The Layer Model: How do industries evolve?

evoluionIndustries evolve over time. Therefore, a reasonable question arises:  Is there a tool to help us understand how companies evolve? Among many options there is the so-called Layer Model, which was used by Martin Fransman in 2002 to discuss the evolution of the telecommunications industry. Originally, this industry was extremely simple: a few equipment manufacturers used to sell hardware to telephone companies. Traditionally (roughly until the advent of data communications and the Internet), the telecommunication industry was thought of as encompassing Layers 1 and 2 in the layer model presented in Exhibit 1. However, due to the evolution of the internet, the TCP/IP (Transmission Control Protocol/Internet Protocol) not only provided an effective way of transferring data between different entities but also provided a platform on which several higher layers could be built in order to offer a range of services, content and applications to final consumers.

Layer Model IFigure 1 – Layer Model, Fransman (2002)

Management history shows that entrants such as browsers (Netscape), on-line information services (Bloomberg) and e-commerce firms quickly joined the industry, which caused an impressive change in this segment. Therefore, the term “telecommunication” industry became obsolete and we witnessed the rise of the “infocommunications” industry (Layers 3,4 and 5).

The Layer Model is simple and has many positive characteristics. First, the model helps us to define industry boundaries. Second, it makes explicit the concept of modularization: in a modularized system, specialists in any module need to have knowledge only of the rules for connecting their module to complementary layers, with little knowledge necessary of what goes on within the other modules, which has facilitated the entry of companies into all layers by allowing them simply to focus on their own activities, while ignoring the complementary activities that are a necessary condition for their entry. Third, it facilitates the understanding of an industry by helping to find out which companies do what and why. Finally, it helps researches to perceive the entry barriers for each layer. For instance, capital requirement is an high entry barrier for equipment manufacturers and this explains why Layer 1 is scarcely populated. On the other hand, there are not many barriers for a company to join Layer 5; therefore, low barriers of entry explain why there are many firms doing business in Layer 5.

From an evolutionary perspective the model helps us to perceive how much any industry evolved over time. Consider Figure 1 as proposed by Fransman in 2002 and compare it with the 2015 version presented in Figure 2. Some companies were vanished by market forces (Netscape), other were acquired by rivals (Lucent was acquired by Alcatel) and newcomers joined the industry (Worldpress, Tumblr, Instagram). Additionally, many companies such as mobile and landline phone operators are present in more than one layer.

Layer Model II

 Figure 2 – Layer Model, 2015

As in any framework, the Layer Model presents a few shortcomings. For instance, while it emphasises the differences between the various layers, it tends to neglect differences within them. For example, there are fundamental differences between fixed and mobile networks that have to be grasped if the network layer is to be understood. Another important shortcoming is that interacting institutions are left out of the picture and therefore have to be somehow added. For instance, regulatory agencies, legal agents and political bodies shape the infocommunication industry, both its structure and its operational mode.

Final question:

The Layer Model provides a useful tool for addressing many of the relevant issues that are necessary for understanding the rise of the infocommunition industry. What would be the next step? We have seen that the birth the game and entertainment industries and have strong reasons to believe that they will be the next layers that need to be added to the model. Thus, the question is: What will be the new name of this industry? “Entertaincommunication” industry?

Reference:

Fransman, M. Mapping the evolving telecoms industry:the uses and shortcomings of the layer model. Telecommunications Policy 26 (2002) 473–483

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