TO MARKET, TO MARKET: HISTORY IN THE MAKING

On 30 April 1995, the commercial backbone networks formally replaced the NSFNET (Frischmann, 2001). Private network providers, eager to get into the game, subsequently invested enormous resources in further developing the Internet.

Carlotta Perez describes the period as a technological revolution in the Schumpeterian sense of the word. According to her, ‘a technological revolution is a set of interrelated radical breakthroughs, forming a major constellation of interdependent technologies’ (Perez, 2010). Such revolutions occur when a radically new technology, such as the Internet, or the World Wide Web, sets off a chain reaction whereby interdependent innovators and entrepreneurs, benefiting from the positive externalities associated with a common pool of knowledge and resources, as well as dense feedback loops, generate new breakthroughs and spaces for profitable opportunities (ibid.).

Such periods are characterized by dramatic ups and downs, as investors overreact to financial signals; regulators add complexity and uncertainty to the process; users strug­gle to interpret their choices in the new environment; and newcomers try out risky ideas, all the while jockeying for position in the restructuring of the field. Such technological revolutions are unique not simply because of the tremendous synergies between entrepre­neurs, technologists and markets; equally important is the transformative power of the technology to change the economy and society as a whole (ibid.; Mokyr, 1990; Freeman and Louca, 2001; Beinhocker, 2006; Benkler, 2006; Arthur, 2009).

A revolutionary perspective such as Perez’s helps make sense of the market’s seem­ingly haphazard evolution following the commercialization of the Internet, as well as the structural changes in the economy and society and the communication field in particular. While this chapter cannot detail all the events and business strategies that have been played out, it depicts a number of well-chosen examples that suggest the direction in which things are headed.

Booms and busts are, perhaps, the best place to start. As one might expect, exuberant investment in the Internet followed in the wake of its commercialization. Thus, between 1996 and 2001, AT&T, MCI and Sprint increased the amount of fiber cable deployed sevenfold, enough to circle the equator 750 times (Shampine and Sider, 2007). At the same time, between the first quarter of 1996 and the fourth quarter of 2000, invest­ment in communications equipment grew at a rate of nearly 18 percent, increasing from approximately $62 billion to more than $125 billion (Couper et al., 2003). Hence from April 1997 to March 2000, the NASDAQ index of telecommunications shot up from 198 to 1230, that is to say, by an average annual gain of 84 percent (Couper et al., 2003, p. 5).

This telecom investment was stimulated by a number of factors. For one, the com­mercialization of the Internet coincided with the advent of the World Wide Web and the first major commercial browser, Netscape Navigator. Telecom providers anticipated that both of these technologies would greatly stimulate bandwidth demand, while greater bandwidth would generate higher bandwidth applications. The Telecommunications Act of 1996 also provided a strong incentive for expansion. Opening up local service markets to competition, the Act induced many participants to become full service providers. So to beat out the others, each built out their capacity as fast as they could (ibid., p. 3).

But the bubble was unsustainable. From late 2000, investment in communications was negative for seven quarters in a row, reaching a nadir in the fourth quarter of 2001, when investment totaled less than $93 billion, a drop of approximately 30 percent from the previous year.

While many have attributed the crash to over-exuberance, leading to excess capacity, there was more to it than that. Legal battles stemming from the Telecommunications Act of 1996 created a general atmosphere of uncertainty, making it difficult for companies to correctly assess the economic landscape and model their business plans accordingly (ibid., pp. 8-9). The downward swing of the whole economy magnified the uncertainty. By June 2001 the end of the boom became starkly apparent when the tried-and-true Canadian equipment manufacturer, Nortel, took a $19 million loss (ibid., p. 19).

Paralleling the boom in telephony was the inflation of the dot-coms, companies who do most of their business on the Internet. With the commercialization of the Internet and the development of the World Wide Web, investors rushed to enter e-commerce (Ryan, 2010, p. 127). The success of online companies such as eBay demonstrated the gains to be made. Having set up shop in September 1995, the eBay site had 41 000 users within a year, and trades were valued at $7.2 million. Growth continued steadily, so that by the end of 2000 the site had 22 million users trading $5.4 billion worth of goods (ibid.). Seeking to replicate such success, a flood of dot-com companies jumped on the bandwagon (Greenstein, 2001, p. 162). By the late 1990s somewhere between 7000 and 10 000 dot-coms had been established (Wang, 2006). These companies had little trouble finding financial backers. Investors, fearing that others would pre-empt them and enter the market faster, made a number of hasty and rash decisions (Ryan, 2010, p.

The dot-com bubble burst in the spring of 2000, as companies began to fold pre­cipitously (Wang, 2006). In the two-year period between spring 2000 and 2003, approxi­mately 5000 dot-com companies went under. Reflecting these developments, the Dow Jones Internet stock index plunged 93 percent, while the NASDAQ composite index lost 78 percent of its value (ibid., p. 2).

As in the case of telephony, uncertainty played a role in the dot-com crash. The Internet was a new phenomenon, and both investors and users were unsure what to make of it. No one could predict the changes it would bring, and hence what strategies to employ. Assuming new business paradigms, many greenhorn and imprudent inves­tors overrated the prospects, and underrated the pitfalls. Like fools rushing in, they were unprepared as well as unwilling to learn the ropes along the way. Consider Netscape, for example. Within a year of its founding, the company increased its workforce from five employees to 2000. Growing at this pace the company was unable to develop a corporate culture that allowed for feedback and learning by doing (Ryan, 2010, p. 130).

Despite the collapse, e-commerce survived, and the proportion of US retail conducted over the Internet remained steady as entrepreneurs caught up with the technology and retrofitted their business plans accordingly. Users also became more comfortable with and trusting of Internet technology and online relationships during this period (Ryan, 2010). In addition, the competitive relationship between online and brick-and-mortar players changed, as traditional firms - building on their strong assets, and having incor­porated many of the lessons of the dot-com era - increased their share of the market while many of the pure dot-coms exited it (Wang, 2006, p. 20).

Likewise, the telecom sector made a comeback, and many of the large media conglom­erates remained in place, such that concentration levels approximated those of the 1950s (Wu, 2011, p.

Time Warner provides a prime example of such an approach, mirroring that of many others. In January 2000 it merged with AOL, the largest Internet firm, with the intent of becoming a major content platform. This turned out to be a great miscalculation. The merger was premised on the notion that customers, using dial-up Internet connec­tions, would only be able to access content through AOL. However, with the advent of web technology and broadband capacity offered through phone and cable companies, ISPs like AOL could be circumvented. Within a year of the merger, AOL’s share value declined dramatically from its lifetime high of $240 billion. AOL’s founder, Steve Case, was forced out, and Carl Levin, from Time Warner, retired. In the end, it was AOL that was modeled after an online service provider, not the other way around (Ryan, 2010, pp. 265-6).

Other incumbent companies had greater success. The early ‘browser wars’ provide a case in point (Sebenius, 2002). In 1995, Netscape controlled the browser market, with a 90 percent installed user base for Netscape Navigator (Windrum, 2000, p. 1). Netscape Navigator’s great lead in the market notwithstanding, the Goliath Microsoft was able to demolish its rival with a browser of its own, Internet Explorer.

Even as the conglomerates were prospering, a new, user-oriented, participatory busi­ness model was emerging under the radar. It was based in the sharing culture and ideol­ogy that had been nurtured within the ARPANET community (Agre, 2003). Epitomized by open-source undertakings such as Linux, Apache, and Wikipedia, this model reflected the notion that individuals were naturally creative and eager to be so, given the oppor­tunity and resources to collaborate around a joint interest or goal (Lerner and Tirole, 2002; Weber, 2004). To facilitate and promote such participation, open-source advocates wanted property rights systems to ensure free access to the tools necessary for user par­ticipation. Open-source advocates - and even rivals - contended that a production system structured around collaborative user interaction could be an extremely efficient and effective way of organizing economic activities, especially when complex systems were involved (Weber, 2004).

Most notable, in this regard, was a secret Microsoft memo made public - the so-called ‘Halloween Memo’ - claiming that Microsoft believed open source to be competitive with their top-down software development approach, so much so that the company needed to either borrow from it, or otherwise undermine it (ibid.). However, Microsoft’s efforts to diminish open source were to no avail. In fact, open-source methodology and culture were legitimated when formal institutions (such as variations on the General Public License [GPL] for free software) and organizations (such as Red Hat) were established to promote and support it, while major corporations, such as Hewlett Packard, IBM, and Sun Microsystems, built open source into their business plans (ibid.).

As end users became directly engaged in online activities, the participatory culture spread from the technology arena to the realm of cultural production (Benkler, 2006; Shirky, 2008, 2010; Schafer, 2011). Yochai Benkler (2006) attributes this development, in part, to the affordances of digital technologies, which allowed individuals to follow their inclinations to be creative and engage collectively with one another (Lessig, 2004; Benkler, 2006). Clay Shirky (2010) points out, moreover, that a significant increase in leisure time gave rise to a ‘cognitive surplus’, resulting in more and more individuals contributing to the public sphere. The enhanced role of information in the economy also helps to explain the growth of peer-based activities. As Benkler notes, because information exhibits properties of public goods, non-profit, collaborative efforts centering on the production of information content are - given appropriate institutional underpinnings - not only sustainable, but, more importantly, competitive with pure market-based efforts (Benkler, 2006, p. 3; Shirky, 2008). Evidencing these trends is the accelerating rate of collaborative peer-to-peer sites ranging from social networks, such as Facebook and YouTube, to game platforms such as Minecraft and Second Life, to fan sites and crowdsourcing (Benkler, 2006; Shirky, 2010; Schafer, 2011).

As Perez (2010) points out, technological revolutions take time to be absorbed into the social fabric. They only do so when all of the interdependent social, economic, and politi­cal processes and subsystems are in place, and a new, shared techno-economic paradigm has been constructed. Achieving such an outcome can be problematic, however, because these subsystems do not necessarily evolve at the same pace (Freeman and Louca, 2001). Accordingly, the structuration of today’s media field is still in the making. Two alterna­tive modes of production - the vertically integrated system and the decentralized, peer- to-peer system - are each operating successfully, but more often than not in competition with one another. The competition, however, is not just about the most appropriate mode(s) of production; equally, if not more, important, it is about the social and political relationships structured around them.

The tensions between these two modalities can best be seen in the recent debates over net neutrality - that is, non-discriminatory access to network services. At stake is the Internet end-to-end principle (Lemley and Lessig, 2001; Wu, 2011). The conglomerate network providers want to provide a tiered access system, which would allow them to reduce network congestion by giving preference to some Internet services - perhaps even their own - over others. They argue that having discretion over provisioning is essential for generating sufficient revenues to build out their systems and meet growing demand, an argument that the cable companies successfully made several years ago. In contrast, those in favor of preserving the Internet’s end-to-end architecture, including big content players, such as Netflix and Google, as well as smaller content providers, non-profits, and general users, are concerned lest network providers use such discretion to recreate the top-down vertically integrated media industries of the past (Ganley and Allgrove, 2006). The outcome, they argue, would not only be higher costs, but also the loss of collabora­tive social benefits that would otherwise be gained via greater externalities.

That such conflicts may be difficult to resolve is clearly evidenced by the recent battles between content providers and Internet service providers, which have ended up in the US Court of Appeals for the District of Columbia. Because the FCC had classified Internet services as information services, which can only be regulated with a light hand, the Court ruled that the FCC does not have the authority to bar Internet service providers from dis­criminating among their customers, thereby allowing them to strike deals in their favor. The FCC is currently developing a new approach to safeguard an open Internet, possibly by reclassifying broadband access providers as common carriers.

Although the ultimate configuration of the communication field is highly unpredict­able, convergence around a new techno-economic paradigm seems likely, due to market discipline in sorting winners from losers and the tendency of organizations and institu­tions to exhibit isomorphism over time (Meyer and Rowan, 1977). Already we have seen some convergence, as in the case of open-source communities collaborating with the corporate world. Likewise, as Schafer points out, businesses are not only engaging more directly with users; users are also collaborating with businesses, as, for example, when they contribute content to online business sites (Schafer, 2011). Failing to come to some private-sector agreement, contenders in the field - now much more broadly conceived than in the past - will likely call on government to establish new rules of the game. When decided at this level, public interest goals will more likely be taken into account.

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