Greenstein_How_F15How did the deployment and uptake of the Internet bring about growth in the US economy? That is a fundamental economic question that still resonates today, because many of these events yielded lessons that we can take to the present.

The topic is hard to address because many participants experienced these events in different ways. There was no typical Internet story and no typical Internet company that defined the era. There was—and continues to be—an enormous variety of commercial circumstances and experiences.

More to the point, the dot com craze and bust hangs prominently over many memories, and incorrectly fosters false conclusions. Lessons from the earlier era have use today. Many behaviors today have antecedents in the first decade of the commercial Internet. A set of economic archetypes – regular patterns of economic behavior that lead to similar general outcomes – shaped behavior. Two decades years later the same set of archetypes can still describe many events.

I wrote a book called How the Internet Became Commercial (Princeton Univ. Press, 2015) to try to understand how it all fit together. Here is a sneak peek at the answer.

After privatization

From the outset, the Internet and Web embodied an almost unique combination of technological maturity, institutional maturity, and commercial surprise. Prior to the mid-1990s, the creators of the Internet and the Web had sufficient time to refine their inventions, accumulate suggestions from many corners, and routinize processes for delivering services to users. However, only insiders appreciated how things had evolved.

Here is what I mean: Institutional support for the Internet was also close to routine, as the Internet Engineering Task Force (IETF) was a functioning organization, designed to enable the accumulation and evolution of new functionality. The World Wide Web Consortium (W3C), though it came into existence at the completion of privatization, governed a set of technologies that had already been tested and refined in a wide set of circumstances.

Very quickly after privatization of the Internet, participants in commercial markets found new opportunities for the Internet and Web. It is hard to believe in retrospect, but large parts of the economy would benefit, and yet, few firms had planned in advance.

Why the surprise? This was due in part to the origins of the Internet and the Web (as working prototypes generated outside commercial markets) and partly to the behavior of the leading communications firms, which had focused their attention elsewhere. In part, the value chain behind the commercial Internet and Web did not resemble anything that had come before it, and established players did not perceive how the new model would work.

Outsiders ended up playing a central role. They saw the opportunity earliest and understood how to exploit it. For example, one central player in the early days, bulletin board systems, became ISPs, and helped build the network everywhere, getting beyond a critical mass.

That is a general observation that still holds today. The US high-tech sector remains vital because it does not exclude outsiders with new ideas.

Then the gold rush

Prototypes were demonstrated, especially those using a Netscape browser. The prototypes convinced many tech watchers to apply the Internet and Web to new areas—back-office enterprise information technology, customer-facing information technology, and operations-enhancing enterprise computing.

Why was the application so wide? Again, maturity. The commercial Internet and Web had a supporting value chain behind it. Related institutions possessed all the attributes affiliated with a successful delivery of value to users.

One other attribute mattered, and that was lack of encumbering ties from established players: the Internet’s supporting institutions did not restrict who could use technical information, nor for what purpose. That permitted radical change to reach the market—again, typically brought there by outsiders—when it otherwise might have encountered roadblocks at private firms in a proprietary value chain.

This radical change came about because the new opportunity provided new value in a dispersed set of circumstances across the economy—financial transactions, retailing and wholesaling, logistics, media, entertainment, and analysis. Both insiders and outsiders saw that.

The rush of entry into supplying web-based applications reflected a real economic opportunity for many entrepreneurs and established firms, simultaneously perceived by many of them. Contemporaries called that a gold rush, and with good reason, since it initially resembled one.

The rush lasted a couple years, and it turned into a boom in investment and entrepreneurial entry. Along the way, it became something other than a rush, something much bigger, for many reasons distinct from the factors that started the rush.

Each participant’s actions simultaneously raised the value of the others and positively reinforced the economic incentive of the others to continue to invest. That was a symptom of the presence of a network effect at an economy-wide level, and by itself would have generated a greater scale of investment. Moreover, in many settings the activities of one set of participants taught others lessons that they could use. The simultaneous activities of so much experimentation at a large scale also increased the extent of learning and experimentation.

Network effects have not gone away. We still see this positive reinforcement in the Internet from time to time. For example, broadband raises the value of plenty of other activities.

The breadth and number of opportunities in the late 1990s extended across virtually every sector of the economy, which meant that every important actor in the economy was investing in the Internet at virtually the same time.

Said succinctly, the factors that started the boom differed from the factors that sustained it. A network effect manifested as a virtuous cycle in the late 1990s, and more than the typical lead industries for computing became involved. The network effect also is still with us.

Impatient exploration

All the impatient activity encouraged another important feature of the economic situation, the seemingly high tolerance for exploratory behavior. Part of that tolerance was unsurprising in light of the scale of the new opportunity and in light of the history of technological races in computing. That tolerance is still in the industry today.

The late 1990s were extraordinary because the experimentation involved such an extensive list of participants and continued for so long. Technically-oriented entrepreneurialism thrived, and the perceptions of outsiders were taken seriously by firms that had previously ignored such views.

It made for strange bedfellows. Firms that had little economic relationship to one another prior to the Internet’s deployment found themselves making deals and basing growth projections on those deals. Entrepreneurs began to talk with each of these firms, and established firms had to assign managers to follow developments that they had previously ignored and make thorough assessments.

Again, this still happens today. For example, just look at the taxi industry today, which has seen itself upended by smartphone applications (and a bit more) from Uber and Lyft. And television is ripe for this transformation, just as has happened to movies and music.

The contrast between IBM’s experience and Microsoft’s experience illustrates another lesson, about governing creative destruction. Both firms profited from the commercial Internet and Web. IBM escaped its near-death experience by selling services as a technological intermediary, while the commercial Internet and Web raised the value of the PC and networking value chain.

Microsoft made money by selling into the PC value chain, but it also sought to control the emerging value chain and cement its exclusive position. That led it to put up resistance to the processes of creative destruction built around Netscape’s browser and not Microsoft’s.

In general, no firm ever cooperates with creative destruction when it shapes its business. However, society benefits from having as vigorous a competitive destruction as possible. That is a central policy issue that still persists today.

Exceptionalism

For a time, especially near the end of the boom in growth, Internet exceptionalism became the prevailing view. This philosophy defied the economic archetypes of business history and boldly rejected traditional approaches to building and valuing businesses.

This view arose partly as a product of the impatience of the era and the confusing nature of the new opportunities. Yet that alone does not explain how this perspective overwhelmed the voices of most experienced entrepreneurs, investors, and analysts. Internet exceptionalism was reinforced by a financial sector that reaped enormous short-term profits from encouraging the activity consistent with Internet exceptionalism, even when experienced managers should have known better.

Internet exceptionalism did not lead to good economic decisions. Many participants overinvested or invested in directions whose merits eventually proved fleeting. For some participants, the ideology of Internet exceptionalism lost creditability only long after the end of the boom.

Although some participants were chastened—for example, venture capitalists have had a great public conversation about whether recent events resemble another bubble—I continue to encounter elements of Internet exceptionalism. Even today, many entrepreneurs want to live by their own rules and deny the brutal constraints of mainstream business practices.

What archetypes still apply today? Outsiders continue to have a role in US high technology. Network effects have not diminished in Internet matters. Creative destruction continues its relentless assault on the business of established firms. The names of the players may have changed in twenty years, but not the economics. A set of economic archetypes shaped behavior then, and continue to do so now.

 

The Internet’s evolution did not end with the dot-com crash. The factors that shaped the next wave of investment would resemble those that shaped the first wave. Further exploration took on an air of renewal in light of the lessons of prior experience.

The creation of value from search engines, for example, built on the interplay between advances made in a university by a couple of graduate students and its commercialization. The advances made in wireless Internet access resulted from the interplay among government policy for spectrum, the design of a standardization committee, and the aspirations of many private firms.

It added up to one of the greatest episodes of technologically-led growth in the 200-year history of American capitalism. It is not an exaggeration to say the deployment of the commercial Internet changed the way everyone lives, works, and plays, changing US economy in irreversible ways. Most astonishing of all, we are not done yet.

Copyright held by IEEE Micro. For the original essay, see here. 

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