Problems In Silicon Valley

It seems to me….

The thing we should all be looking for are people who want to make a difference. I’m a big believer in the Silicon Valley religion of the power of markets. But I also believe in our obligation to give back, and to give back in the way we do business, to create more value than we capture for ourselves.” ~ Tim O’Reilly[1].

High-tech has recently come under criticism, some of it obviously justified, but the majority of companies in this field – Facebook, Amazon, Google, Uber… – are not as totally impersonal, uncaring, and self-serving as some perceive them to be[2]. The vast majority believe in what they are doing and feel they are attempting to achieve what they see as a common good. In some cases, though, success has warped their perception of reality and rather than being market-competitive, some have essentially become monopolists.

There definitely are policy changes, especially regarding user privacy, that need to be made. Users have too little control over information collected about them and there have been too many disclosures of personal information.

Detailed personal user data is highly valuable, especially to high-tech companies, who tailor marketing material to users based on their user profile. To some extent, everyone gains when marketing information is received for products in which they have expressed interest. But that type of specific targeting is not necessarily beneficial when only limited political or other partisan material is provided constrained to a single ideological perspective. As proven in recent elections, this can too easily result in disinformation intended to mislead; especially when it is propaganda issued by a government organization to a rival power or the media.

Users are entitled to know what information is being collected about them, with whom it is being shared, and an ability to easily access, correct, and delete personal data pertaining to them. There also should be sufficient data security for users to have confidence and trust their personal information will not inadvertently be compromised.

Adoption of policies similar to the European Union’s (EU) General Data Protection Regulation (GDPR) would be beneficial. GDPR is a comprehensive change to personal data protection and privacy permitting individuals to be able to access and control aspects of their data including how it is processed, used, deleted, and transferred. Mandates in the GDPR include: stringent rules for the protection, management, and control of any personally identifiable information; changes in how and where organizations store customer data; mandated reporting of data breaches within 72 hours of discovery; and an increase in an organization’s data-management obligations commensurate with increasing risk opportunities.

California approved the California Consumer Privacy Act of 2018 (CCPA) which goes into effect in 2020 and is very similar to GDPR providing consumer data transparency and control in addition to data breach liability. It is anticipated other states will approve statutes similar to this law which introduces new privacy rights for consumers forcing companies that conduct business in California to implement structural changes to their privacy program.

Unfortunately, some companies have been careless with user data, eroded the economics of journalism, and fostered the spread of disinformation. User’s must be able to own their own data and know everyone with whom it is shared. Large data breaches and an inability to control personal data have occurred, especially when much of that data has been marketed to secondary data brokers without the owner’s knowledge or permission.

While protection of user data would be enhanced by general adoption of legislation similar to the EU’s GDPR, the other problem mentioned, monopolism, is more difficult to correct. Since this problem is less obvious, it is best to provide some background as to why it and other related issues are considered to be problems.

Market structures are based on the number of producers in the market (one, two, or many) and whether items or services offered are identical or differentiated from other available similar products. It is to a company’s advantage to attempt to limit competition by becoming either the dominant or only provider within a market segment. A monopoly is an industry controlled by the only producer of a good that has no close substitutes. An oligopoly is an industry with only a small number of producers. Achieving monopolist or oligopolist control in a market segment enables a corporate entity to increase profits by limiting the supply of items or services.

An actual monopoly is difficult to sustain due to antitrust law constraints but oligopolies are relatively common. Such market dominance can be achieved through impediments making it difficult for new firms to enter a market, such as government regulations that discourage entry, increasing returns to scale in production, technological superiority, or control of necessary resources or inputs. (There also are “natural” monopolies created when increasing returns to scale provide a large cost advantage to single firm that produces all of an industry’s output; e.g., local utilities: gas, electric, water….)

Some companies establish sufficient market dominance to basically be a monopolist either through technological advantage or by creating a new market category. Intel maintained its advantage in microprocessors through superior design and production for over twenty years. Google developed a superior search engine. Amazon pioneered online shopping. Though essentially monopolies based on percent of market controlled, these companies are considered legal as there isn’t any obvious restriction to competitors entering their field.

Examples of oligopolistic industries include computer operating systems (Microsoft and Linux) or wide-body aircraft (Boeing and Airbus). Oligopolies also face possible antitrust restriction but many achieve tacit rather than overt collusion thus escaping legal action.

Market dominant companies, especially in high-tech categories, frequently are initially beneficial to their market segment. They establish their market by providing a previously unavailable product or service. They can benefit from economies of scale by avoiding wasteful infrastructure duplication and provide innovation and technological progressiveness through research and development attributable to high profit margins.

Eventually, monopolistic dominance results in a less competitive economy, especially in the global market. Innovation gradually decreases and market dominance is maintained by either purchasing potential competitors or eliminating them through extremely aggressive product pricing. Sweeping patents, standard platforms, fleets of lawyers to litigate against potential rivals, and armies of lobbyists have created formidable barriers to new entrants in many areas. Pharmaceutical products provide a good example of such protection.

Google, Amazon, Apple, Facebook, and Microsoft have bought more than 500 companies in just the past decade. Most of those acquisitions have proven detrimental to both the firms acquired and to market development. Google purchase eight robotics companies, including Boston Dynamics, in six months but then sold them without having provided any product guidance. Google attempted to market an Android phone, purchased Motorola’s phone assets for $12.5 billion, and then sold them to Lenovo two years later for on $2.91 billion. Microsoft purchased Nokia’s highly successful smartphone business, which controlled 90 percent of the MS Windows phone market, and then wrote off $8 billion in investment and laid off 25,000 Nokia employees after failing to promote its products. (Microsoft recently announced it will terminate all Windows phone support in December 2019).

Digital Equipment Corporation (DEC) is a legendary company and perhaps the second most important computer company in history after IBM. Compaq bought DEC in 1998 for $9.6 billion, a significant discount from its profits of that year but did not want DEC’s minicomputer, Unix, or chipmaking businesses. Compaq dismantled DEC keeping what it wanted and sold off the rest like a corporate raider – a sad, inglorious end to a prestigious company.

Compaq then merged with Hewlett Packard (HP) in 2001 in what is generally considered one of the worst tech mergers and acquisitions in history. HP, a Silicon Valley garage startup, was one of the most successful test and measurement product companies until corporate management came under control of accountants rather than technologists. The newly merged HP quickly lost half its market value incurring high financial and job losses.

Sun Microsystems was acquired by Oracle for $7.4 billion in 2010. Sun was a major Silicon Valley company that sold computers, computer components, software, and information technology services and created the Java programming language, the Solaris operating system, ZFS, the Network File System (NFS), and SPARC. Sun contributed significantly to the evolution of several key computing technologies, among them Unix, RISC processors, thin client computing, and virtualized computing. All of which ended following its acquisition.

The list is long. When I was fresh out of graduate school in 1969, the main computer companies were euphemistically known as Snow White and the seven dwarfs: IBM (Snow White), General Electric (GE), RCA, Univac, Burroughs, NCR, Sperry Rand, and Control Data Corporation (CDC – sometimes referred to as Cinderella). IBM and GE still exist though GE is now struggling to remain relevant and exited the computing field many years ago.

Granted that much of this was motivated by poor financial planning or simply bad management but it represents an unfortunate loss of economically beneficial innovation, much of which is relatively typical in a dynamic rapidly advancing field. The computing industry obviously has a considerable history of transformation.

Innovation by market dominant firms eventually diminishes as investors demand higher rates of returns with emphasis consequently being placed on minor enhancements rather than major new development.

The rate of new business formation in the U.S. has slowed dramatically since the late 1970s and more firms have disappeared than were created in the past few years. This disappearance of small firms is directly related to increasing industrial concentration. There also has been a structural change in the U.S. labor market where most jobs are being created by large and established firms rather than through entrepreneurial activity. In real terms, while the average firm has become three times larger over the past 20 years, high-tech companies tend to require fewer employees than those in manufacturing or lower technology fields.

As the pace of technological advancement continues to increase, the duration of corporate dominance within a specific market tends to become shorter. Products of high-tech companies are often quickly outmoded and market share may be ephemeral opening the way for new competitors to overturn the dominance of incumbents. Even the most innovative of companies can experience difficulty. Xerox provides just one example of a company unable to capitalize on what it developed. It had a monopoly on copying technology and its list of initial developments is extraordinary. Xerox’s Palo Alto Research Center (PARC) located in Silicon Valley basically invented the modern computer and Internet yet failed to profit from it.

Fifty years ago, many U.S. companies including Kodak, Xerox, RCA, Ford, General Electric, AT&T, Dow Chemical, 3M… and most aerospace firms supported labs conducting basic research, engineering, and development in relevant areas of science. No longer. Now the primary focus of companies is on minor improvements and development of new features and applications within their existing platforms. While there has been much outstanding development from Silicon Valley and elsewhere, it has not resulted in as much actual economic growth as the reporting and discussion about innovation and disruption might indicate. Companies are likewise more focused than ever on quarterly earnings and shareholder value. Real technology change, contrary to appearances, has slowed to a fraction of its former rate.

Possible remedies exist to misuse of dominant position. Eventually legal restrictions are frequently imposed as regulators attempt to compel a firm to provide rivals open access to information as when Microsoft was forced to release its communications profiles. But monopolistic legality remains open to clarification. Antitrust laws and laws protecting intellectual property remains open to interpretation as does whether monopolies granted under patent laws are fundamentally in conflict with the “antimonopoly” focus of antitrust. Network infrastructure undermines the oversight and accountability of government responsibilities.

High-tech companies have, in general, proven very beneficial but additional constraints are obviously necessary. Though those firms will obviously object, checks and restrictions will be advantageous not only to them but everyone else as well.

That’s what I think, what about you?

[1] Tim O’Reilly is the founder of O’Reilly Media. He has published numerous technical publications and serves on the board of directors of a number of companies. He also is a venture capitalist who has invested in quite a few successful high-tech startups.

[2] Disclosure: I worked for quite a few years in Silicon Valley for a number of computer companies.

About lewbornmann

Lewis J. Bornmann has his doctorate in Computer Science. He became a volunteer for the American Red Cross following his retirement from teaching Computer Science, Mathematics, and Information Systems, at Mesa State College in Grand Junction, CO. He previously was on the staff at the University of Wisconsin-Madison campus, Stanford University, and several other universities. Dr. Bornmann has provided emergency assistance in areas devastated by hurricanes, floods, and wildfires. He has responded to emergencies on local Disaster Action Teams (DAT), assisted with Services to Armed Forces (SAF), and taught Disaster Services classes and Health & Safety classes. He and his wife, Barb, are certified operators of the American Red Cross Emergency Communications Response Vehicle (ECRV), a self-contained unit capable of providing satellite-based communications and technology-related assistance at disaster sites. He served on the governing board of a large international professional organization (ACM), was chair of a committee overseeing several hundred worldwide volunteer chapters, helped organize large international conferences, served on numerous technical committees, and presented technical papers at numerous symposiums and conferences. He has numerous Who’s Who citations for his technical and professional contributions and many years of management experience with major corporations including General Electric, Boeing, and as an independent contractor. He was a principal contributor on numerous large technology-related development projects, including having written the Systems Concepts for NASA’s largest supercomputing system at the Ames Research Center in Silicon Valley. With over 40 years of experience in scientific and commercial computer systems management and development, he worked on a wide variety of computer-related systems from small single embedded microprocessor based applications to some of the largest distributed heterogeneous supercomputing systems ever planned.
This entry was posted in 3M, Amazon, Android, Antitrust, Apple, AT&T, Boeing, Boston Dynamics, Burroughs, California, California Consumer Privacy Act of 2018, CCPA, CDC, Compaq, Control Data Corporation, Data, DEC, Digital Equipment Corporation, Dow Chemical, EU, European Union, Facebook, Financial, Ford, GDPR, GE, General Data Protection Regulation, General Electric, Google, Hewlett Packard, High-Tech, HP, IBM, Kodak, Lenovo, Microsoft, Monopolist, Monopoly, NCR, Nokia, Oligopolist, Oligopoly, Oracle, PARC, Privacy, RCA, Security, Silicon Valley, Sperry Rand, Sun Microsystems, Uber, Univac, Unix, Xerox, Xerox PARC and tagged , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , . Bookmark the permalink.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.