ery infrastructure: telephone services can be mies of scale in production, not only of micro- delivered through coaxial cable, data services chips but of such essential ancillary equipment and Internet access through telephone lines, as mass storage (disk drives), removable stor- and cable TV through direct broadcast satellite. age, and computer network equipment. The * Accompanying the delinking is increasing emergence of a set of de facto industry standards overlap between the two primary components -based on the first IBM personal computer (PC) of the communications industry, which have of 1981, the Intel microprocessor instruction set, traditionally been segregated: common car- and the Microsoft operating systems (DOS and rier conduit systems and networks designed Windows)-has also enabled producers to stan- to transmit signals anonymously (telephony) dardize equipment and software and encouraged and content-based information sources and price competition. technologies (broadcasting). One result of the increase in the power of com- Thus, it is now possible to receive radio broad- puting and the decline in the cost of communi- casts over the Internet (using telephone net- The Drivers of the Information Revolution-Cost, Computing Power, and Convergence FIGURE 4 THE CHANGING INFORMATION INFRASTRUCTURE UNDER CONVERGENCE Before convergence After convergence Basic . Basic telephone Wirekie telephone services services Cellular Cellular Generalized telephone Wireless telephone information services network services infrastructure Wireline Internet IntIntern Internet Wireless services backbone services Cable Coaxial Cable Coaxial television cable television services network services Satellite Data . Satellite Data transmission transmission Viewpoint is an open forum intended to works), and telephone services can be provided legal sanctions (through the courts). Telecom- encourage dissemina- by companies in cable TV (a broadcasting me- munications content has been largely unregu- tion of and debate on diuTm). Broadcasting (from one to many) now lated, because it is not technically possible to ideas, innovations, and best practices for shades from narrow-casting (custom-tailored in- do so using existing content regulation mecha- expanding the private formation) to one-to-one communication like nisms. And convergence opens new realms of sector. The views telephony (figure 4). communications where traditional content regu- published are those of the authors and should lation cannot be applied. in this context, what not be attributed to the Convergence has important implications for do policymakers do about decency, privacy, World Bank or any of its policymakers. First, it has made existing models and intellectual property rights? affiliated organizations. Nor do any of the con- for the telecommunications industry obsolete. clusions represent Those models have assumed that telecommu- Convergence also opens up huge opportuni- official policy of the nications is a public service, delivered through ties for developing countries to accelerate the World Bank or of its Executive Directors a network that is a natural monopoly. But these rollout of connectivity to their populations using or the countries they models are negated by the competition now innovative technologies and private sector-led represent. possible between segments of the delivery investment in a competitive mode. Cheaper To order additional infrastructure (intermodal competition) and, communications are offering new possibilities copies please call 202- increasingly, within segments (intramodal for countries to be internationally competitive 458-1111 o r ontact competition). Convergence thus means that and to "plug in" to the global economy-and Suzanne Smith, editor, Room F6P-188, governments must lower barriers to entry and providing much more cost-effective ways to The World Bank, overhaul telecommunications regulatory sys- deliver essential public services to the poor. 1818 H Street, NW, tems to promote competition, moving away Washington, D.C. 20433, or Internet address from utility-type regulation (Viewpoint 121). James Bond (jbond@worldbank.org), Division ssmith7@worldbank.org. Chief Telecommunications and Informatics The series is also Second, convergence raises serious issues re- available on-line (www.worldbank. lating to content regulation. In broadcasting, org/html/fpd/notes/ countries have applied standards of decency, notelist.html). privacy, and protection of intellectual property @ Printed on recycled rights using different mechanisms, but usually paper relying on a combination of self-regulation and