2.4 History of the Internet

The Internet began with research of a peculiarly theoretical nature: how to send information efficiently over networks so the information got to its destination without being scrambled, attenuated or lost. That achievement is the fruit of communications science: a highly technical field needing a good grasp of advanced mathematical procedures. {1} {2}

The long road to success needs to be emphasized. No one envisaged the Internet in its first phase of development. 1961 to 1974 was a period of innovation, driven by pure and applied research, and the need to link mainframe computers on separate university campuses.

Security drove the next development phase. A simple circuit of information centers was vulnerable to terrorist or nuclear attack. Knock out one section, and whole circuit goes down, leaving battle commanders literally in the dark. Much better would be a diffuse network of circuits, with inbuilt redundancies continually offering different pathways for information. {3} The period 1975 to 1995 was therefore one of institutionalization. Funded by the US Department of Defense and the National Science Foundation, development was directed towards a military communications system robust enough to survive a nuclear war. In 1986, the NSF assumed responsibility for the resulting ARPANET (Advanced Research Projects Agency Network), and spent $200 million over the following ten years to create a civilian equivalent.

1995 onwards saw the commercialization phase in which government agencies encouraged private corporations to expand the Internet backbone and extend services to PC owners: individuals, private institutions and business. Profit and market share were the driving forces.

USA eCommerce from 1995

The USA forged the ecommerce revolution, and still leads in ecommerce services, software and entrepreneurial skills. Phenomenal successes have been mixed with spectacular failures, and if the overall picture is complicated, there is much in the American experience to provide lessons and pointers. {4} Ecommerce started in the mid-nineties, accelerating rapidly through 1999, when large sums could be raised for nebulous and untested notions. Shares traded at unsustainable levels {5}, making fortunes for ecompany bosses and cannier investors. {6}

The bubble burst in early 2000, when shares tumbled to a fraction of their previous values and funding ended. The eighteen months to late 2001 were tough for most concerned, whether emarketers, investors or financial institutions, and were exacerbated by the US recession. Of the estimated 7-10 thousand Internet companies receiving funding to 2000, some 501 were shut down in 2001, and another 1283 taken over. {7} Nonetheless, online revenues increased {8}, even if profit did not. Gradually, in one group or another, it became apparent ecommerce was surviving {9}, even picking up. {10}

Then came September 11th and corporate accounting scandals. The ecommerce recovery continued, but with patchier results in the business to customer sector. {11} Marketing reports continued to be optimistic, with Forrester predicting worldwide online revenues of 3.2 trillion US dollars by 2004 {12}, for example, but these were reigned back to the sensible: to $105 billion by Jupiter Research in 2003. {13} The hype was over, but ecommerce remained an essential and growing part of the US economy.

USA Lessons Learned

Successful ecompanies fell into several categories. There were those who became market leaders — Amazon, Cisco — by starting big at the right time, and by continuing to invest heavily in technology. There were those with forward-looking managements that have brought in customer relationship management and supply chain management technologies, with corresponding staff reorganization and training: their reward was better-run enterprises, with cost savings and increased competitiveness. There were companies, large and small, that have moved their business online, building on existing supply relationships and customer services. And there were those who have brought new businesses online by exploiting market niches and local trading situations. Few of these developments were without difficulties, and some are still learning to adapt to a new and ever-changing environment.

For an unhappy majority of larger companies, however, ecommerce was a frustrating affair. If their websites had not actually lost money, they hadn't fulfilled expectations either, nor repaid the considerable money and effort expended. Lessons were hard earned, and perhaps were obvious from the beginning, {14} but the experience was not being thrown away. Ecommerce continued, but with phased objectives, and sounder notions of costs and benefits.

That left the smaller companies. Some followed the herd and were swept up in the 1998-2000 dotcom land-rush. Some simply thought they'd 'have a go', unaware that ecommerce is anything but easy money. They underestimated the expertise and management effort needed to get the website right, not to mention maintaining and developing it. Capital was cheap, and financial control never caught up. The websites usually achieved orders, but the fulfillment process was painful for everyone. Some ebusinesses were developed for sale, but the dotcom era ended before they could be brought to market. And software houses that were light-years ahead woke up to find themselves suddenly dead when orders and financing evaporated. {15}

But once ecommerce had been shown to work for some, debate turned to how, to what areas, and with what success. {16} Gradually the obvious truth emerged that ecommerce is a business like any other business. {17} Amazon notwithstanding, ecommerce companies had to watch the bottom line. Success came slowly. Effort, planning, knowledge, experience, commitment and resources were all essential. {18} The one advantage ecommerce possessed was its supporting medium, the Internet, which provided information, case histories and guidance for those who had the sense to use them.

Largely unreported outside specialist websites was the growth in business to business ecommerce, which went through many painful developments, but eventually paid its way, its revenues coming to dwarf those of B2C ecommerce. {19}

European eCommerce from 1999

Europe started slowly. Though the area had the potential to reach $1.6 trillion in online trade by 2004, Forrester {20} estimated in 1999, the region had been slow to adopt the necessary site personalization, channel integration and technology. The best of European ecommerce sites were as good as their American counterparts, but many — probably the majority — were losing money in the period 2000-02. Indeed, a survey by the British Chamber of Commerce {21} suggested that three-quarters of smaller firms and more than half of medium-sized ones surveyed had seen no return on the £1,000 to £100,000 spent on their ecommerce site. Only a tiny fraction of retail sales were made online, and many visitors were only window-shoppers. {22}

Country

Ecommerce

as % of

total retail sales

Country

% Online

window

shopping

Country

% Internet

users

buying online

Sweden

0.68

Finland

28

Sweden

27

UK

0.37

Netherlands

28

Norway

26

Netherlands

0.34

Sweden

23

UK

22

Germany

0.30

Norway

22

Germany

21

Belgium

0.16

Spain

16

Netherlands

18

France

0.14

France

14

Finland

16

Italy

0.09

Germany

14

France

8

Spain

0.06

Italy

14

Spain

8

Portugal

0.06

UK

13

Italy

7

Problems included:

1. Language barriers.
2. Multiple currencies, somewhat eased by adoption of the Euro.
3. Differing tax and VAT regimes.
4. Uncertainty over and pending legislation on ecommerce taxation.
5. Lack of cross-border logistical support.
6. Poor IT infrastructure.
7. Conservative banking attitudes.
8. Restricted choice of software, payment service providers and merchant account providers.

Much of that changed in the following few years, but the July 2002 Economist Information Unit {23} could still rank preparedness for ecommerce in Europe as follows (USA scoring 8.41)

Country

Index

Country

Index

Country

Index

Netherlands

8.40

Norway

8.17

Greece

7.03

UK

8.38

Austria

8.10

Portugal

7.02

Switzerland

8.32

Ireland

8.02

Czech Republic

6.45

Sweden

8.32

Belgium

7.77

Hungary

6.05

Denmark

8.29

France

7.70

Poland

5.52

Germany

8.25

Italy

7.32

Slovakia

5.00

Finland

8.18

Spain

7.07

Romania

4.00

Europeans spent an average of €430 online between August and October 2002, only slightly less than the €543 per head spent by Americans over the same period. {24} The three years following saw the UK and Germany emerge as ecommerce leaders in Europe, the larger companies lagging a year behind those in America. {25} {26} Outsourcing continued to accelerate, with the level of deal activity rivaling that in the US. The UK still stands out as Europe's dominant market, but outsourcing has gained ground in Germany, Spain, and France. {27}

The Economist Information Unit updated their rankings in 2005 to include such matters as broadband access, innovation and the penetration of mobiles and public-access wireless 'hotspots'. Preparedness for ecommerce in Europe then stood as follows (USA scoring 8.73): {28}

country

index

country

index

country

index

country

index

Denmark

8.74

Germany

8.03

Portugal

6.90

Slovakia

5.51

Sweden

8.64

Austria

8.01

Estonia

6.32

Latvia

5.11

Switzerland

8.62

Ireland

7.98

Slovenia

6.22

Lithuania

5.04

UK

8.54

Belgium

7.71

Greece

6.19

Bulgaria

4.68

Finland

8.32

France

7.61

Czech Republic

6.09

Romania

4.19

Netherlands

8.28

Spain

7.08

Hungary

6.07

 

 

Norway

8.27

Italy

6.95

Poland

5.53

 

 

The average UK online shopper would spend €1,744 online in 2006 and €2,410 in 2011, driving UK eCommerce from €43bn in 2006 to €76bn in 2011, a Computing report predicted, {29} and a RNCOS report entitled UK Supermarket Analysis (2007-2010) found that online sales in UK were expected to account for more than 19% of the combined retail sales by 2012, exceeding £62 billion. {30} In general, however, European ecommerce lagged behind its retail counterparts in the US. {31}

Then came the recession, which threw most forecasts into the melting pot. Nonetheless, a Forrester Research report noted that European online retail sales grew 18% in 2010, and would grow 13% in 2011, reaching €92bn. Some 72% of the British online population shopped the web in 2010, amounting to €30bn, a €5bn increase from 2009. {32}

eCommerce in Other Countries

Each country and political block has seen its own pattern of Internet and ecommerce growth. Generalizations are difficult, much depending on legislation, government initiatives and local enterprise. Any western company entering these markets will need to purchase specific marketing reports (which do not generally provide free summaries now, and/or maintain them long online), undertake detailed studies in their own market sector, and find local representation.

US Development Phases: Summary

DEVELOPMENT OF THE INTERNET

YEAR

EVENT

SIGNIFICANCE

1961-1974

INNOVATION PHASE

1961

Leonard Kelinrock's paper on

'packet switching'.

Packet switching concept introduced.

1972

Email invented by Ray Tomlinson

and program written by Larry Roberts.

Email application born.

1973

Bob Metcalf devises Ethernet and LANs.

Client/server computing born:

XeroxPark Labs use LANs.

1974

TCP/IP protocols proposed by

Vint Cerf and Bob Kahn.

Networking independent

of hardware now possible.

1974-1995

INSTITUTIONAL PHASE

1980

TCP/IP adopted as DoD standard.

World's largest computing body

adopts TCP/IP.

1980

Altair, IBM and Apple personal

computers invented.

Personal computing becomes feasible.

1984

Apple releases HyperCard

program for Macintosh.

Hyperlinked documents appear.

1984

DNS (Domain Name System) introduced.

User-friendly IP address

system introduced.

1989

Tim Berners-Lee proposes worldwide

network of HTML documents.

World Wide Web is conceived.

1990

NSF plans a civilian Internet.

ARPANET is decommissioned.

Need for open access civilian

Internet is accepted.

1994

Netscape Corporation formed.

Mosaic browser makes

Internet accessible.

1994

First banner ads appear on Hotwired.

eCommerce appears

1995-2012

COMMERCIAL PHASE

1995

NFS privatizes the Internet backbone.

Network Solutions has monopoly for Internet addresses.

Commercial Internet is born.

1995

eBay and Amazon formed.

eCommerce is successful.

1998

ICANN formed.

Internet address assignment

becomes commercial.

1999

First Internet Bank of Indiana formed.

Online banking becomes a reality.

2003

Internet2 Abiline network is upgraded to 10 Gbps.

200 universities, 60 corporations

and 40 affiliate members enjoy

fast networks.

2005

NFS proposes GENI initiative for new

Internet functionality.

Thoroughgoing Internet improvements

considered.

2006

US Senate holds hearings on 'Network Neutrality'.

Start of ongoing debate on two-tier Internet.

2007

Design of GENI begins.

Start of new Internet with differential

pricing and guaranteed service levels.

2008

Internet Society launches better security 2008-10 study.

Launch of better design initiative

for each level of Internet.

2008

National LambdaRail develops 40 Gbps

second network and first transcontinental

Ethernet network.

Cisco routers provide an experimental

platform for high-speed transmission.

2008

Cloud computing becomes billion dollar industry.

Internet extended to provide on-demand

data processing and storage.

2009

Internet-enabled smart-phones become popular.

Range of Internet and ecommerce

greatly extended.

2009

US Broadband Stimulus and Data

Improvement Act passed.

$7.2 billion made available for

US Broadband systems.

2010

Success of Amazon Kindle, Sony Reader,

Barnes & Noble Nook and iPad.

Digital books come of age

2010

Internet TV add-ons launched by Google,

Yahoo and others.

TV added to Internet Services

2010

Facebook becomes more popular

than Google searching.

Runaway success of social media

continues

2011

Mobile phone applications multiply.

Mobile ecommerce becomes practicable.

Questions

1. Briefly describe the three phases in the development of the Internet.
2. Provide a brief history of American ebusiness over its last, commercial stage.
3. How does the European history of the Internet differ from that of America?
4. What are the difficulties in predicting Internet use in different countries? Give some examples.
5. What, in your view, are the most important Internet developments of the last five years?

Sources and Further Reading

Need the references and resources for further study? Consider our affordable (US $ 4.95)  pdf ebook. It includes extensive (3,000) references, plus text, tables and illustrations you can copy, and is formatted to provide comfortable sequential reading on screens as small as 7 inches.

   Get your eBook here.