The Internet Is Not the Answer (7 page)

But the NCSA refused to give the Mosaic team any credit for their remarkably successful creation and so in early 1994 a disillusioned Andreessen quit and moved out west, to Silicon Valley. A couple of months later, he received an email from a stranger. It was his ticket to ride on the express train.

Marc:

You may not know me, but I’m the founder and former chairman of Silicon Graphics. As you may have read in the press lately, I’m leaving SGI. I plan to form a new company. I would like to discuss the possibility of you joining me.

Jim Clark

In his autobiography, Clark suggests, with characteristic immodesty, that this email might be comparable in its epochal significance to when Alexander Graham Bell said to his assistant, “Watson, come in here. I need you”—the first words ever uttered over the telephone.
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It wasn’t, of course. But the email did have profound consequences for the future of the Internet economy. Clark, recognizing both Marc Andreessen’s precocity and the astonishing growth of the Web, saw an opportunity to finally make a Tom Perkins–sized fortune.

“So the hell with the commune,” Clark wrote in his autobiography as he turned his back on the nonprofit World Wide Web created by Tim Berners-Lee. “This was business.”
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Clark and Andreessen created Netscape Communications, one of the most iconic commercial ventures of the last quarter of the twentieth century. Founding it in April 1994 with $3 million of Clark’s own money, they reassembled Andreessen’s original NCSA Mosaic team out in Silicon Valley and built a far superior version of the original Web browser from scratch, code-named Mozilla, and later called Navigator. In the fall of 1994, Clark secured a $5 million investment from John Doerr—which was not only KPCB’s first investment in an Internet company but also among the first significant ventures of any kind in a Web venture. Released in December 1994, Netscape Navigator 1.0 distributed more than 3 million copies in three months, mostly for free. By May 1995, Netscape had 5 million users and its market share had risen to 60% of the Web browser market. Unlike many of the later dot-com companies, Netscape even had real revenue—some $7 million in its first year, mostly from licensing deals to corporations. As
Time
magazine quipped in the summer of 1995 for the first of its many cover stories about the company, Netscape was “growing faster than O.J. Simpson’s legal fees.”
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The eighteen-month-old startup went public in August 1995 because Clark rightly feared that Microsoft, back then the world’s most powerful computer software company, nicknamed Godzilla by its competitors because of its fearsome business practices, was about to get into the browser business in order to crush Netscape.

Mozilla did indeed elude Godzilla. The public offering was so spectacularly successful that it is now known as the “Netscape Moment” and holds its own mythological place in both Wall Street and Silicon Valley folklore. The IPO realized a payout of $765 million for Kleiner Perkins, which was more than double the value of the entire fund from which the original investment came.
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Clark’s investment of $3 million came to be worth $633 million—which explains why the incorrigibly self-aggrandizing entrepreneur put the identifying number 633MN on the tail of an executive jet he bought with some of his proceeds from the IPO.
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And the just turned twenty-four-year-old Marc Andreessen, who two years earlier had been making $6.85 an hour as a NCSA programmer, was suddenly worth $58 million, thus becoming the first in a long line of boy tycoons minted by the Internet.
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“What happened to Netscape Communications was without parallel,” notes David Kaplan, “and came to define modern Silicon Valley.”
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Netscape’s success drove the first great commercial expansion of the Internet. The number of Internet users grew from 16 million in 1995 to 361 million in 2000. This growth confirmed Metcalfe’s law—Ethernet inventor Bob Metcalfe’s eponymous rule that each new person who joins a network increases the power of that network exponentially. It triggered the dot-com boom, a half decade of irrational exuberance that created Amazon, Yahoo, eBay, and thousands of failed Internet startups, including my own, an online music website backed by Intel and SAP called AudioCafe. And it crowned Marc Andreessen, who was featured sitting shoeless on the cover of
Time
magazine in February 1996, as the young disruptive hero of the Internet revolution.

But the Netscape Moment marked the death of something, too. Discussing Tim Berners-Lee’s decision to give away his technology for free, Jim Clark—who disliked venture capitalists, believing them to be vultures that “make hyenas look good”
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—suggests that “any entrepreneur might wonder about his (Berners-Lee’s) sanity while admiring his soul.”
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What the Internet lost in the early nineties, with the passing of its mantle from researchers like Tim Berners-Lee to businessmen like Jim Clark, can be simply summarized. As Wall Street moved west, the Internet lost a sense of common purpose, a general decency, perhaps even its soul. Money replaced all these things. It gushed from the spigots of venture capitalist firms like KPCB, which—with successful Internet companies like Amazon, Facebook, and Google—came to replace the government as the main source for investment in innovation.

Jeff Bezos, if he happened to be reading this, would probably accuse me of inventing a narrative fallacy, of reducing the Internet’s complex reality to an easy-to-understand morality tale. But Bezos and his Everything Store are exhibits A and B in my argument. He was a Wall Street analyst who moved out west and amassed a $30 billion personal fortune through his Internet ventures. And his own 1994 startup, Amazon, the winner-take-all store that had revenue of $74.45 billion in 2013—in spite of its convenience, great prices, and reliability—reflects much of what has gone wrong with the Internet in its monetized second act.

The Winner-Take-All Network

After the Netscape Moment, everything, it seemed, was possible. Venture capital investments rose in America from $10 billion in 1995 to $105.8 billion in 2000.
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Internet companies went public with barely any revenue. Hundreds of millions of dollars were poured into supposedly “innovative” Web businesses trying to sell everything from pet food to toilet paper. One influential futurist, the MIT professor of technology Nicholas Negroponte, even described the digital age in his bestselling 1995 book
Being Digital
as being a “force of nature.” “It has four very powerful qualities that will guarantee its ultimate triumph,” Negroponte promised about this revolution. It would be “decentralizing, globalizing, harmonizing and empowering.”
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One of the most frequently quoted books about the Internet economy published in the wake of the August 1995 IPO was Kevin Kelly’s
New Rules for the New Economy
.
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Kelly’s economic manifesto, which came out as a series of articles he wrote as the founding executive editor for
Wired
magazine, became an appropriately magical handbook for startup entrepreneurs in the surreal dot-com era. The personally very gracious and well-meaning Kelly, one of the founders of the countercultural WELL BBS and a born-again Christian techno-mystic who would later write a book about how technology has a mind of its own,
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stoked the already irrational exuberance of the late nineties with a new economy manifesto that today reads like a parody of digital utopianism. Kelly’s mistake was to assume that the Internet’s open technology would automatically be reflected by what he, borrowing Negroponte’s messianic verbiage, called the “decentralized ownership and equity” of a “global economic culture.”
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More digital shaman than economist, Kelly presented the new economy as an uneconomy—one in which the traditional laws of supply and demand and abundance and scarcity no longer applied. With rules like “Embrace the Swarm,” “Opportunities Before Efficiencies,” and “Plenitude, Not Scarcity,” Kelly’s book—part McLuhan, part Mao, part plain meshuggah—described the Internet economy as a collectivist cornucopia that would climax in what he called “a thousand points of wealth.”

But not everyone embraced the swarm and learned to speak this kind of gobbledygook. In 1995, two American economists published a less hyped but much more prescient book about the depressingly old rules of our new economy. In
The Winner-Take-All Society
,
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Robert Frank and Philip Cook argue that the defining feature of late-twentieth-century global capitalism was a growing financial chasm between a narrow elite and the rest of society. Rather than Kevin Kelly’s “thousand points of wealth,” Frank and Cook found that wealth in the winner-take-all society actually had very few points. They agreed with Tom Perkins about the enormous power and influence of this new elite. But in contrast with Perkins, Frank, and Cook—whose observations about this emerging plutocracy are supported by the later research of many distinguished economists, including Paul Krugman, Joseph Stiglitz, Robert Reich, and Thomas Piketty—didn’t celebrate this one percent, trickle-down economy.

Frank and Cook argued that the new information economy was central in the creation of the new inequality. “Perhaps the most profound changes in the underlying forces that give rise to winner-take-all effects have stemmed from technological developments in two areas—telecommunications and electronic computing,” they argued.
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Scale is critical in an instantly global market like the Internet. But the bigger the Internet became, they predicted, the fewer dominant online companies there would be. What Frank and Cook described as our natural “mental shelf-space constraints” means that in an increasingly information-rich economy, “for any given number of sellers trying to get our attention, an increasingly small fraction of each category can hope to succeed.”
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As
Dot.Con
author John Cassidy notes, this winner-take-all model was already powerful in the pre-Internet tech economy, where “consumers tended to settle on one or two dominant products, such as Microsoft Windows, which generate big profits.” After the 1995 Netscape Moment triggered the dot-com mania, venture capitalists bet that this winner-take-all model would enable the dominance of a single company in each online sector. Alongside the general stock market hysteria, this thinking contributed to the massive increase in venture capital commitments in America between 1995 and 2000. The obsession with getting big quick also explains some of the most surreal Internet deals in the bubble, such as AOL’s catastrophic $164 billion acquisition of Time Warner in January 2000 and the $1.2 billion invested by venture capitalists in the online grocer Webvan, which the technology site CNET ranks as the “most epic fail in the dotcom bubble fiasco.”
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Founded in 1997 by Louis Borders, a founder of Borders Books, Webvan went public in November 1999, even though in the first six months of 1999, the e-commerce grocer lost $35 million on sales of $395,000. On November 5, 1999, the day of its IPO, Webvan was valued at almost $8 billion.
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A little over a year and a half later, on July 10, 2001, Webvan filed for bankruptcy protection and shut down.

In spite of the Webvan disaster, the winner-take-all model had a particular resonance in the e-commerce sector, where the so-called Queen of the Net, the influential Morgan Stanley research analyst Mary Meeker (who is now a partner at KPCB), saw first-mover advantage as critical in dominating online marketplaces. And it was this winner-take-all thinking that led Jeff Bezos, in 1996, to accept an $8 million investment from John Doerr in exchange for 13% of Amazon, a deal that valued the year-old e-commerce startup at $60 million.
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“The cash from Kleiner Perkins hit the place like a dose of entrepreneurial steroids, making Jeff more determined than ever,” noted one early Amazon employee about the impact of the 1996 KPCB investment.
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“Get Big Fast” immediately became Bezos’s mantra. Which is exactly what he did, with Amazon’s value growing to over $150 billion by June 2014, making the Everything Store by far the dominant retailer on the Internet, crushing or acquiring its competitors, monopolizing the mental shelf space of online consumers, selling everything from books, baby gear, and beauty products to shoes, software, and sporting goods.

Mary Meeker was right about first-mover advantage on the Internet and its consequence of a winner-take-all economy dominated by a coterie of massively powerful global companies. What Kevin Kelly incorrectly predicted as the Internet’s “decentralized ownership and equity” structure has, in fact, turned out to be a rigidly centralized economy controlled by what Fred Wilson, the New York City–based cofounder of Union Square Ventures and one of the smartest early-stage investors in the Internet economy, calls “dominant networks that are emerging all around us,” like “Google, Twitter, YouTube, SoundCloud [and] Uber.”
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Wilson explains that “for all of its democratizing power, the Internet, in its current form, has simply replaced the old boss with a new boss and these new bosses have market power that, in time, will be vastly larger than that of the old boss.”
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