How the Internet Happened: From Netscape to the iPhone

by Brian McCullough

As early as November 2000, CNNFN.com pegged the losses at $1.7 trillion.49 But of course, that would only count public companies. The amount of money lost to dot-coms that went bankrupt before IPOing or getting acquired would push the calculation of losses higher still. Beyond the public companies, it’s estimated that 7,000 to 10,000 new online enterprises were launched in the late 1990s, and by mid-2003, around 4,800 of those had either been sold or gone under.50 Many trillions of dollars in wealth vanished almost overnight. Obviously that amount of money leaving the playing field had to have some effect on the economy overall. The U.S. government would date the start of the subsequent dot-com recession as beginning in March 2001.

By the time of the economic shock from the terrorist attacks of September 11, 2001, there was no longer any doubt. That tragic month of September, for the first time in twenty-six years, not a single IPO came to market.51

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.

by 2002, 100 million individual investors had lost $5 trillion in the stock market. Bloomberg News has estimated the damage at $7.41 trillion.69 A Vanguard study showed that by the end of 2002, 70% of 401(k)s had lost at least one-fifth of their value; 45% had lost more than one-fifth.70

At the time of this writing, there is a lot of talk about how the American public, especially the middle and working classes, have come to believe the economic structure of America is rigged against them, and everything is tilted in favor of the insider, the moneyed, the elite.

Baby boomers did what society told them: they invested in stocks; they bought and held. And for a time, they did well, seeing their nest eggs go up by five, even six, figures (or more if they were lucky). 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.

It was later estimated that between 2001 and early 2004, Silicon Valley alone lost 200,000 jobs.71 A whole generation of young people had, in the space of a decade, gone from being young upstarts who “got it,” to masters of the universe who seemed to be transforming the world, to completely redundant.

MANY OBSERVERS of the dot-com bubble have found it instructive to compare it to earlier bubbles like the tulip mania in seventeenth-century Holland or the South Sea Company’s collapse in eighteenth-century London. But it’s the example of the railroads in Britain in the 1840s that’s the most analagous.

Because the British Parliament had to pass legislation approving each new railway scheme, the railway bills passed by Parliament provide an amusing analogy to the IPOs of the dot-com period. Forty-eight railway acts were passed by Parliament in 1844, and 120 in 1845. At the height of the mania, the capital required to fund these schemes came to £100 million, and by 1847, investment in the railways represented 6.7% of all national income.76

When the bubble burst in 2000, there were only around 400 million people online worldwide. Ten years later, there would be more than 2 billion (best estimates peg the current number of Internet users at 3.4 billion).85 In the year 2000, there were approximately 17 million websites. By 2010, there were an estimated 200 million (today, that number is over a billion).

Far from being a fad, the habits Americans acquired during the bubble era ingrained themselves into the rhythms of everyday life. The dot-coms, the training wheels for the Internet, the pioneers, they all taught us to live online. We all might have jumped from dial-up to broadband, but few of us quit using the net. There was no going back.

“The idea behind PageRank was that you can estimate the importance of a web page by the web pages that link to it,” Brin says.

“It was pretty clear to me and the rest of the group,” Page said later, “that if you have a way of ranking things based not just on the page itself but based on what the world thought of that page, that would be a really valuable thing for search.”

The earlier search engines were already answering every query correctly. But it was finding the needle in the haystack and putting it at the top of the list that PageRank did better.

“It wasn’t that they [Page and Brin] sat down and said, ‘Let’s build the next great search engine,’ ” said Rajeev Motwani, who was Brin’s academic advisor. “They were trying to solve interesting problems and stumbled upon some neat ideas.”7

“for every dollar spent, Google had three times more computing power than its competitors.”14

Frugality and efficiency were not just virtues, they were also philosophical and aesthetic differentiators.

“Ultimately I view Google as a way to augment your brain with the knowledge of the world,” Sergey Brin said.

every one of these perks was self-consciously provided as a way to keep workers motivated and productive. The free cafeteria meant that Google employees didn’t have to leave the office in the middle of the day and could get back to work with ease. In the bathroom stalls were quizzes and coding tips to help people stay sharp. The shuttle buses had WiFi on them, so employees could be productive on the way to and from the Googleplex. Healthy, clear-headed workers could do better coding, or so the thinking went.

It turns out that the human auditory system is not an instrument that scoops up all the frequencies in a given environment, like a microphone does. What we “hear” is not an accurate representation of reality, but only those sounds that the brain, over the course of millenia of evolution, has determined to be the “most important” sounds. By stripping out the unnecessary (because they were unheard) noises in a sound file, music files could be made much smaller. Most music was easily compressed and a listener was none the wiser.

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.

Napster hired lawyer David Boies, fresh off his victory over Microsoft, to argue that Napster didn’t have any control over what its users did, that its servers didn’t touch, much less store, any of the copyrighted material, that it was no more liable for crimes committed because of its technology than the phone company was for allowing users to dial in to Napster in the first place.

Napster was perhaps the victim of its own naïve faith in technology. Did Napster know that people were largely using its technology for pirating music? “Yeah we knew,” Napster engineer Ali Aydar would say years later.

that Napster could then cut a deal with the record companies, something along the lines of “Hey, all your customers are now on our platform. Let us help you reach them, in a mutually beneficial, profitable way.” In internal strategy documents drawn up by Parker, this was laid out explicitly: “We use the hook of our existing approach to grow our user base, and then use this user base coupled with advanced technology to leverage the record companies into a deal.”

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.

the music industry had gotten filthy stinking rich on the back of the compact disc in the 1980s and 1990s. Having convinced all of us to repurchase our record collections in digital form, the music industry went from selling 800,000 CDs in 1983 to 288 million in 1990 and nearly a billion in the year

2000.47 Unlike with most digital technologies (the price of which almost always declines over time), the price of the average CD seemed only to inch upward every year, approachi...

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. Shawn Fanning had been right from the very beginning: digital really was a better way to distribute music.

Advertising might have been the first industry the web disrupted, but Madison Avenue adapted to the change, quickly following our attention spans and our eyeballs as they drifted online. 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.

Infinite selection. Instant gratification. On any device. When it comes to digital disruption of media, it is almost never about free content or piracy, not at

the core. It is always about giving people what they want, when they want it, how they want it. Napster seemed to understand this intuitively, even if ...

Sean Parker would say things that, in retrospect, were completely dead-on. “Music will be ubiquitous and we believe you’ll be able to get it on your cell phone, you’ll be able to get it on your stereo, you’ll be able to get it on whatever the device of the future is. And . . . I think people are willing to pay for convenience.”48 The Internet and the web and Google had already made information ubiquitous. Napster was the first company to prove that, in the future, media would be ubiquitous as well.

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.50

consumers wanted unlimited selection and freedom of choice. 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.

“I’ve never spent so much of my time trying to convince people to do the right thing for themselves,” Jobs would say later of his negotiations with the industry.16

Jobs had always conceived of the iPod as a way to sell more Apple computers. He was still married to the idea of the Mac as the digital hub, so he was reluctant to bring iTunes to Windows machines

Apple taught the world what it meant to be a consumer electronics company in the Internet Era.

The lesson of commerce in the Internet Era—from Amazon through Napster through the iTunes store—has been that consumer habits and expectations have changed radically. The general public has intuited that the Internet and digital technology enable a world of unlimited selection and instant gratification. If your business model stands in the way of that, well, consumers will just go around you. It’s a lesson that the music industry failed to learn from Napster, and it’s a lesson that media companies are having to re-confront again and again, even down to the present day.

Eliminating the late fee made for friendly headlines, but it was not what made Netflix take off.35 What mattered was that Netflix too had learned the key lesson of retailing in the Internet Era: unlimited selection, (near-) instant gratification.

Netflix also concentrated on other advantages the web made possible. Copying Amazon’s Recommendation Engine, as well as DVD retail competitor Reel.com’s pioneering Movie Match technology, Netflix developed its CineMatch movie recommendation system. Users were prompted to check out movies they might like based on previous titles delivered from their queue. Netflix invested heavily in this technology, hiring mathematicians and computer scientists to tweak the algorithm to include recommendations based on the habits of subscribers with similar taste.

Video stores were once one of the most common retail storefronts in America; there was hardly a neighborhood without one. Today, the few video rental stores left are nearly museum pieces. 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.

And Netflix deserves credit for continuing to move in that direction even after it had conquered DVD rentals. As early as 2002, Reed Hastings was telling Wired magazine, “The dream 20 years from now is to have a global entertainment distribution company that provides a unique channel for film producers and studios. . . . In five to ten years, we’ll have some downloadables as well as DVDs. By having both, we’ll offer a full service.”

50 He was talking about video on demand. About Netflix becoming a studio and producing its own content. About streaming. All delivered via the Internet. “We named the company Netflix for a reason,” Reed Hastings has said on...

On Friday, February 15, 2002, PayPal went public and enjoyed a 55% first-day pop. The financial press, which had been so instrumental in cheerleading for the bubble, now proved downright hostile to the return of Internet IPOs. “It’s an anachronism—straight out of 1999,” the New York Times quoted a stock analyst as saying. “It’s like we’ve kind of forgotten what got us into this situation in the first place.”5 But doubters were proved wrong a mere five months later when eBay acquired PayPal for $1.5 billion, one of the biggest acquisitions in the wake of the dot-com implosion.

The vision Larry and Sergey had sold the venture capitalists involved a three-pronged strategy. First, Google would license its search technology to the major portals. Second, the company would sell its search technology as a product to enterprises. And third, there were some vague promises about selling ads against searches on its own website.

The fees that Yahoo coughed up were barely enough to cover the increased processing and bandwidth costs Google incurred to service the traffic. The Yahoo deal taught Google that licensing alone wouldn’t be a big enough home run to build a company around—or at least, not a very big company.

Google produced an actual hardware device, known as the Google Search Appliance, which was a rack-mounted box meant to be installed in corporate data centers. It was designed to provide corporations and other organizations with large amounts of data and the ability to organize, index and search that data the same way that Google did with the web. But even though Google continued to produce the Search Appliance until 2017, it never became a breakout hit.

Users who search are searching for something. You don’t perform a search like “hotels in Marietta Georgia” without having at least some passing interest in booking a hotel in that city in the near future. Advertising around search allowed marketers to reach consumers at the very point of intentionality, at the very moment they were either researching a

purchase or actually looking to buy.