From a firm’s perspective, the emergence of a new technology wave is a new opportunity to generate a financial return. The question is precisely how. That topic remains as salient today, in the era of artificial intelligence, as it was when firms first encountered smartphones, the commercial internet, and personal computers.
Before we fully embrace this new era, let me suggest that we review lessons from the most recent era of technology adoption. In particular, let’s focus on consumer computer technologies (CCTs) – the mix of the mobile ecosystem and the widely used internet, enhanced by Web 2.0.
Some research partners and I recently analyzed returns from co-invention in CCTs. By co-invention, we mean the invention of new applications by firms that utilize CCTs in their business. That investment typically involves developing business processes and practices to complement the adoption of CCTs and support the introduction of new services and business models.
This column provides a brief overview of the study’s key points. Some of the implications arising from these points might seem obvious, but it surprised us that all the consequences would stem from the same framework. For more information, please see the reference at the end of the column.
Framework
Consider a straightforward model of the two types of projects undertaken by firms, where one utilizes the new technology as an intermediate input and involves incremental co-invention. The other also uses the technology as an intermediate input, but requires something more ambitious and innovative for the firm. Referred to by many names in everyday speech, for brevity, we will label it as novel co-invention.
Incremental co-invention in CCTs was exceedingly common. That is because, when faced with a low-cost expansion of existing services, most firms choose to invest in it. For example, should a firm build an app? This was a comparatively straightforward economic decision, especially when the benefits were directly measurable in terms of web traffic that enabled a marketing funnel into sales leads or ad revenue. Accordingly, most firms did build apps.
Novel co-invention differed. Success was difficult, costly, and rare, but you knew a successful novel co-invention effort when you saw it. Many users found the service compelling. It established a new category of use or altered leadership in an existing end market. Think of Netflix in its early years, or the elaborate efforts required by your pharmacy to send you text reminders to refill a prescription.
For a firm involved in novel co-invention, adopting CCTs was usually less straightforward, often because the payoffs were several years out from the initiation of investment. For example, when Netflix first began transitioning from mail-order DVD rentals to streaming, it faced considerable uncertainty about how to do so at scale. It took them more than seven years to find a predictable and reliable process.
In an entrepreneurial setting, the economic constraints bind in different ways. For example, should an entrepreneur build an app for a use case that no other firm covers? Consider Snap, which introduced ephemeral messaging with Snapchat. This novel social experience drove rapid adoption among young users, creating network effects that fueled explosive early growth before competitors introduced similar features. Indeed, Snap reached a place that few entrepreneurs ever attain. Alas for them, their time at the top was brief.
Here is my point: novel co-invention was risky in the CCT era. Private returns were uncertain. Yet, as we all know, many firms did build these. Some succeeded, and most failed, sometimes spectacularly.
Implications
What does all that imply? For one, comparisons between investors in incremental co-invention should reveal a specific pattern of returns, one proportional to the pre-existing customer revenue.
Here is what that means. If one observes a single industry as it evolves into an online market over time, and if every firm made incremental changes, then everybody would have received a 2%, 3%, or 4% return, and nobody should miraculously gain a 50% return on their website.
We tested that prediction. We rolled up our sleeves and collected information from the Internet Archive about the online experiences of terrestrial radio and newspapers, in each case in 2013. We compared that with their listenership in 1993, twenty years earlier. In radio, we were able to track the experiences of over 2000 stations. In newspapers, we examined approximately 100.
The framework predicts that radio stations with more listeners in 1993 would have a larger online audience in 2013 than those that started with fewer listeners in 1993. That is what we see. In other words, radio appears to be an industry without any novel successful co-invention as of 2013. We make a similar prediction for the audience size for newspapers, but see a slightly different outcome. Newspapers with larger circulations gained a more than proportionate online readership compared to those with smaller circulations.
Compare incremental and novel.
Here is another implication: Incremental co-invention should be as widespread as the businesses that use it. In contrast, the returns on novel co-invention should be skewed with only a few big winners and many losers. Novel co-inventions should also be tied to the labor market for technical talent or industry specialties.
Testing this contrast is no small task. It requires an examination of all industries. We rolled up our sleeves again and found a way to collect data on private returns for 2400 leading online properties in 2013, roughly split between smartphone apps and websites. Through extensive (and sometimes tedious) work, we classified all of these into incremental and novel co-invention efforts that led to their production. Some of these industries are so new that we also had to build a new product classification to capture the main categories in the data.
Figures A and B illustrate the distribution of value creation across firms. These should differ between incremental and novel innovations. Indeed, we find that it does. Incremental co-invention grows from firm assets that support existing business, while novel co-invention grows from an entirely different origin. Local labor markets with appropriate technical and commercial domain knowledge supported investment in novel uses of CCTs.
We then examined a related, open question. There is no theoretical reason why the total value created by novel co-inventors should be bigger or smaller than that made by incremental co-inventors. A small number of big hits could exceed the total of a large volume of small contributions, or vice versa. Only data can settle the question.
As it turned out, the aggregate private value created by incremental co-invention is smaller than that made by novel co-invention, and by a considerable amount. Empirically, we estimate that incremental co-invention accounts for approximately 6% of the total observed value among the top 2,400 firms. If every bit of value we do not observe in the long tail of small firms is attributed to some incremental investment, it still accounts for less than 18% of the total value.
In other words, novel co-invention drove the vast majority of new private value creation in CCTs, and in a small set of industries where novel co-invention thrived; like it or not, Google, Facebook, Netflix, Amazon, and other top hundred CCT-based companies owned a significant portion of the profits from adapting CCTs.
Figure A: Incremental Co-Invention Distribution Across Industries
Figure B: Novel Co-Invention Distribution Across Industries
To be clear, sometimes these companies came up with the novel co-inventions themselves (e.g., the Google Search Engine and Ad network), and sometimes they bought parts of it (e.g., Google bought YouTube after they tried and failed to develop something similar), absorbing it in the big company. Sometimes these received enormous investments, and sometimes these purchases went nowhere.
That result raises questions about why novel co-inventions sometimes originate in entrepreneurial firms and sometimes in leading firms. That is a bigger topic for another day. Today’s column focuses on the lessons from characterizing these fact patterns.
Concentration
There is one more subtle prediction. If all co-inventions were incremental, there would be little impact on competition and market structure. Similarly, the industrial and geographical distribution of economic activity would change little, as they are based on the existing choices of firms and their existing assets. However, novel co-inventions should not be widespread. It should concentrate on a few industries and in a few places.
As expected, four related media and entertainment industries, as well as retail trade, collectively account for 97% of the value from novel co-invention, with targeted advertising being the most significant. Most of the manufacturing and several additional significant sectors, such as healthcare, are absent.
To be sure, incremental co-invention is more widespread industrially. However, it is also less impactful in creating value.
Novel co-invention should also concentrate geographically. To check this, we conducted another forensic investigation into the location of each product’s co-inventing firm’s headquarters.
Location (CSA, CBSA, or Rural Town)Freq.San Jose-San Francisco-Oakland, CA595New York-Newark, NY-NJ-CT-PA422Los Angeles-Long Beach, CA209Seattle-Tacoma, WA126Washington-Baltimore-Arlington, DC-MD100Boston-Worcester-Providence, MA-RI-NH86Atlanta–Athens-Clarke County–Sandy Sp68Dallas-Fort Worth, TX-OK65Chicago-Naperville, IL-IN-WI60Philadelphia-Reading-Camden, PA-NJ-DE46Austin-Round Rock, TX44Denver-Aurora, CO31
Again, as expected, we find that the location of incremental and novel co-invention differs.
Because incremental co-invention builds on existing business, it is geographically distributed widely, following the existing location patterns of the co-inventing firms. In contrast, the geographic outcome of novel co-invention differs sharply, with four prominent regions emerging for novel innovation: the greater San Francisco region, New York, Seattle, and Los Angeles.
San Francisco and Seattle are no surprise, as they have long been centers for technical talent, and many firms there zig-zagged their way into media and entertainment markets. New York and Los Angeles firms had the opportunity to join them during this technology wave because their cities possessed the entertainment industry’s human capital, and many firms there had to zig-zag their way into technology.
Conclusion
We are not the first commentators to notice the bifurcation of results in the commercial internet. However, most commentators emphasize the winner-take-all competitive dynamics that result in a small number of massive providers.
We took another approach. You might call it reductionist for eschewing elaborate explanations about why things happened, but simple has advantages too. It boils results down to either/or and incremental/novel, making it easy to observe. If that trend continues into the new AI era, expect to be able to track project outcomes this way.
Reference[1] Tim Bresnahan, Shane Greenstein, and Pai-Ling Yin. 2025. “New Economic Forces Behind the Value Distribution of Innovation.” National Bureau of Economic Research, Working Paper 34090. https://www.nber.org/papers/w34090
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October/November 2025