Is Silicon Valley Over?

Is Silicon Valley over? Has the center for high tech entrepreneurial activity moved out of the Valley, to other more favorable climes? One does not know the answer, but Joel Kotkin is surely the most qualified to offer an analysis.

So, we turn to his recent article, wherein he does not exactly bury Silicon Valley, but he does suggest that it has seen better days. It is, by his analysis, on life support.

One reason is that the tech giants have become monopolies. Thereby they no longer compete in the free market, but rig the markets to their advantage:

America’s tech titans have attained oligopolistic sway over markets comparable to that of John D. Rockefeller, Andrew Carnegie and Cornelius Vanderbilt. They may wear baseball caps rather than top hats, but their economic and cultural power is as vast — and their rise has been the death knell of the Valley’s bracing entrepreneurial culture.

Silicon Valley may not be completely over, but signs point toward an unhappy ending:

The collapse of Silicon Valley Bank is the latest indicator that the Valley — site of nothing less than an economic miracle in recent decades — is now in big trouble. Other signs include mass layoffs in the tech sector and a post-pandemic real estate downturn. The Valley, it seems, is entering a period of decadence that raises the prospect of long-term decline.

Now, Kotkin proposes that Silicon Valley declined because it no longer makes things. It has gotten into the business of manipulating minds. And, it has fallen into the hands of the best and the brightest, of Ivy League intellectuals. One adds that the tech talent in many of these companies has been imported from China. American universities are not producing it.

The start of this decline has coincided with a shift from the physical to the virtual. The Valley’s roots were in the old engineer-driven economy, one connected to the rest of the country, and to working-class America — somebody, it’s easy to forget, has to make the hardware. Today tech is dominated by a cognitive elite of Ivy Leaguers, management consultants and MBAs. “We used to build the future,” Leslie Parks, who formerly directed redevelopment efforts in San Jose, once told me. “Then we designed it, now we just think about it.”

But the Valley has slowly left the industrial battlefield — it has lost over 160,000 manufacturing positions over the past two decades. It bought into the idea that the unique genius of its financial and corporate culture would be enough for it to thrive and profit as production headed first to Japan, then China and, more recently, to other parts of North America.

To be fair and balanced, Kotkin still finds some glimmers of hope.

To be clear, the Valley is not done as a major tech center. It still boasts a venture capital community, a remarkable concentration of engineering and other management talent, powerful universities and the headquarters of some of the biggest companies in the world. And it remains home to many of the tech giants that now exploit their monopolistic advantages. But that is not the same thing as being the place where the world looks for a vision of the future, as it once was. Even if the Valley still matters, it may no longer dominate the future as its denizens once assumed it would. Instead, it will face fierce competition for tech supremacy — from other countries, and other parts of this one.

Kotkin is suggesting that the Valley is running on fumes. It is losing market share to foreign companies, especially those in China and India.

Over the last decade or two, the Valley has outsourced much of its industry. Apple produces two-fifths of its products in China, more than four times what is made in the United States. Other tech giants don’t make anything. Rather than trying to build a better mousetrap, big tech now makes much of its billions off surveillance — the source of the wealth generated by Google and Meta — and by disintermediating retail businesses. It is a far cry from the optimistic promise of a better tomorrow on which the Valley was built.

Surveillance, spying on people, collecting data preferences and using them to sell advertising-- these are not signs of a healthy industry. In effect, competition has suffered. And, without healthy competition, companies will either rest on their laurels or buy up their competitors:

The stranglehold of mega-firms and the associated Wall Street and venture capital money machine has undermined competition in fields from video games to artificial intelligence to cloud services to the metaverse and AI. To be sure, there’s some competition among the giants, much as there was between aristocratic clans in Europe or Japan’s feudal daimyo, but there are vanishingly diminished opportunities for the sort of startup that made up much of Silicon Valley Bank’s deposit base. Tech today is largely a game played between giants who, if they see promising technology, simply acquire it. Tech entrepreneur turned author Antonio García Martínez has called the contemporary Valley “feudalism with better marketing,” a “highly stratified” quasi-medieval society “with little social mobility.” With control of key markets, firms that columnist Michael Lind refers to as “toll-booth companies” can exact money from consumers who have little choice of going elsewhere — a bit like feudal lords. And if these barons compete, it is against one another. Largely ignored has been the impact of these changes on the people who live in the Valley. In the Eighties and Nineties it was heralded as “an exemplar of middle-class aspiration.” No longer. And that, too, is thanks in part to deindustrialization.

As the Valley has lost influence, it has become more political and has turned politically to the left. It has sought to have the government protect it. And it especially values progressive politicians.

Oddly, as the Valley has become more feudal — its reliance on “indentured” H-1B visa holders repeats a very old arrangement — its political culture has become more uniformly progressive. Back in its heyday, the Valley’s disproportionate number of eccentric and oddball engineers and tech visionaries belied a pragmatic political culture. It was a place where middle-of-the-road pragmatists in either party would be heard. In the Eighties and Nineties, Silicon Valley, like many industries, placed its bets on both political parties. Moderate Republicans, such as Pete McCloskey, Ed Zschau and Tom Campbell, and pro-business Democrats, such as Bill Clinton, all did well there.

Silicon Valley Bank, the one that just failed, had a board of directors that was chock full of Democrats. And, of course, Governor Gavin Newsome and San Francisco Fed chair Mary Daly had no real interest in banking:

 SVB’s board was packed with Hillary Clinton, Biden and Obama backers. The bank invested in nonprofits linked to Governor Gavin Newsom, and serviced left-wing media such as Vox and the troubled progressive site BuzzFeed. Some on the right have been happy to tie the bank’s decline to its inordinate attention to such non-banking concerns as climate change, racial justice and other progressive causes. This point may be exaggerated, but certainly the board did not seem to focus on the basics. The bank may also have expected gentle handling from the San Francisco Federal Reserve, which has also been focused on the adoption of progressive policies, and which seems to have dozed as the company moved towards bankruptcy.

So, Kotkin does not believe that the end is in sight. Not quite yet, at least. But, he does regret the Valley’s loss of an innovative edge. The giants of high tech are dying on the vine, and there seems to be little we can do about it:

Does all this suggest the Valley is finished? Not quite. Inertia is a mighty force. But something essential to the area’s success has been lost and with it the Valley’s hegemony over technology. The kingdom’s spell has been broken, no doubt accelerated by the SVB collapse. The Valley may be a critical tech center for the foreseeable future, but it will no longer be the undisputed tech center.