Nurturing the Accumulation of Innovation: Lessons from the Internet

1. Nurturing the Accumulation of Innovation: Lessons from the Internet Shane Greenstein Accelerating Innovation in Energy: Lessons from other Sectors

2. Game Plan • Motivation • Lessons of pre-commercial era • Lessons of commercial era

3. Question • Internet touched wide breadth of economy • Transformation for better. • Lower prices, new services, efficiencies. • Changed life as we know it. • Big Question: What economic lessons can we learn from the Internet for large innovative efforts, such as in major energy innovation? • Goal today: provide overview of chapter.

4. No single Internet • The chapter focuses on two eras, pre-commercial, and commercial.

5. Lessons differ over time • Refined Question: What policies lessons can we learn from each era of the Internet? • Focus on processes underlying accumulation of innovation. • Pre-commercial era. • Lessons for managing dispersed community exploring frontier engineering/science. • Commercial era. • Lessons for creating new industry when within competitive market with widely dispersed technical leadership.

6. Game plan • Motivation • Lessons of pre-commercial era • Lessons of commercial era

7. Developments in the early era: finding the right metaphor • Not the Manhattan project, not Apollo • Not a single urgent project in a single lab devoted to building/engineering a single object. • Collective invention • Multiple overlapping groups of funders who shape attributes. Department of Defense, National Science Foundation, universities & research labs. • Multiple overlapping groups of inventors from programmers, administrators, and users.

8. Shared & focused objectives • DOD desired new knowledge & prototypes • Radical technical departures that no existing military services would produce. • Workable models of s/w-h/w combinations that supported data communications capabilities, and (eventually) portable to military application. • General concepts in search of implementation • Communication along many paths. • Over geographic distance. • B/w computing systems w/o human intervention.

9. An organization for nurturing frontier science/engineering • DARPA modeled on a skunk works • An organizational home for projects of value to long term mission, not connected to operations. • Not beholden to any short term mission of any military branch. • Program officers w/strong technical skill picked researchers/stars, funded their labs/students w/uncommonly large amounts of money. • Build new research community. • Satisfying work environment for inventors. • Wild ducks familiar nomenclature from computing.

10. Skunk works was not enough: beyond working prototypes. • Working prototype: unrefined implementation of designs w/aim to learn • Most skunk works aim for working prototypes. • DARPANET went further. NSFNET went even further. • When inventors use what they build… • Ideas grow out of own experience, but it has to work, and work for someone else, and soon. • Users/admins want valuable app (email, FTP, etc.) • Inherited from the university: Technical meritocracy for keeping/eliminating change/improvements. • Learn to achieve scale.

11. A lesson about when gov’t can accelerate new technology? • Compared to what alternative? • A counterfactual that did not take place, and we can never observe. • In 1960s & 70s gov’t funding did accelerate. • Abundant evidence of lack of private firm interest in the 1960s & some interest in 70s. • During the NSF era in the 1980s? Yes. • Observers foresaw coming of electronic commerce. Just not this fast or in this form. NSFNET fostered multiple pathways.

12. A lesson about cost of skunk works: cheap for society? • Federal funds for Precommerical Internet = $200m. How could that be possible?!? • Only from NSF era. Not counting DARPA. • Not counting DARPA failures on other projects. • Benefiting from innovation in computing. • Using existing capital in telephony. • Prototypes cheap to replicate b/c software. • Distributed investment. • Costly part – backbone – targeted by DOD & NSF • Investment in edges (apps, installations) often the domain of university researchers/admins/users.

13. A lesson about what to avoid: truncated experimentation • Arises from restrictions on participation • Motivates spinout in the early 1970s. • Eventually transfer of network to NSF management • New management explores new objectives. • NSF mission: support research. How? Rationalize network operations. Make accessible to students. Expands scale and user base. • Truncated exploration in NSF too. • No commerce.

14. Game Plan • Motivation • Economic lessons of pre-commercial era? • Economic lessons of commercial era?

15. Lesson: Was privatization a good idea? • NSF management expanded range of capabilities, but their mission also limited. • Privatization permitted a new set of participants, and that would expand the range of new uses and new users and new processes… • Beyond proof of concept at a large scale… • Side note: Transition to commercialization very challenging for gov’t managers. • Lack of experience w/apps for non-research. • No experience w/contracting b/w many carriers.

16. To be good and/or lucky • Wide & fast adoption for a reason. • Supply of commercial Internet did not merely create its own demand. • More than twenty years of operations and refinement prior to widespread commercialization. • Browser: another useful invention in long line, and with propitious timing. • World Wide Web starts in 91. W3C starts in mid 94. First commercial browser in late 94. • NSF transition finishes in 95.

17. Waves of entry. Why? • Integrating innovation into the economy: Revenge of a skunk works. • Making up for truncated exploration. • Explore new opportunities affiliated with Web. • More than just technical exploration. Explore multiple models for conducting business. • Markets good at sorting out durable value. • Firm forecasting is necessarily imperfect. • Despite dot-com speculating and VC fratricide, much of it does remain after. • 39B in just access revenue in 2006. That is big.

18. When markets nurture exploration of innovative opportunity. • Healthy innovative conduct? • Economic experiments: activity to learn about unknown factor, not learnable in a lab. • Vigorous standards competition: bleeding edge technologies generally require routine processes, particularly for interconnection w/others. • Entrepreneurial initiatives: business organization in pursuit of a new opportunity. • What healthy innovative conduct nurtures: the pursuit of a variety of options. • When “most valuable” outcome is unknown.

19. A lesson. Why variety beats a single supplier. • Overcome misunderstandings. • Firms can over-commit to one technological forecast about direction of change. • Overcoming organizational inadequacies. • Lack of “internal champions.” Overcoming excuses, & short-sighted cannibalization concerns. • Heterogeneity in incentives to invest. • When unclear which direction is most valuable. • Sticking point for policy: Interoperability… • Accumulated coming from a variety of firms, working together…incentives for platform entry.

20. Lessons for commercialization policy • Commercial era – comparatively low barriers to unrestricted entry for entrepreneurs. • PSINet, UUNet enter in 89 – interconnection issues. • Dial-up ISPs entered under rules that prevented local telcos from refusing to interconnect. Allows for the explosion of entry in 1996. • Comparatively easy to set up consortia • Plays key role in setting up W3C at MIT. Berners-Lee leaves CERN b/c organization is not helpful. • Lubricated the establishment of a key standard setting body, accelerates technical development….

21. Summary

22. Summary • Two distinct ways for accumulating innovation from dispersed set of innovators. • Skunk works aimed at demand. • Inventors assess value from own experience. • Working prototypes put into operation. • Technical meritocracy • But comes at a cost: Truncated exploration • Market orientation explores range of apps. • When no monopoly and when interdependence rules nurture entrepreneurial initiatives. • Appropriate nurturing policies can help.