Greenstein - Kauffman Foundation on Innovation and Entrepreneurship: How the Internet Became Commercial: Innovation, Privatization, and the Birth of a New Network

How the Internet Became Commercial

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The Invention of Enterprise: Entrepreneurship from Ancient Mesopotamia to Modern Times, edited by David S. Landes, Joel Mokyr, and William J. Baumol

The Venturesome Economy: How Innovation Sustains Prosperity in a More Connected World, by Amar Bhid

The Microtheory of Innovative Entrepreneurship, by William J. Baumol

The Entrepreneurial Group: Social Identities, Relations, and Collective Action, by Martin Ruef

Solomons Knot: How Law Can End the Poverty of Nations, by Robert D. Cooter and Hans-Bernd Schfer

The Founders Dilemmas: Anticipating and Avoiding the Pitfalls That Can Sink a Startup, by Noam Wasserman

How the Internet Became Commercial

INNOVATION, PRIVATIZATION, AND THE BIRTH OF A NEW NETWORK

Shane Greenstein

PRINCETON UNIVERSITY PRESS
PRINCETON AND OXFORD

Copyright 2015 by Princeton University Press

Published by Princeton University Press, 41 William Street,
Princeton, New Jersey 08540
In the United Kingdom: Princeton University Press, 6 Oxford Street,
Woodstock, Oxfordshire OX20 1TW
press.princeton.edu

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All Rights Reserved

Library of Congress Cataloging-in-Publication Data

Greenstein, Shane M.

How the Internet became commercial : innovation, privatization, and the birth of a new
network / Shane Greenstein.
pages cm. (The Kauffman foundation series on innovation and entrepreneurship)
Includes bibliographical references and index.
ISBN 978-0-691-16736-7 (hardcover : alk. paper) 1. InternetEconomic aspects. 2. Internet industryHistory. 3. Information technologyEconomic aspects. 4. TelecommunicationTechnological innovations. 5. Entrepreneurship. I. Title.
HC79.I55G744 2015
384.3dc23
2015016998

British Library Cataloging-in-Publication Data is available

Published in collaboration with the Ewing Marion Kauffman Foundation and the Berkley Center for Entrepreneurial Studies, New York University

This book has been composed in Palatino LT Std

Printed on acid-free paper.

Printed in the United States of America

1 3 5 7 9 10 8 6 4 2

To Eli, Ilana, Rebecca, Noah, and Ranna.

Thank you for so much patience and love.

Contents

INTRODUCTION

Ubiquitous Clicks and How It All Started

I think the press has a tendency to pick a person and paint them 10 feet tall. In fact, each of us does a little piece and Ive done one thing, people add on that and then another. So you get credit for doing the whole damn thing, and thats not so.

Paul Baran, after receiving the National Medal of Technology and Innovation

O ne day I watched my children use the Internet and soon found myself talking with them about the Internet in the same effusive way my immigrant grandparents talked about the wonders of electricity and the magic of transcontinental air flights. My kids just shrugged their shoulders at their fathers dramatics and went back to surfing the web and playing online games.

My children cannot imagine a world without the Internet. Clicks are familiar. Hasnt it always been so?

Modern economies frequently change frontier technologies into widely used onesfrom the mysterious to the unremarkable. The Internet was once exotic to all but a small set of cognoscenti, but long ago the technology spread to a majority of households and businesses. In the process of becoming ubiquitous it transformed how we work and livechanging how consumers behave, and altering how firms provide products and services.

My children are not alone in their shrugs. Most adults today could not say where the Internet came from and how its spread caused so many transformative changes. Not only does that hold for many educated adults, it also holds for many of societys thought leaders. I have met many educated economists who know a great deal about many technologies, and yet they lack any view about the general economic lessons the Internets spread illustrates. I have met many perceptive legal scholars and policy analysts with a similar gap in their understanding.

I have also met many who do not shrug, who are curious, especially among those too young to have lived through the relevant events. Can a knowledgeable observer explain how and why the Internet deployed as it did? To what do we attribute its impact? Can those recent events yield insights that help understand technology in the future? They do not know where to go to answer their curiosity. Many key events were genuinely complex, and, at times, involved a vast ensemble of participants with distinct motives and alternative points of view. It is not obvious where to start.

This book addresses this curiosity and points it to the deeper mystery behind the surface of events. The Internets deployment is commonly held responsible for an economic boom. Along with that boom, and in less than one generation, the names of the leading suppliers of communications changed. So too did the predominant view for forecasting how the underlying technology in communications would evolve. To the common eye all these changes occurred in less than a decade, which is extraordinarily fast by historical standards. Any of these would be rare to see in any industry. The combinationeconomic boom, change in leadership, alteration of the common forecast, and rapid changeis rarer still in the history of modern capitalism. These are typically associated with only the most transformative technologies, such as the steam engine, the railroad, electricity, indoor plumbing, and the automobile. Such a combination of events merits an explanation in its own right, because the history of capitalism suggests this should not happen often, if at all.

Existing explanations leave a gap, however. While many rich and wonderful histories have been written about the invention of the Internet, most focus on just invention. That yields an answer rich in technical details and incomplete in perspective. It diminishes the role of markets and government policies for markets. Writing about policy addresses some of that gap but tends to stress legal issues, regulatory debates, and changes in court decisions. It overlooks economic incentives and the behavior policy induces from suppliers and users.

To say it broadly, comparatively less writing focuses on explaining the Internets innovation and commercialization. Innovation is the act of turning invention into something useful, while commercialization translates innovations into valuable products and services. Innovation and commercialization must connect to each other because both involve market activities, such as building the production and distribution processes to deliver a new service to customers. That summarizes the motivation behind this book and its outlook. It is not possible to explain the deeply surprising and unique aspects of these eventseconomic boom, change in leadership, alteration of the common forecast, and rapid changeonly with technology and policy analysis. It also requires understanding how innovation commercialized, that is, how innovations became valuable as the Internet evolved within commercial markets.