Companies investing now in the information highway are, at best, making informed guesses. Skeptics bring up good reasons why they think it won’t be as big or early an opportunity as I think it will be. I believe in this business. Microsoft is investing more than $100 million a year on research and development for the highway. It will almost certainly take five years or more of this kind of investing before the results of the R&D bring in enough revenue to make the money back, so we’re making a $500 million bet. It could prove to be a half-billion-dollar losing bet. Our shareholders are allowing us to make it on the basis of our previous successes, but that’s no guarantee. Naturally we expect we’ll be successful, and like the others running the race, we have a rationale for why. We believe our software-development skills and our commitment to PC evolution will allow us to get a return on our investment.
Comprehensive trials of broadband connections to PCs and television sets should get under way in 1996 in North America, Europe, and Asia, financed by companies willing to take a risk and hoping that the results will give them a head start. Some of the trials will be “me too” efforts aimed at showing that a particular network operator can build and operate a high-bandwidth network. The primary goal of the trials should be to make available a platform for software developers to build and explore new applications on, to test the applications’ appeal and financial viability.
When Paul Allen and I saw that picture of the first Altair computer, we could only guess at the wealth of applications it would inspire. We knew applications would be developed but we didn’t know what they would be. Some were predictable—for example, programs that would let a PC function as the terminal for a mainframe computer—but the most important applications, such as the VisiCalc spreadsheets, were unexpected.
These forthcoming trials will give companies the opportunity to look for the equivalents of the spreadsheet—unexpected killer applications and services that will capture the imagination of consumers—and build a financial case for rolling out the highway. It’s almost impossible to guess what applications will or won’t appeal to the public. Customers’ needs and desires are so personal. For instance, I hope to be able to use the highway to stay up-to-date on medical advances. I’d like to find out about health risks for someone in my age group, and ways to avoid them. So I want fitness and medical applications as well as ones that would enable me to continue educating myself in other areas I’m interested in. But that’s just me. Will other users want medical advice? New kinds of games? New ways of meeting people? Home shopping? Or just a few more movies?
The trials will determine which are the most popular applications and services. These will probably include simple extensions of existing communication functions, such as video-on-demand and high-speed connections between personal computers. In addition, there will be a few wild new services that catch the fancy of the public and inspire further innovation, investment, and entrepreneurship. Those are what I’m looking forward to seeing. If the early trials don’t excite consumers, there will have to be more trials, and the building of the full highway will be delayed. In the meantime, the Internet, connected PCs, and PC software will continue to improve and become an even better foundation to build on. Hardware and software prices will continue to come down.
It’s interesting to watch how different large companies respond to these opportunities. No one wants to admit to uncertainty. Phone and cable companies, TV stations and networks, computer hardware and software companies, newspapers, magazines, movie studios, and even individual authors are all formulating strategies. From a distance their plans appear similar, but the details are really quite different. It’s like the old story about the blind men and the elephant. Each one has a hold of a different part of the elephant and from his own small amount of information is drawing sweeping and erroneous conclusions about what the whole animal looks like. Here, instead of trying to guess the appearance of a large beast, we’re investing billions of dollars based on a vague understanding of the true shape of the market.
Competition is a boon for consumers, but it can be tough on investors, especially those who invest in a product that doesn’t exist yet. At the moment there is a nonexistent business being called the “information highway.” It has generated zero dollars in revenue. The building of the highway will be a learning process, and some companies will lose their shirts. What seem to be lucrative niches today may wind up as highly competitive markets, with low margins. Or they may prove downright unpopular. Gold rushes tend to encourage impetuous investments. A few will pay off, but when the frenzy is behind us, we will look back incredulously at the wreckage of failed ventures and wonder, “Who funded those companies? What was going on in their minds? Was that just mania at work?”
Entrepreneurship will play a major role in shaping the development of the information highway, the same way it shaped the personal-computer business. Only a handful of companies that made mainframe software managed the transition to personal computers. Most successes came from little start-ups, run by people who were open to new possibilities. This will be true on the information highway, too. For every large existing company that succeeds with a new application or service, ten start-ups will flourish and fifty more will flash into existence and momentary glory before slipping into obscurity.
This is a hallmark of an evolving entrepreneurial market; rapid innovation occurs on many fronts. Most of it will be unsuccessful, regardless of whether it’s attempted by a large or a small company. Large companies tend to take fewer risks, but when they crash and burn, the combination of their sheer ego and the scale of their resources means they wind up digging a bigger crater in the ground. By comparison, a start-up usually fails without much notice. The good news is that people learn from both the successes and the failures, and the net result is rapid progress.
By letting the marketplace decide which companies and approaches win and which lose, many paths are explored simultaneously. Nowhere is the benefit of a market-driven decision more apparent than in an unproven market. When hundreds of companies try different risk-taking approaches to discover the level of demand, society gets to the right solution a lot faster than it would with any form of central planning. The range of uncertainties about the information highway is very large, but the marketplace will design an appropriate system.
Governments can help assure a strong competitive framework and should be willing, though not overeager, to intercede if the marketplace fails in some particular area. After the trials have yielded sufficient information, they can determine the “rules of the road"—the basic framework guidelines within which companies can compete. But they should not attempt to design or dictate the nature of the information highway, because governments cannot outsmart or outmanage the competitive marketplace, particularly while there are still questions about customer preference and technological development.
The U.S. government is deeply involved in rule-making for communications companies. Federal regulations currently prevent cable and phone companies from offering a general-purpose network that would put them in competition with each other. The first thing most governments have to do to help the highway start is to deregulate communications.
The old approach in most countries was to create monopolies in the various forms of telecommunication. The theory behind this approach was that companies wouldn’t make the huge investments necessary to run telephone wires out to everyone unless they had the incentive of being the exclusive supplier. A set of rules drawn up by the government binds the monopoly holders to act in the public interest with restricted but essentially guaranteed profit. The outcome has been a very reliable network with broad services but limited innovation. Later regulations extended the concept to cable television as well as to local telephone systems. Both federal and local governments granted monopolies and curtailed competition in exchange for regulatory control.