Equity Research Technology Internet Infrastructure & Services Introducing Internet 3.0 Distribution and Decentralization Change Everything n THE RIPPLES CHANGE THEIR SIZE. This report examines the impact of distribution (of assets and resources across geographies) and decentralization (of a network’s assets and resources outward toward “edge” devices) on the Internet. It highlights the companies that will benefit or be hurt by this trend. Finally, it profiles emerging companies that are taking advantage of these trends and pushing the Internet toward its next phase, which we call Internet 3.0. n WHAT HAPPENS IN INTERNET 3.0? Thick client devices dominate the network. Edge devices communicate directly with each other. Increased traffic among devices places strain on networks, forcing network carriers to increase capacity. All of this is driven and guided by the laws of network dynamics. n EXTENDING TRADITIONAL MARKETS, INTRODUCING NEW ONES. We have identified four emerging areas in the field of distribution and decentralization: distributed processing, distributed storage services, distributed network services, and decentralized collaboration. n INTEL, MICROSOFT, SUN: INCUMBENTS TAKE CHARGE. Intel, Microsoft, and Sun Microsystems have emerged as thought leaders, each waving a flag and jockeying for position in Internet 3.0. We also profile a number of private companies that are providing thought leadership on the next phase of the Internet. We highlight their impact on incumbents and existing markets, and quantify new market opportunities. Chris Kwak Robert Fagin (212) 272-7792 (212) 272-4321 [email protected] [email protected] www.bearstearns.com MAY 2001 Table of Contents Page Executive Summary ...................................................................................................................................................9 Napster: The Year of Living Dangerously ...............................................................................................................16 From Mainframes to PCs to the Web: A Graphical Genealogy...............................................................................22 The Laws of Network Dynamics..............................................................................................................................27 Decentralization? What’s Wrong with Centralization?............................................................................................41 Decentralized Computing Defined in Internet 3.0 ...................................................................................................49 Categories of Decentralization in Internet 3.0..........................................................................................................53 Distributed Processing: Processing as a Resource ...................................................................................................55 Distributed Storage Services: Collapsing Geographic Isolation ..............................................................................72 Distributed Network Services: Adding Intelligence to Bandwidth..........................................................................83 Decentralized Collaboration: Weaving Internet 3.0...............................................................................................102 Public Companies That Take Advantage of Distributed Networks .......................................................................117 Tempering the Tendency to Overstate the Case.....................................................................................................127 Private Company Profiles.......................................................................................................................................131 Funding and Deal Activity; Customer Momentum Already............................................................................133 Appendices.............................................................................................................................................................163 Appendix A — How Information Travels Across the Internet........................................................................165 Appendix B — Terms and Concepts in Internet 3.0........................................................................................166 Appendix C — Instant Messaging and File Sharing Architectures .................................................................172 Bear Stearns may be a market maker or be associated with a specialist that makes a market in the common stock or options of the issuer(s) in this report, and Bear Stearns or such specialist may have a position (long or short) and may be on the opposite side of public orders in such common stock or options. Any recommendation contained in this report may not be suitable for all investors. Moreover, although the information contained herein has been obtained from sources believed to be reliable, its accuracy and completeness cannot be guaranteed. Bear Stearns may make markets and effect transactions, including transactions contrary to any recommendations herein, or have positions in the securities mentioned herein (or options with respect thereto) and may also have performed investment banking services for the issuers of such securities. In addition, employees of Bear Stearns may have positions and effect transactions in the securities or options of the issuers mentioned herein and may serve as directors of such issuers. Copyright © 2001. All rights reserved by Bear, Stearns & Co. Inc. Private Company Profiles Page Applied MetaComputing, Inc.................................................................................................................................135 Centrata, Inc. ..........................................................................................................................................................136 Consilient, Inc. .......................................................................................................................................................137 DataSynapse, Inc....................................................................................................................................................138 Ejasent, Inc.............................................................................................................................................................139 eMikolo Networks, Inc...........................................................................................................................................140 Engenia Software, Inc. ...........................................................................................................................................141 Entropia, Inc...........................................................................................................................................................142 EverNet Systems, Inc. ............................................................................................................................................143 ExactOne, Inc. ........................................................................................................................................................144 Groove Networks, Inc. ...........................................................................................................................................145 Ikimbo, Inc. ............................................................................................................................................................146 NextPage, Inc. ........................................................................................................................................................147 Oculus Technologies Corp. ....................................................................................................................................148 OpenCola, Inc.........................................................................................................................................................149 OpenDesign, Inc.....................................................................................................................................................150 Parabon Computation, Inc......................................................................................................................................151 Proksim Software, Inc. ...........................................................................................................................................152 QUIQ, Inc...............................................................................................................................................................153 Scale Eight, Inc. .....................................................................................................................................................154 Static Online, Inc....................................................................................................................................................155 United Devices, Inc. ...............................................................................................................................................156 Uprizer, Inc.............................................................................................................................................................157 WorldStreet Corp. ..................................................................................................................................................158