Economics of network delivery of computer services

Economics of network delivery of compute r se rvlces o

Einar S t e f f e r u d Network Management Association, htc.. Htmthtgtou Beach. CA 92647. USA

The technical and economic feasibility of using computer/ communication networks for delivery of computer services to consumers is now being demonstrated. This paper attempts to identify basic technological and economic factors and forces which underlie this development, and to interpret them in terms of their impact on 1he delivery of computer services, in terms of issues to be faced and problems to be solved as we attempt to capture the potential benefits of networking. A substantial bibliography is referenced to direct tl~e interested reader to the available literature.

Einar Stefferud is ~: computer management scientist specializing in the computer management structures and policies for business,government and educational institutions. He is currently involved in planning, development and installation of management slructures for computer networks. He received an MBA in 1961 from UCLA while associated with the Western Data Processing Cemer and has been involved with the problems of shared resource management since that time. Mr. Stefferud is active in the IEEE Computer Society, The Institute of Management Sciences,and the Association for Computing Machinery. An edited version of this paper was presented at the Second USA-Japan Computer Conference sponst~red by IPSJ and AFIPS in Tokyc,, Japan, August 28, 1975. "lhe edited version was published in'the Proceedingsavailable '~ from the American Federation of information Processing Societies, 210 Summit Avenue, Montv~le, NI 07645. Permission to publish this complete version has been granted by AI:iPS and IPSJ.

© North-Holland PublishingCompany Computer Networks 1 (1976) 53-64

Introduction

Tile technical and economic feasibility of using computer/communication networks lor delivery of computer services to consumers is now being demonstrated [16,17,35,47,49]. This paper attempts to identify basic vectors and forces which underly this development, and to interpret them in terms of their impact on the delivery of computer services, in terms of issues to be faced and problems to be solved as we attempt to capture the potential benefits of networking, Section 5 embodies most of the new ideas reported in this paper. Sections 1 - 4 provide vital background and insights in support of Section 5. First, basic technical factors and forces are reviewed in terms of developments in hardware, software, ~ommunications, labor and the interactions among these factors. Here it is seen that hardware costs are decreasing much more rapidly than software or communication costs, while labor costs are increasing (or remaining constant if we consider the effects of inflation). The computer-service industry is becoming labor intensive. Second, basic economic factors and forces are reviewed in terms of the economies of scale, specialization and trade, and in terms of demand for services. "[he primary force behind the expanding dentand tbr computer services is seen to be price elasticity of dema,d which is fueled by the dralnalic cost decreases for hardware. A second order effect is seen in the economies of specialization which become available through network access to numerous remote specialty centers. Third, the consequences of the interplay of the basic factors and forces is reviewed in terms of connectivity among producers and consumers, pooling and sharing of resources, trade and the interdependencies resulting from trade, and the mass markets that are created by the existence of networks. The most dramatic and pervasive consequence is seen to be facilitation of a mass production/distribution/consumption structure for the computer service industry which will force the industry out of its current cottage industry mode, and into a highly structured modern industrial mode. Fourth, the anticipated network marketplace is analyzed in terms of structural changes to be expected in the transition from "cottage" or "mass"-production] distribution/co~sumption modes. The "value-added'" structure that characterizes most mass distribution

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E. Stcl]i~'ud / Economics of network delirerr olcomputcr sen'ices

industries, is then reviewed in terms of vendors and consumers roles, and global consequences are identiffed. It is dea~" that everyone will see expanded optmns and will be forced to deal with more complex choices am0ng alternatives, with greater uncertainty as to the consequences o f decisions. Fifth, network marketplace issues are summarized in teims o f the value-added structure, product and sen, ice transformations in a value-added system, product and se~ice packaging economics, functional specialization and market segmentation, wholesale/retail specialization, and the international trade ,netap~,1or.

I. Basic technical factors and forces

Technical factors and forces fall into four main categories: Hardware, Software, Communications and Labor. In addition, there are some interactions among factors. 1.1. Hardware costs

Computer hardware costs have been dropping by a factor of approximately ten each five years since 1955. This is equal to a factor of one hundred for each ten years [21]. There is ample evidence of continuation of this trend [41. There are two fundamental forces working to drive hardware costs down. One is that whole new technologies for circuitry are continuaEy being developed and brought into production, one after another. The second is that each new technology is subject to the learning curve. Eada of these forces appears to coqcost reductions each ten rand for a facto~ of one hundred. New technologies appear to be coming alongin an unending stream [5,33]. 1.2. Software costs

Computer-software costs have been dropping by a factor of ten each ten years and current developments trend [341. productivity over t h e p a s t fifteen years roughly show this factor o f t e n improvement: and show that a sufficient supply of innovations are in the process o f broad adoption to forecast that something like a factor of ten w ~ l~e achieved during the next decade [2,27]. Among the newer developments are continued de-

velopment of higher level languages, structured programmirtg, and new tools to support these advances [7-91. The fundamental cost-reduction force for software is the learning curve. We are simply learning more effectively to use available concepts, methods, techniques and tools. Whole new technologies, such as symbolic addressing or subroutines are not being discovered. We have not developed a "'physics of software" which will lead to whole new software technologies, to correspond with the discovery of whole new hardware technologies. ~vertheless, we are learning to use and manage our iraproved software tools enough better to be gaining a steady productivity-improvement factor of ten eacl~ ten years. L3. Communication costs

Conununicafion costs are somewhat unpredictable in tile United States due to the current upheaval in the data-communication industry, but long-haul transmission costs are predicted to drop by a factor of ten during the "70s [21]. Modems and other "computer-like'" communlcation-hardware costs wdl probably drop this fast o.~ faster, while local loop connections and switching costs will not drop so much [21 ]. Overall, it is reasonable to estimate that communication costs will decrease by an approximate factor of ten during the next ten years. Part of lhe decreasing cost derives from political decisions of regulatory bodies and part from new technologies such as satellites which dramatically reduce longhaul bandwidth costs, in addition, dramatic reductions of computer-hardware logic costs have led to use o f computer hardware in communication systems to reduce communication costs [37], but use of cheap computer logic cannot bring communication costs down faster than computer costs, since other communication-cost components are not affected. 1.4. Labor costs

Labor costs appear to be stable, except for increases due to inflation [30]. it appears that the supply and demand for computer personnel is stable in the long term since annual salaries appear to have remained stable over the last ten years. Nothing appears likely to disrupt this trend in the foreseeable future.

E. Stefferud / Economics of network delivery of computer services 1.5. Tradeoffs

Hardware/communication tradeoffs may now be as favorable for remote computing as they will ever be, because hardware costs have been fallin? faster than communication costs [1]. Recent com,:~unication breakthroughs and FCC rule-changes ma~, temporarily interrupt this, but the long term trend will persist. 1.6. Relative cost ratios

Shifting relative-cost ratios between hardware, software, personnel and communications are evident. Indeed, hardware costs in 1974 were approximately 20% of the total computing bill of the U.S. Department of Defense, as compared to approximately 50% in 1968 [11]. Production of computer services is becoming labor intensive. Labor costs are beginning to assume primacy in both development and operating phases of system life cycles because all other costs are decreasing at various rates [26]. Individual active electronic elements in LS! chips are now at virtually zero cost per element. As hardware absorbs a smaller portion of total cost, it becomes more difficult to achieve major overall savings with hardware improvements. The computer service-industry is becoming more labor intensive every year.

2. Basic economic factors and forces

Economic factors fall into five main categories: Economies of Scale, Specialization, Trade, Complementarity of Products, and Price Elasticity of Demand. Z I. Scale

Economies of scale for computers have been recognized for years as expressed in Grosch's Law which states that the "power" of a given computer is directly proportional to the square of its cost [4,22,24,25, 28,29,38,401. The basic idea is that aggregation of workload to justify a larger scale computer will yield unR cost savings. The use of communication to transmit computer input and output to and from a large central facility has become a popular means of exploiting the benefits of scale. Care must be exercised to avoid excessively offsetting the gained economies of scale with excessive corn-

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munication costs. Continued cost trends are dramatically reducing the available benefits to be gained. 2.2. Specialization

Economies of specialization have only recently been recognized as providing benefits in the computing industry [19,28,29,43,47]. As communication costs have decreased, it is becoming more economical to access specialized resources at their available location rather than to transfer hardware, software and labor to each consuming location. This gives rise to specialty centers which can justify in-depth specialization because of their access to a broader market. 2.3. Trade

Economies of trade derive from the existence of specialty centers which have comparative advantages over each other in the production of different services. The doctrine of comparative advantage has been discussed thoroughly in the literature of economics since the time of Adam Smith [28,29,39]. Economies of trade result from the fact that organizations with different relative production costs for different goods and services can each maximize their productivity l:y trading some of their lower cost goods for good~ produced in another organization. Our modern industrial systems exploit these economies of trade extensively. Most economics textbooks include a detailed discussion of how the doclrine of comparative advantage promotes trade to the advantage of both trading partners. 2.4. Complementarity o f products

Complementarity of products and services exists whenever increased demand for one product results in increased demand for another, regardless of the prices of the complementary products. Tires, cars, gasoline and highways are complementary products. So are Hardware, Software, Communication and Labor. Taken in the aggregate, computer services consist of various mixes of these complementary factors. Increased demand for one will tend to increase demand for the others. This helps to explain why demand for computer labor expands without decreases in labor costs. 2.5. Elasticity

Price elasticity of demand exists whenever a declining unit price for a product or service results in

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E. St
i n c r e ~ d denhand sufficient to more than offset the unit price effect on total revenue for that product or service. Computer hardware clearly exhibits price elasticity of demand !!0]. Prices have been falling rapidly and continuously for years while total industry, revenue l~s been increasing rapidly. Each unit price decrease Causes new applications to become cost-beneficial so that market demand continues to expand. New applications are the rule rather than the exception. Software appears to exhibit similar price elasticity, ahhough the case is not documented. Communications also seem to enjoy price elasticity. Part of ~he evidence lies in the fact that demand is growing lor data communication services in spite o f the fact ~hat computer hardware costs are decreasing faster titan communication costs. Lower unit prices mast be stimulating demand for communication services. Communicauon services appear to enjoy exp:mding demand simply because of the price elasticity of demand for communications. Lower unit costs are making applications more cost effective.

3. Consequences for the computer service-industry When the hardware, software, communication and labor factors of conlputer-service production are combined, the restdt is a computer-comlnunications network that provides wider access to a wider range of resources than is otherwise possible. The result is "connectivity" among producers and consumers of computer and communications services. 3.1. Connectivity

Connectivity is seen to be the primary service provided b y networks, and this connectivity appears to enjoy price elasticity of demand. As networking costs have decreased, demand l~as grown dramatically. Connectivity allows customers and use:s to access remote specialty centers, allows specialty centers to reach larger markets, and allows customers to reach each other. The network creates a connected community for exchange of services and inlbrmation: and this it faciliConnectivity extends b e y o n d simple connection of consumers to producers for service delivery. By connecting numerous users to the same service facility, or facilities, the connected users become interconnected

into a comnmnity whose members exchange messages and information througll the computer-communication complex. Indeed, the array of accessible resources in the network thus expands to include all the people who use the network, in addition to the computers. Indeed, the potentialities of this kind of interconnection are under serious investigation by companies who see potentially more effective and efficient business operation with dispersion of their workforce into network centers [16,31I. Synergism obviously results from the interconnection of all the elements of a network into an integrated community. As network communities expand their membership and their array of accessible resources, it will become an economic necessity for additional users to join because the value of being connected far exceeds the cost. 3.2. Pooling

Resource pooling is facilitated by networks to allow large scale facilities to serve larger communities on tile one hand [491 and to allow collections of small decentralized facilities to operate as though they are large central facilities on the other [15]. By pooling demand via remote connection of users to large central facilities, large facilities can be kept busy and their benefits of scale can be exploited. Large mass production facilities are economic only when sufficient demand is aggregated to adequately utilize capacity. By interconnecting decentralized specialty centers, a collection of small centers can be made to look large to the customers and users. A network user will tend to see any network as a pool o f resources, accessible via a single means of conununication. 3.3. Sharing

Resource sharing is a corollary to resource pooling. in a network, the pool of resources is normally "shared" among the customers and users, and with the passage of time a network will tend to evolve into a collection of consumers whu each draw services from several producers, and producers who each provide services to numerous customers and users. Typically there are more customers than prodt:cer~ in a network.: Centralization of facilities always entails resource sharing on the part of the users. Networks thus facilitate both sharing and pooling of resources. One of the primary motivations of network devel-

E. Stefferud / Economics o[ net work delirery of computer services

opers was to facilitate resource sharing [35]. The first efforts were directed at solving technical problems and to show techn'ical feasibility for network delivery of computer services [36]. Later efforts were directed at management and organization problems to facilitate trade in the network community [19,43,47,49]. The combined result of these efforts is apparent in the developing viability of network delivery systems for coml~_tter services.

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The ability of a multinational company to have multinatlonfl access to common data systems has real positive value. The ability to pool production facilities to meet aggregated demand has real positive value. The ability to become dependent upon resources under the arbitrary control of others has real negative value. 3. 6. Mass market

3.4. Trade

Trade in a network takes on some of the characteristics of international trade as members of the community discover the economics inherent in the doctrine of comparative advantage. With connectivity in place, users have relatively easy access to services which otherwise would require importation and installation of specialized hardware, software o: personnel. Installation of specialized systems often costs more than the intended local use would justify, so that local needs often go unsatisfied. Networks can shift the break-even point by providing relatively small amounts of needed services for less than the cost of installation. 3.5. lnterdependencies

lnterdependencies among consumers and producers develop as a result of trade. It is one thing to get along without some service because it is too expensive to install, and quite another thing to lose access to a network service after becoming dependent upon it. Dependable resources are more valuable than undependable resources. This is true whether undependability stems from technical problems, management problems, or international-trade problems. To the extent that networks degrade the dependability of the services they deliver, they reduce the value of those services and lose some comparative advantage. This is why many organizations choose to own and operate their own computing and communication facilities. They simply cannot assure themselves that shared services delivered via networks will prove to be dependable. Networks foster interdependencies, some of which are useful and some of which are not. The ability to establish a close-knit working group to focus on some specific intellectual task, with members who are geographically dispersed has real positive value.

A mass market is seen to result from establishment of a computer-communication network that provides general connectivity. This mass market will probably develop a structure that is analogous to that of other mass market industries [44]. The developing concepts for network market structure draw from two main sources. One is the international tr:~de metaphor [3,29 I. The other is the value-added structure which has been called wholesale retail specialization [19,43,47,49].

4. Structure of the network marketplace Computer/communication networks provide a transport system for delivery of computer-based products and services which is analogous to the railroad and highway systems which lcd to development of our modern mass productit~n, mass distribution and mass consumption economy [3,20]. Networks. as they are being established, facilitate aggregation of demand for computer services across very broad markets. Aggregation of demand through networks allows us to take advantage of both the economies of scale and the economies of specialization [29]. The rcstflt is that the computer industry is going through a transition from a cottage industry mode to a mass production and mass distribution mode [43]. As with other industries that have gone through such a transition before, computer networks are presenting us with many difficult questions as we try to understand the structure of our new marketplace [20,42,44]. 4. I. Cottage versus mass production modes

Without a transport system, production is necessarily colocated with consumption and distribution activities are nonexistent or essentially invisible. Figure l(a) shows a market that is partitioned into production/consumption segments with little interaction between segments.

E. Stefferud / Economics of network delireo' of computer services

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RETAIL LEVEL "VALUE ADDED" SERVICES MHOLESALE LEVEL "VALUE ADDED" SERVICES

RAw

~

COMPUTATION

A

R

O

~

DATA STORAGE

ta)

LOCAL f~ggET SEC,MEt~TS

CONSUMER SERVICES

(b)

Fig. 1.

Fig. 2.

With a transport system it is possible to aggregate demand for centralized production; with one production facility for all, or with several specialized production facilities each focusing on a particular kind of service, in either case aggregation occurs across segments of the market, irrespective of geography. It is no longer necessary to cdocate production with consumption. Figure l(b) shows a view of centralized production serving numerous market segments through a distribution system that provides general connectivity. Thus it appears that a new computer service industry arises out of efforts to take advantage of both the economies of scale and the economies (,J" specialization. The result is a new factoring of labor and capital into new and different specialized production and distribution activities.

4.3. "'Value-added" structure

4.2. Production/distribution/consumption With centralized production facilities and a communication syste:u for distribution of services to consumers, aggregation o f market demand occurs in the distribution hierarchy. Demand is aggregated in each local market segment b y retailers, and retailers' demands are aggregated in turn by wholesalers, who obtain the required services directly from centralized computation facilities or indirectly through another wholesaler. Thus the structure is aeen to have computational facilities which deliver services into a distribution raw bulk products into ferentiated needs of increasingly specialized distributors who serve specific market segments. As the services flow from the producer to the consumer each level of distribution adds value t o the original product in terms of transformat i o n o f form, location or time of availability.

in a cottage industry, raw materials are gathered into a production site where they are transformed and fabricated into end products and services, in one single step, more or less. in the mass-production/ distribution/consumption industry, transformation and fabrication occurs in a series of distinct steps, each of which adds value to the product. Value is added either in terms of form, location, or time of availability. All stages of production and distribution are seen to add value to the product. Only final consumption is seen to consume value. Figure 2 shows this process in terms of flows, beginning with raw computation and raw storage resources, to which are added wholesale level services by a computer facility operator who in turn transports the enhanced product over network wires to a retail level activity which adds additional value in the process of delivering the services to final end users. In the process of flowing from producer to consumer the product undergoes transformations o f location and form (i.e., repackaging). At each level, closer to the ultimate consumer, the product becomes more specialized to specific consumer needs, just as should be expected from observing the wholesale/retail structure o f any other massproduction industry.

4.4. Computer-services vendor From the point of view of a computer~services vendor, raw computation and storage facilities constitute the raw product. Values are added by packaging the raw product with software and documentation for generalized applications, and by distributing it through communications services which transform the product in terms of location. At the retail level additional value is added by

kZ Stefferud /Economics of network delivery of computer services

further specializing the software documentation and consultation to specific customer needs, and by providing terminal devices for accomplishment of final delivery via communication systems. 4.5. Communication-services vendor

From the point of view of the communicationservices vendor, the raw product is bandwidth capacity and switching. Value is added to this raw product by subdividing it through frequency division, time division multiplexing, or as recently developed, packet switching. Various other subdividing and repackaging techniques are available and still more will surely be developed [ 12,45 ]. More value is added by providing computation services through the communication system, either as part of communications or as complementary services

[141. The production/distribution/consumption, valueadded flow structure can be used to describe both the communications side and the computer ~rvice side of our industry. The structure of the computer/communication-network marketplace is complicated by the existence of these two intermingled product flows, either of which may be viewed as having a separate distribution system. In reality, the two blend into one with the distinctions between them becoming invisible at the end-user level. 4.6. Consumers

The consumer is seeking more economic ways to accomplish his objectives, and from the point of view of thee consumer, the computer/communications industry is about to offer vastly wider access to a vastly wider range of capabilities consisting of various blends of computation and communication. The consumer's concern is for obtaining services most closely matched to his specific requirements at the most favourable prices. His criterion for selection should and will be based on his perceived ability to use the service in accomplishing his objectives. The consumer sees networks as providing expanded options and increased degrees of freedom to choose among a wider variety of offered services. As the customers in a network marketplace achieve the potentially greater degrees of freedom in selecting their purchases, then the computer and communications services vendors must learn better to deal with their network customers in terms of consumer values.

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Increased consumer orientation will provide both an opportunity and a threat to all computer/communication vendors. The customers in a network marketplace will thus pose a challenge to the vendors to economically meet consumer needs for services or be driven out of the business. 4. Z Consequences o f the new structure

Establishment of computer-communication networks provides both producers and consumers with widely expanded options. Many institutions see networks as a means to improve both effectiveness and efficiency of their computer service functions [ 18,19, 32,47,49]. Consumers see wider access to a wider range of capabilities. Vendors see wider access to new markets and opportunities to sell new products via networks. Some even see networks as providing whole new approaches to problems of product development and implementation. The National Software Works is a good example [6]. From a management point of view, expanded options are equivalent to relaxation of constraints. In the network enviromnent, customers become able to secure products and services ~hrough new procurement channels; computation can be purchased in terms of services rather than equipment; and the whole array of current purchasing policies and procedures tend to become relatively counterproductive. Taken altogether, this leads to increased uncertainty for everyone concerned. Vendors' expectationg for product life cycles are threatened; established market positions are threatened by intruders from new quarters; government and industrial purchasing policies appear to become ineffective; and federal regulatory bodies are not even certain as to whether or how their regulatory authority applies to computer networks. A high level of uncertainty is the one common thread for all network industry participants. 5. A summary of network-marketplace issues A number of issues must be resolv, d before any network marketplace can mature into ~n economical!y viable entity. Network-marketplace concepts are s,ill in an early stage of development. Analysis c,f the economies of network marketplaces has not yct been accomplished. The intention of this summary, is to identify some important issues which need analy~!s in order to facilitate further network-marketplace devdopment.

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E Stefferud / Economics o]'network d:,livery oj'computer sen'ices

5. L Value-added structure The basic structure of a mature network marketplace will be a value-added structure in which numerous producers and distributors add value to products and services by transforming them in terms of their time o f availability, flleir location, or their form. A great deal o f trading will occur in this marketplace as each producer or distributor buys inpt~.ts to processes and sells the outputs, many of which will be inputs t o other value-adding processes so that the typical path from initial producer to eventual consumer will pass through several value-adding stages. It will be difficul~ to trace just how much o f any producer's outputs will move by which paths to which ultimate consumers. This structure is due to the comparative advantages held by various producers in the industry. Each producer o f computer services or products is seen to be more efficient or effective at performing his particular transformations at his stage o f production.

5.2. Time trans]brtmttion Ti~ .. ~; availability is typically transformated by storing products for later delivery when the consumers need or want them. in a computer network this transformation is accomplished differently because computation is not storable. Indeed, it is accomplished by storing work in queues, and then scheduling this work according to some queue disciplines. In an international network, time-of-availability transformation is also accomplished by spanning several time zones with a single network. For example. G.E. Irdbnnation Services Division has a network which " n sixteen time zones between Rome ,, .G.E. is serving pril,~etime customers in at least ,me time zone at all times during a 24-hour day.

5.3. Location transfi~rn~ation Location transformation is the essence ef networking. In other industries, location transformation is accomplished by transporting goods front one place networks, providing access to resources from remote locations. In a sense, the t~ser is transported to the resource where the service Is produced rather than transporting the service to the user.

Networks differ from the norm in yet another way. By providing general connectivity, networks conceptually transform large geographic areas into single geographic points. For example, geographicallydispersed individuals often work together within ARPANET on single projects. In so doing, they develop a sense o f doing their work "in ARPANET" as though ARPANET is a place. The result is a dramatic change in the perceived time space continuum, wherein one's actual geographic location is no longer relevant.

5.4. Form transformation Transformations of form normally consist of collecting components and processing them or assembling them into products and services which are then distributed to consumers. A producer in a computer network aggregates colnputer hardware, software, and labor to produce a variety of services which are offered to consumers. Computer.facility operation corresponds to a production factory. When services are delivered to several remote locations, it is likely that additional services will be provided at each location to cater to special requirements of the customers at these locations. Addition of specialized retail services to wholesale services purchased for resale is similar to tile collection and assembly of components at the manufacturing stage, but it differs in that the transformation typically does not alter the basic form of the wholesale service. At the retail level this might better be called "'packaging" or "repackaging".

5.5. Packaging Packaging entails specification of the features to be included in a service to be sold, including the mode oi its sale. Is it to be sold or leased? Does it include user-support in the basic prices? Does the buyer or the seller make a long-term commitment? Does the buyer need to buy additional complementary services? Etc. Packaging at the wholesale level entails assembly of particular system resources (CPU, Storage, Software, Labor), into specific services (Basic, FORTRAN, Simscript, Linear Programs, Payroll, mailing labels, stock quotes, literature search, Data Banking, Planning, etc.) which are offered for sale. At the retail level it entails catering to the needs, wants, tastes and styles of consumers.

If. Stefferud / Economics of network deliveo, o.f computer serrices

Repackaging generally occurs during distribution stages. For example, it often involves buying in bulk and reselling in smaller "'packages". Value-Added Networks (VANs) buy bulk transmission bandwidth from common carriers, subdivide it and add various features, and then sell the "repackaged'" services. They transform bulk wide-band channels into narrow-band channels or into "packets", and then add either channel or message switching to repackage the service for smaller customers [13]. Similarly, computer services can be purchased in bulk and resold with enhancements to smaller customers who need specialized services. This is now done at the Triangle Universities Computation Center ('I-UCC) in North Carolina where TUCC sells bulk "'wholesale" services to three separate university computer centers plus a statewide Educational Computer Service (NCECS), each of which serve as retailing organizations [32,49]. TUCC also sells service to others in small amounts, but TUCC service is only provided in the "wholesale" mode. "Retail" mode services, if needed, must be provided to users by TUCC's retailers. The TttCC arrangement allows each retailer to repackage TUCC services in any way that suits the custonter, including local price-schedules which include payment for values added by the local retailers. Users who receive TUCC service from different retailers actually receive differently packaged services, and pay for their service according to different price schedules. 5.6. Packaging economics

in the network mass-marketplace, packaging and repackaging economics will no doubt prove to be critical. The difference between success or failure for many network activities will hinge on an adequate understanding of how the value of a given service depends on the way it is packaged [23]. For example, dependable service is generally more valuable than undependable service, and guaranteed delivery schedules are often favored over "catch as catch can" schedules. To be able to make do with less dependable service is a luxury that too few customers can afford. Most work has some deadline for completion otherwise it would not be worth doing at all. This means that scheduling procedures and job queueing disciplines are an important component in any offered service "package" [41]. Close inspection of the behavioral properties of the TUCC PriorityScheduling Algorithm [46] shows that tire algorithm

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is an integral part of the TUCC service-package. The algorithm is specifically responsible for assuring that each of the customers (retailers) is guaranteed delivery of its purchased fractional share of TUCC's daily production. The TUCC scheduling algorithm has been copied and applied in other network situations. As applied in the U.S. Army Material Command [47] this fractional share is called a "subscription" wherein a retailer pays a fractional share of a production facility's annual costs in return for a corresponding guaranteed share of each day's useful production. If a retailer fails to claim his daily share, there is no rebate or credit carried forward, and the other subscribers are entitled to claim corresponding shares of the resulting leftovers without additional charge. In AMC, this subscription package is sometimes called a "'surrogate machine". "Subscriptions" are very differe~;t packages than the normal "'pay as you use" arrangements~ from both the seller's and buyer's points of view. The primary difference lies in the l~lacement of risk 1471. With subscriptions, tile buyer assumes the risks of underutflization of purchased capacity, while the seller enjoys a "'sold out" situation fi~r the term of the subzcription contract. With "pay as you use" contracts, the buyer is unconcerned with the seller's uoderutilization problems, because the seller retains the risks. It would appear that subscribers get more value for their money u::der certain circumstances because they get more control over scheduling their own work Ilows and because they get the right to run low priority work in what would otherwise be Icflover idle time. in gross economic terms, a subscription based service facility has a better chance to put its marginal capacity to some marginal use rather than let it go to idle waste. The overall effect of the subscription packaging is to transfer control of the utihzatiol~ of guaranteed quantities of computer service capacity from the facility manager to the customer. With subscriptions, the customer makes the value judgments regarding which work is most important and which work is worth doing. Subscriptions are like leased machines as opposed to service-bureau price schedules for service, if each unit of work must be worth more than its service bureau price, then marginal use of idle leftover capacity will be minimized. The point to be noted here is that the value structure of subscription packages is very different from

~: Stel'ferud / Economics o]'network delirery of computer serrices the value structure of service bureau packages. The economics of se~ice packaging for the computernetwork ~ss-marketplace needs a let of study and analysis.

5. Z Specialization and segmentation Networks will deliver services to many different locations with different service requirements. This gives ~ to opportunities for specialization of service delivew facilities for different market segments. Without networks, the market for computer services has naturally segmented according to types of application and special~ed application support requirements. This segmentation will continue in the network marketplace with retail-level facilities which cater to specific market ~gments.

5.8. Wholesale~retail specialization Among the specializations that will occur in the network marketplace will be those of production and distribution with distribution further specialized into whole'r~ale and retail activities [43]. Wholesale and retail concepts as used in the commercial world apply to distribution activities which serve to deliver the output of factories to consumers. This commercial terminology is confusing because wholesalers trequently sell to wholesalers who sell to wholesalers and eventually sell to the retailers who sell to final consumers. The retailer is the last distributor in the chain and it is the retailer who caters most to the specific detailed needs, wants, tastes and styles of the final consumers. At each stage of production or distribution, added values are "'produced". For example, stockbrokers speak of their sales volume as "production". in this sense, everyone "'produces" something. The wholesale/retail distinction is thus only useful in making relative distinctions as to where a given value-added producer stands in the production/distribution/consumption continuum.

5.9. International trar~e metaphor Any network mass-marketplace that is worthy of r organization d boundaries. . . ks of organization and econonucs in networks have a close parallel in international trade [3,29].

International tr,~e results from operation of the doctrine of comparative advantage, and this leads to international trade problems such as payment imbalances, protective barriers, dumping, unfair competition, etc. The available means for solving these problems entail negotiation of bilateral agreements and nmltilateral agreements. One of the consequences of trade across major organizational boundaries is that economic factors are frequently overridden by political realities [48]. This arises out of the fact that the trading partners are relatively autonomous organizations with different purposes and objectives. Resolution of conflicting purposes and objectives leads to political negotiation and decisions to forego some of the benefits of trade in deference to attainment of certain non-economic organizational objectives. To function smoothly, a~ this implies that a network marketplace needs so~e means for developing multilateral agreements on the rules of trade. To accomplish this, something analogous to GATT (General Agreement on Trade and Tariffs) is needed for the network community. On the international scene. GATT provides a political forum in which political issues are resolved among nations in the interests of fostering smooth working trade relations. Any mass marketplace that fosters trade across major organizational boundaries, as networks do, must provide some means for resolution of political differences among the trading partners, else trade will not expand to capture the full economic potential for members <,f the network community. The business of providing policy and procedures for smooth trading activities is typically the responsibility of national governments and trade associations. If it were not for polRical differences an~ong the members of a marketplace one could rely on simple free market economics to regulate trade. Unfortunately, there are overriding conflicts which must be resolved in non-economic frameworks. The purpose of network management or network regulation should thus be to provide policy and procedures which resolve conflicts of purpose and thus enable economic factors to regulate trade within the established rules.

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