Convergence: term usage and proposed theoretical definition

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CONVERGENCE: HISTORY OF TERM USAGE AND LESSONS FOR

FIRM STRATEGISTS

Jun 2004

Jonas Lind

Center for Information and Communications Research, at

Stockholm School of Economics

PO Box 6501

113 83 Stockholm, Sweden jonas.lind@hhs.se

Key terms : convergence, hype cycle, market definition, industry redefinition, resource based view, corporate strategy, telecom industry, internet bubble

Abstract

Convergence has been widely used in management practice in the IT, telecom and media industries the last decades. A working definition of convergence could be something like:

“merging of hitherto separated markets, removing entry barriers across industry boundaries.”

The popular illustration of convergence was four circles representing the IT, telecom, media and consumer electronics industries moving into each other, creating one big “converging industry“. The vision of convergence had great impact on corporate strategy in the 80s and

90s. The article gives a brief history of how “convergence” has justified a number of – mostly failed – mergers within the Infocom sector. An empirical study of usage of the term convergence in newspaper databases 1990–2004 revealed a steep peak around 1994 when a number of corporate mergers in the telecom industry was motivated by convergence. This was followed by a backlash and a second broader peak during the Internet bubble 1999-2001. This pattern is consistent with the Hype Cycle, a model developed by the IT analyst firm Gartner.

One conclusion is that “convergence” gives few guidelines for concrete strategic action for a given firm. Convergence drives re-definitions of industry boundaries, but the result of convergence is not a merging of separate industries into one big “converging industry”.

Rather, it creates a full eco-system of new specialized sub-industries. The lessons from the resource based view of the firm are enforced. However, “convergence” fills an important rhetorical role in early phases of market re-definitions by alerting strategists about impending change.

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Background

During the course of the 80s and 90s, the term convergence became one of the technoeconomic buzz-words in the IT, telecom, internet, media and consumer electronics industries

(the so called Infocom sector). Convergence was used to denote almost all aspects of the impact of the IT/telecom revolution. Convergence could mean anything that had to do with new applications for computers, new IT related technologies and new business models. It was widely used with little attention to a clear-cut and coherent definition of the term: digitalisation of analogue media; the use of IT in telecom; networking of hitherto separate computers; cable TV; internet usage; online banking; etc. It could all be termed convergence.

In line with other similar buzz-words in the business world (e.g. Synergies, Core Competence,

Total Quality Management, Business Process Re-engineering, and The New Economy) it gained significant rhetorical power and had a significant impact on the world-view of topmanagement, and eventually on corporate strategy. The vision of convergence justified a number of large corporate mergers and aggressive diversifications within the Infocom sector, of which many eventually failed. On the other hand, in the “post-convergence” marketplace in

2004, a number of old and new companies have succeeded in creating viable business models in the re-defined “converged” market.

It was not just the business community who embraced convergence without reflecting about how to define the term or its deeper meaning and implications. Most academic articles the last decade mentioning convergence have taken it as a given and just dealt with different implications of the phenomena. Almost no academic articles have tried to define convergence and relate it to a theoretical framework.

From the perspective of business strategy theory, convergence did motivate aggressive diversifications and firm restructurings. However, the relation between theories about firm structure and the convergence phenomena is still largely an unexplored area in the academic community. “Convergence” seems to be a either a useless epi-phenomena deluding business management to pursue bad strategies, or an interesting concept yet to be analyzed by economic theory.

The aim of this article is to trace the roots of the concept and study the history of its usage in the business community, and from these findings attempt to relate convergence to economic theory. And in particular to identify any viable corporate “convergence strategies”.

Delimitations and definitions

The Concise Oxford English Dictionary defines the word Converge as “come together from different directions so as eventually to meet”. There is no explicit common accepted definition of convergence in the economic academic literature. Adapting the dictionary definition to economic terminology would yield something like “merging of markets”. In this article the focus is on convergence in the management context and how convergence can be analysed by economic theory.

A working definition, derived from term usage in management practice, would be something like “a confluence and merging of hitherto separated markets, removing entry barriers across the market and industry boundaries”. The popular image used to illustrate this convergence

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was three or four circles gradually moving into each other (e.g. Negroponte cited in Brand

1987 and Wirtz 2001). They usually represented IT, telecom, media and consumer electronics. The four industries were expected to merge into one big blob “the converging industries”, in which the old industry barriers were teared down and where everybody would compete with everybody (figure 1 below).

The popular image of convergence

computer s media telecom

Converging

Industries

(IT, telecom, media, cons. electr.) consumer electronic s

Before convergence

(separate industries)

Figure 1: The popular image of Convergence

After convergence

(one big converging industry)

This definition takes its angle on industry and market restructuring. This is a more narrow definition of the term than how it was popularly used in the 90s. Similar to other popular terms and buzz-words, convergence was used to denote all sorts of aspects of the IT-telecom revolution. An example is the European Commission, which published a Green Paper on convergence 1997 with a very wide definition. They defined convergence on four levels. On the level of technology and network platforms, on the level of industry alliances and mergers, convergence in services and markets, and convergence on the level of policy and regulation.

Another example is the report from the Swedish government Convergence Commission (SOU

1999:55). The report defines four types of convergence. Network Convergence happens when separate physical infrastructures can carry all types of services. Service Convergence is the process when the boundaries between communication services and content services are lowered and the two separate service classes converge into one. Appliance Convergence is the

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process when user gadgets and terminals embrace new functionality and eventually can be used for all purposes. Market Convergence is defined as the consequence of the three other kinds of convergence and means that market players can enter new industries when network, appliance or service convergence makes that possible.

More examples where convergence has been used in a very wide definition can be found in

(Bohlin et al. 2000) and the 1000s of news articles in the business press mentioning convergence returned from the empirical study mentioned below.

Frameworks from economic theory

A search for “convergence” in academic databases revealed few articles. The term is used extensively in chemistry, mathematics and parts of international economics but few authors are using the term in the sense of converging markets. Michael Porter and Victor Millar mentioned the term in a Harvard Business Review article from 1985. A few peer-reviewed articles in business and organization journals could be found from the mid 90s and onwards

(e.g. Harianto & Pennings 1995, Katz 1996, Greenstein & Khanna 1997, Gambardella &

Torrisi 1998, Duysters & Hagedoorn 1998, Mueller 1999, Bohlin et al. 2000, Wirtz 2001,

Pennings & Puranam 2001, Stieglitz, 2003). With the exception of Pennings & Puranam,

Stieglitz, and Greenstein & Khanna, these articles only use the term without a systematic reflection about its definition. It seems that academics have either found the concept useless as an analytical tool or been very slow to pick it up. As expected, in the semi-academic business literature there is a significant discussion about the impact of convergence but few attempts to anchor the term in a theoretical framework (e.g. Yoffie 1997).

Convergence raise interesting issues for economic theory. As will be shown below in the article, a number of major strategic corporate moves were justified by “convergence”. These include cross-industry alliances, aggressive in-house diversification strategies, and mergers between IT, telecom and media companies.

At first sight it seems that we are dealing with diversification and/or vertical integration. If so, traditional firm centered management theory as strategic theory would be applicable and applied on convergence strategies. This has not been the case. Most of the identified theoretical articles about convergence have taken an industry perspective. This makes some sense as the “convergence strategies” are a response to re-definitions of industry boundaries.

Firm restructuring and strategies during convergence is a re-action to the outside force of industry restructuring.

One reference with a corporate perspective is Langlois & Robertson (1995) in their book

“Firms, Markets and Economic change : a dynamic theory of business institutions”. The dynamics of the boundaries of the firm are analyzed with the traditional theoretical tool-kits, e.g.: Transaction Costs theory, Capabilities, Vertical Integration, Modularity, and

Technological Change. The merging of two adjacent industries into one is mentioned as one aspect of the dynamics but the term convergence is not used. Most examples are taken from the early automobile industry. The IT, telecom, media convergence in the 90s is not mentioned.

The convergence article by Greenstein & Khanna (1997) takes their point of departure in models of technological change and industry evolution. The traditional theoretical framework

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deals with how new General Purpose Technologies generate Industry Life Cycles and how dominant designs are established. The authors note that these theories have their main focus on developments inside a well defined industry and not what happens at the boundaries between industries. Greenstein & Khanna suggests a model with two types of convergence – convergence in substitutes and convergence in complements. When two different product classes starts to share features that will make them interchangeable for customers, we will have a convergence of substitutes. If two product classes work better together than by themselves we have convergence of complements.

This model is developed further in Pennings & Puranam (2001) and Stieglitz (2003).

Pennings & Puranam starts with the observation that the Resource Based View of the firm prescribe that firms should be coherent and avoid diversification outside their own core competence area. If convergence is a phenomena when boundaries between separate markets erode, firms face a situation where they suddenly have to develop capabilities in a new area – and hence become less coherent.

Pennings & Puranam develop the typology for convergence by adding a second dimension to the Substitute – Complement dimension. They introduce the categories Demand Side and

Supply Side convergence. Supply side convergence has to do with technological functionality.

A Supply Side convergence in Substitutes occur when different technological capabilities become similar and can satisfy then same set of needs. An example is the convergence between biotechnology and pharmacology, where two different technologies can solve the same medical problem in different ways. Another example could be some aspects of the

PC/TV convergence. If there is a Supply Side convergence in Complements different technologies are brought together to create new kinds of opportunities. Optoelectronics, mechatronics, and bioinstrumentation could be illustrative examples.

Substitution convergence on the Demand Side arise when the needs of different consumer segments become similar. Globalisation and homogenisation of market segments are used as examples. Complementary convergence on the Demand Side is a mirror image of the Supply

Side convergence and arise when different but related consumer needs are met by product bundling. The partial merging of consumer and investment banking is used as a convergence example. The authors continue with the problems of empirical measurements of convergence and suggests that a growing overlap in SIC-codes from cross-sectional patent analysis could be used as a proxy for convergence.

The taxonomy by Pennings & Puranam is developed further by Stieglitz (2003). Stieglitz starts with a definition of an Industry based on grouping products with similar characteristics.

A reference here is Bettis (1998), who claims that an industry could be defined as competing firms that share the same resources instead of grounding the definition in firms producing the same products. The boundary of an industry could then be determined by grouping products that share many similar features.

Stieglitz use the 2*2 matrix from Pennings & Puranam but re-labels the Supply-Demand dimension to Technology versus Product based convergence. An example of substitute convergence in technology would be how the transistor replaced the vacuum tubes. A complement convergence in technology is called Technology Integration and occur when a two technologies can be combined in a way that creates a new type of product. An example could be PDA:s. Product Based Substitute convergence involve increased cross-industry

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competition, created by increased overlap in capabilities between two industries. An example from Stieglitz is the growing overlap between the mainframe and minicomputer markets.

Origins of the concept convergence

The roots of the term convergence in the sense used in this article originated in the mid 70s.

Farber & Baran approached the topic with a technological perspective in the 1977 Science article “The Convergence of Computing and Telecommunications Systems”. Nicolas

Negroponte at MIT Media Lab illustrated Convergence in 1978 with a figure of three overlapping circles moving together. The circles symbolized the three industries Computing,

Publishing & Printing, and Broadcasting & Film. This early insight is the first documented use of the well-known figure illustrating how separate industries are moving together.

However, Negroponte missed telecommunications in this early vision (Brand 1987).

Another early visionary forecast of a future information society where TV, computers and telecom have merged is the book “the Wired Society” (Martin 1978), though the term convergence was not used. A research project at Harvard in the mid 70s – Information

Technologies and Public Policy – touched on the issue of an emerging overlap between voice telecom networks and data networks (Oettinger, Berman & Read 1977). They introduced the term “Compunications” but did not envision the impacts of a full convergence between the IT and telecom industries.

Japanese NEC identified the idea of convergence in a vision from 1977. NEC called its vision

C&C (Computer & Communications) and forecasted how in 1990, digitalized integrated communications networks would converge with distributed processing computers (NEC 1984, reprinted in Yoffie 1997). A few years later the early visions of convergence from the late 70s began to translate into corporate strategy and motivated a number of company mergers and diversifications into adjacent industries a

.

Impact on corporate strategy before 1995

A number of large corporate mergers and other strategic moves during the 1980s and 1990s were motivated by “convergence”. The literature search identified corporate deals where the term convergence was used to justify or comment on the move. Hence, there might be

“convergence deals” where the term was never used and strategic moves where convergence was used in the rhetoric but wasn’t the real reason. The “convergence deals” are taken at face value and used to illustrate the phenomena. The mergers mentioned here are the strategic moves that have been most visible in the media, which gives a heavy bias towards full mergers between big incumbent companies.

A first wave of strategies motivated by the convergence vision began in the 80s. Several of the equipment vendors in the IT and telecom sector tried to enter each others markets, usually with failure as result. IBM acquired the PBX telecom switch maker ROLM in 1984 and after a If two industries begin to merge the actors will need mutual access to competence and capabilities in the adjacent industry. Alliances are natural first step, with less risks and commitments than a full merger across the industry lines. In this article the large number of alliances in the infocom sector during the

1990s are noted, but not covered explicitly.

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five years of heavy losses sold it to Siemens in 1988. During the early 80s, IBM held an equity stake in Satellite Business Systems (SBS) until they retreated and sold it to the long distance carrier MCI in 1985. Ericsson tried to enter the computer market with Ericsson

Information Systems in 1981, and after years of losses decided to sell it 1987. AT&T tried to enter the PC market in the mid 80s and eventually withdrew. In 1991 AT&T bought the computer maker NCR, only to sell it 1995. The British telecom company STC (Standard

Telephones and Cables) bought the British computer maker ICL in 1984 and sold ICL to

Fujitsu in 1990.

A broader wave of convergence strategies – mostly failed – began around 1990 and was partly motivated by forecasts of digital media converging with the IT/telecom-industry. Sony acquired CBS Records in 1987 and Columbia Pictures in 1989. Sony’s competitor Matsushita bought MCA and Universal Pictures in 1990. Matsushita retreated and sold the companies in

1995. The business press has reported of heavy losses for Sony with the new acquisitions but

Sony has endured and shown a long term commitment and are still a player in the media market. It is not obvious if these mergers should be included in an overview of convergence.

The mergers were partly motivated by a strategy of vertical integration and the view that controlling content and intellectual property rights would be the key to profits in the future.

An indication of the growing interest in convergence came when the influential investment bank Goldman Sachs published the report Communacopia in 1992, which forecasted bright investment opportunities in the sector. They put convergence between IT, telecom, and digital media on the corporate and investor agenda, though they missed the full future impact of the

Internet.

Before 1994 the convergence debate was rather internal to the Infocom industry. Around this time the potential of the Information Superhighways, VOD, iTV, the Internet and convergence began to grab attention in the general media and business community. A number of large mergers in the infocom sector took place from around the middle of 1993 until 1995.

Bell Atlantic bought the cable TV company TCI. Telecom operator NYNEX and other telecom operators announced aggressive plans for iTV. Bell South tried to buy the Hollywood studio Paramount, only to see Paramount acquired by the conglomerate Viacom, owning a cable TV network. Several telecom operators tried to enter the media sector directly. Swedish

Telia with the portal project Passagen and a strategy to leverage all its assets as cable TV, yellow pages, portals and directory assistance into one “Infomedia Strategy”. The list of examples can be made longer.

After 1995 the convergence debate became closely intervened with the general internet development 1997 – 2001. It was used to motivate all kinds of deals, mergers and other strategic moves. That part of the history is only covered by the analysis of the term usage of convergence in the media (below).

Empirical study - term usage after 1990

Usage of convergence in the business press during the 90s has been extensive. To trace how the term convergence had been used, a term usage analysis was conducted in the database

Factiva (former Reuter Business Briefing and Dow Jones).

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The search was limited to an article count in US sources with monthly data points from

January 1990 to December 2003. The article count would include articles mentioning convergence in the text within eight words of telecom or information technology or new media. The red curve in figure 2 (below) shows the number of returned convergence articles.

A possible source of error could be the general surge in articles about IT during the 90s. It could be possible that a surge in convergence articles was just a by-product of a large number of articles written about IT and internet. The black curve in figure 2 is the article-count of articles mentioning internet or telecom* or comput* or information technology at least three times in the article. This is used as a proxy for the total number of articles about the infocom sector.

Total IT articles and convergence articles, US newspapers

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Figure 2: Total number of “IT” articles and convergence articles in US newspapers

As expected, there is a steady increase in articles about IT, telecom and internet during the

90s with peaks during the internet bubble around 1999-2001. Figure 3 shows the percentage of IT/internet articles also mentioning convergence (derived from the two previous graphs, though the convergence count is not a strict subset of the total article count.) Interest in convergence was very low until early 1993. From the middle of 1993 until the end of 1994 media interests in convergence surged to the highest level in the entire period. This was the period when large companies in the telecom, cable and media industries merged or tried to merge in order to position themselves for the future convergence. A symbolic ending of this first convergence period could be placed at September 1995 when AT&T abandoned its

“convergence strategy” and split itself in three separate companies (NCR in computers,

AT&T as telecom operator, and Lucent as telecom equipment vendor). Another indication of the convergence backlash within the telecom community could be the title of the biennial

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conference by the International Telecommunications Society (ITS) in Stockholm 1998 –

“Beyond Convergence”. The name was set in 1997.

Percent convergence articles of all IT articles, US newspapers

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Figure 3: Percent convergence articles, US newspapers

After this first initial peak, the percentage of convergence articles was low during 1995 and

1996. Between 1997 to 2000 interest in convergence grew steadily. The period 2000–2001 showed a second peak, though lower than in 1994. This was the time of the internet and telecom bubble. Since 2001 interest in convergence has steadily been declining and is now back on the low levels around 1996.

Discussion – the convergence hype cycle

The form of the curve resembles the so called hype-cycle developed by the IT analyst firm

Gartner Group (Gartner 1999). The hype cycle is an empirical regularity that has been used to illustrate how the business community and trade press embrace a new technology. In figure 4 the Gartner hype cycle model is superposed on the convergence usage curve from figure 3.

The start of a new hype cycle is a Technology Trigger. Soon after the trigger, the new technology will receive a lot of initial attention before it has been able to deliver on its promises. This is called the Peak Of Inflated Expectations and occurs when everybody in the industry has just been aware of the new technology. Few has actually used it and it is far from proven if the new technology can deliver on its promises. The next phase is a deep backlash

(Through Of Disillusionment) which comes when the first users find the immature new technology unreliable and performing far below its promises. What is missing in the early

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Figure 4: The convergence hype cycle phases are stable products and complementary technologies and enabling infrastructures that are needed to put the new technology in full use. After the setback comes the Plateau Of

Productivity when the maturing new technology slowly are being put to use and can start to deliver on its promises. In this phase the maturing technology has become a commodity that is widely used and whose functionality and productivity is taken for granted.

With some modifications, the Gartner hype cycle can be used to analyse the development of convergence in the 90s. Convergence is strictly not a new technology. But as a concept it shares many feature with a new technology. A new technology can be viewed as an enabling tool that can offer new superior solutions to established and new technical problems. We can view convergence as en enabler in the same way. But this time as an enabler for business strategists instead of technologists.

The first surge in convergence articles around 1993-1994 had to do with the initial peak of inflated expectations. The vision of convergence carried lot of promises for business executives but few knew exactly how to exploit and implement the new concept. Most of the

“early adopters” failed. If the analogy with the Gartner model, complementary systems and technologies were missing. Knowledge and organisational capabilities to manage the new concept were missing. The early movers from 1994 who tried to implement a convergence strategy missed to consider the impact of the Internet. Their attempts were in retrospect ill defined and eventually failed.

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The backlash around 1996 was a Through Of Disillusionment in the Gartner model. As the early attempts at convergence failed, media and the business community became cynical about the concept. In 1997 and after, the Internet gradually made convergence strategies possible and the concept reached its Plateau Of Productivity during 2000 – 2001. The period when “convergence” was implemented as new strategies, companies and business models. A few examples of new business models could be internet advertising brokers, affiliate programs for e-retail, internet auctions, web hosting service providers, internet portals, and wireless portals. After 2001 most new “convergence” business models were already created, the new firms could operate within a more well-defined market and the usage of the term gradually declined b

.

Conclusion I: is there any room for the convergence concept ?

The popular image of convergence was three or four circles gradually moving into each other

(e.g. Brand, 1987, Wirtz 2001). They usually represented IT, telecom, and media. Sometimes with consumer electronics as a fourth added industry. The four industries were expected to merge into one big blob “the converging industries”, in which the old industry barriers were teared down and where everybody would compete with everybody (figure 1).

From the article search it seems that convergence was used to motivate strategic moves in situations when fundamental market restructurings was imminent. Before the new market or technology was established. When uncertainty was high about the future business logic. As a general and rather vague term imbued with a lot of hype, convergence seems to have been used as rhetoric and a residual argument, in lack of more concrete strategic arguments c

.

The problem with this initial convergence model where four circles conflate is that it offers few if any guidelines for concrete strategic action. However, as an illustration of removed barriers between different adjacent markets and to warn that competitors suddenly can enter from other industries it has a pedagogical point.

But if the merging of the four circles into one is interpreted as a vision of one big “converging industry” where everybody competes with everybody and the number of industries would fall from four to one it will be directly misleading. Rather, the output of the Infocom revolution the last decade is a large number of new or re-defined markets. Each with its own narrow business logic and its own set of players. There are few indications that the barriers to entry between these new sub-markets – once established – in the post-convergence marketplace are lower than in traditional markets. b A test search in Factiva showed a significant number of articles for convergence together with “Wireless” from

2000 and onwards. If wireless had been added to the search the decline would have been much smaller. Between

1997 – 2003 the number of articles with wireless/ mobile convergence articles were 20, 30, 87, 239, 170, 125, and 127. An indication that the hype cycle for “wireless convergence” is separate and are taking place a number of years after the IT, telecom and internet convergence. Therefore it is excluded in this analysis. c Compare “convergence” with the popularity of “synergies” to motivate corporate moves and diversifications in the 70s and 80s.

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The capabilities and unique resources needed to compete in each of the sub-markets are highly proprietary. Amazon has no chance in entering the market for local access provision or compete with Vodafone. Ebay can’t compete with Cisco and Nokia can’t compete with

Amazon. The conclusions one would expect from the Resource Based View of the firm is reaffirmed. Resources or capabilities are non-imitable, mostly tacit and bound within the firm.

The lessons to be learned are that many market players misjudged the need for different capabilities in a re-defined market they were trying to enter – or dragged into against their will. Strategic moves should have been preceded by a careful analysis of the internal capabilities and the needed capabilities in the new market. Another lesson is that alliances and network building probably are less risky ways of entering an adjacent converging market than outright mergers. However, convergence was probably a useful concept to alert strategists about the impending changes in a the early phases of this process.

A search in current news article databases gives two examples of future convergence candidates. One is the convergence between wireless and the internet and the other more longterm is the so called NBIC convergence (Nanotechnology, Biology and medicine, Information sciences, and Cognitive sciences) from The Harrow Technology Report (2003).

Conclusion II: implications for theory

The existing framework from economic theory reviewed earlier in this article provided a taxonomy over different types of convergence but had a primarily industry focus that offered little guidance for corporate firm strategists.

Of the available firm centered theories, the Resource Based View seems to offer a useful framework for analysing convergence. The RBV can be used to define the market/industry as a cluster of firms with a similar set of capabilities. If the market/industry boundaries are redefined by technological change (e.g. convergence) the firms need to re-configure their configuration of capabilities. Success in the new re-defined marketplace will go the firms with the best capabilities for the new environment. “Convergence” is not a carte blanche for reckless diversification into adjacent industries if the internal capabilities are lacking.

The discovery of a “hype cycle” for convergence usage during the 1990s was unexpected. The implications here are more related to how new concepts (“buzz-words”) can be used as a rhetorical construct and the adoption and diffusion process of new technologies.

Acknowledgements

Support from Stockholm School of Economics and the Swedish Foundation for Strategic

Research, under the program AWSI (Affordable Wireless Services and Infrastructures) is greatly appreciated.

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