Open Layered Networks: The Growing Importance of Market Coordination

Open Layered Networks:
The Growing Importance of Market Coordination
Petros Kavassalis,
Ecole polytechnique, Centre de Recherche en Gestion (CRG), Paris, France
And
Institute for Computer Science (ICS), Crete, Greece
<petros@rpcp.mit.edu>
Joseph P. Bailey,
Robert H. Smith School of Business, University of Maryland, USA
<jbailey@rhsmith.umd.edu>
Thomas Y. Lee,
Massachusetts Institute of Technology, Context Interchange, USA
<tlee@mit.edu>
in Decision and Support Systems 790 (2000)
Abstract (*)
Based upon the Internet perspective, this paper will attempt to clarify and revise
several ideas about the separation between infrastructure facilities and service
offerings in digital communications networks. The key notions that we will focus on in
this paper are: i) the bearer service as a technology-independent interface which
exports blind network functionality to applications development; ii) the organizational
consequences associated with the emergence of a sustainable market of bearer service:
a clear movement at the level of industrial structure from traditional hierarchies to
more market coordination.
(*) Note: The authors would like to thank the MIT Internet telephony Consortium for
financial support. A previous version of this paper has been published in Bohlin and Levin
(eds), 1998, Telecommunications Transformation, Technology, Strategy and Policy, IOS
Press, Amsterdam, under the title: Sustaining a Vertically Disintegrated Network through a
Bearer Service Market.

page 2
1. Introduction
During the few past years, applications like email and the World Wide Web have
combined with evolving network protocols to propel the Internet into the heart of a
computer and communications convergence. Central to the Internet's immersion into
digital convergence has been the effectiveness with which the Internet Protocol (IP) has
played the role of “spanning layer.” [1].
The IP abstraction enables applications to request network services independent of
underlying, physical network technologies. Moreover, new underlying network
technologies may either substitute for or co-exist with existing network technologies
without significantly affecting the broader system. Based on this abstraction, the National
Research Council has articulated the "Open Data Network (ODN)" as an architecture for
the networks of the future that generalizes the principle of separating service offerings
from infrastructure facilities as demonstrated in the Internet [2]. In the same way that IP
serves the Internet, the ODN relies upon a "bearer service" to function as a technology-
independent network layer that resides above the technology substrate and enables
interoperation between diverse, high-level applications and various underlying network
infrastructures (figure 1).

page 3
Figure 1. The Bearer Service Concept
The NRC report describes an Open Digital Network (ODN) as a four-level layered
architecture: "i) at the lowest level is an abstract bit-level service, the bearer service,
which is realized out of the lines, switches, and other elements of networking
technology; ii) above this level is the transport level, with functionality that transforms
the basic bearer service into the proper infrastructure for higher-level applications (as
is done in today's Internet by the TCP protocol) and with coding formats to support
various kinds of traffic (e.g., voice, video, fax); iii) above the transport level is the
middleware, with commonly used functions (e.g., file system support, privacy assurance,
billing and collection, and network directory services); and iv) at the upper level are
the applications with which users interact directly. This layered approach with well-
defined boundaries permits fair and open competition among providers of all sorts at
each of the layers”[2].
Certainly, the Internet demonstrates the technical and functional robustness of a
technology-independent bearer service abstraction [3]. The bearer service is intended to
support requests for service from all applications and to recognize all substrates.
However, as both application and infrastructure innovations turn increasingly towards
user-oriented models of network architecture, technology and policy considerations
related to the generalization of this abstraction should be carefully studied. Such a
service blurs the boundaries of telecommunication markets.
For example, the promises of Internet telephony to combine the benefits of the public
switched telephone network (PSTN) and the Internet would be possible through a bearer
service— even though Internet telephony would weaken market boundaries and challenge
the regulatory environment [4]. Regulators have a difficult time categorizing bearer
service providers as belonging to any one existing market because such providers can
offer services that cut across many existing telecommunications markets. Businesses that
develop ubiquitous services or tailor applications for customers may be threatened by
market entrants who have competitive products built around a new technology
architecture that is able to provide great flexibility in applications design— the bearer
service. Finally, customers can benefit from an integrated services environment because
their data and voice communications can be transmitted across multiple
telecommunications infrastructures. A new era of interoperability [5] is possible through
the bearer service.
However, questions for this new market abound. Not only is the business model in
question, but the technology is also in flux. In this paper, we span both technical and
economic issues to describe how the bearer service may be provided through markets
and not hierarchies. We do this by shedding some light on the many questions arising
from this new bearer service market. First, what does a technology independent bearer
service look like? In what ways is this technology different from older
telecommunications architectures? How these differences are interpreted in
organizational terms? Second, is a segregated network that separates infrastructure
facilities from service offerings by a bearer service an economically viable market? And if
so, should we expect market coordination becoming more important than organizational
coordination in the value-process of modern communications industries?

page 4
The remainder of the paper is organized as follows.
Section 2 employs a comparative analysis to define concepts of the bearer service and
the layered network architecture concepts. Considering IP as a bifurcation point in the
evolution of network design, the bearer services of traditional communications
infrastructures and the Internet (both the current best-effort and the future Integrated
Services Internet) are surveyed to elicit design characteristics and functional differences
between a technology-dependent and independent bearer service. We suggest that in a
network design with a technology-independent bearer service, the communications
network supports a flexible organizational model capable of dealing with new and
unanticipated applications.
Section 3 associates the technology-independent bearer service with the Internet
organizational model: a flexible system of regional or more extended backbones and
access links (or access networks) to these backbones, managed by the Internet Service
Providers (ISPs). Specifically, we address the question of whether the ISP model, which
is characterized as a model where network operators exhibiting varying degrees of
vertical integration compete in an open market, can sustain itself, or if one monolithic,
integrated firm will emerge from mega-mergers? To answer this question, we begin by
considering the work of Gong and Srinagesh [6, 7], who argue that a stable and
sustainable equilibrium for healthy bearer service market growth might not be possible
because the firms that own the substrate network layer will monopolize the bearer
service market. Our analysis closely follows the definition for a bearer service formulated
in section 2. Arguing that the bearer service is not a commodity product, we identify
differentiable service attributes upon which an independent bearer service market could
form. Through differentiation, the bearer service market can avoid a Bertrand
equilibrium (i.e. pure price competition). Furthermore, we challenge assumptions about
perceived trends towards vertical integration, by noting the relative independence of
bearer service assets and underlying infrastructure facilities.
2. From the railroad gauge to information bitways: the evolution of the
bearer service functionality
Modern communications networks, such as the Internet, are technologically
heterogeneous and decentralized regarding the distribution of the network intelligence.
The only common denominator bridging over an increasing structural variety is the
bearer service interface. Given a pre-specified set of applications and a physical network
which may include more than one substrate technology (e.g. a Ethernet-based LAN
connected to a Frame relay metropolitan network), the bearer service (BS) constitutes
those common1 functions which are implemented throughout the network rather than in

1 If every application uses the function, then it is certainly a function in common and
unambiguously a component of the Bearer Service (BS). If only one application uses the function, then
perhaps it is more appropriately considered part of the application, but it does not span the many
applications so it cannot be part of the BS. If two or more applications utilize the function but not all
applications in the set use the function, then we need to question whether the function belongs in the BS.
Recall also that a separate metric for distinguishing BS functionality is whether that function can be

page 5
the network end nodes and are necessary for pairing each application's communication
requirements with the performance characteristics of all components of the
heterogeneous network.
More abstractly, computer and communications technologies may be separated into three
layers. The physical infrastructure (e.g. wires, switches, etc.) resides at the lowest layer.
At the top lies the set of applications and service offerings supported by the underlying
infrastructure. A spanning layer2 bridges the two [1]. An application requests network
services through the spanning layer to the substrate technologies. In the early public
switched telephone network (PSTN), telephony was tightly coupled to a specific
infrastructure so the spanning layer supported only a single application and one
technology substrate (typically, the spanning layer was located in the wires). The
development of newer applications for computers and communications as well as
advances in substrate technologies, prompted a refinement of the spanning concept. In
the presence of a diverse suite of applications and a heterogeneous network, the bearer
service (BS) constitutes a spanning layer which escapes from the wires and thus supports
all applications over the entire network as long as the Bearer Service is able to pair a
service request with an underlying substrate technology end-to-end.
This section uses Piore's model of organizational flexibility and production system
transformation as a methodological framework for tracing the evolution of the spanning
layer towards a technology-independent bearer service. Advances in shipping and the
transport of physical goods are used as a metaphor for the transformation of yesterday's
PSTN into tomorrow's ODN.
2.1. Production technologies and flexible specialization
Piore [8, 10] describes the on-going transformation of industrial production systems
towards greater variety and flexibility as a four-stage evolution3. The products in such
systems are comprised of both independent and interdependent design features; changes
in design features mark the different evolutionary stages. Independent design features
"can be varied in isolation without complementary changes in other features of the
design" while interdependent features "require a number of complementary adjustments"
[8].
The initial stage, mass production is characterized by a production system tailored to a
single product. There is no room for variation. In Mass production with cosmetic
variation, product design may slightly vary existing or may introduce new independent
design features. "The notion of cosmetic variation seems to imply a sharp dichotomy
between design changes which are easy to make and those that are not" [8].

implemented in an endnode. BS functions include only those functions that cannot be implemented in
an endnode.
2 As suggested by Clark, "a spanning layer is characterized by three key parameters that
characterize the sort of interoperation it supports: i) the span of infrastructure options over which the
interoperation occurs, ii) the range of higher level applications the spanning layer supports, iii) the
degree of symmetry in the services of the spanning layer and its interfaces, and in the higher layers up to
the application definitions". [1]
3 This work draws on The Second Industrial Divide [9]