Prof Shane Greenstein of Harvard Business School talks about his new book, How the Internet Became Commercial, at the Digital Initiative's Future Assembly.
4. The book’s aspirations
• Question: Why did
commercialization of the
Internet have such a
transformative economic
impact?
• Contribution:
• What happened? 1989-2003. All in
one place.
• Focus on innovation &
commercialization.
• Offer a big picture. Innovation from
the Edges (IFTE).
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5. Who cares? Everyone. It changed life.
• By 2001 almost all business
online.
• Altered business processes,
operations, distribution, sales.
• Touched every major industry.
• Fastest growing network ever.
• By 1998 an ISP in any city w/greater
than 5K pop. Starting from little.
• Changed the way we live, shop, and
work. Rare events in the history of
modern capitalism.
5
Half households
online by 2001.
A transformation comparable
to autos, electricity, radio,
TV, telephones, passenger
aircraft. Interesting in its own
right.
7. Misleading to ask “who orchestrated the Internet?”
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As if the US Department of Defense orchestrated the entire network as one
big project. Or, perhaps, it all sprang from the mind of one major genius,
such as a modern Thomas Edison, who conceived of the entire thing.
8. Misleading archetype to explain how/why major
technologies deploy and have impact.
8
The US government did not orchestrate the entire network, nor did one sole
genius think up the whole thing. There were many inventors (and they all
agree on that). A different approach leads to better understanding of why the
Internet had such a large economic impact.
9. Focus on innovation and commercialization
Well known economic archetypes can explain how/why
major technologies deploy.
• Basis for managerial lessons for strategic positioning
Illustrates creative destruction
• Outsiders keep markets vital with IFTE.
Analyze why gov’t policy succeeds/fails
• Enables but does not orchestrate IFTE.
9
The commercial
Internet was more
than just a series
of tubes.
11. Like all major technologies, this one had to
address two conundrums
• Circular conundrum
• Max value of technology requires all components to
work together.
• Coordinated complementary operations and
investments.
• Adaptation conundrum
• Valuable in disparate circumstances and could be
organized in many different ways.
• Consultants, large firms w/big scale, many small niche
entrepreneurs, local or national.
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13. Circular conundrum: theory
Requires coordinating many firms.
• Who compete, or have few incentive to cooperate everyone waits.
What kind of mechanism help coordination?
• Catalysts garner the attention of third parties
• Commitments to platforms to facilitate third parties
• Durable institutions facilitate open processes
• Standards for voluntary use
• Government mandates
What actually happened in 1995?!? A catalyst.
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14. Outsiders changed perceptions
• Consensus did not perceive:
• Internet’s value to users;
• Myriad & clever ways to serve
users with Internet & web.
• What were they waiting for?
• A visible working prototype for
more than a visionary CTO.
• Enough to persuade CEOs,
Boards, & VCs to invest.
• With a recognizable and
reliable value chain
• “I’d 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.”
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4
What Netscape offered
• Dazzling demonstration
• Skyrocketing IPO
• Name brand VC/founders
• Visible & fast adoption &
astonishing revenue
15. Outsiders supported by modular technology &
open governance.
• More than twenty years of
operations and refinement prior to
widespread commercialization.
• Architecture & governance
• No limits on who can view
information.
• No limits on how information is used.
• And some purposeful
public-spirited action…
• Tim Berners-Lee chose
not to commercialize the
World Wide Web;
instead, he operated a
consortium.
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5
16. Specialists acts as catalysts, supported by VCs
• HoTMaiL® enters market for Web-based
electronic mail.
• Technically straightforward.
• VCs looking for low cost distribution. Put “hotlink”
at bottom of email.
• Astonishing low cost customer acquisition.
Visible. Widely imitated.
• Others learned from experience. Imitated.
• Birth of viral marketing.
• The potential for growing user base with very
little cost.
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6
Tim Draper,
founder of DFJ.
Invented viral
marketing by
suggesting the use
of hotlinks at the
bottom of email.
Inspired by a b-
school case about
Tupperware.
18. Adaptation conundrum: theory
Technologies create value by adapting to users & locations
• Find value: invent new processes, invent new complements.
• Existing business retrofit business processes.
Adaptation come from many sources
• New devices. New uses for lead users.
• Innovative specialists.
• Lead IT users: logistics, scientific services, automated procurement,
distribution, finance, insurance and real estate.
What actually happened in 1995?!? Innovative specialists.
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19. What did outsiders do? Specialists experiment.
• Exploration in a market.
• Which features do users value?
• Best mode for distributing it?
• Most profitable combinations of pricing
& operations?
• Not learnable in a lab.
• Experimentation is easier for a
specialist. Take rest for granted.
• Don’t need to know vast store of
knowledge.
Often the market
experiments involve few
technical aspects. New
users by making Internet
easy to use.
20. Experimented with geography? Dial-up ISPs
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“A good predictor of not finding an ISP is the presence of hybrid corn seed.”
-- Zvi Griliches --
ISPs had to adapt their business to local
conditions and myriad factors that shaped
their viability.
To succeed on a large scale, the
seed needed to spread into new
applications and circumstances and
to prove distinctively valuable to
everyone who might use them.
21. ISPs were specialists in providing access
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Where did all those
ISPs come from?
Many had been BBSs.
Many were treated
like outsiders by the
mainstream.
Protected by FCC
regulations from
exploitation by local
telephone co.
The unsavory ones
were protected by first
amendment.
22. Adaptation and enhancement
(or the need for intermediaries)
Existing business retrofit processes, not from scratch.
• Save on additional investment. Simplify kinks.
Why IBM could provide unique value
• Add front end to a business process its employees had built,
supported & understood. UPS & L.L. Bean as prototypes.
• Similar middleware solutions for many enterprises who want
security, firewalls, & brand preservation.
• The hard part for IBM: non-proprietary software.
• BTW, one part of explanation why many pure play dot-coms
did not succeed in the market. 22
Irving Wladawsky-
Berger, first head of
IBM Internet strategy.
Let the widespread
enhancement of
functionality at many
large enterprises.
23. Adaptation by specialist continues – e.g., Wifi
• Enabling migration from low to high value
• Top-down FCC choice would have erred. Part-
15 rules do not designate owner or a use.
• Unlicensed spectrum facilitated learning about
new users & uses explored new value.
• Early use cases for unlicensed spectrum.
• Baby monitors, garage door openers, wireless
cash registers coffee shops, airports, hotels,
and new use cases.
• Users made choices value migrated.
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3
Michael Marcus and
Vic Hayes,
considered to be the
two “fathers” of Wi-Fi.
Marcus worked at
FCC. Hayes worked
at Lucent, led IEEE
802.11 committee.
24. Adaptation and renewal…
• Paradox of the prevailing
view: incentives for someone
w/alternative view to enter…
• Consensus may lead to a dead
end by over-exploring one
approach… gives incentives to
long shot to try.
• As long as market remains
open to outsiders with a
different view.
• Just as Google renewed ad
markets that dot-com firms did
not profit from…
2
4
Larry Page began working in a
Stanford lab supported by NSF.
Sergey Brin had a graduate
fellowship from NSF. Page
proposed “Page-Rank” using Brin’s
crawlers in spring of 95 & they
developed it for campus users.
Started Google in 1998-99 because
no firm wanted to license their
algorithm. They had to demonstrate
its value in use.
27. To understand impact: use the right archetype.
“Innovation from the edges.”
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Not a single project orchestrated
by the government.
Not a lone genius who
invented the entire system.
28. To understand impact: use the right archetype.
“Innovation from the edges.”
• Exploration of value creation by
innovative specialists
• By outsiders & entrepreneurs
• Supported by appropriate
governance & technology.
• Generates response from
established firms.
• Innovation from the edges
enables innovative specialists to
address adaptation & circular
conundrums…
28
The wrong archetype
29. Lessons for technically led economic growth
Usual argument for competition stresses lower prices, but
more here: better benchmarking from more variety
• Sure, ISP pricing competitive, but not 100% of what mattered.
Differentiated firms. Specialists w/many perspectives.
• Overcome misunderstandings and misperceptions.
• Overtake firms who over-commits to one technological forecast.
Trade-off between uniformity and diversity
• Standardization of platforms eliminates variety and supports
more complements and specialists
• Innovative specialists who explore creating value 29
30. Looking ahead: solutions to two conundrums in
Big Data (3.0?) or Internet of Things?
Coordination mechanism for circular conundrum.
• Catalysts that garner the attention of third party developers (e.g.,
overwhelming visibility of search/social/smart phones).
• Government mandates (e.g., Health Care Act EMR)
• Platforms facilitate third party development (e.g., IOS, Android).
• Open institutions facilitate specialists (e.g., OpenStack).
Adaptation from many sources
• New devices & APIs for specialists (e.g., gaming on smart phones)
• Who are lead users? Expect same lead IT users: logistics, scientific services,
automated procurement, distribution, finance, insurance and real estate.
• Expect similar desire to retrofit, not start greenfield. 30
34. What did Al Gore invent & when did he invent it?
• “Well, I will be offering - I'll be offering my vision when my campaign
begins. And it will be comprehensive and sweeping. And I hope that
it will be compelling enough to draw people toward it. I feel that it will
be. But it will emerge from my dialogue with the American people.
I've traveled to every part of this country during the last six years.
During my service in the United States Congress, I took the initiative
in creating the Internet. I took the initiative in moving forward a whole
range of initiatives that have proven to be important to our country's
economic growth and environmental protection, improvements in our
educational system….“
• 3/99 interview with Wolf Blitzer.
• Dan Quayle “If Al Gore invented the Internet, then I
invented the spell checker.”
• Why ridicule is funny here: Not one policy nor one
person could not have orchestrated the Internet.
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4
Al Gore in
1994.
Quote refers to
funding NSF
with legislation
in late 1980s &
early 1990s.
Can we move
on to other
topics?
35. Extra slides – Wild ducks and the long history of
supporting contributions from outsiders
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36. Wild ducks play a positive role in keeping
conversation vital.
Social tradition in computing. Informal understanding.
• Social permission to deviate from prevailing view.
"In IBM we frequently refer to our need for 'wild ducks.' The moral is
drawn from a story by the Danish philosopher Soren Kierkegaard, who
told of a man who fed the wild ducks flying south in great flocks each fall.
After a while some of the ducks no longer bothered to fly south; they
wintered in Denmark on what he fed them. In time they flew less and less.
After three or four years they grew so lazy and fat that they found difficulty
in flying at all. Kierkegaard drew his point: you can make wild ducks tame,
but you can never make tame ducks wild again. One might also add that
the duck who is tamed will never go anywhere any more. We are
convinced that any business needs its wild ducks. And in IBM we try not to
tame them."
Thomas Watson Jr.
Son of founder of
IBM, who grew it
into the largest
computer company
in the world.
38. Role of government commercial policy
Policies enable the migration of value from low to high
• Antitrust fostered less consolidated decision making – facilitated wider variety of
approaches to new innovation
• Policies encouraged innovation from the edges, even though often that was that
their primary intent (e.g., first amendment).
• Common carrier policy encouraged entry
• Antitrust and regulatory policy enabled entrepreneurship
No single policy is responsible.
• Nothing inevitable. Conscious choices to avoid monopoly.
• Conscious minimization of frictions of market and regulations.
• Government policy not an architect. Can enable IFTE. As if deliberate tendencies
toward IFTE among many actors. How could that possibly be the case? 38
39. Extra slides – Bill Gates and sources of error in
large leading firms
39
40. Lessons for large leading firms?
Bill Gates as illustration.
• Even the best software CEO
(of his generation) missed it.
• Night of surfing in April ’95.
Reverses views. Written in May.
• Gates learned what many others
in SV had already perceived. Just
later.
4
0
8 pages, single spaced. Ben Slivka’s 20 page memo
as source material; However, Gates had authority &
megaphone.
Internet Tidal Wave
41. Why? Underlying lessons from Bill’s errors
• Strengths of leading firm
• Resources for redirecting at a
big push.
• Existing distribution channels.
• Loyalty of a work force.
• Existing lines of authority.
• Such an organization has
opportunity to push to
(usually) dominate its target
market (if it executes well).
• Weakness of leading firm
• Even the best plans are not
omniscient, but easy to
become blinded by them.
• Leading firm will never plan to
cannibalize self, may
underinvest in such directions.
• Tendency to “misperceive”
options inconsistent
w/present business.
• Tends to lead to underinvest in
future sources of revenue and
strategic advantage.
• Manifests many ways.
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1
43. In this case, it produced a “Gold rush” in 95-97.
• How could it be a Gold rush?
Pedantically speaking, the Internet was
discovered before 95….
• That misunderstands the information
that spread from a single prototype…
• Gold rush economics.
• Until t value unknown.
• Once known, info spreads.
• Unrestricted entry.
• A race to be early.
• simultaneous entry.
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3
Replica of Sutter’s Mill in Coloma,
CA. 50 miles east of Sacramento.
Sierra foothills.
Why didn’t the Spanish find gold
sooner? It was an information
problem. B/c nobody had made it
up to the single spot where a river
had exposed a seam in the rock.
44. Continuing investment in adaptation explains
why investment lasted past the initial gold rush
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4
0
10,000
20,000
30,000
40,000
50,000
60,000
88 90 92 94 96 98 00 02 04
Data Communications
venture investment in mil ($)
0
5,000
10,000
15,000
20,000
25,000
88 90 92 94 96 98 00 02 04
Internet Content
venture investment in mil ($)
There are two distinct phenomenon.
* Why did something start in 1995? Was it a gold rush? Yes, because it was
triggered by new information….
* Why did it sustain itself and grow? Adaptation continued…
45. After overcoming circular conundrum, a virtuous
cycle shaped investment in adaptation
Investment by one participant in Internet & web raised
value of investment by another.
• ISPs growth User levels grow Firm process enhancement new
software innovation Carrier investment New users …
Beginning also links to its ending…
• Many began to take complementarity for granted…
• …and some invested in anticipation…
• …bound to overshoot in the impatient sectors…
• …which happened to be entrepreneurial sectors…
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