BOOK SPECIAL..................... Dear Internet: You Are Extraordinary, But Not Exceptional

Dear Internet: You Are Extraordinary, But Not Exceptional

NEW BOOK: Professor Shane Greenstein is annoyed by “Internet exceptionalism,” the prevalent idea that the Internet defies economic logic, that there’s never been anything like it in business history, and that its impact supersedes everything. In his new book, Greenstein argues that the Internet actually follows classic patterns of economic behavior, detailing the commercial forces that guided the Internet’s path from cool invention to successful innovation.

AUTHOR INTERVIEW

What the Internet and Corn Have in Common

Interview by Carmen Nobel

During the dot-com boom of the 1990s, Shane Greenstein routinely met entrepreneurs who believed that economic forces did not apply to their precious startups. As an economist, this bugged the hell out of him.

“I encountered two types,” says Greenstein, the MBA Class of 1957 professor of business administration at Harvard Business School. “One was the techy engineer sort who said, ‘I don’t have to know anything about business. Business will take care of itself.’ The other was the business type who said, ‘We don’t have to have a revenue model yet. Don’t worry about it. It will appear.’”

“E-MAIL AND CORN DEPLOYED MUCH IN THE SAME WAY”

Greenstein dubs it “Internet exceptionalism”—this idea that the Internet is a technological innovation that defies economic logic, that there’s never been anything like it in business history, and that its impact supersedes everything. “It’s a pernicious myth,” he says.

His new book aims to replace Internet exceptionalism with a logical framework based on durable patterns of economic behavior. In How the Internet Became Commercial: Innovation, Privatization, and the Birth of a New Network, Greenstein looks at how the Internet evolved from a government-owned network (used primarily by military and university researchers) to a powerful profit engine (used by pretty much everybody). Marrying industry anecdotes and economic theory, the book examines the factors that created the Internet we know today.

The book is different from many other books on business history in that it focuses on innovation and commercialization rather than invention. Greenstein defines innovation as “the act of turning invention into something useful.” Commercial forces, he argues, turned the Internet into something useful.

While the government laid the groundwork for the information superhighway, pockets of industry outsiders were responsible for paving it. “A set of actors from outside the core played the instrumental role in commercializing the Internet,” Greenstein says. “This was innovation from the edges.”

What do corn and e-mail have in common?

Greenstein says the Internet follows economic archetypes—patterns of economic behavior that show up repeatedly throughout history. “Economic archetypes are not unique to the Internet and have appeared in other markets or time periods,” he writes in the book.

In one example, Greenstein equates the spread of the Internet in the 1990s to the spread of hybrid corn in the 1930s, citing the work of the late economist Zvi Griliches, who chaired the Harvard Department of Economics from 1980 to 1983. In the seminal 1957 paper “Hybrid Corn: An Exploration in the Economics of Technological Change, Griliches was the first scholar to argue that economic forces drive technological innovation. (Previously, economists had treated technology as an exogenous force, immune to the rules of economics.) In How the Internet Became Commercial, Greenstein reminds us that Griliches’ findings hold true in the Internet age, too.

“E-mail and corn deployed much in the same way, which is not an obvious connection,” Greenstein says.

In their infancy, Greenstein explains, both e-mail and hybrid corn faced an “adaptation conundrum.” To succeed on a large scale, they needed to spread into new applications and circumstances and to prove distinctively valuable to everyone who might use them.

In the case of corn, suppliers had to juggle the demands of buyers in different geographies (and therefore different agricultural needs), as well as keep up with the growing number of uses for corn. With e-mail, there were millions of customers subscribing to many Internet service providers operating under various standards. “You did not get the same kind of e-mail everywhere at the same time in 1996,” Greenstein says. “In fact, it had to be adapted in multiple ways, in multiple locations, in multiple circumstances.”

Fateful policy choices

Scholars and industry insiders sometimes debate whether the Internet achieved commercial success because of government policy or in spite of it. “For the most part, I’m on the because-of-it side,” Greenstein says.

That said, he believes that the commercialization of the Internet wasn’t a purposeful governmental orchestration but rather a matter of the government making decisions that enabled something huge, built up by a bunch of small players.

“The 30,000 foot lesson of the Internet is that it’s not designed by the government,” Greenstein says. “There’s no architect. There’s no one person who designed the whole thing. Part of what supported it was lack of concentration from the authority. The other big part was a modular architecture and open governance structure. That supported many so-called ‘innovative specialists,’ who really did much of the investing and building, which accumulated over time.”

He also notes that many of these government policies only incidentally and retrospectively supported the Internet. “Ninety percent of the time it looks as if all these government actors were trying to support innovation from the edges,” Greenstein says. “It’s as if many government policy makers had a strategy to coordinate, but obviously that is not possible across so much time and so many decision makers. How did that happen? It’s one of the big puzzles of the book.”

Early in the book, for instance, he talks about how the 1982 government-ordered divestiture of AT&T created multiple Baby Bells, whose decisions would prove integral to developing the industry, although the Department of Justice couldn’t have known that at the time. “The divestiture was essential to the later growth of the Internet,” Greenstein says. “It eliminated the ability of one firm to veto what happened next with the Internet.”

He discusses the Federal Communications Commission’s decision to open up a particular swath of radio spectrum for unlicensed use. At the time, that spectrum, the 2.4-GHz band, was largely relegated to garage door openers, wireless handsets for landline telephones, and baby monitors. “Those three applications were regarded as ‘garbage’ by snobbish engineers because they were technically uninteresting,” Greenstein says. “They called the spectrum ‘garbage,’ too.”

That “garbage spectrum” eventually became home to Wi-Fi.

“By making it unlicensed, the FCC permitted the dominant use to migrate from the low value to a higher value,” Greenstein says. “To an economist, that’s a wonderful thing. They got rid of the Gordian knot that results from the hoarding of licensed spectrum, which you see quite a lot in the spectrum world.”

And he writes about the National Science Foundation grants that allowed Larry Page and Sergey Brin to conduct research at Stanford University, which eventually gave rise to Google. It wasn’t that the foundation guided the research, but rather that it granted the freedom for the researchers (and their academic advisers) to pursue new opportunities as they arose.

“Did the NSF intend to renew the market for ad-supported Web pages?” Greenstein writes. “No, that was not the direct intent of its funding. However, the flexibility of their funding process helped indirectly, because it raised the chances that the research would be relevant.”

Lessons learned

In addition to examining the factors that led to commercial success, the book also discusses several commercial flops—namely, companies that crashed and burned after falling prey to the idea of Internet exceptionalism.

Case in point: Webvan, the online grocer that went bankrupt in 2001, less than two years after a 1999 initial public offering in which it achieved a whopping $7.9 billion valuation in its first day of trading. Caught up in the dot-com bubble, the company stubbornly flouted basic economic tenets throughout its brief history. The company incurred high sunk costs upon entering the market, as well as high fixed costs during operations. Meanwhile, its margins were low, and its customer base was too small in too many geographic locations.

“How did the Webvan people convince themselves that somehow they could live by a different set of rules?” Greenstein asks. “The only thing that can explain this was that they believed and their investors believed that they didn’t have to play by the rules.”

Greenstein hopes How the Internet Became Commercial might serve as a cautionary tale for modern-day entrepreneurs who are too young to recall the booms and busts of the 1990s.

“The older I get, the more I realize that the kids just don’t get it,” he says. “I’ve been to too many tech conferences, sitting in the back, listening to business presentations and thinking, no, that’s a really bad idea. Don’t you remember what happened in 1996? We’ve been through this already. Don’t do that!”

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