Transcript Comments on “The Great Realignment…”

Innovation from the
Edges
Shane Greenstein
Kellogg School of Management, Northwestern University
2013-14, Visiting Professor, Harvard Business School, Berkman
Fellow, Harvard Law School
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Game Plan
• Motivation
• Lessons of pre-commercial era
• Lessons of commercial era
• Big lessons?
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Question
• Internet touched wide breadth of economy. This is rare.
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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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First observation to get us
started: No single Internet
Technology not constant. Distinct eras.
Make it easy: pre-commercial, and commercial.
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The key concept: Innovation
from the edges
• 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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Lessons differ over time
• 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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Game plan
• 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.
• Collective invention
“from the edges.”
Ray Tomlinson : one of 50+
contributors to email in 70/80s.
• 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.”
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Thomas Watson Sr.
Founder of IBM.
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.
David Clark co-author 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.
• Inherently interesting
for ambitious & young
engineers & inventors.
• Technologists saw big
game-changing
challenges.
• Devote careers to it.
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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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Allowed Unexpected from
inventive specialists at edges…
What Arthur C. Clark and
Stanley Kubrick imagined
(in 1968) would happen in
Champaign in mid
1990s…
A big centralized lab would
make a large (and oddlywired) computer…
What actually happened at Champaign.
A lab funded by NSF had many small
projects, and one worked on “browsers
& servers” for HTML…
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.
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Game Plan
• 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.
• Seeded a competitive market with wide entry,
but only after considerable effort & attention.
• Allowed “the edges to enter.”
Stephen Wolff,
last director of
the NSFNET
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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
• Invention not far from
industry….
• Economies of scale in shared
R&D costs.
• Build on what already exists.
The original CIX router.
Now at the Smithsonian.
• 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.
• Variety of options.
• BTW, this set of entrepreneurs
gathered a set of new users of
the Internet, and sold them to
CompuServe.
• 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,
Today CTO at
BBN. In mid 1980s
just a PhD in CS
looking for good
problems.
Todd Warren, today
retired from Microsoft.
Then ambitious
executive. Looking for
new project. Led
development of
Exchange in 1990s.
• NSF needed an open
gateway b/w networks
• One of most difficult
CS/engineering problems of
late 80s.
• 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.
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The early result: Rapid growth
in the ISP market
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The boom…
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Waves of entry. Why? Network
effects to take advantage
• 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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Markets are good at migrating
use from low to high value
• 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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Markets are good at renewing
opportunities…
• 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 1998-99…
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Game Plan
• Motivation
• Economic lessons of pre-commercial era?
• Economic lessons of commercial era?
• Big lessons?
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Generalities: How to encourage
innovation from the edges?
• 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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Why innovation from edges
had a large impact in late 90s.
• 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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Summary
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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.
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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.
• Thanks for your attention!
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