Earlier this year I read an interesting new book by Harvard Business School professor Debora Spar entitled “Ruling the Waves: Cycles of Discovery, Chaos, and Wealth from the Compass to the Internet.” Spar’s book is important because it can tell us a lot about where cyberspace and the Internet economy might be heading next.
The central thesis of Spar’s book is that there are predictable patterns associated with technological revolutions that can help us understand how rules for future industries might unfold. Importantly, when Spar speaks of rules, she doesn’t necessarily mean government regulation. She includes property rights, contracts, intellectual property, and industry standards as “rules” that are every bit as important in shaping how industries and technologies develop. Spar then examines the history of several important technologies or industries–shipping, the telegraph, radio broadcasting, satellite television, encryption, and online music–to help explain the four phases every industry or technology goes through:
Phase 1: Innovation – - This explosive first stage of any technological revolution is characterized by surges of experimentation, invention and discovery. Although no one is making much money in this phase, a lot of extraordinarily creative things are happening. But people are also struggling to understand the nature and impact of the new technology or industry. Importantly, no rules constrain innovation in this phase.
Phase 2: Commercialization – - This second stage ushers in a cast of characters Spar associates with the frontier: pioneers, pirates, marshals, and outlaws. “They are the ones who define the new territory and bring it to life.” Spar argues that many pioneers (especially young entrepreneurs) become “tempted by the dual visions of anarchy and wealth” in this stage and “rush onto the frontier to stake their claims.” Extraordinary profits are made at this stage but a lot of speculative investments are made too. Still, the industry operates largely without rules in this “romantic” stage with its “wild expansion and even wilder expectations,” in Spar’s words.
Phase 3: Creative Anarchy – - In many ways, phase 3 is the most interesting of those Spar outlines because it is the one many Internet industries find themselves in today. During this phase, the technology or industry in question matures rapidly and many players begin to struggle to find their niche and survive. Moreover, some players start to demand order. “Having carved out positions along the frontier, the more established pioneers no longer want to work in chaos,” notes Spar. “Instead they want to own the market they now consider theirs, to control the dominant technology and keep interlopers at bay.” Questions about rules and property rights now develop, but are frustrated by coordination (i.e., lack of standardization) and competition issues (growing dominance of a few players). Wild-eyed dreams give way to more realistic thinking during this stage, but not before a lot of the early players get pushed aside.
Phase 4: Rules – - Frustrated by the commercial and creative anarchy of the second and third stages of development, many in the industry begin clamoring for rules to govern ongoing industry development. Spar notes that it is typically the case that a new industry or technology “challenges authority for some period of time, but then, ironically, seems to invite this authority back in.” The result is the establishment of a set of rules for the technology or industry to live by. Again, the rules are not always regulatory in character. Indeed, Spar shows the important role played by well-defined property rights, contractual enforcement, and intellectual property laws. Nonetheless, some regulation is also possible (even likely) in this stage.
The balance of Spar’s book is devoted to showing how this model has played out in a the industries mentioned above. She does a marvelous job providing detailed industry case studies that support her thesis.
Clearly, you can see Spar’s framework at play in the Internet sector today. Today we are in the third phase (creative anarchy), but we are quickly transitioning into the fourth stage as rules are being established. Unfortunately, it is becoming increasingly apparent that a large number of these rules will be administrative / regulatory in character. Policymakers appear eager to preempt the natural evolution of industry self-regulation, voluntary standards, and contractual relationships. This is not altogether surprising since the Internet economy is (at least partially) being built upon the economic and legal foundation of other industries or technologies that have already gone through this 4-phase progression (i.e., wireline telephony, broadcasting, spectrum industries, and cable television). Thus, as we enter the “rules” phase of Spar’s model for the Internet, the process of formulating those rules will be heavily influenced by a large body of regulatory law already on the books for those older sectors and technologies.
Debora Star’s book is required reading for anyone hoping to gain a better understand how rules develop during technological revolutions and how rules for cyberspace will likely unfold in coming years.