01 February 2016

How the Internet Became Commercial: Innovation, Privatization and the Birth of a New Network

Shane Greenstein
2015, Princeton University Press, 488 pages,
ISBN 9780691167367

Reviewer: Mark Cleary, Kinetic Economics

Greenstein’s book roves from nerd-like detail to insightful analysis to explain how the current internet evolved. The author does this in two ways. One is to use a detailed chronological narrative to illustrate how the internet evolved and the second is to simultaneously identify the economic and political forces that pushed it from being a rough and ready tool for academics to the sophisticated beast it is today.

In the case of economic forces, Greenstein looks towards theories of innovation and strategic reality. In terms of political forces, he looks towards regulation by market participants in terms of standards and also the role of central government in fostering competition.

Greenstein notes no single firm or organisation dominated the development of the internet. The author suggests four main reasons why this the case. The first was a failure by established companies such as Microsoft to take any real interest in the internet; the second was the academic origins of the internet; the third was the vast number of business opportunities available; and the fourth was US government regulation.

Exploring the role of incumbents, Greenstein explains that leadership, internet innovation and adoption came not from the traditional firms who dominated the software and information service industry but from outside, or as Greenstein notes the ‘edge’. The reasons for the failure of incumbents to initially adopt the internet in any meaningful were twofold. The first of these arose as companies such as Microsoft initially failed to see how the internet could be monetised and the second was that there was little incentive for existing companies such as IBM to engage in ‘creative destruction’, while for new firms this was quite different. Bill Gates (and therefore Microsoft) rejected the internet as a concept that had any real value that could be monetised, despite what some of his senior excecutives were telling him. Gates was a late convert to the internet and his epiphany –  and therefore Microsoft’s strategy towards the internet – only really crystalized when Gates perceived that new firms such as Netscape were a threat to Microsoft’s existing platforms. Then and only then did Microsoft embrace the internet and race to adapt and ultimately attempt to destroy their competitors and provide the products we know today.

The second reason for a lack of domination seems to arise from origins of the internet, that is the academic open sharing tradition that meant a lack of control or domination by any single organisation. Open systems of standardisation based upon its academic sharing past, where committees offered unrestricted access to their designs, encouraged competition and cooperation. It also meant that many new firms were happy to cooperate too, as part of their resistance against market domination by traditional firms.

The third is the claim by Greenstein that the number of opportunities available was too large for any single firm to deal with. Commercialisation of the internet soon became rapid as it became clear, particularly for businesses, that any process which involved a computer was an opportunity. This of course meant that there were seemingly inexhaustible opportunities that no one firm could deal with and this dragged in new companies and of course innovation from the edge.

The fourth arose as central government acted not only as an incubator and sponsor but also acted to promote competition through the use of common carrier legislation and active anti trust law to protect fledging entrepreneurs. They did this to actively promote competition where appropriate and particularly as incumbent firms became more aggressive.

Finally, many readers may be as surprised as me to learn that Greenstein deals with the ‘dot-com’ era as almost a post script, but in the context of his book I agree. The dot-com era arose as Greenstein notes due to views of ‘internet exceptionalism’ (as in ‘this time its different’). However, as the author notes, this time was not different, and the boom and bust were based on a false assumption of ‘exceptionalism’ fuelled by financiers who were driven by short term profits. Greenstein seems to be almost reluctant to focus on this part of his work, most probably because of the depth of coverage available elsewhere. What is new and interesting from this book for me was his analysis of the strategies adopted by companies and the economic theories he used to support this analysis and ultimately the strategies followed by companies and government rather than the tech detail it encompassed.