Shane Greenstein
Kellogg School of Management, Northwestern University
2013-14, Visiting Professor, Harvard Business School, Berkman
Fellow, Harvard Law School
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• Motivation
• Lessons of pre-commercial era
• Lessons of commercial era
• Big lessons?
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• Internet touched wide breadth of economy. This is rare.
• Transformation for the better. Changed life as we know it.
• Lower prices, new services, efficiencies.
• Changed the identity of primary suppliers.
• Changed the prevailing view about future.
• Big Question: Why did market structure change at the same time that the new technology diffused? Why did that change encourage rapid innovation and transformation in core economic conduct and outcomes?
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Why is this question interesting?
• Internet widely regarded as a success.
• Rare event in any industry, and very rare in communications.
• Contributed to economic growth. Is it repeatable?
• An anomaly, perhaps. Generalizable lessons?
• History of government managed commercial R&D does not inspire confidence.
• Super Sonic Transport. Clinch River Breeder Reactor. Synfuels. Space shuttle. Military procurement.
• Renewed interest due to energy/environment.
• ARPA-E allocated $400m. Modeled on Internet.
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Technology not constant. Distinct eras.
Make it easy: pre-commercial, and commercial.
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• Power, as in power to change the market place. Innovation from edge of core/periphery structure.
• Outside the core. Supported by firms who the old core regards as peripheral. Non-leading firms do key experiments.
• Places, as in improvements come from dispersed places.
Innovation from “edges” – many widely dispersed sources.
• Edges in many places. Research labs, BBSs, startups, consultants, iconoclasts, NOT a single inventor over time.
• Perceptions, as in the perceptions of the future market place.
Innovation involving the edge of vision.
• On the horizon. Different perceptions about creating value.
Perceptions that lie outside of prevailing view
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• Restating the key question of the book: What factors encouraged or discouraged innovation from the edges during the diffusion of the Internet. What role does innovation from the edges play in generating a large economic impact?
• First task (Chapters 2-8 mostly): What brought IFTE into existence or almost discouraged it?
• Second task (Chapters 9-17 mostly): Why did IFTE lead to such a large economic impact in this instance?
• My goal today: provide a sense of the bigger insights.
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• Motivation
• Lessons of pre-commercial era
• Lessons of commercial era
• Big lessons?
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Lesson: Not all science projects are Manhattan project or Apollo.
• Not one single project in one lab.
Ray Tomlinson : one of 50+ contributors to email in 70/80s.
• Collective invention
“from the edges.”
• Multiple groups of inventors: users, programmers, & administrators in many locations.
• Multiple funders who shape priorities and attributes. DOD, NSF, universities & research labs.
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Nurturing frontier engineering outside of mainstream
• DARPA modeled on a skunk works
• Organizational home for projects of value to long term mission, not operations.
• Program officers w/technical skill picked research stars, funded their labs/students w/uncommonly large amounts of money.
• Satisfying environment for inventors.
• Wild ducks nomenclature from IBM. Social tradition in computing.
• Building new research community from bottom up.
Few milestones/deliverables. Informal peer review.
• Again, drew ideas from “edges of science.”
Thomas Watson Sr.
Founder of IBM.
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Why did it work? Collective with shared & focused objectives
• The scientific/engineering problems were big: General concepts in search of implementation
• Communication along many paths.
• Over geographic distance.
• B/w computing systems w/o human intervention.
• DOD committed to funding 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.
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• The core facilitated “coordination among the edges.”

Why did it work? It worked for the research community…
Vint Cerf and Bob Kahn, two writers of TCP/IP.
Cerf began work as student & Kahn was a program officer in
DARPA.
• Inherently interesting for ambitious & young engineers & inventors.
• Technologists saw big game-changing challenges.
• Devote careers to it.
David Clark coauthor of “end-to-end”,
“rough consensus & running code” &
“design for tussle” did research on “soft money” at MIT w/o a tenure-track position. Eventually became leader of
IETF and built institutions for long term.
 Norm for keeping & eliminating changes & improvements:
Technical meritocracy
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Why did it work? 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.
• Eat what you grow. Inventors used it themselves.
• 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/administrators want valuable app (email, File transfer protocol, etc.)
• Hard part: Achieve scale. Solution: IT administrators get involved in inventing, especially in NSF era.
• Suggestions from the edges incorporated as invented.
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What Arthur C. Clark and
Stanley Kubrick imagined
(in 1968) would happen in
Champaign in mid
1990s…
What actually happened at Champaign.
A lab funded by NSF had many small projects, and one worked on “browsers
& servers” for HTML…
A big centralized lab would make a large (and oddlywired) computer…
Grew into the catalysts for the commercial web, including Netscape and Apache server….
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Lesson: When can government accelerate new technology?
• Compared to what alternative?
• A counterfactual that did not take place, and never observed.
• In 1960s & 70s gov’t funding did accelerate b/c it tapped into what the edges wanted but the core did not.
• Lack of private firm interest in the 1960s & some interest in 70s.
But nothing like sustained government commitment.
• During the NSF era in the 1980s? Yes, but different.
• Observers foresaw coming of electronic commerce. Just not this fast or in this form. NSFNET fostered a different pathway to acceleration b/c it tapped into the edges.
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Lessons on what to avoid: truncated experimentation
• Arises from restrictions on participation
• Reduces range of applications, and breadth of participation.
• Motivates spinout in the early 1970s.
• Eventually transfer of network to NSF management
• New management explores new objectives.
• But truncated exploration in NSF too. No commerce.
• Postponing the inevitable just made the transition harder later
(and almost doomed the transition).
• Said another way: government policy for funding can be hindrance when it can restrict the contributions of the edges. 16

• Motivation
• Economic lessons of pre-commercial era?
• Economic lessons of commercial era?
• Big lessons?
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Lesson: Was privatization a good idea? Yes, yes, yes.
• NSF expanded range of functions…
• But NSF mission also limited, by def’n.
• Privatization permitted new participants, & that would expand range of new uses and new users…
Beyond proof of concept at large scale…
• Transition to commercialization very challenging for gov’t managers.
• No experience w/new apps for new users
• No experience w/contracting b/w carriers.
Stephen Wolff, last director of the NSFNET
• Seeded a competitive market with wide entry, but only after considerable effort & attention.
• Allowed “the edges to enter.”
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Lesson: easier transitions if gov’t & non-gov’t actors similar
• NSF employed a lot of “offthe-shelf technology.
• Cost saver. Less customization
The original CIX router.
Now at the Smithsonian.
• Invention not far from industry….
• Economies of scale in shared
R&D costs.
• Build on what already exists.
• The firms on the “edges” had access to the same standards and technical information.
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Lesson: Easier to do mkt-focused entrepreneurial exploration…
• Activity to learn about unknown factors
• Not learnable in a lab.
• BTW, this set of entrepreneurs gathered a set of new users of the Internet, and sold them to
CompuServe.
• Variety of options.
• When “most valuable” outcome is unknown.
• More than technical exploration.
• Explore multiple models for conducting business.
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Why it works: Symbiosis b/w science
& market opportunities…
Craig Partridge,
• NSF needed an open gateway b/w networks
Today CTO at
BBN. In mid 1980s just a PhD in CS
• One of most difficult
CS/engineering problems of late 80s.
looking for good problems.
Todd Warren, today retired from Microsoft.
Then ambitious executive. Looking for new project. Led development of
Exchange in 1990s.
• Enabled entry of new provision of email, hosted at enterprise.
• Tethered together by gateways & DNS.
• MS Exchange/Outlook made a ton of money.
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No, really, why did it work out?
Being good and 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.
• Tim Berners-Lee chooses not to commercialize the World
Wide Web; instead, he operates a consortium.
• Starts in 91. W3C starts in mid 94. First commercial browser in late 94. NSF transition finishes in 95.
• Sir Tim Berners-Lee today
• There was serious research money behind it all along.
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Waves of entry. Why? Revenge of prior truncated exploration.
• Integrating innovation into the economy: Revenge of a skunk works.
• Making up for truncated exploration.
• Explore new opportunities affiliated with Web.
• Markets good at sorting out durable value.
• Firm forecasting is necessarily imperfect.
• Drawing on iconoclastic entrepreneurs from all corners.
• Firms on the “edges” were close to users, and to a wide range of new potential markets.
• Had an ability to take action without asking permission from anyone. 23

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• Many different types of participants.
• ISPs, business enterprises, consultants, homes, software vendors, backbone carriers, entrepreneurs…
• The investment by one type of participant raised the value of the investment by another.
• All grew together.
• In retrospect can interpret the privatization of the Internet and the commercialization of the web as catalytic.
• This beginning also links to its ending… after a while many participants took this for granted… and some invested in anticipation of demand…and some over invested…
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• Speaking of access…
• Top-down FCC choice would have made an error.
• Unlicensed spectrum facilitated learning about new users and uses.
• The early use cases:
• Baby monitors, garage door openers, wireless cash registers.
• Users made choices  value migrated.
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• Paradox of the prevailing
view: incentives for someone w/alternative view to enter…
• The long shot can renew a market that has reached a dead end by over-exploring a prevailing view…
• Just as Google renewed ad markets that do-com firms did not profit from…
Larry Page began working in a lab supported by NSF.
Sergey Brin had a graduate fellowship from NSF. Page proposed “Page-Rank” in spring of 95 & developed it for campus users. Started
Google in 199899…
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• Motivation
• Economic lessons of pre-commercial era?
• Economic lessons of commercial era?
• Big lessons?
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• Open IETF & WWW standards, encouraging ideas from dispersed origins. Modularization  inventive specialization.
• Users act as producers, drawing on new voices for ideas.
• Policies required competitive access markets at birth of commercial Internet.
• Antitrust prevents consolidation of decision making.
• US has many entrepreneurs & iconoclasts, and US venture market tolerance for experimentation.
• Markets allow value to learn about new use cases and migrate from low value use of asset to a high value use.
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• The Internet diffused w/operational refinements, mature applied layer in WWW. Which supports & enables…
• Wide breadth of potential applications for non-technical users, otherwise not explored by DARPA & NSF. Which leads to…
• Simultaneous investment by households, ISPs, business users, equipment firms, content providers, software providers.
Which is reinforced by…
• Impatient network effects: Each participant’s actions reinforced the economic incentive of the other. And at a large scale….which leads to…
• Massive new entry of firms with new identities, who need to explore and experiment after 1995. Both new firms & established firms have to experiment. Which was bound to overshoot…
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Why ITFE beat a communication network from 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, & shortsighted cannibalization concerns.
• Heterogeneity in incentives to invest. Less concentration.
• When unclear which direction is most valuable.
• Challenging for policy: low transaction costs…
• How to make learning and exploration easier. Fewer bottlenecks in government and in monopolies within markets.
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The Internet:
Best of both worlds?
• 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.
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• Thanks for your attention!
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