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How the Internet Became Commercial

Innovation, Privatization, and the Birth of a New Network

PRINCETON UNIVERSITY PRESS

Ubiquitous Clicks and How It All Started

I think the press has a tendency to pick a person and paint them 10 feet tall. In fact, each of us does a little piece and I've done one thing, people add on that and then another. So you get credit for doing the whole damn thing, and that's not so.

— Paul Baran, after receiving the National Medal of Technology and Innovation

One day I watched my children use the Internet and soon found myself talking with them about the Internet in the same effusive way my immigrant grandparents talked about the wonders of electricity and the magic of transcontinental air flights. My kids just shrugged their shoulders at their father's dramatics and went back to surfing the web and playing online games.

My children cannot imagine a world without the Internet. Clicks are familiar. Hasn't it always been so?

Modern economies frequently change frontier technologies into widely used ones — from the mysterious to the unremarkable. The Internet was once exotic to all but a small set of cognoscenti, but long ago the technology spread to a majority of households and businesses. In the process of becoming ubiquitous it transformed how we work and live — changing how consumers behave, and altering how firms provide products and services.

My children are not alone in their shrugs. Most adults today could not say where the Internet came from and how its spread caused so many transformative changes. Not only does that hold for many educated adults, it also holds for many of society's thought leaders. I have met many educated economists who know a great deal about many technologies, and yet they lack any view about the general economic lessons the Internet's spread illustrates. I have met many perceptive legal scholars and policy analysts with a similar gap in their understanding.

I have also met many who do not shrug, who are curious, especially among those too young to have lived through the relevant events. Can a knowledgeable observer explain how and why the Internet deployed as it did? To what do we attribute its impact? Can those recent events yield insights that help understand technology in the future? They do not know where to go to answer their curiosity. Many key events were genuinely complex, and, at times, involved a vast ensemble of participants with distinct motives and alternative points of view. It is not obvious where to start.

This book addresses this curiosity and points it to the deeper mystery behind the surface of events. The Internet's deployment is commonly held responsible for an economic boom. Along with that boom, and in less than one generation, the names of the leading suppliers of communications changed. So too did the predominant view for forecasting how the underlying technology in communications would evolve. To the common eye all these changes occurred in less than a decade, which is extraordinarily fast by historical standards. Any of these would be rare to see in any industry. The combination — economic boom, change in leadership, alteration of the common forecast, and rapid change — is rarer still in the history of modern capitalism. These are typically associated with only the most transformative technologies, such as the steam engine, the railroad, electricity, indoor plumbing, and the automobile. Such a combination of events merits an explanation in its own right, because the history of capitalism suggests this should not happen often, if at all.

Existing explanations leave a gap, however. While many rich and wonderful histories have been written about the invention of the Internet, most focus on just invention. That yields an answer rich in technical details and incomplete in perspective. It diminishes the role of markets and government policies for markets. Writing about policy addresses some of that gap but tends to stress legal issues, regulatory debates, and changes in court decisions. It overlooks economic incentives and the behavior policy induces from suppliers and users.

To say it broadly, comparatively less writing focuses on explaining the Internet's innovation and commercialization. Innovation is the act of turning invention into something useful, while commercialization translates innovations into valuable products and services. Innovation and commercialization must connect to each other because both involve market activities, such as building the production and distribution processes to deliver a new service to customers. That summarizes the motivation behind this book and its outlook. It is not possible to explain the deeply surprising and unique aspects of these events — economic boom, change in leadership, alteration of the common forecast, and rapid change — only with technology and policy analysis. It also requires understanding how innovation commercialized, that is, how innovations became valuable as the Internet evolved within commercial markets.

The commercialization of the Internet merits attention for a related reason — it illuminates important relationships between transformation in industrial structure and innovation. How can innovation have such a transformative role in the restructuring of industries? Specifically, replacing one economic structure with another is often called the process of "creative destruction," and a crucial question of this book might be rephrased as "What role does innovation and commercialization play in creative destruction?"

This rephrased question needs a little refining because the phrase "creative destruction" has become an overused colloquial expression. To get clear on its meaning, return to its most famous user, Joseph Schumpeter. In his 1942 book Capitalism, Socialism, and Democracy he describes creative destruction as an inherent property of market-based capitalist systems.

Capitalism, then, is by nature a form or method of economic change and not only never is but never can be stationary.... The fundamental impulse that sets and keeps the capitalist engine in motion comes from the new consumers' goods, the new methods of production or transportation, the new markets, the new forms of industrial organization that capitalist enterprise creates.... This process of Creative Destruction is the essential fact about capitalism.

Schumpeter argues that little is permanent in market economies, and such impermanence serves a useful purpose in the face of large dominant firms. The market value of dominance will motivate new firms to aspire to reach a similar position, principally through creating and promulgating innovations. This activity motivates incumbent firms to fend off such entrants, also by innovating and offering those innovations in commercial markets. Altogether, says Schumpeter, more innovation results from the tournament to become a dominant monopolist, and, relatedly, from defending a lucrative monopoly position by innovating faster than those who threaten it.

Schumpeter's conceptualization directs attention at the role of contests to become monopolies in innovative activities, but it leaves open critical questions about how to best organize such a tournament in a market-based system. Many writers have considered that topic in a variety of technologies and time periods, and this book does as well, and does so in the case of the commercial Internet in the 1990s. Now a core motivation for the book can be rephrased into a seemingly simple retrospective question: What aspects of market structure played an essential role in fostering the growth and development of creative destruction during the deployment of the Internet?

The book's answer to this question focuses primarily on the experience in the United States. Why do this when the commercial Internet has reached a global scale in operation and in final service markets? In part, the US experience generates a coherent analysis and a surprising narrative. Many of the most important early innovations took place in the United States under the stewardship of the US government. The transition out of US government stewardship had a profound impact on how the Internet shaped commercial markets. The Internet also grew rapidly due to some unique structural features of the market for communications in the United States, as well as some unique environmental factors supporting entrepreneurial ventures. Many of these economic factors are not widely appreciated, and focusing on them yields novel insights.

Concentrating on the US experience also directs critical analysis and skepticism toward one the most controversial and important lessons from this experience — the role of government policy in fostering economic growth through encouraging innovation. No expert doubts that the US government played an important role in events — as buyer, lawmaker, regulator, and booster — but there is considerable debate about whether its role was salutary and purposeful. Did government policy and action nurture a positive outcome, or did the key features of the outcome arise in spite of the government role? If government actions helped, what mechanism brought about positive contributions, and why, and when can a government use such policies again? If government policy was a hindrance, what should a government avoid doing? This book aims to identify and sharpen the answers to these questions with a comprehensive examination of the experience. The focus on innovation and commercialization will lead to policy lessons that can carry over to commercialization of other technologies.

The focus on the United States also was a pragmatic choice. There were many networks around the world, and some of them, such as Minitel in France, achieved large-scale use and met some benchmarks of success. Some attempts at standardization of networking, such as the efforts put into open systems interconnection (OSI), did not realize their aspirations before folding some of their successes into the overwhelming advance of the Internet. It is certainly plausible that comparison between countries — for example, between the economic experiences within the United States, Japan, and many European countries — could identify additional factors that shaped outcomes. The required detail is simply beyond my grasp, however. Comparative questions will remain for another analyst to explore and explain.

One of the other goals of this book is to identify the grain of truth in well-known economic myths, and to dismiss the falsehoods. Economic myths are misleading economic metaphors. Usually an economic myth is based on a misreading of a short story or aphorism, and it points away from the key lessons of an event. Many economic myths purport to explain how the Internet developed in the United States, and some of them will be familiar to most readers merely from reading the news. Many economic myths about the Internet have not been confronted by scrutiny. This book must confront many of those myths and correct them.

Perhaps the most pernicious of those myths is Internet exceptionalism. This is the belief that the Internet followed its own unique economic rules, having little in common with other important historical episodes. This belief was common in the United States during the late 1990s, voiced with enthusiasm by participants in the dot-com boom, primarily in the entrepreneurial sector. Internet exceptionalism also can be an ideology that overly stresses the role of the unique features of Internet technology in commercial events. It misattributes most novel economic gains to technical causes, and was commonly espoused by those entrepreneurs familiar with the Internet's technical features. All flavors of Internet exceptionalism relegate economic analysis of commercial behavior and incentives to secondary status and deemphasize or overlook the influence of commercial markets in fostering or discouraging innovation. This book argues that Internet exceptionalism is just plain wrong, that it can be replaced with a coherent and sound economic explanation, and, crucially, that this explanation must serve as the foundation for understanding the broader lessons about the Internet's evolution, for explaining the innovation that took place, and for analyzing the causes behind creative destruction.

Replacing myth with sound economics faces numerous challenges when it comes to the Internet because no single participant experienced the entire event. No single story can narrate its causes. In the 1990s there was no such thing as a typical Internet company or a typical Internet strategy, or a typical user of the Internet or typical application for the Internet. There also was no such thing as an advanced plan for the Internet, and no single organization orchestrated the design, building, and operation of the Internet. The relevant experiences span multiple generations of participants from a varied set of backgrounds — for example, government laboratory managers, university computer science graduate students, Internet service providers and their commercial cousins in bulletin board firms, start-up veterans and founders, and platform software makers, among many other participants.

That requires a book that mixes stories, economic insight, and general lessons. Accordingly, this book employs a framework for each chapter that generates this mix. Each chapter will begin with one story. Each story motivates a broader examination of a specific question or set of questions about commercialization, which the chapter pursues. In the end, each chapter provides a few general economic insights and lessons. The conclusion reviews those insights and shows how the lessons fit together under one framework.

What role do the stories play? This is easier to illustrate than to explain in general terms. Here are three examples of such stories:

• Chapter 2 begins with a story describing the experience of assistant attorney general William F. Baxter. He visited the White House just prior to the divestiture of AT&T. The White House did not intervene in the divestiture, and that nonevent is the first of many to motivate inquiries about planning the Internet. Did any single decision maker or executive orchestrate the Internet in a top-down fashion? Generally no, and, as later chapters show, despite some bumps in the road, it turned out well for society.

• Chapter 6 begins with a historical story, the beginning of the California gold rush in 1848. This story motivates analysis of the conditions that produced the temporal concentration of economic activity, which common language labels as a "rush." Understanding the detail of the story begins the broad inquiry into whether events in 1995 actually resembled a gold rush. It did, but not for too long, and, as later chapters explain, something other than a gold rush explains why the boom sustained itself and eventually crashed.

• Chapter 13 starts with a discussion about the policies that governed National Science Foundation (NSF) funding of research. It shows how the NSF's flexible policies helped two Stanford professors, Hector Garcia-Molina and Terry Winograd, and their students, among them Larry Page and Sergey Brin. The latter two founded Google with a project that started in their professor's labs. This story begins a larger narrative about how markets renew themselves with new ideas that run contrary to assumed wisdom. Did the NSF intend to renew the market? No, that was not the direct intent of its funding. However, the flexibility of their funding process helped indirectly, because it raised the chances that the research would be relevant. In the end, society benefited from that flexibility.

These are just three examples among many, and they illustrate the general challenge in a book with these goals. Commercialization of any major technology, including the Internet, does not involve one individual in one location in one time period. Each participant's story draws on details that reside in different organizations and distinct time periods. Each story illuminates distinct economic forces, decisions, and policies. In each case the story drives toward understanding the sound economic reasoning illustrated by events. The larger narrative is comprised of many of these stories and insights because no single insight or story could or should address the key questions motivating the book. This topic requires an economic narrative with wide scope that integrates many insights.

Innovation from the Edges

This book is more than stories; it describes general economic principles and analyzes connections between cause and effect using economic analysis. It shows how different factors worked in the same direction or against one another to produce the observed outcome. The book distinguishes among three categories of causes — economic archetypes, government policies, and influential institutions:

• Economic archetypes are patterns of economic behavior that reflect economic forces and principles that manifest repeatedly in different episodes. Economic archetypes are not unique to the Internet and have appeared in other markets or time periods.

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Excerpted from How the Internet Became Commercial by Shane Greenstein. Copyright © 2015 Princeton University Press. Excerpted by permission of PRINCETON UNIVERSITY PRESS.
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