Why the Internet Was Not Born in the Private Sector

A common assertion is that the internet represents a quintessential success of state-funded technological development. Indeed, foundational technologies like ARPANET and NSFNET originated from government-funded initiatives. However, a closer examination of historical context reveals that state involvement delayed the development of internet technology for decades, diverting innovation through a costly and circuitous route. Only after regulatory barriers were lifted in the early 1990s were market forces finally able to intervene, catalyzing the rapid growth and widespread adoption of the internet that we benefit from today.

Early Private Networking Attempts Thwarted by Barriers

In mid-20th century America, telecommunications were dominated by AT&T’s Bell System, a regulated monopoly protected by government policy. These regulations may have been intended to ensure universal service but in reality severely limited competition. Critically, AT&T had legal authority to block "foreign attachments” —devices not produced or sanctioned by AT&T—from its network, effectively crippling early private data networking efforts.

This was particularly restrictive for companies wanting to introduce modems (devices essential for computer networking via telephone lines). AT&T routinely blocked or restricted these innovations, forcing companies to either gain special approval, litigate, or abandon their efforts entirely. As a result, many private networking initiatives were stillborn or slow to scale because they needed access to infrastructure controlled by a monopoly carrier. Despite the hostile environment, a few private or non-government efforts in networking were attempted from the 1950s through 1980s:

Carterfone (1959–1968): Inventor Thomas Carter developed a device, the Carterfone, which connected two-way radios to the telephone network, allowing communication from remote locations like oil rigs. Despite its beneficial use, AT&T prohibited the device for almost a decade. It was not until 1968, when the FCC ruled against AT&T, that third-party attachments were legally allowed on the network—opening the path for modems and private data networking, although by then state sponsored networks had taken precedence.

MCI and Long-Distance Competition (1960s–70s): Entrepreneurs attempted alternative long-distance networks using new technologies such as microwave radio. MCI’s effort to establish microwave-based communication lines faced fierce opposition from AT&T, exacerbated by stringent regulatory requirements. It was only in 1969 that MCI secured limited permission after years of legal battles, significantly delaying private data network development.

Packet-Switching Networks: Paul Baran, an early pioneer of packet-switching technology, the basis of modern internet communication, approached AT&T in the early 1960s seeking cooperation on developing a packet-switched network. AT&T engineers, deeply invested in traditional circuit-switched voice technology, flatly rejected the concept as impractical. Other independent initiatives emerged later, including Tymnet (1969) which struggled primarily due to restrictive pricing and dependency on AT&T's leased infrastructure, while Telenet (1975) endured a two-year regulatory battle (1973–1975) to gain FCC approval to offer a commercial public packet-switched service using leased lines from AT&T. Similarly, early packet networks outside the U.S.—such as the UK’s Post Office Experimental Packet Switching Service (EPSS) and France’s TRANSPAC— remained tightly controlled by national telecom monopolies, limiting opportunities for independent innovation and delaying the emergence of private networks.

Government-Funded Networks Crowding Out Private Sector Talent and Resources

While U.S. government regulations constrained private-sector innovation on one hand, substantial public subsidies simultaneously supported government-led projects on the other. In the 1960s, the Defense Advanced Research Projects Agency (DARPA, then known as ARPA) invested significantly in networking, explicitly targeting high-risk, high-reward technologies that quite understandably were "not garnering support in the private sector" (journals.uchicago.edu).

ARPANET, established in 1969, emerged directly from this publicly funded environment as the first operational packet-switching network with the first four connected nodes at UCLA, Stanford Research Institute, UC Santa Barbara, and the University of Utah. It was originally designed to enable researchers at different universities and labs to share computing resources over long distances and to create a communication system that could survive partial outages (e.g., in the event of a nuclear attack).

Throughout the 1970s, DARPA not only financed hardware and software development but also created a community of researchers dedicated to collaborative knowledge-sharing. This government-driven model persisted into the 1980s with the establishment of the National Science Foundation Network (NSFNET), which expanded upon ARPANET by connecting universities nationwide through substantial federal investment.

Resources and talented researchers who might have advanced private networking initiatives were instead concentrated into these publicly funded defense and academic projects: ARPANET's cumulative funding from 1969 to 1989 was approximately $124 million in 1989 dollars (around $280 million today), and NSFNET alone cost roughly $200 million from 1986 to 1995 (approximately $400 million today).

Critically, ARPANET and NSFNET enforced strict policies prohibiting commercial use, restricting them to research and education. This barred private companies from utilizing the public infrastructure even as the technology matured. Only after NSFNET's Acceptable Use Policy was relaxed between 1989 and 1991, allowing commercial traffic, and NSFNET was phased out, could commercial Internet Service Providers (ISPs) fully enter the market.

Lessons Learned

In a very real sense, the early internet had to be a government project largely because regulatory frameworks and monopolies severely restricted private-sector alternatives. Only after these barriers were lifted—AT&T’s breakup, pro-competition regulatory rulings, and the relaxation of NSFNET’s commercial-use restrictions—did private-sector innovation lead to the explosive internet growth we recognize today. Historical evidence indicates regulation and subsidies, despite good intentions, significantly throttled private innovation for decades.

One can only speculate about advancements private entrepreneurs might have delivered on a much earlier timeline without government-imposed barriers and resource misallocation. A competitive market environment would likely have facilitated earlier adoption of decentralized and interoperable standards, lower costs, and more rapid innovation in consumer-driven areas such as security and privacy.

Recognizing the internet as a government-stalled but market-realized success underscores a critical lesson: true innovation thrives best when entrepreneurial freedom prevails. The market's ability to optimize and correct government-induced deficiencies should inspire confidence in free enterprise to achieve genuine, lasting economic and technological progress.