Shane GreensteinAccelerating Innovation in Energy:

Lessons from other Sectors

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Motivation

Lessons of pre-commercial era

Lessons of commercial era

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Internet touched wide breadth of economy ◦ Transformation for better. ◦ Lower prices, new services, efficiencies. ◦ Changed life as we know it.

Big Question: What economic lessons can we learn from the Internet for large innovative efforts, such as in major energy innovation?◦ Goal today: provide overview of chapter.

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The chapter focuses on two eras, pre-commercial, and commercial.

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Refined Question: What policies lessons can we learn from each era of the Internet?◦ Focus on processes underlying accumulation of

innovation. Pre-commercial era.

◦ Lessons for managing dispersed community exploring frontier engineering/science.

Commercial era. ◦ Lessons for creating new industry when within

competitive market with widely dispersed technical leadership.

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Motivation

Lessons of pre-commercial era

Lessons of commercial era

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Not the Manhattan project, not Apollo ◦ Not a single urgent project in a single lab devoted

to building/engineering a single object. Collective invention

◦ Multiple overlapping groups of funders who shape attributes. Department of Defense, National Science Foundation, universities & research labs.

◦ Multiple overlapping groups of inventors from programmers, administrators, and users.

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DOD desired new knowledge & 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.

General concepts in search of implementation◦ Communication along many paths.◦ Over geographic distance.◦ B/w computing systems w/o human intervention.

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DARPA modeled on a skunk works◦ An organizational home for projects of value to

long term mission, not connected to operations. ◦ Not beholden to any short term mission of any

military branch.◦ Program officers w/strong technical skill picked

researchers/stars, funded their labs/students w/uncommonly large amounts of money.

◦ Build new research community. Satisfying work environment for inventors.

◦ Wild ducks familiar nomenclature from computing.

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Working prototype: unrefined implementation of designs w/aim to learn◦ Most skunk works aim for working prototypes.◦ DARPANET went further. NSFNET went even further.

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/admins want valuable app (email, FTP, etc.)◦ Inherited from the university: Technical meritocracy

for keeping/eliminating change/improvements.◦ Learn to achieve scale.

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Compared to what alternative? ◦ A counterfactual that did not take place, and we

can never observe. In 1960s & 70s gov’t funding did accelerate.

◦ Abundant evidence of lack of private firm interest in the 1960s & some interest in 70s.

During the NSF era in the 1980s? Yes.◦ Observers foresaw coming of electronic

commerce. Just not this fast or in this form. NSFNET fostered multiple pathways.

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Federal funds for Precommerical Internet = $200m. How could that be possible?!?◦ Only from NSF era. Not counting DARPA. ◦ Not counting DARPA failures on other projects. ◦ Benefiting from innovation in computing.◦ Using existing capital in telephony.◦ Prototypes cheap to replicate b/c software.

Distributed investment. ◦ Costly part – backbone – targeted by DOD & NSF◦ Investment in edges (apps, installations) often the

domain of university researchers/admins/users.

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Arises from restrictions on participation ◦ Motivates spinout in the early 1970s.◦ Eventually transfer of network to NSF

management New management explores new objectives.

◦ NSF mission: support research. How? Rationalize network operations. Make accessible to students. Expands scale and user base.

Truncated exploration in NSF too. ◦ No commerce.

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Motivation

Economic lessons of pre-commercial era?

Economic lessons of commercial era?

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NSF management expanded range of capabilities, but their mission also limited.◦ Privatization permitted a new set of participants,

and that would expand the range of new uses and new users and new processes…

◦ Beyond proof of concept at a large scale… Side note: Transition to commercialization

very challenging for gov’t managers. ◦ Lack of experience w/apps for non-research.◦ No experience w/contracting b/w many carriers.

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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.

Browser: another useful invention in long line, and with propitious timing.◦ World Wide Web starts in 91. W3C starts in mid

94. First commercial browser in late 94. ◦ NSF transition finishes in 95.

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Integrating innovation into the economy: Revenge of a skunk works. ◦ Making up for truncated exploration.◦ Explore new opportunities affiliated with Web.◦ More than just technical exploration. Explore

multiple models for conducting business. Markets good at sorting out durable value.

◦ Firm forecasting is necessarily imperfect. ◦ Despite dot-com speculating and VC fratricide,

much of it does remain after. ◦ 39B in just access revenue in 2006. That is big.

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Healthy innovative conduct?◦ Economic experiments: activity to learn about

unknown factor, not learnable in a lab.◦ Vigorous standards competition: bleeding edge

technologies generally require routine processes, particularly for interconnection w/others.

◦ Entrepreneurial initiatives: business organization in pursuit of a new opportunity.

What healthy innovative conduct nurtures: the pursuit of a variety of options.◦ When “most valuable” outcome is unknown.

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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.◦ When unclear which direction is most valuable.

Sticking point for policy: Interoperability…◦ Accumulated coming from a variety of firms,

working together…incentives for platform entry.

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Commercial era – comparatively low barriers to unrestricted entry for entrepreneurs.◦ PSINet, UUNet enter in 89 – interconnection issues.◦ Dial-up ISPs entered under rules that prevented

local telcos from refusing to interconnect. Allows for the explosion of entry in 1996.

Comparatively easy to set up consortia◦ Plays key role in setting up W3C at MIT. Berners-

Lee leaves CERN b/c organization is not helpful. ◦ Lubricated the establishment of a key standard

setting body, accelerates technical development….

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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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