The commercial information and communication technology (ICT) industry accounts for a large fraction of economic activity. It has spread to include an extraordinary range of economic undertakings. What drives economic change in this market? A variety of market-driven incentives play a salient role.
Technology Push
The invention of the transistor did not lead in a linear way to the invention of computing and related ICTs. However, the invention of the transistor, and then the integrated circuit, did alter what equipment makers could build cheaply and what users could operate reliably. In popular discussion, advances in ICTs have become almost synonymous with advances in microprocessors. This is due to an observation by Gordon Moore, who cofounded and eventually became chairman at Intel. In 1965, he foresaw a doubling of circuits per chip every two years. This prediction about the rate of technical advance later became known as “Moore’s Law.” In fact, microprocessors and dynamic random access memory (DRAM) have been doubling in capability every 18 months over the last three decades.
A similar pattern of improvement – though with variation in the rate – characterizes many other electronic components that go into producing a computer, server, or other equipment complementary to ICTs in many standard uses. This holds for disk drives, display screens, routing equipment, and data-transmission capacity, to name a few (Flamm 2003). In the majority of these technologies, economic motives intermingle with many others to produce frontier-stretching inventions (Greenstein 2006). For example, in the late 1940s the transistor came out of Bell Laboratories, which at that point was among the best-funded private laboratories where researchers examined cutting-edge issues in electronics. The majority of advances thereafter came from an array of firms, such as Motorola, Texas Instruments, IBM, and notably the numerous “descendents” of Shockley Instruments in Santa Clara, California, such as Fairchild, National Semiconductor, and Intel. Economic motives played a role, but so did the inventors’ desires for fame or professional respect, and the aspiration to build an intellectually satisfying work environment that addressed frontier issues in solid state physics and material science.
The pathway from invention to commercialization also shaped developments in the technical boundary of ICT equipment for sale. For example, Ethernet built on years of university research in data communications. It was nurtured at the Palo Alto Research Center, a private lab funded by Xerox, which chose not to commercialize the technology. It received an endorsement from the standard-setting organization, the Institute of Electrical and Electronics Engineers (IEEE), a nonprofit consortium with representation from industry (whose committees also endorsed two competing technologies at the same time). Ethernet eventually became part of a suite of commercial products sold by many firms, including 3Com, a company founded by Bob Metcalfe, inventor of Ethernet, and which competed against alternative specifications developed by other firms, such as IBM.
Another example illustrates how new inventions take multiple pathways into use. The Uniform Resource Locator (URL) originated in Tim Berners-Lee’s labs at the Organisation européenne pour la recherche nucléaire (CERN) in Switzerland, labs whose primary mission involves research in high-energy physics. The URL’s use was popularized in the first widely used browser, Mosaic. The programmers founded the company Netscape, an event that motivated a wave of investment in Internet-related applications. Simultaneously, the browser was licensed to many firms, including Microsoft, which developed Internet Explorer to compete against Netscape’s products.
Demand Pull
ICTs aid the automated tracking of transactions, a function that is used, e.g., in automating billing, managing the pricing of inventories of airline seating, and restocking retail outlets in a geographically dispersed organization. It also facilitates the coordination of information-intensive tasks, such as the dispatching of time-sensitive deliveries or emergency services. Moreover, computer-based applications enable the improved performance of advanced mathematical calculations, useful in such diverse activities as calculating interest on loans and generating estimates of underground geologic deposits. Computer-aided precision improves the efficiency of processes such as manufacturing metal shapes or the automation of communication switches.
Such widespread use has supported an extensive search for innovative activities to generate additional revenue. Historically, the demand for military applications was quite important for the direction of early inventions. In ICT markets today, however, incentives are greatly shaped by market-oriented incentives (Jorgenson and Wessner 2005). These demand-oriented incentives must be understood in the context of the dispersion of technical knowledge across a wide set of firms. Firms devote considerable resources to resisting becoming a supplier of a commodity available from many vendors without distinction. Pricing at multiples above unit cost requires something special. That induces the search for, and creation of, useful and profitable assets. Firms take a variety of approaches to developing these assets in technology markets, even if they remain unique only for a short period.
For example, one strategy relies on marketing a novel approach or a fad among fanatics. Many of the software gaming firms have tried this, and the Palm also started this way. A second strategy is to expand beyond a niche into a broad product line. Hewlett-Packard (HP) has accomplished this in its laser printer line of products. HP has kept its lead for over a decade and a half and remains very profitable. A third strategy requires the lowest cost and highest volume. Dell computer accomplished this in the 1990s through a combination of volume manufacturing, low distribution costs, and customization to user niche needs.
Platform Competition
In any given era, ICT markets are organized around platforms – a cluster of technically standardized components that buyers use together to make the aforementioned wide range of applications (Bresnahan and Greenstein 1999). Such platforms involve long-lived assets, both components sold in markets (i.e., hardware and some software) and components made by buyers (i.e., training and most software). Important computing platforms historically include the UNIVAC, the IBM 360 and its descendents, the Wang minicomputers, IBM AS/400, DEC VAX, Sun SPARC, Intel/Windows PC, Linux, and, recently, TCP/IP-based client-server platforms linked together.
Vendors tend to sell groups of compatible products under umbrella strategies aimed at the users of particular platforms. In the earliest eras of ICT markets, the leading firms integrated all facets of computing and offered a supply of goods and services from a centralized source. In later eras, the largest and most popular platforms historically included many different computing, communications, and peripheral equipment firms, software tool developers, application software writers, consultants, system integrators, distributors, user groups, news publications, and service providers.
Until the early 1990s, platforms helped define most market segments. These were distinguished by the size of tasks to be undertaken and by the technical sophistication of the typical user. These segments stood in for clusters of technical skills at firms and clusters of operations at users. Mainframes, minicomputers, workstations, and personal computers (in decreasing order of size of installation needed to effectively use the computer) constituted different size-based market segments. Trained engineers or programmers made up the technical user base, while the commercial market was geared more toward administrators, secretaries, and office assistants.
The most popular platform in the late 1980s and 1990s differed from the prominent platforms of earlier years. The personal computer (PC) began in the mid-1970s as an object of curiosity among technically skilled hobbyists, but became a common office tool after the entry of IBM’s design. Unlike prior computing platforms, this one has diffused into both home and business use. From the beginning, this platform involved thousands of large and small software developers, third-party peripheral equipment and card developers, and a few major players.
The networking and Internet revolution in the late 1990s is responsible for blurring familiar distinctions. These new technologies have made it feasible to build client-server systems within large enterprises and across ownership boundaries. Today such networking employs Internet-based computing systems networked across potentially vast geographic distances, supporting the emergence of a “network of networks.” Proprietary network providers, sponsored by firms such as Microsoft, SAP, and Oracle, compete with each other and with software built around open source, such as Linux, Apache, and MySQL.
Changes In Commercial Leadership
Why do incumbents or entrants take advantage of technological opportunity sometimes and not others? Sometimes incumbents either cannot or will not do the same as entrants. Why? There is a seemingly anomalous pattern. Despite frequent and sometimes dramatic technical improvements in specific areas of technology, many features of the most common platforms in use tend to persist or change very slowly. This is because many durable components make up platforms. Though they lose their market value as they become obsolete in comparison to frontier products, they do not as quickly lose their ability to provide a flow of services to users. Consequently, new technology tends to be most successful when new components enhance and preserve the value of previous investments, a factor that creates demand for “backward-compatible” upgrades or improvements. It also creates a demand for support and service activities to reduce the costs of making the transition from old to new.
Control over changes to design and other aspects of technical standards shapes the backward compatibility for key components. Control of these decisions is coincident with platform leadership – determining the rate and direction of change in the technical features of components around which other firms build their businesses. In each platform, it is very rare to observe more than a small number of firms acquiring leadership positions. In more recent experience, control over the standard has completely passed from IBM to Microsoft and Intel. Microsoft produces the Windows operating system and Intel produces the most commonly used microprocessor. For this reason the platform is often called Wintel. Other firms, such as SAP, Oracle, and Cisco, also have dominant positions in other areas of the most common platforms in use.
Financial Institutions Supporting Innovation
In technologically intensive markets, forward-looking firms cannot (or do not) presume that they are certain about the source of market value. Incumbent firms and new entrants get a high rate of return from learning about future technical and market opportunities. A number of institutions, such as venture capitalists, support innovative activities by entrants, often in contraposition to an incumbent firm that has failed to learn to take advantage of new commercial opportunities.
Leading firms have developed numerous mechanisms to elicit cooperation from innovative entrants, even when innovation takes place outside the organizational boundaries of an incumbent. With similar assessments of market opportunities, incumbents and entrants are likely to jointly pursue these opportunities in a manner which reinforces the incumbent’s position. Cisco’s repeated acquisition of small firms during the Internet boom was one such example.
While the spawning of new ICT businesses in North America has tended to be concentrated in a small number of locations, other facets of the supply chain for ICTs involve firms headquartered and operating in a much wider set of locations. Entry into facets of the ICT market has become an important phenomenon world wide. The supply chain for many complementary components has also been associated with firms in western Europe as well as in India, Israel, South Korea, Singapore, Taiwan, and China (Bresnahan and Malerba 1999). Even more widespread are computing service firms, which follow business and home users dispersed across the globe.
References:
- Bresnahan, T., & Greenstein, S. (1999). Technological competition and the structure of the computer industry. Journal of Industrial Economics, March, 1– 40.
- Bresnahan, T., & Malerba, F. (1999). Industrial dynamics and the evolution of firms’ and nations’ competitive capabilities in the world computer industry. In D. Mowery and R. Nelson (eds.), Sources of industrial leadership. Cambridge: Cambridge University Press, pp. 79 –132.
- Flamm, K. (2003). The new economy in historical perspective: Evolution of digital electronics technology. In D. C. Jones (ed.), New economy handbook. San Diego, CA: Academic Press and Elsevier, pp. 28 – 57.
- Greenstein, S. (ed.) (2006). Computing. Cheltenham: Edward Elgar.
- Jorgenson, D. W., & Wessner, C. W. (eds.) (2005). Deconstructing the computer: Report of a symposium. Washington, DC: National Academies Press.