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

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Commercialization of theInternetorWhy
Introducing the Market Workedso Well

• Shane Greenstein
• Kellogg SM

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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

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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

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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), ATT, MCI,
  Mindspring/Earthlink, PSINet.
• Thousands of smaller regional ISPs (25)
• Internet access from university sponsored IAP
  (10).

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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

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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).

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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

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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.

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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.

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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).

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Challenges during technology transfer

• Conventional analysis forecasts that migrating
  Internet access into commercial use would engage
  technical, commercial and structural challenges.

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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.

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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.

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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.

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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.
• ATT entry ATT 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.

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Structural Challenges

• Entering phase twoThis phase started not long
  after the the Netscape IPO. Profitability and
  survival involved more than geographic
  expansiona new array of services was
  introduced

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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.

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Structural ChallengesProduct lines of ISPs
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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
  ATT
• ATT 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.

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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.

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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.

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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.

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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.

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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 on1. 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

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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.

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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.

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Issues for the near future

• Absence of uniformity in the development of
  internet access business models should persist
  into the futureAccess, 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.

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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, MA, subsidize communications
  infrastructures in under served areas, taxation
  of the internet etc.