Commercialization of the Internet or Why Introducing the Market Worked so Well

1. Commercialization of theInternetorWhy Introducing the Market Workedso Well Shane Greenstein Kellogg SM

2. Topics • Definition • What barriers stood in the way of commercialization • The ex-post absence of challenge • Lessons for the commercialization of government managed technologies • Issues for the future

3. Commercialization of the internet • Definition: The removal of restrictions by the NSF over use of the internet for commercial purposes, the browser wars initiated by the founding of Netscape and rapid entry of tens of thousands of firms into commercial ventures using technologies based on TCP/IP. • Focus: ISP market

4. ISP • Internet Service Providers. • Basic Service: • Dial up at different speeds • Direct access employing high speed access technologies • Technology: Server as gate-keeper, Router to direct traffic between the Internet and PCs within a LAN or calling center, Connection to Internet Backbone or data exchange point run by NSF. Standard protocol TCP/IP • Major players: AOL (50%), AT&T, MCI, Mindspring/Earthlink, PSINet. • Thousands of smaller regional ISP’s (25%) • Internet access from university sponsored IAP (10%).

5. Features of ISP marketplace • Rapidly growing market • Firms offering service became nearly geographically pervasive – diffusion pattern rarely found in new infrastructure markets • No standard menu of services to offer

6. Descriptive statistics • More than 92% of the US population had access by a short local phone call to seven or more ISPs by 1998. • No more than 5% did not have any access. • Number of firms maintaining national and regional networks increased over the two years: few of these firms were recognizable to anyone other than industry experts. • Most of the coverage in rural areas comes from local firms. Only for population of 30K or above, do national firms begin to appear. (1998 in 1996 50K).

7. Marketplace prior to Commercialization • Operations found at an academic modem pool or research center. • Small scale operations: Serving no more than several hundred users. • Run by small staff: Students or IT professionals

8. Challenges during technology transfer Technical Challenges • Products generally possess features for which users have no need. • Features needed for commercial use – unavailable. • Additional amount of invention generally needed to bring a product design and to bring its manufacturing to a price point with features that meet more cost conscious or less technically stringent commercial requirements. • E.g.: Military Equipment.

9. Challenges during technology transferCommercial Challenges • How to balance costs and revenues for technologies that had developed under settings with substantial subsidies underwriting losses, and research goals justifying expenditures. • E.g: Supersonic Transport: technically possible, commercially failed.

10. Challenges during technology transferStructual Challenges • Challenges that require change to the bundle of services offered, change to the boundary of the firms offering or using the new technology. • E.g.: Computing equipment for academia during 1950s failed to serve businesses (except IBM).

11. Challenges during technology transfer • Conventional analysis forecasts that migrating Internet access into commercial use would engage technical, commercial and structural challenges.

12. Technical Challenges did not get in the way • TCP/IP was mature in applications such as e-mail and file transfer. • TCP/IP programming weak in areas such as commercial data base software application for business use – not an immediate must. • Little technical invention was required for commercial vendors to put technology into initial mainstream use: basic use similar to academia. • Internet equipment industry was available. • Software continued to be useful – Unix systems, gate keeping software and basic communication protocols. • Technical information about operating ISP was easy to obtain if one had sufficient technical background: Magazines, Internet bulletin boards. • Users with investments in networking (LAN) could easily establish ISP with little further invention.

13. Technical Challenges did not get in the way • TCP/IP compatibility was built into Windows 95. • Frequent contact between the user and the vendor provided opportunity for the vendor to change the delivery of services in response to changes in technology and changes in user needs. • ISP sold knowledge to the user customizing it to the particular needs of the user: educating them about its potential. • NSF decisions: NSF developed a scalable system of address tables and IP address systems. Domain name registration was a monopoly. Data exchange remained organized around cooperative engineering principles. • Interconnection with public switch network did not pose any significant engineering challenges. • Competitive data communications industry was beginning to reach adolescence providing new access points.

14. Commercial Challenges did not slow diffusion • Government mandates after commercialization were fairly minimal. ISP were able to tailor their offerings to local market conditions. • Commercial factors, and not technical factors, largely determined the patterns of development of the basic dial up market. Example: Billing software was easily added to the basic gateway component. • Most ISP were devoted to recreating the type of network found in academic settings. This did not raise insoluble contracting or governance problems. • Scale economics not very binding: Several hundred customers could generate enough revenue to support physical facilities and high speed backbone connection.This encouraged small firms and independent ISPs.

15. Commercial Challenges did not slow diffusion • Decades of debate in telephony had already clarified many regulatory rules for interconnection with the public switch network.(as ISPs have grown and as they threaten to become competitive voice carries, these interconnection regulations have come under more scrutiny) • The emergence of the World Wide Web changed the commercial opportunities for ISPs: Strong incentives to grow and experiment with new business models and new lines of services. It induced considerable new entry. • AT&T entry: AT&T developed a nationwide internet access service, which grew quickly acquiring customers. Although it was a success it was not a dominant success, nor did it initiate a shake-out or restructuring of the ISP market. This defined many predictions about how this market would be structured, further encouraging the decentralized growth and the emergence of independent ISPs.

16. Structural Challenges • Entering phase two:This phase started not long after the the Netscape IPO. Profitability and survival involved more than geographic expansion:a new array of services was introduced

17. Structural Challenges • Networking: activities associated with enabling Internet technology at the users’ location. This includes: regular maintenance, assessment of facilities and emergency repair. • Hosting: including credit-card processing, site analysis tools etc. • Web design: including consulting services, providing web development programs. • Frontier access: access faster than T-1 line. This enabled ISP to offer direct access for resale to other ISPs or data-carriers.

18. Structural ChallengesProduct lines of ISPs

19. Structural ChallengesFirm specific features • IBM: early entrant, focusing on business customers. The firm concluded that joint provision of access and other computer services was not a strategic advantage. Selling ISP to AT&T • AT&T: largest cable provider in the US. High speed infrastructure. • AOL: Sold off access facilities and announcing concentration on the development of content: Buying ICQ, Time Warner.

20. Structural ChallengesLocation specific factors • Fewer high quality services found in rural areas than in urban locations.Greenstein (1999) and Strover et al (1999) found that ISP firm size, capacity and financial strength were important determinants of behavior. Local infrastructure quality influenced investment behavior.Variation in local demographic conditions or competitive conditions did not influence behavior.

21. OverviewWhy did the internet access business grow quickly? • This was due in no small part to the way in which the DoD and the NSF incubated the technology. It grew among researchers and academics without being isolated from commercial suppliers: the technology grew without generating a set of suppliers whose sole business activity involved the supply of uniquely designed goods for military or government users.

22. OverviewWhy did geographic ubiquity arise? • The internet access business was commercially feasible at a small scale. This meant that technology was commercially viable at low densities of population. • High quality infrastructures, such as digital telephony, were available throughout most of the US due to national and local initiatives to keep communication infrastructures modern.

23. OverviewWhy did the internet access business not settle in a common pattern? • Absence of technical and commercial challenges allowed low cost experimentation of the technology in new uses, new locations, new market settings and new applications.

24. The Importance of the BrowserDisentangling the systematic from the merely fortunate • What if hypertext and the browser had been invented a few years later?Expectations are that the internet commercialization would be successful, though events might not have been as dramatic. • This assumption is based on:1. Household level: email, community bulletin boards, financial applications, news and chat rooms would motivate considerable adoption.2. Business level: email, news, on line databases based on TCP/IP

25. Lessons for the commercialization of government managed technologies • Which government policies were critical to enable migration of technology to commercial use? • There was no attempts to exclude researchers who had only mild research justifications for using the Internet. • TCP/IP: an easy standard built to be used in virtually any computing network. • The NSF did not isolate the Internet from mainstream computing use or vendor supply. • Subsidizing growth of the internet at many locations, adopting a decentralized set of “regional networks”. • Contracting with third parties, such as MERIT, for operations. These types of contracts prevented the network technology from being distant from mainstream engineering and technical standards.

26. Lessons for the commercialization of government managed technologies • Interconnection with private data communication firms, such as PSI and UUNet, a spin off from one of the regional networks, well before commercial ISPs came into existence. • 1992 congressional law which officially lifted the use policy on NSFNET, providing more certainty that commerce could be conducted using assets which might have appeared to be previously owned by the federal government. • Government subsidies tend to fulfill their own vision of what to do with technology instead of a user: “build it and they will come”. NSF effectively prevented this attitude: user desires influenced system design, operation and growth.

27. Issues for the near future • Absence of uniformity in the development of internet access business models should persist into the future:Access, by itself, could become absorbed into a bundle of many other complementary services, slowly fading as a stand alone service, as it existed in the academic domain. • Internet access diffused more easily to some users and in some locations causing a “digital divide”. Some of these outcomes are understood as temporary results of young diffusion process and will resolve themselves through market forces without government intervention. Government programs should target factors durable over time such as density of location (availability), income, education and race.

28. Issues for the near future • Geographic pervasiveness has entered into the calculations today and it was not a relevant consideration at the outset of commercialization. The pervasiveness of the Internet across the world changes the economic incentives to build applications and alters the learning process associated with its commercial development. E.g.: virtual private networking, voice telephony over long distance, multi user conferencing, some forms of instant messaging and gaming • Need for new communication policy: Are the legacy institutions appropriate for future communication policies, such as, M&A, subsidize communications infrastructures in under served areas, taxation of the internet etc.