No New Economy Under the Sun
The Lessons of Mastercard

Michael Turner

July 15th, 2002

It's pretty hard to imagine the New Economy bubble without the ubiquitous credit card. The potential of the Web to offer payment for products was seen not long after the browser made its first appearance. Early consumer reservations about sending credit card numbers securely over the Internet rapidly gave way to wild abandon. In Japan, where the credit card has an infirm hold and a confusing presence, much "e-commerce" is still done by settling payments at nearby convenience stores - which have, at least, the saving grace of being much more convenient in Japan than in the U.S. For the U.S. style, clearly, plastic was an "enabling technology" for the Web.

The first universal credit card was Mastercard, which seemed to come out of nowhere at the time. As a phenomenon, perhaps there's some family resemblance to the explosion of the Web. This is history I find well worth exploring, for what it might say about our erstwhile New Economy, and you're invited along.

But first ... let me rehash the early history of the Web. This account may have a few interesting wrinkles that aren't part of the common lore.

The Web: An Explosion of Tangles

It's never enough to just have an idea. The explosion of the World Wide Web - an ongoing explosion, even if dozens of business models based on it have failed - is a case in point.

The Internet had been around for some time already. There were relatively-uncentralized information search utility systems (e.g., WAIS), there were browsers with hyperlinking over the Internet (e.g., the Gopher system).

Nor is enabling technology enough. Actually, none of this Internet development really required Moore's Law - a continuous doubling of computer power for the forseeable future. Sure, that helped, but after a certain point in the mid-80s, it wasn't essential. The Internet and the Web (or things like them), would've happened anyway, growing more slowly, and on a smaller scale.

(Not that Moore's Law didn't play a role. Personal computers with graphical user interfaces, megabytes of RAM, and 32-bit microprocessors were available to the masses. This made a big difference.)

So the technological possibilities had been worked out. Those weren't enough by themselves, though.

Government R&D; isn't enough by itself. Thinks like web browsing had been demonstrated as early as the late sixties, most of it government funded.

Then ... Mosaic. The idea: web browsers should support in-line graphics image formats. People like to look at pictures, after all. What could be simpler? What could be more obvious? Why hadn't people done this before?

Well, for one thing, the lionized progenitor of the Web, Tim Berners-Lee, had set the tone of the debate on this issue: graphics would drag the Web into the gutter.

And he was right.

Still, there were a lot more people in the gutter than there were in Berners-Lee's ivory tower. And so it was left to two undergraduate NCSA hackers, Eric Bina (hard-core programmer) and Marc Andreesen (shameless promoter, coordinator, flak-catcher) working at intern-level wages, to play Prometheus in the name of Eros. (Or do I mean the other way around? Oh, never mind.)

The important thing: at $6.85 per hour, there was no big loss in their supervisors neglecting to supervise them to do what they were hired to do. The easiest way to be an anarchist is to make sure you don't really matter in someone else's bigger scheme of things, AKA government. This is why anarchism has never really taken off - it can't get big, by the very nature of it. Size sometimes does matter, and nothing's bigger than government.

This was hacking done on the taxpayers' nickle. If this was anarchism, it was anarchism within government. The National Center for Supercomputer Applications (NCSA) couldn't very well go into the business of providing software to the masses, particularly not to the pornography- consuming masses. But since Mosaic was bought and paid for by the taxpayers (even if the masses didn't know it at the time), NCSA couldn't very well say, "No, we won't distribute it." It belonged to all of us already, in some sense.

So NCSA had to give it away. And this was easy enough for them. Fast internet connections? They had 'em. NCSA was a significan source of traffic on the Internet at the time - atmospheric modeling and research involves huge amounts of data transfer among many research institutions.

Hence, NCSA Mosaic. Sure, there were commercial spin-offs. Spyglass (remember them? no?) was an early licensee, who later licensed their work to a certain software company in Redmond that found itself playing catch-up ball.

One consequence of giving Mosaic away was that it became multi-platform very quickly. It started in a Unix environment, but was soon running under Windows and on the Macintosh, which is what really mattered for mass-market acceptance.

Now, what's interesting about this is something that wasn't really much noted in the feverish gold rush of the late New Economy: profit-avoidance, and profit-prevention, enforced by the government, were at least as important as the various profit-driven forces that provided the underlying technology for browsing.

Also important was selective disobedience of the rules when it seemed both possible and convenient. As long as scrutiny could be avoided, certain walls were easily breached (or tunnelled under.)

So it was a curious blend of bureacratic barriers, government support, free enterprise, and anarchic individual action (albeit conducted in a skulking manner) that touched off the explosion of the World Wide Web. Had it been left to Tim Berners-Lee, the explosion might have been later, and considerably muffled.

Let's see if we can't find a similar blend in the birth of universal credit cards as a technology.

In the Beginning, There Was ... Plastic

Where did Mastercard come from? When it arrived, there were charge cards around, of course. But they were fragmented into regional markets, or only supported by certain banks, or could only be used for certain things like paying for restaurant meals (Diners Club), or at certain chain stores, or service stations. They were clustered in regions, or associated with existing proprietary supply networks.

And yet, almost overnight, it seemed, there was the nationally-recognized credit card: Mastercard.

The story starts with one Prof Melvin B. Salveson, who was proposing a tie-up among several California banks to compete with Bank of America's charge card, Bankamericard. Salveson's proposal was a non-starter with the banks he approached - they didn't see how any bank could make money on consumer credit. "The reason we're not interested in Salveson's proposal isn't that we think he has planned his company badly," they said, "but that we just don't think there is any money in the credit card business." Why chase Bank of America into a money-losing market?

Michael Phillips, an executive at Bank of California was paying a social call to his counterparts at Wells Fargo Bank, and was irate when he read Salveson's plan. Having worked at Bank of America, he knew otherwise: personal credit could be quite profitable, if, for example, you applied service charges, a revenue source that was absent from Salveson's proposal; and if you were willing to be patient for a few years. Salveson also had little concept of how the banking industry was regulated. Phillips felt he could do a better job of designing the system.

Nevertheless, mindful of the general industry perception of consumer credit, Phillips decided not involve his current employer in the plans that unfolded, until he could make a case. When the bank group's plans had firmed up more under the subtly-guiding hand of Phillips, he invited one of his superiors to represent Bank of California in the group.

Within six months, the organization - Western States Bancard Corporation - had two hundred members. The card name, selected from focus group studies: "Master Charge."

Early market research revealed that a card wouldn't be very popular if it was offered by a single bank, especially a bank with large market share. In part because of these user perceptions, Bank of America was later to change their card's name to "Visa", and to start broadening its base. This was shortly before Master Charge entered the market, but after it had been announced. Master Charge had to make its plans public to avoid regulatory sanctions. Every bank had to be able to join, under a regulatory classification known as "bank clearinghouse" - vendor- neutral payment intermediary.

As one participant, George Briggs, head of marketing at United California Bank at the time, put it in an interview: "the biggest, toughest question of all, is the legal justice, antitrust question. After you got over whether your own bank management even lets you think about that."

No bank clearinghouse in history had ever had a consumer brand image, however. Clearinghouses had needed to balance the interests of banks, but not merchants and consumers as well.

Bank of America was quick to strike back: they tried to convince merchants that they couldn't use the imprinting device given to them by BofA for Mastercharge.

The Western States association told the merchants they could use the imprinting device supplied for Mastercharge with any card - including BankAmericard (soon to be Visa.)

Bank of America also wanted to charge merchants for the use of the Visa-only imprinting device. The counterblow? Mastercharge devices ended up being given away free. Bank of America also shot itself in the foot at one point by fielding defective devices.

If good artists borrow, great artists steal: much of the graphic design for Mastercharge was lifted from BankAmericard.

Prepared ground was important, as George Briggs pointed out: "the Interbank group is ... part of where it got started, because ...that was already a forum, so to speak, for all of this. And the creation of these regional bank-card-association groups gave you the operating basis all around the country to go national."

Yet another, later competition issue was an Arkansas court decision. George Briggs again: "... the court ruled that you could in fact issue both, and it was illegal for either one of the cards to preempt the other one if the bank chose to issue a card."

And on the success of Master Charge solicitation schemes: "Well, don't forget you were sharing information with everybody." Competition for merchant accounts would be a house-to-house battle, but in marketing strategy, the banks shared because they had to.

Bob Footman, who was among other things, the IT brains of the Master Charge startup operation: "Oh, by the way, this was all, up 'til this minute, ... illegal. Because it was collusion. Competitors can't do this."

It was Footman who had, perforce, gotten the group into regulatory terroritory. He had collected marketing directors from the banks to be on the Master Charge marketing committee, because, unlike the ad directors working on the project up until then, bank marketing directors had real authority.

He was told soon after by John Austin, formerly of BofA: "There are six men in jail now in the banking business that were all caught by the Justice Department for marketing collusion with another bank."

According to Footman, until then "... it never once crossed my mind that these banks were competitors. These were cooperators. How do we compete with BankAmericard with four banks, [when] maybe all four of them equalled [BankAmericard]?"

"For two hours, I'll never forget, we just went back and forth, back and forth. 'I've gotta have these men.' And John listened to me shout and scream. And he realized that I really was serious. How could we have a card without Richard Rosenberg and George [Briggs]?"

"All right," Austin said, finally. "But they can't be a marketing committee. I'll tell you what. We'll call it the planning committee. No one has gone to jail yet for planning. Let's see how that flies."

"So what about my conference reports?" asked Footman.

"You call everybody up and have them destroyed." said Austin. "Right now. Go and reissue it as Conference Report No. 1 of the Planning Committee."

Bob Footman was also instrumental in keeping Master Charge from being branded as Californian. This was before the "Nevada banks ... appeared on our doorstep." Bob Footman turned them down at first, but they threatened to sue. The result: "They're in." However, to do interstate transactions, Master Charge had to be in the Interbank system.

This turned out to be a blessing in disguise. It became "Mastercharge, the Interbank card." When Marine Midland Bank in New York, the problem was easily solved: the Interbank 'i' logo was already designed into the card. Master Charge went from Western States to national, almost without thinking about it.

For the initial investment in point of sales equipment, Bob Footman said, "I spent $4,000 of the [ad] agency's money without asking anybody. And then I billed, when it came in, like a sign to go on the window, they would buy 5,000 of them, and I would bill them. So I got the money back But I became a bookkeeper, for God's sake. Keeping track of all this point-of-sale.

When asked by Michael Phillips if BofA disliked the competition, Footman replied, "Liking or disliking was not the issue. But if there'd been anything at all in that line, I think they would have approved, deeply, because then, again, it takes the curse of collusion off them, too. .. So BankAmericard now had a legitimate reason to unite to compete. Which they did, very well."

Mosaic and Master Charge Compared

The story of Master Charge revisits issues that most of us associate almost exclusively with the "New economy". One of them is, clearly: increasing returns to scale. Get big enough and you can get bigger almost effortlessly. One way to get big, short of going for monopoly advantage, is to share and share alike.

Another common thread is vendor lock-in. Communications protocols lock themselves in once increasing-returns-to-scale kick in, so vendors attempt to lock in control of protocols. Microsoft tried to gain control of HTML, Java and Javascript. Bank of America tried to get merchants to use only their imprinting device. Master Charge "open-sourced" their imprinting technology, giving it away, and not restricting it to any particular card.

Regulatory issues appeared in both arenas, but because banking regulation has an old, not to say hoary, tradition, these issues raised their heads fairly early in the proto-history of Master Charge, and had to be worked around. At various junctures, anti-competition issues were simply ducked - the "marketing committee" became "the planning committee". But there wasn't much headroom to begin with, and Master Charge might have become just another small bank grouping, regionally bound, had the group not been forced to consider anti-trust issues almost at the outset, and chosen the most expansionist strategy consisten with the law. Not so with Microsoft in the browser wars, which revealed that the company had achieved a massive and dangerous increasing-returns-to-scale advantage before regulatory thought had gotten a chance to catch up with the situation.

More generally, the government's role in technology dissemination can be seen in both cases. NCSA had to give away Mosaic, though it could also license the technology to private companies. Had it not been forced to share, web browsing might have not been an overnight success. Anti-trust forced Master Charge to be inclusive, which ironically also helped Visa get started.

Disobedience played a role. As Footman had forcefully pointed out to him by Austin, everything that the Master Charge "marketing committee" was doing up until that point was illegal. A documentation sleight-of-hand solved the problem, but that didn't make it any less illegal. In fact, it was probably more so. In the case of Andreesen and Bina, their supervisors might well have been within their rights not only to fire the two of them, but also have the sued, for working on unauthorized projects. As it was, their supervisors saw an opportunity to share credit for a phenomenon.

It doesn't pay to go too public, too soon. What if Michael Phillips had gone to his supervisors immediately? What if the "marketing committee" had gone public under that name. And what if Andreesen and Bina had approached their supervisors with a project proposal, instead of doing Mosaic as a bootleg project? "It's a poor bureaucrat who can't stall a good idea until even its sponsor is relieved to see it dead and officially buried." [Robert Townsend, Up the Organization, section "Ejaculation, Premature."] Openness is good - except in the embryonic stages.

You can't have more than a little anarchy, but sometimes a little anarchy goes a long way.

A fair amount of existing infrastructure helps, however. Interbank made Master Charge possible - a network of state-level clearinghouses. Chance favors the prepared mind - so long as there is also prepared ground.

The early branding issues - tying Master Charge to a California identity - have a rough parallel in Mosaic's competition: Gopher, which some see as being doomed by a product identity that tied it too closely to its host institution, the University of Minnesota.

(U of Minn also alienated potential adopters later on by proposing to charge non-academic institutions for Gopher. This has its parallel in Master Charge vs. Bankamericard, and BofA's proposal to charge merchants for their imprinting device.)

Both Master Charge and Mosaic ran up against cultural obstacles. Andreesen and Bina were hacking in a browser culture that took exception to the idea of in-line images on web pages. Bina himself was appalled at the sudden growth in traffic on the Web when Mosaic was released with IMG tag support, almost all of it driven at first by increasing numbers of pixels.

The initial group of Master Charge organizers faced cultural obstacles too. They were skeptical that consumer credit could make money, and George Briggs pointed out, the cards didn't make inroads into grocery stores for over a decade because of an ingrained banker prejudice against facilitating the buying of groceries on credit. Those instincts may have been formed during the Great Depression, just as Tim Berners-Lee's injunctions at CERN against in-line graphics were formed by the relative poverty of bandwidth, and concerns about arousing prurient interests. Someone had to go against the grain, in a fresh setting for innovation. These people Michael Phillips, in the case of Master Charge (away from Bank of California), and Marc Andreesen in the case of Mosaic (at NCSA, not at CERN.)

There are, of course, many points of distinction to be drawn. Consumer credit was a former loss-leader business that turned a profit with a new business model: the universal credit card. The B2C e-business area spawned a thousand loss-leaders that never turned any profit. And if Master Charge corresponds to Netscape, clearly Microsoft is more than just Visa, it's a BofA that figured out how to take over the whole enchilada, if you count browsers on the desktop.

The Phenomenology of Overnight Success

Overnight successes are rare. And when they come, the sheer singularity of the event often causes people to search immediately for a corresponding single cause, or - when that explanation proves too simple - for a few interlinked causes. "Those brilliant kids," they think, "or Gilder's Law," or "all that porn bursting its britches to get out onto a new medium."

More often, however, overnight sucess is better explained by combinations of independent trends, preparing the ground for seeds that never sprouted before, no matter how often they were planted in the past. Modest failures seldom make the history books, after all. How many people know that the light bulb was invented twenty years before Edison made it practical?

Then there is a factor which is undeniable, even if it requires a prepared setting: the right people, at the right time, with the right idea - and the guts to oppose old ideas as well (but at the right time, in the right setting.)

Finally, there's a factor that was never too popular with the libertarian-leaning New Economy crowd: government limits what people are allowed to do, and this sometimes this makes people do "the right thing," where they might instead try to go off and make money. Of course, people will try to do that anyway. But out of this, the Web at least got the W3C, which Microsoft had to join because it's too hard to beat, and the U.S. got a reasonably competitive credit card oligopoly.

(C) 2002 Michael Turner