Computers and the Internet (2008)

Shane M. Greenstein [*] The of the is shorthand for three nearly simultaneous events: the removal of restrictions by the National Science Foundation (NSF) over use of the Internet for commercial purposes; the browser wars initiated by the founding of Netscape; and the rapid entry of tens of thousands of firms into commercial ventures using technologies that employ the suite of TCP/IP (Transmission Control Protocol/Internet Protocol) standards. These events were the culmination of years of work at NSF to transfer the Internet into commercial hands from its exclusive use for research activity in government-funded laboratories and universities. Now, sufficient time has passed to begin to evaluate how the market performed after commercialization. In fact, actual events have surpassed the forecasts of the most optimistic managers at NSF. Was this because of mere good fortune or something systematic with lessons for the market today? Other government-managed technologies typically face vexing technical and commercial challenges that prevent them from diffusing quickly, if at all. Can we draw lessons from this episode for the commercialization of other government-managed technologies, or even for the commercialization of other Internet activities? As a window on these questions, I have examined the Internet access market and one set of actors: Internet Service Providers (ISPs). ISPs provide Internet access for most of the households and business users in the country, usually for a fee or, more recently, in exchange for advertising. Depending on the user facilities -- whether a business or personal residence -- access can involve dial-up to a local or a toll-free number at different speeds, or direct access to the user's server via one of several high-speed access technologies. The largest ISP in the United States today is America Online, to which approximately half the households in the United States subscribe. There also are many national ISPs with recognizable names, such as AT&T Worldnet, MCI WorldCom/UUNet, Mindspring/ Earthlink, and PSINet, as well as thousands of smaller regional ISPs that provide service to businesses and households. The Internet access market has several features that make it an interesting case to examine. Facilities for similar activity existed prior to commercialization, but there was reason to expect problems during migration into commercial use. The Internet appeared to possess idiosyncratic technical features and uneconomic operational procedures that made it unsuitable in other settings. Exclusive use of the Internet by academics and researchers fostered cautious predictions that unanticipated problems would abound and that commercial demand might not materialize. However, in sharp contrast to cautious expectations, the ISP market displayed three extraordinary features. First, this market grew rapidly, attracting thousands of entrants and many users, and quickly achieved mass-market status. Second, firms offering ISP service became nearly geographically pervasive, a pattern of diffusion rarely found in new infrastructure markets. Third, firms did not settle on a standard menu of services to offer, indicative of new commercial opportunities and a lack of consensus about the optimal business model for this opportunity. These patterns underlay a number of puzzles and questions. Concern over the potential need to redefine universal service to account for Internet-related services and other combinations of communication and computing, for example, have motivated me and others to study the geographic spread of commercial ISPs. In two papers, Thomas Downes and I [1] characterize the location of over 40,000 access points of presence -- local phone numbers offered by commercial ISPs -- in 1997 and 1998. In these studies, we establish that the U.S. commercial ISP market is comprised of thousands of small, geographically dispersed local markets for Internet access. …