the structural changes in the telecommunications industry

As a result of the structural changes in the telecommunications industry, the source of funds for investing in research has shifted from the demand side—telephone customers who paid for Bell System research via a tax on telephony usage—to the vendors of equipment, software, and chips, although the U.S. military (through DARPA, the Army, the Navy, and the Air Force) continues to be a major source of investment in telecommunications research. Currently, end-user organizations and commercial intermediaries are investing very little in research (an exception is AT&T, which has maintained a vestige of Bell Labs but has cut that back substantially, due to dramatic reductions in traditional telecommunications revenues over the past 3 years, from a support level of close to 0 million in 2001 to a support level of below million in 2004).

Today, for commercial technologies, most of the investment is made by supply-side equipment vendors and semiconductor and software companies. Service providers and equipment vendors primarily support research leading to near-term incremental additions to their own products and services, and are likely to keep the results of their short-term research programs proprietary in the interest of gaining competitive advantage.

Although demand-side entities are generally more likely to direct their research investments toward more fundamental and long-time-horizon opportunities, a major economic impediment to doing so is so-called free-riding. Since the goal of a demand-side entity is typically not to gain proprietary advantage, but to make innovative solutions available through the totality of its suppliers, demand-side investments in research usually benefit everybody, that is, all suppliers and other demand-side entities. Thus, companies or entities failing to invest in research can still benefit from the investments of others, and there is a temptation to gain a free ride on those investments—and a disincentive to invest in results that become largely a public good.

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Growing consumer demand and the need to make better use of available spectrum resources fueled the development of a second generation of wireless technologies (also commonly referred to as 2G technologies). This second generation marked the transition to a fully digital technology, providing enhanced quality and enabling better use of spectrum resources. While the European wireless industry settled on global system for mobile communications (GSM) for its 2G standard, two major wireless standards emerged in the United States: time division multiple access (TDMA), a technology standard adopted by the Telecommunications Industry Association in 1989; and code division multiple access (CDMA), a newer, competing technology developed and championed by Qualcomm. 2G technology included many improvements over first-generation technology; for example, 2G included such advanced digital features as compression, network control techniques, bandwidth conservation measures, and full support for voice mail.

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