3:Market Penetration Model and Technology Assumptions

Chapter 3
Market Penetration Model
and Technology Assumptions

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Contents
Page
Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
23
Mailstream . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
24
EFT Diversion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
26
EMS Diversion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
27
Generation II Growth and Timing Estimates . . . . . . . . . . . . . . . . . . . . . .
29
Generation III Growth and Timing Estimates . . . . . . . . . . . . . . . . . . . . .
30
Relationships Between Generation II and Generation III Estimates. . .
31
Alternative Generation II Growth and Timing Estimates . . . . . . . . . . . .
32
Mainstream Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
33
TABLES
Table No.
Page
l. Baseline Mainstream . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
24
2. Mail Content . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
24
3. Major Mailstream Segments Vulnerable to Penetration by Electronic
Funds Transfer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
25
4. Major Mainstream Segments Vulnerable to Penetration by Electronic
Mail and Message Systems ....,... . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
25
5. Assumptions About Rate of EFT Penetration . . . . . . . . . . . . . . . . . . . . .
26
6. Assumptions About Rate of EMS Penetration . . . . . . . . . . . . . . . . . . . . .
29
7. Assumptions for Generation II Growth Alternatives . . . . . . . . . . . . . . .
32
8. Alternative Assumptions About Underlying Mainstream
Growth Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
33
FIGURES
Figure No.
Page
l. Market Penetration Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
2. Comparison of Conventional Mail Service With Generations I,II,
and III EMS Service . . . . . . . . . . . . . . . . . . . ........... 28

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Chapter 3
Market Penetration Model
and Technology Assumptions
Introduction
The primary purpose of the market penetra-
1995, and 2000. The basic elements of the mod-
tion model is to estimate the level of electronic
el are shown in figure 1. (See app. A, fig. A-1,
and conventional mail volumes in 1985, 1990,
for further details.)
Figure 1.— Market Penetration Model
SOURCE:
of Technology Assessment, see
A, table
for further details.
23

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24 . Implications of Electronic Mail and Message Systems for the U.S. Postal Service
Baseline Mainstream
As one input to the market penetration mod-
Table 1.— Baseline Mainstream
el, the baseline mainstream was divided into
T o h o u s e h o l d s
T o n o n h o u s e h o l d s
a number of different submarkets (subclasses
F r o m
7.60/o
9.90/0
of mail) in two ways—by mail content and by
households . . . . . . . . .
(7.1 billion pieces)
(9.2 billion pieces)
sender/receiver pairs. The mail content cate-
F r o m
5 3 . 3 %
29.20/o
gories included correspondence, merchandise,
nonhouseholds. . . . . . (49.7 billion pieces) (27.3 billion pieces)
bills, financial statements, and advertising,
SOURCE: 1977 data, University of Michigan Millstream Study conducted for
USPS; percentages shown are based on total 1977 mail volume of
among others. Senders and receivers were
93.3 billion pieces, See app. A, table A-2, for further details
grouped into households and nonhouseholds.
Thus, the four possible sender/receiver pairs
Table 2.—Mail Content (illustrative)
included household-to-household, household/
nonhousehold, nonhousehold/household, and
T o h o u s e h o l d s
T o n o n h o u s e h o l d s
nonhousehold/nonhousehold.
F r o m
C o r r e s p o n d e n c e — 7 . 1
N e g o t i a b l e I n s t r u m e n t s
h o u s e h o l d s
percent of total mail
( e . g . , c h e c k s ) – 7 . 0
v o l u m e
p e r c e n t
The baseline volume for every class of con-
C o r r e s p o n d e n c e — 1 . 5
ventional mail (first, second, third, fourth,
p e r c e n t
other) was estimated for each category of mail
F r o m
Third-class (mostly bulk
Bills and financial state-
non-
content and sender/receiver pair. These esti-
rate) mail— 10.2
m e n t s — 9 . 1
h o u s e h o l d s
p e r c e n t
p e r c e n t
mates were based on data in two studies con-
B i l l s — 9 . 5 p e r c e n t
C o r r e s p o n d e n c e – 6 . 1
ducted for the U.S. Postal Service (USPS) by
A d v e r t i s i n g — 9 . 1 p e r c e n t
p e r c e n t
the University of Michigan Survey Research
F i n a n c i a l s t a t e m e n t s —
A d v e r t i s i n g — 5 . 7 p e r c e n t
2.8 percent
Center known as the Household Mainstream
SOURCE: University of Michigan Millstream Study conducted for USPS. Per-
Study and Nonhousehold Mailstream Study,
centages shown are based on total 1977 mail volume. See app. A,
table A-2, for further details
which in turn were based respectively on 1977
and 1979 mainstream data.1 For consistency,
the 1979 nonhousehold data were used to es-
Mail originating from nonhouseholds consti-
tablish ratios among the types of mail and
tutes over four-fifths of the total mainstream.
then applied to 1977 mail volumes so that all
Nonhousehold-originated bills and financial
data would be for the 1977 calendar year.
statements alone account for over one-fifth of
the total, advertising about one-seventh, and
The resulting baseline mainstream is high-
bulk rate mail over one-tenth. Of the one-fifth
lighted in tables 1 and 2 and detailed in ap-
of the mail originating from households, most
pendix A (table A-l). It is possible that some
is either correspondence (letters and cards) or
shifting among the mail segments has oc-
negotiable instruments (checks).
curred since 1977, although a comparison of
data for the 1977 and 1980 fiscal years indi-
All mainstream segments were evaluated to
cates no major changes. The total mail volume
determine whether they potentially could be
has grown from about 92 billion to 106 billion
handled (in whole or in part) by electronic
pieces between 1977 and 1980. First-class mail
funds transfer (EFT) and/or electronic mail
has decreased from 58 percent of the total to
and message systems (EMS). Those major seg-
56.6 percent; second-class mail has decreased
ments judged to be vulnerable to penetration
from 9.4 percent to 7.9 percent; and third-class
by EFT and/or EMS are listed in tables 3 and
mail has increased from 26 percent to 28.5 per-
4. (See app. A, table A-2, for a complete list.)
cent of the total mail volume.2
As shown in tables 3 and 4, accounting only
‘M. Kallick, W. Rodgers, et al., Household
Study,
for major mainstream segments, about two-

prepared for the Mail Classification Division,
thirds of the mainstream is vulnerable to pene-
USPS, 1978. Also,

Study, Interim
tration by EFT and/or EMS. This translates
Report for First Postal Quarter PFY 1979, July 1979.
‘Annual Report of the Postmaster General, fiscal 1980, pp.
into about three-quarters of first-class mail
28-29.

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Ch. 3—Market Penetration Model and Technology Assumptions q 2 5
Table 3.—Major Mainstream Segments Vulnerable to Penetration by
Electronic Funds Transfer
1977 volume
Percentage
Mail
(billions of
of first-
Percentage of
Mainstream segment
class
pieces)
class mail
total mail
Nonhousehold to household
bills . . . . . . . . . . . . . . . . . . . . . . 1
8.9
15.4%
9.50/0
Non household to household
financial statements. . . . , . . . 1
2.6
4,5
2.8
Non household to
nonhousehold bills and
financial statements. . . . . . . . 1
8.4
14.6
9.0
Household to
nonhousehold negotiable
instruments . . . . . . . . . . . . . 1
6.5
11.3
7.0
Totals . . . . . . . . . . . . . . . . . . . .
26.4
45.8%
28.3%
SOURCE: University of Michigan Mainstream Study conducted for USPS. Percentages based on total 1977 mail volume of
93.3 billion pieces and 1977 first-class mail volume of 57.7 billion pieces. First-class mail defined to include
penalty and franked mail.
Table 4.—Major Mainstream Segments Vulnerable to Penetration by
Electronic Mail and Message Systems
Percentage of mail class
Mail
1977 volume
Mainstream segment
class (billions of pieces)
First
Third
Total
Household to household
correspondence . . . . . . . . . . . . . . . . 1
6.6
11.4%
—
7.1 %
Household to nonhousehold
correspondence . . . . . . . . . . . . . . . . 1
1.4
2,4 —
1.5
Non household to household third-
class (mostly bulk rate) mail . . . . . . 3
9.5
—
38.80/o
10.2
Nonhousehold to household
1
1.1
1.9 —
1.2
advertising . . . . . . . . . . . . . . . . . . . . . 3
7.2
—
29.4
7.7
Nonhousehold to nonhousehold
1
2.3
4.0
—
2.5
advertising . . . . . . . . . . . . . . . . . . . . . 3
3.0
—
12.3
3.2
Non household to nonhousehold
correspondence . . . . . . . . . . . . . . . . 1
5.2
9.0 –
5.6
Totals . . . . . . . . . . . . . . . . . . . . . . . . .
36.3
28.70/o
80.50/o
39.00/0
SOURCE: University of Michigan Mainstream Study conducted for USPS. Percentages based on total 1977 mail volume of
93,3 billion pieces and 1977 first-class mail volume of 57.7 billion pieces, and 1977 third-class mail volume of
24.5
pieces. First-class mail defined to include penalty and franked mail.
volume and about four-fifths of third-class
natures, endorsements, and documentation for
mail. Actually, only the merchandise and mis-
many such instruments. Even here, the possi-
cellaneous segments and nonhousehold to non-
bilities for electronic certified mail and elec-
household legal/financial instruments were
tronic contract signing are being researched.3
assumed to have no vulnerability. Legal/finan-
cial instruments were assumed to have no
potential for electronic handling due to the fre-
“’Cryptographers Gather to Discuss Research,” Science, vol.
quent requirement for verified and original sig-
214, NOV. 6, 1981, p. 647.

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26 q Implications of Electronic Mail and Message Systems for the U.S. Postal Service
—
E F T D i v e r s i o n
The next step in the market penetration
Table 5.—Assumptions About Rate of EFT
model was to subtract from the baseline mail-
Penetration
stream the mail that could be diverted to EFT.
Year of 5 percent penetration—1985
While for some purposes EFT might be viewed
Year of 75 percent penetration—2005
as a special type of EMS, other EFT applica-
Initial exponential growth rate (1985)—20 percent
tions, such as the point-of-sale use of debit
Growth rate at 50 percent penetration (year 2000)–
5 percent
cards, could eliminate certain payment
Penetration potential —0.9 for bills and financial state-
messages altogether. Accordingly, in this
ments
study EFT was considered to be separate from
1.0 for negotiable instruments
Key technologies
EMS. Mail diverted to EFT was considered
Automated teller machines (ATMs)
unavailable for EMS. For mainstream seg-
25,000 in operation (1981)
ments such as bills and statements where both
ATMs estimated by industry to at least double by 1990
and could increase to 120,000 (an annual growth rate of
EFT and EMS could produce diversion, EFT
roughly 10 to 20 percent):
diversion was assumed to occur first. The
. deposit
residual mail volume in each mail segment
q cash withdrawal
q bill or loan payment
after EFT diversion was then considered the
q cash advance
potential market for EMS diversion. The
Point-of-sale terminals
diversion to EFT was modeled using the logis-
87,500 in service (1981):
• check validation
tic substitution process described in appen-
q credit card authorization
dix B.
q debit of transaction balance
Telephone bill payment (TBP)
Based on the results of a separate OTA
302 financial institutions offer (1980)
study,4 current trends suggest that a signifi-
TBP transactions estimated by industry to be growing by
27 percent a year:
cant consolidation of bills and financial state-
q bill or loan payment
ments is likely to take place via EFT, but that
q account status inquiry
it will take many years. OTA has assumed
q interaccount transfer
that the use of EFT for bills and financial
SOURCE Off Ice of Technology Assessment, see
A, table A-3, for further
statements in the long run would result in a
90-percent reduction in total bills and state-
sion was estimated to be 2005. As shown in
ments received via conventional mail by the
table 5, this growth rate is generally consist-
average household or nonhousehold. Thus, the
ent with rates of growth projected by industry
maximum potential fraction (or penetration
for key EFT technologies.
potential) of bills and statements that could
Likewise, the results of the OTA study sug-
be diverted to EFT is 0.9, as shown in table
gest that EFT is likely to displace checks and
5. OTA assigned an initial growth rate of 20
other paper-based negotiable instruments, but
percent, as indicated in table 5. Given the
that this displacement will take many years.
nature of the logistic substitution process, a
OTA has assumed that all such instruments
20-percent initial growth rate would decline to
eventually could be displaced by EFT. Thus,
a 5-percent growth rate for the 20th year out.
the EFT penetration potential is 1.0 for nego-
It would take 20 years to progress from 5 to
tiable instruments sent to households or non-
75 percent of the maximum potential diver-
households. As with bills and financial state-
sion. The year of 5-percent diversion (time
ments, OTA has assigned an initial growth
when 5-percent diversion occurs) was esti-
rate of 20 percent and estimated the year of
mated to be 1985. The year of 75-percent diver-
5-percent diversion to be 1985. (See app. A,
table A-3, for details.)
4See OTA report Sleeted Electronic
Transfer Issues:
The OTA assumptions for bills and finan-
Privacy, Security, and Equity, OTA-BP-CIT-12, March 1982.
See also
The Next Fifteen
Electronic Banking, Inc.,
cial statements and for negotiable instruments
June 1980, a working paper prepared for the above report.
were optimistic in the sense that the actual

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Ch. 3—Market Penetration Model and Technology Assumptions q 2 7
penetration potential might be lower than 0.9
the mainstream. The assumptions about EFT
and 1.0, respectively. Therefore, the actual
may be affected by various intangible consid-
EFT penetration is more likely to be lower
erations important to EFT and EMS users,
than assumed. EFT was defined, in effect, as
especially those relating to consumer prefer-
an all-electronic service completely outside of
ences and institutional marketing strategies.
E M S D i v e r s i o n
As noted earlier, the residual mail volume
the use of the television set and the tele-
in each mail segment after EFT diversion is
phone.
the potential market for EMS diversion. EMS
6. Inexpensive hardcopy receiver. Facsimile
diversion is divided between Generation II and
receivers or character printers at a price
Generation III and was calculated through use
which could find acceptance in a major-
of the same logistic substitution process used
ity of homes are included in this category.
for estimating EFT diversion (see app. B). The
The maximurn market penetration potential
terms Generation II and Generation III are
was estimated for each mainstream segment.
explained and compared in figure 2.
As with EFT, the assumptions about EMS
The EMS diversion model was based on a
penetration potential were optimistic in the
set of EMS technology assumptions discussed
sense that the actual penetration potential
below, highlighted in table 6, and detailed in
might be lower due to restrained consumer ac-
appendix A (table A-4). The assumptions re-
ceptance and other intangible factors. In most
late to the following six categories of technol-
instances, the entire segment was judged 100-
ogy as applied to the various combinations of
percent susceptible to Generation II and Gen-
mail content and sender/receiver pairs:
eration III EMS. The exceptions are as
follows.
1. Generation II EMS systems with early
About 30 percent of the “other nonadvertis-
electronic printers (no color). This cate-
gory includes such industry offerings as
ing” segments (nonhousehold to nonhousehold
Mailgram, Datapost and Tyme-Gram,
and nonhousehold to household) is made up of
pamphlets, newsletters, official documents,
and USPS offerings such as E-COM.
2. Generation II EMS systems with ad-
coupons, and stockholder communications.
vanced electronic printers (including a col-
Items of this type were judged not likely to
be susceptible to EMS technologies that are
or capability).
3. Electronic data processing and office
expected to achieve widespread use over the
next 20 years. Hence a maximum potential
automation. This category includes Gen-
penetration of 70 percent (P = 0.7) was
eration III technologies such as computer
networks, communicating word process-
estimated.
ors, public and private message and pack-
The displacement of direct mail “advertis-
et-switching networks, and facsimile sys-
ing” and greeting “cards” segments to the
tems oriented toward nonhousehold use.
home (nonhousehold to household and house-
4. Home computer terminals. Included are
hold to household) by TV-based Generation
home computers and associated commu-
III home terminals was judged to be limited
nications concepts/services such as PC
by the constraints of the video medium. Thus,
Net (Personal Computer Network).
a maximum Generation III penetration poten-
5. Viewdata/teletext. This category includes
tial of 30 percent (0.3) was estimated for these
services, primarily to the home, based on
segments.

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28 q Implications of Electronic Mail and Message Systems for the U.S. Postal Service
Figure 2.—Comparison of Conventional Mail Service With Generations I, II, and Ill EMS Service
SOURCE: Office of Technology Assessment; and
Academy of Sciences,

Systems for the U.S. Postal Service, 1976.

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Ch. 3—Market Penetration Model and Technology Assumptions q 2 9
Table 6.—Assumptions About Rate of EMS Penetration (illustrative)
Early Generation II EMS (using current technology black
Advanced Generation Ill EMS (using home computer ter-
and white printers) for correspondence, bills, third-class
minals) for household to household correspondence:
bulk mail:
Year of 5 percent penetration—1987
Year of 5 percent penetration—1983
Year of 75 percent penetration—2007
Year of 75 percent penetration—1996
Initial growth rate (1987)—20 percent
Initial exponential growth rate (1983)—30 percent
for nonhousehold to household correspondence and bulk
Advanced Generation III EMS (using inexpensive home
mail:
hardcopy receiver) for nonhousehold to household bills and
Year of 5 percent penetration—1987
statements:
Year of 75 percent penetration—1997
Year of 5 percent penetration—1990
Initial growth rate (1987)—40 percent
Year of 75 percent penetration—2010
Key technologies:
Initial growth rate—20 percent
Home computers:
Advanced Generation II EMS (using high resolution color
q 500,000 installed (1980)
printers) for advertising, greeting cards:
q Estimated by industry to grow to 4.5 million installed
Year of 5 percent penetration—1995
by 1985 and 33 million by 1990 (roughly a 50 percent an-
Year of 75 percent penetration—2015
nual growth rate).
Initial growth rate (1995)—20 percent
Video computer games:
Generation Ill EMS (using public and private message and
q Revenues increased from $308 million in 1978, to $968
packet-switching networks, communicating word proces-
million in 1979, to $2.8 billion in 1980 (roughly a 300 per-
sors, computer networks) for intraoffice correspondence:
cent annual growth rate).
Year of 5 percent penetration—1983
Mini and small business computers:
Year of 75 percent penetration—1996
q Revenues of about $9.4 billion worldwide (1980)
Initial growth rate (1983)—30 percent
• Estimated by industry to continue to grow at 25 to 35
for interoffice correspondence:
percent a year.
Year of 5 percent penetration—1984
Computer software products:
Year of 75 percent penetration—2004
q Revenues of about $1.5 billion (1980)
Initial growth rate (1984)—20 percent
. Estimated by industry to grow at 30 percent annually
Generation Ill EMS (using viewdata/teletext) for household
over the next 5 years.
to household cards:
Data communications:
Year of 5 percent penetration–1985
q Estimated revenues of about $4 billion (1979) and grow-
Year of 75 percent penetration—2005
ing at 30 to 35 percent a year.
Initial growth rate—20 percent
SOURCE: Office of Technology Assessment, see app. A, table A-4, for further details,
Generation II Growth and
scale, and color capabilities and probably will
T i m i n g E s t i m a t e s
include greater flexibility in materials han-
dling. Recent technology and product an-
The attractiveness of Generation II services
nouncements suggest that advanced printers
is determined primarily by the capabilities and
may be available earlier than assumed for this
cost effectiveness of the devices for converting
study.
the electronic signals back to hardcopy. De-
vices that have black and white capability only
Generation II EMS services using early elec-
and limitations in page size and print style are
tronic printing capabilities, if priced competi-
frequently not as attractive as conventional-
tively with mail service, could begin to find
ly printed material. Also, printing systems
substantial use by nonhousehold senders in
must be very cost effective or EMS prices will
the next few years. For correspondence, bulk
be too high to compete successfully with con-
statements, and other nonadvertising content,
ventional mail.
OTA estimated a 5-percent diversion of exist-
ing mail to Generation II EMS by 1983, with
For the purposes of this study, OTA as-
a high initial rate of growth (30 percent) which
sumed that the electronic printers available in
could lead to a 75-percent market share about
the 1980’s will be limited in resolution and
13 years thereafter, as summarized in table 6.
flexibility and will lack color capabilities. Ad-
The use of Generation II for advertising pur-
vanced electronic printers, which are expected
poses, however, is expected to be largely de-
to become available at cost-effective prices in
layed until color capabilities become available,
the 1990’s, will add greater resolution, grey
and even then growth will be slower to the ex-

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30 q Implications of Electronic Mail and Message Systems for the U.S. Postal Service
tent that cost and relative inflexibility contin-
based message systems, intelligent communi-
ue to limit the advantages of electronic color
cation networks, and store and forward mes-
printing over conventional printing. Thus, for
sage systems. Until recently, this competition
the advertising segment (nonhousehold to non-
has tended to impede the development of
household and nonhousehold to household) a
standards among different vendors supporting
5-percent market share was forecast for 1995,
each technology, and for information exchange
with an initial growth rate of 20 percent.
between systems based on the different tech-
nologies. The International Standard Organi-
Households will not be able to initiate a sig-
zation, the Consultative Committee for Inter-
nificant volume of Generation II EMS until
national Telephone and Telegraph, and the
home terminals capable of originating text
U.S. standards groups continue to work on
come into widespread use. About 500,000
developing standards. The process of agree-
home computers had been sold by 1980,5
ing on and then implementing standards has
though many of these were not equipped for
been slow but appears to be accelerating. The
communications. OTA assumed that it will
time required to achieve and implement stand-
take several more years before 5 percent of
ards at a variety of system levels will be a prin-
households, or roughly 4 million homes, are
cipal determinant of the rate of growth of Gen-
equipped with communications-capable home
eration III message systems within the non-
computers, and that there will be additional
household sector.
delays before many of these home computers
are used routinely for correspondence. Thus,
The problem will be easiest to resolve within
OTA assumed that the EMS market share for
individual companies. OTA estimated a 5-per-
correspondence originating in the home will
cent market share for Generation II EMS in
not reach 5 percent before 1987. A high initial
1983, and initial growth at a fast rate (30 per-
growth rate (30 percent) was projected, which
cent). As shown in table 6, OTA estimated a
is consistent with growth rates projected by
75-percent market share for Generation III
industry for home computers, as indicated in
EMS intra-office correspondence in 1996. A
table 6.
slower initial growth rate (20 percent) was pro-
jected for interoffice correspondence due to in-
The requirement for a color capability is ex-
compatibility and the number of different
pected to put greeting cards in the same posi-
standards issues involved. These rates of
tion as advertising, thus delaying a 5-percent
growth are generally consistent with industry
market share for Generation II EMS until
projections (listed in table 6) for small business
1995.
computers, computer software, and data com-
munications.
G e n e r a t i o n I I I G r o w t h a n d
T i m i n g E s t i m a t e s
The standards problem will begin to be re-
solved first for correspondence, which requires
Generation III EMS services between non-
a minimum of content standardization. OTA
household senders and receivers are expected
estimated a 5-percent market share in this seg-
to be based largely on electronic data-process-
ment in 1984. Generation III will become at-
ing and office automation technologies. There
tractive for bills and statements when the re-
are strong incentives within this sector for
cipients can automatically process the infor-
keeping information in electronic form and for
mation received. This requires considerable
machine processing by the receiver. As a result
standardization of data elements and formats.
of these incentives, there is a healthy competi-
OTA anticipated a slow penetration of these
tion among several technologies for this mar-
complex standards to other sectors, in part
ket, including word processors, computer-
due to the software development required to
employ them. Initially, exchanges frequently
Congress, Office of Technology Assessment,
Based National Information

and
are likely to be via hand-carried or mailed com-
Policy Issues OTA-CIT-146, September 1981.
puter tapes substituting for numerous paper

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