Why Silicon Valley Is Abandoning the Culture That Assured Its Success

Disruption and innovation were great when there were bigger corporations to unseat. But now that they are the biggest economic entities around, they prefer to tout their own scale as the 'new new thing.' JL

Alexis Madrigal reports in The Atlantic:

The post-dot-com generation of companies became the most ubiquitous and valuable corporations in the world, and Silicon Valley’s rhetoric began to change. The leaders of Facebook and Google began to argue a new line: The most innovative, competitive companies are not small and nimble, but big and rich with user data. The real game isn’t among American internet companies; it’s global, and pits American giants against Chinese. If the nature of innovation is selling to an incumbent, you’re going to get more feature-driven innovation rather than systemic disruption.”

For decades, whole regions, nations even, have tried to model themselves on a particular ideal of innovation, the lifeblood of the modern economy. From Apple to Facebook, Silicon Valley’s freewheeling ecosystem of new, nimble corporations created massive wealth and retilted the world’s economic axis. Silicon Valley meant young companies scrambling to create the next great thing, and that scramble delivered new products to the world, so innovation became linked to start-ups.

AnnaLee Saxenian, a professor at the UC Berkeley School of Information, literally wrote the book on what differentiated the Valley from other centers of technology (particularly New England’s Route 128). The key words were decentralized and fluid. You worked for Silicon Valley, and working for Silicon Valley often meant striking out on your own, not only to make your name, but because innovation itself required small firms with new visions. That’s how disruption happened, no?

Then the post-dot-com generation of companies became the most ubiquitous and valuable corporations in the world, and Silicon Valley’s rhetoric began to change. Over time, the leaders of Facebook and Google, specifically, began to argue a new line: The most innovative, competitive companies are not small and nimble, but big and rich with user data. The real game isn’t among American internet companies; it’s global, and pits American giants against Chinese corporations, governments, and values. In competition with such power, small will lose, or so the executives warn when facing down antitrust action.

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When Mark Zuckerberg, Facebook’s CEO, testified to Congress in April 2018, a photographer captured his notes, which slimmed the contention down to its core: “Break up FB? US tech companies key asset for America; break up strengthens Chinese companies.”

Facebook’s COO, Sheryl Sandberg, placed the words in other people’s mouths to make the same point. “Let me share with you something else I heard in my meetings in D.C. And I heard this in private meetings from both sides of the aisle,” Sandberg said on CNBC last year. “That while people are concerned with the size and power of tech companies, there’s also a concern in the United States with the size and power of Chinese companies, and the realization that these companies are not going to be broken up.”

Eric Schmidt, the former CEO of Google, said much the same last year. “Chinese companies are growing faster, they have higher valuations, and they have more users than their non-Chinese counterparts," he said. "It’s very important to understand that there is a global competition around technology innovation, and China is a significant player and likely to remain so.”

This is a full reversal of the language that tech promoters used to sell Silicon Valley–style innovation and competitiveness for decades. Saxenian has noticed the change in how the Valley describes itself, or at least in how the dominant firms do. “Advocacy of the small, innovative firm and entrepreneurial ecosystem is giving way to more and more justifications for bigness (scale economics, competitive advantage, etc.),” Saxenian wrote to me in an email. “The big is beautiful line is coming especially from the large companies (Facebook, Google, Amazon, Apple) that are threatened by antitrust and need to justify their scale.”

This sort of talk prompts one obvious, knee-jerk response: It’s simply hypocrisy. When Google and Facebook were start-ups, their executives said start-ups were good. Now that Google and Facebook are huge, their executives say huge companies are good. It’s cynical, if not unexpected.

But there’s a more troubling possibility. Maybe something has changed about the nature of innovation, at least in software.

The start-up tradition traces back to Hewlett-Packard, the original company-in-a-garage, in 1937, and later to the Fairchildren of the 1960s, a tangle of semiconductor companies that successively spun out of larger companies, one after the other. The go-your-own-way ethos infused later cohorts of entrepreneurs across the spectrum of technologies, all the way up through the 20th century. The best thing you could be in Silicon Valley was a founder, and the best thing a founder could do was supercede those who came before.

The newest generation of companies has not been able to fulfill the latter half of that prophecy. It’s more difficult to dislodge the elder companies, which have grown ever more entrenched and valuable. CB Insights, a research firm, recently added up the (likely inflated) value of all 439 “unicorns”—start-ups that investors have valued at more than $1 billion—in the world. It got roughly $1.3 trillion, or about one Apple’s worth of market value. Remember, that figure accounts for hardly tech companies, such as Juul; so-far dubious technologies, such as augmented-reality headsets from Magic Leap (valued at $6.3 billion on this list); and all the Chinese and Indian players.

For start-ups not on the unicorn list—and even for many that are—the chance that they will have an initial public offering and remain independent is small. That means the only way their investors will get their money out will be via an acquisition by one of the large companies. Google, Facebook, and their ilk “have become enormous by swallowing small companies, so the network is no longer the network but the octopus,” Margaret O’Mara, a historian at the University of Washington, told me.

This could alter the course of technological development, not just corporate structures. Quantitative research suggests that big companies do different kinds of R&D than their more modest counterparts. Instead of coming up with new products, they come up with process improvements. “If the nature of innovation is distorted toward selling to an incumbent, you’re going to get more feature-driven innovation rather than systemic disruption,” Federal Trade Commissioner Rohit Chopra told me. As an example, O’Mara told me a story famous in Silicon Valley about how Xerox had a personal computer in its hands in the 1970s (thanks, Alan Kay!) but declined to commercialize it. “You get to a certain degree of bigness, and you’re making so much darn money on copy machines, why on Earth would you work on a PC and bring it to market?” O’Mara said. Apple, a start-up at the time, would famously popularize PCs instead.

Even though small firms have been responsible for many of the Valley’s most successful products and services, large firms have deep roots there too. As O’Mara points out in her book The Code, Lockheed Missiles and Space (later a unit of Lockheed Martin) was the largest Silicon Valley employer from the 1950s into the 1980s. The government supported the development of computing and networking in myriad ways. During the Cold War, the U.S. government pushed research dollars through a select few major research universities such as Stanford. Local companies directly benefited from this largesse, in terms of both the funding and concentration of talent around Palo Alto. It wasn’t until the 1970s that the military-industrial beginnings of the technology industry gave way to a different understanding of how to make change in the world.

“The story the Valley told about itself has been very much a small-is-beautiful story since the 1970s,” O’Mara told me. “It has a politics—this Vietnam-era rejection of the military-industrial complex, rejection of the mainframe, Big Business, Big Government, big universities.”

This led people to take risks and launch new projects and firms. Entrepreneurs from all over the world migrated to a place where people understood why they wanted to start companies. And the idea even embedded itself right near the heart of the Valley, at Google. The company’s slogan, “Don’t be evil”, had a particular meaning when it was adopted around the millennium. In the classic Valley mind-set, “evil is bigness of all kinds,” O’Mara said.

Now, of course, “the mainframe” has been replaced by the cloud, and companies such as Facebook have openly called for government regulation around key platform issues. The biggest companies moved closer and closer to Washington, D.C., during the Obama era, and despite some teeth-gnashing, stayed close after Donald Trump’s election.

What happens when you find yourself becoming the thing you said was evil? So far, the Valley response has been to find a bigger evil, which is to say China. “China is building its own internet focused on very different values, and is now exporting their vision of the internet to other countries,” Zuckerberg said in a highly publicized policy speech at Georgetown University last year. “Until recently, the internet in almost every country outside China has been defined by American platforms with strong free-expression values. There’s no guarantee these values will win out.”

There are obviously legitimate issues with the Chinese version of regulating the internet. The problem is, there’s no guarantee that “American values” will win out with American-headquartered technology companies either.

Back when Facebook was a start-up, Zuckerberg sang an entirely different tune. “I don’t want Facebook to be an American company,” he said at a Startup School event in 2010. “Like obviously we’re in America, but I don’t want it to be this company that just, like, spreads American values all across the world.”

Maybe the company is still nimble after all.