How the Internet Became Commercial: Innovation, Privatization, and the Birth of a New Network (The Kauffman Foundation Series on Innovation and Entrepreneurship)

by Shane Greenstein

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.

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.

Looking back on these events through a wide lens, it is now possible to ask and answer one of the core questions of this book: why did the privatization of the Internet—turning into a private asset a network designed to suit the needs of researchers and students—unleash a wide and profound set of economic outcomes as it grew into a widely used commercial network?

Lack of concentrated decision-making power. A number of factors enabled dispersed decision making. Authority for technical improvements was not centralized within one firm or organization. No single entity or decision maker coordinated the Internet for an extended time with a single economic interest as motive.

This book also has highlighted the many ways in which innovation from the edges encouraged exploratory activity. Demand for new value created different opinions about the appropriate actions to take. Not every participant perceived the value of the opportunities in the same terms, or possessed the same set of assets for exploiting the opportunities. Decentralized decision making was better at permitting a variety of experimentation than a central decision-making process. There were minimal barriers coming from the limitations affiliated with departing from the prevailing view, competing with an established firm, or approaching an opportunity that others had not perceived.

circumstances. As described in chapter 7, neither the IETF nor the World Wide Web Consortium restricted how technology could be used or who could use it.

As chapters 4 and 6 stressed, many of these opportunities came as a surprise, and it caused a rush of economic activity. As chapter 6 explained, large parts of the economy would benefit from the commercialization of the Internet and the web, and had not acted in advance of its deployment.

That enabled the support of value creation over a long period. One additional feature of the experience sprung from the openness of value chain: it permitted radical change to reach the market when it otherwise might have encountered roadblocks at private firms.

Each participant’s actions simultaneously raised the value of the other, and positively reinforced the economic incentive of the other to continue to invest.

The breadth and number of opportunities in the late 1990s extended across virtually every sector of the economy, which meant that every important actor in the economy was investing in the Internet at virtually the same time. That placed enormous strains on the ability of firms and labor to supply inputs and services. The symptoms of impatience were everywhere and manifested themselves as resource shortages in IT labor markets and entrepreneurial managerial markets. Said succinctly, the factors that started the boom differed from the factors that sustained it. A network effect manifested as a virtuous cycle in the late 1990s. That it is distinct from a gold rush—namely, the factors that catalyzed investment in the middle of the 1990s.

The late 1990s were extraordinary because the experimentation involved such an extensive list of participants and continued for so long.

Competitive core encouraged competitive complementary markets. Backbone markets were competitive because, as explained in chapter 3, the privatization of the NSF backbone created competitive conditions.

A killer app could be a catalyst for adoption and investment. The application with the highest value for the early Internet was e-mail, a point made repeatedly in chapters 2 and 3. The most valuable application for the privatized Internet was the web browser, a point first raised in chapter 4 and followed in many later chapters.

Economic experiments in the marketplace generated valuable lessons about coinvention. The privatization of the Internet motivated a number of ISPs to experiment with developing the access business and applying it to new areas and unserved applications, an observation central to chapters 5 and 8. The deployment of the browser-based World Wide Web motivated a number of programmers and entrepreneurs to start new firms that applied the browser in new applications, an observation central to chapter 9. The actions of entrepreneurs collectively amounted to a large economic experiment in learning how to adapt the Internet to user needs in a variety of locations and commercial settings. As chapter 10 observed, established firms also incurred coinvention expenses as they adapted the Internet to their business needs.

Platform governance shaped the character of contributions from the periphery.

Well-managed proprietary platforms, such as Microsoft’s Windows, also could efficiently manage contributions from many specialized application developers. Open platforms, such as TCP/IP, allowed technical change to come from many contributors by making information accessible and from not restricting what got built for the platform, while proprietary platforms resisted changes that reduced the value captured by a platform leader.

No established firm willingly encouraged creative destruction against itself. No established firm knowingly agreed to reduce its own value by letting another firm provide a substitute or cannibalize a product or service.

Unrestricted markets supported technological competition between distinct perceptions. The history of the Internet contains several crucial moments when competition between organizations with distinct perceptions supported distinct approaches to creating market value. As described in chapters 2 and 3, in the early 1990s PSINet and UUNET were entrepreneurs with a distinct viewpoint about how the Internet would create value, and they invested more aggressively in the data-carrier business than many established firms. In the middle of the 1990s, as chapters 4 and 7 stressed, Microsoft failed to make aggressive investments in supporting web technology, and Netscape, a start-up with a distinct viewpoint about how to create value, challenged it by trying to grow the browser-based market for new applications.

There was nothing inevitable about innovation from the edges. Some economic behavior encouraged it, but not all did. One important aspect of the historical experience was the way events reinforced one another at a market-wide level. For example, lack of concentrated decision making and dispersed technical leadership fostered a variety of inventions, contributed to greater competitive conduct from more suppliers, and nurtured a great variety of economic experiments.

Three surprising observations emerge from this summary at this point. The first has to do with the symbiosis between several coordinated collective efforts—in particular, the design of standards—and the emergence of innovation from the edges. For example, the design of TCP/IP came from a very coordinated process, and that enabled inventive specialists.

the initial design of the World Wide Web also came from a single vision.

Wi-Fi also initially emerged from a coordinated collective effort at designing a standard.

There was no invisible hand automatically guaranteeing that market events would become either creative or destructive. On the one hand, events were consistent with the classic Schumpeterian framework: entrepreneurial outsiders innovated, and existing firms innovated in response to entrepreneurial innovation from outsiders. Yet that is too simple a characterization. The same events that motivated innovative behavior also motivated defensive resistance and attempts to control competitive events. The process of creative destruction emerged only after the failure of attempts at defensiveness by established firms and failures in the attempts to control competitive processes.

During the deployment of the commercial Internet, low frictions shaped exploratory activities, and that affected multiple participants simultaneously. A friction refers to two related activities: the nonmonetary cost of designing and setting up procedures to deliver a new service or innovative product, and the nonmonetary cost of executing a set of proscribed processes and procedures for delivering services to users—specifically, the nonmonetary costs of employing personnel to gain technical knowledge and the hassles of addressing and managing delays, lost output, and other events for which no secondary market exists. In other words, low frictions encouraged innovation. Why did low frictions matter? They helped make it cheaper to learn in markets when the most valuable direction of change remained unknown. By experimenting in markets, value creation emerged from novel combinations of demand-fulfillment and operations from multiple vendors combining their complementary services in new ways for mass users.

Internet exceptionalism also overlooks the role of government policy, or merely mischaracterizes its importance.

Policies for moving federally funded technology from universities to private ownership played an enormous role in setting the stage for the Internet’s commercialization.

Policies mediated the tension that arose when university technologies moved into commercial markets. One policy decision mattered more than any other—the decision to privatize the NSF backbone, as chapters 2 and 3 described.

Limiting the uses of the research-oriented Internet reduced the range of inventions for the early Internet. The NSF’s managers focused the Internet on the needs of their niche user communities—students, faculty, university administrators, and researchers. As chapter 3 observed, this had salutary effects and also distorted later events. Due to restrictions on participation and acceptable uses, many commercial applications for the Internet were unexplored prior to privatization. There was no possibility for tailoring new products and services to every potential new set of users outside of universities and research settings.

Government actors selectively intervened in network design at early moments. The NSF and DOD played a crucial role in starting and sponsoring organizations that managed and standardized the operations of the Internet, such as helping to establish the IETF, an observation made in chapters 2, 3, and

Pragmatic government policies nurtured institutions for the long run. The NSF’s managers foresaw the need to establish a standards organization to maintain the life of the TCP/IP platform.

Common carrier policies encouraged competition in communications networks. US policies for telephony evolved in an era when a single firm dominated, and this theme emerged in chapters 2, 5, 8, and 14. Computer II or federal policy for customer premise equipment continued to evolve after AT&T’s divestiture.

Antitrust and regulatory policy protected and enabled entrepreneurs.

Antitrust policy fostered less consolidated decision making. Several chapters—notably 2, 8, and 11—discussed many

Antitrust policy remained present when the name of the dominant firm changed. The list of dominant firms changed, but not the concerns about dominance.

FCC policy could enable the migration of assets from low-value to high-value use. By permitting ISPs to interconnect with the phone system, assets designed for one use, such as voice telephony, found value in another use, such as transferring data to support Internet applications.

Once again, nothing about these policies was inevitable.

Policy also could lower frictions—in the sense that government policy could minimize or eliminate an entrepreneur’s need to “ask for permission” of either a large dominant firm or an overbearing government regulator.

Embodying norms that respected independent decision making.

Pursuit of purposeful idealism motivated action. There were many examples of events where the pursuit of an ideal played an essential role.

Impatient entrepreneurship became the new normal. As chapters 6, 9, and 12 emphasized, considerable innovation activity was commercialized by entrepreneurs, funded by US venture capitalists, with IPOs that passed through Wall Street’s financial firms. It oriented enormous sums of investment toward developing many applications for the commercial network.

In the case of the Internet, low frictions, decentralization, and a diversity of views allowed for an especially potent impact from more entry and competition, enhanced as it was by innovation from the edges.