The Bumpy Ride of a Silicon Valley Idea

If you’re a researcher you’re lucky if a couple of dozen people cite your paper, and very lucky if it’s remembered at all in five years. So I was surprised recently when Fast Company brought out an article, “A Short History of the Most Important Economic Theory in Tech,” marking the 20th anniversary of a paper of mine in the Harvard Business Review.

And what was that economic theory? I was trained in economics to think in terms of diminishing returns. If a beer brand, Coors Light say, gets ahead, sooner or later it runs out of people who favor it (there are diminishing returns); other brewing companies sell similar products, and the market is shared. But I was seeing something different in the early 80s in tech markets. Markets were not always shared. At the time the video technologies VHS and Betamax were competing and I realized that if one of these got ahead—got more user base, we’d now say—more movies would be made in that technology, people would buy more playback machines in that format, and that technology would get further advantage. It might go on to lock in the market, as VHS did, but you couldn’t say in advance which one this would be, nor was it guaranteed to be the best.

Markets, I realized, could operate under increasing, not diminishing returns. And that meant companies that cleverly built early advantage in user base could go on to lock in the market.

It took me a while to work out the mathematics and in 1983 I wrote an academic paper on it. Over the next six years four top economic journals in succession turned it down. Reviewers pointed out that what I said might be possible in theory, but didn’t occur in the real world; so it wasn’t of much interest. And in the Reagan era market economists didn’t like the idea that capitalism could lock you in to an inferior choice. Eventually, in 1989, the Economic Journal in England accepted the piece, and after a period of little interest it started to attract a few cites. Now it’s up to near 10,000.

It began to be noticed in Silicon Valley as well, and in 1990 I was invited to give a talk at Sun Microsystems. I showed up expecting 30 or so nerdy types with pocket protectors but instead the hall was packed. Years later Eric Schmidt, who was present as Sun’s CTO, told me, “We launched Java based on your ideas.” And still later John Seely Brown, who brought me to PARC, wrote that “Hundreds of millions of dollar slosh around Silicon Valley every day based on [these] ideas.” In fact the idea is now so familiar it’s hard to remember it once shocked people. Tech startups routinely go after user base and network effects, and nobody’s surprised when markets get dominated by single players like Microsoft, Facebook, Uber, Amazon, Google, and Airbnb.

The popular version of the idea—the one Fast Company was celebrating—came about pretty much by accident. An editor from Harvard Business Review asked me at a conference in 1996 to do a piece for them. We were going down an escalator and I casually suggested increasing returns in business. “Doesn’t everybody know about that,” she said. I thought not, and reluctantly she agreed. I struggled with the draft, I wasn’t confident about writing for business, but I got help from an unexpected source. I’ll let Rick Tetzeli, who wrote the Fast Company piece, tell the rest of story:

“I don’t know if you know the writer Cormac McCarthy,” Arthur begins, “but I was very good friends with him at the time. I mailed the draft down to Cormac, who was in El Paso at the time. When I didn’t hear from him I called him up and said, ‘Did you like my increasing returns article? It is for Harvard Business Review.’ There was a kind of silence on the line and then he said, ‘Would you be interested in some editing help on that?’ Next time he’s in Santa Fe we spent four days on that piece. He took apart every single sentence, deleted every comma he could find. I said, ‘You can add that piece to your collected works, it will be somewhere in between Blood Meridian and All the Pretty Horses.’

“Let’s say the piece was better for all the hours Cormac and I spent poring over every sentence. The word got back to my editor at Harvard Business Review.’ She called me up in a slight panic and says ‘I heard your article’s getting completely rewritten.’ And I said, ‘Yeah!’ She says, “By Cormac McCarthy? What did he do to it?’ And I said, ‘Oh, well, you know, pretty much what you’d expect. It now starts out with two guys on horseback in Texas, and they go off and discover increasing returns.’ And for a couple of seconds she was aghast.”