Economic and Technical Drivers of Technology Choice: Browsers

Economic and Technical Drivers of Technology Choice: Browsers (Working paper: please do not cite without permission from authors) Timothy F. Bresnahan and Pai-Ling Yin First Draft: Nov 05, 2003 Abstract The diffusion of new technologies is their adoption by different economic agents at different times. A classical concern in the diffusion of technologies (Griliches, 1957) is the importance of raw technical progress versus economic forces. We examine this classical issue in the modern market of web browsers. Using a new data source, we study browser brand shares and the diffusion of new browser versions. Features of that market also generate novel questions in the economics of diffusion. We find that browser distribution via the expanding market for a complementary technology, personal computers (PCs), had a larger effect on the rate and direction of technical change than technical browser improvements. Timothy F. Bresnahan Pai-Ling Yin Landau Professor in Technology and the Economy Harvard Business School Stanford University Morgan Hall 241 Department of Economics Soldiers Field 579 Serra St. Boston MA 02163 Stanford, CA, 94305 USA [email protected] [email protected] 1 1) Introduction A new invention creates a technological opportunity. The diffusion of the new technology to the economic agents who will use it determines the rate and direction of realized technical change in the economy. We have known since the work of Griliches (1957) that both economic and technical forces shape diffusion. Invention is only the beginning of technical progress. Inventors introduce new technologies into the field and start their diffusion. The movement of the overall economy toward realizing a technological opportunity depends on the behavior of the adopters of the technology. More attractive technologies diffuse more rapidly. To study diffusion, we examine the economic incentives of adopters. They generate the field of users into which the technology diffuses (henceforth referred to as the “diffusion field”). They decide whether to adopt immediately or to wait (determining the pace of diffusion) and what technology to adopt (determining the direction of diffusion). Incentives for adopters to wait rather than to immediately adopt are the key explanation for an economy moves slowly to exploit technological opportunity. These inertial forces include the fixed costs of adopting new technologies and of adapting them to high value uses. The inertial forces can be blunted by practical market considerations. Users’ fixed adoption costs may be overcome by effective distribution and marketing, for example. Ultimately, the pace of diffusion is determined by the interplay between propelling technical forces like raw technical opportunity and economic forces like adoption costs and the success of market distribution. We study the diffusion of new and improved versions of World Wide Web browsers in the late 1990s, where the classic issues in the diffusion of technologies appear in new forms. Suppliers introduced a large number of browsers into the marketplace. Between the first commercialization of the web browser in 1994 and the end of the “browser war” in 1999, there were five major versions of commercial browsers from each of the major brands, Microsoft and Netscape. Each new version of each new brand diffused into the field of personal computer users, and brand shares shifted as well. Both were important phenomena. The diffusion rate of new browser versions was critical for the pace at which the Internet evolved to serve a mass market. Widespread use of a browser of one brand would set a de facto standard for connection between the Internet and PCs. By creating a new dataset, we are able to study the determinants of both the pace of diffusion of new browser versions and the shift in brand shares. The “browser war” has been studied for the determinants of shifting brand shares,1 but as yet there has been no study of the diffusion process. Studying both is important to understanding the incentives, because they show two very different trends. The changeover in brand shares was rapid, with Netscape far in the lead at first and Microsoft dominant later. In contrast, webmasters in the late 1990s complained that the pace of diffusion of new browser versions had slowed. Our results show that the same common economic explanation reconciles that apparent difference. 1 The studies of brand share emphasized different forces, one side taking the view that relative technical advance determined changes in brand market shares, the other that distribution was very important as well. See AEI-Brookings (1999). 2 The central idea of our measurement is to attempt a quantification of the impact of technical progress versus distribution convenience. As our sample begins, some users are already using pre-commercial browsers (such as Mosaic) and version 1 browsers from Netscape and Microsoft. Since the browser was an entirely new application, we measure technical progress from the base of version 1 commercial browsers.2 We measure distribution convenience in terms of the availability of browsers that come with a new computer or with an ISP subscription. We will examine the role of these two different forces in both the brand shift and the diffusion of new versions. A related goal is the examination of a new force relevant to diffusion of a technology like the browser. The widespread use of the Internet caused by the browser meant that a large number of people were buying new PCs and opening new Internet Service Provider subscriptions. Thus, the browser diffused into a rapidly expanding (rather than fixed) field of potential adapters. We examine the possibility that this expansion of the diffusion field affected the rate and direction of diffusion. This would occur, for example, if new users are less subject to inertial forces than existing users. There are several reasons to take up the study of browser version diffusion. (1) The technology is important. (2) There is an existing controversy about the relative importance of technical advance and of distribution in browser brand shares. (3) The diffusion of Internet technologies is understudied. (4) The invention of the browser caused a tremendous upsurge in investments in complements. Some of these occurred rapidly enough to feed back on the diffusion process in the short run. We will try to measure that feedback. (5) This feedback cycle suggests a microeconomic explanation for the economic boom of the late 1990’s as an alterative to stories of overinvestment induced by a speculative stock-market bubble. Perhaps high investment reflected an economy moving in line with an expanding technological frontier coincident with other macroeconomic forces. 2) The Browser Market and Pre-Existing Technologies A web browser lets an individual computer user find, observe, and retrieve information on the Internet conveniently. It is the gateway to new Internet-oriented applications. Web browsers plus online databases permit a wide variety of Internet-based transactions. Individual users have an incentive to adopt a browser in order to get access to all these online assets. Those who build websites, whether commercial or not, also benefitted when many users adopted the browser. More browser users implied a larger audience and more customers for a website. The browser was invented inside the academic Internet by students and staffers at a university. In 1994, one of the inventors founded Netscape to commercialize the browsers. Microsoft entered with its own browser, Internet Explorer, in 1995. Browser quality improved over time at both innovator Netscape and imitator Microsoft. That technical progress gave users an incentive to adopt newer versions. Some browser technical progress, such as “rendering” images more quickly, was directly 2 Of course, nothing is ever an entirely new application, and one might follow Nordhaus (1997) by modeling the technical level of a broad “online services” category which could include the predecessors to the widely used Internet. Before the widespread use of the Internet, however, online services reached approximately 2.5% of their current total users and had a fundamentally different approach to technology and to its market organization. 3 useful to the user. Yet many improvements in browsers were less narrowly focused on the user alone, instead permitting webmasters to make more advanced web sites.3 This is why webmasters cared about the slowdown in the pace of diffusion of new browser versions in the late 1990’s. At the same time, there were fixed costs of adopting a new browser version. The marketing managers selling browsers focused on two elements of the fixed costs as particularly important. One was simple distribution convenience. Users might conveniently get a browser with a new computer or when they signed up for Internet service. Less conveniently, they might download a new browser from the web. (Over the period we study, modem speeds grew faster while browsers also grew larger, so the time costs of a download remained roughly constant for the average user.) The second fixed cost identified by marketing managers is the complexity of installing a new piece of software on a computer. Less-sophisticated users tend to avoid that prospect. Less- sophisticated users also tend to be uninformed about new products. The implications of both kinds of fixed costs are that users might delay adoption of a new browser version. How many users might delay adoption is, of course, an empirical question. Some people use the software that comes with their computer until they get a new computer. Others are quick to get the latest updates. The prevalence of these distinct behaviors are depends not only on the size of the fixed costs but also on the distribution of tastes in the population, especially tastes for distribution convenience, the time and hassle costs of downloading. We attempt to testhe hypothesis that fixed costs cause quantitatively important inertia. The broader context within which we attempt to measure a selected group of causal flows can be seen in Figure 1.

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