The early Internet: No business model

One of the things that often comes up when talking about Web-based startups is the debate over whether you should just launch your company or service and see whether people want it, or whether you should wait until you’ve established a sound business model first. One of the most obvious examples of a company that chose the former, of course, is Google. I remember someone telling me that the first two venture funds that invested in the company were scared to death, because Google clearly had no idea how it was going to make money.

That seemed to work out pretty well, all things considered, given Google’s $180-billion market cap. And Mike Masnick’s post at Techdirt about a Vanity Fair retrospective reminded me that it isn’t just Google: the Internet itself didn’t have a business model when it first started — and that fact, ironically, is what arguably made it so valuable that hundreds of companies are making billions of dollars from it now. As the Vanity Fair article makes fairly clear, the CERN research center came close to filing a patent on the Web and trying to control it, something that would undoubtedly have been a disaster (as one commenter at Techdirt notes, the creator of the Gopher protocol chose that path).

Whether as a result of persuasive argument from Sir Tim Berners-Lee and his colleagues, or simply because CERN couldn’t see the commercial applications of such a system — or because the research center was about research — the early building blocks of the Web remained open, and thereby helped to create a platform whose value is effectively unmeasurable, but is certainly well into the billions of dollars. The same goes for AT&T, which literally didn’t see the value of a packet-switching system, and thereby missed an opportunity to be involved at ground level in the development of the Internet. Thank God for that.

Some choice quotes:

— “I get credit for a lot of things I didn’t do. I just did a little piece on packet switching and I get blamed for the whole goddamned Internet, you know?” (Paul Baran, who developed packet switching and later invented the airport metal detector)

— “The culture was one of: You find a good scientist. Fund him. Leave him alone. Don’t over-manage.” (Leonard Kleinrock, networking pioneer)

— “I went over to Charlie Herzfeld’s office and told him about it. And he pretty much instantly made a budget change within his agency and took a million dollars away from one of his other offices and gave it to me to get started. It took about 20 minutes.” (Robert Taylor recalls when he got the idea for Arpanet)

— “The one hurdle packet switching faced was AT&T. They fought it tooth and nail at the beginning. They tried all sorts of things to stop it. They pretty much had a monopoly in all communications.” (Paul Baran)

— “They said, There’s no business there, and why should we waste our time until we can see that there’s a business opportunity?” (Bob Kahn, co-developer of the TCP and IP protocols)

— “So on October 29, 1969, at 10:30 in the evening, you will find in a log, a notebook log that I have in my office at U.C.L.A., an entry which says, “Talked to SRI host to host.” If you want to be, shall I say, poetic about it, the September event was when the infant Internet took its first breath.” (Leonard Kleinrock)

— “It became very important that the world have one protocol, so they could all talk to each other. And Bob Kahn really pushed that process. And Vint. And it wasn’t licensed. They proved to the world that making something free as a driver would make a huge difference in making it a standard.” (Larry Roberts)

— “Whether it was instant messaging or chat rooms, which we launched in 1985, or message boards, it was always the community that was front and center. Everything else—commerce and entertainment and financial services—was secondary. We thought community trumped content.” (America Online founder Steve Case)

— “I’d rather not talk about it — sorry.” (Robert Morris, who launched the first Internet “worm” in 1988 while at Cornell)

— “I didn’t want yet another one of these stupid things that doesn’t tell you anything. In the end Tim said, Why don’t we temporarily call it the World Wide Web? It just says what it is.” (Robert Cailliau remembers the invention of the Web)

— “When Al Gore says that he created the Internet, he means that he funded these four national supercomputing centers. Federal funding was critical. I tease my libertarian friends—they all think the Internet is the greatest thing. And I’m like, Yeah, thanks to government funding.” (Marc Andreessen, who developed the first Web browser)

5 thoughts on “The early Internet: No business model

  1. Isn't this a bit of strawman? “The Internet” was not a corporation or enterprise. It was a collection of networked computers tied together by mutual agreement. You can bet though that the corporations/enterprises offering access to the internet did have a business plan.

    The fact that Google succeeded but existed so long without a strategy where more revenue was generated than was needed to cover costs was generated was an anomoly. It is not the rule. For every business that succeeded using that strategy there are thousands that failed. The history of tech and Silicon valley are full of the bodies.

    This kind of thinking fuelled by ego and greed is exactly what caused the first technology bubble to burst and will cause another. Evenutally somebody has to pay the piper.

    • I would argue that it's more of a metaphor or an analogy than a
      strawman, Brian. You're right that the Internet wasn't a corporation,
      but there were all kinds of corporations and other entities involved
      who could have pursued the business aspects of the technology —
      patenting, licensing etc. — and thereby prevented it from growing as
      quickly or as broadly as it did. That's my point, really — not that
      every company should ignore the business aspects of what they're
      doing, but that there is a lot more to it than just that.

  2. I think this points to a more fundamental issue for startups, the idea of muddled purpose. One of the problems with being in the startup space is keeping a sense of purpose *and* making money to fuel your purpose. When asked 'why build a startup', most people would answer 'to make money'. I don't think this is exactly right and where the criticisms of not having a business plan arise. I like this quote from Peter Drucker on the idea of profit:

    Asked what a business is, the typical business man is likely to answer, “An organization to make profit”. The typical economist is likely to give the same answer. The answer is not only false, it is irrelevant.

    The prevailing economic theory of the mission of business enterprise and behavior, the maximization of profit […] cannot explain how Sears, Roebuck or any other business operates, or how it should operate. The concept of profit maximization is, in fact, meaningless. The danger in the concept of profit maximization is that it makes profitability appear a myth.

    Profit and profitability are, however, crucial—for society even more than for the individual business. Yet profitability is not the purpose of, but the limiting factor on business enterprise and business activity…

    – “The Essential Drucker”, Peter Drucker

    In both cases, google and the internet, they had purpose from their inception. The internet's purpose was to build a reliable, fault tolerant communication infrastructure in the event of a disaster.

    As an aside, for the early internet what's really interesting are the network economics at play where the distributed system brought enough value (not necessarily monetary) to each member that it was incentive enough for them to participate. “The internet” never needed to make money, it's value derives from an economy of connection. It's a mind-bender because it's the thing itself (interconnectedness) that was the currency.

    For startups like the early google, the job is frequently to pursue your main purpose while probing the value space of what you're doing. I actually see a real danger in the future of Google. They are no longer an exploration of an academic thesis or, as their vision evolved, to organize the world's information, they are becoming an advertising company. What's dangerous is that their profit motive frequently contradicts their original vision instead of complimenting it. We're seeing this transition of purpose already, especially with the growth pressure from Wall Street which will only get more powerful. We'll see if they're able to balance this force in the company against their original vision.

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