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How the Internet Became Commercial
Innovation, Privatization, and the Birth of a New Network
Shane Greenstein
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eBook - ePub
How the Internet Became Commercial
Innovation, Privatization, and the Birth of a New Network
Shane Greenstein
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About This Book
In less than a decade, the Internet went from being a series of loosely connected networks used by universities and the military to the powerful commercial engine it is today. This book describes how many of the key innovations that made this possible came from entrepreneurs and iconoclasts who were outside the mainstreamâand how the commercialization of the Internet was by no means a foregone conclusion at its outset.Shane Greenstein traces the evolution of the Internet from government ownership to privatization to the commercial Internet we know today. This is a story of innovation from the edges. Greenstein shows how mainstream service providers that had traditionally been leaders in the old-market economy became threatened by innovations from industry outsiders who saw economic opportunities where others didn'tâand how these mainstream firms had no choice but to innovate themselves. New models were tried: some succeeded, some failed. Commercial markets turned innovations into valuable products and services as the Internet evolved in those markets. New business processes had to be created from scratch as a network originally intended for research and military defense had to deal with network interconnectivity, the needs of commercial users, and a host of challenges with implementing innovative new services. How the Internet Became Commercial demonstrates how, without any central authority, a unique and vibrant interplay between government and private industry transformed the Internet.
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THE BLOSSOMING
Chapters 6, 7, 8, 9, and 10 analyze the blossoming of the national dial-up network. The market had the air of an impatient gold rush. These chapters show how innovation from the edges shaped the timing of investment and actions. Investment by one type of participant increased the value of action by another, accumulating in a virtuous cycle of value creation.
TABLE 6.1. Selected notable events from chapters 6, 7, 8, 9, 10
Year | Chapter | Notable Event |
1992 | 7 | David Clark delivers âRough Consensus and Running Codeâ |
7 | Internet Society founded and IETF becomes part of it | |
7 | Tim Berners-Lee first visits the IETF to standardize the web | |
1993 | 8 | Louis Gerstner hired as CEO at IBM |
7 | CERN renounces ownership rights to World Wide Web code | |
8 | Earliest ads for ISPs appear in Boardwatch Magazine | |
1994 | 6 | Vermeer founded, begins work on web-authoring tools |
7 | Tim Berners-Lee founds the World Wide Web Consortium | |
6 | Brad Silverberg organizes team at Microsoft to examine web | |
1995 | 6 | Gates circulates the memo, âThe Internet Tidal Waveâ |
6, 7 | Netscape IPO and the launch of Windows 95 | |
9 | HoTMaiL founded and âviral marketingâ is invented. | |
1996 | 8 | Microsoft offers Internet Explorer at a price of zero |
8 | AT&T WorldNet sold at $19.95 for unlimited service | |
8 | AOL implements all-you-can-eat pricing | |
1997 | 8 | 56K modems first introduced |
10 | Tiered structure emerges among Internet data carriers | |
9 | Netscape and Microsoft reach parity in browser features | |
1998 | 10 | WorldCom merges with MCI, spins off backbone assets |
8 | Over 65,000 phone numbers available for dial-up ISPs | |
1999 | 9 | Dot-com boom reaches greatest height |
10 | WorldCom proposed merger with Sprint is called off | |
2000 | 8 | Boardwatch Magazine records over 7,000 ISPs |
9 | Internet adoption nears saturation at medium/large businesses |
6
How Not to Start a Gold Rush
Iâd 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.
âJim Clark1
Just as the California gold rush of 1849 involved rigorous and concerted exploration of natural resources for commercial gain, a gold rush in a technology market can be an intensive exploration of a specific productâs commercial value. In mid-1995, especially after Netscapeâs first browser and Netscapeâs initial public offering (IPO), the commercial Internet turned into something akin to a gold rush, experiencing intense exploration by a large number and wide range of firms. Many established firms altered their investment plans to take advantage of the new business opportunities the commercial Internet offered. Many newly founded start-ups, attempting either to displace incumbent firms or establish service in areas incumbents had not addressed, also tried to take advantage of these opportunities by becoming dominant in specific activities.
Examining these events leads to two economic questions regarding the ways that firms invested their resources in the commercial Internet: Why did they explore and invest simultaneously? Why did the Internet gold rush not occur sooner?
FIGURE 6.1 James H. Clark, cofounder of Netscape (photo by Knnkanda, July 14, 2013)
FIGURE 6.2 Bill Gates, cofounder of Microsoft (photo by Simon Davis/DFID, July 2014)
The beginning of the explanation lies in Coloma, California, and in lessons learned from the history of the California gold rush. Coloma gets its name from a Native American word for beautiful. It deserves the label. Located on the southern fork of the American River, just over fifty miles east of Sacramento, it retains an abundance of oak trees and other flora. These dot the rolling foothills, which lie at the base of the Sierra Nevada mountain range. It is not an easily accessible place today and can be reached only by way of hilly roads off major highways. It was regarded as an even more remote location when it first gained notoriety, as the location for the discovery of gold in California in 1848.2
Contrary to popular romantic conceptions, gradual exploration is the norm for metal mining, and that is how most of gold in the Sierras eventually was mined. It is not what happened in Coloma. There are several seams of gold in the Sierra Nevada, put there hundreds of millions of years ago by natural forces. Millions of years ago plate tectonics formed the mountains and pushed several of the seams close to the surface. Miners eventually explored many of those seams using underground tunnels.3 However, glacial erosion did much work to expose one of those seams, combined with wind and rain. The southern fork of the American River happens to travel over one exposed seam, taking flakes from the rock, depositing it a little downriver.
Spanish settlers had been in California for more than seven decades. Evidence of gold occasionally surfaced in rock in the Central Valleyâover hundreds of thousands of years rock easily could have moved down the hills in cataclysmic landslides and landed in the valley, far down from its sources in the Sierras. Yet the Spanish had never identified the origins in the mountains, many miles east and much higher up in elevation. Nobody had traveled to the exact place in the mountains because it was remote from the Spanish settlements in California, and it was not easy to find. The weight of gold also helped keep it hidden. The American River joins the Sacramento River upstream, but far downstream from the exposed gold seam over which the American River traverses. Gold flakes are too heavy to travel far in water, even in a fast-running river like the South Fork of the American during a snowmelt in spring.
An enterprising American commercial iconoclast and entrepreneur, John Sutter, decided to be the first person to go high up on the South Fork of the American River. He was seeking fresh timber, not gold. He established his mill in Coloma in an attempt to get timber nobody else had harvested. In 1848, in the midst of building that enterprise, one of his employees, John Marshall, discovered gold flakes in the water tracings of the mill, which had turned over sediment around the river. Weeks after Marshallâs discovery the word was out. The mill site was soon overrun with prospectors. The following year the hills contained as many prospectors as oak trees, the â49ersâ of the California gold rush who panned for gold.
What are the lessons from this story for the Internet gold rush? Stated broadly, gold rushes possess four features:
1. The value remains unknown for some time and is discovered to the surprise of the discoverer and all others.
2. Once the value becomes known, knowledge about it spreads rapidly.
3. Many prospectors explore and invest in the hope to gain later.
4. Every prospector takes action quickly, believing that only the earliest movers will reap part of the newly discovered value.
There is another lesson embedded in this story, which later chapters will return to: a few of the earliest pioneers profit in the long run, but only a few. That last lesson, however, requires several steps to illustrate, and the first of which is explaining the rush. This chapter discusses the first step, why circumstances led to the Internet gold rushânamely, the simultaneous exploration of value by many market participants. That is also equivalent to asking why everyone waited until a specific moment in time, so an oversimplified statement can summarize the puzzle one must explain: if a gold rush begins when a great deal of activity follows a quiet moment, what triggers the change? To understand the timing of a rush it is necessary to explain what circumstances prevented the Internet rush from happening earlier. As the above story suggests, typically some new information acts as a catalyst, and the crucial question becomes a query about what action led to new information, and whose knowledge changed and why.
Looking at it from this angle, the puzzle requires stretching the metaphor about the gold rush to make it fit events in the Internet. There were, in fact, two overlapping periods of exploration. The first period involved many prospectors looking for Internet gold, but nobody shouting, âEureka, I found it!â Stephen Wolffâs discussions to privatize the Internet started this period of exploration. It led to the founding of the for-profit data carriers PSINet and UUNET in late 1989 by William Schrader and Martin Schoffstall, and Rick Adams, respectively. It also led to a slow trickle of entry by commercial ISPs into the US market for such services, by firms such as Netcom. It also led a few intrepid BBSs to add an Internet service. It also led CompuServe, a very large information service using BBS technology, to offer Internet service. As earlier chapters discussed, these were interesting events among the cognoscenti of the Internet. To the core of the communications and computer industry, however, a new valuable market had not been found.
The introduction of Netscapeâs first commercial browser eventually started the second and much noisier rush. By the end of 1994, many commercial computing and communications firms had seen a beta version of Netscapeâs product, and many were on the way to altering their plans. By the end of the summer of 1995, after Netscapeâs IPO, every market participant was evaluating the value chain for the commercial Internet and web. Many venture capitalists were beginning to assess the prospects for newly founded firms in a variety of applications. A few of the early pioneers also began to reap large rewards about this time. Like a gold rush, new information about the source of value triggered these actions.
To summarize, by the end of the summer of 1995 events were set in motion that would last for a considerable length of time, events that contemporaries would label as a boom in investment. Netscapeâs IPO is, therefore, probably the best symbolic event for marking the birth date of the commercial web, and, accordingly, the beginning of events that resembled an Internet gold rush.
The above also suggests why the metaphor about the gold rush fails eventually. While the Netscape IPO did generate a short and intense period of prospecting by entrepreneurs, the boom was sustained by more than just the immediate and one-time reaction to new information. Different factors explain why the boom sustained itself long after the initial rush of 1995 and 1996.
This chapter, in contrast, focuses on understanding the sense in which the metaphor about a gold rush actually explains events. It focuses on commercial markets before the Internet rush, say, in early 1994, before participants were informed about the value of the Internet. Why had only a few major commercial firms prospected for value in the commercial Internet up until that point? This chapter explains why circumstances left many potential participants in doubt, and that illuminates why those who came from the edges would have such a large impact on catalyzing commercial markets.
The Collective Shrug of â94
Looking back at the commercial computing market in 1994 requires a big change in perspective for an observer from the future. While years later it would be obvious that the privatization of the Internet resulted in an extraordinarily valuable gift to the US economy, most contemporaries in 1994 did not appreciate the value of that gift at the time it was given. Most contemporaries did not appreciate the NSFâs plan to privatize the Internet. Most of them just shrugged.
The marketplace primarily attracted prospectors from the edges. By early 1994 the catalytic pieces were all in place for motivating investment to meet the anticipated demand. The plans for privatization of the Internet were almost complete and the web was beginning to diffuse, available as shareware for anybody to use and assess. Several commercial iconoclasts had made investments in carrier markets and access markets, demonstrating the viability of providing commercial services.
The actions of those early pioneers did not generate a reaction. No prominent business magazine in early 1994 hailed PSINet or UUNET as leaders of an Internet revolution. No Wall Street analyst changed his or her recommendations in early 1994 from sell to buy for the stock of prospecting firms who had a great deal to gain from privatization. No venture capitalist made an explicit effort to round up the leading talented Internet entrepreneurs in early 1994 and fund a portfolio of the most sensible plans for new Internet services, even thou...