Paradigm Shifting Technologies: Surprising Lessons on the 50th Anniversary of Smartphone Technology

AT&T initially dismissed the most important electronic device on the planet today. How early decisions on mobile phone technology has shifted the balance of power over three decades and its lessons for potential paradigm shifting technologies today.

Last week we celebrated the fiftieth birthday of the first mobile phone industry. On April 3, 2073, Motorola engineer Martin Cooper hoisted a 2.5 pound prototype to his ear and called rival Joel Engel at Bell Laboratories to declare that his firm had a functional portable phone.

Martin Cooper’s first mobile phone call on Sixth Avenue and 53rd Street in New York City.

Martin’s call may be considered the first sentence in a paradigm shifting saga from fixed telephony to the smartphone industry we know today. Predecessors date back to 1917 when Eric Tigerstedt, called “The Thomas Edison of Finland,” filed a patent for “a pocket-sized folding telephone.” Bell Labs launched the first “Mobile Telephone Service” in 1946 with 80-pound equipment supporting just three concurrent calls for the entire St. Louis metro area.

Regardless of when one begins the mobile timeline, little commended the shoebox sized phone used by Martin Cooper that required ten hours to change for 35 minutes talk time. A decade later, when I made my first mobile call, “the brick” still weighed a pound and cost over $3500. In 1980, McKinsey ascribed a limited future to mobile telephony envisioning not more than one million portable phones in America, just 0.3% of the actual U.S. market today.

Few could have anticipated the impact of smartphones today from its humble origins in 1973. Statistica estimates there are over seven million mobile users, more than the worldwide adult population. The average person spends nearly seven hours on screens per day, most of it on mobile phones. We use phones for calls as initially intended, but text messages are now four times more prevalent than phone calls.

Smartphones are the Swiss Army knife of electronic devices enriching our daily lives in countless ways. They are our indispensable companion for business, entertainment, relationships and daily tasks. Smartphones have displaced cameras, credit cards, wallets, alarm clocks, watches, maps, books, newspapers, calendars, business cards, personal navigation devices and personal coaches. As Table 1 indicates, smartphones have created and transformed dozens of industries. Perhaps less appreciated, smartphones are the economic backbone of many developing countries and have helped pull up to one billion out of poverty in the past two decades.

Table 1: Selected Industries Impacted by Smartphones

Opportunity Realized and Foregone: Industry Transitions and National Interests

The global wireless industry, a $2.5 billion market, has created a constellation of star companies that brighten the tech galaxy. Apple, Qualcomm, Samsung, Foxconn, Facebook and hundreds of wireless operators thrive on mobile.

Yet the wireless industry is also a story of missed opportunity. AT&T developed the first mobile prototypes and had an inside track on the Internet, yet internal resistance delayed commercialization of both by a decade or more. In 1979 NTT leapfrogged AT&T and launched the first commercial cellular network in Japan. Japan had made significant inroads into the auto and consumer electronics industries and NTT’s early entry into wireless was deemed yet another competitive threat. In response to U.S. government pressure, AT&T hired McKinsey to assess the mobile opportunity. Savvy consultants divine and reflect their client’s wishes, and McKinsey dutifully produced its skeptical report on wireless prospects. AT&T, eager to preserve its fixed telephone monopoly, readily accepted the verdict.

Frustrated with AT&T’s recalcitrance, the U.S. broke up the balkanized business in 1984. Yet Europe had already launched the Nordic Mobile Telephone system in Scandinavia in 1981. As U.S. firms fragmented efforts across multiple wireless protocols, Europe standardized on GSM. Finland launched with the first 2G GSM network in 1991. Rapid user uptake in Scandinavia propelled European vendors Nokia and Ericsson, which emerged as the global GSM standard bearers for the next twenty years. By 2018, the GSM standard served over 5 billion people in 220 countries.

While Europe and Asia had seized the initiative in wireless, the Internet had still not commercially deployed when AT&T was dismantled. The U.S. Defense Department conceived ARPANET, the Internet’s predecessor, in 1963 and funded its development until 1990. Absent AT&T support or interest, PSInet developed an Internet backbone for commercial use in 1991. AOL and Netscape introduced the Internet to a broader audience, which created demand for online content and services. American startups responded to this opportunity and have ridden the crest of an Internet innovation wave for the past three decades. Ten of the top 100 US public companies by market capitalization are Internet businesses, including Google, Facebook, Cisco, Salesforce, Netflix, ServiceNow and Paypal.

In contrast, the U.S. had lost the lead in wireless before the breakup of AT&T and saw the mobile gap with Europe and Asia widen for three decades. In 2006, French Alcatel acquired Lucent, the marquis network equipment vendor from Bell Labs. Under pressure from Huawei, Canadian network equipment vendor Nortel Networks filed for bankruptcy in 2009. Motorola split in 2011 and ultimately sold its phone business to Lenovo and network equipment division to Nokia.

Asia led smartphone app innovation in the decade before the iPhone launched in 2007. Japan deployed 3G and was first to the mobile Internet after NTT Docomo launched i-Mode in 1999. Leveraging this new platform, Gree and Mixi pioneered mobile social networking and mobile gaming while Rakuten led in mobile content and commerce. Text messaging was popular in Asia years before it reached American shores. TenCent launched instant messaging app QQ in 1999 and its successor WeChat was the most popular messaging app with over 1 billion users in 2018. South Korea first launched wireless broadband in 2006 and was the first country to offer nationwide broadband in 2011. Naver, Kakao and Coupang offer leading commerce, gaming and social networking services leveraging Korea’s broadband service and now have a combined market cap exceeding $75 billion.

Apple turned a long receding tide and brought mobile innovation back to America when it launched the iconic iPhone. Smartphones shifted the locus of innovation, and U.S. startups launched competitive mobile first businesses for the first time. WhatsApp, Uber, Square, Snapchat, AirBnB and Doordash — all U.S. mobile first companies started shortly after initial launch of the iPhone in 2007 — have emerged as global leaders in their respective markets and are collectively valued at over $250 billion.

While the iPhone has facilitated a resurgence of U.S. mobile innovation at the application layer, the telecom equipment market has consolidated around three global players: Nokia, Ericsson and Huawei. The expansion of Huawei has raised geopolitical interest in the telecom equipment market as data access has become a strategic asset both for companies and nations.

Industry consolidation is a byproduct of global trade as scale promotes lower costs. Yet we may not fully appreciate the longer run costs that industry consolidation exacts with innovation. A monopolistic AT&T delayed development of the Internet and mobile industry by over a decade and cost America the lead for three decades in the wireless industry. A highly consolidated wireless industry benefits consumers in the short run but crowds out startup innovation and may hurt consumers in the long run.

Lessons for the Next Paradigm Shifting Technologies: A Look Back to Look Forward

As Winston Churchill noted, the more we look back, the further we can look forward. Understanding how the mobile and Internet industries developed informs strategy in pursuing the next paradigm shifting technologies.

When he made the first mobile phone call in 1973, Martin Cooper could not have anticipated the future impact of the wireless industry nor the seminal moment in history that his call would one day represent.

Paradigm shifting innovation such as mobile or the Internet merits special consideration for their epochal impact across technologies and industries. Across the twentieth century, paradigm shifting technologies emerged about once per decade. Table 2 summarizes selected seminal technologies with far reaching civilian applications that reached critical mass usage in the 1900s. Chemicals and pharmaceuticals are excluded as several industry leaders were established in the second half of the nineteenth century.

Table 2: Selected 20th Century Paradigm Shifting Technologies

As Table 2 suggests, wireless and the Internet share several characteristics with these paradigm shifting technologies.

1. Long Development Cycles

Seminal technologies have development cycles that extend for decades. For electricity, automobiles, radio transmission, coolants and antibiotics, it took an average of 39 years to demonstrate a minimum viable product from when research started for paradigm shifting technologies that reached critical mass before 1950. Another 48 years were required to reach critical mass adoption from working prototypes. The development cycle from start of research to critical mass was 87 years.

The development cycle for platform shifting technologies that came to market after 1950 has accelerated but still takes decades. For television, semiconductors, biotech, software, wireless and the Internet, it took an average of 25 years from the start of research to minimum viable product and 45 years total to reach critical mass adoption.

Funding early-stage research is well beyond the scope of venture capital firms, which typically manage funds with a ten-year fund life. Governments fund most basic research done at universities and labs for proof of concept and working prototypes in foundational technologies. Venture capital funding and corporate research apply primarily for applied research after proof of concept.

The success and impact of these paradigm shifting technologies is clear only in retrospect. Basic research is an uneven process with bursts of progress followed by periods of disappointment and stagnation.

Artificial intelligence research began in 1956 and has survived at least three AI winters. For those of us who have followed artificial intelligence for many decades, skepticism is a natural response with each new advance. Further study may seem futile during periods of disappointment and stagnation, especially for inventors, who may not see the fruition of their work during their career. What Machiavelli observed in the fifteenth century is equally true today: “There is nothing more difficult to plan, more doubtful of success, nor more dangerous to manage than the creation of a new order of things … Whenever his enemies have the ability to attack the innovator they do so with the passion of partisans, while others defend him sluggishly, so that the innovator and his party alike are vulnerable.”

Revisiting the history of wireless and other paradigm shifting technologies reminds us that a long, circuitous development path may simply be the entry price for the opportunity that awaits when technology catches up with the vision.

2. Long Term Impact: Innovation Builds on Innovation

Paradigm shifting technologies may have long development cycles, but their impact is often broad and long lasting. Each of the technologies in Table 2 are platform inventions that remain relevant today and were catalysts for future innovation over several decades.

Innovation builds on innovation. Without electricity, few of the landmark innovations of the twentieth century would be possible. Electricity is a necessary input for radio transmission, refrigeration, television, consumer electronics, semiconductors, wireless and the Internet. Semiconductors propelled advancements in computers, software, mobile phones and the Internet.

The cumulative impact of innovation helps explain the accelerating pace of technology development and adoption. The widely shared graph in Table 3 shows the cellphone and Internet at the end of the adoption curves. We should expect further acceleration of adoption cycles with the rapid diffusion of information made possible by mobile phones and the Internet. The rapid adoption of ChatGPT, which reached one hundred million users within three months of public beta launch in November 2022, reinforces this view.

Table 3: Adoption Rates of New Technology

Each of the early paradigm shifting technologies spurred innovation for a half century or more. Our celebration of a half century since the first mobile call reminds us that we are still in the early innings of forthcoming innovation spurred by wireless technology and the Internet.

3. Leading Innovation: The Knowledge Frontier and Knowledge Gaps

Isaac Newton remarked in 1675, “If I have seen further than others, it is by standing on the shoulders of giants.” Yet as Benjamin Jones observed in “The Knowledge Trap”, giants have gotten much taller as innovation has advanced. Standing atop taller giants now involves a much longer climb. The average student now spends thirteen years in school, five more than in 1900, yet knowledge workers typically require 15–20 years of education and perhaps many years thereafter in on-the-job training to develop expertise.

Inventors, companies and countries must be on the knowledge frontier to lead in innovation. As Nobel Laureate Paul Romer noted and as illustrated in Table 4, nations fall off the knowledge frontier once technical gaps and knowledge gaps emerge. Innovation begets innovation through knowledge spillovers, but knowledge gaps tend to persist and grow. Like falling off the back of a peloton in biking, a company or country that falls off the knowledge frontier must pedal that much harder to get back into the pack.

Table 4: Object Gaps and Knowledge Gaps

The world is flatter with Internet and wireless technology, yet cities are spiky and innovation tends to cluster in an ideas economy. Even with the easy access to information worldwide, knowledge spillovers that are catalysts for ongoing innovation often transmit through local, informal networks. Universities and labs are talent magnets and conduits for formal and informal knowledge transfer. Investors and service providers cluster in the densest innovative ecosystems. Aspiring entrepreneurs cluster where ideas foment and funds flow. Over 75% of global venture funding goes to startups in just 24 cities.

Companies and cities benefit from virtuous cycles when at the forefront of technology and experience vicious circles when lagging in innovation. American firms led Internet development for thirty years by being first to market with the Internet. But America lagged in mobile for three decades when it fell behind Europe and Asia in wireless deployment. AT&T’s failure to commercialize its mobile technology created a small gap that magnified under the telescope of further innovation. The breakup of AT&T may have salvaged American leadership in the Internet.

The 20th century has been described “the America century,” a time of economic growth, prosperity and expanding global influence. America firms led the world in each of the paradigm shifting technologies in the past century except wireless technology. While venture capital and entrepreneurs receive much of the attention for commercializing innovation, the all-important role of leading in basic research and funding the long and unpredictable process of inventing paradigm shifting technologies has received less attention. Unrecognized among the din of daily news featuring the latest hot initial public offerings, is government’s quiet role in promoting innovation decades earlier through funding university and basic research that helped secure leadership in these vital technologies.

Global competition has increased. In 2000, nearly 90% of all venture funding went to startups in the United States. Today over 50% of venture funding is in Asia and Europe. We welcome this trend as broader capital access should accelerate innovation and spur economic growth by giving more entrepreneurs the opportunity to innovate in their home country.

Accelerating innovation raises the bar for everyone. Companies and countries must be more vigilant than ever to attract top talent and stay at the forefront of innovation as seemingly small decisions can magnify over time. The breakup of AT&T was too late to save U.S. leadership in mobile telephony but occurred in time to salvage Internet leadership.

Companies allocate resources to exploit current assets and explore new opportunities. This review of paradigm shifting technology over the past century reminds leaders that investing in the future is essential.

Government investment in basic research is vital for future innovation, economic growth and national prosperity while seeding the next generation of startups and corporate champions. The impact of government investment is less visible as future generations benefit from public munificence, yet this review reminds us that cuts that may seem expedient in the near term can have damaging long term consequences. Astrophysicist Neil Degrasse Tyson laments U.S. federal government defunding of the Texas Supercollider in 1993, which shifted the locus of research to CERN in Europe resulting in the loss of U.S. leadership in high energy physics in the following decades.

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What are the paradigm shifting technologies of the next century? Artificial intelligence, robotics, autonomous driving and quantum computing loom as candidates. Who will lead in these paradigm shifting technologies of the future? This is the topic of my next blog. Suffice to say for now, scientists, entrepreneurs, companies and governments all have a vital role in who leads in the next century.