1. Soumya Sen Dept. of Electrical & Systems Engineering University of Pennsylvania ssoumya@seas.upenn.edu www.seas.upenn.edu/~ssoumya Joint Work with: R. Guerin, K. Hosanagar, Y. Jin 18 th November, 2010. Penn Seminar on Communications & Networking On the Adoption and Deployment of New Network Technologies: An Economic Perspective

2. Networked Systems have a ubiquitous presence –e.g., Internet, Power grid, Facilities Management networks, Distributed databases Success of new network technologies depends on: – Technical advantage – Economic factors (e.g. price, costs, demand) Shortcomings: –Many technologies have failed to get adopted e.g., IPv6 migration, QoS solutions –Ad-hoc decisions for deployment e.g. Cloud Coimputing, U-Verse versus. FiOS How to assess (design) new network technologies (architectures) for technical and economic viability? –Analytical frameworks –Multi-disciplinary approach S. Sen On the Adoption and Deployment of New Network Technologies: An Economic Perspective Research Motivation 2

3. On Developing Analytical Models: –What are the key economic aspects? –What factors are specific to network technologies? (e.g. externality, gateways) –What are the ‘qualitative’ insights from the model? –Are the results robust to changes in the underlying model? Some Dimensions for Assessing Network Technologies: Topic 1: –Network Technology Adoption/ Migration How can a provider help its technology (service) to succeed? Topic 2: –Network Infrastructure Choice What infrastructure should the new technology (service) be deployed on? Understanding Trade-offs between Shared and Dedicated networks Topic 3: –Trade-offs between Functionality-rich versus Minimalist Designs S. Sen On the Adoption and Deployment of New Network Technologies: An Economic Perspective Research Approach 3

4. Network Technology Adoption Dependencies across users (externality) Incumbent’s advantage of installed base Gateway’s impact on adoption –Explored the dynamics of adoption among heterogeneous users –Characterized the trajectories and equilibrium outcomes –Analyzed the role of gateways in migration Shared vs. Dedicated Networks Many services on a common (shared) network vs. Many services over separate (dedicated) networks –Choice depends on compatibility among services, demand uncertainty –Identified trade-offs and guideline for network design S. Sen On the Adoption and Deployment of New Network Technologies: An Economic Perspective Research Contributions 4

5. Network Technology Adoption 1. Problem Formulation 2. Model & Solution Methodology 3. Key Findings & Examples 4. Conclusions S. Sen On the Adoption and Deployment of New Network Technologies: An Economic Perspective A Two-part Talk: Outline 5

6. Models that do not consider individual user utility: Fourt & Woodlock (1960) – constant hazard rate model Bass (1969) - extension to include “word-of-mouth” effect Norton & Bass (1987) - successive generation of technology adoption Models that consider user utility function: Cabral (1990) – only single technology adoption Farrell & Saloner (1992) - homogeneous users Choi (1996) - extended Farrell & Saloner to include converters Joseph et al. (2007) – homogeneous users, model lacks dynamics What model do we really need? Competition between incumbent and entrant technologies Role of converters Heterogeneous users Adoption dynamics S. Sen On the Adoption and Deployment of New Network Technologies: An Economic Perspective Related Literature 6

7. Two competing and incompatible network technologies (e.g., IPv4 IPv6) –Different qualities and price –Different installed base Users individually (dis)adopt the technology that gives them the highest positive utility –Depends on technology’s intrinsic value and price –Depends on number of other users reachable (externality) Gateways offer a migration path –Overcome chicken-and-egg problem of first users Independently developed by each technology –Effectiveness depends on gateways (converters) characteristics/ performance Duplex vs. Simplex (independent in each direction or coupled) Asymmetric vs. Symmetric (performance/ functionality wise) Constrained vs. Unconstrained (performance/functionality wise) S. Sen On the Adoption and Deployment of New Network Technologies: An Economic Perspective Problem Formulation 7

8. S. Sen On the Adoption and Deployment of New Network Technologies: An Economic Perspective A Basic User Model 8 Users evaluate relative benefits of each technology –Intrinsic value of the technology (  q 1 ) Tech. 2 better than Tech.1 (q 2 >q 1 )  denotes user valuation (captures heterogeneity),  Є [0,1]. –Externalities: linear in no. of users (0≤x 1 +x 2 ≤1) - Metcalfe’s Law Possibly different across technologies (captured through β ) α i, 0  α i  1, i = 1,2, captures gateway’s performance –Cost (recurrent) for each technology (p i ) Technology 1: U 1 ( ,x 1,x 2 ) =  q 1 +(x 1 +α 1 β x 2 ) – p 1 Technology 2: U 2 ( ,x 1,x 2 ) =  q 2 +(βx 2 +α 2 x 1 ) – p 2

9. S. Sen On the Adoption and Deployment of New Network Technologies: An Economic Perspective Example: IPv4 (Tech.1) IPv6 (Tech. 2) 9 Technology 1: U 1 ( ,x 1,x 2 ) =  q 1 +(x 1 +α 1 β x 2 ) – p 1 Technology 2: U 2 ( ,x 1,x 2 ) =  q 2 +(βx 2 +α 2 x 1 ) – p 2 –Cost (recurrent) of each technology ( p i ) –Linear Externalities (Metcalfe’s law) Normalized to 1 for Tech. 1 Scaled by β for Tech. 2 (possibly different from Tech. 1) α i, 0  α i  1, i = 1,2, captures gateways’ performance –Intrinsic technology quality ( q i ) Tech. 2 better than tech. 1 ( q 2 >q 1 ) –User sensitivity to technology quality (  ) Private information for each user, but known distribution

10. S. Sen On the Adoption and Deployment of New Network Technologies: An Economic Perspective Low-def. video (Tech.1) High-def video (Tech. 2) 10 Technology 1: U 1 ( ,x 1,x 2 ) =  q 1 +(x 1 +α 1 β x 2 ) – p 1 Technology 2: U 2 ( ,x 1,x 2 ) =  q 2 +(βx 2 +α 2 x 1 ) – p 2 User sensitivity to technology quality (  ) Private information for each user, but known distribution Low-def & High def video-conferencing service –Low-def has a lower price ( p 1 < p 2 ) but lower quality ( q 1 < q 2 ) –Video is an asymmetric technology Encoding is hard, decoding is easy –Low-def subscribers could display high-def signals but not generate them Externality benefits of High-def are higher than those of Low-def Converter characteristics ( β>1) –High/Low-def user can decode Low/High-def video signal –α i, 0  α i  1, i = 1,2, captures gateways’ performance –Simplex, asymmetric, unconstrained (α 1 β >1)

11. S. Sen On the Adoption and Deployment of New Network Technologies: An Economic Perspective User Adoption Process 11 Decision threshold associated with indifference points for each technology choice:  1 0 (x),  2 0 (x),  2 1 (x), where x=(x 1, x 2 ) U 1 ( , x) > 0 if  ≥  1 0 (x) - Tech. 1 becomes attractive U 2 ( , x) > 0 if  ≥  2 0 (x) - Tech. 2 becomes attractive U 2 ( , x) > U 1 ( , x) if  ≥  2 1 (x) - Tech. 2 over Tech. 1 Users rationally choose None if U 1 < 0, U 2 < 0 Technology 1 if U 1 > 0, U 1 > U 2 Technology 2 if U 2 > 0, U 1 < U 2 Decisions change as x evolves over time (myopic) x1x1 x2x2

12. S. Sen On the Adoption and Deployment of New Network Technologies: An Economic Perspective Diffusion Model 12 Assume a given level of technology penetration x(t)=(x 1 (t),x 2 (t)) at time t –H i (x(t)) is the number of users for whom it is rational to adopt technology i at time t (users can change their mind) –At equilibrium, H i (x*) = x i *, i  {1,2} –Determine H i (x(t)) f rom user utility function Adoption dynamics: –Users differ in learning and reacting to adoption information –Diffusion process with constant rate γ< 1 H 2 ( x(t))H 1 ( x(t))

13. S. Sen On the Adoption and Deployment of New Network Technologies: An Economic Perspective Solution Methodology 13 Delineate each region in the (x 1,x 2 ) plane, where H i (x) has a different expression –There are 9 such regions, i.e., R 1,…, R 9 –Regions can intersect the feasibility region S 0  x 1 +x 2  1 in a variety of ways This is in part what makes the analysis complex –trajectories cross boundaries P Q R1R1 R2R2 R3R3 R4R4 R5R5 R6R6 R7R7 R8R8 R9R9 x 1 =1 x 2 =1 0

14. S. Sen On the Adoption and Deployment of New Network Technologies: An Economic Perspective Computing Equilibria & Trajectories 14 Solve H i (x*) = x i *, i  {1,2} in each region Identify “candidate” equilibrium for each Region R k Candidates are valid only if they lie in their region Equilibria can be stable or unstable Trajectories: λ 1 and λ 2 can be positive, negative, or even complex

15. What are possible adoption outcomes? –Combinations of equilibria –Stable/ Unstable Adoption trajectories? –Monotonic vs. chaotic (cyclic) What is the role of gateways? –Do they help and how much? S. Sen On the Adoption and Deployment of New Network Technologies: An Economic Perspective Key Questions 15

16. Theorem 1: There can be multiple stable equilibria (at most two) Coexistence of technologies is possible –even in absence of gateways Final outcome is hard to predict simply from observing the initial adoption trends S. Sen On the Adoption and Deployment of New Network Technologies: An Economic Perspective Results (1): A Typical Outcome 16

17. Theorem 2: Gateways can help a technology alter market equilibrium from a scenario where it has been eliminated to one where it coexists with the other technology, or even succeeds in nearly eliminating it. Gateways need not be useful to entrant always! No gateways: Tech. 2 wipes out Tech.1 Perfect gateways: Tech. 1 nearly wipes out Tech. 2 S. Sen On the Adoption and Deployment of New Network Technologies: An Economic Perspective Results (2): Gateways may help Incumbents 17

18. Theorem 3: Incumbent can hurt its market penetration by introducing a gateway and/or improving its efficiency if entrant offers higher externality benefits (β>1) and users of incumbent are able to access these benefits (α 1 β>1) Theorem 4: Both technologies can hurt overall market penetration through better gateways. Entrant can have such an effect only when (α 1 β 1) Takeaway: Gateways can be harmful at times. They can lower market share for an individual technology or even both. S. Sen On the Adoption and Deployment of New Network Technologies: An Economic Perspective Results (3): More Harmful Gateway Behaviors 18

19. Theorem 5: Gateways can create “boom-and-bust” cycles in adoption process. This arises only when entrant exhibits higher externality benefits (β>1) than incumbent and the users of the incumbent are unconstrained in their ability to access these benefits (α 1 β>1) Corollary: This cannot happen without gateways, i.e., in the absence of gateways, technology adoption always converges Takeaway: Gateways can create perpetual cycles of adoption/ disadoption P.S: Behavioral Results were tested for robustness across wide range of modeling changes S. Sen On the Adoption and Deployment of New Network Technologies: An Economic Perspective Results (4): More Harmful Gateway Behaviors 19

20. S. Sen On the Adoption and Deployment of New Network Technologies: An Economic Perspective Limit Cycles: An Intuitive Explanation 20 Technology 1 Technology 2 Full-circle! α 1 β>1 Technology 1: U 1 ( ,x 1,x 2 ) =  q 1 +(x 1 +α 1 β x 2 ) – p 1 Technology 2: U 2 ( ,x 1,x 2 ) =  q 2 +(βx 2 +α 2 x 1 ) – p 2

21. Gateways can be useful to: –Promote coexistence & improve market penetration –Help lessen price sensitivity But, Gateways can be harmful too: –Hurt an individual technology –Lower Overall Market –Introduce Market Instabilities Analytical model is useful in: –Identifying scenarios for policy intervention –developing long-term strategic vision Qualitative results are robust to: –switching costs –variation in utility function –non-uniform distr. of user preferences S. Sen On the Adoption and Deployment of New Network Technologies: An Economic Perspective Conclusions 21

22. Network Infrastructure Choice: Shared Versus Dedicated Networks 1. Problem Formulation 2. Model & Solution Methodology 3. Key Findings & Examples 4. Conclusions S. Sen On the Adoption and Deployment of New Network Technologies: An Economic Perspective Part 2: Outline 22

23. Emergence of new services require: –Network provider has to decide between: Common (shared) Network Infrastructure Separate (dedicated) Network Infrastructure Examples: –Facilities Management services & IT e.g. IT & HVAC systems –Video and Data services e.g. Internet & IPTV services –Cloud Computing e.g. Private (dedicated) cloud Vs Shared cloud –Broadband over Power lines Lack of Framework to evaluate choices: –Ad-hoc decisions (AT&T U-Verse versus Verizon FiOS) –Manufacturing Systems Literature: Plant-product allocation, optimal resource allocation S. Sen On the Adoption and Deployment of New Network Technologies: An Economic Perspective Motivation 23

24. Plant-product allocation –How to allocate product demands to manufacturing plants –Effect of process flexibility in handling variable demand Jordan & Graves (1995) Graves & Tomlin (2003) E.K.Bish, Muriel, Biller (2005) Optimal Resource Allocation Fine & Fruend (1990) – firm’s optimal investment in flexible and dedicated resources J.A.Van Mieghem (1998) – role of price margins and cost-mix differential on flexibility benefits S. Sen On the Adoption and Deployment of New Network Technologies: An Economic Perspective Related Literature 24

25. Two network services (technologies) –One existing (mature) service –One new service with demand uncertainty Costs show economies or diseconomies of scope New service has demand uncertainty –Needs capacity provisioning before demand gets realized –Dynamic resource “reprovisioning” But some penalty will be incurred (portion of excess demand is lost) –Technology advances allow Reprovisioning (e.g., using virtualization) How critical is reprovisioning ability in choosing network design? –Compare networks based on profits S. Sen On the Adoption and Deployment of New Network Technologies: An Economic Perspective Problem Formulation 25

26. S. Sen On the Adoption and Deployment of New Network Technologies: An Economic Perspective Model Formulation 26 Basic Model: A Two-Service Model Service 1 (existing service) Service 2 (new service with uncertain demand) Three-stage sequential decision process Compare Infrastructure choices based on expected profits Reprovisioning Stage Capacity Allocation Stage Infrastructure Choice Stage Solve backwards

27. S. Sen On the Adoption and Deployment of New Network Technologies: An Economic Perspective Model Variables 27 Provider’s profit depends on: Costs: Fixed costs Variable costs - grows with the number of subscribers (e.g. access equipment, billing) Capacity costs - incurred irrespective of how many users join (e.g. provisioning, operational) Cost ComponentService 1 Dedicated Service 2 Dedicated Shared Fixed Costsc d1 c d2 cscs Contribution Margin (grows with each unit of realized demand) p d1 p d2 p s1, p s2 Variable Costs (incurred irrespective of realized demand) a d1 a d2 a s1, a s2 Gross Profit Margin = p i - a i, i={s2, d2} Return on capacity = p i /a i

28. S. Sen On the Adoption and Deployment of New Network Technologies: An Economic Perspective Solution (1): Reprovisioning Stage 28 Service 2 revenue: (i={s2, d2} for Shared and Dedicated respectively) i.when D 2 ≤ K i : R i (D 2 ≤ K i ) = p i D 2 – a i K i ii.when D 2 >K i : Reprovisioning Ability: A fraction “α” of the excess demand can be accommodated User contribution Capacity cost R i (D 2 > K i ) = (p i – a i )(K i + α(D 2 - K i )) A word about reprovisioning ability, α –Independent of the magnitude of excess demand –Captures feasibility of and latency in securing additional resources –So what do α =0 and α =1 mean?

29. S. Sen On the Adoption and Deployment of New Network Technologies: An Economic Perspective Solution (2): Capacity Allocation Stage 29 Expected Revenue, E(R i |K i ), for a given provisioned level K i : Optimal Provisioning Capacity : For demand distribution ~U[0, D 2 max ]:

30. S. Sen On the Adoption and Deployment of New Network Technologies: An Economic Perspective Solution (3): Infrastructure Choice Stage 30 Dedicated Networks: –Service 1 revenue: –Service 2 revenue under optimal provisioning: –Total profit: Shared Network: Infrastructure Choice: –Common if, else separate Profit from Service 2 Profit from Service 1

31. S. Sen On the Adoption and Deployment of New Network Technologies: An Economic Perspective Choice of Infrastructure 31 Impact of system parameters: –Varying cost parameters affect the choice of infrastructure Shared to Dedicated (or Dedicated to Shared) Single threshold for switching n/w choice –Surprisingly, ad-hoc “reprovisioning” ability also impacts in even more interesting ways! Common is preferred over separate when Independent of provisioning decision Depends on provisioning decision Diff. in optimal capacity cost h(α)= Function of p i, a i, α, i={s2,d2}

32. S. Sen On the Adoption and Deployment of New Network Technologies: An Economic Perspective Analyzing the effect of α on h(α) 32 Proposition 1: Increase in α benefits both shared and dedicated networks. (i) if increases in α benefits shared (dedicated) n/w more than dedicated (shared) (ii) if increases in α benefits shared (dedicated) more at low α and dedicated (shared) more at high α The value of h'(0) and h'(1) fully characterize the shape of h(α) Gross Profit Margin Return on Capacity

33. S. Sen On the Adoption and Deployment of New Network Technologies: An Economic Perspective Results: Impact of Reprovisioning 33 GPM ded (p d2 -a d2 ) is sufficiently lower than GPM shr (p s2 -a s2 ) GPM ded > GPM shr i.e. (p d2 -a d2 ) >(p s2 -a s2 ) and ROC ded <ROC shr i.e. (p d2 /a d2 ) <(p s2 /a s2 ) GPM ded > GPM shr i.e. (p d2 -a d2 ) >(p s2 -a s2 ) and ROC ded >ROC shr i.e. (p d2 /a d2 ) >(p s2 /a s2 )

34. Identify cost components Use the model to investigate the net economies/ diseconomies they create –Single threshold for switching choices for most cost parameters Check the impact of reprovisioning –Whether α has an effect depends on The sign of the derivative h'(α) Use the two metrics to identify operational region The magnitude of γ (how far from zero) Outcomes: zero, one or two switches in network choice S. Sen On the Adoption and Deployment of New Network Technologies: An Economic Perspective Some Design Guidelines 34

35. Developed a generic model that captures economies and diseconomies of scope between shared and dedicated networks Reprovisioning can affect the outcome in non-intuitive ways –Validates the need for models to incorporate this feature –Yields guidelines on how reprovisioning affects choice of architecture Identified key operational metrics to consider –Provided decision guideline Whether α has an effect depends on –The sign of the derivative h'(α) –Use the two metrics to identify operational region –The magnitude of γ (how far from zero) –Outcomes: zero, one or two switches in network choice S. Sen On the Adoption and Deployment of New Network Technologies: An Economic Perspective Conclusions 35

36. Network Technology Adoption: Different User Preference (θ) Non-uniform distribution –positively & negatively skewed β-distribution) Extended to externality benefits (i.e. θβx instead of θq+ βx) Alternative Externality Models Non-linear externalities –Sublinear: x α, 0 < α < 1 –Superlinear: x α, α > 1 –Logarithmic: log(x+1 ) Pure externalities (no intrinsic technology values, q≈1 ) Presence of Switching costs, Learning costs Network Infrastructure Choice: Different Demand Distribution Non-uniform distribution –positively & negatively skewed β-distribution) Economies and diseconomies of scale Different reprovisioning abilities for shared and dedicated networks ( α 1, α 2 ≠ α) S. Sen On the Adoption and Deployment of New Network Technologies: An Economic Perspective Closing Remarks: On Robustness 36

37. Understanding trade-offs between minimalist and functionality-rich networks Strategic selection of gateways in network technology adoption Dynamics of adoption in two sided markets S. Sen On the Adoption and Deployment of New Network Technologies: An Economic Perspective Ongoing Work & Future Extensions 37

38. Network Technology Adoption: (1)S. Sen, Y. Jin, R. Guerin and K. Hosanagar. Modeling the Dynamics of Network Technology Adoption and the Role of Converters. IEEE/ACM Transactions on Networking. 2010 (2)S. Sen, Y. Jin, R. Guerin and K. Hosanagar. Technical Report: Modeling the Dynamics of Network Technology Adoption and the Role of Converters. Technical Report. June, 2009. Available at http://repository.upenn.edu/ese papers/496/. (3)Y. Jin, S. Sen, R. Guerin, K. Hosanagar and Zhi-Li Zhang. Dynamics of competition between incumbent and emerging network technologies. In Proc. Of ACM NetEcon'08, pp.49-54, Seattle, WA, 2008. Network Infrastructure Choice: (4) S. Sen, R. Guerin and K. Hosanagar. Shared Versus Separate Networks - The Impact of Reprovisioning. In Proc. ACM ReArch'09, Rome, Italy, December 2009. (5)S. Sen, K. Yamauchi, R. Guerin and K. Hosanagar. The Impact of Reprovisioning on the Choice of Shared versus Dedicated Networks, Proc. of Ninth Workshop on E-business, WEB, St. Louis, MO, December 2010. S. Sen On the Adoption and Deployment of New Network Technologies: An Economic Perspective Bibliography 38 Thank You!