Copyright © President & Fellows of Harvard College

How the Internet Became Commercial: Innovation, Privatization, and the Birth of a new Network

Shane GreensteinNovember, 2015Digital Summit

1

Thanks

• Thanks for opportunity to present.

• Princeton U Press.

• Available online.

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Game Plan

Aspirations

How major technologies deploy

Big lessons

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The book’s aspirations

• Question: Why did commercialization of the Internet have such a transformative economic impact?

• Contribution: • What happened? 1989-2003. All in

one place.

• Focus on innovation &

commercialization.

• Offer a big picture. Innovation from the Edges (IFTE).

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Who cares? Everyone. It changed life.

• By 2001 almost all business online.

• Altered business processes, operations, distribution, sales.

• Touched every major industry.

• Fastest growing network ever.• By 1998 an ISP in any city w/greater

than 5K pop. Starting from little.

• Changed the way we live, shop, and work. Rare events in the history of modern capitalism.

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Half households online by 2001.

A transformation comparable to autos, electricity, radio, TV, telephones, passenger aircraft. Interesting in its own right.

Why care? Popular conversation gets it wrong.

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Misleading to ask “who orchestrated the Internet?”

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As if the US Department of Defense orchestrated the entire network as one big project. Or, perhaps, it all sprang from the mind of one major genius, such as a modern Thomas Edison, who conceived of the entire thing.

Misleading archetype to explain how/why major technologies deploy and have impact.

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The US government did not orchestrate the entire network, nor did one sole genius think up the whole thing. There were many inventors (and they all agree on that). A different approach leads to better understanding of why the Internet had such a large economic impact.

Focus on innovation and commercialization

Well known economic archetypes can explain how/why major technologies deploy.• Basis for managerial lessons for strategic positioning

Illustrates creative destruction• Outsiders keep markets vital with IFTE.

Analyze why gov’t policy succeeds/fails• Enables but does not orchestrate IFTE.

9The commercial Internet was more than just a series of tubes.

Game Plan

Aspirations

How Major Technologies Deploy

Big lessons

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Like all major technologies, this one had to address two conundrums

• Circular conundrum• Max value of technology requires all components to

work together.

• Coordinated complementary operations and

investments.

• Adaptation conundrum• Valuable in disparate circumstances and could be

organized in many different ways.

• Consultants, large firms w/big scale, many small niche

entrepreneurs, local or national.

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Circular conundrum and the chicken-egg problem.

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Circular conundrum: theory

Requires coordinating many firms. • Who compete, or have few incentive to cooperate everyone waits.

What kind of mechanism help coordination? • Catalysts garner the attention of third parties

• Commitments to platforms to facilitate third parties

• Durable institutions facilitate open processes

• Standards for voluntary use

• Government mandates

What actually happened in 1995?!? A catalyst.13

Outsiders changed perceptions

• Consensus did not perceive: • Internet’s value to users;

• Myriad & clever ways to serve users with Internet & web.

• What were they waiting for?• A visible working prototype for

more than a visionary CTO.

• Enough to persuade CEOs, Boards, & VCs to invest.

• With a recognizable and reliable value chain

• “I’d say there was a fair amount of skepticism at the time about whether the Internet held any promise. And of course I felt that it did.”

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What Netscape offered• Dazzling demonstration• Skyrocketing IPO• Name brand VC/founders• Visible & fast adoption &

astonishing revenue

Outsiders supported by modular technology & open governance.

• More than twenty years of operations and refinement prior to widespread commercialization.

• Architecture & governance

• No limits on who can view information.

• No limits on how information is used.

• And some purposeful public-spirited action…• Tim Berners-Lee chose

not to commercialize the World Wide Web; instead, he operated a consortium.

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Specialists acts as catalysts, supported by VCs

• HoTMaiL® enters market for Web-based electronic mail.

• Technically straightforward.

• VCs looking for low cost distribution. Put “hotlink” at bottom of email.

• Astonishing low cost customer acquisition. Visible. Widely imitated.

• Others learned from experience. Imitated.• Birth of viral marketing.

• The potential for growing user base with very little cost.

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Tim Draper, founder of DFJ. Invented viral marketing by suggesting the use of hotlinks at the bottom of email. Inspired by a b-school case about Tupperware.

Adaptation conundrum are implementation challenges

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Adaptation conundrum: theory

Technologies create value by adapting to users & locations • Find value: invent new processes, invent new complements.

• Existing business retrofit business processes.

Adaptation come from many sources• New devices. New uses for lead users.

• Innovative specialists.

• Lead IT users: logistics, scientific services, automated procurement, distribution, finance, insurance and real estate.

What actually happened in 1995?!? Innovative specialists.18

What did outsiders do? Specialists experiment.

• Exploration in a market.• Which features do users value?

• Best mode for distributing it?

• Most profitable combinations of pricing & operations?

• Not learnable in a lab.

• Experimentation is easier for a specialist. Take rest for granted. • Don’t need to know vast store of

knowledge.

Often the market experiments involve few technical aspects. New users by making Internet easy to use.

Experimented with geography? Dial-up ISPs

20“A good predictor of not finding an ISP is the presence of hybrid corn seed.”-- Zvi Griliches --

ISPs had to adapt their business to local conditions and myriad factors that shaped their viability.

To succeed on a large scale, the seed needed to spread into new applications and circumstances and to prove distinctively valuable to everyone who might use them.

ISPs were specialists in providing access

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Where did all those ISPs come from? Many had been BBSs. Many were treated like outsiders by the mainstream.

Protected by FCC regulations from exploitation by local telephone co.

The unsavory ones were protected by first amendment.

Adaptation and enhancement (or the need for intermediaries)

Existing business retrofit processes, not from scratch.

• Save on additional investment. Simplify kinks.

Why IBM could provide unique value

• Add front end to a business process its employees had built, supported & understood. UPS & L.L. Bean as prototypes.

• Similar middleware solutions for many enterprises who want security, firewalls, & brand preservation.

• The hard part for IBM: non-proprietary software.

• BTW, one part of explanation why many pure play dot-coms did not succeed in the market. 22

Irving Wladawsky-Berger, first head of IBM Internet strategy. Let the widespread enhancement of functionality at many large enterprises.

Adaptation by specialist continues – e.g., Wifi

• Enabling migration from low to high value• Top-down FCC choice would have erred. Part-

15 rules do not designate owner or a use.

• Unlicensed spectrum facilitated learning about new users & uses explored new value.

• Early use cases for unlicensed spectrum.• Baby monitors, garage door openers, wireless

cash registers coffee shops, airports, hotels, and new use cases.

• Users made choices value migrated.

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Michael Marcus and Vic Hayes, considered to be the two “fathers” of Wi-Fi. Marcus worked at FCC. Hayes worked at Lucent, led IEEE 802.11 committee.

Adaptation and renewal…

• Paradox of the prevailing view: incentives for someone w/alternative view to enter…

• Consensus may lead to a dead end by over-exploring one approach… gives incentives to long shot to try.

• As long as market remains open to outsiders with a different view.

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

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Larry Page began working in a Stanford lab supported by NSF. Sergey Brin had a graduate fellowship from NSF. Page proposed “Page-Rank” using Brin’s crawlers in spring of 95 & they developed it for campus users. Started Google in 1998-99 because no firm wanted to license their algorithm. They had to demonstrate its value in use.

Game Plan

Aspirations

How major technologies deploy

Big lessons

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To understand impact: use the right archetype.

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To understand impact: use the right archetype.“Innovation from the edges.”

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Not a single project orchestrated by the government.

Not a lone genius who invented the entire system.

To understand impact: use the right archetype.“Innovation from the edges.”

• Exploration of value creation by innovative specialists

• By outsiders & entrepreneurs • Supported by appropriate governance & technology.

• Generates response from established firms.

• Innovation from the edges enables innovative specialists to address adaptation & circular conundrums…

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The wrong archetype

Lessons for technically led economic growth

Usual argument for competition stresses lower prices, but more here: better benchmarking from more variety

• Sure, ISP pricing competitive, but not 100% of what mattered. Differentiated firms. Specialists w/many perspectives.

• Overcome misunderstandings and misperceptions.

• Overtake firms who over-commits to one technological forecast.

Trade-off between uniformity and diversity

• Standardization of platforms eliminates variety and supports more complements and specialists

• Innovative specialists who explore creating value 29

Looking ahead: solutions to two conundrums in Big Data (3.0?) or Internet of Things?

Coordination mechanism for circular conundrum. • Catalysts that garner the attention of third party developers (e.g.,

overwhelming visibility of search/social/smart phones).

• Government mandates (e.g., Health Care Act EMR)

• Platforms facilitate third party development (e.g., IOS, Android).

• Open institutions facilitate specialists (e.g., OpenStack).

Adaptation from many sources• New devices & APIs for specialists (e.g., gaming on smart phones)

• Who are lead users? Expect same lead IT users: logistics, scientific services, automated procurement, distribution, finance, insurance and real estate.

• Expect similar desire to retrofit, not start greenfield. 30

Thanks.

Thanks for your attention!

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Extra slides

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Extra slides – Al Gore

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What did Al Gore invent & when did he invent it?

• “Well, I will be offering - I'll be offering my vision when my campaign begins. And it will be comprehensive and sweeping. And I hope that it will be compelling enough to draw people toward it. I feel that it will be. But it will emerge from my dialogue with the American people. I've traveled to every part of this country during the last six years. During my service in the United States Congress, I took the initiative in creating the Internet. I took the initiative in moving forward a whole range of initiatives that have proven to be important to our country's economic growth and environmental protection, improvements in our educational system….“

• 3/99 interview with Wolf Blitzer.

• Dan Quayle “If Al Gore invented the Internet, then I invented the spell checker.”

• Why ridicule is funny here: Not one policy nor one person could not have orchestrated the Internet.

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Al Gore in 1994.

Quote refers to funding NSF with legislation in late 1980s & early 1990s.

Can we move on to other topics?

Extra slides – Wild ducks and the long history of supporting contributions from outsiders

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Wild ducks play a positive role in keeping conversation vital.

Social tradition in computing. Informal understanding.

• Social permission to deviate from prevailing view.

"In IBM we frequently refer to our need for 'wild ducks.' The moral is drawn from a story by the Danish philosopher Soren Kierkegaard, who told of a man who fed the wild ducks flying south in great flocks each fall. After a while some of the ducks no longer bothered to fly south; they wintered in Denmark on what he fed them. In time they flew less and less. After three or four years they grew so lazy and fat that they found difficulty in flying at all. Kierkegaard drew his point: you can make wild ducks tame, but you can never make tame ducks wild again. One might also add that the duck who is tamed will never go anywhere any more. We are convinced that any business needs its wild ducks. And in IBM we try not to tame them."

Thomas Watson Jr.Son of founder of IBM, who grew it into the largest computer company in the world.

Extra slides – Lessons for commercial policy

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Role of government commercial policy

Policies enable the migration of value from low to high

• Antitrust fostered less consolidated decision making – facilitated wider variety of approaches to new innovation

• Policies encouraged innovation from the edges, even though often that was that their primary intent (e.g., first amendment).

• Common carrier policy encouraged entry

• Antitrust and regulatory policy enabled entrepreneurship

No single policy is responsible.

• Nothing inevitable. Conscious choices to avoid monopoly.

• Conscious minimization of frictions of market and regulations.

• Government policy not an architect. Can enable IFTE. As if deliberate tendencies toward IFTE among many actors. How could that possibly be the case? 38

Extra slides – Bill Gates and sources of error in large leading firms

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Lessons for large leading firms? Bill Gates as illustration.

• Even the best software CEO (of his generation) missed it.• Night of surfing in April ’95.

Reverses views. Written in May.

• Gates learned what many others in SV had already perceived. Just later.

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8 pages, single spaced. Ben Slivka’s 20 page memo as source material; However, Gates had authority & megaphone.

Internet Tidal Wave

Why? Underlying lessons from Bill’s errors

• Strengths of leading firm• Resources for redirecting at a

big push.

• Existing distribution channels.

• Loyalty of a work force.

• Existing lines of authority.• Such an organization has opportunity to push to (usually) dominate its target market (if it executes well).

• Weakness of leading firm• Even the best plans are not

omniscient, but easy to become blinded by them.

• Leading firm will never plan to cannibalize self, may underinvest in such directions.

• Tendency to “misperceive” options inconsistent w/present business.

• Tends to lead to underinvest in future sources of revenue and strategic advantage.

• Manifests many ways.41

Extra slides – Gold rush economics

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In this case, it produced a “Gold rush” in 95-97.

• How could it be a Gold rush? Pedantically speaking, the Internet was discovered before 95….

• That misunderstands the information that spread from a single prototype…

• Gold rush economics.

• Until t value unknown.

• Once known, info spreads.

• Unrestricted entry.

• A race to be early.

• simultaneous entry.

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Replica of Sutter’s Mill in Coloma, CA. 50 miles east of Sacramento. Sierra foothills.

Why didn’t the Spanish find gold sooner? It was an information problem. B/c nobody had made it up to the single spot where a river had exposed a seam in the rock.

Continuing investment in adaptation explains why investment lasted past the initial gold rush

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venture investment in mil ($)

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There are two distinct phenomenon. * Why did something start in 1995? Was it a gold rush? Yes, because it was triggered by new information…. * Why did it sustain itself and grow? Adaptation continued…

After overcoming circular conundrum, a virtuous cycle shaped investment in adaptation

Investment by one participant in Internet & web raised value of investment by another. • ISPs growth User levels grow Firm process enhancement new

software innovation Carrier investment New users …

Beginning also links to its ending… • Many began to take complementarity for granted…

• …and some invested in anticipation…

• …bound to overshoot in the impatient sectors…

• …which happened to be entrepreneurial sectors… 45