Innovation from the Edges

Shane GreensteinKellogg School of Management, Northwestern University2013-14, Visiting Professor, Harvard Business School, Berkman Fellow, Harvard Law School

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Game Plan• Motivation

• Lessons of pre-commercial era

• Lessons of commercial era

• Big lessons?

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Question• Internet touched wide breadth of economy. This is rare.

• Transformation for the better. Changed life as we know it.• Lower prices, new services, efficiencies. • Changed the identity of primary suppliers.• Changed the prevailing view about future.

• Big Question: Why did market structure change at the same time that the new technology diffused? Why did that change encourage rapid innovation and transformation in core economic conduct and outcomes?

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Why is this question interesting?

• Internet widely regarded as a success. • Rare event in any industry, and very rare in communications. • Contributed to economic growth. Is it repeatable?

• An anomaly, perhaps. Generalizable lessons?• History of government managed commercial R&D does not

inspire confidence. • Super Sonic Transport. Clinch River Breeder Reactor. Synfuels. Space

shuttle. Military procurement.

• Renewed interest due to energy/environment.• ARPA-E allocated $400m. Modeled on Internet.

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First observation to get us started: No single Internet

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Technology not constant. Distinct eras.Make it easy: pre-commercial, and commercial.

The key concept: Innovation from the edges• Power, as in power to change the market place. Innovation

from edge of core/periphery structure.• Outside the core. Supported by firms who the old core regards as

peripheral. Non-leading firms do key experiments.

• Places, as in improvements come from dispersed places. Innovation from “edges” – many widely dispersed sources.• Edges in many places. Research labs, BBSs, startups, consultants,

iconoclasts, NOT a single inventor over time.

• Perceptions, as in the perceptions of the future market place. Innovation involving the edge of vision.• On the horizon. Different perceptions about creating value.

Perceptions that lie outside of prevailing view

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Lessons differ over time• Restating the key question of the book: What factors

encouraged or discouraged innovation from the edges during the diffusion of the Internet. What role does innovation from the edges play in generating a large economic impact?

• First task (Chapters 2-8 mostly): What brought IFTE into existence or almost discouraged it?

• Second task (Chapters 9-17 mostly): Why did IFTE lead to such a large economic impact in this instance?

• My goal today: provide a sense of the bigger insights. 7

Game plan• Motivation

• Lessons of pre-commercial era

• Lessons of commercial era

• Big lessons?

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Lesson: Not all science projectsare Manhattan project or Apollo.

• Not one single project in one lab.

• Collective invention “from the edges.”• Multiple groups of

inventors: users, programmers, & administrators in many locations.

• Multiple funders who shape priorities and attributes. DOD, NSF, universities & research labs.

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Ray Tomlinson : one of 50+ contributors to email in 70/80s.

Nurturing frontier engineering outside of mainstream• DARPA modeled on a skunk works

• Organizational home for projects of value to long term mission, not operations.

• Program officers w/technical skill picked research stars, funded their labs/students w/uncommonly large amounts of money.

• Satisfying environment for inventors.• Wild ducks nomenclature from IBM. Social tradition in

computing.• Building new research community from bottom up. Few

milestones/deliverables. Informal peer review.

• Again, drew ideas from “edges of science.” 10

Thomas Watson Sr.Founder of IBM.

Why did it work? Collective withshared & focused objectives• The scientific/engineering problems were big: General concepts in search

of implementation• Communication along many paths.• Over geographic distance.• B/w computing systems w/o human intervention.

• DOD committed to funding prototypes• Radical technical departures that no existing military services would produce.• Workable models of s/w-h/w combinations that supported data

communications capabilities, and (eventually) portable to military application.

• The core facilitated “coordination among the edges.” 11

Why did it work? It worked for the research community…

• Inherently interesting for ambitious & young engineers & inventors.• Technologists saw big

game-changing challenges.

• Devote careers to it. Norm for keeping &

eliminating changes & improvements: Technical meritocracy

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David Clark co-author of “end-to-end”, “rough consensus & running code” & “design for tussle” did research on “soft money” at MIT w/o a tenure-track position. Eventually became leader of IETF and built institutions for long term.

Vint Cerf and Bob Kahn, two writers of TCP/IP. Cerf began work as student & Kahn was a program officer in DARPA.

Why did it work? Beyond working prototypes. • Working prototype: unrefined implementation of designs w/aim

to learn• Most skunk works aim for working prototypes.• DARPANET went further. NSFNET went even further. • Eat what you grow. Inventors used it themselves.

• When inventors use what they build…• Ideas grow out of own experience, but it has to work, and work for

someone else, and soon. Users/administrators want valuable app (email, File transfer protocol, etc.)

• Hard part: Achieve scale. Solution: IT administrators get involved in inventing, especially in NSF era.

• Suggestions from the edges incorporated as invented.

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Allowed Unexpected from inventive specialists at edges…

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What Arthur C. Clark and Stanley Kubrick imagined (in 1968) would happen in Champaign in mid 1990s…

A big centralized lab would make a large (and oddly-wired) computer…

What actually happened at Champaign.A lab funded by NSF had many small projects, and one worked on “browsers & servers” for HTML…

Grew into the catalysts for the commercial web, including Netscape and Apache server….

Lesson: When can government accelerate new technology? • Compared to what alternative?

• A counterfactual that did not take place, and never observed.

• In 1960s & 70s gov’t funding did accelerate b/c it tapped into what the edges wanted but the core did not.• Lack of private firm interest in the 1960s & some interest in 70s.

But nothing like sustained government commitment.

• During the NSF era in the 1980s? Yes, but different. • Observers foresaw coming of electronic commerce. Just not this

fast or in this form. NSFNET fostered a different pathway to acceleration b/c it tapped into the edges. 15

Lessons on what to avoid: truncated experimentation• Arises from restrictions on participation

• Reduces range of applications, and breadth of participation.• Motivates spinout in the early 1970s.• Eventually transfer of network to NSF management

• New management explores new objectives.• But truncated exploration in NSF too. No commerce. • Postponing the inevitable just made the transition harder later

(and almost doomed the transition).

• Said another way: government policy for funding can be hindrance when it can restrict the contributions of the edges. 16

Game Plan• Motivation

• Economic lessons of pre-commercial era?

• Economic lessons of commercial era?

• Big lessons?

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Lesson: Was privatization a good idea? Yes, yes, yes. • NSF expanded range of functions…

• But NSF mission also limited, by def’n.• Privatization permitted new participants, & that

would expand range of new uses and new users… Beyond proof of concept at large scale…

• Transition to commercialization very challenging for gov’t managers. • No experience w/new apps for new users • No experience w/contracting b/w carriers.

• Seeded a competitive market with wide entry, but only after considerable effort & attention.• Allowed “the edges to enter.”

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Stephen Wolff, last director of the NSFNET

Lesson: easier transitions if gov’t & non-gov’t actors similar

• NSF employed a lot of “off-the-shelf technology.• Cost saver. Less customization

• Invention not far from industry….• Economies of scale in shared

R&D costs.• Build on what already exists.

• The firms on the “edges” had access to the same standards and technical information. 19

The original CIX router. Now at the Smithsonian.

Lesson: Easier to do mkt-focused entrepreneurial exploration…

• Activity to learn about unknown factors• Not learnable in a lab.

• Variety of options.• When “most valuable” outcome

is unknown.• More than technical

exploration. • Explore multiple models for

conducting business. 20

• BTW, this set of entrepreneurs gathered a set of new users of the Internet, and sold them to CompuServe.

Why it works: Symbiosis b/w science & market opportunities…

• NSF needed an open gateway b/w networks• One of most difficult

CS/engineering problems of late 80s.

• Enabled entry of new provision of email, hosted at enterprise. • Tethered together by

gateways & DNS.• MS Exchange/Outlook made

a ton of money.21

Craig Partridge,Today CTO at BBN. In mid 1980s just a PhD in CS looking for good problems.

Todd Warren, today retired from Microsoft. Then ambitious executive. Looking for new project. Led development of Exchange in 1990s.

No, really, why did it work out? Being good and lucky.• Wide & fast adoption. For a reason.

• Supply of commercial Internet did not merely create its own demand. More than twenty years of operations and refinement prior to widespread commercialization.

• Tim Berners-Lee chooses not to commercialize the World

Wide Web; instead, he operates a consortium. • Starts in 91. W3C starts in mid 94. First commercial browser in

late 94. NSF transition finishes in 95.• Sir Tim Berners-Lee today

• There was serious research money behind it all along. 22

Waves of entry. Why? Revengeof prior truncated exploration.

• Integrating innovation into the economy: Revenge of a skunk works. • Making up for truncated exploration.• Explore new opportunities affiliated with Web.

• Markets good at sorting out durable value.• Firm forecasting is necessarily imperfect.

• Drawing on iconoclastic entrepreneurs from all corners. • Firms on the “edges” were close to users, and to a wide range of new

potential markets. • Had an ability to take action without asking permission from anyone.

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The early result: Rapid growth in the ISP market

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The boom…

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Waves of entry. Why? Network effects to take advantage• Many different types of participants.

• ISPs, business enterprises, consultants, homes, software vendors, backbone carriers, entrepreneurs…

• The investment by one type of participant raised the value of the investment by another. • All grew together. • In retrospect can interpret the privatization of the Internet and the

commercialization of the web as catalytic.

• This beginning also links to its ending… after a while many participants took this for granted… and some invested in anticipation of demand…and some over invested…

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Markets are good at migrating use from low to high value• Speaking of access…

• Top-down FCC choice would have made an error.

• Unlicensed spectrum facilitated learning about new users and uses.

• The early use cases: • Baby monitors, garage door

openers, wireless cash registers.

• Users made choices value migrated.

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Markets are good at renewing opportunities…

• Paradox of the prevailing view: incentives for someone w/alternative view to enter…• The long shot can renew a

market that has reached a dead end by over-exploring a prevailing view…

• Just as Google renewed ad markets that do-com firms did not profit from…

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Larry Page began working in a lab supported by NSF. Sergey Brin had a graduate fellowship from NSF. Page proposed “Page-Rank” in spring of 95 & developed it for campus users. Started Google in 1998-99…

Game Plan• Motivation

• Economic lessons of pre-commercial era?

• Economic lessons of commercial era?

• Big lessons?

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Generalities: How to encourage innovation from the edges?• Open IETF & WWW standards, encouraging ideas from

dispersed origins. Modularization inventive specialization.• Users act as producers, drawing on new voices for ideas.• Policies required competitive access markets at birth of

commercial Internet.• Antitrust prevents consolidation of decision making.• US has many entrepreneurs & iconoclasts, and US venture

market tolerance for experimentation.• Markets allow value to learn about new use cases and migrate

from low value use of asset to a high value use. 30

Why innovation from edges had a large impact in late 90s.• The Internet diffused w/operational refinements, mature

applied layer in WWW. Which supports & enables…• Wide breadth of potential applications for non-technical users,

otherwise not explored by DARPA & NSF. Which leads to…• Simultaneous investment by households, ISPs, business users,

equipment firms, content providers, software providers. Which is reinforced by…

• Impatient network effects: Each participant’s actions reinforced the economic incentive of the other. And at a large scale….which leads to…

• Massive new entry of firms with new identities, who need to explore and experiment after 1995. Both new firms & established firms have to experiment. Which was bound to overshoot…

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Why ITFE beat a communication network from a single supplier…

• Overcome misunderstandings.• Firms can over-commit to one technological forecast about direction

of change.

• Overcoming organizational inadequacies.• Lack of “internal champions.” Overcoming excuses, & short-sighted

cannibalization concerns.

• Heterogeneity in incentives to invest. Less concentration.• When unclear which direction is most valuable.

• Challenging for policy: low transaction costs…• How to make learning and exploration easier. Fewer bottlenecks in

government and in monopolies within markets.

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Summary

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The Internet: Best of both worlds?• Two distinct ways for accumulating innovation from dispersed

set of innovators.

• Skunk works aimed at demand. • Inventors assess value from own experience.• Working prototypes put into operation.• Technical meritocracy• But comes at a cost: Truncated exploration

• Market orientation explores range of apps.• When no monopoly and when interdependence rules nurture

entrepreneurial initiatives. • Appropriate nurturing policies can help.

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Thanks.• Thanks for your attention!

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