How the Internet Happened: From Netscape to the iPhone

by Brian McCullough

Mosaic had become the most successful project in computer science by leaving the computer scientists behind and appealing to the mainstream.

Over the next half decade, AOL would spend billions of dollars on its “carpet bombing” marketing campaign. At one point, 50% of the CDs produced worldwide had AOL logos printed on them.

eBay would be one of the first web companies to understand that all the value of its service came from the users and their community. eBay’s only asset, in fact, was its users, and therefore the only important thing for the company to do was to make sure the buyers and sellers were happy so that they would keep coming back.

This is a key evolution. In so many ways, over the last twenty years, the web and the Internet have slowly trained all of us to get comfortable interacting with crowds and, often, crowds of strangers. eBay was one of the first websites to show that a largely anonymous community, carefully constrained by a few guidelines and regulations, but invested in a system of online reputation, could actually work. Today, this key ingredient of ratings and reputation continues on sites like Yelp and Reddit—and especially on sites like Uber and Airbnb. It’s hard to imagine that the current sharing economy could even exist without the reputation template that eBay pioneered.

In April of 1997, listings of Beanie Babies surged to 2,500 separate auctions, and eBay assigned them their own category. When rare and discontinued Beanie Babies suddenly started going for hundreds, even thousands, of dollars at auction, eBay reaped the attendant press attention thanks to its position at ground zero of the craze. Within a month, that single Beanie Baby category was responsible for 6.6% of the entire site’s sales volume.10 eBay was not exactly the company that Beanie Babies built, but Beanie Babies certainly brought eBay to the world’s attention.

Suck was rude, often crude, glib and satirical, but always with purpose. Suck was, in short, snarky. It was a publication that laid the groundwork for blogging in its modern form, both in structure and in tone.

The web revolution helped normalize computing and Microsoft rode this wave as much as any dot-com. But the end result of the trial was that, going forward, Microsoft was merely another passenger; it was no longer steering the wave’s direction.

As one anonymous dot-com executive remembered AOL’s tactics, “For weeks it was, ‘You’re great, you’re great, you’re great,’ and then one day [we had to] give them every last dollar we had in the bank and 20 percent of our company.” Another dot-commer said AOL demanded 30% of her company, “and then for good measure they tell us, ‘These are our terms. You have 24 hours to respond, and if you don’t, screw you, we’ll go to your competitor.’ ”30 In essence, AOL leveraged its “platform” of eyeballs and dial-up customers in the same way that Microsoft had leveraged its operating system.

Especially given the way it all turned out, many have painted the AOL/Time Warner merger as a smash-and-grab job: savvy Internet punks swooping in and taking advantage of clueless old-media types. In some sense, it’s hard not to see the merger as a cynical ploy for AOL to cash in on its market cap before its business model collapsed. But, from another angle, Steve Case probably made the most rational move on behalf of his shareholders. “We all knew we were living on borrowed time and had to buy something of substance by using that huge currency,” one AOL executive said later.34 “We didn’t use the term bubble,” said another exec. “But we did talk about a coming ‘nuclear winter.’ ”

For all the talk of the deal being a “merger of equals,” AOL shareholders would control 56% of the company and Time Warner shareholders, 44%.38 The reality was, AOL had bought Time Warner. An Internet upstart had taken over a decades-old media giant with five times its revenue.

What we can say definitively is that we know who ended up holding the bag as the bubble exploded: average investors. Over the course of the year 2000, as the stock market began its meltdown, individual investors continued to pour $260 billion into U.S. equity funds. This was up from the $150 billion invested in the market in 1998 and $176 billion invested in 1999.67 Everyday Americans were the most aggressive investors in the dot-com bubble68 at the very moment the bubble was at its height—and right at the moment the smart money was getting out. According to Barron’s journalist Maggie Mahar, by 2002, 100 million individual investors had lost $5 trillion in the stock market. Bloomberg News has estimated the damage at $7.41 trillion.

And then they watched it all evaporate. They watched the insiders and the bankers, the lucky and the elite, walk away scot-free while they, the hardworking Americans who did what they were told, lost everything. And all of that would happen to them again less than a decade later, only this time, in the housing market. The bursting of the dot-com bubble was the opening act of our current economic era, and the repercussions from that bubble’s aftermath are still with us today, economically, socially, and especially politically.

The bubble made possible the British Empire at its economic height. People never stopped riding trains. Businesses never stopped shipping goods over them. The railways never went away, even after the investment mania did. The lesson of the dot-com bubble is similar. Of course, the dot-coms went away. Of course, AOL—for one brief shining moment, the embodiment of the Internet in American life—went away. But the Internet itself didn’t go away. And that’s why the railway example is so pertinent. All of the money poured into technology companies in the first half decade of the Internet Era created an infrastructure and economic foundation that would allow the Internet to mature.

What did this mean, ultimately? Well, it meant that for the coming years, the literal infrastructure that would allow for the maturation of the Internet was in place. And because of a resulting glut of fiber (the telecoms had overextended themselves just as disastrously as the dot-coms, thus the bankruptcies) in the years after the dot-com bubble burst, there was a severe overcapacity in bandwidth for Internet usage that allowed the next wave of companies to deliver sophisticated new Internet services on the cheap. By 2004, the cost of bandwidth had fallen by more than 90%, despite Internet usage continuing to double every few years.83 As late as 2005, as much as 85% of broadband capacity in the United States was still going unused.84 That meant as soon as new “killer apps” were developed, apps like social media and streaming video, there was plenty of cheap capacity allowing them to roll out to the masses.

In January 1996, LarryandSergey ended up working in the same office, number 360, in the just-completed William Gates Computer Science Building on Stanford’s campus. The building was of course named after the founder of Microsoft, who had donated $6 million to the construction. All his career, Bill Gates repeatedly predicted that one day, some student somewhere would found a company that would challenge Microsoft for dominance of the tech industry. His prediction turned out to be right, and from a building with his name on it.

This war chest of money, coming just before the dot-com bubble burst, combined with Larry and Sergey’s frugal ways, meant that Google would survive the coming nuclear winter. Had Google waited a further year to raise money, it might not have been able to. And by virtue of being flush with cash when the rest of Silicon Valley was seemingly going belly-up, Google was able to have its pick of talent when the dot-com layoffs began.

Google also bucked prevailing dot-com habits when it came to hiring. The company put off drafting an army of sales and marketing people until much later. Instead, in 1999 and 2000, Google staffed up with—what else?—brainiacs.

By the end of 2000, Napster could claim more users than even mighty AOL: around 40 million. And instead of taking more than a decade and billions of dollars to do so, Napster had attracted that many users on the backs of half a dozen barely postpubescent hackers and about $400,000 worth of hardware.

Everyone knew that it was only a matter of time before Napster wound up in court, and sure enough, on December 6, 1999, the Recording Industry Association of America filed a lawsuit against Napster in San Francisco’s U.S. District Court. Napster was not even six months old. This is another point that’s widely misunderstood about the Napster story. The lawsuits and the media publicity that came with them helped create the Napster sensation. It was almost a textbook example of the Streisand Effect, the phenomenon (as Wikipedia describes it) whereby an attempt to hide, remove or censor a piece of information has the unintended consequence of publicizing the information more widely. Before the lawsuit, there were maybe 50,000 users on Napster; a month after the lawsuit, that number had tripled to 150,000.38 By the summer of 2000, there were more than 20 million.

If Napster had been naïve to think it could have done a deal with the record companies, then the record companies were certainly naïve to think destroying Napster would somehow make the threat of digital technology go away. But, as has been endlessly discussed and is widely understood, the music industry was caught in a classic innovator’s dilemma, tied to a highly lucrative business model it was loath to give up, even in the face of an existential threat presented by new technology.

But even this analysis—the record companies were wedded to the cash cow of the CD—doesn’t quite get at the truth behind the revolution that Napster began. Napster was the first signal that the web had changed consumer behavior in a fundamental way. Today, we live in a world where consumers not only expect, but demand, infinite selection and instant gratification. Amazon had first introduced the concept of infinite selection, and now Napster was training an entire generation to require the instant gratification.

The record companies, in contrast, refused to budge as the habits and preferences of music consumers changed. It was never piracy that was the problem for the music industry (at least, not entirely). But rather, it was the stubborn refusal to adapt to a revolution in consumer expectations that has, at its root, truly bedeviled the record companies, and the television companies and the movie companies, and on and on and on over the course of the Internet Era.

About a year before it sued Napster, the RIAA sued Diamond Multimedia. Before it had even heard of Napster, the record industry knew it didn’t want MP3 as a technology to catch on. But while Napster was eventually defeated, the RIAA lost the Diamond Multimedia case. The Rio PMP300 went on to become the first commercially successful portable MP3 player. As the author Stephen Witt has noted in his book How Music Got Free: A Story of Obsession and Invention, from the perspective of history, the music industry won the wrong lawsuit.

People were filling their hard drives—and now their iPods—with their favorite songs, not necessarily their favorite albums. Jobs wanted to sell individual songs on the iTunes store, and this was what the record companies couldn’t abide because they were still wedded to the physical album.

But third, they were willing to experiment with Apple because, at the time, Apple was an insignificant player. Both iTunes and the iPod were, at this point, available only to Mac users. “We used our small market share to our advantage by arguing that if the store turned out to be destructive it wouldn’t destroy the entire universe,” Jobs said later.17 Apple announced the iTunes Store on April 28, 2003, and in no time Jobs’s notion that ease of use and user freedom could give piracy a run for its money proved prescient.

mid-2006, Apple had sold 58 million iPods in total, and the iPod-iTunes business combined contributed 61% of Apple’s total revenue.23 Apple was no longer “just” a computer company. But then, the iPod was the first device to prove that computers were no longer just computers. In the Internet Era, you could put a computer into any piece of consumer electronics and suddenly it became something more.

Other companies, especially Microsoft, with its Zune MP3 player and accompanying music store, attempted to usurp Apple’s dominance in digital music. But (irony of ironies) the iTunes software platform gave Apple a near-monopoly of the MP3 player and digital music download markets. It was (ironically) a software platform that Microsoft couldn’t penetrate.

Netflix won not because it eliminated late fees, but, again, because it understood how consumers’ expectations were changing and moved to satisfy those new expectations. Unlimited selection. Instant gratification.

Before we were all sending SMS texts, before we all reconnected on Facebook, a great many of us were connected on AIM. The social graph was actually the great prize of Web 2.0. Others were only able to seize this prize because AOL dropped the ball.

But none of that would have been possible had Zuckerberg not matured into the sort of businessman who could make such a gamble. The fact that he did is the entrepreneurial story of our age.

Apple was not a company that liked bureaucracy. Furthermore, Steve Jobs had only recently dragged the music industry kicking and screaming into the twenty-first century. He didn’t relish the prospect of having to cajole and educate another recalcitrant group of backward-thinking companies.